-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EzHyEKdsNrKMdHYnwQltMS9uJXiYl4jomQbTxu3DxDn+86qolgP1t3B2Bv4GidmC nR6XnGhh4p40+QExCMyCGQ== 0000950152-00-002042.txt : 20000324 0000950152-00-002042.hdr.sgml : 20000324 ACCESSION NUMBER: 0000950152-00-002042 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINCINNATI FINANCIAL CORP CENTRAL INDEX KEY: 0000020286 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 310746871 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-04604 FILM NUMBER: 576892 BUSINESS ADDRESS: STREET 1: 6200 S GILMORE RD CITY: FAIRFIELD STATE: OH ZIP: 45014 BUSINESS PHONE: 5138702000 MAIL ADDRESS: STREET 1: 6200 SOUTH GILMORE ROAD CITY: FAIRFIELD STATE: OH ZIP: 45014-5141 10-K 1 CINCINNATI FINANCIAL CORPORATION 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 Commission file number 0-4604 CINCINNATI FINANCIAL CORPORATION -------------------------------- (Exact name of registrant as specified in its charter) Ohio 31-0746871 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6200 S. Gilmore Road, Fairfield, Ohio 45014-5141 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (513) 870-2000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Exchange on Which Title of Each Class Registered - ------------------- ----------------- $2.00 Par, Common Over The Counter 5.5% Convertible Senior Debentures Due 2002 Over The Counter 6.9% Senior Debentures Due 2028 Over The Counter Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Yes No [] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [] The aggregate market value of voting stock held by nonaffiliates of Cincinnati Financial Corporation was $4,087,138,439 as of March 1, 2000. As of March 1, 2000, there were 160,951,892 shares of common stock outstanding. Documents Incorporated by Reference ----------------------------------- Annual Report to Shareholders for year ended December 31, 1999 (in part) into Parts I, II and IV and Registrant's Proxy Statement dated March 1, 2000 into Parts I, III and IV. 2 PART I ITEM 1. BUSINESS -------- Cincinnati Financial Corporation ("CFC") was incorporated on September 20, 1968 under the laws of the State of Delaware. On April 4, 1992, the shareholders voted to adopt an Agreement of Merger by means of which the reincorporation of the Corporation from the State of Delaware to the State of Ohio was accomplished. CFC owns 100% of The Cincinnati Insurance Company ("CIC"), 100% of CFC Investment Company ("CFC-I") and 100% of CinFin Capital Management Company ("CinFin"). The principal purpose of CFC is to be a holding company for CIC, CFC-I and CinFin in addition for the purpose of acquiring other companies. CIC, incorporated in August, 1950, is an insurance carrier presently licensed to conduct multiple line underwriting in accordance with Section 3941.02 of the Revised Code of Ohio. This includes the sale of fire, automobile, casualty, bonds, and all related forms of property and casualty insurance in 50 states, the District of Columbia, and Puerto Rico. CIC is not authorized to write any other forms of insurance. CIC is in a highly competitive industry and competes in varying degrees with a large number of stock and mutual companies. CIC also owns 100% of the stock of the following insurance companies. 1. The Cincinnati Life Insurance Company ("CLIC") incorporated in 1987 under the laws of Ohio for the purpose of acquiring the business of Inter-Ocean and The Life Insurance Company of Cincinnati. CLIC acquired The Life Insurance Company of Cincinnati and Inter-Ocean Insurance Company on February 1, 1988. CLIC is licensed for the sale of life insurance and accident and health insurance in 47 states and the District of Columbia. 2. The Cincinnati Casualty Company ("CCC") (formerly the Queen City Indemnity Company), incorporated in 1972 under the laws of Ohio, is licensed in the fire and casualty insurance business on a direct billing basis in 40 states. The business of CIC and CCC is conducted separately, and there are no plans for combining the business of said companies. 3. The Cincinnati Indemnity Company ("CID"), incorporated in 1988 under the laws of Ohio, is engaged in the writing of nonstandard personal and casualty lines of insurance in 31 states. The business of CIC and CID is conducted separately, and there are no plans for combining the business of said companies. CFC-I, incorporated in 1970, owns certain real estate in the Greater Cincinnati area and is in the business of leasing or financing various items, principally automobiles, trucks, computer equipment, machine tools, construction equipment, and office equipment. CinFin, incorporated in 1998, offers investment management services to corporations, insurance agencies and companies, institutions, pension plans, and high net worth individuals. Industry segment information for revenues, income before income taxes, and identifiable assets is included on pages 35 and 36 of the Company's Annual Report to Shareholders and is incorporated herein by reference (see Exhibit 13 to this filing). As more fully discussed in pages 6 through 14 in the Company's Annual Report to Shareholders, incorporated herein by reference (see Exhibit 13 to this filing), the Company sells insurance primarily in the Midwest and Southeast through a network of a limited number (977 in 30 states at December 31, 1999) of selectively appointed independent agents, most of whom own stock in the Company. Gross written premiums by property/casualty lines increased 7% to $1.775 billion in 1999. The Company's mix of property/casualty business did not change significantly in 1999. Life and accident and health insurance (which constituted 19% of the Company's premium income for 1999) is sold primarily through property/casualty agencies and independent life agencies. The growth rate of 267% was largely the result of a $302.9 million single pay life policy on a bank's officers (BOLI). 2 3 The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses ("LAE") of the Company's property/casualty ("P/C") insurance subsidiaries. Property and casualty insurance is written in 50 states, the District of Columbia, and Puerto Rico. The liabilities for losses and LAE are determined using case-basis evaluations and statistical projections and represent estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effect of trends in future claim severity and frequency. These estimates are continually reviewed; and as experience develops and new information becomes known, the liability is adjusted as necessary. Such adjustments, if any, are reflected in current operations. The Company does not discount any of its property/casualty liabilities for unpaid losses and unpaid loss adjustment expenses. There are two tables used to present an analysis of the liability for losses and LAE. The first table, providing a reconciliation of beginning and ending liability balances for 1999, 1998, and 1997, is on page 31 in the Company's Annual Report to Shareholders, incorporated herein by reference (see Exhibit 13 to this filing). The second table, showing the development of the estimated liability for the ten years prior to 1999 is presented on the next page. The reconciliation referred to in the preceding paragraph shows a 1999 recognition of $116,061,000 redundancy in the December 31, 1998 liability. This redundancy is due in part to the effects of settling case reserves established in prior years for less than expected and also in part to the over estimation of the severity of IBNR losses. Average severity continues to increase primarily because of increases in medical costs related to workers' compensation and auto liability insurance. Litigation expenses for recent court cases on pending liability claims continue to be very costly; and judgments continue to be high and difficult to estimate. Reserves for environmental claims have been reviewed, and the Company believes that the reserves are adequate. Environmental exposures are minimal as a result of the types of risks we have insured in the past. Historically, most commercial accounts are written with post-date coverages that afford clean-up costs and Superfund responses. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for anticipated changes in underwriting standards, policy provisions, and general economic trends. These trends are monitored based on actual development and are modified if necessary. The limits on risks retained by the Company vary by type of policy, and risks in excess of the retention limits are reinsured. Because of the growth in the Company's capacity to underwrite risks and reinsurance market conditions, the Company raised its casualty line retention limits in 1995 and 1999 from $1,000,000 to $2,000,000 to $2,400,000, respectively, and raised its property line retention limits in 1995 from $1,000,000 to $2,000,000. The principal reason for differences between the property/casualty liabilities reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles ("GAAP") and that reported in the annual statements filed with state insurance departments in accordance with statutory accounting practices ("SAP") relates to the reporting of reinsurance recoverables which are recognized as receivables for GAAP purposes and as an offset to reserves for SAP purposes. 3 4 ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (Millions of Dollars)
Year Ended December 31 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 - ---------------------- ---- ---- ---- ---- ---- ---- ---- ----- ---- ---- ---- Net Liability for Unpaid Losses and Loss Adjustment Expenses $742 $833 $986 $1,138 $1,293 $1,432 $1,581 $1,702 $1,777 $1,840 $1,932 Net Liability Reestimated as of: One Year Later 751 869 956 1,098 1,200 1,306 1,429 1,582 1,623 1,724 Two Years Later 747 816 928 993 1,116 1,220 1,380 1,470 1,551 Three Years Later 696 795 823 949 1,067 1,214 1,279 1,405 Four Years Later 676 723 814 937 1,067 1,131 1,236 Five Years Later 635 720 824 943 1,103 1,106 Six Years Later 637 732 827 910 1,005 Seven Years Later 653 734 804 900 Eight Years Later 655 731 795 Nine Years Later 657 719 Ten Years Later 649 Net Cumulative Redundancy $ 93 $114 $191 $ 238 $ 288 $ 326 $ 345 $ 297 $ 226 $ 116 ==== ==== ==== ====== ====== ====== ====== ====== ====== ====== Net Cumulative Amount of Liability Paid Through: One Year Later $238 $232 $280 $ 310 $ 343 $ 368 $ 395 $ 453 $ 499 $ 522 Two Years Later 356 397 440 498 538 578 630 732 761 Three Years Later 446 493 546 612 663 709 801 884 Four Years Later 497 552 611 681 734 802 881 Five Years Later 528 588 647 718 788 847 Six Years Later 550 610 666 743 814 Seven Years Later 563 621 676 760 Eight Years Later 570 631 689 Nine Years Later 577 640 Ten Years Later 585 Net Liability--End of Year $1,138 $1,293 $1,432 $1,581 $1,702 $1,777 $1,840 $1,932 Reinsurance Recoverable 62 72 78 109 122 112 138 161 ------ ------ ------ ------ ------ ------ ------ ------ Gross Liability--End of Year $1,200 $1,365 $1,510 $1,690 $1,824 $1,889 $1,978 $2,093 ====== ====== ====== ====== ====== ====== ====== ====== Net Reestimated Liability--Latest $ 900 $1,005 $1,106 $1,236 $1,405 $1,551 $1,724 Reestimated Recoverable--Latest 74 76 73 72 59 44 32 ------ ------ ------ ------ ------ ------ ------ Gross Reestimated Liability--Latest $ 974 $1,081 $1,179 $1,308 $1,464 $1,595 $1,756 ====== ====== ====== ====== ====== ====== ====== Gross Cumulative Redundancy $ 226 $ 284 $ 331 $ 382 $ 360 $ 294 $ 222 ====== ====== ====== ====== ====== ====== ======
The table above presents the development of balance sheet liabilities for 1989 through 1999. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the reestimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims for individual years. 4 5 The "net cumulative redundancy" represents the aggregate change in the estimates over all prior years. For example, the 1989 liability has developed a $93,000,000 redundancy over ten years and has been reflected in income over the ten years. The effects on income of the past three years of changes in estimates of the liabilities for losses and LAE for all accident years is shown in the reconciliation table, referred to above. The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. For example, as of December 31, 1999, the Company had paid $585,000,000 of the currently estimated $649,000,000 of losses and LAE that have been incurred as of the end of 1989; thus an estimated $64,000,000 of losses incurred as of the end of 1989 remain unpaid as of the current financial statement date. In evaluating this information, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of deficiency or redundancy related to losses settled in 1994, but incurred in 1989, will be included in the cumulative deficiency or redundancy amount for 1989 and each subsequent year. This table does not present accident or policy year development data which readers may be more accustomed to analyzing. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. The Company limits the maximum net loss that can arise by large risks or risks concentrated in areas of exposure by reinsuring (ceding) with other insurers or reinsurers. Related thereto, the Company's retention levels were last increased for casualty lines of business from $2,000,000 to $2,400,000 in 1999, and for property lines of insurance from $1,000,000 to $2,000,000 in 1995. The Company reinsures with only financially sound companies. The composition of its reinsurers has not changed, and the Company has not experienced any uncollectible reinsurance amounts or coverage disputes with its reinsurers in more than ten years. Information concerning the Company's investment strategy and philosophy is contained on pages 21 through 23 of the Annual Report to Shareholders, incorporated herein by reference (see Exhibit 13 to this filing). The Company's primary strategy is to maintain liquidity to meet both its immediate and long-range insurance obligations through the purchase and maintenance of medium-risk fixed maturity and equity securities, while earning optimal returns on medium-risk equity securities which offer growing dividends and capital appreciation. The Company usually holds these securities to maturity unless there is a change in credit risk or the securities are called by the issuer. Historically, municipal bonds (with concentrations in the essential services, i.e. schools, sewer, water, etc.) have been attractive to the Company due to their tax exempt features. Because of Alternative Minimum Tax matters, the Company uses a blend of tax-exempt and taxable fixed maturity securities. Investments in common stocks have been made with an emphasis on securities with an annual dividend yield of at least 2 to 3 percent and annual dividend increases. The Company's strategy in equity investments is to identify approximately 10 to 12 companies in which it can accumulate 10 to 20 percent of their common stock. As a long-term investor, a buy and hold strategy has been followed for many years, resulting in an accumulation of a significant amount of unrealized appreciation on equity securities. As of December 31, 1999, CFC employed 2,920 associates. 5 6 ITEM 2. PROPERTIES ---------- CFC-I owns a fully leased 85,000 square feet office building in downtown Cincinnati that is currently leased to an unaffiliated company, on a net, net, net lease basis. This property is carried in the financial statements at $535,000 as of December 31, 1999. CFC-I also owns the Home Office building located on 75 acres of land in Fairfield, Ohio. This building contains approximately 380,000 square feet. The John J. and Thomas R. Schiff & Company, an affiliated company, occupies approximately 5,350 square feet, and the balance of the building is occupied by CFC and its subsidiaries. The property is carried in the financial statements at $9,967,693 as of December 31, 1999. CFC-I also owns the Fairfield Executive Center which is located on the northwest corner of the home office property in Fairfield, Ohio. This is a four-story office building containing approximately 103,000 rentable square feet. CFC and its subsidiaries occupy approximately 91% of the building, unaffiliated tenants occupy approximately 7% of the building, and approximately 2% of the building is unoccupied. The property is carried in the financial statements at $9,407,040 as of December 31, 1999. The CLIC owns a four-story office building in the Tri-County area of Cincinnati containing approximately 127,000 square feet. At the present time, 100% of the building is currently being leased by an unaffiliated tenant. This property is carried in the financial statements at $3,619,373 as of December 31, 1999. In addition, the Company is in the process of constructing a second office tower to be used by CFC and its subsidiaries. This building is identical and connected to the current Home Office building. The total cost of the building is expected to be approximately $60 million. The new construction and related renovations will be completed in the first half of 2000. As of December 31, 1999, the Company had paid $45.8 million of such costs. ITEM 3. LEGAL PROCEEDINGS ----------------- The Company is involved in no material litigation other than routine litigation incident to the nature of the insurance industry. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- CFC filed with the Securities and Exchange Commission (SEC) on March 2, 2000, definitive proxy statements and annual reports pursuant to Regulation 14A. Material filed was the same as that described in Item 4 and is incorporated herein by reference. No matters were submitted during the fourth quarter. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER ----------------------------------------------------------------- MATTERS ------- Cincinnati Financial Corporation had approximately 11,485 direct shareholders of record as of December 31, 1999. The information related to the market for the registrant's common stock is included in the Annual Report of the Registrant to its shareholders on page 38 for the year ended December 31, 1999 and is incorporated herein by reference (see exhibit 13 to this filing). ITEM 6. SELECTED FINANCIAL DATA ----------------------- This information is included in the Annual Report of the Registrant to its shareholders on pages 16 and 17 for the year ended December 31, 1999 and is incorporated herein by reference (see exhibit 13 to this filing). 6 7 ITEM 7 AND 7(A). MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE ---------------------------------------------------------- DISCLOSURES ABOUT MARKET RISK ----------------------------- This information is included in the Annual Report of the Registrant to its shareholders on pages 18 to 23 for the year ended December 31, 1999 and is incorporated herein by reference (see Exhibit 13 to this filing). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- (a) Financial Statements The following consolidated financial statements of the Registrant and its subsidiaries, included in the Annual Report of the Registrant to its shareholders on pages 24 to 36 for the year ended December 31, 1999, are incorporated herein by reference (see Exhibit 13 to this filing). Consolidated Balance Sheets--December 31, 1999 and 1998 Consolidated Statements of Income--Years ended December 31, 1999, 1998, and 1997 Consolidated Statements of Shareholders' Equity--Years ended December 31, 1999, 1998, and 1997 Consolidated Statements of Cash Flows--Years ended December 31, 1999, 1998, and 1997. Notes to Consolidated Financial Statements Independent Auditors' Report (b) Supplementary Data Selected quarterly financial data, included in the Annual Report of the Registrant to its shareholders on page 15 for the year ended December 31, 1999, is incorporated herein by reference (see Exhibit 13 to this filing). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- There were no disagreements on accounting and financial disclosure requirements with accountants within the last 24 months prior to December 31, 1999. PART III CFC filed with the SEC on March 2, 2000 definitive proxy statements pursuant to regulation 14-A. Material filed was the same as that described in Item 10, Directors and Executive Officers of the Registrant; Item 11, Executive Compensation; Item 12, Security Ownership of Certain Beneficial Owners and Management; Item 13, Certain Relationships and Related Transactions, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ---------------------------------------------------------------- (a) Filed Documents. The following documents are filed as part of this report: 1. Financial Statements--incorporated herein by reference (see Exhibit 13 to this filing) as listed in Part II of this Report. 7 8 2. Financial Statement Schedules: Independent Auditors' Report Schedule I--Summary of Investments Other than Investments in Related Parties Schedule II--Condensed Financial Information of Registrant Schedule III--Supplementary Insurance Information Schedule IV--Reinsurance Schedule VI--Supplemental Information Concerning Property-Casualty Insurance Operations All other schedules are omitted because they are not required, inapplicable or the information is included in the financial statements or notes thereto. 3. Exhibits: Exhibit 3(i) --Amended Articles of Incorporation of Cincinnati Financial Corporation. Exhibit 3(ii)--Regulations of Cincinnati Financial Corporation--incorporated by reference to Exhibit 2 to registrant's Proxy Statement dated March 2, 1992. Exhibit 11 --Statement re computation of per share earnings for years ended December 31, 1999, 1998, and 1997 Exhibit 13 --Material incorporated by reference from the annual report of the registrant to its shareholders for the year ended December 31, 1999 Exhibit 21 --Subsidiaries of the registrant-- information contained in Part I of this report Exhibit 22 --Published Report regarding matters submitted to vote of securityholders-- notice of Annual Meeting of Shareholders and Proxy Statement dated March 1, 2000--incorporated by reference to such document previously filed with Securities and Exchange Commission, Washington, D.C., 20549 Exhibit 23 --Independent Auditors' Consent Exhibit 27 --Financial Data Schedule (b) Reports on Form 8-K--NONE 8 9 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Cincinnati Financial Corporation: We have audited the consolidated financial statements of Cincinnati Financial Corporation and its subsidiaries as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, and have issued our report thereon dated February 3, 2000; such consolidated financial statements and report are included in your 1999 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedules of Cincinnati Financial Corporation and its subsidiaries, listed in Item 14. These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP /S/ Deloitte & Touche LLP Cincinnati, Ohio February 3, 2000 9 10 SCHEDULE I CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1999
