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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 | 31-0746871 | |
(State of incorporation) | (I.R.S. Employer Identification No.) |
Fairfield, Ohio 45014-5141
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
None
$2.00 par, common stock
(Title of Class)
6.125% Senior Notes due 2034
(Title of Class)
6.9% Senior Debentures due 2028
(Title of Class)
6.92% Senior Debentures due 2028
(Title of Class)
Large accelerated filerþ | Accelerated filero | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller Reporting Companyo |
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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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• | 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) |
• | 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 |
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Reporting agency | Net earned | Percent of | Average premium | |||||||||||||
(Dollars in millions) | locations | premiums | total earned | per location | ||||||||||||
Year ended December 31, 2007 | ||||||||||||||||
Ohio | 218 | $ | 664 | 21.2 | % | $ | 3.0 | |||||||||
Illinois | 116 | 283 | 9.1 | 2.4 | ||||||||||||
Indiana | 101 | 218 | 7.0 | 2.2 | ||||||||||||
Pennsylvania | 77 | 188 | 6.0 | 2.4 | ||||||||||||
North Carolina | 69 | 154 | 4.9 | 2.2 | ||||||||||||
Georgia | 66 | 150 | 4.8 | 2.3 | ||||||||||||
Michigan | 95 | 146 | 4.7 | 1.5 | ||||||||||||
Virginia | 56 | 140 | 4.5 | 2.5 | ||||||||||||
Wisconsin | 47 | 114 | 3.6 | 2.4 | ||||||||||||
Tennessee | 37 | 103 | 3.3 | 2.8 | ||||||||||||
Year ended December 31, 2006 | ||||||||||||||||
Ohio | 220 | $ | 695 | 22.0 | % | $ | 3.2 | |||||||||
Illinois | 116 | 291 | 9.2 | 2.5 | ||||||||||||
Indiana | 98 | 225 | 7.1 | 2.3 | ||||||||||||
Pennsylvania | 75 | 190 | 6.0 | 2.5 | ||||||||||||
Michigan | 92 | 160 | 5.1 | 1.7 | ||||||||||||
Georgia | 62 | 147 | 4.6 | 2.4 | ||||||||||||
North Carolina | 70 | 144 | 4.5 | 2.1 | ||||||||||||
Virginia | 55 | 142 | 4.5 | 2.6 | ||||||||||||
Wisconsin | 51 | 119 | 3.8 | 2.3 | ||||||||||||
Kentucky | 38 | 103 | 3.2 | 2.7 |
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• | allow our agencies and our field and headquarters associates to collaborate more efficiently, |
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• | 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 efficient 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 make available seats for agents in our structured classroom training for new underwriting |
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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 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 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 | Standard Market Property | |||||||||||||||||||||
Company | Casualty Insurance | Life Insurance | Excess and Surplus | |||||||||||||||||||
Senior Debt | Subsidiaries Financial | Subsidiary Financial | Subsidiary Financial | |||||||||||||||||||
Rating | Strength Ratings | Strength Ratings | Strength Ratings | Outlook | ||||||||||||||||||
Rating | Rating | Rating | ||||||||||||||||||||
Tier | Tier | Tier | ||||||||||||||||||||
A. M. Best Co. | aa- | A++ | Superior | 1 of 16 | A+ | Superior | 2 of 16 | A | Excellent | 3 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 May 21, 2007, A.M. Best affirmed its financial strength rating (FSR) of A++ (Superior) for our standard market 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 the homeowner line of business. A.M. Best also affirmed its issuer credit ratings of aa+ for those property casualty insurance subsidiaries. Additionally, A.M. Best affirmed the FSR of A+ (Superior) and the issuer credit rating of aa- for The Cincinnati Life Insurance Company. The outlook for all ratings is stable. |
On December 21, 2007, A.M. Best assigned an FSR of A (Excellent) and an issuer credit rating of a to The Cincinnati Specialty Underwriters Insurance Company, our new excess and surplus lines subsidiary. A.M. Best cited an excellent level of risk-adjusted capital and the explicit and implicit support garnered from being part of Cincinnati Financial, somewhat offset by execution risk associated with a new initiative and increased competitiveness in the E&S market. The outlook is stable. |
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• | Fitch Ratings —On October 8, 2007, Fitch Ratings affirmed its AA (Very Strong) insurer financial strength ratings for our three standard market property casualty insurance 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 group’s investment concentration in a small number of common stocks and geographic concentration in Ohio and Midwestern states. The ratings outlook is stable. |
• | Moody’s Investors Service —On September 18, 2007, Moody’s Investors Service affirmed its Aa3 insurance financial strength ratings of the standard market property casualty insurance companies. Moody’s said the ratings reflect our solid regional franchise emphasizing superior claims service, our relationship strategy with agents, strong commercial lines profitability, strong risk-adjusted capitalization and substantial holding company liquidity. These ratings consider our investment concentration risk, technology risk and increased competition in small and middle market commercial lines. The outlook is stable. |
• | Standard & Poor’s Ratings Services —On July 23, 2007, Standard & Poor’s Ratings Services affirmed the AA- (Very Strong) financial strength ratings and counterparty credit ratings for our standard market property casualty and life insurance companies. Standard & Poor’s cited our very strong distribution channel and low-cost infrastructure, extremely strong capitalization, high degree of financial flexibility and improved operating performance. Offsetting these strengths are a very aggressive investment strategy, underperformance in the homeowner line of business and a relatively high catastrophe exposure. The outlook is stable. |
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• | Commercial lines property casualty insurance |
• | Personal lines property casualty insurance |
• | Life insurance |
• | Investments |
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• | 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 on both a discounted and non-discounted basis as part of commercial package policies. |
• | 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 contractor’s equipment, builder’s risk, 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, Washington and West Virginia, where coverage is provided solely by the state instead of by private insurers. West Virginia plans to allow private insurers to market workers’ compensation beginning in July 2008. |
• | 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. Businessowners 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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Reporting agency | Net earned | Percent of | Average premium | |||||||||||||
(Dollars in millions) | locations | premiums | total earned | per location | ||||||||||||
Year ended December 31, 2007 | ||||||||||||||||
Ohio | 216 | $ | 397 | 16.5 | % | $ | 1.8 | |||||||||
Illinois | 115 | 234 | 9.7 | 2.0 | ||||||||||||
Pennsylvania | 77 | 170 | 7.0 | 2.2 | ||||||||||||
Indiana | 100 | 158 | 6.6 | 1.6 | ||||||||||||
North Carolina | 69 | 147 | 6.1 | 2.1 | ||||||||||||
Virginia | 56 | 119 | 4.9 | 2.1 | ||||||||||||
Michigan | 95 | 115 | 4.8 | 1.2 | ||||||||||||
Wisconsin | 47 | 94 | 3.9 | 2.0 | ||||||||||||
Georgia | 66 | 88 | 3.7 | 1.3 | ||||||||||||
Tennessee | 37 | 81 | 3.5 | 2.2 | ||||||||||||
Year ended December 31, 2006 | ||||||||||||||||
Ohio | 219 | $ | 410 | 17.1 | % | $ | 1.9 | |||||||||
Illinois | 116 | 238 | 9.9 | 2.1 | ||||||||||||
Pennsylvania | 75 | 172 | 7.2 | 2.3 | ||||||||||||
Indiana | 98 | 160 | 6.7 | 1.6 | ||||||||||||
North Carolina | 70 | 136 | 5.7 | 1.9 | ||||||||||||
Michigan | 92 | 124 | 5.2 | �� | 1.3 | |||||||||||
Virginia | 55 | 120 | 5.0 | 2.2 | ||||||||||||
Wisconsin | 51 | 96 | 4.0 | 1.9 | ||||||||||||
Georgia | 62 | 84 | 3.5 | 1.4 | ||||||||||||
Tennessee | 37 | 81 | 3.4 | 2.2 |
• | 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, 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. |
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• | 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. |
Reporting agency | Net earned | Percent of | Average premium | |||||||||||||
(Dollars in millions) | locations | premiums | total earned | per location | ||||||||||||
Year ended December 31, 2007 | ||||||||||||||||
Ohio | 200 | $ | 266 | 37.3 | % | $ | 1.3 | |||||||||
Georgia | 58 | 61 | 8.6 | 1.1 | ||||||||||||
Indiana | 71 | 59 | 8.3 | 0.8 | ||||||||||||
Illinois | 81 | 49 | 6.8 | 0.6 | ||||||||||||
Alabama | 33 | 37 | 5.2 | 1.1 | ||||||||||||
Kentucky | 36 | 37 | 5.2 | 1.0 | ||||||||||||
Michigan | 64 | 31 | 4.4 | 0.5 | ||||||||||||
Florida | 10 | 23 | 3.2 | 2.3 | ||||||||||||
Virginia | 22 | 21 | 3.0 | 1.0 | ||||||||||||
Wisconsin | 29 | 20 | 2.9 | 0.7 | ||||||||||||
Year ended December 31, 2006 | ||||||||||||||||
Ohio | 204 | $ | 285 | 37.4 | % | $ | 1.4 | |||||||||
Indiana | 65 | 65 | 8.5 | 1.0 | ||||||||||||
Georgia | 52 | 63 | 8.3 | 1.2 | ||||||||||||
Illinois | 76 | 53 | 6.9 | 0.7 | ||||||||||||
Alabama | 25 | 39 | 5.1 | 1.6 | ||||||||||||
Kentucky | 33 | 38 | 5.0 | 1.2 | ||||||||||||
Michigan | 64 | 36 | 4.7 | 0.6 | ||||||||||||
Wisconsin | 28 | 23 | 3.1 | 0.8 | ||||||||||||
Florida | 10 | 22 | 2.9 | 2.2 | ||||||||||||
Virginia | 19 | 22 | 2.8 | 1.2 | ||||||||||||
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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, property casualty agency management is predisposed to consider selling our life products. |
• | Marketing efforts for both our property casualty and life insurance businesses are directed by our field marketing department, which assures consistency of communication and operations. Life field marketing representatives are available to meet face-to-face with the agency personnel and their clients as well. |
• | 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. Fewer and fewer of our competitors provide direct, personal support between the agent and the insurance carrier. |
• | We primarily offer products addressing the needs of businesses with key person and buy-sell coverages. We offer personal and commercial clients of our agencies quality, personal life insurance 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 and redesigning our underwriting classifications to better meet the needs of the agency’s clients. |
• | 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, 2007 | At December 31, 2006 | |||||||||||||||
(In millions) | Book value | Fair value | Book value | Fair value | ||||||||||||
Taxable fixed maturities | $ | 3,265 | $ | 3,284 | $ | 3,357 | $ | 3,389 | ||||||||
Tax-exempt fixed maturities | 2,518 | 2,564 | 2,382 | 2,416 | ||||||||||||
Common equities | 2,715 | 6,020 | 2,400 | 7,564 | ||||||||||||
Preferred equities | 260 | 229 | 221 | 235 | ||||||||||||
Short-term investments | 101 | 101 | 95 | 95 | ||||||||||||
Total | $ | 8,859 | $ | 12,198 | $ | 8,455 | $ | 13,699 | ||||||||
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At December 31, 2007 | At December 31, 2006 | |||||||||||||||
Fair | Percent | Fair | Percent | |||||||||||||
(Dollars in millions) | value | to total | value | to total | ||||||||||||
Moody’s Ratings | ||||||||||||||||
Aaa, Aa, A | $ | 4,103 | 69.0 | % | $ | 4,039 | 68.5 | % | ||||||||
Baa | 1,070 | 17.9 | 1,086 | 18.4 | ||||||||||||
Ba | 280 | 4.7 | 266 | 4.5 | ||||||||||||
B | 105 | 1.8 | 122 | 2.1 | ||||||||||||
Caa | 36 | 0.6 | 28 | 0.5 | ||||||||||||
Ca | 0 | 0.0 | 0 | 0.0 | ||||||||||||
C | 0 | 0.0 | 0 | 0.0 | ||||||||||||
Non-rated | 355 | 6.0 | 359 | 6.0 | ||||||||||||
Total | $ | 5,949 | 100.0 | % | $ | 5,900 | 100.0 | % | ||||||||
Standard & Poor’s Ratings | ||||||||||||||||
AAA, AA, A | $ | 3,589 | 60.3 | % | $ | 3,631 | 61.5 | % | ||||||||
BBB | 1,092 | 18.4 | 1,044 | 17.7 | ||||||||||||
BB | 258 | 4.3 | 310 | 5.3 | ||||||||||||
B | 125 | 2.1 | 131 | 2.2 | ||||||||||||
CCC | 33 | 0.6 | 10 | 0.2 | ||||||||||||
CC | 0 | 0.0 | 0 | 0.0 | ||||||||||||
C | 0 | 0.0 | 0 | 0.0 | ||||||||||||
D | 0 | 0.0 | 0 | 0.0 | ||||||||||||
Non-rated | 852 | 14.3 | 774 | 13.1 | ||||||||||||
Total | $ | 5,949 | 100.0 | % | $ | 5,900 | 100.0 | % | ||||||||
Years ended December 31, | ||||||||
2007 | 2006 | |||||||
Weighted average yield-to-book value | 5.3 | % | 5.3 | % | ||||
Weighted average maturity | 8.0 | yrs | 8.7 | yrs | ||||
Effective duration | 4.8 | yrs | 5.1 | yrs | ||||
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• | $896 million in U.S. agency paper, which is rated AAA by both Moody’s and Standard & Poor’s. |
• | $1.874 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-. |
• | $287 million in high-yield corporate bonds that have a Moody’s rating below Baa 3 or a Standard & Poor’s rating below BBB-. |
• | $227 million in convertible bonds and redeemable preferred stocks. |
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As of and for the year ended December 31, 2007 | ||||||||||||||||||||
Earned | Earned | |||||||||||||||||||
Actual | Fair | Percent of | dividend | dividend to | ||||||||||||||||
(Dollars in millions) | cost | value | fair value | income | fair value | |||||||||||||||
Fifth Third Bancorp | $ | 185 | $ | 1,691 | 28.1 | % | $ | 121 | 7.2 | % | ||||||||||
The Procter & Gamble Company | 206 | 552 | 9 .2 | 10 | 1.8 | |||||||||||||||
Exxon Mobil Corporation | 58 | 484 | 8 .0 | 8 | 1.7 | |||||||||||||||
U.S. Bancorp | 270 | 332 | 5 .5 | 16 | 4.8 | |||||||||||||||
PNC Financial Services Group, Inc. | 62 | 309 | 5 .1 | 12 | 3.9 | |||||||||||||||
AllianceBernstein Holding L.P. | 113 | 295 | 4 .9 | 17 | 5.8 | |||||||||||||||
Johnson & Johnson | 218 | 267 | 4 .5 | 6 | 2.2 | |||||||||||||||
Wyeth | 62 | 196 | 3 .3 | 5 | 2.6 | |||||||||||||||
Wells Fargo & Company | 128 | 194 | 3 .2 | 7 | 3.6 | |||||||||||||||
Huntington Bancshares Inc. | 188 | 152 | 2 .5 | 4 | 2.6 | |||||||||||||||
Piedmont Natural Gas Company, Inc. | 64 | 147 | 2 .4 | 6 | 4.1 | |||||||||||||||
Wachovia Corporation | 186 | 140 | 2 .3 | 6 | 4.3 | |||||||||||||||
National City Corporation | 132 | 140 | 2 .3 | 16 | 11.4 | |||||||||||||||
Chevron Corporation | 56 | 123 | 2 .1 | 3 | 2.4 | |||||||||||||||
General Electric Co. | 106 | 116 | 1 .9 | 3 | 2.6 | |||||||||||||||
All other common stock holdings | 681 | 882 | 14.7 | 31 | 3.5 | |||||||||||||||
Total | $ | 2,715 | $ | 6,020 | 100.0 | % | $ | 271 | ||||||||||||
• | ExxonMobil — We sold 3.8 million shares of our holding in Exxon Mobil Corporation common stock in 2007. We sold a portion of this holding to try to achieve a higher yield. |
• | Fifth Third — We sold 5.5 million shares of our holdings in Fifth Third common stock in 2007. We sold these shares to fund an accelerated share repurchase agreement. |
• | FirstMerit — We sold all of our holding in FirstMerit Corporation in 2007. We sold these shares because the investment no longer met our criteria. |
• | REITs — We divested the majority of our real estate investment trust holdings in 2007. We believed the fundamentals for this sector no longer supported their valuation. |
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• | Insurance Holding Company Regulation — Our insurance company 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 in the subsidiaries’ respective states of domicile. 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 — All of our insurance company subsidiaries are 100 percent owned by The Cincinnati Insurance Company, which is 100 percent owned by Cincinnati Financial Corporation. The dividend-paying capacity of our insurance company subsidiaries is regulated by the laws of the applicable state of domicile. Under these laws, our insurance subsidiaries must provide a 10-day advance informational notice to the insurance commissioner for the domiciliary state prior to payment of any dividend or distribution to its shareholders. In all cases, ordinary dividends may be paid only from earned surplus, which for the Ohio subsidiaries is the amount of unassigned funds set forth in an insurance subsidiary’s most recent statutory financial statement. For the Delaware subsidiary, it is the amount of available and accumulated funds derived from the subsidiary’s net operating profit of its business and realized capital gains. | |
The insurance company subsidiaries must give 30 days notice to and obtain prior approval from the state insurance commissioner before the payment of an extraordinary dividend as defined by the state’s insurance code. You can find information about the dividends paid by our insurance subsidiary in 2007 in Item 8, Note 8 of the Consolidated Financial Statements, Page 96. |
• | 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 that must be met and maintained; the licensing of insurers and their agents and brokers; 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; the involuntary assumption of hard-to-place or high-risk insurance business, primarily workers’ compensation insurance; and the collection, remittance and reporting of certain taxes and fees. |
Legislative and regulatory developments through 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 extended to all lines of insurance and other business areas until June 2007 when we resumed accepting new directors and officers, surety, machinery and equipment and life insurance coverages, subject to existing guidelines. We continue not to seek new insurance relationships for our remaining commercial lines and personal lines. This marketing stance remains in force. It did not affect directly policies already in force, which we continue to support and address at renewal, in line with our current underwriting guidelines and in compliance with Florida rules and regulations. In 2007, our written premiums from Florida agencies were 3.2 percent of total written premiums. Our Florida market share was estimated at 0.29 percent in 2006. | ||
On August 24, 2007, the company received administrative subpoenas from the Florida Office of Insurance Regulation seeking documents and testimony concerning insurance for residential risks located in Florida and communications with reinsurers, risk modeling companies, rating agencies and insurance trade associations. We produced documents to respond to the subpoenas. The Office of Insurance Regulation cancelled and has not rescheduled the hearing noticed in the subpoena for October 18, 2007. |
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We continue to assess the changing insurance environment in Florida and hope to resume writing our complete portfolio of insurance products in the state as the market stabilizes. |
• | 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 incurred a charge of $2 million from guaranty associations in 2007 and received a net refund of $500,000 in 2006. 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 (SAP). 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 state regulators to identify companies that may be undercapitalized and may merit further regulatory action. The NAIC has a standard formula for annually assessing RBC. The formula for calculating RBC for property casualty companies takes into account asset and credit risks but places more emphasis on underwriting factors for reserving and pricing. The formula for calculating RBC for life insurance companies takes into account factors relating to insurance, business, asset and interest rate risks. |
• | The Terrorism Risk Insurance Act of 2002 (TRIA) — TRIA was originally signed into law on November 26, 2002, and extended on December 22, 2005, in a revised form, and extended again on December 26, 2007. 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, 2014. 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 would 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 in 2007 was $388 million (20 percent of 2006 subject premiums) and we estimate it will be $395 million (20 percent of 2007 subject premiums) in 2008. |
• | Office of 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++ (Excellent) rating from A.M. Best of our standard market property casualty insurance subsidiaries, are an important competitive advantage. Only 16 other insurance groups, or 1.6 percent of all rated insurance groups, qualify for the A++, A.M. Best’s highest rating. If our property casualty ratings are 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, perceptions that our level of service is no longer a distinguishing characteristic in the marketplace or perceptions that our business practices are not compatible with agents’ business models. This could occur if agents or policyholders believe that we are 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. |
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• | Competitiveness of premiums charged |
• | Relationships among carriers, agents, brokers and policyholders |
• | Underwriting and pricing methodologies that allow insurers to identify and flexibly price risks |
• | Compensation provided to agents |
• | Underwriting discipline |
• | Terms and conditions of insurance coverage |
• | Speed at which products are brought to market |
• | 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. |
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• | Maintenance of a greater portion of our portfolio of equity securities at the insurance subsidiary, which would cause the parent to be more reliant on its subsidiaries for cash to fund parent-company obligations, including shareholder dividends and interest on long-term debt. |
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Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
(Source: Nasdaq Global Select Market) | 2007 | 2006 | |||||||||||||||||||||||||||||||
Quarter: | 1st | 2nd | 3rd | 4th | 1st | 2nd | 3rd | 4th | |||||||||||||||||||||||||
High close | $ | 45.92 | $ | 47.62 | $ | 44.79 | $ | 44.84 | $ | 45.56 | $ | 47.01 | $ | 48.44 | $ | 49.07 | |||||||||||||||||
Low close | 42.24 | 42.57 | 36.91 | 38.37 | 42.07 | 41.43 | 45.93 | 44.25 | |||||||||||||||||||||||||
Period-end close | 42.40 | 43.40 | 43.31 | 39.54 | 42.07 | 47.01 | 48.12 | 45.31 | |||||||||||||||||||||||||
Cash dividends declared | 0.355 | 0.355 | 0.355 | 0.355 | 0.335 | 0.335 | 0.335 | 0.335 |
Number of securities remaining | ||||||||||||
available for future issuance | ||||||||||||
Number of securities to be issued | under equity compensation plan | |||||||||||
upon exercise of outstanding | (excluding securities reflected in | |||||||||||
options, warrants and rights at | Weighted-average exercise price | column (a)) at December 31, | ||||||||||
December 31, 2007 | of outstanding options | 2007 | ||||||||||
Plan category | (a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders | 10,676,202 | $ | 36.86 | 10,560,257 | ||||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
Total | 10,676,202 | $ | 36.86 | 10,560,257 | ||||||||
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 | plans or programs | ||||||||||||
January 1-31, 2007 | 0 | $ | 0.00 | 0 | 6,819,248 | |||||||||||
February 1-28, 2007 | 478,267 | 43.82 | 478,267 | 6,340,981 | ||||||||||||
March 1-31, 2007 | 1,012,808 | 42.64 | 1,012,317 | 5,328,664 | ||||||||||||
April 1-30, 2007 | 0 | 0.00 | 0 | 5,328,664 | ||||||||||||
May 1-31, 2007 | 0 | 0.00 | 0 | 5,328,664 | ||||||||||||
June 1-30, 2007 | 0 | 0.00 | 0 | 5,328,664 | ||||||||||||
