1
SCHEDULE 14A
(Rule 14A)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14A-6(E)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 240, 14a-12
CINCINNATI FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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March 3, 1997
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of Cincinnati Financial Corporation:
You are hereby notified that the Annual Meeting of Shareholders of Cincinnati
Financial Corporation will be held at 9:30 a.m. on Saturday, April 5, 1997, at
the Cincinnati Art Museum, located in Eden Park, Cincinnati, Ohio, for the
purpose of:
1. Electing four directors for terms of three years; and
2. Transacting such other business as may properly come before the meeting or
any adjournment thereof.
Shareholders of record at the close of business on February 10, 1997, will be
entitled to vote at the meeting and at any adjournment thereof.
Whether or not you plan to attend the meeting, you can ensure that your shares
will be voted as you want by completing, signing and mailing the enclosed form
of proxy. Your interest and participation in the affairs of the Corporation are
appreciated.
/s/ THEODORE F. ELCHYNSKI
- -------------------------
Theodore F. Elchynski
Secretary
3
CINCINNATI FINANCIAL CORPORATION
P.O. Box 145496, Cincinnati, Ohio 45250-5496
PROXY STATEMENT
Annual Meeting of Shareholders
to be held April 5, 1997
March 3, 1997
The enclosed proxy is solicited by the Board of Directors of Cincinnati
Financial Corporation (the "Corporation") for use at the Annual Meeting of
Shareholders to be held at 9:30 a.m., Saturday, April 5, 1997, at the Cincinnati
Art Museum, located in Eden Park, Cincinnati, Ohio. The proxy and this statement
are being distributed to shareholders on March 3, 1997. Any shareholder giving a
proxy may revoke it at any time before it is voted by a later proxy received by
the Corporation or by giving notice of revocation to the Corporation in writing
or in open meeting or by voting the shares personally.
The cost of soliciting proxies will be borne by the Corporation. The Corporation
has requested banks, brokerage houses, other custodians, nominees and
fiduciaries to forward copies of the proxy material to beneficial owners of
shares or to request authority for the execution of proxies; and the Corporation
has agreed to reimburse the reasonable out-of-pocket expenses incurred in
connection therewith. In addition to solicitations by mail, regular employees of
the Corporation may, without extra remuneration, solicit proxies personally or
by telephone.
The Annual Report for the fiscal year ended December 31, 1996, is enclosed.
OUTSTANDING SECURITIES
Only the holders of common stock of the Corporation of record at the close of
business on February 10, 1997, are entitled to vote at the meeting. Each share
of common stock entitles the holder thereof to one vote. As of February 1, 1997,
there were 55,561,491 shares outstanding. A majority of such holders present in
person or by proxy is necessary for a quorum. As stated in the notice of
meeting, an election will be held to fill the four vacancies which occur on the
Board of Directors of the Corporation and a simple majority of votes cast is
required to elect directors. An abstention or broker non-vote will not be the
equivalent of a negative vote, although the failure by a broker to return a
proxy card will result in the shares covered by the proxy not being counted
towards a quorum.
Votes cast by proxy will be tabulated prior to the meeting by the holders of the
proxies. Inspectors of election, duly appointed by the presiding officer of the
meeting in accordance with the provisions of Ohio law, will definitively count
and tabulate the votes and determine and announce the results at the meeting.
The Proxy Committee reserves the right not to vote any proxies which are altered
in a manner not intended by the instructions contained in the proxy.
PRINCIPAL SHAREHOLDERS
The following table lists the persons who, to the best of the Corporation's
knowledge, are "beneficial owners" (as defined in Regulations of the SEC) of
more than 5% of the outstanding shares of the Corporation's common stock at
February 1, 1997.
Name and Address Of Shares Bene- Percent of
Beneficial Owner ficially Owned Common Stock
------------------- -------------- ------------
Robert C. Schiff
Central Trust Building
Cincinnati, Ohio 45202 3,125,012 5.61
(1)
4
NOMINEES FOR ELECTION OF DIRECTORS
The Board of Directors of the Corporation is divided into three classes; and
each year, the directors in one class are elected to serve terms of three years.