(000's omitted) Amount at which shown Fair in balance Type of Investment Cost Value sheet ------------------ ---- ----- ----------- Fixed maturities: Bonds: United States government and government agencies and authorities The Cincinnati Insurance Company................... $ 251 $ 258 $ 258 The Cincinnati Casualty Company.................... 403 403 403 The Cincinnati Indemnity Company................... 455 452 452 The Cincinnati Life Insurance Company ............. 5,929 5,786 5,786 ---------- ---------- ---------- Total................................................ 7,038 6,899 6,899 ---------- ---------- ---------- States, municipalities and political subdivisions: The Cincinnati Insurance Company................... 841,901 837,198 837,198 The Cincinnati Casualty Company.................... 29,239 29,357 29,357 The Cincinnati Indemnity Company................... 13,631 13,379 13,379 The Cincinnati Life Insurance Company.............. 6,548 6,719 6,719 ---------- ---------- ---------- Total................................................ 891,319 886,653 886,653 ---------- ---------- ---------- Public utilities: The Cincinnati Insurance Company................... 36,498 36,575 36,575 The Cincinnati Casualty Company.................... 3,215 3,406 3,406 The Cincinnati Life Insurance Company.............. 21,265 21,427 21,427 ---------- ---------- ---------- Total................................................ 60,978 61,408 61,408 ---------- ---------- ---------- Convertibles and bonds with warrants attached: The Cincinnati Insurance Company................... 60,527 54,083 54,083 The Cincinnati Life Insurance Company.............. 12,908 12,033 12,033 Cincinnati Financial Corporation................... 10,558 9,679 9,679 ---------- ---------- ---------- Total................................................ 83,993 75,795 75,795 ---------- ---------- ---------- All other corporate bonds: The Cincinnati Insurance Company................... 638,062 624,853 624,853 The Cincinnati Casualty Company.................... 44,650 44,946 44,946 The Cincinnati Indemnity Company................... 16,453 16,764 16,764 The Cincinnati Life Insurance Company.............. 542,612 531,812 531,812 Cincinnati Financial Corporation................... 407,049 368,282 368,282 ---------- ---------- ---------- Total................................................ 1,648,826 1,586,657 1,586,657 ---------- ---------- ---------- TOTAL FIXED MATURITIES................................. $2,692,154 $2,617,412 $2,617,412 ---------- ---------- ----------
10 11
(000's omitted) Amount at which shown Fair in balance Type of Investment Cost Value sheet ------------------ ---- ----- ----------- Equity securities: Common stocks: Public utilities The Cincinnati Insurance Company................... $ 87,546 $ 409,882 $ 409,882 The Cincinnati Casualty Company.................... 3,697 12,352 12,352 The Cincinnati Life Insurance Company.............. 16,023 97,417 97,417 Cincinnati Financial Corporation................... 66,430 667,427 667,427 ---------- ---------- ----------- Total.............................................. 173,696 1,187,078 1,187,078 ---------- ---------- ----------- Banks, trust and insurance companies The Cincinnati Insurance Company................... 346,424 1,158,432 1,158,432 The Cincinnati Casualty Company.................... 15,817 84,862 84,862 The Cincinnati Indemnity Company................... 725 690 690 The Cincinnati Life Insurance Company.............. 40,094 137,288 137,288 Cincinnati Financial Corporation................... 448,231 3,145,178 3,145,178 ---------- ---------- ----------- Total.............................................. 851,291 4,526,450 4,526,450 ---------- ---------- ----------- Industrial miscellaneous and all other The Cincinnati Insurance Company................... 412,597 1,037,185 1,037,185 The Cincinnati Casualty Company.................... 19,451 49,977 49,977 The Cincinnati Indemnity Company................... 5,505 15,042 15,042 The Cincinnati Life Insurance Company.............. 54,808 132,749 132,749 Cincinnati Financial Corporation................... 84,603 158,505 158,505 ---------- ---------- ----------- Total.............................................. 576,964 1,393,458 1,393,458 ---------- ---------- ----------- Nonredeemable preferred stocks: The Cincinnati Insurance Company................... 299,584 291,200 291,200 The Cincinnati Casualty Company.................... 6,156 5,193 5,193 The Cincinnati Indemnity Company................... 2,434 1,842 1,842 The Cincinnati Life Insurance Company.............. 77,933 69,518 69,518 Cincinnati Financial Corporation................... 34,497 36,179 36,179 ---------- ---------- ----------- Total.............................................. 420,604 403,932 403,932 ---------- ---------- ----------- TOTAL EQUITY SECURITIES $2,022,555 $7,510,918 $ 7,510,918 ---------- ---------- ----------- Other invested assets: Mortgage loans on real estate The Cincinnati Life Insurance Company.............. $ 2,603 XXXXXX $ 2,603 CFC Investment Company............................. 12,767 XXXXXX 12,767 ---------- ----------- Total.............................................. 15,370 XXXXXX 15,370 ---------- ----------- Real estate The Cincinnati Life Insurance Company.............. 3,620 XXXXXX 3,620 CFC Investment Company............................. 650 XXXXXX 650 ---------- ----------- Total.............................................. 4,270 XXXXXX 4,270 ---------- ----------- Policy loans The Cincinnati Life Insurance Company.............. 21,781 XXXXXX 21,781 ---------- ----------- Notes receivable CFC Investment Company............................. 24,488 XXXXXX 24,488 ---------- ----------- TOTAL OTHER INVESTED ASSETS............................... $ 65,909 XXXXXX $ 65,909 ---------- ----------- TOTAL INVESTMENTS......................................... $4,780,618 XXXXXX $10,194,239 ========== ===========
11 12 SCHEDULE II CINCINNATI FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed statements of income (Parent company only) (000's omitted) For the Years ended December 31 1999 1998 1997 ---- ---- ---- Income - ------ Dividends from subsidiaries............................... $ 175,000 $ 175,000 $ 125,000 Investment income......................................... 107,473 95,106 87,312 Realized (losses) gains on investments.................... (14,329) (23) 4,415 Other..................................................... 489 2,739 99 ----------- ---------- ---------- Total ................................................. $ 268,633 $ 172,822 $ 216,826 ----------- ---------- ---------- Expenses - -------- Interest.................................................. $ 33,461 $ 27,070 $ 20,306 Other..................................................... 6,272 9,305 8,568 ----------- ---------- ---------- Total expenses......................................... 39,733 36,375 28,874 ----------- ---------- ---------- Income before taxes and earnings of subsidiaries.......... 228,900 136,447 187,952 Applicable income taxes................................... 4,532 9,372 11,066 ----------- ---------- ---------- Net income before change in undistributed earnings of subsidiaries........................................... 224,368 127,075 176,886 Increase in undistributed earnings of subsidiaries........ 30,354 114,492 122,489 ----------- ---------- ---------- Net income............................................. $ 254,722 $ 241,567 $ 299,375 =========== ========== ==========
Condensed balance sheets (Parent company only) (000's omitted) December 31 1999 1998 ---- ---- Assets - ------ Cash....................................................................... $ 1,257 $ 21,421 Fixed maturities, at fair value............................................ 377,961 431,704 Equity securities, at fair value........................................... 4,007,289 3,823,801 Investment income receivable............................................... 23,821 21,431 Inter-company dividends receivable......................................... 0 20,000 Equity in net assets of subsidiaries....................................... 2,723,296 2,911,439 Finance receivables........................................................ 2,144 4,221 Other assets............................................................... 66,529 41,778 ---------- ---------- Total assets............................................................ $7,202,297 $7,275,795 ========== ========== Liabilities - ----------- Notes payable.............................................................. $ 90,000 $ 0 Dividends declared but unpaid.............................................. 27,609 25,564 Federal income tax Current................................................................. 3,780 8,316 Deferred................................................................ 1,172,212 1,133,387 5.5% Convertible senior debentures due 2002................................ 36,759 51,919 6.9% Senior debentures due 2028............................................ 419,614 419,601 Other liabilities.......................................................... 31,039 16,072 ---------- ---------- Total liabilities....................................................... $1,781,013 $1,654,859 Stockholders' equity....................................................... 5,421,284 5,620,936 ---------- ---------- Total liabilities and stockholders' equity.............................. $7,202,297 $7,275,795 ========== ==========
This condensed financial information should be read in conjunction with the consolidated financial statements and notes included in the Registrant's 1999 Annual Report to Shareholders. 12 13 SCHEDULE II CINCINNATI FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed statements of cash flows (Parent company only) (000's omitted) For the years ended December 31 1999 1998 1997 ---- ---- ---- Operating Activities - -------------------- Net income................................................ $ 254,722 $ 241,567 $ 299,375 Adjustments to reconcile net income to net cash Provided by operating activities: Amortization.......................................... (282) (385) (624) Increase in investment income receivable.............. (2,390) (2,862) (228) (Decrease) increase in current federal income taxes payable............................................. (4,536) (2,413) 1,307 Provision for deferred income taxes................... 818 642 159 Decrease (increase) in dividends receivable from subsidiaries........................................ 20,000 30,000 (29,500) (Increase) decrease in other assets.................... (24,751) (34,677) 3,417 Increase (decrease) in other liabilities.............. 14,968 (4,089) 11,806 Increase in undistributed earnings of subsidiaries.... (30,354) (114,492) (122,489) Realized losses (gains) on investments................ 14,329 23 (4,415) ---------- ---------- ---------- Net cash provided by operating activities................. 242,524 113,314 158,808 ---------- ---------- ---------- Investing Activities - -------------------- Sale of fixed maturity investments........................ 42,453 30,805 62,712 Maturity of fixed maturity investments.................... 49,555 68,396 77,380 Sale of equity security investments....................... 61,836 7,125 9,982 Collection of finance receivables......................... 2,077 3,608 1,330 Purchase of fixed maturity investments.................... (94,622) (132,759) (119,592) Purchase of equity security investments................... (94,413) (116,530) (40,834) Investment in finance receivables......................... 0 0 (9,159) ---------- ---------- ---------- Net cash used in investing activities..................... (33,114) (139,355) (18,181) ---------- ---------- ---------- Financing Activities - -------------------- Increase in (payoff of) notes payable..................... 90,000 (265,564) 3,466 Proceeds from issue of 6.9% senior debentures............. 0 419,593 0 Payment of cash dividends................................. (109,702) (99,522) (88,405) Purchase/issuance of treasury shares...................... (217,084) (24,301) (60,714) Proceeds from stock options exercised..................... 7,212 10,314 6,474 ---------- ---------- ---------- Net cash provided by (used in) financing activities....... (229,574) 40,520 (139,179) ---------- ---------- ---------- (Decrease) increase in cash............................... (20,164) 14,479 1,448 Cash at beginning of year................................. 21,421 6,942 5,494 ---------- ---------- ---------- Cash at end of year....................................... $ 1,257 $ 21,421 $ 6,942 ========== ========== ==========
This condensed financial information should be read in conjunction with the consolidated financial statements and notes included in the Registrant's 1999 Annual Report to Shareholders. 13 14 SCHEDULE III CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION FOR YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (000's omitted)
Column A Column B Column C Column D Column E Column F -------- -------- -------- -------- -------- -------- Future Policy Deferred Benefits, Other Policy Policy Losses, Claims & Acquisition Claims & Expense Unearned Benefits Premium Segment Cost Losses Premiums Payable Revenue - --------------------------------------------------------------------------------------------------------- 1999 Commercial Lines Insurance.... $ --(3) $1,751,926 $297,203 $ --(3) $1,088,039 Personal Lines Insurance...... --(3) 340,650 182,324 --(3) 569,238 -------- ---------- -------- ------- ---------- Total Property/Liability Insurance.................. 91,360 2,092,576 479,527 36,536 1,657,277 Life/Health Insurance......... 63,025 870,362 926 15,236 74,673 -------- ---------- -------- ------- ---------- Grand Total................... $154,385 $2,962,938 $480,453 $51,772 $1,731,950 ======== ========== ======== ======= ========== 1998 Commercial Lines Insurance.... $ --(3) $1,644,823 $287,148 $ --(3) $1,019,463 Personal Lines Insurance...... $ --(3) 333,637 171,722 --(3) 523,176 -------- ---------- -------- ------- ---------- Total Property/Liability Insurance.................. 86,611 1,978,460 458,870 50,422 1,542,639 Life/Health Insurance......... 56,285 544,093 825 15,480 70,096 -------- ---------- -------- ------- ---------- Grand Total................... $142,896 $2,522,553 $459,695 $65,902 $1,612,735 ======== ========== ======== ======= ========== 1997 Commercial Lines Insurance.... $ --(3) $1,567,436 $285,401 $ --(3) $ 983,761 Personal Lines Insurance...... $ --(3) 321,447 156,677 --(3) 469,765 -------- ---------- -------- ------- ---------- Total Property/Liability Insurance.................. 83,759 1,888,883 442,078 24,614 1,453,526 Life/Health Insurance......... 51,554 491,374 976 14,110 62,852 -------- ---------- -------- ------- ---------- Grand Total................... $135,313 $2,380,257 $443,054 $38,724 $1,516,378 ======== ========== ======== ======= ========== Column A Column G Column H Column I Column J Column K -------- -------- -------- -------- -------- -------- Benefits, Amortization Claims, of Deferred Net Losses & Policy Other Investment Settlement Acquisition Operating Premium Segment Income (3) Expenses Costs Expenses Written - ---------------------------------------------------------------------------------------------------------- 1999 Commercial Lines Insurance.... $ -- $ 794,294 $ --(3) $ --(3) $1,100,612 Personal Lines Insurance...... -- 393,296 --(3) --(3) 580,200 ----- ---------- -------- -------- ---------- Total Property/Liability Insurance.................. -- 1,187,590 347,854 126,228 1,680,812 Life/Health Insurance......... -- 66,773 16,811 21,648 8,849(4) ----- ---------- -------- -------- ---------- Grand Total................... $ -- $1,254,363 $364,665 $147,876 $1,689,661 ===== ========== ======== ======== ========== 1998 Commercial Lines Insurance.... $ -- $ 725,621 $ --(3) $ --(3) $1,019,786 Personal Lines Insurance...... -- 427,262 --(3) $ --(3) 537,795 ----- ---------- -------- -------- ---------- Total Property/Liability Insurance.................. -- 1,152,883 324,833 91,414 1,557,581 Life/Health Insurance......... -- 68,235 11,465 20,655 8,392(4) ----- ---------- -------- -------- ---------- Grand Total................... $ -- $1,221,118 $336,298 $112,069 $1,565,973 ===== ========== ======== ======== ========== 1997 Commercial Lines Insurance.... $ -- $ 624,639 $ --(3) $ --(3) $ 987,446 Personal Lines Insurance...... -- 370,847 --(3) $ --(3) 484,157 ----- ---------- -------- -------- ---------- Total Property/Liability Insurance.................. -- 995,486 305,336 130,960 1,471,603 Life/Health Insurance......... -- 59,438 9,056 17,737 8,112(4) ----- ---------- -------- -------- ---------- Grand Total................... $ -- $1,054,924 $314,392 $148,697 $1,479,715 ===== ========== ======== ======== ==========
Notes to Schedule III: - --------------------- (1) The sum of columns C, D, & E is equal to the sum of Losses and loss expense reserves, Life policy reserves, and Unearned premium reserves reported in the Company's consolidated balance sheets. (2) The sum of columns I & J is equal to the sum of Commissions, Other operating expenses, Taxes, licenses, and fees, Increase in deferred acquisition costs, and Other expenses shown in the consolidated statements of income, less other expenses not applicable to the above insurance segments. (3) This segment information is not regularly allocated to segments and reviewed by Company management in making decisions about resources to be allocated to the segments and assess their performance. (4) Amounts represent written premiums on accident and health insurance business only. 14 15 SCHEDULE IV CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES REINSURANCE FOR YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (000's omitted)