July 1-31, 2007 | 0 | 0.00 | 0 | 5,328,664 | ||||||||||||
August 1-31, 2007 | 1,522,147 | 41.42 | 1,522,147 | 3,806,517 | ||||||||||||
September 1-30, 2007 | 405,001 | 42.18 | 405,001 | 3,401,516 | ||||||||||||
October 1-31, 2007 | 4,000,000 | 40.02 | 4,000,000 | 12,401,516 | ||||||||||||
November 1-30, 2007 | 55,332 | 39.99 | 36,905 | 12,364,611 | ||||||||||||
December 1-31, 2007 | 0 | 0.00 | 0 | 12,364,611 | ||||||||||||
Totals | 7,473,555 | 41.02 | 7,454,637 | |||||||||||||
(1) | Includes 18,918 shares acquired in 2007 primarily in satisfaction of the purchase price due upon exercise of stock options. |
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Years ended December 31, | ||||||||||||||||
(In millions except per share data) | 2007 | 2006 | 2005 | 2004 | ||||||||||||
Consolidated Income Statement Data | ||||||||||||||||
Earned premiums | $ | 3,250 | $ | 3,278 | $ | 3,164 | $ | 3,020 | ||||||||
Investment income, net of expenses | 608 | 570 | 526 | 492 | ||||||||||||
Realized investment gains and losses | 382 | 684 | 61 | 91 | ||||||||||||
Total revenues | 4,259 | 4,550 | 3,767 | 3,614 | ||||||||||||
Net income | 855 | 930 | 602 | 584 | ||||||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 5.01 | $ | 5.36 | $ | 3.44 | $ | 3.30 | ||||||||
Diluted | 4.97 | 5.30 | 3.40 | 3.28 | ||||||||||||
Cash dividends per common share: | ||||||||||||||||
Declared | 1.42 | 1.34 | 1.205 | 1.04 | ||||||||||||
Paid | 1.40 | 1.31 | 1.162 | 1.02 | ||||||||||||
Shares Outstanding | ||||||||||||||||
Weighted average, diluted | 172 | 175 | 177 | 178 | ||||||||||||
Consolidated Balance Sheet Data | ||||||||||||||||
Invested assets | $ | 12,261 | $ | 13,759 | $ | 12,702 | $ | 12,677 | ||||||||
Deferred policy acquisition costs | 461 | 453 | 429 | 400 | ||||||||||||
Total assets | 16,637 | 17,222 | 16,003 | 16,107 | ||||||||||||
Loss and loss expense reserves | 3,967 | 3,896 | 3,661 | 3,549 | ||||||||||||
Life policy reserves | 1,478 | 1,409 | 1,343 | 1,194 | ||||||||||||
Long-term debt | 791 | 791 | 791 | 791 | ||||||||||||
Shareholders’ equity | 5,929 | 6,808 | 6,086 | 6,249 | ||||||||||||
Book value per share | 35.70 | 39.38 | 34.88 | 35.60 | ||||||||||||
Property Casualty Insurance Operations | ||||||||||||||||
Earned premiums | $ | 3,125 | $ | 3,164 | $ | 3,058 | $ | 2,919 | ||||||||
Unearned premiums | 1,562 | 1,576 | 1,557 | 1,537 | ||||||||||||
Loss and loss expense reserves | 3,925 | 3,860 | 3,629 | 3,514 | ||||||||||||
Investment income, net of expenses | 393 | 367 | 338 | 289 | ||||||||||||
Loss ratio | 46.6 | % | 51.9 | % | 49.2 | % | 49.8 | % | ||||||||
Loss expense ratio | 12.0 | 11.6 | 10.0 | 10.3 | ||||||||||||
Expense ratio | 31.7 | 30.8 | 30.0 | 29.7 | ||||||||||||
Combined ratio | 90.3 | % | 94.3 | % | 89.2 | % | 89.8 | % | ||||||||
Per share data adjusted to reflect all stock splits and dividends prior to December 31, 2007. |
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2003 | 2002 | 2001 | 2000 | 1999 | 1998 | 1997 | ||||||||||||||||||||||
$ | 2,748 | $ | 2,478 | $ | 2,152 | $ | 1,907 | $ | 1,732 | $ | 1,613 | $ | 1,516 | |||||||||||||||
465 | 445 | 421 | 415 | 387 | 368 | 349 | ||||||||||||||||||||||
(41 | ) | (94 | ) | (25 | ) | (2 | ) | 0 | 65 | 69 | ||||||||||||||||||
3,181 | 2,843 | 2,561 | 2,331 | 2,128 | 2,054 | 1,942 | ||||||||||||||||||||||
374 | 238 | 193 | 118 | 255 | 242 | 299 | ||||||||||||||||||||||
$ | 2.11 | $ | 1.33 | $ | 1.10 | $ | 0.67 | $ | 1.40 | $ | 1.31 | $ | 1.64 | |||||||||||||||
2.10 | 1.32 | 1.07 | 0.67 | 1.37 | 1.28 | 1.61 | ||||||||||||||||||||||
0.90 | 0.81 | 0.76 | 0.69 | 0.62 | 0.55 | 0.50 | ||||||||||||||||||||||
0.89 | 0.80 | 0.74 | 0.67 | 0.60 | 0.54 | 0.49 | ||||||||||||||||||||||
178 | 180 | 179 | 181 | 186 | 190 | 188 | ||||||||||||||||||||||
$ | 12,485 | $ | 11,226 | $ | 11,534 | $ | 11,276 | $ | 10,156 | $ | 10,296 | $ | 8,778 | |||||||||||||||
372 | 343 | 286 | 259 | 226 | 143 | 135 | ||||||||||||||||||||||
15,509 | 14,122 | 13,964 | 13,274 | 11,795 | 11,484 | 9,867 | ||||||||||||||||||||||
3,415 | 3,176 | 2,887 | 2,473 | 2,154 | 2,055 | 1,937 | ||||||||||||||||||||||
1,025 | 917 | 724 | 641 | 885 | 536 | 482 | ||||||||||||||||||||||
420 | 420 | 426 | 449 | 456 | 472 | 58 | ||||||||||||||||||||||
6,204 | 5,598 | 5,998 | 5,995 | 5,421 | 5,621 | 4,717 | ||||||||||||||||||||||
35.10 | 31.43 | 33.62 | 33.80 | 30.35 | 30.58 | 25.71 | ||||||||||||||||||||||
$ | 2,653 | $ | 2,391 | $ | 2,073 | $ | 1,828 | $ | 1,658 | $ | 1,543 | $ | 1,454 | |||||||||||||||
1,444 | 1,317 | 1,060 | 920 | 835 | 458 | 442 | ||||||||||||||||||||||
3,386 | 3,150 | 2,894 | 2,416 | 2,093 | 1,979 | 1,889 | ||||||||||||||||||||||
245 | 234 | 223 | 223 | 208 | 204 | 199 | ||||||||||||||||||||||
56.1 | % | 61.5 | % | 66.6 | % | 71.1 | % | 61.6 | % | 65.4 | % | 58.3 | % | |||||||||||||||
11.6 | 11.4 | 10.1 | 11.3 | 10.0 | 9.3 | 10.1 | ||||||||||||||||||||||
27.0 | 26.8 | 28.2 | 30.4 | 28.6 | 29.6 | 30.0 | ||||||||||||||||||||||
94.7 | % | 99.7 | % | 104.9 | % | 112.8 | % | 100.2 | % | 104.3 | % | 98.4 | % | |||||||||||||||
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
• | 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, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions except share data) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Income statement data | ||||||||||||||||||||
Earned premiums | $ | 3,250 | $ | 3,278 | $ | 3,164 | (0.9 | ) | 3.6 | |||||||||||
Investment income, net of expenses | 608 | 570 | 526 | 6.6 | 8.4 | |||||||||||||||
Realized investment gains and losses (pretax) | 382 | 684 | 61 | (44.1 | ) | 1,026.1 | ||||||||||||||
Total revenues | 4,259 | 4,550 | 3,767 | (6.4 | ) | 20.8 | ||||||||||||||
Net income | 855 | 930 | 602 | (8.0 | ) | 54.5 | ||||||||||||||
Per share data (diluted) | ||||||||||||||||||||
Net income | $ | 4.97 | $ | 5.30 | $ | 3.40 | (6.2 | ) | 55.9 | |||||||||||
Cash dividends declared | 1.42 | 1.34 | �� | 1.205 | 6.0 | 11.2 | ||||||||||||||
Weighted average shares outstanding | 172,167,452 | 175,451,341 | 177,116,126 | (1.9 | ) | (0.9 | ) |
• | Underwriting profit or loss — The consolidated property casualty underwriting profit rose in 2007 because of lower catastrophe losses and a higher level of savings from favorable development on prior period reserves. In 2006, underwriting profit was below the prior year due to higher catastrophe losses and a lower level savings from favorable development of prior period reserves as well as higher underwriting expenses. These factors are discussed in more detail in the Results of Operations beginning on Page 42. | ||
• | Realized investment gains or losses — 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. As discussed in Investments Segment Results of Operation, Page 57, security sales led to realized investment gains in the past three years: |
o | 2007 — Raised net income by $245 million, or $1.43 per share. This amount reflected the sale of 3.8 million shares of Exxon Mobil Corporation, the block sale of 5.5 million shares of Fifth Third Bancorp common stock, the sale of our FirstMerit Corporation common stock holdings and the disposition of the majority of our real estate investment trust holdings. | ||
o | 2006 — Raised net income by $434 million, or $2.48 per share. This amount reflected the sale of our Alltel Corporation common stock holding. | ||
o | 2005 — Raised net income by $40 million, or 23 cents per share. |
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• | 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. Weighted average shares outstanding on a diluted basis declined 3 million in 2007 and 2 million in 2006. |
At December 31, | At December 31, | At December 31, | ||||||||||
(Dollars in millions except share data) | 2007 | 2006 | 2005 | |||||||||
Balance sheet data | ||||||||||||
Invested assets | $ | 12,261 | $ | 13,759 | $ | 12,702 | ||||||
Total assets | 16,637 | 17,222 | 16,003 | |||||||||
Short-term debt | 69 | 49 | 0 | |||||||||
Long-term debt | 791 | 791 | 791 | |||||||||
Shareholders’ equity | 5,929 | 6,808 | 6,086 | |||||||||
Book value per share | 35.70 | 39.38 | 34.88 | |||||||||
Debt-to-capital ratio | 12.7 | % | 11.0 | % | 11.5 | % | ||||||
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Performance measures | ||||||||||||
Comprehensive income | $ | (368 | ) | $ | 1,057 | $ | 99 | |||||
Return on equity | 13.4 | % | 14.4 | % | 9.8 | % | ||||||
Return on equity based on comprehensive income | (5.8 | ) | 16.4 | 1.6 | ||||||||
Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Property casualty highlights | ||||||||||||||||||||
Written premiums | $ | 3,117 | $ | 3,178 | $ | 3,076 | (1.9 | ) | 3.3 | |||||||||||
Earned premiums | 3,125 | 3,164 | 3,058 | (1.2 | ) | 3.5 | ||||||||||||||
Underwriting profit | 304 | 181 | 330 | 68.3 | (45.2 | ) | ||||||||||||||
GAAP combined ratio | 90.3 | % | 94.3 | % | 89.2 | % | ||||||||||||||
Statutory combined ratio | 90.3 | 93.9 | 89.0 | |||||||||||||||||
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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 2008, 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, not taking into account any contribution from our excess and surplus lines business. We expect to improve service to our agencies by subdividing one or two field territories in 2008. We also expect to appoint another 65 agencies. | |
In 2008, 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 2008 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 — If current commercial lines pricing trends continue into 2008, our net written premiums could decline as much as 5 percent compared with the 1.9 percent decline in 2007. |
Overall industry premiums are expected to decline 0.6 percent in 2008, which includes an estimated 5.0 percent decline for the reinsurance sector. Net written premiums for the commercial lines sector are expected to be down 2.3 percent in 2008 while the personal lines sector is expected to grow 1.4 percent. The projected industry average 2008 combined ratio is 98.6 percent. | |||
Our combined ratio estimate for 2008 is 96 percent to 98 percent compared with 90.3 percent in 2007. The year-over-year increase reflects three assumptions: |
o | Current accident year loss ratio excluding catastrophe losses — We believe the market trends that contributed to an increase in this ratio in 2007 are continuing and may put the ratio under further pressure in 2008. | ||
o | Catastrophe loss ratio — We assume catastrophe losses could contribute approximately 4.5 percentage points to the full-year 2008 combined ratio. We are aware of the unpredictability of catastrophic events in any given year. Catastrophe losses have made an average contribution of 3.7 percentage points to our combined ratio in the past 10 years, ranging from 2007’s low of 0.8 points to 1998’s high of 6.1 points. | ||
In January and February of 2008, storms affecting our policyholders in the Midwest resulted in at least $36 million of pretax catastrophe losses, which will be included in first-quarter 2008 results. This estimate does not take into account any catastrophe activity that may occur in the remainder of the first quarter of 2008 or potential development from events in prior periods. | |||
o | Savings from favorable development on prior period reserves — To establish this combined ratio estimate, management made the assumption that prior period reserves would develop favorably and that the development would affect the ratio by 4 percentage points. The actual level of development on prior period reserves will be based on sound actuarial analysis. |
Economic factors, including Inflation, may increase our claims and settlement expenses related to medical care, litigation and construction. We could see higher than anticipated loss costs related to workers’ compensation and lines of business that provide protection against bodily injury claims. Similarly, higher legal expenses could raise the loss expenses we incur to defend our policyholders and settle complex or disputed claims. We would factor any such higher losses and loss expenses into our pricing and reserve |
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calculations, potentially increasing reserves and adjusting rates. Our ability to meet performance targets would depend on our ability to offset the increased losses and loss expenses by promptly effecting rate adjustments or finding other savings and efficiencies, and on our agents’ ability to market at the increased rate. | |||
• | Pursuing a total return investment strategy that generates both strong investment income growth and capital appreciation — In 2008, we estimate the growth rate of investment income may be below the 6.6 percent growth rate in 2007 as financial sector holdings in our portfolio evaluate their dividend levels. We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth. This outlook considers the 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 2007, our compound annual equity portfolio return was a negative 16.3 percent, compared with a compound annual total return of 5.5 percent for the Index. Over the five years ended December 31, 2007, our compound annual equity portfolio return was flat compared with a compound annual total return of 12.8 percent for the Index. Our equity portfolio underperformed the market for the five-year period primarily because of the decline in the market value of our holdings of Fifth Third common stock between 2003 and 2007. | |||
• | Increasing the total return to shareholders through a combination of higher earnings per share, growth in book value, increasing dividends and share repurchase — 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, periodically authorizing stock dividends and splits and authorizing share repurchase. In February 2008, the board increased the indicated annual cash dividend rate 9.9 percent, marking the 48th consecutive year of increase in the dividend rate. We believe our record of dividend increases is matched by only 11 other publicly traded corporations. Between January 1 and February 22, 2008, we repurchased 1 million shares under the current board authorization. | |||
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 34.0 percent was below the 62.3 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 — Our debt-to-capital ratio rose to 12.7 percent in 2007 because of the decline in shareholders’ equity. 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 below 13 percent. | ||
In December 2007, we finalized our property casualty reinsurance program for 2008, updating it to maintain the balance between the cost of the program and the level of risk we retain. Under the new program, our 2008 reinsurance costs are expected to decline slightly due to higher retention levels and moderating rates for certain lines of business. We provide more detail on our reinsurance programs in 2008 Reinsurance Programs, Page 70. |
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• | type of claim involved | |
• | circumstances surrounding each claim | |
• | policy provisions pertaining to each claim | |
• | potential for subrogation or salvage recoverable | |
• | general insurance reserving practices |
Page 66.
• | paid and reported loss development methods | |
• | paid and reported loss Bornhuetter-Ferguson methods | |
• | individual and multiple probabilistic trend family models |
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• | company and industry pricing | |
• | company and industry exposure | |
• | company and industry loss frequency and severity | |
• | past large loss events such as hurricanes | |
• | company and industry premium | |
• | company in-force policy count | |
• | average premium per policy |
• | large loss activity and trends in large losses | |
• | new business activity | |
• | judicial decisions | |
• | general economic trends such as inflation | |
• | trends in litigiousness and legal expenses | |
• | product and underwriting changes | |
• | changes in claims practices |
• | Emergence of loss and allocated loss expenses on an accident year basis. Historical paid loss, reported loss and paid allocated loss expense data for the business lines we analyze contain patterns that reflect how unpaid losses, unreported losses and unpaid allocated loss expenses as of a financial statement date will emerge in the future on an accident year basis. Unless our actuarial staff or management identifies reasons or factors that invalidate the extension of historical patterns into the future, these patterns can be |
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used to make projections necessary for estimating IBNR reserves. Our actuaries significantly rely on this assumption in the application of all methods and models mentioned above. | ||
• | Calendar year inflation. For long-tail and mid-tail business lines, calendar year inflation trends for future paid losses and paid allocated loss expenses will not vary significantly from a stable, long-term average. Our actuaries base reserve estimates derived from probabilistic trend family models on this assumption. | |
• | Exposure levels. Historical earned premiums, when adjusted to reflect common levels of product pricing and loss cost inflation, can serve as a proxy for historical exposures. Our actuaries require this assumption to estimate expected loss ratios and expected allocated loss expense ratios used by the Bornhuetter-Ferguson reserving methods. They also use this assumption to establish exposure levels for recent accident years, characterized by “green” or immature data, when working with probabilistic trend family models. | |
• | Claims having atypical emergence patterns. Characteristics of certain subsets of claims, such as high frequency, high severity, or mass tort claims, have the potential to distort patterns contained in historical paid loss, reported loss and paid allocated loss expense data. When testing indicates this to be the case for a particular subset of claims, our actuaries segregate these claims from the data and analyze them separately. Subsets of claims that could fall into this category include hurricane claims, individual large claims and asbestos and environmental claims. |
Net loss and loss expense range of reserves | ||||||||||||||||||||
Carried | Low | High | Standard | Net income | ||||||||||||||||
(In millions) | reserves | point | point | error | effect | |||||||||||||||
At December 31, 2007 | ||||||||||||||||||||
Commercial casualty | $ | 1,565 | $ | 1,352 | $ | 1,634 | $ | 141 | $ | 92 | ||||||||||
Commercial property | 121 | 104 | 136 | 16 | 10 | |||||||||||||||
Commercial auto | 383 | 362 | 395 | 17 | 11 | |||||||||||||||
Workers’ compensation | 777 | 726 | 786 | 30 | 20 | |||||||||||||||
Personal auto | 189 | 173 | 191 | 9 | 6 | |||||||||||||||
Homeowners | 77 | 75 | 88 | 7 | 5 | |||||||||||||||
At December 31, 2006 | ||||||||||||||||||||
Commercial casualty | $ | 1,483 | $ | 1,269 | $ | 1,542 | $ | 136 | $ | 88 | ||||||||||
Commercial property | 170 | 155 | 181 | 13 | 8 | |||||||||||||||
Commercial auto | 386 | 374 | 387 | 6 | 4 | |||||||||||||||
Workers’ compensation | 713 | 665 | 724 | 30 | 20 | |||||||||||||||
Personal auto | 206 | 193 | 203 | 5 | 3 | |||||||||||||||
Homeowners | 104 | 100 | 108 | 4 | 3 | |||||||||||||||
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• | Commercial lines property casualty insurance | |
• | Personal lines property casualty insurance | |
• | Life insurance | |
• | Investments operations |
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Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Written premiums | $ | 3,117 | $ | 3,178 | $ | 3,076 | (1.9 | ) | 3.3 | |||||||||||
Earned premiums | $ | 3,125 | $ | 3,164 | $ | 3,058 | (1.2 | ) | 3.5 | |||||||||||
Loss and loss expenses excluding catastrophes | 1,806 | 1,833 | 1,685 | (1.5 | ) | 8.8 | ||||||||||||||
Catastrophe loss and loss expenses | 26 | 175 | 127 | (85.1 | ) | 37.9 | ||||||||||||||
Commission expenses | 599 | 596 | 592 | 0.4 | 0.7 | |||||||||||||||
Underwriting expenses | 375 | 363 | 319 | 3.2 | 13.9 | |||||||||||||||
Policyholder dividends | 15 | 16 | 5 | (5.4 | ) | 208.1 | ||||||||||||||
Underwriting profit | $ | 304 | $ | 181 | $ | 330 | 68.3 | (45.2 | ) | |||||||||||
Ratios as a percent of earned premiums: | ||||||||||||||||||||
Loss and loss expenses excluding catastrophes | 57.8 | % | 58.0 | % | 55.1 | % | ||||||||||||||
Catastrophe loss and loss expenses | 0.8 | 5.5 | 4.1 | |||||||||||||||||
Loss and loss expenses | 58.6 | 63.5 | 59.2 | |||||||||||||||||
Commission expenses | 19.2 | 18.8 | 19.4 | |||||||||||||||||
Underwriting expenses | 12.0 | 11.5 | 10.4 | |||||||||||||||||
Policyholder dividends | 0.5 | 0.5 | 0.2 | |||||||||||||||||
Combined ratio | 90.3 | % | 94.3 | % | 89.2 | % | ||||||||||||||
• | Changes in written and earned premiums over the past three years, reflecting growing price competition partially offset by consistently high retention rates. New business written directly by agencies was $325 million, $357 million and $314 million in 2007, 2006 and 2005, 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 improved the combined ratio by 7.7 percentage points in 2007 compared with 3.7 and 5.2 percentage points in 2006 and 2005. These amounts include development on prior period catastrophe loss reserves as discussed below. | |
• | The adoption of stock option expensing added approximately 0.5 percentage points to the 2007 and 2006 combined ratios. | |
• | Non-catastrophe weather-related losses — Approximately 1 percentage point of the increase in the 2007 accident year loss and loss expense ratio was due to higher losses from weather events not deemed to be catastrophes, including a few unusually large losses. | |
• | Catastrophe losses contributed 0.8 percentage points to the combined ratio in 2007, the lowest catastrophe loss ratio for our company since 1991. The ratio compared with 5.5 percentage points in 2006 and 4.1 percentage points in 2005. 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. Our 2005 Hurricane Katrina and Rita losses included significant losses associated with commercial accounts with operations extending into states where we do not actively market, as well as losses under three assumed reinsurance treaties. |
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Years ended December 31, | ||||||||||||||||
(In millions, net of reinsurance) | Commercial | Personal | ||||||||||||||
Dates | Cause of loss | Region | lines | lines | Total | |||||||||||
2007 | ||||||||||||||||
Mar. 1-2 | Wind, hail, flood | South | $ | 6 | $ | 2 | $ | 8 | ||||||||
Jun. 7-9 | Wind, hail, flood | Midwest | 4 | 5 | 9 | |||||||||||
Sep. 20-21 | Wind, hail, flood | Midwest | 2 | 4 | 6 | |||||||||||
Other 2007 catastrophes | 14 | 9 | 23 | |||||||||||||
Development on 2006 and prior catastrophes | (10 | ) | (10 | ) | (20 | ) | ||||||||||
Calendar year incurred total | $ | 16 | $ | 10 | $ | 26 | ||||||||||
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 | ||||||||||
• | Premiums — As competition in our commercial markets continued to increase, our 2007 commercial lines written premiums declined slightly. Softer pricing offset the benefits of our strong agency relationships, healthy policy retention rates, accurate risk classification, and insurance-to-value initiatives. We continue to make deliberate decisions not to write or renew certain business. In this 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 compares satisfactorily with the average for the overall commercial lines industry, which was estimated to decline 1.5 percent in 2007, after rising 3.5 percent in 2006 and declining 0.4 percent in 2005. Earned premiums remained relatively steady over the period. | |
