6200 South Gilmore Road
Company Perspectives:
We strive to grow profitability and enhance the ability of local independent insurance agents to deliver quality financial protection to the people and businesses they serve by providing market stability through financial strength; producing competitive, up-to-date products and services; and developing associates committed to superior service.
With assets of over $13 billion, Cincinnati Financial Corporation was ranked the 17th largest U.S. stock property casualty insurer by Fortune magazine in April 2000. This holding company--known in some circles as "Cin-Fin"--controls six subsidiaries. The Cincinnati Insurance Company, founded in 1950, markets property and casualty insurance in 31 states through nearly 1,000 carefully selected independent agencies. The Cincinnati Casualty Company and The Cincinnati Indemnity Company offer business, homeowner, auto, and personal liability insurance. The company markets life, health, long term care, disability income insurance, and annuities through The Cincinnati Life Insurance Company. Cin-Fin's investment-related subsidiary, CFC Investment Company, supports the other subsidiaries and their agents through commercial leasing and financing activities. The company's newest subsidiary, CinFin Capital Management Company, was created in 1999 to provide investment management services to both businesses and individuals.
Historically, Cincinnati Financial's low cost structure, conservative investment strategy, and strong network of agents have enabled it to consistently outperform property and casualty insurance industry averages. In fact, Barron's analyst Harlan S. Byrne has characterized Cin-Fin as "one of the best-performing of property-casualty insurance companies." Its revenues increased from $1.05 billion in 1990 to $1.74 billion in 1995, and net income grew from $128.96 million to $227.35 million during the same period.
While able to claim its 40th consecutive year of annual dividend increases in 2000, Cin-Fin was hit hard in the late 1990s and into the new millennium by factors largely outside of its control. Court decisions affecting the auto insurance industry in Ohio, costs related to technology upgrades, losses related to weather conditions, price wars brought on by increased competition, and higher loss costs, all played a part in a 53.5 percent decline in net income posted in 2000. Net income for the year was $118.4 million versus $254.7 million recorded in 1999.
Postwar Origins
The business was chartered as The Cincinnati Insurance Company in 1950 by two brothers, John ("Jack") and Robert Schiff. Jack, the elder of the two, had graduated from Ohio State University in 1938 and started working with Travelers Insurance Company that same year. After serving in the military during World War II, Jack launched an independent insurance agency. His independent insurance agency did not represent any single firm and could therefore sell policies from any number of companies. Robert joined his brother's business in 1946, when he graduated from Ohio State.
It wasn't long before Jack conceived of a new insurance company, one created, owned, and operated by insurance agents themselves. A 1949 meeting with family friend and respected colleague Chester T. Field helped bring the idea to life in 1950. Field and the Schiffs persuaded several local independent agents to join them, including Harry Turner, who became the company's first president. Robert Schiff was the company's first vice-president, while Jack Schiff was named secretary-treasurer, and Chester Field served as a board member. The board raised $200,000 in initial investments and enlisted several independent agents from around the state to begin promoting Cincinnati Insurance Company's fire, auto, and later marine and theft insurance.
The Cincinnati Insurance Company (CIC) was founded on several key concepts, including a conservative investment and growth strategy, low expenses, and a strong agent network. The company kept costs low by hiring agents who either had their own offices or worked out of their homes. This strategy would continue throughout CIC's history; in the early 1990s, expenses were only about ten percent of annual premiums, one of the lowest rates in the industry. The company also kept costs low by carefully choosing its clients as well as its agents, making sure that both were the "cream of the crop."
The firm had two primary constituencies: the independent agents to whom it offered insurance products, and the clients to whom independent agents sold the individual policies. CIC forged strong relationships with its agents by paying high commissions (up to 20 percent of premiums), providing responsive claims service, and encouraging agents to own company stock. In a 1990 Financial World article, McDonald & Co. analyst Nancy Benacci noted that Cin-Fin had "a claims person in every town and [made] payments and adjustments fast." A newspaper article written around the time of the company's formation called CIC "the first company owned exclusively by Ohio insurance agents and Cincinnati businessmen." By the early 1990s, company agents owned about one-fifth of its equity. Financial World's Adrienne Linsenmeyer noted that in 1990 "70 percent of Cin-Fin's independent agents rate the company tops and book their best business with the company." CIC won over customers by offering guaranteed rates, and policies with premiums that did not increase for up to five years. These factors laid a solid foundation upon which the Schiff brothers and their colleagues built a prosperous business.
Solid Growth in the 1950s and 1960s
Insurance companies typically have two possible profit centers: underwriting (or selling insurance policies) and investing. An underwriting profit is expressed in industry parlance as the "underwriting margin" or "combined ratio." The combined operating ratio compares claims and overhead to premiums collected. A combined operating ratio of 100 or more indicates that a company's expenses equaled or exceeded the premiums that it collected. A ratio of 105, for example, indicates that a company suffered a loss of five percent on underwriting; premiums collected fell short of claims and operating expenses. Beginning in the 1960s, property and casualty insurers in general did not make money on underwriting. Consequently, any profits made were usually generated through shrewd investment of premiums.