Column A Column B Column C Column D Column E Column F -------- -------- -------- -------- -------- -------- Ceded to Assumed from Percentage of Gross Other Other Net Amount Assumed Amount Companies Companies Amount to Net - ----------------------------------------------------------------------------------------------------------------------------------- 1999 - ---- Life Insurance in Force...................... $ 17,889,524 $6,334,702 $ 10,352 $ 11,565,174 .1% ============ ========== ============ ============ Premiums Commercial Lines Insurance................... $ 1,125,270 $ 73,406 $ 36,175 $ 1,088,039 3.3% Personal Lines Insurance..................... 590,466 22,166 938 569,238 .2% ------------ ---------- ------------ ------------ Total Property/Liability Insurance......... 1,715,736 95,572 37,113 1,657,277 2.2% ------------ ---------- ------------ ------------ Life/Health Insurance........................ 84,935 10,350 88 74,673 .1% ------------ ---------- ------------ ------------ Grand Total Premiums......................... $ 1,800,671 $ 105,922 $ 37,201 $ 1,731,950 2.1% ============ ========== ============ ============ 1998 - ---- Life Insurance in Force...................... $ 13,048,209 $3,080,996 $ 11,647 $ 9,978,860 .1% ============ ========== ============ ============ Premiums Commercial Lines Insurance................... $ 1,055,769 $ 74,251 $ 37,945 $ 1,019,463 3.7% Personal Lines Insurance..................... 544,153 21,822 845 523,176 .2% ------------ ---------- ------------ ------------ Total Property/Liability Insurance......... 1,599,922 96,073 38,790 1,542,639 2.5% ------------ ---------- ------------ ------------ Life/Health Insurance........................ 75,657 $ 5,682 121 70,096 .2% ------------ ---------- ------------ ------------ Grand Total Premiums......................... $ 1,675,579 $ 101,755 $ 38,911 $ 1,612,735 2.4% ============ ========== ============ ============ 1997 - ---- Life Insurance in Force...................... $ 10,844,743 $1,313,957 $ 13,631 $ 9,544,417 .1% ============ ========== ============ ============ Premiums Commercial Lines Insurance................... $ 1,016,586 $ 74,137 $ 41,157 $ 983,606 4.2% Personal Lines Insurance..................... 489,643 20,260 537 469,920 .1% ------------ ---------- ------------ ------------ Total Property/Liability Insurance......... 1,506,229 94,397 41,694 1,453,526 2.9% ------------ ---------- ------------ ------------ Life/Health Insurance........................ 68,073 5,357 136 62,852 .2% ------------ ---------- ------------ ------------ Grand Total Premiums......................... $ 1,574,302 $ 99,754 $ 41,830 $ 1,516,378 2.8% ============ ========== ============ ============
15 16 SCHEDULE VI CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS FOR YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (000's omitted)
Column A Column B Column C Column D Column E Column F Column G -------- -------- -------- -------- -------- -------- -------- Reserves for Unpaid Deferred Claims and Discount, Affiliation Policy Claim if any, Net with Acquisition Adjustment Deducted Unearned Earned Investment Registrant Costs Expenses in Column C Premiums Premiums Income - -------------------------------------------------------------------------------------------------- Consolidated Property-Casualty Entities 1999 $ 91,360 $2,092,576 $ 0 $ 479,527 $1,657,277 $ 207,640 ========== ========== ========== ========== ========== ========== 1998 $ 86,611 $1,978,460 $ 0 $ 458,870 $1,542,639 $ 203,919 ========== ========== ========== ========== ========== ========== 1997 $ 83,759 $1,888,883 $ 0 $ 442,078 $1,453,526 $ 199,427 ========== ========== ========== ========== ========== ========== Column A Column H Column I Column J Column K -------- -------- -------- -------- -------- Claims and Claim Amortization Paid Adjustment Expenses of Deferred Claims and Affiliation Incurred Related to Policy Claim with (1) (2) Acquisition Adjustment Premiums Registrant Current Year Prior Years Costs Expenses Written - -------------------------------------------------------------------------------------- Consolidated Property-Casualty Entities 1999 $1,303,651 $(116,061) $ 347,854 $1,096,146 $ 1,680,812 ========== ========= ========== ========== ============ 1998 $1,306,194 $(153,311) $ 324,833 $1,089,208 $ 1,557,581 ========== ========= ========== ========== ============ 1997 $1,115,140 $(119,654) $ 305,336 $ 921,253 $ 1,471,603 ========== ========= ========== ========== ============
16 17 Index of Exhibits Exhibit 3(i) --Amended Articles of Incorporation of Cincinnati Financial Corporation. Exhibit 3(ii)--Regulations of Cincinnati Financial Corporation--incorporated by reference to Exhibit 2 to registrant's Proxy Statement dated March 2, 1992. Exhibit 11 --Statement re computation of per share earnings for the years ended December 31, 1999, 1998, and 1997 Exhibit 13 --Material incorporated by reference from the annual report of the registrant to its shareholders for the year ended December 31, 1999 Exhibit 21 --Subsidiaries of the registrant--information contained in Part I of this report Exhibit 22 --Notice of Annual Meeting of Shareholders and Proxy Statement dated March 1, 2000--incorporated by reference to such document previously filed with Securities and Exchange Commission, Washington, D.C., 20549 Exhibit 23 --Independent Auditors' Consent Exhibit 27 --Financial Data Schedule 17 18 S I G N A T U R E S Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CINCINNATI FINANCIAL CORPORATION
Signature Title Date --------- ----- ---- /S/ John J. Schiff, Jr. Chairman, ------------------------------------------ Chief Executive March 17, 2000 John J. Schiff, Jr. Officer, President and Director /S/ Kenneth W. Stecher Senior Vice President, ------------------------------------------ Secretary and March 17, 2000 Kenneth W. Stecher Treasurer (Principal Financial Officer) (Principal Accounting Officer) /S/ William F. Bahl Director March 17, 2000 ------------------------------------------ William F. Bahl Director March , 2000 ------------------------------------------ Michael Brown /S/ John E. Field Director March 17, 2000 ------------------------------------------ John E. Field Director March , 2000 ------------------------------------------ William R. Johnson /S/ Kenneth C. Lichtendahl Director March 17, 2000 ------------------------------------------ Kenneth C. Lichtendahl /S/ James G. Miller Senior Vice President March 17, 2000 ------------------------------------------ Chief Investment Officer James G. Miller and Directo
27 19
Signature Title Date --------- ----- ---- /S/ Jackson H. Randolph Director March 17, 2000 ------------------------------------------ Jackson H. Randolph Director March , 2000 ------------------------------------------ Robert C. Schiff /S/ Thomas R. Schiff Director March 17, 2000 ------------------------------------------ Thomas R. Schiff Director March , 2000 ------------------------------------------ Frank J. Schultheis /S/ Larry R. Webb Director March 17, 2000 ------------------------------------------ Larry R. Webb /S/ Alan R. Weiler Director March 17, 2000 ------------------------------------------ Alan R. Weiler /S/ E. Anthony Woods Director March 17, 2000 ------------------------------------------ E. Anthony Woods
28 EX-3.I 2 EXHIBIT 3(I) 1 EXHIBIT 3(i) AMENDED ARTICLES OF INCORPORATION OF CINCINNATI FINANCIAL CORPORATION FIRST: The name of the corporation is CINCINNATI FINANCIAL CORPORATION (the "Corporation"). SECOND: The principal office of the Corporation in the State of Ohio shall be located in the City of Fairfield, County of Butler. THIRD: The purpose for which the Corporation is formed is to engage in any lawful act or activity for which corporations may be organized under the Ohio General Corporation Law specifically including acting as a control entity in an insurance holding company system under Chapter 3901 of the Ohio Revised Code. The Corporation is hereby expressly authorized to repurchase and to redeem its outstanding securities to the maximum extent now or hereafter permitted by applicable law. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is Two Hundred Million (200,000,000) and the par value of each share shall be Two ($2.00) Dollars. FIFTH: No holder of shares of any class of the Corporation shall have any preemptive right to acquire shares of the Corporation and the preemptive rights described in Ohio Revised Code Section 1701.15 are hereby specifically denied to the holders of shares of any class of the Corporation. SIXTH: The Board of Directors shall be divided into three (3) classes, each class consisting of one-third (as nearly as possible but in no event may any one class have greater than one more director than any other class) of the total number of directors. At each annual meeting of the shareholders, the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting. Subject to the right of the shareholders to fix the number of directors at a meeting called for the purpose of electing directors, the Board of Directors may change the number of directors constituting the Board of Directors by resolution. 2 Directors of the Corporation shall only be removed by the shareholders for cause. "Cause" for the removal of a director shall exist only upon the occurrence of one (1) of the following events: (1) the conviction of a director of a felony; or (2) a finding by a court of law that the director has been or is guilty of negligence or misconduct in the performance of his duties as a director of the Corporation. Vacancies in the Board of Directors, whether arising through death, resignation or removal of a director, or newly created directorships resulting from any increase in the authorized number of directors, shall be filled by a majority of the directors then in office, or by a sole remaining director, and the directors so chosen shall hold office for the unexpired portion of the term of the directors replaced or, in the case of a newly created directorship, the Board of Directors shall determine the class of such director. SEVENTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: To authorize and cause to be executed mortgages and liens upon the real and personal property of the corporation; To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created; By a majority of the whole board, to designate one or more committees, each committee to consist of at least three of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution or in the regulations of the corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. 2 3 EIGHTH: (a) Unless the conditions set forth in this Article are satisfied, the affirmative vote of the holders of seventy-five (75%) percent of all shares of the corporation entitled to vote in elections of Directors, shall be required for the adoption or authorization of a business combination (as hereinafter defined) with any other entity (as hereinafter defined) if, as of the record date for the determination of shareholders entitled to notice thereof and to vote thereon, the other entity is the beneficial owner, directly or indirectly, of more than ten (10%) percent of the outstanding shares of the corporation entitled to vote in elections of Directors. The seventy-five (75%) percent voting requirement set forth in the foregoing sentence shall not be applicable if: The cash, or fair market value of other consideration, to be received per share by holders of common shares of the corporation in the business combination is not less than the greater of: (A) the highest per-share price (including brokerage commissions, soliciting dealers' fees, dealer-management compensation, and other expenses, including, but not limited to, costs of newspaper advertisements, printing expenses, and attorney fees) paid by the other entity in acquiring any of its holdings of the common shares of the corporation or, (B) an amount which bears the same or a greater percentage relationship to the market value price of the corporation's common stock immediately prior to the announcement of such business combination as the highest per-share price determined in (A) above bears to the market price of the corporation's common stock immediately prior to the commencement of acquisition of the corporation's common stock by the other entity but in no event in excess of two times the highest per-share price determined in (A) above; The provisions of this Article shall also apply to a business combination with any other entity that at any time has been the beneficial owner, directly or indirectly, of more than ten (10%) percent of the outstanding shares of the corporation entitled to vote in elections of Directors, notwithstanding the fact that the other entity has reduced its shareholdings below ten (10%) percent if, as of the record date for the determination of shareholders entitled to notice of and to vote on the business combination, the other entity is an "affiliate" of the corporation (as hereinafter defined). 3 4 (b) As used in this Article, (1) the term "other entity" shall include any corporation, person, or other entity and any other entity with which it or its "affiliate" or "associate" (as defined below) has any agreement, arrangement, or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of shares of the corporation, or that is its "affiliate" or "associate" as those terms are defined in Rule 12b-2 of the general rules and regulations under the Securities Exchange Act of 1934, together with the successors and assigns of those persons in any transaction or series of transactions not involving a public offering of the corporation's shares within the meaning of the Securities Act of 1933; (2) an other entity shall be deemed to be the beneficial owner of any shares of the corporation that the other entity has the right to acquire pursuant to any agreement or upon exercise of conversion rights, warrants, or options or otherwise; (3) the outstanding shares of any class of the corporation shall include shares deemed owned through application of clause (2) above but shall not include any other shares that may be issuable pursuant to any agreement or upon exercise of conversion rights, warrants, or options or otherwise; (4) the term "business combination" shall include (A) the sale, exchange, lease, transfer or other disposition by the corporation of all, or substantially all, of its assets or business to any other entity, (B) the consolidation of the corporation with or its merger into any other entity, (C) the merger into the corporation of any other entity, or (D) a "combination" or "majority share acquisition" in which the corporation is the "acquiring corporation" (as those terms are defined in Section 1701.01 of the Ohio Revised Code or any similar provision hereafter enacted) and its voting shares are issued or transferred to any other entity or to the shareholders of any other entity, and the term "business combination" shall also include any agreement, contract, or other arrangement with another entity providing for any of the transactions described in (A) through (D) of this clause (4); and (5) for the purposes of clause (a)(1) of this Article, the term "other consideration to be received" shall mean common shares of the corporation retained by its existing public shareholders in the event of a business combination with the other entity in which the corporation is the surviving corporation. (c) Nothing contained in this Article shall be construed to relieve any other entity from any fiduciary obligation imposed by law. 4 5 NINTH: Meetings of stockholders may be held within or without the State of Ohio. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Ohio at such place or places as may be designated from time to time by the board of directors or in the Regulations of the corporation. Elections of directors need not be by written ballot unless the Regulations of the corporation shall so provide. TENTH: The corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon shareholders herein are granted subject to this reservation. Notwithstanding the foregoing, this Article and Articles SIXTH and EIGHTH of the Corporation's Articles of Incorporation may be altered, amended or repealed only if seventy-five (75%) percent of the outstanding stock of each class entitled to vote thereon as a class have been voted in favor of such action. ELEVENTH: Each person who is or was a director or officer of the Corporation shall be indemnified by the Corporation to the full extent permitted by the General Corporation Law of the State of Ohio against any liability, cost or expense incurred by him in his capacity as a director or officer or arising out of his status as a director or officer. The Corporation may, but shall not be obligated to, maintain insurance, at its expense, to protect itself and any such person against any such liability, cost or expense. The indemnification authorized by this Article ELEVENTH shall not be exclusive of, and shall be in addition to, any other rights granted to a person seeking indemnification or advancement of expenses under any statute, the Regulations or any agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. TWELFTH: No action required to be taken or which may be taken at any annual or special meeting of shareholders of the Corporation may be taken without a meeting, and the power of shareholders to consent in writing, without a meeting, to the taking of any action, including (without limitation) the power of shareholders to adopt or amend the Regulations by written consent, is hereby specifically denied. 5 6 Special meetings of the shareholders of the Corporation may be called only by the Board of Directors or the Chief Executive Officer of the Corporation or by persons who hold fifty (50%) percent of all shares of the Corporation outstanding and entitled to vote at such special meeting. No holder of shares of any class of the Corporation shall have the right to cumulate his voting power in the election of the Board of Directors and the right to cumulative voting described in Ohio Revised Code Section 1701.55 is hereby specifically denied to the holders of shares of any class of the Corporation. 6 EX-11 3 EXHIBIT 11 1 EXHIBIT 11 CINCINNATI FINANCIAL CORPORATION STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (000's omitted except per share amounts)
1999 1998 1997 ---- ---- ---- Basic Earnings per share: Net income $ 254,722 $ 241,567 $ 299,375 ========= ========= ========= Average shares outstanding 164,637 166,821 165,538 ========= ========= ========= Net income per common share $ 1.55 $ 1.45 $ 1.81 ========= ========= ========= Diluted earnings per share: Net income $ 254,722 $ 241,567 $ 299,375 Interest on convertible debentures--net of tax 1,539 1,918 2,712 --------- --------- --------- Net income for per share calculation (diluted) $ 256,261 $ 243,485 $ 302,087 ========= ========= ========= Average shares outstanding 164,637 166,821 165,538 Effective of dilutive securities: 5.5% convertible senior debentures 2,471 3,490 3,928 Stock options 1,507 1,767 1,329 --------- --------- --------- Total dilutive shares 168,615 172,078 170,795 ========= ========= ========= Net income per common share--diluted $ 1.52 $ 1.41 $ 1.77 ========= ========= =========
Per share amounts reflect the effects of a three-for-one stock split effective to shareholders of record on April 24, 1998. 23 EX-13 4 EXHIBIT 13 1 EXHIBIT 13 Material incorporated by reference from the annual report of the registrant to the shareholders for the year ended December 31, 1999. Segment information from pages 35 and 36 (incorporated into Item 1). 16. SEGMENT INFORMATION The Company is organized and operates principally in two industries and has four reportable segments - commercial lines property and casualty insurance, personal lines property and casualty insurance, life insurance and investment operations. The accounting policies of the segments are the same as those described in the basis of presentation. Revenue is primarily from unaffiliated customers. Identifiable assets by segment are those assets, including investment securities, used in the Company's operations in each industry. Corporate and other identifiable assets are principally cash and marketable securities. Segment information, for which results are regularly reviewed by Company management in making decisions about resources to be allocated to the segments and assess their performance, is summarized as follows (000's omitted):
Years Ended December 31, -------------------------- REVENUES 1999 1998 1997 ------------------------------------------------------ Commercial lines insurance ........ $ 1,088,039 $ 1,019,463 $ 983,605 Personal lines insurance .......... 569,238 523,176 469,921 Life insurance .................... 74,673 70,096 62,852 Investment operations ............. 386,209 433,302 417,827 Corporate and other ............... 10,064 8,252 8,179 ------------ ------------ ------------ Total revenues ................. $ 2,128,223 $ 2,054,289 $ 1,942,384 ============ ============ ============ INCOME BEFORE INCOME TAXES Property and casualty insurance ... $ 3,241 $ (59,438) $ 28,955 Life insurance .................... (903) (1,776) 2,763 Investment operations ............. 355,643 403,925 390,850 Corporate and other ............... (36,408) (35,604) (28,009) ------------ ------------ ------------ Total income before income taxes $ 321,573 $ 307,107 $ 394,559 ============ ============ ============ IDENTIFIABLE ASSETS Property and casualty insurance ... $ 5,372,717 $ 5,483,137 $ 4,953,259 Life insurance .................... 1,441,657 1,203,908 1,094,445 Corporate and other ............... 4,565,840 4,399,458 3,445,721 ------------ ------------ ------------ Total identifiable assets ...... $ 11,380,214 $ 11,086,503 $ 9,493,425 ============ ============ ============