After many years of loyal service, Robert J. Driehaus has elected to retire and
his term as a director expires at the time of the Annual Meeting. The Board of
Directors has elected to reduce the number of directors on the Board rather than
to fill the resulting vacancy at this time. Accordingly, as of the date of the
Annual Meeting, the number of directors will be reduced to 16 and the term of
office of four of the remaining directors will expire. In order to fill the
resulting vacancies, it is intended that votes will be cast to elect as
directors the following nominees: William F. Bahl, Kenneth C. Lichtendahl,
Jackson H. Randolph and John J. Schiff, Jr. (to serve for terms of three years
or until their respective successors shall be elected). Each of these nominees
is presently serving as a director of the Corporation. The Board of
Directors has no reason to believe that any of the above-mentioned
nominees will refuse or be unable to accept the nomination. In the event,
however, that any of the above nominees should refuse or for any reason be
unable to accept the nomination, it is intended that the persons acting under
the proxies will vote for the election of such person or persons as the Board of
Directors may recommend.
INFORMATION REGARDING NOMINEES, DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information with respect to each nominee for
election to the office of director, each of the current directors whose term
does not expire at this time and each of the executive officers of the
Corporation.
Nominees For Director For Term Ending 2000
- ------------------------------------------
Office, Principal Shares Percent
Occupation During Past Beneficially Of
Five Years & Other Owned As Of Common Director
Name and Age Directorships February 1, 1997 Stock Since
------------ ---------------------- ---------------- ------- --------
William F. Bahl (45) President, Bahl & Gaynor, Inc.
(investment advisors) 74,926 (12)(13) 0.13 1995
Kenneth C. Lichtendahl (48) President, Chief Exec. Officer & Director,
Hudepohl-Schoenling Brewing Co., Inc.;
and Director, Glenway Financial Corp. 3,307 0.01 1988
Jackson H. Randolph (66) Chairman of the Board and Director
(former Chief Executive Officer until
1995), CINergy Corp.; Director, The
Union Light, Heat, Power Co., and PNC
Financial Corp. 11,025 0.02 1986
John J. Schiff, Jr. (53) Chairman of the Board, Cincinnati
Financial Corp.; Chairman of the Board,
Cincinnati Insurance Co., and Director (agent
until December 1996), John J. & Thomas R.
Schiff & Co., Inc. (insurance agency);
Director, Fifth Third Bancorp, Standard
Register Co., and CINergy Corp. (1) 1,994,878 (2)(3)(4)(5)(9) 3.58 1968
Continuing Directors Whose Terms Expire in 1999
- -----------------------------------------------
Richard M. Burridge (67) Chairman of the Board, The Burridge Group,
Inc. (investment advisors); Director,
Lincoln National Income Fund, Advisory
and Convertible Securities Funds,
St. Joseph Light & Power Co., and
Ft. Dearborn Income Fund 9,313 0.02 1987
James G. Miller (59) Senior Vice President, Cincinnati
Financial Corp.; Senior Vice President--
Investments, Cincinnati Ins.
Co., a subsidiary of the Corporation 151,035 0.27 1996
Robert B. Morgan (62) President & Chief Exec. Officer,
Cincinnati Financial Corp.; Pres. &
Chief Exec. Officer, Cincinnati Ins.
Co., a subsidiary of the Corporation;
Director, Fifth Third Bancorp (1) 521,283 (9) 0.94 1978
(2)
5
Continuing Directors Whose Terms Expire in 1999 (Continued)
- -----------------------------------------------------------
Thomas R. Schiff (49) Chairman of the Board & Chief Executive
Officer (President until December 1996),
John J. & Thomas R. Schiff & Co., Inc.
(insurance agency) 1,537,243 (2)(3)(4)(5)(9) 2.76 1975
Frank J. Schultheis (57) President, Director & Agent,
Schultheis Insurance Agency, Inc. 2,497 (9) -- 1995
Larry R. Webb (41) President, Director & Agent, Webb
Insurance Agency, Inc. 35,788 0.06 1979
Continuing Directors Whose Terms Expire in 1998
- -----------------------------------------------
Michael Brown (61) President & Gen'l Mgr., Cincinnati
Bengals, Inc. (professional football
team) 60,116 0.11 1980
John E. Field (63) President, Wallace & Turner, Inc.
(insurance agency, Director, Western
Ohio Financial Corp. 48,970 (10)(11) 0.09 1995
William R. Johnson (48) President & Chief Operating Officer
and Director, H. J. Heinz Co. -- -- 1996
John J. Schiff (80) Chairman of the Exec. Committee,
Cincinnati Financial Corp.; Chairman of
the Exec. Committee, Cincinnati Ins.