• | Combined ratio — Our commercial lines combined ratio was a strong 89.2 percent in 2007. This was better than the 91.3 percent reported in 2006 but higher than the 87.4 percent reported in 2005. The 2007 ratio reflected higher current accident year losses excluding catastrophe losses and higher underwriting expenses. These were more than offset by lower catastrophe losses and higher savings from favorable development on prior period reserves. We continue to focus on sound underwriting fundamentals and seek to obtain adequate premiums per policy. We discuss factors affecting the combined ratio and savings from favorable reserve development by commercial line of business below. | |
Our commercial lines statutory combined ratio was 89.2 percent in 2007 compared with 90.8 percent in 2006 and 87.1 percent in 2005. By comparison, the estimated industry commercial lines combined ratio was 94.0 percent in 2007, 91.2 percent in 2006 and 99.7 percent in 2005. We believe our results trended differently than the overall industry in part because the industry experienced unusually high catastrophe losses in 2005 and unusually low catastrophe losses in 2006. |
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Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Written premiums | $ | 2,413 | $ | 2,442 | $ | 2,290 | (1.2 | ) | 6.7 | |||||||||||
Earned premiums | $ | 2,411 | $ | 2,402 | $ | 2,254 | 0.4 | 6.6 | ||||||||||||
Loss and loss expenses excluding catastrophes | 1,378 | 1,377 | 1,222 | 0.1 | 12.7 | |||||||||||||||
Catastrophe loss and loss expenses | 16 | 89 | 76 | (81.3 | ) | 16.6 | ||||||||||||||
Commission expenses | 454 | 444 | 438 | 2.0 | 1.4 | |||||||||||||||
Underwriting expenses | 287 | 268 | 228 | 7.0 | 17.8 | |||||||||||||||
Policyholder dividends | 15 | 16 | 5 | (5.4 | ) | 208.1 | ||||||||||||||
Underwriting profit | $ | 261 | $ | 208 | $ | 285 | 25.4 | (27.0 | ) | |||||||||||
Ratios as a percent of earned premiums: | ||||||||||||||||||||
Loss and loss expenses excluding catastrophes | 57.2 | % | 57.3 | % | 54.2 | % | ||||||||||||||
Catastrophe loss and loss expenses | 0.7 | 3.7 | 3.4 | |||||||||||||||||
Loss and loss expenses | 57.9 | 61.0 | 57.6 | |||||||||||||||||
Commission expenses | 18.8 | 18.5 | 19.5 | |||||||||||||||||
Underwriting expenses | 11.9 | 11.1 | 10.1 | |||||||||||||||||
Policyholder dividends | 0.6 | 0.7 | 0.2 | |||||||||||||||||
Combined ratio | 89.2 | % | 91.3 | % | 87.4 | % | ||||||||||||||
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Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
New losses greater than $4,000,000 | $ | 4 | $ | 0 | $ | 23 | 0.0 | nm | ||||||||||||
New losses $2,000,000-$4,000,000 | 111 | 111 | 34 | 0.3 | 225.8 | |||||||||||||||
New losses $1,000,000-$2,000,000 | 90 | 67 | 60 | 34.2 | 11.2 | |||||||||||||||
New losses $750,000-$1,000,000 | 33 | 28 | 20 | 18.8 | 36.7 | |||||||||||||||
New losses $500,000-$750,000 | 48 | 40 | 32 | 20.9 | 22.9 | |||||||||||||||
New losses $250,000-$500,000 | 74 | 64 | 59 | 14.1 | 7.5 | |||||||||||||||
Case reserve development above $250,000 | 201 | 201 | 150 | 0.3 | 33.9 | |||||||||||||||
Total large losses incurred | 561 | 511 | 378 | 10.0 | 34.3 | |||||||||||||||
Other losses excluding catastrophes | 502 | 562 | 596 | (10.6 | ) | (5.7 | ) | |||||||||||||
Catastrophe losses | 16 | 89 | 76 | (82.3 | ) | 16.6 | ||||||||||||||
Total losses incurred | $ | 1,079 | $ | 1,162 | $ | 1,050 | (7.0 | ) | 10.7 | |||||||||||
Ratios as a percent of earned premiums: | ||||||||||||||||||||
New losses greater than $4,000,000 | 0.2 | % | 0.0 | % | 1.1 | % | ||||||||||||||
New losses $2,000,000-$4,000,000 | 4.6 | 4.6 | 1.5 | |||||||||||||||||
New losses $1,000,000-$2,000,000 | 3.7 | 2.8 | 2.7 | |||||||||||||||||
New losses $750,000-$1,000,000 | 1.4 | 1.2 | 0.9 | |||||||||||||||||
New losses $500,000-$750,000 | 2.0 | 1.7 | 1.4 | |||||||||||||||||
New losses $250,000-$500,000 | 3.0 | 2.7 | 2.6 | |||||||||||||||||
Case reserve development above $250,000 | 8.4 | 8.3 | 6.6 | |||||||||||||||||
Total large loss ratio | 23.3 | 21.3 | 16.8 | |||||||||||||||||
Other losses excluding catastrophes | 20.8 | 23.4 | 26.4 | |||||||||||||||||
Catastrophe losses | 0.7 | 3.7 | 3.4 | |||||||||||||||||
Total loss ratio | 44.8 | % | 48.4 | % | 46.6 | % | ||||||||||||||
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Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Commercial casualty: | ||||||||||||||||||||
Written premiums | $ | 830 | $ | 838 | $ | 779 | (1.0 | ) | 7.7 | |||||||||||
Earned premiums | 827 | 831 | 759 | (0.5 | ) | 9.5 | ||||||||||||||
Loss and loss expenses incurred | 423 | 440 | 302 | (4.0 | ) | 45.8 | ||||||||||||||
Loss and loss expense ratio | 51.1 | % | 53.0 | % | 39.8 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 51.1 | 53.0 | 39.8 | |||||||||||||||||
Reserve development impact on loss and loss expense ratio | (18.1 | ) | (12.0 | ) | (22.5 | ) | ||||||||||||||
Accident year loss and loss expenses incurred and ratios to earned premiums: |
Accident year: | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
as of December 31, 2007 | $ | 572 | $ | 469 | $ | 398 | 69.2 | % | 56.4 | % | 52.5 | % | ||||||||||||
as of December 31, 2006 | 540 | 420 | 64.9 | 55.4 | ||||||||||||||||||||
as of December 31, 2005 | 473 | 62.3 | ||||||||||||||||||||||
Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Commercial property: | ||||||||||||||||||||
Written premiums | $ | 499 | $ | 505 | $ | 476 | (1.1 | ) | 6.1 | |||||||||||
Earned premiums | 497 | 491 | 467 | 1.2 | 5.1 | |||||||||||||||
Loss and loss expenses incurred | 241 | 282 | 300 | (14.6 | ) | (5.9 | ) | |||||||||||||
Loss and loss expense ratio | 48.5 | % | 57.5 | % | 64.2 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 46.3 | 43.6 | 49.3 | |||||||||||||||||
Reserve development impact on loss and loss expense ratio | (3.9 | ) | 0.9 | 3.5 | ||||||||||||||||
Accident year loss and loss expenses incurred and ratios to earned premiums: |
Accident year: | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
as of December 31, 2007 | $ | 260 | $ | 274 | $ | 287 | 52.4 | % | 55.7 | % | 61.4 | % | ||||||||||||
as of December 31, 2006 | 278 | 300 | 56.6 | 64.2 | ||||||||||||||||||||
as of December 31, 2005 | 283 | 60.7 | ||||||||||||||||||||||
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Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Commercial auto: | ||||||||||||||||||||
Written premiums | $ | 429 | $ | 450 | $ | 448 | (4.7 | ) | 0.3 | |||||||||||
Earned premiums | 440 | 453 | 457 | (2.9 | ) | (0.9 | ) | |||||||||||||
Loss and loss expenses incurred | 278 | 278 | 274 | 0.2 | 1.5 | |||||||||||||||
Loss and loss expense ratio | 63.5 | % | 61.5 | % | 60.1 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 63.5 | 60.6 | 60.0 | |||||||||||||||||
Reserve development impact on loss and loss expense ratio | (5.8 | ) | (4.6 | ) | (5.0 | ) | ||||||||||||||
Accident year loss and loss expenses incurred and ratios to earned premiums: |
Accident year: | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
as of December 31, 2007 | $ | 304 | $ | 284 | $ | 274 | 69.3 | % | 62.7 | % | 60.1 | % | ||||||||||||
as of December 31, 2006 | 300 | 281 | 66.1 | 61.4 | ||||||||||||||||||||
as of December 31, 2005 | 298 | 65.1 | ||||||||||||||||||||||
Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Workers’ compensation: | ||||||||||||||||||||
Written premiums | $ | 378 | $ | 379 | $ | 338 | (0.3 | ) | 12.1 | |||||||||||
Earned premiums | 373 | 366 | 328 | 1.9 | 11.4 | |||||||||||||||
Loss and loss expenses incurred | 316 | 313 | 299 | 1.0 | 4.7 | |||||||||||||||
Loss and loss expense ratio | 84.6 | % | 85.4 | % | 90.9 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 84.6 | 85.4 | 90.9 | |||||||||||||||||
Reserve development impact on loss and loss expense ratio | (2.7 | ) | 2.6 | 12.9 | ||||||||||||||||
Accident year loss and loss expenses incurred and ratios to earned premiums: |
Accident year: | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
as of December 31, 2007 | $ | 326 | $ | 284 | $ | 254 | 87.3 | % | 77.6 | % | 77.3 | % | ||||||||||||
as of December 31, 2006 | 300 | 254 | 82.8 | 77.4 | ||||||||||||||||||||
as of December 31, 2005 | 256 | 78.1 | ||||||||||||||||||||||
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Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Specialty packages: | ||||||||||||||||||||
Written premiums | $ | 146 | $ | 144 | $ | 138 | 1.5 | 4.6 | ||||||||||||
Earned premiums | 146 | 141 | 137 | 3.1 | 3.2 | |||||||||||||||
Loss and loss expenses incurred | 86 | 94 | 92 | (7.5 | ) | 2.1 | ||||||||||||||
Loss and loss expense ratio | 59.4 | % | 66.3 | % | 67.0 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 55.3 | 54.9 | 61.8 | |||||||||||||||||
Reserve development impact on loss and loss expense ratio | 0.5 | 1.6 | 10.9 | |||||||||||||||||
Accident year loss and loss expenses incurred and ratios to earned premiums: |
Accident year: | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
as of December 31, 2007 | $ | 86 | $ | 92 | $ | 81 | 58.9 | % | 65.3 | % | 59.1 | % | ||||||||||||
as of December 31, 2006 | 91 | 80 | 64.7 | 58.6 | ||||||||||||||||||||
as of December 31, 2005 | 77 | 56.1 | ||||||||||||||||||||||
Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Surety and executive risk: | ||||||||||||||||||||
Written premiums | $ | 102 | $ | 97 | $ | 85 | 5.2 | 15.3 | ||||||||||||
Earned premiums | 100 | 93 | 80 | 7.8 | 16.3 | |||||||||||||||
Loss and loss expenses incurred | 42 | 47 | 27 | (11.1 | ) | 72.2 | ||||||||||||||
Loss and loss expense ratio | 41.8 | % | 50.7 | % | 34.2 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 41.8 | 50.7 | 34.2 | |||||||||||||||||
Reserve development impact on loss and loss expense ratio | 1.2 | 6.3 | (5.4 | ) | ||||||||||||||||
Accident year loss and loss expenses incurred and ratios to earned premiums: |
Accident year: | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
as of December 31, 2007 | $ | 41 | $ | 44 | $ | 42 | 40.6 | % | 47.3 | % | 52.5 | % | ||||||||||||
as of December 31, 2006 | 41 | 39 | 44.4 | 48.3 | ||||||||||||||||||||
as of December 31, 2005 | 32 | 39.6 | ||||||||||||||||||||||
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Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Machinery and equipment: | ||||||||||||||||||||
Written premiums | $ | 29 | $ | 29 | $ | 26 | 0.2 | 8.7 | ||||||||||||
Earned premiums | 28 | 27 | 26 | 2.4 | 5.8 | |||||||||||||||
Loss and loss expenses incurred | 8 | 12 | 6 | (32.3 | ) | 98.7 | ||||||||||||||
Loss and loss expense ratio | 27.8 | % | 42.0 | % | 22.4 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 28.1 | 41.6 | 22.5 | |||||||||||||||||
Reserve development impact on loss and loss expense ratio | (5.8 | ) | 2.8 | (3.7 | ) | |||||||||||||||
Accident year loss and loss expenses incurred and ratios to earned premiums: |
Accident year: | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
as of December 31, 2007 | $ | 10 | $ | 10 | $ | 7 | 33.6 | % | 35.9 | % | 26.1 | % | ||||||||||||
as of December 31, 2006 | 11 | 7 | 39.2 | 28.6 | ||||||||||||||||||||
as of December 31, 2005 | 7 | 26.1 | ||||||||||||||||||||||
• | Premiums — As competition in our personal lines markets rose and we continued to work to generate consistent profitability in our personal lines segment, our written premiums declined in both 2007 and 2006, largely due to pricing that led to lower premiums per policy. Industry average written premiums were estimated to be flat in 2007, after rising 2.0 percent in 2006 and 3.7 percent in 2005. | |
Personal lines new business premiums written directly by agencies increased 16.9 percent to $38 million in 2007 and 1.6 percent to $33 million in 2006 after declining 33.9 percent to $32 million in 2005. | ||
• | Combined ratio — The combined ratio improved 9.7 percentage points in 2007 after rising 9.2 percentage points in 2006. The year-over-year differences largely were due to fluctuations in the level of catastrophe losses and the steady rise in the current accident year loss and loss expense ratio excluding catastrophe losses. Year-over-year comparisons would have been stronger if earned premiums had not declined. |
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Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Written premiums | $ | 704 | $ | 736 | $ | 786 | (4.4 | ) | (6.4 | ) | ||||||||||
Earned premiums | $ | 714 | $ | 762 | $ | 804 | (6.3 | ) | (5.3 | ) | ||||||||||
Loss and loss expenses excluding catastrophes | 428 | 456 | 463 | (6.2 | ) | (1.5 | ) | |||||||||||||
Catastrophe loss and loss expenses | 10 | 86 | 51 | (89.0 | ) | 69.8 | ||||||||||||||
Commission expenses | 145 | 152 | 154 | (4.4 | ) | (1.6 | ) | |||||||||||||
Underwriting expenses | 88 | 95 | 91 | (7.5 | ) | 4.2 | ||||||||||||||
Underwriting profit (loss) | $ | 43 | $ | (27 | ) | $ | 45 | 260.9 | (160.0 | ) | ||||||||||
Ratios as a percent of earned premiums: | ||||||||||||||||||||
Loss and loss expenses excluding catastrophes | 60.0 | % | 59.9 | % | 57.6 | % | ||||||||||||||
Catastrophe loss and loss expenses | 1.3 | 11.3 | 6.3 | |||||||||||||||||
Loss and loss expenses | 61.3 | 71.2 | 63.9 | |||||||||||||||||
Commission expenses | 20.3 | 19.9 | 19.2 | |||||||||||||||||
Underwriting expenses | 12.3 | 12.5 | 11.3 | |||||||||||||||||
Combined ratio | 93.9 | % | 103.6 | % | 94.4 | % | ||||||||||||||
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Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
New losses greater than $4,000,000 | $ | 0 | $ | 0 | $ | 0 | 0.0 | 0.0 | ||||||||||||
New losses $2,000,000-$4,000,000 | 13 | 8 | 2 | 72.0 | 270.4 | |||||||||||||||
New losses $1,000,000-$2,000,000 | 15 | 14 | 6 | 3.5 | 113.2 | |||||||||||||||
New losses $750,000-$1,000,000 | 8 | 9 | 8 | (6.7 | ) | 13.8 | ||||||||||||||
New losses $500,000-$750,000 | 10 | 8 | 9 | 20.9 | (4.4 | ) | ||||||||||||||
New losses $250,000-$500,000 | 26 | 22 | 22 | 15.5 | 2.3 | |||||||||||||||
Case reserve development above $250,000 | 19 | 23 | 19 | (16.4 | ) | 21.9 | ||||||||||||||
Total large losses incurred | 91 | 84 | 66 | 8.1 | 27.7 | |||||||||||||||
Other losses excluding catastrophes | 279 | 309 | 339 | (9.7 | ) | (8.9 | ) | |||||||||||||
Catastrophe losses | 10 | 86 | 51 | (89.0 | ) | 69.8 | ||||||||||||||
Total losses incurred | $ | 380 | $ | 479 | $ | 456 | (20.8 | ) | 5.1 | |||||||||||
Ratios as a percent of earned premiums: | ||||||||||||||||||||
New losses greater than $4,000,000 | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||
New losses $2,000,000-$4,000,000 | 1.9 | 1.0 | 0.3 | |||||||||||||||||
New losses $1,000,000-$2,000,000 | 2.0 | 1.8 | 0.8 | |||||||||||||||||
New losses $750,000-$1,000,000 | 1.1 | 1.1 | 0.9 | |||||||||||||||||
New losses $500,000-$750,000 | 1.5 | 1.1 | 1.1 | |||||||||||||||||
New losses $250,000-$500,000 | 3.6 | 2.9 | 2.7 | |||||||||||||||||
Case reserve development above $250,000 | 2.7 | 3.1 | 2.4 | |||||||||||||||||
Total large losses incurred | 12.8 | 11.0 | 8.2 | |||||||||||||||||
Other losses excluding catastrophes | 39.1 | 40.6 | 42.2 | |||||||||||||||||
Catastrophe losses | 1.3 | 11.3 | 6.3 | |||||||||||||||||
Total loss ratio | 53.2 | % | 62.9 | % | 56.7 | % | ||||||||||||||
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Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Personal auto: | ||||||||||||||||||||
Written premiums | $ | 332 | $ | 359 | $ | 409 | (7.5 | ) | (12.4 | ) | ||||||||||
Earned premiums | 342 | 385 | 433 | (11.0 | ) | (11.2 | ) | |||||||||||||
Loss and loss expenses incurred | 228 | 250 | 259 | (8.6 | ) | (3.5 | ) | |||||||||||||
Loss and loss expense ratio | 66.8 | % | 65.0 | % | 59.9 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 67.4 | 62.2 | 59.3 | |||||||||||||||||
Reserve development impact on loss and loss expense ratio | 0.7 | 0.6 | (1.9 | ) |
Accident year: | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
as of December 31, 2007 | $ | 226 | $ | 251 | $ | 276 | 66.1 | % | 65.4 | % | 64.0 | % | ||||||||||||
as of December 31, 2006 | 248 | 272 | 64.5 | 62.8 | ||||||||||||||||||||
as of December 31, 2005 | 267 | 61.8 | ||||||||||||||||||||||
Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Homeowner: | ||||||||||||||||||||
Written premiums | $ | 284 | $ | 290 | $ | 288 | (2.1 | ) | 0.7 | |||||||||||
Earned premiums | 285 | 289 | 282 | (1.6 | ) | 2.3 | ||||||||||||||
Loss and loss expenses incurred | 168 | 240 | 213 | (30.0 | ) | 12.4 | ||||||||||||||
Loss and loss expense ratio | 59.0 | % | 83.0 | % | 75.5 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 55.5 | 59.3 | 58.6 | |||||||||||||||||
Reserve development impact on loss and loss expense ratio | (3.5 | ) | 1.5 | (0.4 | ) |
Accident year: | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
as of December 31, 2007 | $ | 178 | $ | 229 | $ | 220 | 62.5 | % | 79.2 | % | 77.9 | % | ||||||||||||
as of December 31, 2006 | 235 | 219 | 81.5 | 77.6 | ||||||||||||||||||||
as of December 31, 2005 | 215 | 76.0 | ||||||||||||||||||||||
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• | Non-commission expenses — Since we generally do not allocate non-commission expenses to individual business lines, to measure homeowner profitability, we use a personal lines segment commission and underwriting expense ratio of approximately 33 percentage points to determine an estimated homeowner combined ratio. Lower levels of premium growth affected our expense ratio in 2007 and may affect our ability to attain our personal lines segment expense ratio target in the future. |
• | Catastrophe losses — To measure our progress toward homeowner profitability, we use a normalized catastrophe loss ratio (as a percent of homeowner earned premium) in the range of 17 percent. Between 2005 and 2007, catastrophe losses averaged 14.5 percent of homeowner earned premiums. We have not changed our catastrophe loss assumption because unusually low catastrophe losses in 2007 artificially lowered the average and because the geographic concentration of losses in 2005 and 2006 was unusual. |
Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Other personal: | ||||||||||||||||||||
Written premiums | $ | 88 | $ | 87 | $ | 89 | 0.4 | (2.0 | ) | |||||||||||
Earned premiums | 87 | 88 | 89 | (1.2 | ) | (1.1 | ) | |||||||||||||
Loss and loss expenses incurred | 41 | 52 | 40 | (21.7 | ) | 31.6 | ||||||||||||||
Loss and loss expense ratio | 47.0 | % | 59.4 | % | 44.6 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 45.3 | 52.0 | 41.6 | |||||||||||||||||
Reserve development impact on loss and loss expense ratio | (37.8 | ) | (28.6 | ) | (28.7 | ) |
Accident year: | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
as of December 31, 2007 | $ | 74 | $ | 67 | $ | 53 | 84.8 | % | 75.7 | % | 59.3 | % | ||||||||||||
as of December 31, 2006 | 77 | 58 | 88.0 | 65.4 | ||||||||||||||||||||
as of December 31, 2005 | 64 | 73.3 | ||||||||||||||||||||||
• | Competitive rates — In mid-2006, we introduced insurance scores into our rating program for homeowner and personal auto pricing. In 2007 we began offering a discount on homeowner policies in some states when an auto policy is also purchased. Previously, we discounted only the auto policy when a policyholder had both policies. Rollout of this credit will continue in additional states in 2008. While these pricing refinements reduced premiums for many policies we write, we believe they present an opportunity to attract our agents’ more quality-conscious clientele. We are working to build on this success with the introduction of more sophisticated rating during 2008. |
• | Value-added products — We introduced three new personal lines products in 2007, supporting our agents’ ability to create packages with marketable differences: Replacement Cost Coverage for a Total Loss — Auto; Personal Auto Plus Endorsement; and Identify Theft Expense Coverage and Advocacy Services. Another new product will begin rolling out in the second half of 2008: Mechanical Breakdown Coverage adds protection for major home systems to the homeowner policy. |
• | Diamond -The Diamond system is in use by agencies writing approximately 97.5 percent of personal lines premium volume. The system makes 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 |
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and providing direct-bill capabilities. In 2008, we expect to implement upgrades that will further improve user satisfaction. |
• | New agencies — The availability of Diamond should help us increase the number of agencies that offer our personal lines products. During 2007, some agency locations that previously marketed only our commercial lines products added our personal lines products. Expanding into these agencies should provide additional sources of premiums and help geographically diversify our personal lines portfolio. | |
Further, in 2008, we expect to deploy Diamond to agencies in eight additional states. We already market personal lines products in Maryland, Montana, New Hampshire, North Carolina and Vermont, and we expect agencies in these states to respond favorably to its advantages. We also expect to deploy Diamond to agencies in Arizona, South Carolina and Utah, where we currently market only commercial lines products. |
• | Revenues — Driven by higher term life insurance premiums, revenue growth has accelerated over the past three years. Gross in-force policy face amounts increased to $61.875 billion at year-end 2007 from $56.971 billion at year-end 2006 and $51.493 billion at year-end 2005. |
• | Profitability — The life insurance segment frequently 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 reported a nominal operating profit in 2007. |
Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(In millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Written premiums | $ | 167 | $ | 161 | $ | 205 | 3.2 | (21.3 | ) | |||||||||||
Earned premiums | $ | 125 | $ | 115 | $ | 106 | 9.0 | 7.9 | ||||||||||||
Separate account investment management fees | 4 | 3 | 4 | 25.1 | (0.3 | ) | ||||||||||||||
Total revenues | 129 | 118 | 110 | 9.5 | 7.6 | |||||||||||||||
Contract holders benefits incurred | 133 | 122 | 102 | 9.2 | 20.1 | |||||||||||||||
Investment interest credited to contract holders | (59 | ) | (54 | ) | (51 | ) | 9.8 | 5.7 | ||||||||||||
Operating expenses incurred | 52 | 51 | 52 | 0.8 | (1.8 | ) | ||||||||||||||
Total benefits and expenses | 126 | 119 | 103 | 5.3 | 16.1 | |||||||||||||||
Life insurance segment profit (loss) | $ | 3 | $ | (1 | ) | $ | 7 | 446.3 | (115.4 | ) | ||||||||||
• | Statutory written premiums for term and other life insurance products rose 10.5 percent to $141 million for 2007 and 12.7 percent to $127 million for 2006. In 2006, we began emphasizing products that |
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generate a higher average premium per policy through enhanced features and higher face amounts while reducing expenses. |
• | Statutory written annuity premiums declined $8 million in 2007 and $58 million in 2006. Since late 2005, we have de-emphasized annuities because of an unfavorable interest rate environment. |
• | Contract holders (policyholders) benefits incurred related to traditional life and interest-sensitive products accounted for 71.9 of 2007 total benefits and expenses, 73.8 percent of 2006 total benefits and expenses and 71.3 percent of 2005 total benefits and expenses. |