2 Text data from pages 6 through 14 (incorporated into Item 1). PROPERTY AND CASUALTY INSURANCE OPERATIONS Property and casualty insurance underwriting achieved a combined loss and expense ratio of 100.0% for 1999, on a statutory basis. Several factors converged to improve performance over 1998, when the ratio was 103.6%. Primary among those factors were increased underwriting discipline, reduced catastrophe losses, selective abatement of competitive pressure on commercial pricing and some rate improvements on personal lines. Net written premiums advanced to $1.681 billion, up 7.9% versus estimated industry growth of 2.3%. New business reached $210.3 million in direct premiums, compared with 1998's $218.4 million. The decrease reflected heightened efforts to balance growth and profitability. Notably, fourth- quarter highlights included new business growth of 11.0% and a $19.0 million gross underwriting profit, the second quarterly underwriting gain in 1999. INNOVATION: PARTNERING WITH AGENTS Our strong desire to remain a stable market for most of our agents' best accounts influences the strategies we employ to underwrite profitably. Where some other insurers tighten up by eliminating whole classes of business or drastically raising prices, we're more likely to search for flexible solutions that allow us to write each account. Sometimes the overall risk can be made more attractive by selling additional, more highly profitable coverages in the package, increasing the total premium while giving the policyholder extra value. Or we may offer to write the same policy at a higher price for a multi-year term. This gives policyholders a guarantee that the rates on most coverages won't increase, reduces their incentive to shop their business every year and lowers processing expenses for agents and for us. Innovative strategies do much more than control our profitability; they give agents new advantages to sell. To provide individualized solutions for agencies and accounts, we must give them each more personal attention. That's why we choose to keep our agency partnerships under 1,000 instead of taking the approach of appointing every agency that asks to represent us. We commit to having a strong local presence by placing almost a third of our staff in the field, assigning well-trained underwriters and granting easy access to our executives and headquarters staff. While we've succeeded at keeping the number of partnerships fairly constant, the average size of those agencies is increasing due to mergers and consolidations. Many agencies now have multiple locations, giving them a larger marketing radius and larger volume. We wrote an average of $1.7 million of premiums per agency in 1999, out of more than $9 billion total volume reported for all 977 agencies. There is clearly room to grow by further penetrating these prosperous, top-tier agencies. INNOVATION: CREATING OPPORTUNITIES Cincinnati also has room to grow geographically. We've expanded to seven new states over the past five years and expect to appoint our first Utah agency soon. It takes time to develop our style of relationship and build premium volume. Those seven new states accounted for $58.9 million of direct premiums in 1999, 3.4% of our total volume. For additional growth, we supplement the new states with expansion of the number of marketing territories in established states. Over the past five years, this strategy led to the creation of 12 additional, smaller territories where we could provide increased support in return for more business. For 2000, we are looking at staffing new territories in established states of Michigan, South Carolina, Tennessee, Pennsylvania and Illinois. We also grow by expanding the product lines our agents can sell. In 1999, Michigan moved into fourth place among our largest states, following addition of auto insurance to the products available there. Personal lines filings were approved during 1999 for Montana, a young state with $3 million in 1999 direct premiums; and selected personal lines are available in Idaho, the newest state, activated late in 1999. 3 Cincinnati's product portfolio undergoes continuous review and enhancement to make sure agents have up-to-date products with differentiated features. Major 1999 updates included the Homeowner Plus value package of extra coverages, the Residential Business Program and the Businessowners Package Policy. New coverages that are giving agents marketing opportunities include Equipment Breakdown Coverage, Builders' Risk Soft Costs, Actual Loss Sustained Business Income and the Businessowners Package for Cosmetologists and Barbers. While many insurers pursue their own growth, the innovative Cincinnati approach focuses on the flexible underwriting and deeper relationships that help our agencies grow first. This is a prime reason for our property and casualty insurance group's high rankings and ratings (published in 1999 and generally based on 1998 performance): - - A.M. BEST COMPANY A++ (Superior), awarded to just 3% of insurer groups - - STANDARD & POOR'S AA+ (Very Strong) Security Circle - - WARD FINANCIAL GROUP Ward's 50 Benchmark Company, ninth consecutive year, for balancing policyholder safety and shareholder return - - ARKANSAS INDEPENDENT AGENTS ASSOCIATION Regional Company of the Year - - BEST'S REVIEW (JULY 1999) #33 nationally, net written premiums - - BEST'S REVIEW (SEPTEMBER 1999) #31 nationally, assets - - NATIONAL UNDERWRITER (AUGUST 1999) #40 nationally, direct written auto premiums - - BUSINESS WEEK GLOBAL 1000 (JULY 12, 1999) #327 in United States, based on financial measures #661 globally INNOVATION: PROVIDING THE RESOURCES A 1999 study by Conning & Co. named Cincinnati as one of the four most prominent middle market insurers. The report singled out effective use of technology and outstanding service as the two most important strategies for future success in this market. Both the commercial and personal lines areas of the Company are dedicating resources to bring the benefits of technology and service to agents. Multi-year projects now underway are beginning to change business workflow. At this time, the headquarters staff and field representatives across the country have been connected to a corporate intranet. CFCNet provides a direct communication link between headquarters, field staff and agencies. This spring, when we begin connecting agencies, they will have online access from their offices to property and casualty policy forms and manuals in our Electronic Document Repository. This repository is the infrastructure for automation of paper-based processes. Ongoing software and systems projects contribute to progress in every area. Personal lines agents received software to calculate property values and establish correct policy limits, providing the right level of protection at the right price. Sales and Commercial Lines teamed up to attract $12.7 million of jumbo account new business, averaging over $140,000 per package. The large account unit's underwriters are skilled in quoting and underwriting multi-state accounts supported by appropriate resources--loss control, claims service agreements and loss reports customized to the policyholder's needs. When fully implemented, new large loss reporting software will let policyholders view their reports online via a secure Internet link. By partnering with good agents and innovating to meet their needs, Cincinnati has achieved outstanding commercial and personal insurance rankings and ratings: - - CRITTENDEN'S PROPERTY/CASUALTY RATINGS #1 commercial insurer nationwide for 1999--agent survey covering six service categories (January 4, 2000); fourth year as the agents' top choice #1 insurer for commercial umbrellas, employment practices liability, multi-peril, commercial inland marine, commercial general liability--product-specific agent surveys #2 insurer for commercial auto and business owner policies--product-specific agent surveys - - BEST'S REVIEW (JULY 1999) #1 insurer in Ohio for commercial auto direct premiums, with an 8% market share #14 of Top 250 insurers for commercial multi-peril net written premiums - - STANDARD & POOR'S (BUSINESS INSURANCE, OCTOBER 25, 1999) One of the "Top Global Business Insurers Operating in the United States," based on suggestions from market participants and share of commercial risks written in the local market - - BEST'S REVIEW (SEPTEMBER 1999) #27 for homeowner direct written premiums - - NATIONAL UNDERWRITER (AUGUST 16, 1999) #68 insurer for private passenger auto direct written premiums - - INDEPENDENT CONSUMER SURVEY Highest-rated independent agent insurer for auto claims satisfaction 4 LIFE INSURANCE OPERATIONS INNOVATION: ALIGNING PRODUCT AND DISTRIBUTION Cincinnati Life contributed $28.1 million of net operating income in 1999, up from $23.6 million in 1998. Gross written premiums were $420.7 million, including the $302.9 million dollar, single-premium Bank Owned Life Insurance policy discussed in the Shareholders' Letter (page 3). The Company's life insurance operations are in the third year of new leadership. Management's charge is to align product and distribution to achieve corporate objectives, by rounding accounts and improving persistency of business for Cincinnati's property and casualty agencies. Innovations include a new generation of life products, updated agent compensation programs, a larger agency force and expanded geographical presence. On the product side, a third-party agreement made it possible to add LifeHorizons Long Term Care to the portfolio and hold training seminars for over 1,000 agents who are selling the coverage. Term insurance sales were very strong as consumers locked in long-term rate guarantees before Triple X regulations became effective on January 1, 2000. Term life first-year premiums rose 70% and ordinary life applications,including individual term, whole life and universal products, rose 64%. Because term insurance is easily cross-sold to property and casualty policyholders, it opens doors to increased life production from those agencies. We will introduce an updated series of LifeHorizons Term in 2000, as well as survival universal life, disability products, a single premium deferred annuity and a flexible premium deferred annuity. The broader product portfolio gives agents the full range they must have to meet most life insurance needs of their property and casualty clientele. It also makes recruiting agencies in new states easier. During 1999, we appointed our first agents in Massachusetts, Connecticut, Montana and Nevada. As Cincinnati Life enters states or areas where we have no property casualty agents selling life insurance, we are recruiting independent life agencies. This strategy increases our return on product development because these agencies require less support at a lower fixed cost. Cincinnati Life will pilot imaging and automated workflow for the Corporation during 2000. Over 325,000 active files will be converted to digital format for online access, with major implications for enhanced service to agencies. Cincinnati Life's solid financial strength qualifies it for the high rankings and ratings that increase the comfort level of property and casualty agencies considering life insurance sales: - - BEST'S REVIEW (JULY 1999) #100 for ordinary life insurance premiums #330 for net premiums written - - WARD FINANCIAL GROUP Ward's 50 Benchmark Company, seventh consecutive year, for policyholder safety and financial strength - - A.M. BEST COMPANY A+ (Superior) - - STANDARD & POOR'S AA+ (Very Strong), Security Circle FINANCIAL SERVICES Cincinnati's financial services subsidiaries enhance relationships by increasing service to our agent customers while providing direct availability to other organizations and individuals. INNOVATION: CROSS-SELLING CFC Investment Company, the commercial lease and finance subsidiary, reported $3.2 million of net income in 1999. Gross receivables rose 19.9% to $92.6 million as of December 31, 1999. In addition to paying finders' fees to agents for referrals, CFC Investment provides agencies with equipment and vehicles through incentive leases. The Sales Department negotiates generous repayment agreements in exchange for higher insurance premium production. During 1999, two new marketing territories were staffed in Georgia and in Kentucky/ Tennessee. 1999 was the first full year of operations for the asset management services subsidiary, CinFin Capital Management Company. Although start-up costs exceeded income, the Company ended the year with 14 accounts and more than $450 million under management. This amount includes $302.9 million from the large Cincinnati Life policy discussed in the Shareholders' Letter (page 3). As Cincinnati Life pursues additional sales of this type, CinFin's asset management services should be a sales advantage. 5 Prospective clientele for CinFin services include corporations, insurance agencies and companies, institutions, pension plans and high net-worth individuals. As Cincinnati executives travel to 28 cities for insurance sales meetings this spring, they will introduce agents to CinFin's disciplined, buy-and-hold approach to investing. INVESTMENT OPERATIONS INNOVATION: FOCUSING ON THE LONG TERM Cincinnati's investment style is differentiated by our focus on common stocks of well-managed, high-quality companies with proven success and regular dividend increases. During 1999, 35 of the 45 stocks held in the portfolio announced dividend increases, adding $16.1 million, on an annualized basis, to our investment income. Revenues from investment income advanced $18.8 million, a 5.1% increase. We achieved this growth with an unusually low level of new investment dollars, due to cash outlays for priority projects of major importance to the Company's future. We spent $35.2 million in 1999 to double the size of our offices, bringing headquarters associates back under one roof for increased efficiency; approximately $23 million for ongoing software development; and $217.1 million to repurchase 6.1 million shares of CFC common stock at an average price of $35.66 per share. After a purchase of 589,000 shares in January of 2000, a balance of 10.3 million shares remained authorized for repurchase under the 17 million share program announced in February 1999. The average price of all repurchases since November of 1996 is $32.13. We recorded a slight realized capital loss in 1999, less than $0.4 million, compared with net realized capital gains of $42.5 million in 1998. Our policy, over the years, has been to offset capital gains during the fourth quarter and minimize taxes. The Company's exceptionally strong surplus allows us to capture long-term gains by investing more in common stocks than is typical for many insurers. We continued in 1999 to invest over 40% of new money in equities. The cost basis of the common stock portfolio was $1.602 billion or 34.0% of the total portfolio's cost at December 31, 1999. Because of our buy-and-hold philosophy, equities accounted for $7.107 billion or 70.2% of total portfolio value on a market basis, as of December 31, 1999. Half of our top 10 equity holdings are financial stocks, a sector temporarily out of favor at year-end 1999. We own financial stocks because of their strong fundamentals, including consistent earnings and dividend histories, in contrast to technology stocks that inflated gains in 1999 for the S&P 500. At year-end 1999, unrealized equity gains in our common stock portfolio were $5.485 billion versus $5.455 billion at year-end 1998. For the three-year period 1997-99, annual total return on our portfolio was 28.7% versus 27.5 % for the S&P 500. Higher interest rates impacted the bond market, reducing its asset value by $194.8 million as of December 31, 1999. Looking forward to 2000, those high interest rates should bring many opportunities to select fixed-income investments with higher current income and the potential for ratings upgrade. Reflecting the lower unrealized gains in the portfolio, the book value of Cincinnati Financial stock was $33.46 at year-end 1999 versus $33.72 at year-end 1998. Book value over the past three years grew at a 20.9% compound growth rate. 6 PUBLIC RESPONSIBILITY INNOVATION: SPEAKING OUT, STEPPING UP Published rankings peg Cincinnati as the 18(th) largest insurer in the country for revenues and the 33(rd) largest for net written premiums--but size alone doesn't determine an insurer's spot as a good corporate citizen and industry leader. We back our commitment to local independent agents and their customers with a tradition of civic involvement and social responsibility. In 1999, this tradition took us to classrooms and to nonprofit boardrooms, to statehouses and to Congress. The legislative news of the year was the Gramm-Leach-Bliley Act. The law paves the way for insurers, securities firms and banks to enter each other's businesses. Your Company actively presented our industry perspective as legislators crafted provisions. Our goal was to make sure that, in this new landscape, consumers will benefit from consistent regulatory oversight, regardless of the type of financial company providing their insurance. We believe the law, as enacted, sufficiently preserves state regulation of insurance and protects consumer privacy. During 1999, your Company helped recruit more than 50 Congressional sponsors for the Policyholder Disaster Protection Act (H.R. 2749, S.1914), a proposal to protect insurer solvency and provide mega-disaster recovery funds through restricted, tax-deferred insurer reserves. We continue to help build support for the proposal through a broad coalition of insurance, business and consumer organizations. The Company's representative testified before a Congressional committee to urge consideration of this private-sector solution--and to oppose passage of other disaster insurance legislation (H.R. 21) that unnecessarily involves the federal government. To learn more about this issue, visit www.pdpc.com. Doing what's right for the people we serve is the principle that drives Cincinnati Financial and The Cincinnati Insurance Companies to innovate. Consistent innovation has given us strong agency partnerships, highly-rated claims service, satisfied policyholders...and loyal shareholders who see the opportunity to grow and profit with us over the years. Thank you for your support. 7 Loss and loss expenses in Notes to Financial Statements from page 31 (incorporated into Item 1). 4. LOSSES AND LOSS EXPENSES Activity in the reserve for losses and loss expenses is summarized as follows (000's omitted):
Years Ended December 31, ------------------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Balance at January 1 $1,978,461 $1,888,883 $1,824,296 Less reinsurance receivable ............................ 138,138 112,235 121,881 ---------- ---------- ---------- Net balance at January 1 ................................. 1,840,323 1,776,648 1,702,415 ---------- ---------- ---------- Incurred related to: Current year ........................................... 1,303,561 1,306,194 1,115,140 Prior years ............................................ (116,061) (153,311) (119,654) ---------- ---------- ---------- Total incurred ........................................... 1,187,590 1,152,883 995,486 ---------- ---------- ---------- Paid related to: Current year ........................................... 574,038 590,366 467,843 Prior years ............................................ 522,108 498,842 453,410 ---------- ---------- ---------- Total paid ............................................... 1,096,146 1,089,208 921,253 ---------- ---------- ---------- Net balance at December 31 ............................... 1,931,767 1,840,323 1,776,648 Plus reinsurance receivable ............................ 160,809 138,138 112,235 ---------- ---------- ---------- Balance at December 31 $2,092,576 $1,978,461 $1,888,883 ========== ========== ==========
As a result of changes in estimates of insured events in prior years, the provision for losses and loss expenses decreased by $116,061,000, $153,311,000 and $119,654,000 in 1999, 1998 and 1997. These decreases are due in part to the effects of settling reported (case) and unreported (IBNR) reserves established in prior years for less than expected. The reserve for losses and loss expenses in the accompanying balance sheets also includes $61,573,000 and $76,264,000 at December 31, 1999 and 1998, respectively, for certain life/health losses and loss checks payable. "Price range of Common Stock" section from page 38 (incorporated into Item 5). Shares are traded nationally over the counter. Closing sale price is quoted under the symbol CINF on the National Market List of Nasdaq (National Association of Securities Dealers Automated Quotation System). Tables below show the price range reported for each quarter based on daily last sale prices.