Co., a subsidiary of the Corporation (1) 1,704,187 (9) 3.06 1968
Robert C. Schiff (73) Chairman & Chief Exec. Officer, Schiff,
Kreidler-Shell, Inc. (insurance agency) 3,125,012 (6)(7)(8) 5.61 1968
Alan R. Weiler (63) President, Chief Exec. Officer, Archer-
Meek-Weiler Agency, Inc. (insurance
agency); Director, Glimcher Realty Trust 11,237 0.02 1992
All Directors and Executive Officers As A Group
(17 Persons), Including Shares Listed Above 9,135,083 16.40
- --------------------
(1) Also a member of the Executive Committee of the Corporation.
(2) Includes 387,198 shares owned of record by a trust, the trustees of
which are John J. Schiff, Jr., Thomas R. Schiff and Suzanne S. Reid, who
share voting and investment power equally.
(3) Includes 134,867 shares owned of record by a trust, the beneficiaries of
which include John J. Schiff, Jr. and Thomas R. Schiff.
(4) Includes 34,903 shares owned of record by the John J. & Thomas R. Schiff
& Co., Inc. pension plan, the trustees of which are John J. Schiff, Jr.
and Thomas R. Schiff, who share voting and investment power.
(5) Includes 33,468 shares owned by John J. & Thomas R. Schiff & Co., Inc.,
of which John J. Schiff, Jr. and Thomas R. Schiff are principal owners.
(6) Includes 34,467 shares owned of record by the Schiff, Kreidler-Shell,
Inc. pension plan, of which Robert C. Schiff is a trustee.
(7) Includes 84,108 shares owned of record by Schiff, Kreidler-Shell, Inc.,
which is owned by Robert C. Schiff.
(8) Includes 251,387 shares owned of record by a trust, the trustees of
which are Robert C. Schiff and Adele R. Schiff who share voting and
investment power.
(9) Includes shares available within 60 days from exercise of stock options
or conversion of debentures in the amount of 9,697 shares for Mr. Miller;
190,210 shares for Mr.Morgan; 108,755 shares for Mr. J. Schiff, Jr.;
14,564 shares for Mr. T. Schiff; 448 shares for Mr. Schultheis; 2,240
shares for Mr. Weiler; and 20,040 shares for other executive officers.
(10) Includes 1,323 shares owned of record by Wallace & Turner, Inc.,
of which John E. Field is President.
(11) Includes 33,869 shares owned of record by a trust, the trustee of
which is John E. Field, and 12,731 shares owned of record by a trust,
the trustee of which is Alice A. Field, wife of John E. Field.
(12) Includes 26,641 shares owned of record by a trust, the trustee of
which is William F. Bahl.
(13) Includes 415 shares owned of record by Bahl & Gaynor, Inc. of which
William F. Bahl is a principal owner.
(3)
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Theodore F. Elchynski, age 60, Senior Vice President of the Corporation, has
been designated by the Board of Directors as an executive officer of the
Corporation for successive terms of one year since 1995.
Executive officers are elected at the annual meeting of the Board of Directors
for terms of one year.
Each of the executive officers, and each of the nominees and each of the
directors whose term does not expire has served as an officer or director
continuously since first elected to that position. John J. Schiff is the
brother of Robert C. Schiff and the father of John J. Schiff, Jr. and
Thomas R. Schiff.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Corporation met six times and the Executive
Committee of the Board met four times during the previous fiscal year. In
addition, the Board of Directors has standing Audit, Compensation and
Nominating Committees.
The Nominating Committee is composed of John J. Schiff, Jr., Michael Brown and
Jackson H. Randolph, and the members of that committee met three times during
the last year. The Nominating Committee recommends qualified candidates for
election as officers and directors of the Corporation, including the slate of
directors which the Board proposes for election by the shareholders at the
Annual Meeting. Shareholders wishing to suggest candidates for director for
consideration by the Nominating Committee should write to the Secretary of the
Corporation, giving the candidate's name, biographical data and qualifications.
Such information must be received by November 30 of each year to be considered
for the Annual Meeting held in the following year.
The Audit Committee is composed of Richard M. Burridge, Kenneth C. Lichtendahl,
and Jackson H. Randolph and the members of that committee met two times during
the last year. The functions of the committee include but are not limited to
the following: recommendation to the full Board as to engagement or discharge
of independent auditors, reviewing with independent auditors the plan and
results of the audit engagement, reviewing the scope and results of the
Corporation's internal auditing procedures and reviewing the adequacy of the
Corporation's system of internal accounting controls.
The Compensation Committee is composed of Michael Brown, Kenneth C. Lichtendahl
and William F. Bahl and the members of that committee met three times during
the last fiscal year. The function of the committee is to fix compensation for
the members of senior management and the internal auditor of the Corporation
and to administer the Corporation's stock option and performance-based
compensation plans.