CIC consistently achieved underwriting profits throughout the 1950s and 1960s. By 1955, CIC's roster of products included homeowner's and commercial all-risk plans. From the outset, the firm tailored its policies to small businesses across the Midwest. CIC expanded geographically during its first five years in business, hiring agents in Kentucky in 1955 and Indiana the following year. Gross annual premiums multiplied from $92,000 in 1951 to $928,000 in 1956.
From 1956 to 1971, the company averaged a 9.2 percent annual profit on underwriting. During this period of CIC's history, the company conservatively invested its surplus in government bonds, one of the most low-risk vehicles available. From 1956 to 1968, CIC expanded its reach into six new, primarily Midwest, states: Michigan, Pennsylvania, Florida, Georgia, Alabama, and Tennessee. The company also broadened the types of coverage it offered during this period, adding earthquake, automobile comprehensive and collision, burglary, and robbery options. By 1967, CIC offered 13 types of insurance. Harry Turner served as president until 1963, providing the young company's first decade with what successor Jack Schiff called "wise, conservative management."
Reorganization Brings New Era of Growth
As president of CIC from 1963 to 1975, Jack Schiff ushered in a more aggressive era. In line with a trend that swept the insurance industry in the 1960s, CIC established Cincinnati Financial Corp. as a holding company in 1968. Harry Turner served as the new entity's chairman, while Jack Schiff was president and, starting in 1973, chief executive officer.
The corporate reorganization signaled a period of diversification and rapid growth in revenues and net income. In 1970, Cin-Fin created CFC Investment Company. This segment of Cin-Fin bought and sold commercial real estate for investment purposes. It also provided low cost loans to agents and offered vehicle leases and loans for the agents and their customers.
Public stock floatations in 1971 and 1972 raised about $14 million, $3.5 million of which was used for debt reduction. The remainder went into a fund used in 1972 to acquire The Life Insurance Company of Cincinnati and Queen City Indemnity, a property/casualty firm. Cin-Fin made its biggest purchase ever the following year, merging with Inter-Ocean Corporation, another Cincinnati company and life insurer. The transaction increased Cin-Fin's asset base by almost 60 percent, to $161 million, by the end of 1973. Inter-Ocean Chairman W.G. Alpaugh, Jr., replaced the retiring Harry Turner as Cin-Fin chairman in 1973.
This string of acquisitions helped increase Cincinnati Financial's revenues dramatically, from $19.7 million in 1968 to $96.7 million in 1973, while its net income shot from $1.1 million to $9.8 million. During this time, Cin-Fin's primary profit center shifted from underwriting to investing. From the 1970s through the early 1990s, the insurance industry overall averaged a seven percent annual loss on underwriting. Cincinnati Financial's insurance businesses were more profitable than most, but they still only broke even on average, bringing an increased emphasis on investing.
In 1972, the company hired James Miller as its first full-time investment department employee. According to a late 1995 article in Forbes magazine, Miller and Cin-Fin demanded the same performance of its investments that it expected of its own stock: "We want dividends and companies that will increase their dividends." For all its conservatism, by the early 1990s, about half of the insurer's investment portfolio was in common stocks. In fact, nearly 43 percent of the fund was tied up in just two stocks: Fifth Third Bancorp and Alltel, both based in Ohio.
In spite of this fundamental change in its business, Cin-Fin's growth continued unabated through the remainder of the decade. Revenues expanded from less than $100 million in 1973 to over $330 million by 1980, and profits jumped from $9.8 million to $33.4 million during the same period.
Weathering the Storms of the 1980s
Robert Morgan succeeded co-founder Jack Schiff as CEO in 1982. Morgan--who had joined Cincinnati Insurance in 1966, advanced to vice-president and general manager in 1972, and became president in 1976--oversaw a relatively difficult decade for Cin-Fin and other property-casualty insurers. A string of natural disasters highlighted by Hurricane Hugo battered underwriting results, and investment pitfalls including commercial real estate and junk bonds led to the downfall of several insurers. Cin-Fin suffered the effects of both these trends, though not nearly as severely as some of its rivals.
The company experienced its first-ever decline in profits from $68.7 million on $490.6 million revenues in 1984 to $55 million on $596.5 million in 1985. During the mid-1980s, property-casualty insurers averaged a combined ratio of 116, but in the latter years of the decade, Cin-Fin managed to keep its combined ratio under 100. Revenues increased to $974.4 million and net grew to $111.5 million by 1989, and the dividend nearly doubled from 1986 to 1990.