1999 1998 ------------------------------------------------ ------------------------------------------------------- Quarter 1ST 2ND 3RD 4TH 1st 2nd 3rd 4th ------- --------- ------- ---------- -------- --------- ------- ------- High ........ $39 1/4 $41 15/32 $42 1/4 $37 1/16 $45 3/8 $45 21/64 $39 1/8 $40 Low ......... 30 7/8 36 5/16 36 3/4 30 1/8 41 21/64 36 5/8 30 3/4 31 5/8 Dividend paid .15 1/3 .17 .17 .17 .13 2/3 .15 1/3 .15 1/3 .15 1/3
8 "Selected Financial Information" from pages 16 and 17 (incorporated into Item 6). SELECTED FINANCIAL INFORMATION (000's omitted except per share data and ratios) Cincinnati Financial Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 1999 1998 1997 1996 ----------- ----------- ----------- ----------- TOTAL ASSETS ...................... $11,380,214 $11,086,503 $ 9,493,425 $ 7,045,514 LONG-TERM OBLIGATIONS.............. $ 456,373 $ 471,520 $ 58,430 $ 79,847 SHAREHOLDERS' EQUITY............... $ 5,421,284 $ 5,620,936 $ 4,716,965 $ 3,162,889 BOOK VALUE PER SHARE............... $ 33.46 $ 33.72 $ 28.35 $ 18.95 - ------------------------------------------------------------------------------------------------------------------ REVENUES Premium Income .................... $ 1,731,950 $ 1,612,735 $ 1,516,378 $ 1,422,897 Investment Income (Less Expense) 386,773 367,993 348,597 327,307 Realized Gains on Investments ..... (564) 65,309 69,230 47,946 Other Income ...................... 10,064 8,252 8,179 10,599 NET INCOME BEFORE REALIZED GAINS ON INVESTMENTS In Total .......................... $ 255,089 $ 199,116 $ 254,375 $ 192,595 Per Common Share .................. 1.55 1.19 1.54 1.15 Per Common Share (Diluted) 1.51 1.16 1.49 1.11 NET INCOME In Total .......................... $ 254,722 $ 241,567 $ 299,375 $ 223,760 Per Common Share .................. 1.55 1.45 1.81 1.34 Per Common Share (Diluted) 1.52 1.41 1.77 1.31 - ------------------------------------------------------------------------------------------------------------------ CASH DIVIDENDS PER COMMON SHARE Declared........................... $ .68 $ .61 1/3 $ .54 2/3 $ .48 2/3 Paid............................... .66 1/3 .59 2/3 .53 1/3 .47 2/3 - ------------------------------------------------------------------------------------------------------------------ PROPERTY AND CASUALTY OPERATIONS Gross Premiums Written............. $ 1,774,633 $ 1,656,476 $ 1,566,688 $ 1,476,011 Net Premiums Written .............. 1,680,812 1,557,581 1,471,603 1,383,525 Net Premiums Earned ............... 1,657,277 1,542,639 1,453,526 1,366,544 Loss and Expense Ratio (Statutory Basis): Loss Ratio ........................ 61.6% 65.4% 58.3% 61.6% Loss Expense Ratio ................ 10.0 9.3 10.1 13.8 Underwriting Expense Ratio ........ 28.4 28.9 29.3 27.6 ----------- ----------- ----------- ----------- Combined Ratio .................... 100.0% 103.6% 97.7% 103.0% Investment Income Before Taxes..... $ 207,640 $ 203,919 $ 199,427 $ 190,318 Property and Casualty Reserves Unearned Premiums ................. $ 454,844 $ 432,436 $ 418,465 $ 401,562 Losses ............................ 1,513,134 1,432,212 1,373,950 1,319,286 Loss Adjustment Expense ........... 418,634 408,113 402,698 383,135 Statutory Policyholders' Surplus... $ 2,851,774 $ 3,019,828 $ 2,472,532 $ 1,608,084 - ------------------------------------------------------------------------------------------------------------------
(*) 1993 earnings include a credit for $13,845 ($.08 per share) cumulative effect of a change in the method of accounting for income taxes to conform with SFAS No. 109 and a net charge of $8,641 ($.05 per share) related to the effect of the 1993 increase in income tax rates on deferred taxes recorded for various prior year items. 9
Cincinnati Financial Corporation and Subsidiaries - ------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 - ---------- ---------- ---------- ---------- ---------- ---------- ---------- $6,109,298 $4,734,279 $4,602,288 $4,098,713 $3,513,749 $2,626,156 $2,602,990 $ 80,000 $ 80,000 $ 80,000 $ 80,000 $ 182 $ 202 $ 753 $2,657,971 $1,940,047 $1,947,338 $1,713,776 $1,441,401 $1,006,868 $1,020,253 $ 15.90 $ 11.63 $ 11.70 $ 10.37 $ 8.79 $ 6.18 $ 6.31 - ------------------------------------------------------------------------------------------------------------- $1,314,126 $1,219,033 $1,140,791 $1,038,772 $ 947,576 $ 871,196 $ 813,313 300,015 262,649 239,436 218,942 193,220 167,425 149,285 30,781 19,557 51,529 35,885 7,641 1,488 4,678 10,729 11,267 10,396 10,552 12,698 8,822 7,134 $ 207,342 $ 188,538 $ 182,530(*) $ 147,669 $ 141,273 $ 128,052 $ 111,477 1.24 1.13 1.10(*) .90 .86 .79 .69 1.20 1.09 1.06(*) .87 .86 .78 .69 $ 227,350 $ 201,230 $ 216,024(*) $ 171,325 $ 146,280 $ 128,962 $ 114,490 1.36 1.21 1.30(*) 1.04 .90 .79 .71 1.33 1.18 1.27(*) 1.03 .89 .79 .70 - ------------------------------------------------------------------------------------------------------------- $ .42 2/3 $ .38 2/3 $ .34 $ .31 $ .27 2/3 $ .24 1/3 $ .22 .42 .37 1/3 .33 1/3 .30 .27 .23 2/3 .21 - ------------------------------------------------------------------------------------------------------------- $1,377,426 $1,287,280 $1,216,766 $1,089,901 $ 996,807 $ 896,204 $ 845,346 1,295,852 1,190,824 1,123,780 1,014,971 930,296 838,554 790,971 1,263,257 1,169,940 1,092,135 992,335 903,465 828,046 771,205 57.6% 63.3% 63.5% 63.8% 61.6% 61.6% 61.6% 14.7 9.8 8.7 9.0 9.2 9.0 9.0 27.1 27.5 27.9 29.0 28.9 29.0 29.1 --------- ---------- ---------- ---------- ---------- ---------- ---------- 99.4% 100.6% 100.1% 101.8% 99.7% 99.6% 99.7% $ 180,074 $ 162,260 $ 153,190 $ 141,958 $ 126,332 $ 110,827 $ 97,661 $ 385,418 $ 353,697 $ 333,550 $ 302,473 $ 280,404 $ 254,000 $ 244,011 1,274,180 1,213,383 1,100,051 960,571 825,952 692,081 616,730 306,570 218,642 193,305 177,262 160,260 140,501 124,993 $1,268,597 $ 998,595 $1,011,609 $ 933,529 $ 735,557 $ 477,355 $ 494,460 - -------------------------------------------------------------------------------------------------------------
Per share data adjusted for three-for-one stock splits in 1998 and 1992 and stock dividends of 5 percent in 1996 and 1995. 10 "Management Discussion" from pages 18 through 23 (incorporated into Items 1, 7, and 7A). MANAGEMENT DISCUSSION Cincinnati Financial Corporation and Subsidiaries - -------------------------------------------------------------------------------- INTRODUCTION This Management Discussion is intended to supplement the data contained in the financial statements and related notes of Cincinnati Financial Corporation and subsidiaries. Cincinnati Financial Corporation (CFC) had six subsidiaries at year-end 1999. The lead property and casualty insurance subsidiary, The Cincinnati Insurance Company, markets a broad range of business and personal policies in 30 states through an elite corps of 977 independent insurance agencies. Also engaged in the property and casualty business are The Cincinnati Casualty Company, which works on a direct billing basis, and The Cincinnati Indemnity Company, which markets nonparticipatory workers' compensation and nonstandard policies for preferred risk accounts. The Cincinnati Life Insurance Company markets life, long term care, health and accident policies and annuities through property and casualty agencies and independent life agencies. CFC Investment Company complements the insurance subsidiaries with commercial leasing, financing and real estate services. The Company's sixth subsidiary, CinFin Capital Management Company, was established in 1998 to provide asset management services to institutions, corporations and individuals with $500,000 minimum accounts. CinFin's assets under management more than tripled to $462 million in 14 accounts by January 2000 from $150 million in two accounts in January 1999. Investment operations are CFC's primary source of profits. A total return strategy emphasizes investment in fixed-maturity securities as well as equity securities that contribute to current earnings through dividend increases and add to net worth through long-term price appreciation. The following discussion, related consolidated financial statements and accompanying notes contain certain forward-looking statements that involve potential risks and uncertainties. The Company's future results could differ materially from those discussed. Factors that could cause or contribute to such differences include, but are not limited to: unusually high levels of catastrophe losses due to changes in weather patterns or other natural causes; changes in insurance regulations or legislation that place the Company at a disadvantage in the marketplace; recession or other economic conditions resulting in lower demand for insurance products; sustained decline in overall stock market values negatively affecting the Company's equity portfolio; delays in the planned schedule of development and implementation of technology enhancements; and, decreased ability to generate growth in investment income. Readers are cautioned that the Company undertakes no obligation to review or update the forward-looking statements included in this material. Further, income per share discussions herein relate to basic income per share. RESULTS OF OPERATION OVERVIEW OF RESULTS Primarily as a result of continued market penetration and entry into new states, CFC revenues have increased at a compound annual rate of 7.1%, reaching $2.128 billion in 1999, with property and casualty net written premiums also growing at a 7.1% rate to $1.681 billion over the past five years. In the same five-year period, total net income, including realized capital gains, grew at a compound rate of 4.8% to $254.7 million, or $1.55 per share, from $201.2 million, or $1.21. Net operating income, which excludes capital gains or losses, increased at a 6.2% rate to $255.1 million, or $1.55 per share, from $188.5 million, or $1.13, in 1994. Book value grew at a 23.5% compound rate over the same period to $33.46 per share in 1999 from $11.63. A number of factors, including the Company's strong reputation among independent insurance agencies and management's belief that the Company can achieve additional market penetration in states in which it currently operates, led management to target an ambitious $2.0 billion in total direct written premiums by the year 2000. This goal was met in 1999, when the Company wrote $2.158 billion in direct written premiums, largely as the result of a single Bank Owned Life Insurance (BOLI) premium of $302.9 million written by The Cincinnati Life Insurance Company. Management believes the Company could again reach $2.0 billion in total direct written premiums in 2000, without additional BOLI sales. Management balances this goal with the objectives of generating an underwriting profit and maximizing annual growth in investment income. 11 The following table and discussion analyzes results for the three-year period ending December 31, 1999 and provides insight into management's strategic direction.
- ------------------------------------------------------------------------------------------------------------------ (000,000's omitted except 1999 CHANGE CHANGE 1998 Change Change per share data and ratios) $ % $ $ - ------------------------------------------------------------------------------------------------------------------ Revenue $ 2,128.2 $ 73.9 4 $ 2,054.3 $ 111.9 6 Net Operating Income 255.1 56.0 28 199.1 (55.3) (22) Net Capital (Losses) Gains (after tax) (.4) (42.9) (101) 42.5 (2.5) (6) Net Income 254.7 13.1 5 241.6 (57.8) (19) - ----------------------------------------------------------------------------------------------------------------- Net Operating Income Per Share $ 1.55 $ .36 30 $ 1.19 $ (.35) (23) Net Capital Gains Per Share .00 (.26) (100) .26 (.01) (4) Net Income Per Share $ 1.55 $ .10 7 $ 1.45 $ (.36) (20) - ----------------------------------------------------------------------------------------------------------------- Catastrophe Losses (before tax) $ 36.8 $ (56.7) (61) $ 93.5 $ 68.0 267 Catastrophe Losses Per Share (after tax) .15 (.21) (58) .36 .26 260 - ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------ (000,000's omitted except 1997 Change Change per share data and ratios) % - ------------------------------------------------------------------------------------ Revenue $ 1,942.4 $ 133.7 7 Net Operating Income 254.4 61.8 32 Net Capital (Losses) Gains (after tax) 45.0 13.8 44 Net Income 299.4 75.6 34 - ------------------------------------------------------------------------------- Net Operating Income Per Share $ 1.54 $ .39 34 Net Capital Gains Per Share .27 .08 42 Net Income Per Share $ 1.81 $ .47 35 - ------------------------------------------------------------------------------- Catastrophe Losses (before tax) $ 25.5 $ (39.2) (60) Catastrophe Losses Per Share (after tax) .10 (.15) (60) - ------------------------------------------------------------------------------------
The Company's financial results for the three years ending December 31, 1999 reflected growth in new insurance business and retention of renewal customers, offset by highly competitive property and casualty pricing in 1997 through the first half of 1999. Net operating earnings in 1999 were the best for any year in Company history, modestly surpassing the record results of 1997. Relatively low catastrophe losses contributed to the Company's 28% improvement in net operating income in 1999. In 1998, net operating income declined due to catastrophe losses and large property losses. The Company reported a modest net capital loss after tax of $0.4 million in 1999. Capital gains on sales of equity securities were offset by sales of fixed maturity securities with market value lower than book value, attributable to higher interest rates and sales of a few non-performing investments. In 2000, the Company expects to be able to invest available cash and proceeds from the sales of securities at higher yields. Revenue from investment income rose 5.1% to an all-time high of $386.8 million in 1999. Record investment income was achieved despite reduced cash flow available for investment in 1999, when more cash was spent on the Company's stock repurchase, the construction of a new office tower and ongoing technology initiatives. YEAR 2000 The Company's Year 2000 project was successfully completed, with total expenses of $9.7 million over a six-year period ending in 1999. The investment included upgrading and replacement of systems that will generate long-term value for the Company. No material effect on operations or financial results occurred because of the calendar year change. Small isolated technical problems early in January 2000 were resolved quickly. Any future problems are anticipated to be minimal and further reporting of Year 2000 issues will not be made, unless the occurrence is material to the Company.
PROPERTY AND CASUALTY INSURANCE OPERATIONS - ---------------------------------------------------------------------------------------------------------------------------------- (000,000's omitted except ratios) 1999 CHANGE CHANGE 1998 Change Change 1997 Change Change $ % $ % $ % - ---------------------------------------------------------------------------------------------------------------------------------- Gross Written Premiums $1,774.6 $118.1 7.1 $1,656.5 $ 89.8 5.7 $1,566.7 $ 90.7 6.1 Net Written Premiums 1,680.8 123.2 7.9 1,557.6 86.0 5.8 1,471.6 88.1 6.4 Net Earned Premiums 1,657.3 114.7 7.4 1,542.6 89.1 6.1 1,453.5 87.0 6.4 Loss and LAE Ratio 71.6% n/a (4.1) 74.7% n/a 9.2 68.4% n/a (9.3) Expense Ratio (Statutory Basis) 28.4% n/a (1.7) 28.9% n/a (1.4) 29.3% n/a 6.2 Combined Ratio (Statutory Basis) 100.0% n/a (3.5) 103.6% n/a 6.0 97.7% n/a (5.1) - ----------------------------------------------------------------------------------------------------------------------------------
PREMIUMS -- The Company's property and casualty total net written premiums, which advanced 7.9% in 1999, continued to outpace the estimated industry growth rate. The Company's commercial lines growth rate reversed a downward trend to increase 7.9% to $1,099.8 billion in 1999 versus 3.3% in 1998 and 3.6% in 1997. Personal lines net written premiums increased 8.0% to $581.0 million in 1999 compared with 11.0% in 1998 and 12.4% in 1997. 12 During 1999, the commercial insurance market continued to experience the price competition that began prior to 1996, although some of the Company's field marketing representatives and independent agents reported firmer pricing for selected lines in some market areas. Accelerated growth of new business later in the year brought the 1999 total to $210.3 million versus $218.4 million in 1998. The Company continues to selectively underwrite both new and renewal accounts, carefully assessing profitability. In addition, the Company completed an agency re-underwriting program that helped restore profitability to its personal lines insurance business. The improved profitability was balanced against slower premium growth, and the Company anticipates that the pace of personal lines growth will continue to reflect heightened underwriting discipline and the need for upcoming technology upgrades. While improved pricing of some commercial lines of business should contribute to future growth, the Company will be challenged to continue achieving strong personal lines growth. To continue its growth and maximize profitability, the Company is working harder to develop new and retain profitable business by: - pursuing a marketing strategy that permits field representatives to spend more time assisting the independent insurance agents and - providing innovative product and service solutions that meet the needs of the Company's independent agents. Management believes additional market penetration can be achieved by leveraging strong relationships with independent agencies. The Company also can distinguish itself through competitive features of its insurance products such as the availability of three- and five-year policy terms for many types of insurance coverage. In 1999, approximately 97% of the Company's premium volume was in states in which the Company has had a presence for more than five years. During the past five years, the Company added 12 territories in established states,restructuring so that each field representative has fewer agencies to serve. The Company expects to subdivide as many as five territories in 2000 and 2001 to further strengthen agency relationships. Entry into new states also has been a source of premium growth. The Company appointed its first agent in Idaho late in 1999 and expects to be active in Utah in 2000. A very successful example of a new market entry is Minnesota, where premium volume reached $23.1 million in 1999, up from $2.9 million in 1995. From 1997 through 1999, the Company began marketing commercial lines in North Dakota, Montana, Idaho and upstate New York and added full personal lines in Minnesota, North Dakota, Montana and Pennsylvania. The Company's criteria for entry into new states include a favorable regulatory climate and no residual market. The Company's Special Accounts unit enjoyed strong growth in 1999. Formed to underwrite and support large, multi-state accounts, the unit generated $12.7 million in new business in 1999 -- up from $8.3 million in 1998. The accounts in this unit are among the largest businesses served by the Company's agents. EXPENSES -- The Company recorded a $6.2 million statutory gross underwriting loss in 1999, compared with a $59.6 million statutory gross underwriting loss in 1998 and a $28.6 million gross underwriting profit in 1997. The 1999 underwriting loss, reflecting a combined ratio (statutory basis) of 100.0%, was primarily the result of strong premium growth and more favorable loss results, with catastrophe losses accounting for only 2.2 percentage points of the loss and loss adjustment expense ratio. The 1998 underwriting loss, reflecting a combined ratio of 103.6%, was primarily the result of catastrophe losses, which added 6.1 percentage points to the loss and loss adjustment expense ratio, as well as an unusual number of losses greater than $1 million, including several large fire losses. In 1997, catastrophe losses had a 1.8 percentage point impact on a combined ratio of 97.7%. Due to the nature of catastrophic events, management is unable to predict accurately the frequency or potential cost of such occurrences in the future. However, in an effort to control such catastrophe losses, the Company has continued not to market property and casualty insurance in California, not to write flood insurance, to review exposure to huge disasters and reduce coverage in certain coastal regions. For property catastrophes, the Company retains the first $25 million of losses and is reinsured for 95% of losses from $25 million up to $200 million. The pure loss ratio for commercial lines increased to 61.4% in 1999 from 61.1% in 1998 and 53.3% in 1997. The 1999 pure loss ratio for commercial lines was increased by 1.3 percentage points due to Ohio uninsured motorist claims that the Company incurred, which resulted in losses of $13.7 million. In 1999, the Ohio Supreme Court ruled that Ohio business automobile policies cover employees or their family members for injuries caused by uninsured and underinsured motorists, even when the injured persons are not in company vehicles or on company business. Effective October 1, 1999, the Company began using new language in Ohio business auto policies to relieve business policyholders of the need to fund this coverage for losses that they did not intend to assume responsibility for. The Company is being very proactive about changing the policy language on renewals, at or before the policy anniversaries,and amending language on policies outside of Ohio to protect business owner policyholders from this type of risk. The pure loss ratio for personal lines improved to 62.0% for 1999, down from 73.8% in 1998 and 68.9% in 1997. Lower catastrophe losses accounted for 6.3 percentage points of the improvement between 1999 and 1998. The Company's 1998-1999 agency re-underwriting program, designed to help restore profitability, accounted for the remainder. 13 The expense ratio (statutory basis) continued to decline slightly in 1999, dropping to 28.4% from 28.9% in 1998 and 29.3% in 1997, as the Company maintained a sustainable level of investment in staff and costs associated with upgrading technology and facilities. For the next several years, the Company anticipates the expense ratio will be affected by plans to invest in upgraded or new direct personal lines billing software for the Company's property and casualty subsidiaries, with the phased roll-outs planned for 2000 through 2001. In January 1999, the Company adopted Statement of Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." This SOP provides guidance on the capitalization of costs related to internal use software and does not require restatement of prior period amounts. The Company capitalized costs of $6.0 million in 1999, which would have been expensed under the Company's prior policy. As discussed in the Notes to the Consolidated Financial Statements, the Company's liabilities for insurance reserves are estimated by management based upon Company experience. The Company consistently has established property and casualty insurance reserves, including adjustments of estimates, using information from internal analysis and review by external actuaries. Though uncertainty always exists as to the adequacy of established reserves, management believes this uncertainty is less than it otherwise would be, due to the stability of the Company's book of business. Such reserves are related to various lines of business and will be paid out over future periods. Reserves for environmental claims have been reviewed and the Company believes at this time these reserves are adequate. Environmental exposures are minimal as a result of the types of risks the Company has insured in the past. Historically, most commercial accounts are written with post-date coverages that afford clean-up costs and Superfund responses.