All directors attended at least 75% of the Board and committee meetings they
were required to attend.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Directors, officers and 10% shareholders of the Corporation are required to
report their beneficial ownership of the Corporation's stock according to
Section 16 of the Exchange Act of 1934. During the last year, Frank J.
Schultheis failed to report the purchase of 300 shares of stock by his spouse
in December of 1996 and it was discovered that Alan R. Weiler had failed to
report the purchase of the Corporation's debentures convertible into 2,240
shares of stock by Archer-Meek-Weiler Agency, Inc., in May of 1992. Both of
these acquisitions were reported in February, 1997.
(4)
7
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Nonemployee directors of the Corporation were paid a fee of $4,500 per meeting
for attendance at directors' meetings and $1,500 per meeting for attendance at
committee meetings of the Board and the Corporation's subsidiaries, fees for
all meetings in any one day not to exceed $6,000. They were also reimbursed for
actual travel expenses incurred in attending meetings.
Executive Compensation Summary
The following table summarizes the compensation of the Corporation's Chief
Executive Officer and the four most highly compensated executive officers for
each of the Corporation's last three years.
Summary Compensation Table (1)
- ----------------------------------------------------------------------------------------------------------------
Annual Long-Term
Compensation Compensation
----------------------------------------------------------------
Name and Options
Principal Salary Bonus (# Awarded
Position Year ($) ($) Shares)
- ----------------------------------------------------------------------------------------------------------------
Robert B. Morgan 1996 659,947 458,834 25,000
President & Chief 21,000(2)
Executive Officer 1995 576,056 399,105 20,000(2)
1994 549,266 346,984 20,000
- ----------------------------------------------------------------------------------------------------------------
John J. Schiff, Jr. 1996 373,786 199,814 25,000
Chairman, 21,000(2)
Board of Directors 1995 338,954 172,817 20,000(2)
1994 324,425 157,887 20,000
- ----------------------------------------------------------------------------------------------------------------
John J. Schiff 1996 276,048 87,213
Chairman, Executive Committee 1995 276,048 87,255
Board of Directors 1994 266,248 87,108
- ----------------------------------------------------------------------------------------------------------------
Robert J. Driehaus 1996 313,220 77,588
Financial Vice President 1995 284,744 77,630
1994 272,538 70,484
- ----------------------------------------------------------------------------------------------------------------
James G. Miller 1996 148,247 165,038 5,000
Senior Vice President 3,675(2)
1995 133,357 143,630 3,500(2)
1,575
1994 126,765 130,484 -0-
- ----------------------------------------------------------------------------------------------------------------
(1) Pursuant to SEC rules, the column "Other Annual Compensation" was omitted
because, in all cases, the amounts were less than the minimum required to
be reported.
(2) Options granted December 12, 1995, were revoked and replaced with options
granted December 10, 1996, which included additional shares due to the 5%
stock dividend paid in April, 1996.
(5)
8
STOCK OPTION PLANS
The following table contains information concerning grants of options to
purchase the Corporation's common stock which were made to each of the named
executive officers in 1996.
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Option Grants in Last Fiscal Year
- ------------------------------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
% of Total Stock Price
Options Appreciation for
Options Granted to Exercise Option Term (4)
Granted Employees Price Expiration ---------------------------------
Name (# Shares) (1) in 1996 $/Sh. (3) Date 5% ($) 10% ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Robert B. Morgan 25,000 4.92% 61.50 04/06/06 966,750 2,450,500
21,000(2) 4.14% 61.43 12/10/06 811,230 2,055,900
- ------------------------------------------------------------------------------------------------------------------------------------
John J. Schiff, Jr. 25,000 4.92% 61.50 04/06/06 966,750 2,450,500
21,000(2) 4.14% 61.43 12/10/06 811,230 2,055,900
- ------------------------------------------------------------------------------------------------------------------------------------
John J. Schiff -0- 0% -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Robert J. Driehaus -0- 0% -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
James G. Miller 5,000 .98% 61.50 04/06/06 193,350 490,100
3,675(2) .72% 61.43 12/10/06 141,965 359,783
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Options were granted April 6, 1996, and December 10, 1996. One third of
each option becomes exercisable on the first anniversary of grant in 1997,
an additional one third on the second anniversary in 1998, and the
remainder on the third anniversary in 1999, so long as employment continues
with the Corporation or its subsidiaries. There are no stock appreciation
rights, performance units or other instruments granted in tandem with these
options, nor are there any re-load provisions, tax reimbursement features
or performance-based conditions to exercisability.