• | Operating expenses incurred, net of deferred acquisition costs, accounted for 28.1 percent of 2007 total benefits and expenses, 29.7 percent of 2006 total benefits and expenses and 34.0 percent of 2005 total benefits and expenses. Operating expenses rose on an absolute and percentage basis principally because of changes in the amortization of universal life deferred acquisition costs. |
• | Investment income — Pretax investment income reached a new record again in 2007, rising 6.6 percent from the prior record in 2006. Growth in investment income over the past two years has been driven by |
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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 all three years largely due to investment sales that were discretionary in timing and amount. |
Years ended December 31, | 2007-2006 | 2006-2005 | ||||||||||||||||||
(In millions) | 2007 | 2006 | 2005 | Change % | Change % | |||||||||||||||
Investment income: | ||||||||||||||||||||
Interest | $ | 308 | $ | 300 | $ | 280 | 2.5 | 7.1 | ||||||||||||
Dividends | 294 | 262 | 244 | 12.1 | 7.5 | |||||||||||||||
Other | 15 | 15 | 8 | (0.5 | ) | 90.0 | ||||||||||||||
Investment expenses | (9 | ) | (7 | ) | (6 | ) | (18.7 | ) | (19.3 | ) | ||||||||||
Total investment income, net of expenses | 608 | 570 | 526 | 6.6 | 8.4 | |||||||||||||||
Investment interest credited to contract holders | (59 | ) | (54 | ) | (51 | ) | 9.8 | 5.7 | ||||||||||||
Realized investment gains and losses summary: | ||||||||||||||||||||
Realized investment gains and losses | 409 | 678 | 69 | (39.6 | ) | 883.0 | ||||||||||||||
Change in fair value of securities with embedded derivatives | (11 | ) | 7 | (7 | ) | (263.6 | ) | 200.7 | ||||||||||||
Other-than-temporary impairment charges | (16 | ) | (1 | ) | (1 | ) | (1,872.5 | ) | 41.7 | |||||||||||
Total realized investment gains and losses | 382 | 684 | 61 | (44.1 | ) | 1,026.0 | ||||||||||||||
Investment operations income | $ | 931 | $ | 1,200 | $ | 536 | (22.4 | ) | 124.0 | |||||||||||
• | 2007 - |
o | We sold 3.8 million shares of ExxonMobil common stock, contributing $217 million to realized investment gains | ||
o | We divested the majority of our real estate investment trust holdings, contributing $72 million to realized investment gains | ||
o | We sold 5.5 million shares of Fifth Third common stock in a block sale, contributing $64 million to realized investment gains | ||
o | We sold all of our FirstMerit common stock holdings, contributing $59 million to realized investment gains |
• | 2006 — We sold the remainder of our Alltel common stock holdings, contributing $647 million to realized investment gains. | |
• | 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. |
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Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Home building | $ | (5 | ) | $ | 0 | $ | 0 | |||||
Financial | (6 | ) | 0 | 0 | ||||||||
Automotive | 0 | (1 | ) | (1 | ) | |||||||
Other | (5 | ) | 0 | 0 | ||||||||
Total | $ | (16 | ) | $ | (1 | ) | $ | (1 | ) | |||
Years ended December 31, | ||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | |||||||||
Taxable fixed maturities: | ||||||||||||
Impairment amount | $ | (14 | ) | $ | (1 | ) | $ | (1 | ) | |||
New book value | $ | 46 | $ | 0 | $ | 0 | ||||||
Percent to total owned | 1 | % | 0 | % | 0 | % | ||||||
Number of securities impaired | 18 | 1 | 2 | |||||||||
Percent to total owned | 2 | % | 0 | % | 0 | % | ||||||
Common equities: | ||||||||||||
Impairment amount | $ | (2 | ) | $ | 0 | $ | 0 | |||||
New book value | $ | 2 | $ | 0 | $ | 0 | ||||||
Percent to total owned | 0 | % | 0 | % | 0 | % | ||||||
Number of securities impaired | 2 | 0 | 0 | |||||||||
Percent to total owned | 4 | % | 0 | % | 0 | % | ||||||
Total: | ||||||||||||
Impairment amount | $ | (16 | ) | $ | (1 | ) | $ | (1 | ) | |||
New book value | $ | 48 | $ | 0 | $ | 0 | ||||||
Percent to total owned | 1 | % | 0 | % | 0 | % | ||||||
Number of securities impaired | 20 | 1 | 2 | |||||||||
Percent to total owned | 1 | % | 0 | % | 0 | % |
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Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Premiums collected | $ | 3,256 | $ | 3,285 | $ | 3,187 | ||||||
Loss and loss expenses paid | (1,888 | ) | (1,859 | ) | (1,752 | ) | ||||||
Commissions and other underwriting expenses paid | (1,053 | ) | (1,036 | ) | (995 | ) | ||||||
Insurance subsidiary cash flow from underwriting | 315 | 390 | 440 | |||||||||
Investment income received | 505 | 471 | 427 | |||||||||
Insurance subsidiary operating cash flow | $ | 820 | $ | 861 | $ | 867 | ||||||
• | Sales of fixed-maturity investments — The majority of our fixed-maturity securities are held until maturity. Any decision to sell or reduce a holding is executed either to improve long term total return prospects or in response to adverse credit concerns. |
• | 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, including U.S. Agency paper, began to rise in 2007 as interest rates shifted lower in the second half of the year. |
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• | Sales of equity securities investments — The decision to divest an equity position generally is reached after careful analysis of the direction the company is headed and its ability to meet our investment parameters. |
In 2007 and 2006, we sold a portion of our ExxonMobil common stock holding, completed the sale of our Alltel and FirstMerit common stock holdings and made other sales of all or part of smaller holdings, including divesting the majority of our REIT holdings. We sold a portion of our Fifth Third position in 2007 to fund an accelerated share repurchase program. |
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Payment due by period | ||||||||||||||||||||
Less than | Years | Years | More than | |||||||||||||||||
(In millions) | 1 year | 1-3 | 4-5 | 5 years | Total | |||||||||||||||
Interest on long-term debt | $ | 52 | $ | 104 | $ | 104 | $ | 944 | $ | 1,204 | ||||||||||
Long-term debt | 0 | 0 | 0 | 795 | 795 | |||||||||||||||
Short-term debt | 69 | 0 | 0 | 0 | 69 | |||||||||||||||
Profit-sharing commissions | 102 | 0 | 0 | 0 | 102 | |||||||||||||||
Headquarters building expansion | 16 | 0 | 0 | 0 | 16 | |||||||||||||||
Capital lease obligations | 5 | 9 | 1 | 0 | 15 | |||||||||||||||
Computer hardware and software | 4 | 4 | 2 | 0 | 10 | |||||||||||||||
Other invested assets | 12 | 15 | 11 | 4 | 42 | |||||||||||||||
Liability for uncertain tax positions | 2 | 11 | 1 | 0 | 14 | |||||||||||||||
Subtotal | 262 | 143 | 119 | 1,743 | 2,267 | |||||||||||||||
Gross property casualty loss and loss expense payments (1) | 1,193 | 1,320 | 582 | 830 | 3,925 | |||||||||||||||
Gross life policyholder obligations (2) | 30 | 49 | 92 | 3,611 | 3,782 | |||||||||||||||
Total | $ | 1,485 | $ | 1,512 | $ | 793 | $ | 6,184 | $ | 9,974 | ||||||||||
(1) | Gross property casualty loss and loss expense payments — Our estimate of gross property casualty loss and loss expense payments of $3.925 billion is lower than loss and loss expense reserves of $3.967 billion as of year-end 2007. The $42 million difference is due to life and health losses, as discussed in Item 8, Note 4 of the Consolidated Financial Statements, Page 95. | |
We believe that our insurance subsidiaries maintain sufficient liquidity to pay claims and operating expenses, as well as meet commitments in the event of unforeseen circumstances such as catastrophe losses, reinsurer insolvencies, changes in the timing of claims payments, increases in claims severity, reserve deficiencies or inadequate premium rates. We believe catastrophic events are the most likely cause of an unexpected rise in claims severity or frequency. | ||
While we believe that historical performance of property casualty and life loss payment patterns is a reasonable source for projecting future claims payments, there is inherent uncertainty in this estimate of contractual obligations. We believe that we could meet our obligations under a significant and unexpected change in the timing of these payments because of the liquidity of our invested assets, strong financial position and access to lines of credit. | ||
Our estimates of gross property casualty loss and loss expense payments also do not include reinsurance receivables or ceded losses. As discussed in 2008 Reinsurance Programs, Page 70, we purchase reinsurance to mitigate our property casualty risk exposure. Ceded property casualty reinsurance receivables of $528 million at year-end 2007 offset our gross property casualty loss and loss expense obligations. Our reinsurance program mitigates the liquidity risk of a single large loss or an unexpected rise in claims severity or frequency due to a catastrophic event. Reinsurance does not relieve us of our obligation to pay covered claims. The financial strength of our reinsurers is important because our ability to recover for losses under one of our reinsurance agreements depends on the financial viability of the reinsurer. | ||
We direct our associates and agencies to settle claims and pay losses as quickly as practical and made $1.791 billion in net claim payments during 2007. At year-end 2007, net property casualty reserves reflected $1.901 billion in unpaid amounts on reported claims (case reserves), $808 million in loss expense reserves and $688 million in estimates of incurred but not yet reported claims. The specific amounts and timing of obligations related to case reserves and associated loss expenses are not set contractually. The amounts and timing of obligations for IBNR claims and related loss expenses are unknown. We discuss the adequacy of our loss and loss expense reserves in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 37. | ||
The historic pattern of using premium receipts for the payment of loss and loss expenses has enabled us to extend slightly the maturities of our investment portfolio beyond the estimated settlement date of the loss reserves. The effective duration of our fixed-maturity portfolio was 4.84 years at year-end 2007. By contrast, the duration of our loss and loss expense reserves was 3.21 years, and the duration of all liabilities was 2.86 years. We believe this difference in duration does not affect our ability to meet current obligations because cash flow from operations is sufficient to meet these obligations. In addition, our investment strategy has led to substantial unrealized gains from holdings in equity securities. These equity holdings could be liquidated, if necessary, to meet higher than anticipated loss and loss expenses. | ||
(2) | Gross life policyholder obligations — Our estimates of life, annuity and disability policyholder obligations reflect future estimated cash payments to be made to policyholders for future policy benefits, policyholders’ account balances and separate account liabilities. These estimates include death and disability claims, policy surrenders, policy maturities, annuity payments, minimum guarantees on separate account products, commissions and premium taxes offset by expected future deposits and premiums on in-force contracts. | |
Our estimates of gross life, annuity and disability obligations do not reflect net recoveries from reinsurance agreements. Ceded life reinsurance receivables were $208 million at year-end 2007. As discussed in 2008 Reinsurance Programs, Page 70, we purchase reinsurance to mitigate our life insurance risk exposure. At year-end 2007, ceded death benefits represented approximately 53.3 percent of our total policy face amounts in force. | ||
These estimated cash outflows are undiscounted with respect to interest. As a result, the sum of the cash outflows shown for all years of $3.782 billion (total of life insurance obligations) exceeds the liabilities recorded in life policy reserves and separate accounts for future policy benefits and claims of $2.037 billion (total of life insurance policy reserves and separate account policy reserves). Separate account policy reserves make up all but $10 million of separate accounts liabilities. | ||
We have made significant assumptions to determine the estimated undiscounted cash flows of these policies and contracts that include mortality, morbidity, future lapse rates and interest crediting rates. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. |
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• | Interest on long-term debt — Our interest expense remained unchanged in 2007 at an annual rate of approximately $52 million. We generally have tried to minimize our reliance on debt financing and do not expect a material increase in interest expense from long-term debt in the near future. |
• | Short-term debt — We plan to renew our $69 million outstanding note payable drawn on our lines of credit. |
• | Headquarters building expansion — The construction project is on schedule and on budget. We expect construction to be completed by July 2008. |
• | Contingent commissions — Contingent, or profit-sharing, commissions are paid to agencies using a formula that takes into account agency profitability and other factors. We estimate 2008 contingent commission payments of approximately $102 million. |
• | Computer hardware and software — We expect to need approximately $10 million over the next five years for current material commitments for computer hardware and software, including maintenance contracts on hardware and other known obligations. We discuss below the non-contractual expenses we anticipate for computer hardware and software in 2008. |
• | Commissions — As discussed above, commissions paid rose in each the past two years, reflecting the operating expense trends we discuss in the Commercial Lines and Personal Lines Insurance Results of Operations, Page 44 and Page 51. Commission payments generally track with written premiums. | |
• | Other operating expenses — Many of our operating expenses are not contractual obligations, but reflect the ongoing expenses of our business. Non-commission operating expenses paid rose in the past two years. Staffing is the largest component of our operating expenses and is expected to rise again in 2008, reflecting the 1.7 percent average annual growth in our associate base over the past three years. Our associate base has grown as we focus on enhancing service to our agencies and staffing additional field territories. In 2008, we also anticipate an additional $9 million of expenses related to associate benefit plan modifications. Our benefit plans help us retain experienced associates, attract new talent and provide a measure of security and stability to associates and their families. | |
In addition to contractual obligations for hardware and software, we anticipate capitalizing $8 million in spending for key technology initiatives in 2008. Technology projects for 2008 are discussed in Item 1, Technology Solutions, Page 4. Capitalized development costs related to key technology initiatives totaled $6 million in 2007. These activities are conducted at our discretion, and we have no material contractual obligations for activities planned as part of these projects. | ||
• | Disaster recovery and backup data processing center — We expect to spend approximately $26 million in 2008 and 2009 to begin renovation of a newly purchased building that will serve as our disaster recovery and backup data processing center. | |
• | Qualified pension plan — We anticipate a cash contribution of $10 million to pension plan assets in 2008. Our results of operation will reflect an anticipated $19 million expense related to an increase in accrued pension benefits. |
• | Dividends to shareholders — Over the past 10 years, the company has paid an average of 37 percent of net income as dividends, with the remaining 63 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 2008, the board of directors authorized a 9.9 percent increase in the regular quarterly cash dividend to an indicated annual rate of $1.56 per share. In 2007, 2006 and 2005, we paid cash dividends of $240 million, $228 million and $204 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 were a record in 2007, building from the steady pace of the last several years. Repurchases occur when we believe that stock prices on the open market are favorable for such repurchases. Our corporate code of conduct restricts repurchases during certain time |
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periods. At a minimum, we would expect repurchases to offset dilution from share-based compensation. In 2007, 2006 and 2005, we used $306 million, $118 million and $63 million for share repurchase. | ||
Repurchase activity in 2007 included open market purchases, two private transactions (at market prices) and an ASR agreement under which 4 million shares were purchased at an average price of $39.20. In conjunction with the authorization for the ASR, the board increased its repurchase authorization to an additional 13 million shares. | ||
The details of the repurchase authorizations and activity are described in Item 5, Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, Page 27. Between February 1999 and year-end 2007, we have repurchased 24.9 million shares at a total cost to the company of $967 million. We do not adjust the number of shares repurchased and average price per repurchased share for stock dividends. |
• | 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 were 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, 2007, we had paid $1.295 billion of loss and loss expenses in calendar years 1998 through 2007 for losses that occurred in accident years 1997 and prior. An estimated $171 million of losses remained unpaid as of year-end 2007 (net re-estimated reserves of $1.466 billion from Section C less cumulative paid loss and loss expenses of $1.295 billion). |
• | 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 |
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December 31, 1997, had developed a $311 million redundancy over 10 years, net of reinsurance, which was reflected in income over the 10 years. The table shows favorable development in redundant reserves as a negative number. The effects on income in 2007, 2006 and 2005 of changes in estimates of the reserves for loss and loss expenses for all accident years are shown in the reconciliation below. |
Calendar year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
(In millions) | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | |||||||||||||||||||||||||||||||||
A. Originally reported reserves for unpaid loss and loss expenses: | ||||||||||||||||||||||||||||||||||||||||||||
Gross of reinsurance | $ | 1,889 | $ | 1,978 | $ | 2,093 | $ | 2,401 | $ | 2,865 | $ | 3,150 | $ | 3,386 | $ | 3,514 | $ | 3,629 | $ | 3,860 | $ | 3,925 | ||||||||||||||||||||||
Reinsurance recoverable | 112 | 138 | 161 | 219 | 513 | 542 | 541 | 537 | 518 | 504 | 528 | |||||||||||||||||||||||||||||||||
Net of reinsurance | $ | 1,777 | $ | 1,840 | $ | 1,932 | $ | 2,182 | $ | 2,352 | $ | 2,608 | $ | 2,845 | $ | 2,977 | $ | 3,111 | $ | 3,356 | $ | 3,397 | ||||||||||||||||||||||
B. Cumulative net paid as of: | ||||||||||||||||||||||||||||||||||||||||||||
One year later | $ | 499 | $ | 522 | $ | 591 | $ | 697 | $ | 758 | $ | 799 | $ | 817 | $ | 907 | $ | 944 | $ | 1,006 | ||||||||||||||||||||||||
Two years later | 761 | 833 | 943 | 1,116 | 1,194 | 1,235 | 1,293 | 1,426 | 1,502 | |||||||||||||||||||||||||||||||||||
Three years later | 965 | 1,067 | 1,195 | 1,378 | 1,455 | 1,519 | 1,626 | 1,758 | ||||||||||||||||||||||||||||||||||||
Four years later | 1,075 | 1,207 | 1,327 | 1,526 | 1,614 | 1,716 | 1,823 | |||||||||||||||||||||||||||||||||||||
Five years later | 1,152 | 1,283 | 1,412 | 1,623 | 1,717 | 1,823 | ||||||||||||||||||||||||||||||||||||||
Six years later | 1,205 | 1,333 | 1,464 | 1,680 | 1,778 | |||||||||||||||||||||||||||||||||||||||
Seven years later | 1,239 | 1,366 | 1,496 | 1,717 | ||||||||||||||||||||||||||||||||||||||||
Eight years later | 1,260 | 1,390 | 1,520 | |||||||||||||||||||||||||||||||||||||||||
Nine years later | 1,279 | 1,409 | ||||||||||||||||||||||||||||||||||||||||||
Ten years later | 1,295 | |||||||||||||||||||||||||||||||||||||||||||
C. Net reserves re-estimated as of: | ||||||||||||||||||||||||||||||||||||||||||||
One year later | $ | 1,623 | $ | 1,724 | $ | 1,912 | $ | 2,120 | $ | 2,307 | $ | 2,528 | $ | 2,649 | $ | 2,817 | $ | 2,995 | $ | 3,112 | ||||||||||||||||||||||||
Two years later | 1,551 | 1,728 | 1,833 | 2,083 | 2,263 | 2,377 | 2,546 | 2,743 | 2,871 | |||||||||||||||||||||||||||||||||||
Three years later | 1,520 | 1,636 | 1,802 | 2,052 | 2,178 | 2,336 | 2,489 | 2,657 | ||||||||||||||||||||||||||||||||||||
Four years later | 1,465 | 1,615 | 1,771 | 2,010 | 2,153 | 2,299 | 2,452 | |||||||||||||||||||||||||||||||||||||
Five years later | 1,466 | 1,608 | 1,757 | 1,999 | 2,127 | 2,276 | ||||||||||||||||||||||||||||||||||||||
Six years later | 1,463 | 1,602 | 1,733 | 1,992 | 2,122 | |||||||||||||||||||||||||||||||||||||||
Seven years later | 1,460 | 1,577 | 1,739 | 1,994 | ||||||||||||||||||||||||||||||||||||||||
Eight years later | 1,435 | 1,593 | 1,746 | |||||||||||||||||||||||||||||||||||||||||
Nine years later | 1,456 | 1,603 | ||||||||||||||||||||||||||||||||||||||||||
Ten years later | 1,466 | |||||||||||||||||||||||||||||||||||||||||||
D. Cumulative net redundancy as of: | ||||||||||||||||||||||||||||||||||||||||||||
One year later | $ | (154 | ) | $ | (116 | ) | $ | (20 | ) | $ | (62 | ) | $ | (45 | ) | $ | (80 | ) | $ | (196 | ) | $ | (160 | ) | $ | (116 | ) | $ | (244) | |||||||||||||||
Two years later | (226 | ) | (112 | ) | (99 | ) | (99 | ) | (89 | ) | (231 | ) | (299 | ) | (234 | ) | (240 | ) | ||||||||||||||||||||||||||
Three years later | (257 | ) | (204 | ) | (130 | ) | (130 | ) | (174 | ) | (272 | ) | (356 | ) | (320 | ) | ||||||||||||||||||||||||||||
Four years later | (312 | ) | (225 | ) | (161 | ) | (172 | ) | (199 | ) | (309 | ) | (393 | ) | ||||||||||||||||||||||||||||||
Five years later | (311 | ) | (232 | ) | (175 | ) | (183 | ) | (225 | ) | (332 | ) | ||||||||||||||||||||||||||||||||
Six years later | (314 | ) | (238 | ) | (199 | ) | (190 | ) | (230 | ) | ||||||||||||||||||||||||||||||||||
Seven years later | (317 | ) | (263 | ) | (193 | ) | (188 | ) | ||||||||||||||||||||||||||||||||||||
Eight years later | (342 | ) | (247 | ) | (186 | ) | ||||||||||||||||||||||||||||||||||||||
Nine years later | (321 | ) | (237 | ) | ||||||||||||||||||||||||||||||||||||||||
Ten years later | (311 | ) | ||||||||||||||||||||||||||||||||||||||||||
Net reserves re-estimated—latest | $ | 1,466 | $ | 1,603 | $ | 1,746 | $ | 1,994 | $ | 2,122 | $ | 2,276 | $ | 2,452 | $ | 2,657 | $ | 2,871 | $ | 3,112 | ||||||||||||||||||||||||
Re-estimated recoverable—latest | 188 | 214 | 223 | 257 | 537 | 591 | 584 | 637 | 641 | 532 | ||||||||||||||||||||||||||||||||||
Gross liability re-estimated—latest | $ | 1,654 | $ | 1,817 | $ | 1,969 | $ | 2,251 | $ | 2,659 | $ | 2,867 | $ | 3,036 | $ | 3,294 | $ | 3,512 | $ | 3,644 | ||||||||||||||||||||||||
Cumulative gross redundancy | $ | (235 | ) | $ | (161 | ) | $ | (124 | ) | $ | (150 | ) | $ | (206 | ) | $ | (283 | ) | $ | (350 | ) | $ | (220 | ) | $ | (117 | ) | $ | (216 | ) | ||||||||||||||
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Loss reserves | Loss | Total | ||||||||||||||||||
Case | IBNR | expense | gross | Percent | ||||||||||||||||
(In millions) | reserves | reserves | reserves | reserves | of total | |||||||||||||||
At December 31, 2007 | ||||||||||||||||||||
Commercial casualty | $ | 1,035 | $ | 389 | $ | 524 | $ | 1,948 | 55.1 | % | ||||||||||