Cincinnati Financial Corporation and Subsidiaries - ----------------------------------------------------------------------------------------------------------------------------- LIFE AND ACCIDENT AND HEALTH - ----------------------------------------------------------------------------------------------------------------------------- (000,000's omitted except 1999 CHANGE CHANGE 1998 Change Change 1997 Change Change ratios) $ % $ % $ % - ----------------------------------------------------------------------------------------------------------------------------- Gross Written Premiums $ 420.7 $306.0 266.8 $ 114.7 $ 17.1 17.5 $ 97.6 $ 7.8 8.7 Net Written Premiums 410.4 301.2 275.8 109.2 16.8 18.2 92.4 7.2 8.5 Net Earned Premiums 74.7 4.6 6.6 70.1 7.2 11.4 62.9 6.5 11.5 Total Assets 1,447.1 236.9 19.6 1,210.2 110.2 10.0 1,100.0 192.7 21.2 Equity 463.2 (61.8) (11.8) 525.0 48.4 10.2 476.6 101.0 26.9 Net Operating Income 28.1 4.5 19.1 23.6 (1.2) (4.8) 24.8 4.7 23.4 - -----------------------------------------------------------------------------------------------------------------------------
CFC's life insurance subsidiary had total net earned premium income for 1999 of $74.7 million, up from $70.1 million in 1998 and $62.9 million in 1997. Life insurance premiums were $65.1 million in 1999, $61.7 million in 1998 and $54.7 million in 1997. The life insurance subsidiary contributed 11% of CFC's operating income in 1999, down from 12% in 1998 but above the 10% in 1997. The growth in life insurance premium came primarily from the sale of term insurance. The LifeHorizons products offered competitive rates and commissions along with guaranteed level premiums for periods up to 30 years. Term insurance sales were strong throughout the industry as policyholders wanted to lock in those level premiums before "Triple X" regulations took effect on January 1, 2000. Term life first-year premiums rose 70% and ordinary life applications, including individual term, whole life and universal products, rose 64%. Worksite marketing applications increased 17% in 1999. An important part of Cincinnati Life's strategic mission is to round out accounts while improving persistency for the Company. Term and worksite insurance products are well suited to cross selling by the Company's property and casualty agency force. Agents find that offering worksite marketing to employees of their small commercial accounts provides a benefit to the employees at low cost to the employer. With the success of the term and worksite efforts, the Company intends to enhance and develop new life insurance products that will meet the needs of the property and casualty agent and their customers as well as attract independent life agents to help support overall product volume. INVESTMENT INCOME AND INVESTMENTS Though the growth rate for investment income declined slightly to 5.1% in 1999 from 5.6% in 1998, income reached a record level of $386.8 million primarily as a result of investing the cash flows from operating activities and the collection of dividend increases from equity securities in the investment portfolio. The primary reason for the slower growth in 1999 was the use of $217.1 million of cash flow to fund the repurchase of the Company's common stock, which decreased cash available for the investment portfolio compared with 1998, a year affected by high catastrophe losses, and 1997. The asset value of the equities rose by about $56 million in 1999, offset by the bond portfolio, which declined by about $195 million, in line with the market. In 1999, 35 out of the 45 common stocks in the Company's investment portfolio increased dividends during the year, adding more than $16.1 million to future annualized investment earnings. 14 The Company's primary investment strategy is to maintain liquidity to meet both immediate and long-range insurance obligations through the purchase and maintenance of medium- risk, fixed maturity and equity securities, while earning optimal returns on the equity portfolio through higher dividends and capital appreciation. The Company's investment decisions on an individual insurance company basis are influenced by insurance regulatory statutory requirements designed to protect policyholders from investment risk. Cash generated from insurance operations is invested almost entirely in corporate, municipal, public utility and other fixed maturity securities or equity securities. Such securities are evaluated prior to purchase based on yield and risk. Investments in common stocks have emphasized securities with an annual dividend yield of at least 2% to 3% and with annual dividend increases. The Company's portfolio of equity investments had an average dividend yield-to-cost of 8.9% at December 31, 1999. Management's strategy in equity investments includes identifying approximately 10 to 12 companies, for the core of the investment portfolio, in which the Company can accumulate 10% to 20% of their common stock. INTEREST AND INCOME TAXES The Company's income tax expense was $66.9 million, $65.5 million and $95.2 million for 1999, 1998 and 1997, respectively, while the effective tax rate was 20.79%, 21.34% and 24.12%, for the same periods. The higher tax rate in 1997 primarily was due to the strong underwriting profit recorded for the year and higher capital gains. The effective rate remained constant from 1998 to 1999. The Company incurred no additional alternative minimum tax expenses for the three years. CASH FLOW AND LIQUIDITY - -------------------------------------------------------------------------------- (000,000's omitted) 1999 1998 1997 - -------------------------------------------------------------------------------- Net Cash Provided by Operating Activities $ 687.8 $ 273.6 $ 427.0 Net Cash Used in Investing Activities (205.3) (320.7) (282.5) Net Cash (Used in) Provided by Financing Activities (201.6) 25.5 (124.2) Net Increase (Decrease) in Cash 280.9 (21.6) 20.3 Cash at Beginning of Year 58.6 80.2 59.9 Cash at End of Year 339.5 58.6 80.2 Supplemental Interest Paid 31.6 36.4 21.8 Income Taxes Paid 55.0 91.2 95.5 - -------------------------------------------------------------------------------- CASH FLOW In 1999, operating cash flow was 151% higher than in 1998, primarily because of the sale of a $302.9 BOLI policy. Excluding this event, operating cash flow was 41% higher than in 1998 primarily because of lower catastrophe losses. For the years 1999 and 1998, cash flow was sufficient to meet operating needs, but short-term borrowings were utilized for financing and investing activities. In 1997, operating cash flow was sufficient to meet operating needs and provide for financing needs and increased investment. Management expects operating cash flow will continue to be CFC's primary source of funds because no substantial changes are anticipated in the Company's mix of business nor are there plans to reduce protection by ceded reinsurance agreements with financially stable reinsurance companies. Further, the Company has no significant exposure to assumed reinsurance. Assumed reinsurance comprised no more than 3% of gross premiums in each of the last three years. The change in net cash used in investing activities for 1999 reflected a decline in the amount of fixed maturity investments being called by the issuers, compared with the higher amounts called in 1998 and 1997. This also resulted in lower levels of fixed maturities purchased in 1999, compared with 1998 and 1997. Cash flows used in net purchases of fixed maturity and equity securities, respectively, amounted to $45.1 million and $49.0 million in 1999, $107.8 million and $153.2 million in 1998, and $122.6 million and $134.1 million in 1997. For the years 1999 and 1997, the primary reasons for increases in net cash used for financing activities were for the payment of cash dividends and the purchase of treasury shares. In 1998, net cash was provided in financing activities due to the issuance of a senior debenture, offset by treasury share purchases, cash dividend payments and reduction of short-term debt. 15 NOTES PAYABLE -- Notes payable, primarily short-term debt used to enhance liquidity, increased to $118.0 million in 1999 from zero in 1998. Management used short-term debt for purchase of treasury shares, the construction of an additional Cincinnati headquarters building and for other purposes. DIVIDENDS -- CFC has increased cash dividends to shareholders for 39 consecutive years and, periodically, the Board of Directors authorizes stock dividends or splits. In February 1998, the CFC Board increased the indicated annual dividend 12.2%, raising the annual dividend five cents to an indicated annual rate of $1.84 (pre split basis). At the same time, the Board of Directors announced its intention to declare a three-for-one split to be distributed on May 15, 1998, to shareholders of record as of April 24, 1998, which was authorized on April 4, 1998, based on shareholder approval of a proposal to increase authorized shares to 200 million from 80 million. On February 6, 1999, the Board of Directors authorized a 10.9% cash dividend increase, raising the quarterly dividend by one and two-thirds cents to an indicated annual rate of $0.68. On February 5, 2000, the Board of Directors authorized an 11.8% increase in the regular quarterly dividend to an indicated annual rate of $0.76 per share. Since 1987, the Company's Board has authorized three additional stock splits or stock dividends: a 5% stock dividend in 1996; a 5% stock dividend in 1995 and a three-for-one stock split in 1992. After the stock split in 1998, a shareholder who purchased one Cincinnati Insurance share before 1957 would own 1,946 Cincinnati Financial shares, if all shares from accrued stock dividends and splits were held and cash dividends not reinvested. In the past 10 years, the Company has paid an average of 30-35% of net income as dividends, with the other 65-70% reinvested for future growth. The ability of the Company to continue paying cash dividends is subject to such factors as the Board of Directors may deem relevant. FINANCIAL CONDITION ASSETS Cash and marketable securities of $10.468 billion make up 92.0% of the Company's $11.380 billion assets; this compares with 93.1% in 1998 and 93.0% in 1997. The Company has only minor investments in real estate and mortgages, which are typically illiquid. At December 31, 1999, the Company's portfolio of fixed maturity securities had an average yield-to-cost of 8.3% and an average maturity of 10 years. For the insurance companies' purposes, strong emphasis has been placed on purchasing current income-producing securities and maintaining such securities as long as they continue to meet the Company's yield and risk criteria. Historically, municipal bonds have been attractive due to their tax-exempt feature. Essential service (e.g., schools, sewer, water, etc.) bonds issued by municipalities are prevalent in this area. Many of these bonds are not rated due to the small size of their offerings. At year-end 1999 and 1998, investments totaling approximately $888 million and $873 million ($970 million and $883 million at cost) of the Company's $10.194 billion and $10.325 billion investment portfolio related to securities rated as non-investment grade or not rated by Moody's Investors Service or Standard & Poor's. Such investments, which tend to have higher yields, historically have benefited the Company's results of operations. Further, many have been upgraded to investment grade while owned by CFC. Because of alternative minimum tax matters, the Company uses a blend of tax-exemptand taxable fixed maturity securities. Tax-exempt bonds comprise 9% of invested assets as of December 31, 1999, compared with 9% at year-end 1998 and 10% at year-end 1997. Additional information regarding the composition of investments, together with maturity data regarding investments in fixed maturities, is included in the Notes to Consolidated Financial Statements. The $54.1 million increase in land, building and equipment for Company use includes $35.2 million relating to the addition of a second office tower, which approximately doubled the headquarters space. The new construction and related renovations will be completed in the first half of 2000. The total cost is estimated at $60 million. MARKET RISK The Company could incur losses due to adverse changes in market rates and prices. The Company's primary market risk exposures are changes in price for equity securities and changes in interest rates and credit ratings for fixed maturity securities. The Company could alter the existing investment portfolios or change the character of future investments to manage this exposure to market risk. CFC, with the Board of Directors, administers and oversees investment risk through the Investment Committee, which provides executive oversight of investment activities. The Company has specific investment guidelines and policies that define the overall framework used daily by investment portfolio managers to limit the Company's exposure to market risk. LIABILITIES AND SHAREHOLDERS' EQUITY At December 31, 1999, long- and short-term debt were 5%, insurance reserves were 26% and total shareholders' equity was 48%, of total assets, with remaining liabilities consisting of unearned premiums, deferred income taxes, declared but unpaid dividends and other liabilities. DEBT -- Total long- and short-term debt was less than 6% of total assets at year-end 1999 and 1998. At December 31, 1999 and 1998, long-term debt consisted of $456.4 million and $471.5 million,respectively, of convertible and senior debentures. Short-term debt is used to provide working capital as discussed above. 16 EQUITY -- Shareholders' equity, as a percentage of total assets, declined in 1999 to 48% compared with 51% for 1998 and 50% for 1997 due to a decrease in accumulated other comprehensive income as a result of a decline in unrealized capital gains, primarily due to the lower market value of the Company's bond portfolio. Statutory risk-based capital requirements became effective for life insurance companies in 1993 and for property casualty companies in 1994. The Company's capital has been well above required amounts in each year since those effective dates. - -------------------------------------------------------------------------------- (000,000's omitted) 1999 1998 1997 - -------------------------------------------------------------------------------- Shareholders' Equity Excluding Retained Earnings and Accumulated Other Comprehensive Income $ 267.3 $ 462.0 $ 469.5 Retained Earnings 1,623.9 1,480.9 1,341.7 Accumulated Other Comprehensive Income 3,530.1 3,678.0 2,905.8 Total Shareholders' Equity $ 5,421.3 $ 5,620.9 $ 4,717.0 - -------------------------------------------------------------------------------- As a long-term investor, the Company has followed a buy-and-hold strategy for more than 40 years. A significant amount of unrealized appreciation on equity investments has been generated as a result of this policy. Unrealized appreciation on equity investments, before deferred income taxes, was $5.488 billion as of December 31, 1999 and constituted 54% of the total investment portfolio; 73% of the equity investment portfolio; and after deferred income taxes, 66% of total shareholders' equity. Such unrealized appreciation, before deferred income taxes, amounted to $5.512 billion and $4.273 billion, at year-end 1998 and 1997, respectively. On November 22, 1996, the Board of Directors authorized the repurchase of up to 3 million of the Company's outstanding shares as management deemed appropriate over an unspecified period of time. On August 21, 1998, the Board of Directors adjusted the authorization to reflect the three-for-one split, which resulted in a total of 9 million shares authorized to be repurchased. On February 6, 1999, the CFC Board authorized management to repurchase up to 17 million shares of the Company's 166.7 million shares outstanding at December 31, 1998. They specified their intention to complete the repurchase by December 31, 2000. This authorization superceded the previous authorization of 9 million shares. As of December 31, 1999, the Company, working under Board repurchase authorizations, had bought back more than 9.6 million shares of its common stock at a cost of $310.2 million. Under the new authority, repurchases in 1999 and the first month of 2000 totaled 6.7 million shares at a cost of $235.1 million. As of February 1, 2000, 10.3 million shares remained authorized for repurchase by the Board of Directors. 54 17 Independent Auditors' Report and Financial Statements from pages 24 thru 36 (incorporated into Items 8 and 14).
CONSOLIDATED BALANCE SHEETS (000's omitted) Cincinnati Financial Corporation and Subsidiaries - ------------------------------------------------------------------------------------------------------------- December 31, ----------------------------------- 1999 1998 ------------ ------------- ASSETS Investments Fixed maturities, at fair value (cost: 1999-$2,692,154; 1998-$2,682,659)............................................. $ 2,617,412 $ 2,812,231 Equity securities, at fair value (cost: 1999-$2,022,555; 1998-$1,943,206)............................................. 7,510,918 7,454,817 Other invested assets .......................................... 65,909 57,902 Cash ............................................................... 339,554 58,611 Investment income receivable ....................................... 80,128 76,773 Finance receivables................................................. 32,931 32,107 Premiums receivable ................................................ 166,585 164,412 Reinsurance receivable ............................................. 159,229 135,991 Prepaid reinsurance premiums ...................................... 24,684 26,435 Deferred acquisition costs pertaining to unearned premiums and to life policies in force.......................... 154,385 142,896 Land, buildings and equipment for Company use (at cost, less accumulated depreciation: 1999-$123,427; 1998-$108,449)......... 107,784 53,639 Other assets ....................................................... 120,695 70,689 ----------- ----------- Total assets ................................................ $11,380,214 $11,086,503 =========== =========== LIABILITIES Insurance reserves Losses and loss expenses ...................................... $ 2,154,149 $ 2,054,725 Life policy reserves........................................... 860,561 533,730 Unearned premiums ................................................. 480,453 459,695 Other liabilities.................................................. 169,721 136,894 Deferred income taxes ............................................. 1,719,673 1,809,003 Notes payable ..................................................... 118,000 - 0 - 6.9% senior debentures due 2028 ................................... 419,614 419,601 5.5% convertible senior debentures due 2002 ....................... 36,759 51,919 ----------- ----------- Total liabilities .......................................... 5,958,930 5,465,567 ----------- ----------- SHAREHOLDERS' EQUITY Common stock, par value-$2 per share; authorized 200,000 shares; issued: 1999-171,862; 1998-170,435 ............................ 343,725 340,871 Paid-in capital.................................................... 237,859 218,328 Retained earnings.................................................. 1,623,890 1,480,914 Accumulated other comprehensive income ............................ 3,530,104 3,678,019 ----------- ----------- 5,735,578 5,718,132 Less treasury shares at cost (1999-9,841 shares; 1998-3,754 shares) (314,294) (97,196) ----------- ----------- Total shareholders' equity..................................... 5,421,284 5,620,936 ----------- ----------- Total liabilities and shareholders' equity..................... $11,380,214 $11,086,503 =========== =========== Accompanying notes are an integral part of this statement.