Cin-Fin's performance won it increased attention from business analysts in the early 1990s, but not necessarily for its insurance activities. To be sure, such observers as Barron's Harlan S. Byrne praised the company's "better than average" underwriting results and "tight-fisted control of expenses." But others, including Forbes' Thomas Easton, admired the company as "a well-run insurer coupled to a closed-end fund with a superb performance record." Easton noted that the insurer's investment returns had beaten the Standard & Poor's 500 by four percentage points from 1985 to 1995, for example. Cincinnati Financial Corp.'s bottom line bore out these accolades. Having broken the $1 billion revenue mark in 1990, Cincinnati Financial Corp. approached $2 billion in 1995. Net income increased from $128.9 million to $227.4 million during the same period. In 1996, the firm secured the second-highest profit margin among publicly traded U.S. insurers.
While garnering much attention from the business community, Cin-Fin management felt that it lacked adequate attention from investors, especially since its financial performance had a history of being strong. As such, company executives began to target Wall Street analysts in late 1995, touting the company's financial and industry achievements. It was the second time in the firm's history that it aggressively marketed itself to Wall Street. Morgan commented on the strategy in a 1996 Cincinnati Business Courier article stating, "We didn't feel we were getting attention from analysts. We wanted to get our story out." The strategy appeared to pay off when in 1997, Cin-Fin's stock was added to the S&P 500 Index. Stock price peaked that year at $141 per share.
Overcoming Challenges: Late 1990s and Beyond
As competition became fierce in the late 1990s, price wars broke out and threatened the company's goal of writing $2 billion of direct premiums on an annual basis. At the time, nearly two-thirds of the firm's policies covered commercial-related lines, a shift from the past when it had focused primarily on personal-related insurance. Due to the increased competition, the company began to increase its emphasis on commercial business, a more profitable segment to write versus auto or homeowners policies.
Cin-Fin also concentrated on expanding to new markets. After moving into Arkansas, Maryland, and Minnesota in the mid 1990s, the firm targeted upstate New York in 1998 and Montana, Idaho, and Utah in 1999. It also began to upgrade its internal technology, which included the development of an intranet that would enable its agents to process claims faster and easier.
During 1999, Morgan retired after over 30 years of services with the company. Chairman John Schiff, Jr., took over as CEO. Along with expanding into new markets, Cin-Fin eyed new business ventures to increase revenues and profitability. In January of that year, the firm created its sixth subsidiary, CinFin Capital Management, to provide investment management services to businesses and wealthy individuals.
Factors outside of the company's control, however, began to take their toll on the firm's profits. Severe weather, including a tornado that swept through Cincinnati, cost Cin-Fin $93.5 million in 1998. During that year and in 1999, growth slowed to six percent, and the company's stock price began to fall. Share prices fell by 19 percent during 1999, and traded at late 1997 prices.
Despite these setbacks, management remained optimistic about Cin-Fin's future gains. During 1999, the firm's property and casualty premiums grew by seven percent, while the industry average at the time was just 2.3 percent. The firm also began to raise its rates, after nearly ten years of falling prices due to stiff competition. Schiff, Jr., claimed in a February 2000 Business Courier article, "We believe our business model gives us strong advantages in continuing to outperform the industry through all kinds of market and economic environments."
While entering the new millennium, however, Cin-Fin again faced challenges beyond its control. During 2000, the company was forced to take a $110 million charge related to two Ohio Supreme Court decisions that affected auto insurers. In the first ruling, Ohio business automobile policies now had to cover employees and family members for injuries caused by uninsured or underinsured motorists, even while on personal--not company--time. The second ruling stated that forms used by insurance companies that allowed Ohio policyholders to decline uninsured motorist coverage were insufficient. Cin-Fin operated as Ohio's largest commercial auto insurer with a 8.4 percent market share, and these new decisions had a negative and dramatic impact on net income for 2000--the company reported a decrease of 53.5 percent over the previous year. The decisions also had the potential to adversely affect results in 2001.
Increased loss costs also played a part in decreasing profits, reflected in its 2000 combined ratio of 110.7 percent (industry average at the time was 110.3 percent). The firm also expected nearly $9 million in losses related to the September 11th attacks on the World Trade Center and the Pentagon. Despite these challenges, Cin-Fin remained confident that it would return to profitability due to its increasing growth rate, especially that of its property/casualty business, which secured a 11.9 percent increase in its net premiums written in 2000. As one of the 20th largest property casualty insurers in the United States, Cin-Fin's long-standing history of success and well-respected position in the industry would no doubt carry it well into the 21st century.
Principal Subsidiaries: The Cincinnati Insurance Company; The Cincinnati Casualty Company; The Cincinnati Indemnity Company; The Cincinnati Life Insurance Company; CFC Investment Company; CinFin Capital Management.
Principal Competitors: The Allstate Corporation; The Progressive Corporation; State Farm Insurance Companies.
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