(2) Options granted December 10, 1996, replace options granted December 12,
1995 which were revoked.
(3) The option exercise price is 100% of the NASDAQ National Market's closing
price on the day prior to date of grant, except for the replacement
options granted on December 10, 1996. Those options have an exercise
price of $61.43 per share, which is higher than the closing price
on the day prior to the date of grant.
(4) The assumed annual rates of stock price appreciation are prescribed in
the proxy rules of the SEC and should not be construed as a forecast of
future appreciation in the market price for the Corporation's common stock.
The following table contains information for each of the named executive
officers concerning the exercise of options during 1996 and the value of
unexercised options at year-end for the Corporation's common stock.
- -------------------------------------------------------------------------------------------------------------------------------
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
- -------------------------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares 12/31/96 12/31/96
Acquired on Value Exercisable (E)/ Exercisable (E)/
Exercise Realized Unexercisable (U) Unexercisable (U)
Name (# Shares) ($) (# Shares) ($)
- -------------------------------------------------------------------------------------------------------------------------------
Robert B. Morgan -0- -0- E 181,876 E 6,765,246
U 53,350 U 293,726
- -------------------------------------------------------------------------------------------------------------------------------
John J. Schiff, Jr. 15,000 335,400 E 66,204 E 1,421,361
U 53,360 U 293,726
- -------------------------------------------------------------------------------------------------------------------------------
John J. Schiff 19,265 462,894 E -0- E -0-
U -0- U -0-
- -------------------------------------------------------------------------------------------------------------------------------
Robert J. Driehaus -0- -0- E 5,514 E 120,127
U -0- U -0-
- -------------------------------------------------------------------------------------------------------------------------------
James G. Miller -0- -0- E 5,239 E 106,770
U 9,778 U 48,821
- -------------------------------------------------------------------------------------------------------------------------------
(6)
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REPORT ON REPRICING OF OPTIONS
In December of 1995, the Compensation Committee granted options to three of the
Corporation's executive officers under its existing Stock Option Plan No. IV.
As explained in the Report on Executive Compensation, it is the policy of the
Compensation Committee to maintain the deductible status of all compensation
paid to its executive officers. Because of an amendment to Stock Option Plan
No. IV which occurred in November of 1995, the deductibility of any income
which might have been recognized due to the exercise of those options was
subject to challenge by the Internal Revenue Service. In order to ensure the
deductibility by the Corporation of that income, the Compensation Committee
canceled the December, 1995 options and replaced them with options granted
under the Corporation's Stock Option Plan No. V. The number of shares and the
exercise price in the new options were the same as those contained in the 1995
options even though the current market price for the shares was lower. The
following table sets forth information regarding the options which were
repriced.
Ten-Year Option Repricings
--------------------------
Length of
Number of Market Price Exercise Original
Securities of Stock at Price at Option Term
Underlying Time of Time of Remaining at
Options Repricing or Repricing or New Date of
Repriced or Amendment Amendment Exercise Repricing or
Name Date Amended ($) ($) Price ($) Amendment
---- ---- ----------- ------------ ------------ --------- ------------
Robert B. Morgan,
President & Chief
Executive Officer 12/10/96 21,000 61.00 61.43 61.43 9 years
John J. Schiff, Jr.
Chairman,
Board of Directors 12/10/96 21,000 61.00 61.43 61.43 9 years
James G. Miller
Senior Vice
President 12/10/96 3,675 61.00 61.43 61.43 9 years
Submitted by the Compensation Committee
Michael Brown, Kenneth C. Lichtendahl and William F. Bahl
PENSION PLAN
The following table sets forth the estimated annual benefits payable from the
Corporation's qualified noncontributory pension plan under various assumptions
as to the employee's compensation level and years of service.
Qualified Pension Plan Table
----------------------------
Years of Service on December 31, 1996
-------------------------------------
Average
Annual Earnings 15 20 25 30 35 40
--------------- -- -- -- -- -- --
$200,000 $20,250 $29,250 $38,250 $47,250 $56,250 $65,250
150,000 20,250 29,250 38,250 47,250 56,250 65,250
100,000 13,500 19,500 25,500 31,500 37,500 43,500
75,000 10,125 14,625 19,125 23,625 28,125 32,625
50,000 6,750 9,750 12,750 15,750 18,750 21,750
(7)
10
All the persons listed in the Summary Compensation Table, except John J. Schiff
(whose accrued retirement benefit has already been paid) are participants in
the plan. For purposes of computing retirement benefits under the Corporation's
pension plan for the remaining individuals listed in the Summary Compensation
Table, earnings for any given year as defined by the plan is the base rate of
salary in effect on the last day of the plan year, subject to maximum
recognizable compensation under Sec. 401(a)(17) of the Internal Revenue Code.