18
CONSOLIDATED STATEMENTS OF INCOME (000's omitted except per share data) Cincinnati Financial Corporation and Subsidiaries - ------------------------------------------------------------------------------------------------------------------- Years Ended December 31, --------------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- REVENUE Premium income Property and casualty ........................... $ 1,657,277 $ 1,542,639 $ 1,453,526 Life ............................................ 65,824 61,704 54,742 Accident and health ............................. 8,849 8,392 8,110 ----------- ----------- ----------- Net premiums earned ............................. 1,731,950 1,612,735 1,516,378 Investment income .................................. 386,773 367,993 348,597 Realized (losses) gains on investments ............. (564) 65,309 69,230 Other income ....................................... 10,064 8,252 8,179 ----------- ----------- ----------- Total revenues .................................. 2,128,223 2,054,289 1,942,384 ----------- ----------- ----------- BENEFITS AND EXPENSES Insurance losses and policyholder benefits ......... 1,254,363 1,221,118 1,054,924 Commissions ........................................ 311,979 290,832 282,690 Other operating expenses ........................... 151,170 144,849 139,030 Taxes, licenses and fees ........................... 59,796 60,798 48,573 Increase in deferred acquisition costs pertaining to unearned premiums and to life policies in force . (11,489) (7,583) (7,725) Interest expense ................................... 33,043 28,012 20,821 Other expenses ..................................... 7,788 9,156 9,512 ----------- ----------- ----------- Total benefits and expenses ..................... 1,806,650 1,747,182 1,547,825 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES ............................. 321,573 307,107 394,559 ----------- ----------- ----------- PROVISION FOR INCOME TAXES Current ............................................ 76,534 78,847 107,046 Deferred ........................................... (9,683) (13,307) (11,862) ----------- ----------- ----------- Total provision for income taxes ................ 66,851 65,540 95,184 ----------- ----------- ----------- NET INCOME ............................................. $ 254,722 $ 241,567 $ 299,375 =========== =========== =========== PER COMMON SHARE Net income ......................................... $ 1.55 $ 1.45 $ 1.81 =========== =========== =========== Net income (diluted) ............................... $ 1.52 $ 1.41 $ 1.77 =========== =========== =========== Cash dividends (declared) .......................... $ .68 $.61 1/3 $.54 2/3 =========== =========== ===========
Per share amounts reflect the effects of a three-for-one stock split effective to shareholders of record on April 24, 1998. Accompanying notes are an integral part of this statement. 19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (000's omitted) Cincinnati Financial Corporation and Subsidiaries - ----------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER TOTAL COMMON TREASURY PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS' STOCK STOCK CAPITAL EARNINGS INCOME EQUITY - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 ........ $ 334,972 $ (11,217) $ 178,547 $ 1,132,880 $ 1,527,707 $ 3,162,889 Net income ........................ 299,375 299,375 Change in unrealized gains on investments ................... 2,120,075 2,120,075 Income taxes on unrealized gains .. (742,026) (742,026) ----------- Comprehensive income .............. 1,677,424 Dividends declared ................ (90,525) (90,525) Purchase/issuance of treasury shares ............... (61,368) 654 (60,714) Stock options exercised ........... 931 5,543 6,474 Conversion of debentures .......... 2,879 18,538 21,417 ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1997 ........ 338,782 (72,585) 203,282 1,341,730 2,905,756 4,716,965 Net income ........................ 241,567 241,567 Change in unrealized gains on investments ................... 1,188,097 1,188,097 Income taxes on unrealized gains .. (415,834) (415,834) ------------ Comprehensive income .............. 1,013,830 Dividends declared ................ (102,383) (102,383) Purchase/issuance of treasury shares ............... (24,611) 310 (24,301) Stock options exercised ........... 1,214 9,100 10,314 Conversion of debentures .......... 875 5,636 6,511 ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1998 ........ 340,871 (97,196) 218,328 1,480,914 3,678,019 5,620,936 Net income ........................ 254,722 254,722 Change in unrealized losses on investments ................... (227,562) (227,562) Income taxes on unrealized losses . 79,647 79,647 ----------- Comprehensive income .............. 106,807 Dividends declared ................ (111,746) (111,746) Purchase/issuance of treasury shares ............... (217,098) 14 (217,084) Stock options exercised ........... 816 6,396 7,212 Conversion of debentures .......... 2,038 13,121 15,159 ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1999 ........ $ 343,725 $ (314,294) $ 237,859 $ 1,623,890 $ 3,530,104 $ 5,421,284 =========== =========== =========== =========== =========== ===========
Amounts reflect the effects of a three-for-one stock split effective to shareholders of record on April 24, 1998. Accompanying notes are an integral part of this statement. 20 CONSOLIDATED STATEMENTS OF CASH FLOWS (000's omitted) Cincinnati Financial Corporation and Subsidiaries - -----------------------------------------------------------------------------
Years Ended December 31, --------------------------------------- 1999 1998 1997 ---------- --------- --------- Cash flows from operating activities: Net income ............................................... $ 254,722 $ 241,567 $ 299,375 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ......................... 16,016 11,793 11,327 Increase in investment income receivable .............. (3,355) (2,253) (4,074) (Increase) decrease in premiums receivable ............ (2,173) (5,873) 3,506 (Increase) decrease in reinsurance receivable ......... (23,238) (26,881) 6,796 Decrease (increase) in prepaid reinsurance premiums ... 1,751 (2,823) (688) Increase in deferred acquisition costs ................ (11,489) (7,583) (7,725) Increase in accounts receivable ....................... (15,277) (7,369) (7,230) (Increase) decrease in other assets ................... (376) 649 42,084 Increase in loss and loss expense reserves ............ 99,424 118,191 55,367 Increase in life policy reserves ...................... 326,831 51,283 42,166 Increase in unearned premiums ......................... 20,758 16,641 17,304 Increase (decrease) in other liabilities .............. 10,030 (20,330) 38,746 Increase (decrease) in current income taxes ........... 20,752 (14,595) 10,926 Decrease in deferred income taxes ..................... (9,683) (13,307) (11,862) Realized loss (gains) on investments .................. 564 (65,309) (69,230) Other ................................................. 2,546 (224) 169 --------- --------- --------- Net cash provided by operating activities ......... 687,803 273,577 426,957 --------- --------- --------- Cash flows from investing activities: Sale of fixed maturities investments ..................... 61,909 47,486 138,741 Call or maturity of fixed maturities investments ......... 316,495 320,510 376,496 Sale of equity securities investments .................... 197,141 321,003 266,296 Collection of finance receivables ........................ 16,133 14,738 8,588 Purchase of fixed maturities investments ................. (423,505) (475,751) (637,858) Purchase of equity securities investments ................ (246,129) (474,176) (400,405) Investment in land, buildings and equipment .............. (102,141) (47,750) (16,485) Investment in finance receivables ........................ (16,957) (15,131) (13,439) Increase in other invested assets ........................ (8,232) (11,589) (4,471) --------- --------- --------- Net cash used in investing activities ............. (205,286) (320,660) (282,537) --------- --------- --------- Cash flows from financing activities: Proceeds from issue of 6.9% senior debentures ............ - 0 - 419,593 - 0 - Proceeds from stock options exercised .................... 7,212 10,314 6,474 Purchase/issuance of treasury shares ..................... (217,084) (24,301) (60,714) Increase in (payoff of) notes payable .................... 118,000 (280,558) 18,460 Payment of cash dividends to shareholders ................ (109,702) (99,522) (88,405) --------- --------- --------- Net cash (used in) provided by financing activities (201,574) 25,526 (124,185) --------- --------- --------- Net increase (decrease) in cash .............................. 280,943 (21,557) 20,235 Cash at beginning of year .................................... 58,611 80,168 59,933 --------- --------- --------- Cash at end of year .......................................... $ 339,554 $ 58,611 $ 80,168 ========= ========= ========= Supplemental disclosures of cash flow information: Interest paid ............................................ $ 31,612 $ 36,419 $ 21,823 ========= ========= ========= Income taxes paid ........................................ $ 55,000 $ 91,241 $ 95,488 ========= ========= ========= Accompanying notes are an integral part of this statement
21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cincinnati Financial Corporation and Subsidiaries - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS- Cincinnati Financial Corporation (the "Company"), through its subsidiaries, sells insurance primarily in the Midwest and Southeast regions of the United States of America through a network of local independent agents. Insurance products sold include fire, automobile, casualty, bonds and all related forms of property and casualty insurance as well as life insurance and accident and health insurance. BASIS OF PRESENTATION- The consolidated financial statements include the accounts of the Company and its subsidiaries, each of which is wholly owned, and are presented in conformity with accounting principles generally accepted in the United States of America. Accounting principles generally accepted in the United States of America differ in certain respects from statutory insurance accounting practices prescribed or permitted for insurance companies by regulatory authorities. All significant inter-company balances and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. The accompanying consolidated financial statements include estimates for such items as insurance reserves and income taxes. Actual results could differ from those estimates. PROPERTY AND CASUALTY INSURANCE- Expenses incurred in the issuance of policies are deferred and amortized over the terms of the policies. Anticipated investment income is not considered in determining if a premium deficiency related to insurance contracts exists. Policy premiums are included in income on a pro rata basis over the terms of the policies. Losses and loss expense reserves are based on claims reported prior to the end of the year and estimates of unreported claims. LIFE INSURANCE- Policy acquisition costs are deferred and amortized over the premium paying period of the policies. Life policy reserves are based on anticipated rates of mortality derived primarily from industry experience data, anticipated withdrawal rates based principally on Company experience and estimated future interest earnings using initial interest rates ranging from 3% to 10 1/2%. Interest rates on approximately $380,000,000 and $356,000,000 of such reserves at December 31, 1999 and 1998, respectively, are periodically adjusted based upon market conditions. Payments received for investment, limited pay and universal life-type contracts are recognized as income only to the extent of the current cost of insurance and policy administration, with the remainder recognized as liabilities and included in life policies reserves. ACCIDENT AND HEALTH INSURANCE- Expenses incurred in the issuance of policies are deferred and amortized over a five-year period. Policy premium income, unearned premiums and reserves for unpaid losses are accounted for in substantially the same manner as property and casualty insurance discussed above. REINSURANCE- In the normal course of business, the Company seeks to reduce losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance companies, reinsurers and involuntary state pools. Reinsurance contracts do not relieve the Company from any obligation to policyholders. Although the Company historically has not experienced uncollectible reinsurance, failure of reinsurers to honor their obligations could result in losses to the Company. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. 22 The Company also assumes some reinsurance from other insurance companies, reinsurers and involuntary state pools. Such assumed reinsurance activity is recorded principally on the basis of reports received from the ceding companies. INVESTMENTS- Fixed maturities (bonds and notes) and equity securities (common and preferred stocks) are classified as available for sale and are stated at fair values. Unrealized gains and losses on investments, net of income taxes associated therewith, are included in shareholders' equity in accumulated other comprehensive income. Realized gains and losses on sales of investments are recognized in net income on a specific identification basis. INCOME TAXES- Deferred tax liabilities and assets are computed using the tax rates in effect for the time when temporary differences in book and taxable income are estimated to reverse. Deferred income taxes are recognized for numerous temporary differences between the Company's taxable income and book-basis income and other changes in shareholders' equity. Such temporary differences relate primarily to unrealized gains on investments and differences in the recognition of deferred acquisition costs and insurance reserves. Deferred taxes associated with unrealized appreciation (except the amounts related to the effect of income tax rate changes) are charged to shareholders' equity, and deferred taxes associated with other differences are charged to income. EARNINGS PER SHARE - Net income per common share is based on the weighted average number of common shares outstanding during each of the respective years. The calculation of net income per common share (diluted) assumes the conversion of convertible senior debentures and the exercise of stock options. FAIR VALUE DISCLOSURES - Fair values for investments in fixed maturity securities (including redeemable preferred stock) are based on quoted market prices, where available. For such securities not actively traded, fair values are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. Fair values for equity securities are based on quoted market prices. The fair values for liabilities under investment-type insurance contracts (annuities) are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. Fair values for short-term notes payable are estimated using interest rates currently available to the Company. Fair values for long-term debentures are based on the quoted market prices for such debentures. STOCK SPLIT - On April 4, 1998, the Company's authorized capital was increased to 200,000,000 shares of common stock and a three-for-one stock split was declared that was effective for shareholders of record as of April 24, 1998. The financial statements, notes and other references to share and per share data have been retroactively restated to reflect the stock split for all periods presented. 23 ACCOUNTING CHANGES - Effective January 1, 1999, the Company adopted Statement of Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." This SOP does not require restatement of prior period amounts. The adoption of this SOP was not material to the Company's financial statements. Statements of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" is effective for the Company in 2001 and establishes accounting and reporting standards for derivative instruments. The effects of SFAS No. 133 to the Company are not yet known. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform with 1999 classifications. 2. INVESTMENTS (000's omitted)
Years Ended December 31, --------------------------------------------- 1999 1998 1997 ----------- ---------- ---------- Investment income summarized by investment category: Interest on fixed maturities......................................... $ 218,688 $ 217,675 $ 218,065 Dividends on equity securities....................................... 165,137 145,885 128,403 Other investment income.............................................. 8,316 9,545 6,865 ----------- ---------- ---------- Total ........................................................... 392,141 373,105 353,333 Less investment expenses............................................. 5,368 5,112 4,736 ----------- ---------- ---------- Net investment income ........................................... $ 386,773 $ 367,993 $ 348,597 =========== ========== ========== Realized (losses) gains on investments summarized by investment category: Fixed maturities: Gross realized gains ............................................ $ 10,842 $ 11,591 $ 22,075 Gross realized losses ........................................... (48,518) (10,354) (6,732) Equity securities: Gross realized gains ............................................ 57,605 104,079 62,337 Gross realized losses ........................................... (20,493) (40,007) (8,450) ----------- ---------- ---------- Realized (losses) gains on investments .......................... $ (564) $ 65,309 $ 69,230 =========== ========== ========== Change in unrealized (losses) gains on investments summarized by investment category: Fixed maturities .................................................... $ (204,314) $ (50,098) $ 49,650 Equity securities.................................................... (23,248) 1,238,195 2,070,425 ----------- ---------- ---------- Change in unrealized (losses) gains on investments............... $ (227,562) $1,188,097 $2,120,075 =========== ========== ==========
Analysis of cost, gross unrealized gains, gross unrealized losses and fair value as of December 31, 1999 and 1998 (000's omitted):
GROSS GROSS UNREALIZED UNREALIZED FAIR 1999 COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- Fixed maturities: States, municipalities and political subdivisions $ 891,319 $ 16,971 $ 21,637 $ 886,653 Convertibles and bonds with warrants attached ... 83,993 2,221 10,419 75,795 Public utilities ................................ 60,978 1,120 690 61,408 United States government and government agencies and authorities .................... 7,038 34 173 6,899 All other corporate bonds ....................... 1,648,826 30,886 93,055 1,586,657 ---------- ---------- ---------- ---------- Total ....................................... $2,692,154 $ 51,232 $ 125,974 $2,617,412 ========== ========== ========== ========== Equity securities ................................... $2,022,555 $5,580,114 $ 91,751 $7,510,918 ========== ========== ========== ========== 1998 Fixed maturities: States, municipalities and political subdivisions $ 865,600 $ 51,944 $ 341 $ 917,203 Convertibles and bonds with warrants attached ... 100,360 6,208 4,914 101,654 Public utilities ................................ 55,709 4,713 - 0 - 60,422 United States government and government agencies and authorities .................... 9,043 480 - 0 - 9,523 All other corporate bonds ....................... 1,651,947 104,849 33,367 1,723,429 ---------- ---------- ---------- ---------- Total ....................................... $2,682,659 $ 168,194 $ 38,622 $2,812,231 ========== ========== ========== ========== Equity securities ................................... $1,943,206 $5,553,489 $ 41,878 $7,454,817 ========== ========== ========== ==========
24 Contractual maturity dates for investments in fixed maturity securities as of December 31, 1999 (000's omitted):
FAIR % OF COST VALUE FAIR VALUE ---------- ---------- ---------- Maturity dates occurring: One year or less .......................... $ 110,483 $ 111,754 4.3 After one year through five years.......... 709,912 703,431 26.9 After five years through ten years......... 827,996 778,814 29.7 After ten years ........................... 1,043,763 1,023,413 39.1 ---------- ---------- ------ Total.................................. $2,692,154 $2,617,412 100.0 ========== ========== ======
Actual maturities may differ from contractual maturities when there exists a right to call or prepay obligations with or without call or prepayment penalties. At December 31, 1999, investments with a cost of $58,850,000 and fair value of $58,082,000 were on deposit with various states in compliance with certain regulatory requirements. Investments in companies that exceed 10% of the Company's shareholders' equity include the following as of December 31 (000's omitted):
1999 1998 --------------------------- --------------------------- COST FAIR VALUE Cost Fair Value ---------- ---------- --------- ---------- Fifth Third Bancorp common stock........... $ 276,799 $3,544,757 $ 276,799 $3,445,118 Alltel Corporation common stock ........... $ 100,467 $1,060,481 $ 100,467 $ 767,105
3. DEFERRED ACQUISITION COSTS Acquisition costs incurred and capitalized during 1999, 1998 and 1997 amounted to $376,154,000, $343,881,000 and $322,117,000, respectively. Amortization of deferred acquisition costs was $364,665,000, $336,298,000 and $314,392,000 for 1999, 1998 and 1997, respectively. 4. LOSSES AND LOSS EXPENSES Activity in the reserve for losses and loss expenses is summarized as follows (000's omitted): Years Ended December 31, -------------------------------------- 1999 1998 1997 ---------- ---------- ----------- Balance at January 1............ $1,978,461 $1,888,883 $1,824,296 Less reinsurance receivable .. 138,138 112,235 121,881 ---------- ---------- ----------- Net balance at January 1........ 1,840,323 1,776,648 1,702,415 ---------- ---------- ----------- Incurred related to: Current year ................. 1,303,561 1,306,194 1,115,140 Prior years .................. (116,061) (153,311) (119,654) ---------- ---------- ----------- Total incurred ................. 1,187,590 1,152,883 995,486 ---------- ---------- ----------- Paid related to: Current year.................. 574,038 590,366 467,843 Prior years................... 522,108 498,842 453,410 ---------- ---------- ----------- Total paid...................... 1,096,146 1,089,208 921,253 ---------- ---------- ----------- Net balance at December 31...... 1,931,767 1,840,323 1,776,648 Plus reinsurance receivable... 160,809 138,138 112,235 ---------- ---------- ----------- Balance at December 31........ $2,092,576 $1,978,461 $1,888,883 ========== ========== ==========
