Enron In Cincinnati? Insurer Says No

While the company reported 15 percent growth in both first-quarter operating earnings and net written premiums, Mr. Schiff began his remarks by expressing his disappointment over a now-public battle over the composition of the company's board being waged by California Public Employees' Retirement System.

A day earlier, CalPERS, the holder of more than 700,000 shares in the Cincinnati-based property-casualty insurer, issued a press statement naming the insurer among five companies it says have the worst corporate governance structures.

At the heart of the dispute is the question of whether independent agents can be independent directors on the board of directors of an insurance company.

CalPERS says no.

In a shareholder proposal submitted by CalPERS, the pension fund defines an "independent director" as one that "is not, and is not affiliated with a company that is, an advisor or consultant to the Company, or a significant customer or supplier of the Company," among other things. The proposal was included in a March 8 Cincinnati Financial proxy statement.

"Through this proposal, we promote strong, objective leadership on the board," CalPERS said, citing a November 1992 survey of Fortune 1000 corporations, which found that 93 percent thought a majority of the board should consist of outside independent directors.

CalPERS noted that only one-third of Cincinnati Financial's board was independent under its definition, with the remainder of the board being comprised of agents that do business with the company and company executives. Six independent agents sit on the 15-member board of directors.

Cincinnati Financial Corporation's board of directors, in the same proxy statement, recommended that shareholders vote against the resolution to shake up their membership.

"We recognize that independent directors play an important role in the affairs of the company. But the interests of shareholders also need to be protected by board members who are not independent, because they are shareholders and executive officers and insurance agents who sell our products, and thus have intimate knowledge of the company and its business," the board reasoned.

After the CalPERS proposal was rejected by shareholders at the company's April 6 meeting, CalPERS made the battle more public. On April 24, the fund released a statement with its "Focus List" of five companies "which represent some of the worst examples of poor financial and governance performance."

"Following the lessons learned from the Enron and Arthur Andersen experiences, CalPERS believes these companies have inadequate governance structures, particularly a lack of independence and conflicts of interest," the statement said, listing Cincinnati Financial with a handful of technology companies (including Lucent Technologies and Gateway Computers).

"We're disappointed that CalPERS apparently has rejected the decision of our shareholders to retain our current board composition," Mr. Schiff said in a prepared statement released on the day of the CalPERS announcement.

Noting that 75 percent of shareholders rejected the CalPERS proposal at the company's annual meeting, he said, the shareholders "agreed that our unique, agent-centered business model works best with directors selected for their qualifications, not to conform to an arbitrary quota or definition."

"Currently, our 15-member board includes independent business executives alongside independent insurance agents who bring us a special ability to serve policyholders and agents in the communities where we do business," the statement continued.

Mr. Schiff also cited the fact that Cincinnati Financial has given shareholders a solid return under its current board structure, noting that the company had "a record of more than 40 years of increasing dividends." He added that the company's five-year return to shareholders was 193 percent, compared to 166 percent for the S&P 500 Index.

The statement also suggested that the company had been recognized by organizations such as PricewaterhouseCoopers and Morgan Stanley for the "transparency and clarity" of its disclosures, and said that it consistently received high financial strength ratings from the various insurance rating agencies.

Expanding on those remarks during yesterday's conference call, Mr. Schiff said: "We are not too happy that [CalPERS chooses] to group us with companies that have financial performance questions."

"We differentiate our company by giving agents personal access to company executives and elevating them to our board," he said. "We believe that by taking a cookie-cutter approach?that all boards and all companies are alike, CalPERS has shown how limited their approach is."

"They have shown that they are willing to overlook how we create value for our shareholders," he continued.

Concluding his remarks on the subject, he said: "We know our strategy is successful and we are willing to defend it," adding, "our agent members are independent business owners.

"They have their own offices to staff, their own payroll to cover and people to motivate?to sell insurance in a correct way. They have many different insurance companies that they represent."

"At the drop of a hat, all of our agent directors could replace the business with Cincinnati Insurance with darn near any one of their other insurance companies, and then Cincinnati Financial would be the worse for it," he said, defending the company's actions that "highlight and honor" the local agent.

Turning to the financial results, Mr. Schiff said the company reported "record results across the board."

First-quarter net operating income was $80 million, or 49 cents per share, compared to $69 million, or 42 cents per share, in last year's first quarter.

Net income, including realized losses, was $75 million, or 46 cents per share.

Net written p-c premiums rose to $621 million from $538 in last year's first quarter and the first-quarter combined ratio was 96.3, compared to 96.5 in first-quarter 2001.

Although Cincinnati Financial expects an improvement in full-year results compared to 2001, "we are maintaining our perspective," Mr. Schiff said, noting that first-quarter performance, while strong for the company, is not necessarily predictive of full-year results.

He said that the insurer is targeting premium growth "well-ahead of the industry average" for the year and a combined ratio of 101.3?the five-year average for the company from 1995-1999.

Cincinnati Financial reported combined ratios of 103.6 in 2001 and 111.6 in 2000.