This differs from Salary as shown in the Summary Compensation Table. The annual
earnings for 1996 qualifying under the plan and the years of service as of
December 31, 1996, under the plan for those individuals are as follows: Robert
J. Driehaus, $150,000 and 40 years; James G. Miller, $150,000 and 30 years;
Robert B. Morgan, $150,000 and 31 years; and John J. Schiff, Jr., $150,000 and
10 years.
The normal retirement pension is computed as a single life annuity and is the
sum of .009 per year of the employee's highest five-year average earnings for
the first 15 years of service plus .012 per year of the employee's highest
five-year average earnings for years 16 through 40. Vesting is 100% after five
years of service and there are no deductions for Social Security or other
offset amounts.
SUPPLEMENTAL RETIREMENT PLAN
Effective January 1, 1989, the Corporation adopted a nonqualified,
noncontributory Supplemental Retirement Plan for the benefit of thirty-seven
higher paid employees whose projected retirement pension was reduced as a
result of the amendment to the Corporation's qualified pension plan. The
Supplemental Retirement Plan was designed to replace the pension benefit lost
by those employees.
The following table illustrates the retirement income payable under the
Supplemental Retirement Plan computed as a single life annuity on retirement at
age 65 under various assumptions as to the employee's highest five-year average
annual earnings and years of service.
Supplemental Retirement Plan
----------------------------
Years of Service on December 31, 1996
-------------------------------------
Average
Annual Earnings 15 25 35 45
--------------- -- -- -- --
$650,000 $98,600 $161,550 $224,500 $296,450
550,000 79,850 130,300 180,750 240,200
450,000 61,100 99,050 137,000 183,950
350,000 41,787 67,800 93,250 127,700
250,000 23,600 36,550 49,500 71,450
150,000 -0- 5,300 5,750 15,200
100,000 -0- 2,425 2,625 8,825
This Plan is integrated with Social Security and a normal retirement pension is
the sum of .0075 of the employee's highest five-year average annual earnings
below the integration level plus .0125 of the employee's highest five-year
average annual earnings in excess of the integration level, multiplied by the
number of years of service. The integration level is equal to the average of
the integration levels for the period of the employee's employment, using wages
paid, with a maximum of $6,000 for years beginning prior to 1976 and wages
subject to Social Security tax for all years after 1975. The retirement benefit
paid pursuant to the Supplemental Plan is the difference between the amount
computed by the above formula and the amount payable from the Qualified Plan.
All of the persons listed in the Summary Compensation Table, except John J.
Schiff, are participants in the plan. For purposes of determining benefits
under the Supplemental Retirement Plan, annual earnings is defined as the base
rate of salary in effect on the last day of the plan year. This differs from
salary under the Summary Compensation Table. The annual earnings for 1996 as
defined in the plan and the years of service as of December 31, 1996, for those
individuals are as follows: Robert J. Driehaus, $341,912 and 43 years; James G.
Miller, $175,201 and 30 years; Robert B. Morgan, $720,400 and 31 years; and
John J. Schiff, Jr., $407,003 and 10 years.
(8)
11
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Corporation's Compensation Committee for 1996 were Michael
Brown, Kenneth C. Lichtendahl and William F. Bahl. Lawrence H. Rogers, II, a
former director, served as an advisor to the Committee.
During 1996, Michael Brown was the President and General Manager of Cincinnati
Bengals, Inc., and John J. Schiff, Jr., Chairman of the Corporation's Board of
Directors, was a director of Cincinnati Bengals, Inc. Mr. Schiff also served on
the Compensation Committee of the Board of Directors of CINergy Corp., and
Jackson H. Randolph, Chairman and Chief Executive Officer of CINergy Corp.
served on the Corporation's Board of Directors.
John J. Schiff, Jr. was also Chairman of the Board, a director and one of the
principal owners of John J. & Thomas R. Schiff & Co., Inc., an insurance agency
which represents a number of insurance companies, including the Corporation's
insurance affiliates. Thomas R. Schiff, also a director of the Corporation, was
the President and one of the principal owners of John J. & Thomas R. Schiff &
Co., Inc. During the year ended December 31, 1996, the Corporation's insurance
affiliates paid John J. & Thomas R. Schiff & Co., Inc. commissions of
$2,563,779. Those commissions were paid at the same commission rates pursuant
to the same agent's contract with the Corporation's insurance affiliates as
other agents of those companies. John J. Schiff, Jr. and Thomas R. Schiff are
brothers and their father is John J. Schiff.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Corporation's Compensation Committee is charged with the duty of
determining the compensation of the Corporation's internal auditor and members
of senior management. It also administers and grants options under the
Corporation's stock option plans and administers the Corporation's Incentive
Compensation Plan, including options and performance bonuses to senior
management.