As a result of changes in estimates of insured events in prior years, the provision for losses and loss expenses decreased by $116,061,000, $153,311,000 and $119,654,000 in 1999, 1998 and 1997. These decreases are due in part to the effects of settling reported (case) and unreported (IBNR) reserves established in prior years for less than expected. The reserve for losses and loss expenses in the accompanying balance sheets also includes $61,573,000 and $76,264,000 at December 31, 1999 and 1998, respectively, for certain life/health losses and loss checks payable. 5. LIFE POLICY RESERVES Life policy reserves have been calculated using the account value basis for universal life and annuity policies and primarily the Basic Table (select) mortality basis for ordinary/traditional, industrial and other policies. Following is a summary of such reserves (000's omitted):
1999 1998 ---------- ---------- Ordinary/traditional life................ $155,931 $156,887 Universal life........................... 236,214 221,197 Annuities................................ 144,221 135,176 Group life............................... 302,990 80 Industrial............................... 15,555 15,986 Other.................................... 5,650 4,404 -------- -------- Total.................................. $860,561 $533,730 ======== ========
At December 31, 1999 and 1998, the fair value associated with the annuities shown above approximated $158,000,000 and $144,000,000, respectively. 6. NOTES PAYABLE The Company and subsidiaries had no compensating balance requirement on debt for either 1999 or 1998. Notes payable in the accompanying balance sheets are short term, and interest rates charged on such borrowings ranged from 5.22% to 6.69% during 1999, which resulted in an average interest rate of 5.49%. At December 31, 1999, the fair value of the notes payable approximated the carrying value and the weighted average interest rate approximated 6.67%. 7. SENIOR DEBENTURES The Company issued $420,000,000 of senior debentures due in 2028 in 1998. The convertible senior debentures due in 2002 are convertible by the debenture holders into shares of common stock as a conversion price of $14.88 (67.23 shares for each $1,000 principal). At December 31, 1999 and 1998, the fair value of the debentures approximated $445,000,000 and $533,000,000, respectively. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Cincinnati Financial Corporation and Subsidiaries - -------------------------------------------------------------------------------- 8. SHAREHOLDERS' EQUITY AND RESTRICTION The insurance subsidiaries paid cash dividends to the Company of approximately $195,000,000, $105,000,000 and $95,500,000 in 1999, 1998 and 1997, respectively. Dividends paid to the Company by insurance subsidiaries are restricted by regulatory requirements of the insurance subsidiaries' domiciliary state. Generally, the maximum dividend that may be paid without prior regulatory approval is limited to the greater of 10% of statutory surplus or 100% of statutory net income for the prior calendar year, up to the amount of statutory unassigned surplus as of the end of the prior calendar year. Dividends exceeding these limitations can be paid only with approval of the insurance department of the subsidiaries' domiciliary state. During 2000, the total dividends that can be paid to the Company without regulatory approval are approximately $285,177,000. 3,401,000 shares of common stock were available for future stock option grants, as of December 31, 1999. On February 6, 1999, the Board of Directors of the Company authorized the repurchase of up to 17 million of the Company's outstanding shares, with the intent to complete the repurchase by December 31, 2000. This authorization supercedes the previous authorization of nine million shares. 9. REINSURANCE Property and casualty premium income in the accompanying statements of income includes approximately $37,113,000, $38,790,000 and $41,694,000 of earned premiums on assumed business and is net of approximately $95,572,000, $96,073,000 and $94,397,000 of earned premiums on ceded business for 1999, 1998 and 1997, respectively. Written premiums for 1999, 1998 and 1997 consist of the following (000's omitted): 1999 1998 1997 ---------- ---------- ---------- Direct business............ $1,737,370 $1,618,357 $1,523,915 Assumed business........... 37,263 38,119 42,773 Ceded business ............ (93,821) (98,895) (95,085) ---------- ---------- ---------- Net ..................... $1,680,812 $1,557,581 $1,471,603 ========== ========== ========== Insurance losses and policyholder benefits in the accompanying statements of income are net of approximately $63,206,000, $59,741,000 and $34,744,000 of reinsurance recoveries for 1999, 1998 and 1997, respectively. 10. FEDERAL INCOME TAXES Significant components of the Company's net deferred tax liability as of December 31, 1999 and 1998 are as follows (000's omitted):
1999 1998 ---------- ---------- Deferred tax liabilities: Unrealized gains on investments........ $1,894,768 $1,974,414 Deferred acquisition costs............. 46,780 45,205 Other.................................. 22,211 8,046 ---------- ---------- Total ................................. 1,963,759 2,027,665 ---------- ---------- Deferred tax assets: Losses and loss expense reserves....... 181,713 162,311 Unearned premiums...................... 31,839 30,270 Life policy reserves................... 18,603 18,637 Other.................................. 11,931 7,444 ---------- ---------- Total ................................ 244,086 218,662 ---------- ---------- Net deferred tax liability.............. $1,719,673 $1,809,003 ========== ==========
26 The provision for federal income taxes is based upon a consolidated income tax return for the Company and subsidiaries. The differences between the statutory federal rates and the Company's effective federal income tax rates are as follows:
1999 1998 1997 PERCENT Percent Percent ------- ------- ------- Tax at statutory rate................... 35.00 35.00 35.00 Increase (decrease) resulting from: Tax-exempt municipal bonds............ (5.13) (5.39) (4.44) Dividend exclusion.................... (9.19) (9.29) (6.54) Other................................. .11 1.02 .10 ----- ----- ----- Effective rate.......................... 20.79 21.34 24.12 ===== ===== =====
No provision has been made (at December 31, 1999, 1998 and 1997) for federal income taxes on approximately $14,000,000 of the life insurance subsidiary's retained earnings, since such taxes will become payable only to the extent that such retained earnings are distributed as dividends or exceed limitations prescribed by tax laws. The Company does not contemplate any such dividend. Cincinnati Financial Corporation and Subsidiaries - ------------------------------------------------- 11. NET INCOME PER COMMON SHARE (000's omitted except per share data)
Income Shares Per Share 1999 (Numerator) (Denominator) Amount ----------- ----------- --------- Net income per common share........ $254,722 164,637 $1.55 Effect of dilutive securities: ===== 5.5% convertible senior debentures..................... 1,539 2,471 Stock options................... 1,507 Net income per common share........ (diluted) -------- ------- $256,261 168,615 $1.52 ======== ======= ===== 1998 Net income per common share........ $241,567 166,821 $1.45 Effect of dilutive securities: ===== 5.5% convertible senior debentures..................... 1,918 3,490 Stock options................... 1,767 Net income per common share -------- ------- (diluted)......................... $243,485 172,078 $1.41 ======== ======= ===== 1997 Net income per common share........ $299,375 165,538 $1.81 Effect of dilutive securities: ===== 5.5% convertible senior debentures..................... 2,712 3,928 Stock options 1,329 Net income per common share -------- ------- (diluted)......................... $302,087 170,795 $1.77 ======== ======= =====
Options to purchase 918,000, 667,000 and 76,000 shares of common stock were outstanding during 1999, 1998 and 1997, respectively, but were not included in the computation of net income per common share (diluted) because the options' exercise prices were greater than the average market price of the common shares. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. PENSION PLAN The Company and subsidiaries have a defined benefit pension plan covering substantially all employees. Benefits are based on years of credited service and compensation level. Contributions to the plan are based on the frozen entry age actuarial cost method. Pension expense is composed of several components that are determined using the projected unit credit actuarial cost method and based on certain actuarial assumptions. The following table sets forth summarized information on the Company's defined benefit pension plan (000's omitted):
Years Ended December 31, ------------------------ 1999 1998 --------- ---------- Change in benefit obligation: Benefit obligation at beginning of year..... $ 76,314 $ 62,934 Service cost................................ 5,319 4,150 Interest cost............................... 5,147 4,474 Plan amendments............................. 11,088 - 0 - Actuarial gain.............................. (18,795) 7,383 Benefits paid (3,152) (2,627) -------- --------- Benefit obligation at end of year........... $ 75,921 $ 76,314 ======== ========= Change in plan assets: Fair value of plan assets at beginning of year.................................... $151,879 $ 133,470 Actual return on plan assets................ (107) 21,036 Benefits paid............................... (3,152) (2,627) -------- --------- Fair value of plan assets at end of year.... $148,620 $ 151,879 ======== ========= Funded status: Funded status at end of year................ $ 72,699 $ 75,565 Unrecognized net actuarial gain............. (80,552) (72,235) Unrecognized net transitional asset......... (2,962) (3,331) Unrecognized prior service cost............. 10,770 (357) -------- --------- Prepaid (accrued) pension cost.............. $ (45) $ (358) ======== =========
A 1999 plan amendment increased benefit obligations and unrecognized prior service costs. This plan amendment primarily changed the retirement benefit formula resulting in increased benefit payments to plan participants. 28 Cincinnati Financial Corporation and Subsidiaries - -------------------------------------------------------------------------------- The fair value of the Company's stock comprised $18,164,130 and $21,331,023 of the plan's assets at December 31, 1999 and 1998, respectively. The following summarizes the assumptions for the plan:
Years Ended December 31, ------------------------ 1999 1998 PERCENT Percent ------- ------- Discount rate .................... 7.50 6.25 Expected return on plan assets.... 8.00 8.00 Rate of compensation increase .... 5 to 7 5 to 7
The components of the net periodic benefit cost for 1999, 1998 and 1997 include the following (000's omitted):
Years Ended December 31, ----------------------------- 1999 1998 1997 ------- ------- -------- Service cost .................... $ 5,319 $ 4,150 $ 3,449 Interest cost.................... 5,147 4,474 3,938 Expected return on plan assets... (9,100) (7,451) (6,250) Amortization of: Transition obligation (asset).. (370) (370) (370) Prior service cost............. (40) (40) (40) Actuarial (gain) loss.......... (1,269) (1,049) (790) ------- ------- ------- Net pension expense.............. $ (313) $ (286) $ (63) ======= ======= =======
13. STATUTORY ACCOUNTING INFORMATION Net income and shareholders' equity, as determined in accordance with statutory accounting practices for the Company's insurance subsidiaries, are as follows (000's omitted):
Years Ended December 31, --------------------------- 1999 1998 1997 ----- ---- ----- Net income: Property/casualty insurance subsidiaries................. $209,915 $148,235 $200,830 Life/health insurance subsidiary................... $ 21,381 $ 7,248 $ 6,261
December 31, 1999 1998 ---- ---- Shareholders' equity: Property/casualty insurance subsidiaries...................... $2,498,609 $2,650,503 Life/health insurance subsidiary... $ 353,165 $ 369,325
14. TRANSACTIONS WITH AFFILIATED PARTIES The Company paid certain officers and directors, or insurance agencies of which they are shareholders, commissions of approximately $12,989,000, $11,654,000 and $11,780,000 on premium volume of approximately $82,707,000, $82,839,000 and $78,727,000 for 1999, 1998 and 1997, respectively. 15. STOCK OPTIONS The Company has primarily qualified stock option plans under which options are granted to employees of the Company at prices which are not less than market price at the date of grant and which are exercisable over ten-year periods. The Company applies APB Opinion 25 and related Interpretations in accounting for these plans. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (000's omitted except per share data):
1999 1998 1997 --------- --------- --------- Net income As reported $ 254,722 $ 241,567 $ 299,375 Pro forma 246,007 235,420 296,078 Net income per common share As reported $ 1.55 $ 1.45 $ 1.81 Pro forma 1.49 1.41 1.79 Net income per common share As reported $ 1.52 $ 1.41 $ 1.77 (diluted) Pro forma 1.47 1.38 1.75
29 Cincinnati Financial Corporation and Subsidiaries - -------------------------------------------------------------------------------- In determining the pro forma amounts above, the fair value of each option was estimated on the date of grant using the Binomial option-pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield of 2.36%, 1.79% and 1.22%; expected volatility of 22.89%, 21.79% and 19.67%; risk-free interest rates of 6.81%, 5.02% and 5.89%; and expected lives of ten years for all years. Compensation expense in the pro forma disclosures is not indicative of future amounts as options vest over several years and additional grants are generally made each year. A summary of options information for the years ended December 31, 1999, 1998 and 1997 follows (000's omitted except per share data):
1999 1998 1997 ---------------------------- --------------------------- --------------------------- SHARES WEIGHTED-AVERAGE SHARES Weighted-Average Shares Weighted-Average EXERCISE PRICE Exercise Price Exercise Price ---------- ---------------- --------- ---------------- --------- ---------------- Outstanding at beginning of year .. 4,940,591 $ 25.11 3,932,271 $ 17.88 3,774,492 $ 15.98 Granted ........................... 1,011,800 35.46 1,664,200 38.00 655,437 20.97 Exercised ......................... (414,703) 16.55 (615,884) 15.27 (465,429) 11.31 Forfeited/revoked ................. (77,548) 32.89 (39,996) 25.48 (32,229) 17.96 --------- --------- --------- Outstanding at end of year ........ 5,460,140 27.57 4,940,591 25.11 3,932,271 17.88 ========= ========= ========= Options exercisable at end of year 3,224,461 2,243,982 2,108,790 Weighted-average fair value of options granted during the year $ 14.40 $ 13.39 $ 7.66
Options outstanding and exercisable at December 31, 1999 consisted of the following:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------------------------- -------------------------------- RANGE OF WEIGHTED-AVERAGE EXERCISE REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE - ---------------- ---------- ----------------- ----------------- ---------- ----------------- $ 7.46 to 15.79 681,606 2.96 yrs $13.13 681,606 $13.13 15.95 to 20.47 776,500 5.30 yrs 18.57 776,500 18.57 20.50 to 22.46 1,085,661 6.51 yrs 20.96 998,961 20.83 23.00 to 33.75 984,423 8.55 yrs 31.08 217,329 25.69 33.88 to 34.50 916,250 8.76 yrs 33.93 282,040 33.88 36.63 to 42.00 414,200 9.25 yrs 39.43 47,104 38.07 42.87 to 45.37 601,500 8.07 yrs 43.87 220,921 43.76 --------- --------- 5,460,140 7.02 yrs 27.57 3,224,461 21.95 ========= =========
30 16. SEGMENT INFORMATION The Company is organized and operates principally in two industries and has four reportable segments - commercial lines property and casualty insurance, personal lines property and casualty insurance, life insurance and investment operations. The accounting policies of the segments are the same as those described in the basis of presentation. Revenue is primarily from unaffiliated customers. Identifiable assets by segment are those assets, including investment securities, used in the Company's operations in each industry. Corporate and other identifiable assets are principally cash and marketable securities. Segment information, for which results are regularly reviewed by Company management in making decisions about resources to be allocated to the segments and assess their performance, is summarized as follows (000's omitted):
Years Ended December 31, --------------------------- REVENUES 1999 1998 1997 ------------------------------------------------------- Commercial lines insurance........... $ 1,088,039 $ 1,019,463 $ 983,605 Personal lines insurance............. 569,238 523,176 469,921 Life insurance ...................... 74,673 70,096 62,852 Investment operations................ 386,209 433,302 417,827 Corporate and other ................. 10,064 8,252 8,179 ------------ ------------ ---------- Total revenues .................. $ 2,128,223 $ 2,054,289 $1,942,384 ============ ============ ========== INCOME BEFORE INCOME TAXES Property and casualty insurance.... $ 3,241 $ (59,438) $ 28,955 Life insurance..................... (903) (1,776) 2,763 Investment operations ............. 355,643 403,925 390,850 Corporate and other................ (36,408) (35,604) (28,009) ------------ ------------ ---------- Total income before income taxes......................... $ 321,573 $ 307,107 $ 394,559 ============ ============ ========== IDENTIFIABLE ASSETS Property and casualty insurance... $ 5,372,717 $ 5,483,137 $4,953,259 Life insurance.................... 1,441,657 1,203,908 1,094,445 Corporate and other .............. 4,565,840 4,399,458 3,445,721 ------------ ------------ ---------- Total identifiable assets...... $ 11,380,214 $ 11,086,503 $9,493,425 ============ ============ ==========
INDEPENDENT AUDITORS' REPORT [DELOITTE & TOUCHE LLP LOGO] To the Shareholders and Board of Directors of Cincinnati Financial Corporation: We have audited the consolidated balance sheets of Cincinnati Financial Corporation and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Cincinnati Financial Corporation and subsidiaries at December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Cincinnati, Ohio February 3, 2000 "Selected Quarterly Financial Data" from page 15 (incorporated into Item 8). SELECTED QUARTERLY FINANCIAL DATA (Unaudited) (000's omitted except per share data) Financial data for each quarter in the two years ended December 31,
1999 ----------------------------------------------------------------------- Quarter 1ST 2ND 3RD 4TH FULL YEAR --------- --------- --------- --------- ---------- Revenues.......................... $ 536,659 $ 541,321 $ 538,301 $ 511,942 $2,128,223 Income before income taxes ....... 82,061 116,341 69,042 54,129 321,573 Net income........................ 64,477 86,254 57,046 46,945 254,722 Net income per common share....... .39 .53 .35 .29 1.55 Net income per common share (diluted)....................... .38 .52 .34 .28 1.52 1998 ----------------------------------------------------------------------- Quarter 1st 2nd 3rd 4th Full Year --------- --------- --------- --------- ---------- Revenues........................... $ 512,554 $ 518,578 $ 514,766 $ 508,392 $2,054,289 Income before income taxes......... 116,333 72,913 64,019 53,841 307,107 Net income......................... 84,178 58,850 52,915 45,623 241,567 Net income per common share........ .51 .35 .31 .27 1.45 Net income per common share (diluted)........................ .49 .35 .30 .27 1.41
EX-23 5 EXHIBIT 23 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 333-85953 (on Form S-8), No. 2-71575 (on Form S-8), No. 33-34127 (on Form S-8), No. 333-24815 (on Form S-8), No. 333-24817 (on Form S-8), No. 333-49981 (on Form S-8), No. 333-51677 (on Form S-3), and No. 33-48970 (on Form S-4) of Cincinnati Financial Corporation of our reports dated February 3, 2000, appearing in and incorporated by reference in the Annual Report on Form 10-K of Cincinnati Financial Corporation for the year ended December 31, 1999. DELOITTE & TOUCHE LLP /S/ Deloitte & Touche LLP Cincinnati, Ohio March 20, 2000 25 EX-27 6 EXHIBIT 27
7 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 2,617,412 0 0 7,510,918 15,370 4,270 10,194,239 339,554 1,717 154,385 11,380,214 2,957,781 480,453 51,773 16,552 574,373 0 0 343,725 5,077,559 11,380,214 1,731,950 386,773 (564) 10,064 1,254,363 364,665 187,622 321,573 66,851 254,722 0 0 0 254,722 1.55 1.52 1,840,323 1,303,651 (116,061) 574,038 522,108 1,931,767 (116,061) Equals the sum of Fixed Maturities, Equity Securities and other Invested Assets Equals the sum of Life Policy Reserves and Losses and Loss Expenses less the Life Company liability for Supplementary Contracts without Life Contingencies of $5,156 which is classified as Other Policyholder Funds Equals the sum of Notes Payable, the 5.5% Convertible Senior Debentures and the 6.9% Senior Debentures Equals the Total Shareholders' Equity Equals the Sum of Commissions, Other Operating Expenses, Taxes Licenses and Fees, Increase in Deferred Acquisition Costs, Interest Expense and Other Expenses Equals the Net Reserve for Unpaid Claims for the Property Casualty Subsidiaries less Loss Checks Payable as of December 31, 1998 Equals the Net Reserves for Unpaid Claims for the Property Casualty Subsidiaries less Loss Checks Payable as of December 31, 1999
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