Commercial property | 104 | 6 | 29 | 139 | 3.9 | |||||||||||||||
Commercial auto | 276 | 48 | 65 | 389 | 11.0 | |||||||||||||||
Workers’ compensation | 426 | 315 | 119 | 860 | 24.3 | |||||||||||||||
Specialty packages | 67 | 1 | 9 | 77 | 2.3 | |||||||||||||||
Surety and executive risk | 68 | 2 | 42 | 112 | 3.2 | |||||||||||||||
Machinery and equipment | 4 | 3 | 1 | 8 | 0.2 | |||||||||||||||
Total | $ | 1,980 | $ | 764 | $ | 789 | $ | 3,533 | 100.0 | % | ||||||||||
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 | % | ||||||||||
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Commercial | Commercial | Commercial | Workers’ | Specialty | Surety & | Machinery & | ||||||||||||||||||||||||||
(Dollars in millions) | casualty | property | auto | compensation | packages | executive risk | equipment | Totals | ||||||||||||||||||||||||
As of December 31, 2007 | ||||||||||||||||||||||||||||||||
2006 accident year | $ | (70 | ) | $ | (4 | ) | $ | (15 | ) | $ | (20 | ) | $ | 1 | $ | 3 | $ | (1 | ) | $ | (106 | ) | ||||||||||
2005 accident year | (22 | ) | (13 | ) | (6 | ) | 0 | 2 | 3 | (1 | ) | (37 | ) | |||||||||||||||||||
2004 accident year | (34 | ) | (1 | ) | 1 | 1 | (1 | ) | (1 | ) | 0 | (35 | ) | |||||||||||||||||||
2003 accident year | (2 | ) | 0 | (3 | ) | (1 | ) | 0 | (3 | ) | 0 | (9 | ) | |||||||||||||||||||
2002 accident year | (15 | ) | (1 | ) | 1 | 5 | (1 | ) | (3 | ) | 0 | (14 | ) | |||||||||||||||||||
2001 accident year | (8 | ) | 0 | (1 | ) | 2 | 0 | 1 | 0 | (6 | ) | |||||||||||||||||||||
2000 and prior accident years | 2 | 0 | (2 | ) | 3 | 0 | 1 | 0 | 4 | |||||||||||||||||||||||
Deficiency/(redundancy) | $ | (149 | ) | $ | (19 | ) | $ | (25 | ) | $ | (10 | ) | $ | 1 | $ | 1 | $ | (2 | ) | $ | (203 | ) | ||||||||||
Reserves estimated as of December 31, 2006 | $ | 1,483 | $ | 170 | $ | 386 | $ | 713 | $ | 84 | $ | 83 | $ | 9 | $ | 2,928 | ||||||||||||||||
Reserves re-estimated as of December 31, 2007 | 1,334 | 151 | 361 | 703 | 85 | 84 | 7 | 2,725 | ||||||||||||||||||||||||
Deficiency/(redundancy) | $ | (149 | ) | $ | (19 | ) | $ | (25 | ) | $ | (10 | ) | $ | 1 | $ | 1 | $ | (2 | ) | $ | (203 | ) | ||||||||||
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 estimated as of December 31, 2005 | $ | 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 | ) | |||||||||||||
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 estimated as of December 31, 2004 | $ | 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 | ) | |||||||||||
• | The initiative, begun in 2001 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 reserving 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 |
• | Recognition of favorable case reserve development |
• | Implementation of Claims Management System in 2003 and 2004 |
Table of Contents
Loss reserves | Loss | Total | ||||||||||||||||||
Case | IBNR | expense | gross | Percent | ||||||||||||||||
(In millions) | reserves | reserves | reserves | reserves | of total | |||||||||||||||
At December 31, 2007 | ||||||||||||||||||||
Personal auto | $ | 163 | $ | (4 | ) | $ | 30 | $ | 189 | 48.2 | % | |||||||||
Homeowners | 61 | 8 | 14 | 83 | 21.0 | |||||||||||||||
Other personal | 54 | 54 | 12 | 120 | 30.8 | |||||||||||||||
Total | $ | 278 | $ | 58 | $ | 56 | $ | 392 | 100.0 | % | ||||||||||
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 | % | ||||||||||
Personal | Other | |||||||||||||||
(Dollars in millions) | auto | Homeowner | personal | Totals | ||||||||||||
As of December 31, 2007 | ||||||||||||||||
2006 accident year | $ | 3 | $ | (7 | ) | $ | (11 | ) | $ | (15 | ) | |||||
2005 accident year | 5 | 0 | (5 | ) | 0 | |||||||||||
2004 accident year | (2 | ) | (3 | ) | (10 | ) | (15 | ) | ||||||||
2003 accident year | (3 | ) | (1 | ) | (1 | ) | (5 | ) | ||||||||
2002 accident year | (1 | ) | 0 | (4 | ) | (5 | ) | |||||||||
2001 accident year | 0 | 0 | (1 | ) | (1 | ) | ||||||||||
2000 and prior accident years | 0 | 1 | (1 | ) | 0 | |||||||||||
Deficiency/(redundancy) | $ | 2 | $ | (10 | ) | $ | (33 | ) | $ | (41 | ) | |||||
Reserves estimated as of December 31, 2006 | $ | 206 | $ | 104 | $ | 118 | $ | 428 | ||||||||
Reserves re-estimated as of December 31, 2007 | 208 | 94 | 85 | 387 | ||||||||||||
Deficiency/(redundancy) | $ | 2 | $ | (10 | ) | $ | (33 | ) | $ | (41 | ) | |||||
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 estimated as of December 31, 2005 | $ | 213 | $ | 99 | $ | 118 | $ | 430 | ||||||||
Reserves re-estimated as of December 31, 2006 | 215 | 104 | 93 | 412 | ||||||||||||
Deficiency/(redundancy) | $ | 2 | $ | 5 | $ | (25 | ) | $ | (18 | ) | ||||||
As of December 31, 2005 | ||||||||||||||||
2004 accident year | $ | 0 | $ | 0 | $ | (5 | ) | $ | (5 | ) | ||||||
2003 accident year | 0 | (2 | ) | (11 | ) | (13 | ) | |||||||||
2002 accident year | (3 | ) | 0 | (3 | ) | (6 | ) | |||||||||
2001 accident year | (4 | ) | 0 | (3 | ) | (7 | ) | |||||||||
2000 accident year | (1 | ) | 0 | 0 | (1 | ) | ||||||||||
1999 accident year | 0 | 1 | 0 | 1 | ||||||||||||
1998 and prior accident years | 0 | 0 | (3 | ) | (3 | ) | ||||||||||
Deficiency/(redundancy) | $ | (8 | ) | $ | (1 | ) | $ | (25 | ) | $ | (34 | ) | ||||
Reserves estimated as of December 31, 2004 | $ | 231 | $ | 114 | $ | 125 | $ | 470 | ||||||||
Reserves re-estimated as of December 31, 2005 | 223 | 113 | 100 | 436 | ||||||||||||
Deficiency/(redundancy) | $ | (8 | ) | $ | (1 | ) | $ | (25 | ) | $ | (34 | ) | ||||
• | Settlements that differed from the established case reserves |
• | Changes in reinsurance treaty retentions |
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• | 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 |
• | Implementation of Claims Management System in 2003 and 2004 |
• | Property per risk treaty — The primary purpose of the property treaty is to provide capacity up to $25 million, adequate for the majority of the risks we write. It also includes protection for extra-contractual liability coverage losses. We retain the first $4 million of each loss. Losses between $4 million and $25 million are reinsured at 100 percent. The ceded premium is estimated at $38 million for 2008, compared with $35 million in 2007 and $29.5 million in 2006. |
• | Casualty per occurrence treaty — The casualty treaty provides capacity up to $25 million. Similar to the property treaty, it provides sufficient capacity to cover the vast majority of casualty accounts we insure and also includes protection for extra-contractual liability coverage losses. We retain the first $5 million of each loss. Losses between $5 million and $25 million are reinsured at 100 percent. The ceded premium is estimated at $45 million in 2008, compared with $50 million in 2007 and $44.8 million in 2006. | |
We have modified our casualty per occurrence treaty for one Fortune 1000 policyholder. Three executive risk policies are written for this insured and the $5 million casualty retention would apply separately to each policy for a total retention of $15 million. This aggregation would be applicable only if all three policies were triggered under the same occurrence. |
Table of Contents
• | 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 would apply when a single occurrence involved multiple policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The ceded premium is estimated at $1.8 million in 2008, the same premium we paid in 2007. | |
We purchase a second 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 at less than $1 million for 2008, the same premium we paid in 2007. |
• | 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 2008 treaty, ceded premiums are estimated at $43 million compared with $48 million in 2007 and $38 million in 2006. Our retention on this program remains at $45 million and we also retain: |
o | 43 percent of losses between $45 million and $70 million | ||
o | 5 percent of losses between $70 million and $200 million | ||
o | 12 percent of losses between $200 million and $300 million | ||
o | 19 percent of losses between $300 million and $400 million and | ||
o | 11 percent of losses between $400 million and $500 million. |
• | Property per risk treaty — The property treaty provides limits up to $5 million, which provides adequate capacity for the risk profile we expect to write in 2008. We retain the first $1 million of any policy loss. Losses between $1 million and $5 million are reinsured at 100 percent. |
• | Casualty per occurrence treaty — The casualty treaty provides limits up to $5 million, which provides adequate capacity for the risk profile we expect to write in 2008. We retain the first $1 million of any policy loss. Losses between $1 million and $5 million are reinsured at 100 percent. |
• | Basket retention — CSU has purchased this coverage to limit our retention to $1 million in the event that the same occurrence results in both a property and a casualty loss. |
• | Property catastrophe treaty — As a subsidiary of The Cincinnati Insurance Company, CSU has been added as a named insured under our property catastrophe treaty. All terms and conditions of this treaty apply to policies underwritten by CSU. |
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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 |
• | Changing consumer buying habits and consolidation of independent insurance agencies that could alter our competitive advantages |
• | 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 |
• | 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 |
• | Securities laws that could limit the manner and timing of our investment transactions |
• | Recession or other economic conditions or regulatory, accounting or tax changes resulting in lower demand for insurance products |
• | Events, such as the subprime mortgage lending crisis, that lead to a significant decline in the value of a particular security or group of securities, such as our financial sector holdings, and impairment of the asset(s) |
• | 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 |
• | 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 |
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• | Personal lines pricing and loss trends that lead management to conclude that this segment could not attain sustainable profitability, which could prevent the capitalization of policy acquisition costs |
• | 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 |
• | Adverse outcomes from litigation or administrative proceedings |
• | Unforeseen departure of certain executive officers or other key employees due to retirement, health or other causes that could interrupt progress toward important strategic goals or diminish the effectiveness of certain longstanding relationships with insurance agents and others. |
• | 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 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 |
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• | Default — the possibility that an issuer will not make a required payment (interest payment or return of principal) on its debt. Generally this occurs after its financial profile has deteriorated (credit risk) and it no longer has the means to make its payments |
Taxable | Tax-exempt | 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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Fair value of | Effective duration | |||||||||||
fixed maturity | 100 basis point | 100 basis point | ||||||||||
(In millions) | portfolio | spread decrease | spread increase | |||||||||
At December 31, 2007 | $ | 5,848 | $ | 6,131 | $ | 5,565 | ||||||
At December 31, 2006 | 5,805 | 6,099 | 5,511 |
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Years ended December 31, | ||||||||
(In millions except market price data) | 2007 | 2006 | ||||||
Fifth Third Bancorp common stock holding: | ||||||||
Dividends earned | $ | 121 | $ | 115 | ||||
Percent of total net investment income | 20.0 | % | 20.2 | % |
At December 31, | At December 31, | ||||||||
2007 | 2006 | ||||||||
Shares held | 67 | 73 | |||||||
Closing market price of Fifth Third | $ | 25.13 | $ | 40.93 | |||||
Book value of holding | 185 | 283 | |||||||
Fair value of holding | 1,691 | 2,979 | |||||||
After-tax unrealized gain | 979 | 1,752 | |||||||
Market value as a percent of total equity investments | 27.1 | % | 38.2 | % | |||||
Market value as a percent of invested assets | 13.8 | 21.7 | |||||||
Market value as a percent of total shareholders’ equity | 28.5 | 43.8 | |||||||
After-tax unrealized gain as a percent of total shareholders’ equity | 16.5 | 25.7 | |||||||
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• | 319 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 319 securities was $1.332 billion at year-end 2007, and they accounted for $46 million in unrealized losses. |
• | 54 of these holdings were trading below 90 percent of book value at year-end 2007. The fair value of these holdings was $562 million, and they accounted for $142 million in unrealized losses. These securities, which are being closely monitored, have been affected by a combination of factors including the effects of higher interest rates on longer-duration instruments, leveraged buyout activity and the slowdown in the residential construction market. The majority of these securities are in the financial sector. |
• | Three securities were trading below 70 percent of book value at year-end 2007. The fair value of these holdings was $12 million, and they accounted for $6 million in unrealized losses. Our impairment committee evaluated these securities and believes the change in valuation is temporary. |
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6 Months or less | > 6 - 12 Months | > 12 - 24 Months | > 24 - 36 Months | |||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Number | unrealized | Number | unrealized | Number | unrealized | Number | unrealized | |||||||||||||||||||||||||
(Dollars in millions) | of issues | gain/loss | of issues | gain/loss | of issues | gain/loss | of issues | gain/loss | ||||||||||||||||||||||||
At December 31, 2007 | ||||||||||||||||||||||||||||||||
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 | 57 | (7 | ) | 64 | (19 | ) | 27 | (4 | ) | 80 | (15 | ) | ||||||||||||||||||||
Trading at 100% and above of book value | 241 | 9 | 17 | 1 | 47 | 5 | 203 | 49 | ||||||||||||||||||||||||
Total | 298 | 2 | 81 | (18 | ) | 74 | 1 | 283 | 34 | |||||||||||||||||||||||
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 | 3 | 0 | 19 | (1 | ) | 8 | 0 | 69 | (1 | ) | ||||||||||||||||||||||
Trading at 100% and above of book value | 741 | 17 | 3 | 0 | 89 | 6 | 290 | 25 | ||||||||||||||||||||||||
Total | 744 | 17 | 22 | (1 | ) | 97 | 6 | 359 | 24 | |||||||||||||||||||||||
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 | 11 | (60 | ) | 2 | (47 | ) | 0 | 0 | 0 | 0 | ||||||||||||||||||||||
Trading at 100% and above of book value | 3 | 0 | 2 | 19 | 5 | 237 | 23 | 3,156 | ||||||||||||||||||||||||
Total | 14 | (60 | ) | 4 | (28 | ) | 5 | 237 | 23 | 3,156 | ||||||||||||||||||||||
Preferred equities: | ||||||||||||||||||||||||||||||||
Trading below 70% of book value | 3 | (6 | ) | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||
Trading at 70% to less than 100% of book value | 21 | (21 | ) | 6 | (7 | ) | 0 | 0 | 0 | 0 | ||||||||||||||||||||||
Trading at 100% and above of book value | 5 | 1 | 1 | 0 | 2 | 2 | 4 | 0 | ||||||||||||||||||||||||
Total | 29 | (26 | ) | 7 | (7 | ) | 2 | 2 | 4 | 0 | ||||||||||||||||||||||
Short-term investments: | ||||||||||||||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Trading at 70% to less than 100% of book value | 0 | 0 | 3 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Trading at 100% and above of book value | 4 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Total | 4 | 0 | 3 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Summary: | ||||||||||||||||||||||||||||||||
Trading below 70% of book value | 3 | (6 | ) | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||
Trading at 70% to less than 100% of book value | 92 | (88 | ) | 94 | (74 | ) | 35 | (4 | ) | 149 | (16 | ) | ||||||||||||||||||||
Trading at 100% and above of book value | 994 | 27 | 23 | 20 | 143 | 250 | 520 | 3,230 | ||||||||||||||||||||||||
Total | 1,089 | $ | (67 | ) | 117 | $ | (54 | ) | 178 | $ | 246 | 669 | $ | 3,214 | ||||||||||||||||||
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Gross | Gross | |||||||||||||||||||
Number | Book | Fair | unrealized | investment | ||||||||||||||||
(Dollars in millions) | of issues | value | value | gain/loss | income | |||||||||||||||
At December 31, 2007 | ||||||||||||||||||||
Taxable fixed maturities: | ||||||||||||||||||||
Trading below 70% of book value | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||
Trading at 70% to less than 100% of book value | 228 | 936 | 891 | (45 | ) | 52 | ||||||||||||||
Trading at 100% and above of book value | 508 | 2,329 | 2,393 | 64 | 130 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 22 | |||||||||||||||
Total | 736 | 3,265 | 3,284 | 19 | 204 | |||||||||||||||
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 | 99 | 246 | 244 | (2 | ) | 9 | ||||||||||||||
Trading at 100% and above of book value | 1,123 | 2,272 | 2,320 | 48 | 98 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 3 | |||||||||||||||
Total | 1,222 | 2,518 | 2,564 | 46 | 110 | |||||||||||||||
Common equities: | ||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Trading at 70% to less than 100% of book value | 13 | 672 | 565 | (107 | ) | 21 | ||||||||||||||
Trading at 100% and above of book value | 33 | 2,043 | 5,455 | 3,412 | 244 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 6 | |||||||||||||||
Total | 46 | 2,715 | 6,020 | 3,305 | 271 | |||||||||||||||
Preferred equities: | ||||||||||||||||||||
Trading below 70% of book value | 3 | 18 | 12 | (6 | ) | 0 | ||||||||||||||
Trading at 70% to less than 100% of book value | 27 | 180 | 152 | (28 | ) | 10 | ||||||||||||||
Trading at 100% and above of book value | 12 | 62 | 65 | 3 | 1 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 3 | |||||||||||||||
Total | 42 | 260 | 229 | (31 | ) | 14 | ||||||||||||||
Short-term investments: | ||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Trading at 70% to less than 100% of book value | 3 | 30 | 30 | 0 | 0 | |||||||||||||||
Trading at 100% and above of book value | 4 | 71 | 71 | 0 | 0 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 2 | |||||||||||||||
Total | 7 | 101 | 101 | 0 | 2 | |||||||||||||||
Portfolio summary: | ||||||||||||||||||||
Trading below 70% of book value | 3 | $ | 18 | $ | 12 | $ | (6 | ) | $ | 0 | ||||||||||
Trading at 70% to less than 100% of book value | 370 | 2,064 | 1,882 | (182 | ) | 92 | ||||||||||||||
Trading at 100% and above of book value | 1,680 | 6,777 | 10,304 | 3,527 | 473 | |||||||||||||||
Investment income on securities sold in current year | 0 | 0 | 0 | 0 | 36 | |||||||||||||||
Total | 2,053 | $ | 8,859 | $ | 12,198 | $ | 3,339 | $ | 601 | |||||||||||
At December 31, 2006 | ||||||||||||||||||||
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 | |||||||||||||||
Investment income on securities sold in current year | 0 | 0 | 0 | 0 | 19 | |||||||||||||||
Total | 1,973 | $ | 8,455 | $ | 13,699 | $ | 5,244 | $ | 562 | |||||||||||
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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. | ||||
John J. Schiff, Jr., CPCU Chairman and Chief Executive Officer | ||||
/S/ Kenneth W. Stecher | ||||
Kenneth W. Stecher | ||||
Chief Financial Officer, Executive Vice President, Secretary and Treasurer (Principal Accounting Officer) |
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Fairfield, Ohio
Cincinnati, Ohio
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Consolidated Balance Sheets
December 31, | December 31, | |||||||
(Dollars in millions except per share data) | 2007 | 2006 | ||||||
ASSETS | ||||||||
Investments | ||||||||
Fixed maturities, at fair value (amortized cost: 2007—$5,783; 2006—$5,739) | $ | 5,848 | $ | 5,805 | ||||
(includes securities pledged to creditors of $745 at December 31, 2007) | ||||||||
Equity securities, at fair value (cost: 2007—$2,975; 2006—$2,621) | 6,249 | 7,799 | ||||||
Short-term investments, at fair value (amortized cost: 2007—$101; 2006—$95) | 101 | 95 | ||||||
Other invested assets | 63 | 60 | ||||||
Total investments | 12,261 | 13,759 | ||||||
Cash and cash equivalents | 226 | 202 | ||||||
Securities lending collateral invested | 760 | 0 | ||||||
Investment income receivable | 124 | 121 | ||||||
Finance receivable | 92 | 108 | ||||||
Premiums receivable | 1,107 | 1,128 | ||||||
Reinsurance receivable | 754 | 683 | ||||||
Prepaid reinsurance premiums | 13 | 13 | ||||||
Deferred policy acquisition costs | 461 | 453 | ||||||
Land, building and equipment, net, for company use (accumulated depreciation: 2007—$276; 2006—$261) | 239 | 193 | ||||||
Other assets | 72 | 58 | ||||||
Separate accounts | 528 | 504 | ||||||
Total assets | $ | 16,637 | $ | 17,222 | ||||
LIABILITIES | ||||||||
Insurance reserves | ||||||||
Loss and loss expense reserves | $ | 3,967 | $ | 3,896 | ||||
Life policy reserves | 1,478 | 1,409 | ||||||
Unearned premiums | 1,564 | 1,579 | ||||||
Securities lending payable | 760 | 0 | ||||||
Other liabilities | 574 | 533 | ||||||
Deferred income tax | 977 | 1,653 | ||||||
Note payable | 69 | 49 | ||||||
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 | 528 | 504 | ||||||
Total liabilities | 10,708 | 10,414 | ||||||
Commitments and contingent liabilities (Note 15) | — | — | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, par value—$2 per share; (authorized: 2007—500 million shares, 2006—500 million shares; issued: 2007—196 million shares, 2006—196 million shares) | 393 | 391 | ||||||
Paid-in capital | 1,049 | 1,015 | ||||||
Retained earnings | 3,404 | 2,786 | ||||||
Accumulated other comprehensive income | 2,151 | 3,379 | ||||||
Treasury stock at cost (2007—30 million shares, 2006—23 million shares) | (1,068 | ) | (763 | ) | ||||
Total shareholders’ equity | 5,929 | 6,808 | ||||||
Total liabilities and shareholders’ equity | $ | 16,637 | $ | 17,222 | ||||
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Consolidated Statements of Income
Years ended December 31, | ||||||||||||
(In millions except per share data) | 2007 | 2006 | 2005 | |||||||||
REVENUES | ||||||||||||
Earned premiums | ||||||||||||
Property casualty | $ | 3,125 | $ | 3,163 | $ | 3,058 | ||||||
Life | 125 | 115 | 106 | |||||||||
Investment income, net of expenses | 608 | 570 | 526 | |||||||||
Realized investment gains and losses | 382 | 684 | 61 | |||||||||
Other income | 19 | 18 | 16 | |||||||||
Total revenues | 4,259 | 4,550 | 3,767 | |||||||||
BENEFITS AND EXPENSES | ||||||||||||
Insurance losses and policyholder benefits | 1,963 | 2,128 | 1,911 | |||||||||
Commissions | 624 | 630 | 627 | |||||||||
Other operating expenses | 362 | 354 | 302 | |||||||||
Taxes, licenses and fees | 75 | 77 | 72 | |||||||||
Increase in deferred policy acquisition costs | (9 | ) | (21 | ) | (19 | ) | ||||||
Interest expense | 52 | 53 | 51 | |||||||||
Total benefits and expenses | 3,067 | 3,221 | 2,944 | |||||||||
INCOME BEFORE INCOME TAXES | 1,192 | 1,329 | 823 | |||||||||
PROVISION (BENEFIT) FOR INCOME TAXES | ||||||||||||
Current | 325 | 404 | 188 | |||||||||
Deferred | 12 | (5 | ) | 33 | ||||||||
Total provision for income taxes | 337 | 399 | 221 | |||||||||
NET INCOME | $ | 855 | $ | 930 | $ | 602 | ||||||
PER COMMON SHARE | ||||||||||||
Net income—basic | $ | 5.01 | $ | 5.36 | $ | 3.44 | ||||||
Net income—diluted | 4.97 | 5.30 | 3.40 | |||||||||