It is the opinion of the Committee that senior management of the Corporation
should receive compensation which will accomplish the following:
o Attract and retain quality personnel.
o Reinforce the attainment of the Corporation's performance objectives.
o Align the interests of senior management with those of the Corporation's
shareholders.
o Encourage the members of senior management to acquire and retain the
Corporation's stock.
o Retain its status as a deductible expense for tax purposes.
A portion of total compensation is paid in the form of a fixed annual salary in
an amount which the Committee feels sufficient to retain top quality
executives. In determining the levels of compensation necessary to be
competitive, the Committee reviews compensation paid by other multiline
insurance companies which constitute the Corporation's most direct competitors
for executive talent. This group is subject to modification if the companies
experience significant changes in size or product lines resulting from mergers,
acquisition or other factors. The nine insurance companies which currently
constitute the comparison group comprise part (but not all) of the companies
included in the Standard & Poor's Multiline Insurance Index which is referred
to in the performance graph below. Senior management salaries are reviewed on
an annual basis. In determining salary levels, the Committee considers changes
in general economic conditions, including inflation, and changes in
compensation paid by the Corporation's competitors. The Committee also seeks
input from the Corporation's chief executive officer in setting salaries for
senior management other than the CEO.
A second component of compensation is paid in the form of a bonus, determined
in light of the Corporation's performance during the year. Performance is
measured not only by profit, which is directly affected by the impact of
weather on the profits of the Corporation's property and casualty insurance
subsidiaries, but by a review of such factors as stock price, premium volume,
total expenses, combined ratios of the insurance subsidiaries and ratings
issued by national rating agencies, including A. M. Best Company. Bonuses are
established at the end of each year but do not reflect the application of any
precise formula to the performance indicators listed. Because of the impact
that uncontrollable factors such as weather have on the financial indicators
reviewed, the committee does not feel that the application of a mechanical
system of determining bonuses is appropriate; therefore, the setting of bonuses
is a subjective process, not totally dependent on the objective criteria
listed.
The third component of compensation is awarded through the grant of stock
options. The Compensation Committee considers the value attributable to the
grant of options to be an integral part of total compensation. In addition,
options are the primary mechanism for encouraging the ownership of the
Corporation's shares, aligning the interests of senior management with those of
shareholders and for providing long-term rewards to employees for overall
corporate performance. In granting options to senior management, it is the
Committee's intent not only to reward senior management for services to the
Corporation but to provide incentive for individual option holders to remain in
the employ of the Corporation. Members of senior management are reviewed for
stock option grants each year. In determining the appropriate value of options
to be granted to senior management, the Committee reviews grants by the
Corporation's competitors with the objective of providing the opportunity for
competitive long-term compensation.
(9)
12
The Internal Revenue Service has limited the deductibility of compensation paid
to the five most highly compensated members of senior management to one million
dollars each, unless that compensation is paid pursuant to a performance-based
compensation plan meeting IRS requirements. Income resulting from the exercise
of options under the Corporation's Stock Option Plan No. V qualifies as
performance-based compensation. A bonus plan was adopted by the Corporation in
1996 pursuant to which participants will be eligible to receive deductible
bonuses if the Corporation meets certain performance goals. By granting a
portion of an affected individual's bonus under that plan, the committee
believes that all compensation paid to senior management should remain
deductible by the Corporation.
The 1996 salaries contained in the Summary Compensation Table were established
in October of 1995. Available information at that time regarding compensation
paid by the Corporation's competitors was for the calendar year 1994. For that
year, the salary and bonus of Mr. Morgan, President and Chief Executive
Officer, was approximately 25% below the mean for CEO salaries and bonuses of
the Corporation's competitors. Mr. Morgan's salary was increased by 15% for the
year 1996 which the Committee felt would increase his base salary to
approximately 85% of the mean for base CEO salaries paid by the Corporation's
competitors.