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Consolidated Statements of Shareholders’ Equity
Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
COMMON STOCK | ||||||||||||
Beginning of year | $ | 391 | $ | 389 | $ | 370 | ||||||
5% stock dividend | 0 | 0 | 18 | |||||||||
Stock options exercised | 2 | 2 | 1 | |||||||||
End of year | 393 | 391 | 389 | |||||||||
PAID-IN CAPITAL | ||||||||||||
Beginning of year | 1,015 | 969 | 618 | |||||||||
5% stock dividend | 0 | 0 | 341 | |||||||||
Stock options exercised | 19 | 28 | 9 | |||||||||
Share-based compensation | 14 | 17 | 0 | |||||||||
Other | 1 | 1 | 1 | |||||||||
End of year | 1,049 | 1,015 | 969 | |||||||||
RETAINED EARNINGS | ||||||||||||
Beginning of year | 2,786 | 2,088 | 2,057 | |||||||||
Cumulative effect of change in accounting for hybrid financial securities | 5 | 0 | 0 | |||||||||
Cumulative effect of change in accounting for uncertain tax positions | (1 | ) | 0 | 0 | ||||||||
Adjusted beginning of year | 2,790 | 2,088 | 2,057 | |||||||||
Net income | 855 | 930 | 602 | |||||||||
5% stock dividend | 0 | 0 | (359 | ) | ||||||||
Dividends declared | (241 | ) | (232 | ) | (212 | ) | ||||||
End of year | 3,404 | 2,786 | 2,088 | |||||||||
ACCUMULATED OTHER COMPREHENSIVE INCOME | ||||||||||||
Beginning of year | 3,379 | 3,284 | 3,787 | |||||||||
Cumulative effect of change in accounting for hybrid financial securities | (5 | ) | 0 | 0 | ||||||||
Adjusted beginning of year | 3,374 | 3,284 | 3,787 | |||||||||
Other comprehensive income (loss), net | (1,223 | ) | 127 | (503 | ) | |||||||
Cumulative effect of change in accounting for pension obligations | 0 | (32 | ) | 0 | ||||||||
End of year | 2,151 | 3,379 | 3,284 | |||||||||
TREASURY STOCK | ||||||||||||
Beginning of year | (763 | ) | (644 | ) | (583 | ) | ||||||
Purchase | (306 | ) | (120 | ) | (63 | ) | ||||||
Reissued | 1 | 1 | 2 | |||||||||
End of year | (1,068 | ) | (763 | ) | (644 | ) | ||||||
Total shareholders’ equity | $ | 5,929 | $ | 6,808 | $ | 6,086 | ||||||
COMMON STOCK — NUMBER OF SHARES OUTSTANDING | ||||||||||||
Beginning of year | 173 | 174 | 167 | |||||||||
5% stock dividend | 0 | 0 | 9 | |||||||||
Shares issued | 0 | 1 | 0 | |||||||||
Purchase of treasury shares | (7 | ) | (2 | ) | (2 | ) | ||||||
End of year | 166 | 173 | 174 | |||||||||
COMPREHENSIVE INCOME | ||||||||||||
Net income | $ | 855 | $ | 930 | $ | 602 | ||||||
Unrealized investment gains and losses during the period | (1,898 | ) | 181 | (749 | ) | |||||||
Taxes on other comprehensive income | 667 | (54 | ) | 246 | ||||||||
Pension obligations | 8 | 0 | 0 | |||||||||
Total comprehensive income (loss) | $ | (368 | ) | $ | 1,057 | $ | 99 | |||||
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Consolidated Statements of Cash Flows
Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 855 | $ | 930 | $ | 602 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation, amortization and other non-cash items | 36 | 38 | 33 | |||||||||
Realized gains on investments | (382 | ) | (684 | ) | (61 | ) | ||||||
Share-based compensation | 14 | 17 | 0 | |||||||||
Interest credited to contract holders | 36 | 31 | 28 | |||||||||
Changes in: | ||||||||||||
Investment income receivable | (3 | ) | (3 | ) | (10 | ) | ||||||
Premiums and reinsurance receivable | (50 | ) | (13 | ) | 2 | |||||||
Deferred policy acquisition costs | (8 | ) | (21 | ) | (19 | ) | ||||||
Other assets | (4 | ) | 17 | 5 | ||||||||
Loss and loss expense reserves | 71 | 235 | 112 | |||||||||
Life policy reserves | 101 | 81 | 84 | |||||||||
Unearned premiums | (15 | ) | 20 | 20 | ||||||||
Other liabilities | 64 | (5 | ) | (17 | ) | |||||||
Deferred income tax | 12 | (5 | ) | 33 | ||||||||
Current income tax | (22 | ) | (23 | ) | (7 | ) | ||||||
Net cash provided by operating activities | 705 | 615 | 805 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Sale of fixed maturities | 321 | 110 | 243 | |||||||||
Call or maturity of fixed maturities | 520 | 343 | 466 | |||||||||
Sale of equity securities | 812 | 859 | 104 | |||||||||
Collection of finance receivables | 37 | 35 | 34 | |||||||||
Purchase of fixed maturities | (924 | ) | (753 | ) | (1,297 | ) | ||||||
Purchase of equity securities | (769 | ) | (689 | ) | (219 | ) | ||||||
Change in short-term investments, net | (5 | ) | (15 | ) | (4 | ) | ||||||
Investment in buildings and equipment, net | (70 | ) | (52 | ) | (44 | ) | ||||||
Investment in finance receivables | (23 | ) | (41 | ) | (45 | ) | ||||||
Change in other invested assets, net | (1 | ) | (11 | ) | (9 | ) | ||||||
Change in securities lending collateral invested | (760 | ) | 0 | 0 | ||||||||
Net cash used in investing activities | (862 | ) | (214 | ) | (771 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Payment of cash dividends to shareholders | (240 | ) | (228 | ) | (204 | ) | ||||||
Purchase of treasury shares | (307 | ) | (120 | ) | (61 | ) | ||||||
Increase in notes payable | 20 | 49 | 0 | |||||||||
Proceeds from stock options exercised | 19 | 27 | 11 | |||||||||
Contract holder funds deposited | 12 | 32 | 87 | |||||||||
Contract holder funds withdrawn | (79 | ) | (78 | ) | (54 | ) | ||||||
Change in securities lending payable | 760 | 0 | 0 | |||||||||
Excess tax benefits on share-based compensation | 2 | 2 | 0 | |||||||||
Other | (6 | ) | (2 | ) | 0 | |||||||
Net cash provided by (used in) financing activities | 181 | (318 | ) | (221 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 24 | 83 | (187 | ) | ||||||||
Cash and cash equivalents at beginning of year | 202 | 119 | 306 | |||||||||
Cash and cash equivalents at end of period | $ | 226 | $ | 202 | $ | 119 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Interest paid (net of capitalized interest: 2007—$2; 2006—$1) | $ | 51 | $ | 53 | $ | 51 | ||||||
Income taxes paid | 346 | 429 | 195 | |||||||||
Non-cash activities: | ||||||||||||
Conversion of securities | $ | 20 | $ | 50 | $ | 42 | ||||||
Equipment acquired under capital lease obligations | 12 | 12 | 0 | |||||||||
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• | SFAS No. 157, Fair Value Measurements – In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures of fair value measurements. The provisions of SFAS No. 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. Management currently is evaluating the effect SFAS No. 157 will have on our results of operations and financial position in 2008. | |
• | SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115 – In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.” SFAS No. 159, which is effective for fiscal years beginning after November 15, 2007, permits an entity to choose to measure many financial instruments and certain other items at fair value (on an instrument-by-instrument basis) at specified election dates. The objective is to improve financial reporting by providing an entity with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. We have not yet determined whether we will elect the fair value option for certain financial assets or liabilities; and therefore, we do not know the impact, if any, SFAS No. 159 may have on our results of operations and financial position in 2008. | |
• | SFAS No. 160, Noncontrolling Interests In Consolidated Financial Statements – an amendment of Accounting Research Bulletin (ARB) No. 51 – In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests In Consolidated Financial Statements – an amendment of Accounting ARB No. 51. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The provisions of SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Management currently is evaluating the effect SFAS No. 160 will have on our results of operations and financial position. |
• | FIN No. 48, Accounting For Uncertainty in Income Taxes, an interpretation of SFAS No. 109 – In July 2006, the FASB issued FIN 48. We adopted the provisions of FIN 48 on January 1, 2007. |
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As a result, we recorded a charge of approximately $300,000 to the January 1, 2007, retained earnings. As of the adoption date, we had a gross unrecognized tax benefit of $24.8 million. See Note 10, Income Taxes, Page 98, for additional information. |
• | SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS Nos. 133 and 140 – In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” and resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interest in Securitized Financial Assets.” | |
SFAS No. 155: (a) permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; (b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; (c) establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (d) clarifies that concentrations of credit risk in the form of subordination is not embedded derivatives; and (e) eliminates restrictions on a qualifying special-purpose entity’s ability to hold passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial instrument. SFAS No. 155 was effective for all financial instruments acquired or issued in a fiscal year that begins after September 15, 2006. | ||
On January 1, 2007, we adopted SFAS No. 155, which allows us to account for the entire hybrid financial instrument at fair value, with changes in the fair value recognized in realized investment gains and losses rather than unrealized investment gains and losses. We elected the fair value option for hybrid financial instruments to simplify our reporting, to address cost-benefit considerations and to have a consistent and reliable fair value. The transition adjustment was comprised of $12 million of gross realized investment gains and $4 million of gross realized investment losses, before tax. Our transition adjustment increased retained earnings by $5 million, reducing accumulated other comprehensive income by the same amount. | ||
• | SOP 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchange of Insurance Contracts – In September 2005, the Accounting Standards Executive Committee issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts.” This statement provides guidance on accounting for deferred acquisition costs on an internal replacement, which is defined broadly as a modification in product benefits, features, rights, or coverages that occurs by the exchange of an existing contract for a new contract, or by amendment, endorsement, or rider to an existing contract, or by the election of a benefit, feature, right, or coverage within an existing contract. An internal replacement that is determined to result in a replacement contract that is substantially unchanged from the replaced contract should be accounted for as a continuation of the replaced contract. Contract modifications resulting in a replacement contract that is substantially changed from the replaced contract should be accounted for as an extinguishment of the replaced contract and any unamortized deferred acquisition costs, unearned revenue liabilities, and deferred sales inducement assets from the replaced contract should not be deferred in connection with the replacement contract. The provisions of SOP 05-1 were effective for internal replacements beginning January 1, 2007. The initial adoption of SOP 05-1 did not have a material impact on our results of operations or financial position. | |
• | SFAS No. 158. Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of SFAS Nos. 87, 88, 106, and 132(R) – In September 2006, the FASB issued SFAS No. 158, “Employers Accounting for Defined Benefit and Other Retirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires employers to recognize the overfunded or underfunded status of defined benefit pension and other postretirement benefit plans as an asset or liability in its statement of financial position, measured as the difference between the fair value of plan assets and the projected benefit obligation as of the end of our fiscal year-end. In addition, SFAS No. 158 requires employers to recognize changes in the funded status of defined benefit pension and other postretirement plans in the year in which the changes occur through other accumulated comprehensive income. The company adopted SFAS No. 158 effective December 31, 2006. The adoption of SFAS No. 158 resulted in an increase in liabilities of $32 million on an after-tax basis with a corresponding reduction in accumulated other comprehensive income and shareholders’ equity. SFAS No. 158 did not change the amount of net periodic benefit expense recognized in an entity’s results of operations. |
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Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Investment income summarized by investment category: | ||||||||||||
Interest on fixed maturities | $ | 308 | $ | 300 | $ | 280 | ||||||
Dividends on equity securities | 294 | 262 | 244 | |||||||||
Other investment income | 15 | 15 | 8 | |||||||||
Total | 617 | 577 | 532 | |||||||||
Less investment expenses | 9 | 7 | 6 | |||||||||
Total | $ | 608 | $ | 570 | $ | 526 | ||||||
Realized investment gains and losses summary: | ||||||||||||
Fixed maturities: | ||||||||||||
Gross realized gains | $ | 8 | $ | 27 | $ | 36 | ||||||
Gross realized losses | (18 | ) | (2 | ) | (1 | ) | ||||||
Other-than-temporary impairments | (14 | ) | (1 | ) | (1 | ) | ||||||
Equity securities: | ||||||||||||
Gross realized gains | 438 | 656 | 40 | |||||||||
Gross realized losses | (24 | ) | (5 | ) | (6 | ) | ||||||
Other-than-temporary impairments | (2 | ) | 0 | 0 | ||||||||
Securities with embedded derivatives | (11 | ) | 7 | (7 | ) | |||||||
Other | 5 | 2 | 0 | |||||||||
Total | $ | 382 | $ | 684 | $ | 61 | ||||||
Change in unrealized investment gains and losses and other summary: | ||||||||||||
Fixed maturities | $ | 7 | $ | (23 | ) | $ | (198 | ) | ||||
Equity securities | (1,904 | ) | 200 | (575 | ) | |||||||
Adjustment to deferred acquisition costs and life policy reserves | (1 | ) | 2 | 6 | ||||||||
Pension obligations | 12 | 0 | 0 | |||||||||
Other | 0 | 2 | 18 | |||||||||
Income taxes on above | 663 | (54 | ) | 246 | ||||||||
Total | $ | (1,223 | ) | $ | 127 | $ | (503 | ) | ||||
Amortized | Fair | % of Fair | ||||||||||
(In millions) | cost | value | value | |||||||||
Maturity dates occurring: | ||||||||||||
Less than one year | $ | 201 | $ | 202 | 3.4 | % | ||||||
One year through five years | 880 | 911 | 15.3 | |||||||||
After five years through ten years | 3,000 | 3,008 | 50.6 | |||||||||
After ten years through twenty years | 1,641 | 1,680 | 28.2 | |||||||||
Over twenty years | 162 | 148 | 2.5 | |||||||||
Total | $ | 5,884 | $ | 5,949 | 100.0 | % | ||||||
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 93
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Cost or | ||||||||||||||||||||||||
(In millions) | amortized | Gross unrealized | Fair | |||||||||||||||||||||
At December 31, | cost | gains | losses | value | ||||||||||||||||||||
2007 | ||||||||||||||||||||||||
Fixed maturities: | ||||||||||||||||||||||||
States, municipalities and political subdivisions | $ | 2,518 | $ | 48 | $ | 2 | $ | 2,564 | ||||||||||||||||
Convertibles and bonds with warrants attached | 238 | 2 | 14 | 226 | ||||||||||||||||||||
Public utilities | 163 | 5 | 1 | 167 | ||||||||||||||||||||
United States government | 4 | 0 | 0 | 4 | ||||||||||||||||||||
Government-sponsored enterprises | 894 | 2 | 0 | 896 | ||||||||||||||||||||
Foreign government | 3 | 0 | 0 | 3 | ||||||||||||||||||||
All other corporate bonds and short-term investments | 2,064 | 56 | 31 | 2,089 | ||||||||||||||||||||
Total | $ | 5,884 | $ | 113 | $ | 48 | $ | 5,949 | ||||||||||||||||
Equity securities | $ | 2,975 | $ | 3,414 | $ | 140 | $ | 6,249 | ||||||||||||||||
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 | ||||||||||||||||
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 | ||||||||||||||||||
2007 | ||||||||||||||||||||||||
Fixed maturities: | ||||||||||||||||||||||||
States, municipalities and political subdivisions | $ | 39 | $ | 1 | $ | 205 | $ | 1 | $ | 244 | $ | 2 | ||||||||||||
Convertibles and bonds with warrants attached | 70 | 14 | 0 | 0 | 70 | 14 | ||||||||||||||||||
Public utilities | 13 | 0 | 41 | 1 | 54 | 1 | ||||||||||||||||||
Government-sponsored enterprises | 0 | 0 | 20 | 0 | 20 | 0 | ||||||||||||||||||
All other corporate bonds and short-term investments | 384 | 13 | 393 | 18 | 777 | 31 | ||||||||||||||||||
Total | 506 | 28 | 659 | 20 | 1,165 | 48 | ||||||||||||||||||
Equity securities | 729 | 140 | 0 | 0 | 729 | 140 | ||||||||||||||||||
Total | $ | 1,235 | $ | 168 | $ | 659 | $ | 20 | $ | 1,894 | $ | 188 | ||||||||||||
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 | ||||||||||||
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 94
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Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Deferred policy acquisition costs asset at beginning of year | $ | 453 | $ | 429 | $ | 400 | ||||||
Capitalized deferred policy acquisition costs | 666 | 706 | 683 | |||||||||
Amortized deferred policy acquisition costs | (657 | ) | (685 | ) | (664 | ) | ||||||
Amortized shadow deferred policy acquisition costs | (1 | ) | 3 | 10 | ||||||||
Deferred policy acquisition costs asset at end of year | $ | 461 | $ | 453 | $ | 429 | ||||||
Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Gross loss and loss expense reserves, January 1, | $ | 3,860 | $ | 3,629 | $ | 3,514 | ||||||
Less reinsurance receivable | 504 | 518 | 537 | |||||||||
Net loss and loss expense reserves, January 1, | 3,356 | 3,111 | 2,977 | |||||||||
Net incurred loss and loss expenses related to: | ||||||||||||
Current accident year | 2,076 | 2,124 | 1,972 | |||||||||
Prior accident years | (244 | ) | (116 | ) | (160 | ) | ||||||
Total incurred | 1,832 | 2,008 | 1,812 | |||||||||
Net paid loss and loss expenses related to: | ||||||||||||
Current accident year | 785 | 819 | 772 | |||||||||
Prior accident years | 1,006 | 944 | 906 | |||||||||
Total paid | 1,791 | 1,763 | 1,678 | |||||||||
Net loss and loss expense reserves, December 31, | 3,397 | 3,356 | 3,111 | |||||||||
Plus reinsurance receivable | 528 | 504 | 518 | |||||||||
Gross loss and loss expense reserves, December 31, | $ | 3,925 | $ | 3,860 | $ | 3,629 | ||||||
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 95
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At December 31, | ||||||||
(In millions) | 2007 | 2006 | ||||||
Ordinary/traditional life | $ | 505 | $ | 453 | ||||
Universal life | 410 | 396 | ||||||
Annuities | 541 | 537 | ||||||
Other | 22 | 23 | ||||||
Total | $ | 1,478 | $ | 1,409 | ||||
(In millions) | ||||||||||||
Interest | Year of | At December 31, | ||||||||||
rate | issue | 2007 | 2006 | |||||||||
6.900% | 1998 | Senior debentures, due 2028 | $ | 28 | $ | 28 | ||||||
6.920% | 2005 | Senior debentures, due 2028 | 392 | 392 | ||||||||
6.125% | 2004 | Senior notes, due 2034 | 375 | 375 | ||||||||
Total | $ | 795 | $ | 795 | ||||||||
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 96
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Years ended December 31, | ||||||||||||||||||||||||||||||||||||||||
2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||||
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, | $ | 5,241 | $ | 1,830 | $ | 3,411 | $ | 5,060 | $ | 1,776 | $ | 3,284 | $ | 5,809 | $ | 2,022 | $ | 3,787 | ||||||||||||||||||||||
Net unrealized gains (losses) | (1,515 | ) | (530 | ) | (985 | ) | 880 | 298 | 582 | (692 | ) | (226 | ) | (466 | ) | |||||||||||||||||||||||||
Reclassification adjustment for (gains) losses included in net income | (382 | ) | (137 | ) | (245 | ) | (701 | ) | (245 | ) | (456 | ) | (61 | ) | (21 | ) | (40 | ) | ||||||||||||||||||||||
Adjustment to deferred acquisition costs and life policy reserves | (1 | ) | — | (1 | ) | 2 | 1 | 1 | 4 | 1 | 3 | |||||||||||||||||||||||||||||
Effect on other comprehensive income | (1,898 | ) | (667 | ) | (1,231 | ) | 181 | 54 | 127 | (749 | ) | (246 | ) | (503 | ) | |||||||||||||||||||||||||
Accumulated unrealized gains (losses) on securities available for sale at December 31, | $ | 3,343 | $ | 1,163 | $ | 2,180 | $ | 5,241 | $ | 1,830 | $ | 3,411 | $ | 5,060 | $ | 1,776 | $ | 3,284 | ||||||||||||||||||||||
Accumulated unrealized gains (losses) on hybrid financial securities at January 1, | $ | (7 | ) | $ | (2 | ) | $ | (5 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
Net unrealized gains (losses) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Reclassification adjustment for (gains) losses included in net income | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Effect on other comprehensive income | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Accumulated unrealized gains (losses) on hybrid financial securities at December 31, | $ | (7 | ) | $ | (2 | ) | $ | (5 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
Accumulated unrealized losses for pension obligations at January 1, | $ | (49 | ) | $ | (17 | ) | $ | (32 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
Cumulative effect of change in accounting for pension obligations | — | — | — | (49 | ) | (17 | ) | (32 | ) | — | — | — | ||||||||||||||||||||||||||||
Current year change in accounting for pension obligations | 12 | 4 | 8 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Accumulated unrealized losses for pension obligations at December 31, | $ | (37 | ) | $ | (13 | ) | $ | (24 | ) | $ | (49 | ) | $ | (17 | ) | $ | (32 | ) | $ | — | $ | — | $ | — | ||||||||||||||||
Accumulated other comprehensive income at January 1, | $ | 5,185 | $ | 1,811 | $ | 3,374 | $ | 5,060 | $ | 1,776 | $ | 3,284 | $ | 5,809 | $ | 2,022 | $ | 3,787 | ||||||||||||||||||||||
Other comprehensive income (loss) | (1,898 | ) | (667 | ) | (1,231 | ) | 181 | 54 | 127 | (749 | ) | (246 | ) | (503 | ) | |||||||||||||||||||||||||
Effect of change in accounting for pension obligations and hybrid financial securities | 12 | 4 | 8 | (49 | ) | (17 | ) | (32 | ) | — | — | — | ||||||||||||||||||||||||||||
Accumulated other comprehensive income at December 31, | $ | 3,299 | $ | 1,148 | $ | 2,151 | $ | 5,192 | $ | 1,813 | $ | 3,379 | $ | 5,060 | $ | 1,776 | $ | 3,284 | ||||||||||||||||||||||
Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Direct earned premiums | $ | 3,278 | $ | 3,296 | $ | 3,209 | ||||||
Assumed earned premiums | 22 | 26 | 28 | |||||||||
Ceded earned premiums | (175 | ) | (158 | ) | (179 | ) | ||||||
Net earned premiums | $ | 3,125 | $ | 3,164 | $ | 3,058 | ||||||
�� |
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 97
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Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Direct incurred loss and loss expenses | $ | 1,922 | $ | 2,072 | $ | 1,898 | ||||||
Assumed incurred loss and loss expenses | 17 | 13 | 40 | |||||||||
Ceded incurred loss and loss expenses | (107 | ) | (77 | ) | (126 | ) | ||||||
Net incurred loss and loss expenses | $ | 1,832 | $ | 2,008 | $ | 1,812 | ||||||
Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Direct earned premiums | $ | 178 | $ | 159 | $ | 150 | ||||||
Assumed earned premiums | 0 | 0 | 0 | |||||||||
Ceded earned premiums | (53 | ) | (44 | ) | (44 | ) | ||||||
Net earned premiums | $ | 125 | $ | 115 | $ | 106 | ||||||
Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Direct contract holders benefits incurred | $ | 173 | $ | 162 | $ | 141 | ||||||
Assumed contract holders benefits incurred | 0 | 0 | 0 | |||||||||
Ceded contract holders benefits incurred | (40 | ) | (40 | ) | (39 | ) | ||||||
Net incurred loss and loss expenses | $ | 133 | $ | 122 | $ | 102 | ||||||
At December 31, | ||||||||
(In millions) | 2007 | 2006 | ||||||
Deferred tax liabilities: | ||||||||
Unrealized gains on investments and derivatives | $ | 1,158 | $ | 1,824 | ||||
Deferred acquisition costs | 145 | 142 | ||||||
Other | 35 | 36 | ||||||
Total | 1,338 | 2,002 | ||||||
Deferred tax assets: | ||||||||
Loss and loss expense reserves | 200 | 190 | ||||||
Unearned premiums | 108 | 109 | ||||||
Life policy reserves | 13 | 22 | ||||||
Other | 40 | 28 | ||||||
Total | 361 | 349 | ||||||
Net deferred tax liability | $ | 977 | $ | 1,653 | ||||
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Tax at statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
Increase (decrease) resulting from: | ||||||||||||
Tax-exempt municipal bonds | (2.7 | ) | (2.2 | ) | (3.2 | ) | ||||||
Dividend exclusion | (4.7 | ) | (3.9 | ) | (5.7 | ) | ||||||
Other | 0.7 | 1.1 | 0.7 | |||||||||
Effective rate | 28.3 | % | 30.0 | % | 26.8 | % | ||||||
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 98
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(In millions) | 2007 | |||
Gross unrecognized tax benefits at January 1, | $ | 24.8 | ||
Gross increase in prior year positions | 0 | |||
Gross decrease in prior year positions | (12.0 | ) | ||
Gross increase in current year positions | 1.4 | |||
Gross decrease in current year positions | 0 | |||
Settlements with tax authorities | 0 | |||
Decrease for lapse in applicable statue of limitations | 0 | |||
Gross unrecognized tax benefits at December 31, | $ | 14.2 | ||
Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Numerator: | ||||||||||||
Net income—basic and diluted | $ | 855 | $ | 930 | $ | 602 | ||||||
Denominator: | ||||||||||||
Weighted-average common shares outstanding | 170,595,204 | 173,423,395 | 175,062,669 | |||||||||
Effect of stock options and non-vested shares | 1,572,248 | 2,027,946 | 2,053,457 | |||||||||
Adjusted weighted-average shares | 172,167,452 | 175,451,341 | 177,116,126 | |||||||||
Earnings per share: | ||||||||||||
Basic | $ | 5.01 | $ | 5.36 | $ | 3.44 | ||||||
Diluted | 4.97 | 5.30 | 3.40 | |||||||||
Number of anti-dilutive option shares | 1,870,579 | 1,336,150 | — | |||||||||
Exercise price of anti-dilutive option shares | $ | 44.79-45.26 | $ | 45.26 | $ | — |
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 99
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Qualified Pension Plan | Supplemental Pension Plan | Totals | ||||||||||||||||||||||
(In millions) | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||||
Change in projected benefit obligation: | ||||||||||||||||||||||||
Benefit obligation at beginning of year | $ | 266 | $ | 235 | $ | 5 | $ | 9 | $ | 271 | $ | 244 | ||||||||||||
Service cost | 17 | 16 | 0 | 0 | 17 | 16 | ||||||||||||||||||
Interest cost | 16 | 14 | 0 | 0 | 16 | 14 | ||||||||||||||||||
Plan amendments | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Actuarial loss/(gain) | (30 | ) | 11 | 1 | 0 | (29 | ) | 11 | ||||||||||||||||
Benefits paid | (5 | ) | (10 | ) | 0 | (4 | ) | (5 | ) | (14 | ) | |||||||||||||
Projected benefit obligation at end of year | $ | 264 | $ | 266 | $ | 6 | $ | 5 | $ | 270 | $ | 271 | ||||||||||||
Accumulated benefit obligation | $ | 201 | $ | 200 | $ | 5 | $ | 4 | $ | 206 | $ | 204 | ||||||||||||
Change in plan assets: | ||||||||||||||||||||||||
Fair value of plan assets at beginning of year | $ | 208 | $ | 173 | $ | 0 | $ | 0 | $ | 208 | $ | 173 | ||||||||||||
Actual return on plan assets | (4 | ) | 35 | 0 | 0 | (4 | ) | 35 | ||||||||||||||||
Employer contributions | 11 | 10 | 0 | 4 | 11 | 14 | ||||||||||||||||||
Benefits paid | (5 | ) | (10 | ) | 0 | (4 | ) | (5 | ) | (14 | ) | |||||||||||||
Fair value of plan assets at end of year | $ | 210 | $ | 208 | $ | 0 | $ | 0 | $ | 210 | $ | 208 | ||||||||||||
Funded (unfunded) status: | ||||||||||||||||||||||||
Funded (unfunded) status at end of year | $ | (54 | ) | $ | (58 | ) | $ | (6 | ) | $ | (5 | ) | $ | (60 | ) | $ | (63 | ) | ||||||
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 100
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Qualified | Supplemental | Qualified | Supplemental | |||||||||||||||||||||
Pension Plan | Pension Plan | Total | Pension Plan | Pension Plan | Total | |||||||||||||||||||
(In millions) | 2007 | 2007 | 2007 | 2006 | 2006 | 2006 | ||||||||||||||||||
Amounts recognized in the balance sheet consists of: | ||||||||||||||||||||||||
Noncurrent liability | $ | (54 | ) | $ | (6 | ) | $ | (60 | ) | $ | (58 | ) | $ | (5 | ) | $ | (63 | ) | ||||||
Total | $ | (54 | ) | $ | (6 | ) | $ | (60 | ) | $ | (58 | ) | $ | (5 | ) | $ | (63 | ) | ||||||
Amounts recognized in accumulated other comprehensive income not yet recognized as a component of net periodic benefit costs consist of: | ||||||||||||||||||||||||
Net actuarial loss/(gain) | $ | 27 | $ | 1 | $ | 28 | $ | 40 | $ | (1 | ) | $ | 39 | |||||||||||
Prior service cost | 6 | 3 | 9 | 6 | 4 | 10 | ||||||||||||||||||
Total | $ | 33 | $ | 4 | $ | 37 | $ | 46 | $ | 3 | $ | 49 | ||||||||||||
Qualified Pension Plan | Supplemental Pension Plan | Total | ||||||||||||||||||||||
(In millions) | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||||
Projected benefit obligation in excess of plan assets: | ||||||||||||||||||||||||
Projected benefit obligation at end of year | $ | 264 | $ | 266 | $ | 6 | $ | 5 | $ | 270 | $ | 271 | ||||||||||||
Fair value of plan assets at end of year | 210 | 208 | 0 | 0 | 210 | 208 |
Supplemental Pension Plan | ||||||||
(In millions) | 2007 | 2006 | ||||||
Accumulated benefit obligation in excess of plan assets: | ||||||||
Projected benefit obligation at end of year | $ | 6 | $ | 5 | ||||
Accumulated benefit obligation at end of year | 5 | 4 | ||||||
Fair value of plan assets at end of year | 0 | 0 |
(In millions) | 2007 | 2006 | ||||||
Discount rate | 6.25 | % | 5.75 | % | ||||
Rate of compensation increase | 4-6 | 4-6 |
Qualified Pension Plan | Supplemental Pension Plan | Total | ||||||||||||||||||||||||||||||||||
(In millions) | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||||||||||||||||
Service cost | $ | 17 | $ | 16 | $ | 13 | $ | 0 | $ | 0 | $ | 0 | $ | 17 | $ | 16 | $ | 13 | ||||||||||||||||||
Interest cost | 16 | 14 | 12 | 0 | 0 | 1 | 16 | 14 | 13 | |||||||||||||||||||||||||||
Expected return on plan assets | (15 | ) | (14 | ) | (13 | ) | 0 | 0 | 0 | (15 | ) | (14 | ) | (13 | ) | |||||||||||||||||||||
Amortization of actuarial gain, prior service cost and transition asset | 2 | 2 | 1 | 1 | 1 | 0 | 3 | 3 | 1 | |||||||||||||||||||||||||||
Net periodic benefit cost | $ | 20 | $ | 18 | $ | 13 | $ | 1 | $ | 1 | $ | 1 | $ | 21 | $ | 19 | $ | 14 | ||||||||||||||||||
Qualified Pension Plan | Supplemental Pension Plan | |||||||||||||||||||||||
2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||||||||
Discount rate | 5.75 | % | 5.50 | % | 5.75 | % | 5.75 | % | 5.50 | % | 5.75 | % | ||||||||||||
Expected return on plan assets | 8.00 | 8.00 | 8.00 | NA | NA | NA | ||||||||||||||||||
Rate of compensation increase | 4-6 | 5-7 | 5-7 | 4-6 | 5-7 | 5-7 |
At December 31, | ||||||||
2007 | 2006 | |||||||
Asset category: | ||||||||
Equity securities | 94 | % | 94 | % | ||||
Fixed maturities | 3 | 4 | ||||||
Cash and cash equivalents | 3 | 2 | ||||||
Total | 100 | % | 100 | % | ||||
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 101
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(In millions) | Qualified | Supplemental | ||||||||||
For the years ended December 31, | Pension Plan | Pension Plan | Total | |||||||||
2008 | $ | 9 | $ | 0 | $ | 9 | ||||||
2009 | 12 | 0 | 12 | |||||||||
2010 | 13 | 6 | 19 | |||||||||
2011 | 10 | 0 | 10 | |||||||||
2012 | 15 | 0 | 15 | |||||||||
Years 2013-2017 | 108 | 3 | 111 |
Qualified | Supplemental | |||||||||||
(In millions) | Pension Plan | Pension Plan | Total | |||||||||
Actuarial loss/ (gain) | $ | 0 | $ | 1 | $ | 1 | ||||||
Prior service cost | 1 | 0 | 1 | |||||||||
Total | $ | 1 | $ | 1 | $ | 2 | ||||||
• | 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. |
SAP Net Income | Capital and Surplus | |||||||||||||||||||
Years ended December 31, | At December 31, | |||||||||||||||||||
(In millions) | 2007 | 2006 | 2005 | 2007 | 2006 | |||||||||||||||
The Cincinnati Insurance Company | $ | 658 | $ | 572 | $ | 517 | $ | 4,307 | $ | 4,750 | ||||||||||
The Cincinnati Casualty Company | 12 | 15 | 13 | 278 | 282 | |||||||||||||||
The Cincinnati Indemnity Company | 1 | 2 | 2 | 66 | 62 | |||||||||||||||
The Cincinnati Specialty Underwriters Insurance Company | 0 | 0 | 0 | 196 | 0 | |||||||||||||||
The Cincinnati Life Insurance Company | 39 | 28 | 21 | 477 | 479 |
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 102
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• | 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 2007, 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. |
Year ended | ||||||||
December 31, | ||||||||
(In millions except per share data) | 2005 | |||||||
Net income | As reported | $ | 602 | |||||
Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | 13 | |||||||
Pro forma | $ | 589 | ||||||
Net income per common share—basic | As reported | $ | 3.44 | |||||
Pro forma | 3.36 | |||||||
Net income per common share—diluted | As reported | $ | 3.40 | |||||
Pro forma | 3.32 |
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 103
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Weighted- | ||||||||||||
average | Aggregate | |||||||||||
exercise | intrinsic | |||||||||||
(Dollars in millions, shares in thousands) | Shares | price | value | |||||||||
2007 | ||||||||||||
Outstanding at beginning of year | 10,667 | $ | 36.02 | |||||||||
Granted/reinstated | 582 | 44.79 | ||||||||||
Exercised | (634 | ) | 29.56 | |||||||||
Forfeited/revoked | (135 | ) | 38.86 | |||||||||
Outstanding at end of period | 10,480 | 36.86 | $ | 42 | ||||||||
Options exercisable at end of period | 8,597 | $ | 35.25 | $ | 42 | |||||||
Weighted-average fair value of options granted during the period | 9.43 | |||||||||||
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 |
Options outstanding | Options exercisable | |||||||||||||||||||
Weighted-average | Weighted- | Weighted- | ||||||||||||||||||
(Shares in thousands) | remaining | average | average | |||||||||||||||||
Range of exercise prices | Shares | contractual life | exercise price | Shares | exercise price | |||||||||||||||
$25.00 to $29.99 | 831 | 2.08 yrs | $ | 26.97 | 831 | $ | 26.97 | |||||||||||||
$30.00 to $34.99 | 4,293 | 3.24 yrs | 32.70 | 4,293 | 32.70 | |||||||||||||||
$35.00 to $39.99 | 1,836 | 4.45 yrs | 38.45 | 1,836 | 38.45 | |||||||||||||||
$40.00 to $44.99 | 2,220 | 6.71 yrs | 42.38 | 1,195 | 41.51 | |||||||||||||||
$45.00 to $49.99 | 1,300 | 8.05 yrs | 45.26 | 442 | 45.26 | |||||||||||||||
Total | 10,480 | 4.69 yrs | 36.86 | 8,597 | 35.25 | |||||||||||||||
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 104
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Service - | Weighted - | Performance - | Weighted - | |||||||||||||
based | average grant- | based | average grant- | |||||||||||||
nonvested | date fair | nonvested | date fair | |||||||||||||
(Shares in thousands) | shares | value | shares | value | ||||||||||||
Nonvested at January 1, 2007 | 0 | $ | 0.00 | 0 | $ | 0.00 | ||||||||||
Granted | 168 | 40.74 | 35 | 40.74 | ||||||||||||
Vested | 0 | 0.00 | 0 | 0.00 | ||||||||||||
Forfeited | (6 | ) | 40.74 | 0 | 0.00 | |||||||||||
Nonvested at December 31, 2007 | 162 | 40.74 | 35 | 40.74 | ||||||||||||
• | 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 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. |
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 105
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Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Revenues: | ||||||||||||
Commercial lines insurance Commercial casualty | $ | 827 | $ | 831 | $ | 759 | ||||||
Commercial property | 497 | 491 | 467 | |||||||||
Commercial auto | 440 | 453 | 457 | |||||||||
Workers’ compensation | 373 | 366 | 328 | |||||||||
Specialty packages | 146 | 141 | 137 | |||||||||
Surety and executive risk | 100 | 93 | 80 | |||||||||
Machinery and equipment | 28 | 27 | 26 | |||||||||
Total commercial lines insurance | 2,411 | 2,402 | 2,254 | |||||||||
Personal lines insurance | ||||||||||||
Personal auto | 342 | 385 | 433 | |||||||||
Homeowner | 285 | 289 | 282 | |||||||||
Other personal lines | 87 | 88 | 89 | |||||||||
Total personal lines insurance | 714 | 762 | 804 | |||||||||
Life insurance | 129 | 118 | 110 | |||||||||
Investment operations | 990 | 1,254 | 587 | |||||||||
Other | 15 | 15 | 12 | |||||||||
Consolidated eliminations | 0 | (1 | ) | 0 | ||||||||
Total | $ | 4,259 | $ | 4,550 | $ | 3,767 | ||||||
Income (loss) before income taxes: | ||||||||||||
Insurance underwriting results: | ||||||||||||
Commercial lines insurance | $ | 261 | $ | 208 | $ | 285 | ||||||
Personal lines insurance | 43 | (27 | ) | 45 | ||||||||
Life insurance | 3 | (1 | ) | 7 | ||||||||
Investment operations | 931 | 1,200 | 536 | |||||||||
Other | (46 | ) | (51 | ) | (50 | ) | ||||||
Total | $ | 1,192 | $ | 1,329 | $ | 823 | ||||||
Identifiable assets: | ||||||||||||
Property casualty insurance | $ | 2,281 | $ | 2,220 | ||||||||
Life insurance | 938 | 886 | ||||||||||
Investment operations | 12,322 | 13,820 | ||||||||||
Other | 1,096 | 296 | ||||||||||
Total | $ | 16,637 | $ | 17,222 | ||||||||
Quarter | ||||||||||||||||||||
(Dollars in millions except per share data) | 1st | 2nd | 3rd | 4th | Full year | |||||||||||||||
2007 | ||||||||||||||||||||
Revenues | $ | 1,029 | $ | 1,267 | $ | 980 | $ | 983 | $ | 4,259 | ||||||||||
Income before income taxes | 271 | 508 | 160 | 254 | 1,192 | |||||||||||||||
Net income | 194 | 351 | 124 | 187 | 855 | |||||||||||||||
Net income per common share—basic | 1.12 | 2.04 | 0.72 | 1.12 | 5.01 | |||||||||||||||
Net income per common share—diluted | 1.11 | 2.02 | 0.72 | 1.11 | 4.97 | |||||||||||||||
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 |
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 106
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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. |
a) | Information about our directors and executive officers is in the Proxy Statement under “Security Ownership of Principal Shareholders and Management,” “Information Regarding Nondirector Executive Officers” and “Information regarding the Board of Directors.” | |
b) | Information about Section 16(a) beneficial ownership reporting compliance appears in the Proxy Statement under “Section 16(a) Beneficial Ownership Reporting Compliance.” | |
c) | Information about the “Code of Ethics for Senior Financial Officers” appeared in the 2004 Proxy Statement as an appendix and is available in the Investors section of our Web site,www.cinfin.com. Our code of ethics applies to those who are responsible for preparing and disclosing our financial information. This includes our chief executive officer, chief financial officer, chief investment officer and others performing similar functions or reporting directly to these officers. | |
d) | Information about our audit committee membership and our financial expert compliance appears in the Proxy Statement under “Information Regarding the Board of Directors” and “Report of the Audit Committee.” | |
e) | The procedures under which shareholders may recommend director nominees have not changed during the reporting period. Information on the nominating committee processes appears in the Proxy Statement under “Information Regarding the Board of Directors.” |
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 107
Table of Contents
a) | Information on the security ownership of certain beneficial owners and management appears in the Proxy Statement under “Security Ownership of Principal Shareholders and Management.” | |
b) | Information on securities authorized for issuance under equity compensation plans appears in Part II, Item 5, Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, Page 27, as securities authorized for issuance under equity compensation plans. Additional information on share-based compensation under our equity compensation plans is available in Item 8, Note 16 of the Consolidated Financial Statements, Page 102. |
a) | Financial Statements — information contained in Part II, Item 8, of this report, Pages 83 to 87 | |
b) | Exhibits — see Index of Exhibits, Page 120 | |
c) | Financial Statement Schedules | |
Schedule I — Summary of Investments — Other than Investments in Related Parties, Page 109 | ||
Schedule II — Condensed Financial Statements of Registrant, Page 111 | ||
Schedule III — Supplementary Insurance Information, Page 114 | ||
Schedule IV — Reinsurance, Page 116 | ||
Schedule V — Valuation and Qualifying Accounts, Page 117 | ||
Schedule VI — Supplementary Information Concerning Property Casualty Insurance Operations, Page 118 |
Cincinnati Financial Corporation — 2007 Annual Report on 10-K — Page 108
Table of Contents
Summary of Investments — Other than Investments in Related Parties
At December 31, 2007 | ||||||||||||
(In millions) | Cost or | Fair | Balance | |||||||||
Type of investment | amortized | value | sheet | |||||||||
Fixed maturities: | ||||||||||||
United States government: | ||||||||||||
The Cincinnati Insurance Company | $ | 1 | $ | 1 | $ | 1 | ||||||
The Cincinnati Life Insurance Company | 3 | 4 | 3 | |||||||||
Total | 4 | 5 | 4 | |||||||||
Government-sponsored enterprises: | ||||||||||||
The Cincinnati Insurance Company | 547 | 548 | 548 | |||||||||
The Cincinnati Casualty Company | 4 | 4 | 4 | |||||||||
The Cincinnati Indemnity Company | 2 | 2 | 2 | |||||||||
The Cincinnati Life Insurance Company | 341 | 341 | 342 | |||||||||
Total | 894 | 895 | 896 | |||||||||
Foreign government: | ||||||||||||
The Cincinnati Insurance Company | 3 | 3 | 3 | |||||||||
Total | 3 | 3 | 3 | |||||||||
States, municipalities and political subdivisions: | ||||||||||||
The Cincinnati Insurance Company | 2,318 | 2,360 | 2,360 | |||||||||
The Cincinnati Casualty Company | 138 | 141 | 141 | |||||||||
The Cincinnati Indemnity Company | 33 | 33 | 33 | |||||||||
The Cincinnati Specialty Underwriters Insurance Company | 23 | 24 | 24 | |||||||||
The Cincinnati Life Insurance Company | 6 | 6 | 6 | |||||||||
Total | 2,518 | 2,564 | 2,564 | |||||||||
Public utilities: | ||||||||||||
The Cincinnati Insurance Company | 63 | 65 | 65 | |||||||||
The Cincinnati Casualty Company | 4 | 4 | 4 | |||||||||
The Cincinnati Indemnity Company | 1 | 1 | 1 | |||||||||
The Cincinnati Specialty Underwriters Insurance Company | 2 | 2 | 2 | |||||||||
The Cincinnati Life Insurance Company | 91 | 93 | 93 | |||||||||
Cincinnati Financial Corporation | 2 | 2 | 2 | |||||||||
Total | 163 | 167 | 167 | |||||||||
Convertibles and bonds with warrants attached: | ||||||||||||
The Cincinnati Insurance Company | 139 | 141 | 141 | |||||||||
The Cincinnati Life Insurance Company | 90 | 76 | 76 | |||||||||
Cincinnati Financial Corporation | 9 | 9 | 9 | |||||||||
Total | 238 | 226 | 226 | |||||||||
All other corporate bonds: | ||||||||||||
The Cincinnati Insurance Company | 893 | 900 | 900 | |||||||||
The Cincinnati Casualty Company | 23 | 24 | 24 | |||||||||
The Cincinnati Indemnity Company | 8 | 9 | 9 | |||||||||
The Cincinnati Specialty Underwriters Insurance Company | 32 | 32 | 32 | |||||||||
The Cincinnati Life Insurance Company | 929 | 945 | 945 | |||||||||
Cincinnati Financial Corporation | 78 | 78 | 78 | |||||||||
Total | 1,963 | 1,988 | 1,988 | |||||||||
Total fixed maturities | $ | 5,783 | $ | 5,848 | $ | 5,848 | ||||||
Table of Contents
Summary of Investments — Other than Investments in Related Parties
At December 31, 2007 | ||||||||||||
(In millions) | Cost or | Fair | Balance | |||||||||
Type of investment | amortized | value | sheet | |||||||||
Equity securities: | ||||||||||||
Common stocks: | ||||||||||||
Public utilities: | ||||||||||||
The Cincinnati Insurance Company | $ | 84 | $ | 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 | 55 | 110 | 110 | |||||||||
Total | 153 | 290 | 290 | |||||||||
Banks, trust and insurance companies: | ||||||||||||
The Cincinnati Insurance Company | 620 | 1,649 | 1,649 | |||||||||
The Cincinnati Casualty Company | 16 | 53 | 53 | |||||||||
The Cincinnati Specialty Underwriters Insurance Company | 15 | 42 | 42 | |||||||||
The Cincinnati Life Insurance Company | 57 | 119 | 119 | |||||||||
CinFin Capital Management Company | 1 | 2 | 2 | |||||||||
Cincinnati Financial Corporation | 515 | 1,178 | 1,178 | |||||||||
Total | 1,224 | 3,043 | 3,043 | |||||||||
Industrial, miscellaneous and all other: | ||||||||||||
The Cincinnati Insurance Company | 683 | 1,695 | 1,695 | |||||||||
The Cincinnati Casualty Company | 17 | 71 | 71 | |||||||||
The Cincinnati Indemnity Company | 7 | 21 | 21 | |||||||||
The Cincinnati Specialty Underwriters Insurance Company | 19 | 21 | 21 | |||||||||
The Cincinnati Life Insurance Company | 124 | 210 | 210 | |||||||||
CinFin Capital Management Company | 5 | 5 | 5 | |||||||||
Cincinnati Financial Corporation | 483 | 664 | 664 | |||||||||
Total | 1,338 | 2,687 | 2,687 | |||||||||
Nonredeemable preferred stocks: | ||||||||||||
The Cincinnati Insurance Company | 235 | 207 | 207 | |||||||||
The Cincinnati Life Insurance Company | 16 | 13 | 13 | |||||||||
Cincinnati Financial Corporation | 9 | 9 | 9 | |||||||||
Total | 260 | 229 | 229 | |||||||||
Total equity securities | $ | 2,975 | $ | 6,249 | $ | 6,249 | ||||||
Short-term investments: | ||||||||||||
The Cincinnati Insurance Company | $ | 50 | $ | 50 | $ | 50 | ||||||
The Cincinnati Life Insurance Company | 51 | 51 | 51 | |||||||||
Total short-term investments | $ | 101 | $ | 101 | $ | 101 | ||||||
Other invested assets: | ||||||||||||
Policy loans: | ||||||||||||
The Cincinnati Life Insurance Company | $ | 32 | — | $ | 32 | |||||||
Limited partnerships: | ||||||||||||
Cincinnati Financial Corporation | 31 | — | 31 | |||||||||
Total other invested assets | $ | 63 | — | $ | 63 | |||||||
Total investments | $ | 8,922 | — | $ | 12,261 | |||||||
Table of Contents
Condensed Balance Sheets
At December 31, | ||||||||
(In millions) | 2007 | 2006 | ||||||
ASSETS | ||||||||
Investments | ||||||||
Fixed maturities, at fair value | $ | 88 | $ | 128 | ||||
Equity securities, at fair value | 1,961 | 2,484 | ||||||
Other invested assets | 31 | 25 | ||||||
Cash and cash equivalents | 16 | 38 | ||||||
Securities lending collateral invested | 9 | 0 | ||||||
Equity in net assets of subsidiaries | 4,831 | 5,303 | ||||||
Investment income receivable | 18 | 16 | ||||||
Land, building and equipment, net, for company use (accumulated depreciation: 2007—$67; 2006—$64) | 169 | 121 | ||||||
Prepaid federal income tax | 5 | 0 | ||||||
Other assets | 14 | 19 | ||||||
Due from subsidiaries | 66 | 150 | ||||||
Total assets | $ | 7,208 | $ | 8,284 | ||||
LIABILITIES | ||||||||
Dividends declared but unpaid | $ | 59 | $ | 58 | ||||
Securities lending payable | 9 | 0 | ||||||
Deferred federal income tax | 296 | 526 | ||||||
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 | 124 | 101 | ||||||
Total liabilities | 1,279 | 1,476 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock | 393 | 391 | ||||||
Paid-in capital | 1,049 | 1,015 | ||||||
Retained earnings | 3,404 | 2,786 | ||||||
Accumulated other comprehensive income | 2,151 | 3,379 | ||||||
Treasury stock at cost | (1,068 | ) | (763 | ) | ||||
Total shareholders’ equity | 5,929 | 6,808 | ||||||
Total liabilities and shareholders’ equity | $ | 7,208 | $ | 8,284 | ||||
Table of Contents
Condensed Statements of Income
Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
REVENUES | ||||||||||||
Dividends from subsidiaries | $ | 420 | $ | 275 | $ | 275 | ||||||
Investment income, net of expenses | 100 | 98 | 89 | |||||||||
Realized gains on investments | 97 | 410 | 2 | |||||||||
Other revenue | 10 | 10 | 10 | |||||||||
Total revenues | 627 | 793 | 376 | |||||||||
EXPENSES | ||||||||||||
Interest expense | 49 | 51 | 52 | |||||||||
Depreciation expense | 3 | 3 | 3 | |||||||||
Other expenses | 15 | 18 | 16 | |||||||||
Total expenses | 67 | 72 | 71 | |||||||||
INCOME BEFORE INCOME TAXES AND EARNINGS OF SUBSIDIARIES | 560 | 721 | 305 | |||||||||
PROVISION (BENEFIT) FOR INCOME TAXES | ||||||||||||
Current | 34 | 153 | (27 | ) | ||||||||
Deferred | (2 | ) | (11 | ) | 20 | |||||||
Total provision for income taxes | 32 | 142 | (7 | ) | ||||||||
NET INCOME BEFORE EARNINGS OF SUBSIDIARIES | 528 | 579 | 312 | |||||||||
Increase in undistributed earnings of subsidiaries | 327 | 351 | 290 | |||||||||
NET INCOME | $ | 855 | $ | 930 | $ | 602 | ||||||
Table of Contents
Condensed Statements of Cash Flows
Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 855 | $ | 930 | $ | 602 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 2 | 1 | 3 | |||||||||
Realized (gains) on investments | (97 | ) | (410 | ) | (2 | ) | ||||||
Changes in: | ||||||||||||
Investment income receivable | (2 | ) | 1 | 0 | ||||||||
Current federal income taxes | (21 | ) | 48 | (12 | ) | |||||||
Deferred income taxes | (2 | ) | (11 | ) | 19 | |||||||
Other assets | 0 | 2 | (3 | ) | ||||||||
Other liabilities | 12 | 16 | 0 | |||||||||
Undistributed earnings of subsidiaries | (327 | ) | (351 | ) | (290 | ) | ||||||
Net cash provided by operating activities | 420 | 226 | 317 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Sale of fixed-maturities | 9 | 4 | 8 | |||||||||
Call or maturity of fixed-maturities | 37 | 36 | 2 | |||||||||
Sale of equity securities | 186 | 511 | 18 | |||||||||
Purchase of fixed-maturities | (1 | ) | (42 | ) | (9 | ) | ||||||
Purchase of equity securities | (231 | ) | (351 | ) | (12 | ) | ||||||
Change in short-term investments, net | 0 | 3 | 21 | |||||||||
Investment in buildings and equipment, net | (49 | ) | (26 | ) | (24 | ) | ||||||
Change in other invested assets, net | (6 | ) | (8 | ) | (8 | ) | ||||||
Change in securities lending collateral, net | (9 | ) | 0 | 0 | ||||||||
Net cash (used in) provided by investing activities | (64 | ) | 127 | (4 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Increase in notes payable | 20 | 0 | 0 | |||||||||
Payment of cash dividends to shareholders | (240 | ) | (228 | ) | (204 | ) | ||||||
Purchase/issuance of treasury shares | (307 | ) | (119 | ) | (61 | ) | ||||||
Proceeds from stock options exercised | 20 | 30 | 11 | |||||||||
Net transfers to subsidiaries | 120 | (5 | ) | (80 | ) | |||||||
Change in securities lending payable, net | 9 | 0 | 0 | |||||||||
Net cash used in financing activities | (378 | ) | (322 | ) | (334 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | (22 | ) | 31 | (21 | ) | |||||||
Cash and cash equivalents at beginning of year | 38 | 7 | 28 | |||||||||
Cash and cash equivalents at end of year | $ | 16 | $ | 38 | $ | 7 | ||||||
Table of Contents
Supplementary Insurance Information
Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Deferred policy acquisition costs: | ||||||||||||
Commercial lines insurance | $ | 234 | $ | 235 | $ | 226 | ||||||
Personal lines insurance | 78 | 80 | 85 | |||||||||
Total property casualty insurance | 312 | 315 | 311 | |||||||||
Life insurance | 149 | 138 | 118 | |||||||||
Total | $ | 461 | $ | 453 | $ | 429 | ||||||
Future policy benefits, losses, claims and expense losses: | ||||||||||||
Commercial lines insurance | $ | 3,533 | $ | 3,414 | $ | 3,173 | ||||||
Personal lines insurance | 392 | 446 | 456 | |||||||||
Total property casualty insurance | 3,925 | 3,860 | 3,629 | |||||||||
Life insurance | 1,505 | 1,430 | 1,362 | |||||||||
Total (1) | $ | 5,430 | $ | 5,290 | $ | 4,991 | ||||||
Unearned premiums: | ||||||||||||
Commercial lines insurance | $ | 1,191 | $ | 1,195 | $ | 1,150 | ||||||
Personal lines insurance | 371 | 382 | 407 | |||||||||
Total property casualty insurance | 1,562 | 1,577 | 1,557 | |||||||||
Life insurance | 2 | 2 | 2 | |||||||||
Total (1) | $ | 1,564 | $ | 1,579 | $ | 1,559 | ||||||
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 | 15 | 13 | |||||||||
Total (1) | $ | 15 | $ | 15 | $ | 13 | ||||||
Premium revenues: | ||||||||||||
Commercial lines insurance | $ | 2,411 | $ | 2,402 | $ | 2,254 | ||||||
Personal lines insurance | 714 | 762 | 804 | |||||||||
Total property casualty insurance | 3,125 | 3,164 | 3,058 | |||||||||
Life insurance | 125 | 115 | 106 | |||||||||
Consolidated eliminations | 0 | (1 | ) | 0 | ||||||||
Total | $ | 3,250 | $ | 3,278 | $ | 3,164 | ||||||
Table of Contents
Supplementary Insurance Information
Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Investment income, net of expenses: | ||||||||||||
Commercial lines insurance | $ | 0 | $ | 0 | $ | 0 | ||||||
Personal lines insurance | 0 | 0 | 0 | |||||||||
Total property casualty insurance (3) | 393 | 367 | 338 | |||||||||
Life insurance | 114 | 108 | 99 | |||||||||
Total | $ | 507 | $ | 475 | $ | 437 | ||||||
Benefits, claims losses and settlement expenses: | ||||||||||||
Commercial lines insurance | $ | 1,395 | $ | 1,466 | $ | 1,298 | ||||||
Personal lines insurance | 437 | 542 | 514 | |||||||||
Total property casualty insurance | 1,832 | 2,008 | 1,812 | |||||||||
Life insurance | 133 | 122 | 102 | |||||||||
Total | $ | 1,965 | $ | 2,130 | $ | 1,914 | ||||||
Amortization of deferred policy acquisition costs: | ||||||||||||
Commercial lines insurance | $ | 477 | $ | 504 | $ | 473 | ||||||
Personal lines insurance | 150 | 160 | 168 | |||||||||
Total property casualty insurance | 627 | 664 | 641 | |||||||||
Life insurance | 30 | 21 | 23 | |||||||||
Total (2) | $ | 657 | $ | 685 | $ | 664 | ||||||
Other operating expenses: | ||||||||||||
Commercial lines insurance | $ | 248 | $ | 224 | $ | 198 | ||||||
Personal lines insurance | 83 | 87 | 77 | |||||||||
Total property casualty insurance | 331 | 311 | 275 | |||||||||
Life insurance | 22 | 30 | 29 | |||||||||
Total (2) | $ | 353 | $ | 341 | $ | 304 | ||||||
Written premiums: | ||||||||||||
Commercial lines insurance | $ | 2,413 | $ | 2,442 | $ | 2,290 | ||||||
Personal lines insurance | 704 | 736 | 786 | |||||||||
Total property casualty insurance | 3,117 | 3,178 | 3,076 | |||||||||
Accident health insurance | 3 | 3 | 3 | |||||||||
Consolidated eliminations | 0 | (1 | ) | 0 | ||||||||
Total | $ | 3,120 | $ | 3,180 | $ | 3,079 | ||||||
(1) | The sum of future policy benefits, losses, claims and expense losses, unearned premium and other policy claims and other policy claims and benefits payable is equal to the sum of loss and loss expense, life policy reserves and unearned premiums reported in the company’s consolidated balance sheets. | |
(2) | The sum of amortization of deferred policy acquisition costs and other operating expenses is equal to the sum of Commissions; Other operating expenses; Taxes, licenses and fees; and Increase in deferred acquisition costs expenses shown in the consolidated statements of income, less other expenses not applicable to the above insurance segments. | |
(3) | This segment information is not regularly allocated to segments and reviewed by company management in making decisions about resources to be allocated to the segments or to assess their performance. |
Table of Contents
Reinsurance
Years ended December 31, | ||||||||||||
(Dollars in millions) | 2007 | 2006 | 2005 | |||||||||
Gross amounts: | ||||||||||||
Life insurance in force | $ | 61,873 | $ | 56,968 | $ | 51,488 | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | $ | 2,536 | $ | 2,513 | $ | 2,386 | ||||||
Personal lines insurance | 742 | 783 | 823 | |||||||||
Total property casualty insurance | 3,278 | 3,296 | 3,209 | |||||||||
Life insurance | 178 | 159 | 150 | |||||||||
Consolidated eliminations | 0 | (1 | ) | 0 | ||||||||
Total | $ | 3,456 | $ | 3,454 | $ | 3,359 | ||||||
Ceded amounts to other companies: | ||||||||||||
Life insurance in force | $ | 32,959 | $ | 31,744 | $ | 30,705 | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | $ | 144 | $ | 134 | $ | 157 | ||||||
Personal lines insurance | 31 | 24 | 22 | |||||||||
Total | 175 | 158 | 179 | |||||||||
Life insurance | 53 | 44 | 44 | |||||||||
Total | $ | 228 | $ | 202 | $ | 223 | ||||||
Assumed amounts from other companies: | ||||||||||||
Life insurance in force | $ | 2 | $ | 3 | $ | 5 | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | $ | 20 | $ | 24 | $ | 25 | ||||||
Personal lines insurance | 2 | 2 | 3 | |||||||||
Total property casualty insurance | 22 | 26 | 28 | |||||||||
Life insurance | 0 | 0 | 0 | |||||||||
Total | $ | 22 | $ | 26 | $ | 28 | ||||||
Net amounts: | ||||||||||||
Life insurance in force | $ | 28,916 | $ | 25,227 | $ | 20,788 | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | $ | 2,411 | $ | 2,402 | $ | 2,254 | ||||||
Personal lines insurance | 714 | 762 | 804 | |||||||||
Total property casualty insurance | 3,125 | 3,164 | 3,058 | |||||||||
Life insurance | 125 | 115 | 106 | |||||||||
Consolidated eliminations | 0 | (1 | ) | 0 | ||||||||
Total | $ | 3,250 | $ | 3,278 | $ | 3,164 | ||||||
Percentage of amounts assumed to net: | ||||||||||||
Life insurance in force | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | 0.8 | % | 1.1 | % | 1.1 | % | ||||||
Personal lines insurance | 0.3 | 0.4 | 0.4 | |||||||||
Total property casualty insurance | 0.7 | 0.9 | 0.9 | |||||||||
Life insurance | 0.0 | 0.0 | 0.1 | |||||||||
Total | 0.7 | 0.9 | 0.9 |
Table of Contents
Valuation and Qualifying Accounts
At December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Allowance for doubtful receivables: | ||||||||||||
Balance at beginning of period | $ | 3 | $ | 3 | $ | 3 | ||||||
Additions charged to costs and expenses | 3 | 3 | 6 | |||||||||
Other additions | 0 | 0 | 0 | |||||||||
Deductions | (2 | ) | (3 | ) | (6 | ) | ||||||
Balance at end of period | $ | 4 | $ | 3 | $ | 3 | ||||||
Table of Contents
Supplementary Information Concerning Property Casualty Insurance Operations
Years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Deferred policy acquisition costs: | ||||||||||||
Commercial lines insurance | $ | 234 | $ | 235 | $ | 226 | ||||||
Personal lines insurance | 78 | 80 | 85 | |||||||||
Total | $ | 312 | $ | 315 | $ | 311 | ||||||
Reserves for unpaid claims and claim adjustment expenses: | ||||||||||||
Commercial lines insurance | $ | 3,533 | $ | 3,414 | $ | 3,173 | ||||||
Personal lines insurance | 392 | 446 | 456 | |||||||||
Total | $ | 3,925 | $ | 3,860 | $ | 3,629 | ||||||
Reserve discount deducted | $ | 0 | $ | 0 | $ | 0 | ||||||
Unearned premiums: | ||||||||||||
Commercial lines insurance | $ | 1,191 | $ | 1,195 | $ | 1,150 | ||||||
Personal lines insurance | 371 | 382 | 407 | |||||||||
Total | $ | 1,562 | $ | 1,577 | $ | 1,557 | ||||||
Earned premiums: | ||||||||||||
Commercial lines insurance | $ | 2,411 | $ | 2,402 | $ | 2,254 | ||||||
Personal lines insurance | 714 | 762 | 804 | |||||||||
Total | $ | 3,125 | $ | 3,164 | $ | 3,058 | ||||||
Investment income: | ||||||||||||
Commercial lines insurance (1) | $ | 0 | $ | 0 | $ | 0 | ||||||
Personal lines insurance (1) | 0 | 0 | 0 | |||||||||
Total | $ | 393 | $ | 367 | $ | 338 | ||||||
Loss and loss expenses incurred related to current accident year: | ||||||||||||
Commercial lines insurance | $ | 1,598 | $ | 1,564 | $ | 1,424 | ||||||
Personal lines insurance | 478 | 560 | 548 | |||||||||
Total | $ | 2,076 | $ | 2,124 | $ | 1,972 | ||||||
�� | ||||||||||||
Loss and loss expenses incurred related to prior accident years: | ||||||||||||
Commercial lines insurance | $ | (204 | ) | $ | (98 | ) | $ | (126 | ) | |||
Personal lines insurance | (40 | ) | (18 | ) | (34 | ) | ||||||
Total | $ | (244 | ) | $ | (116 | ) | $ | (160 | ) | |||
Amortization of deferred policy acquisition costs: | ||||||||||||
Commercial lines insurance | $ | 477 | $ | 504 | $ | 473 | ||||||
Personal lines insurance | 150 | 160 | 168 | |||||||||
Total | $ | 627 | $ | 664 | $ | 627 | ||||||
Paid loss and loss expenses: | ||||||||||||
Commercial lines insurance | $ | 1,299 | $ | 1,218 | $ | 1,126 | ||||||
Personal lines insurance | 492 | 545 | 552 | |||||||||
Total | $ | 1,791 | $ | 1,763 | $ | 1,678 | ||||||
Written premiums: | ||||||||||||
Commercial lines insurance | $ | 2,413 | $ | 2,442 | $ | 2,290 | ||||||
Personal lines insurance | 704 | 736 | 786 | |||||||||
Total | $ | 3,117 | $ | 3,178 | $ | 3,076 | ||||||
(1) | This segment information is not regularly allocated to segments and not reviewed by company management in making decisions about resources to be allocated to the segments or to assess their performance. |
Table of Contents
By: | Kenneth W. Stecher | |
Title: | Chief Financial Officer, Executive Vice President, Secretary and Treasurer | |
Date: | February 29, 2008 |
Signature | Title | Date | ||
/S/ John J. Schiff, Jr. | Chairman, Chief Executive Officer and Director | February 29, 2008 | ||
John J. Schiff, Jr. | ||||
/S/ Kenneth W. Stecher | Chief Financial Officer, Executive Vice | February 29, 2008 | ||
Kenneth W. Stecher | President, Secretary and Treasurer | |||
(Principal Accounting Officer) | ||||
/S/ William F. Bahl | Director | February 29, 2008 | ||
William F. Bahl | ||||
/S/ James E. Benoski | Vice Chairman, President, Chief Operating | February 29, 2008 | ||
James E. Benoski | Officer, Chief Insurance Officer and Director | |||
/S/ Gregory T. Bier | Director | February 29, 2008 | ||
Gregory T. Bier | ||||
/S/ Dirk J. Debbink | Director | February 29, 2008 | ||
Dirk J. Debbink | ||||
/S/ Kenneth C. Lichtendahl | Director | February 29, 2008 | ||
Kenneth C. Lichtendahl | ||||
/S/ W. Rodney McMullen | Director | February 29, 2008 | ||
W. Rodney McMullen | ||||
/S/ Gretchen W. Price | Director | February 29, 2008 | ||
Gretchen W. Price | ||||
/S/ Thomas R. Schiff | Director | February 29, 2008 | ||
Thomas R. Schiff | ||||
/S/ Douglas S. Skidmore | Director | February 29, 2008 | ||
Douglas S. Skidmore | ||||
/S/ John F. Steele, Jr. | Director | February 29, 2008 | ||
John F. Steele, Jr. | ||||
/S/ Larry R. Webb | Director | February 29, 2008 | ||
Larry R. Webb | ||||
/S/ E. Anthony Woods | Director | February 29, 2008 | ||
E. Anthony Woods |
Table of Contents
Exhibit | ||
No. | Exhibit Description | |
3.1A | Amended Articles of Incorporation of Cincinnati Financial Corporation(1) | |
3.1B | Amendment to Article Fourth of Amended Articles of Incorporation of Cincinnati Financial Corporation(2) | |
3.2 | Regulations of Cincinnati Financial Corporation(3) | |
4.1 | Indenture with The Bank of New York Trust Company(4) | |
4.2 | Supplemental Indenture with The Bank of New York Trust Company(4) | |
4.3 | Second Supplemental Indenture with The Bank of New York Trust Company(5) | |
4.4 | Form of 6.125% Exchange Note Due 2034 (included in Exhibit 4.2) | |
4.5 | Form of 6.92% Debentures Due 2028 (included in Exhibit 4.3) | |
4.6 | Indenture with the First National Bank of Chicago (subsequently assigned to The Bank of New York Trust Company)(6) | |
4.7 | Form of 6.90% Debentures Due 2028 (included in Exhibit 4.6) | |
10.1 | Agreement with Messer Construction(7) | |
10.2 | 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 Arrangements November 2007(14) | |
10.12 | Executive Compensation Arrangements November 2006(15) | |
10.13 | Amendment No. 1 to Credit Agreement by and among Cincinnati Financial Corporation and CFC investment Company, as Borrower, and Fifth Third Bank, as lender.(16) | |
10.14 | Cincinnati Financial Corporation Supplemental Retirement Plan(17) | |
10.15 | Standard Form of Incentive Stock Option Agreement for Stock Option Plan VII(18) | |
10.16 | Standard Form of Nonqualified Stock Option Agreement for Stock Option Plan VII(19) | |
10.17 | Standard Form of Incentive Stock Option Agreement for the 2006 Stock Compensation Plan(20) | |
10.18 | Standard Form of Nonqualified Stock Option Agreement for the 2006 Stock Compensation Plan(21) | |
10.19 | Restricted Stock Unit Agreement for John J. Schiff, Jr., dated January 31, 2007(22) | |
10.20 | Restricted Stock Unit Agreement for James E. Benoski, dated January 31, 2007(23) | |
10.21 | Restricted Stock Unit Agreement for Jacob F. Scherer, Jr., dated January 31, 2007(24) | |
10.22 | Restricted Stock Unit Agreement for Kenneth W. Stecher, dated January 31, 2007(25) |
(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. (File No. 000-04604) | |
(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 dated March 30, 2007 (File No. 000-04604). | |
(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 Item 5.02 of the company’s Current Report on Form 8-K dated November 14, 2007. | |
(15) | Incorporated by reference to Item 5.02 of the company’s Current Report on Form 8-K dated November 24, 2006. | |
(16) | 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
Exhibit | ||
No. | Exhibit Description | |
10.23 | Restricted Stock Unit Agreement for Thomas A. Joseph, dated January 31, 2007(26) | |
10.24 | Form of Restricted Stock Unit Agreement for use under the Cincinnati Financial Corporation 2006 Stock Purchase Incentive Plan (service-based)(27) | |
10.25 | Form of Restricted Stock Unit Agreement for use under the Cincinnati Financial Corporation 2006 Stock Purchase Incentive Plan (performance-based)(28) | |
10.26 | Form of Incentive Compensation Agreement for use under the Cincinnati Financial Corporation 2006 Incentive Compensation Plan (performance-based)(29) | |
10.27 | Credit Agreement by and among Cincinnati Financial Corporation, CFC Investment Company, The Huntington National Bank and LaSalle Bank National Association, among others, dated July 2, 2007(30) | |
10.28 | Second Amended and Restated Discretionary Line of Credit Note with PNC Bank, National Association dated July 12, 2007(31) | |
10.29 | Secondary Block Trade Agreement between The Cincinnati Insurance Company and UBS Securities LLC, dated October 23, 2007(32) | |
10.30 | Purchase Agreement (Tranche 1 of 4) between Cincinnati Financial Corporation and UBS AG, London Branch, acting through UBS Securities LLC as agent, dated October 24, 2007(33) | |
10.31 | Purchase Agreement (Tranche 2 of 4) between Cincinnati Financial Corporation and UBS AG, London Branch, acting through UBS Securities LLC as agent, dated October 24, 2007(34) | |
10.32 | Purchase Agreement (Tranche 3 of 4) between Cincinnati Financial Corporation and UBS AG, London Branch, acting through UBS Securities LLC as agent, dated October 24, 2007(35) | |
10.33 | Purchase Agreement (Tranche 4 of 4) between Cincinnati Financial Corporation and UBS AG, London Branch, acting through UBS Securities LLC as agent, dated October 24, 2007(36) | |
10.34 | Stock Purchase Agreement between Cincinnati Financial Corporation and the E. Perry Webb Marital Trust, dated September 5, 2007(37) |
(17) | 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. | |
(18) | Incorporated by reference to Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated October 20, 2006. | |
(19) | Incorporated by reference to Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated October 20, 2006. | |
(20) | Incorporated by reference to Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated October 20, 2006. | |
(21) | Incorporated by reference to Exhibit 10.4 filed with the company’s Current Report on Form 8-K dated October 20, 2006. | |
(22) | Incorporated by reference to Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated January 31, 2007. | |
(23) | Incorporated by reference to Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated January 31, 2007. | |
(24) | Incorporated by reference to Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated January 31, 2007. | |
(25) | Incorporated by reference to Exhibit 10.4 filed with the company’s Current Report on Form 8-K dated January 31, 2007. | |
(26) | Incorporated by reference to Exhibit 10.5 filed with the company’s Current Report on Form 8-K dated January 31, 2007. | |
(27) | Incorporated by reference to Exhibit 10.6 filed with the company’s Current Report on Form 8-K dated January 31, 2007, as amended. | |
(28) | Incorporated by reference to Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated November 14, 2007. | |
(29) | Incorporated by reference to Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated March 19, 2007. | |
(30) | Incorporated by reference to Exhibit 10.01 filed with the company’s Current Report on Form 8-K dated June 30, 2007. | |
(31) | Incorporated by reference to Exhibit 10.27 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007. | |
(32) | Incorporated by reference to Exhibit 10.29 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. | |
(33) | Incorporated by reference to Exhibit 10.30 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. | |
(34) | Incorporated by reference to Exhibit 10.31 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. | |
(35) | Incorporated by reference to Exhibit 10.32 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. | |
(36) | Incorporated by reference to Exhibit 10.33 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. | |
(37) | Incorporated by reference to Exhibit 10.34 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. |
Table of Contents
Exhibit | ||
No. | Exhibit Description | |
10.35 | Restricted Stock Unit Agreement for John J. Schiff, Jr. dated February 18, 2008(38) | |
10.36 | Restricted Stock Unit Agreement for James E. Benoski dated February 18, 2008(39) | |
10.37 | Restricted Stock Unit Agreement for Jacob F. Scherer, Jr. dated February 18, 2008(40) | |
10.38 | Restricted Stock Unit Agreement for Kenneth W. Stecher dated February 18, 2008(41) | |
10.39 | Restricted Stock Unit Agreement for Thomas A. Joseph dated February 18, 2008(42) | |
10.40 | Standard Form of Performance based Restricted Stock Unit Agreement(43) | |
11 | Statement re: Computation of per share earnings for the years ended December 31, 2007, 2006 and 2005, contained in Note 11 of the Consolidated Financial Statements included in Part II, Item 8 of this report, Page 99 | |
14 | Cincinnati Financial Corporation Code of Ethics for Senior Financial Officers(44) | |
21 | Cincinnati Financial Corporation Subsidiaries contained in Part I, Item 1, Page 1 | |
23 | Consent of Independent Registered Public Accounting Firm, Page 123 | |
31A | Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 — Chief Executive Officer, Page 124 | |
31B | Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 — Chief Financial Officer, Page 125 | |
32 | Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002, Page 126 |
(38) | Incorporated by reference to Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated February 20, 2008. | |
(39) | Incorporated by reference to Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated February 20, 2008. | |
(40) | Incorporated by reference to Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated February 20, 2008. | |
(41) | Incorporated by reference to Exhibit 10.4 filed with the company’s Current Report on Form 8-K dated February 20, 2008. | |
(42) | Incorporated by reference to Exhibit 10.5 filed with the company’s Current Report on Form 8-K dated February 20, 2008. | |
(43) | Incorporated by reference to Exhibit 10.6 filed with the company’s Current Report on Form 8-K dated February 20, 2008. | |
(44) | Incorporated by reference to the company’s Definitive Proxy Statement dated March 18, 2004 (File No. 000-04604). |