In determining the year-end bonus for senior management, including Mr. Morgan,
the Committee reviewed an analysis of the total salary and bonus payable to
senior management from 1991 through 1995 which revealed that percentage
increases in salary and bonus lagged far behind percentage increases in gross
revenues and net income of the Corporation. The Committee also reviewed
available information regarding corporate performance for the first three
quarters of 1996. At that time, profit from operations was projected to be
slightly less than in 1995 (down 3.4%) due to the effects of several
catastrophic storms. The efforts of management and the leadership of Mr. Morgan
resulted in the continued growth in gross premium volume for the first nine
months of 9%. Total expenses other than claims were steady, however, resulting
in an overall increase in employee efficiency. The combined loss and expense
ratio of the property and casualty insurance subsidiaries for the first three
quarters was 103.2, far better than the industry average, and the ratings from
A.M. Best Company for all insurance subsidiaries were renewed at their then
current levels. The market price of the Corporation's stock had fallen 8%
during the first three quarters. In light of all of these indicators,
Mr. Morgan's cash bonus for 1996 was increased by 15% over that given in 1995.
On April 6, 1996, Mr. Morgan received options for 25,000 shares of the
Corporation's stock. The value of the grant, employing SEC evaluation
procedures, was approximately 53% of the mean value of grants made by the
Corporation's competitors to their chief executive officers during 1995. In
addition, in December of 1996, certain options held by members of senior
management, including Mr. Morgan, were canceled and re-granted under the
Corporation's Stock Option Plan No. V as explained in the Report on Repricing
of Options on Page 7.
Submitted by the Compensation Committee
Michael Brown, Kenneth C. Lichtendahl and William F. Bahl
(10)
13
FINANCIAL PERFORMANCE
The graph below summarizes the cumulative total shareholder return on the
Corporation's common stock compared to the Standard & Poor's 500 Index and the
Standard & Poor's Multiline Insurance Index.
- ----------------------------------------------------------------------------------------------------------------
Total Return Analysis
CFC vs. Market Indices
December 31 Totals
1991 1992 1993 1994 1995 1996
CFC Index 100 174 155 153 208 223
S&P Index 100 104 112 110 148 178
S&P ML Index 100 112 123 127 184 220
OTHER TRANSACTIONS
John E. Field is a director of the Corporation and a principal owner and
President of Wallace & Turner, Inc., an insurance agency which represents a
number of insurance companies, including the Corporation's insurance
affiliates. During the year ending December 31, 1996, the Corporation's
insurance affiliates paid Wallace & Turner, Inc., commissions of $989,047.
Robert C. Schiff is a director of the Corporation, The Cincinnati Insurance
Company, The Cincinnati Life Insurance Company, The Cincinnati Indemnity
Company and The Cincinnati Casualty Company. Mr. Schiff is President and
principal owner of Schiff, Kreidler-Shell, Inc., an insurance agency which
represents a number of insurance companies, including the Corporation's
insurance affiliates. During the year ending December 31, 1996, the
Corporation's insurance affiliates paid Schiff, Kreidler-Shell, Inc.,
commissions of $2,751,008.
John J. Schiff, Jr. is Chairman of the Board and a director of the Corporation,
The Cincinnati Insurance Company and The Cincinnati Indemnity Company; and a
director of The Cincinnati Casualty Company, The Cincinnati Life Insurance
Company and CFC Investment Company. Thomas R. Schiff is a director of the
Corporation, The Cincinnati Insurance Company, The Cincinnati Casualty Company,
The Cincinnati Indemnity Company and The Cincinnati Life Insurance Company.
John J. Schiff, Jr. and Thomas R. Schiff were Chairman of the Board and
President, respectively, and principal owners of John J. & Thomas R. Schiff &
Co., Inc., an insurance agency which represents a number of insurance
companies, including the Corporation's insurance affiliates. During the year
ended December 31, 1996, the Corporation's insurance affiliates paid John J. &
Thomas R. Schiff & Co., Inc., commissions of $2,563,779.
Larry R. Webb is a director of the Corporation, The Cincinnati Insurance
Company and The Cincinnati Indemnity Company; and President and a principal
owner of Webb Insurance Agency, Inc., an insurance agency which represents a
number of insurance companies including the Corporation's insurance affiliates.
During the year ended December 31, 1996, the Corporation's insurance affiliates
paid Webb Insurance Agency, Inc., commissions of $645,002.
(11)
14
Alan R. Weiler is a director of the Corporation, The Cincinnati Insurance
Company and The Cincinnati Indemnity Company; and President and a principal
owner of Archer-Meek-Weiler Agency, Inc., an insurance agency which represents
a number of insurance companies, including the Corporation's insurance
affiliates. During the year ended December 31, 1996, the Corporation's
insurance affiliates paid Archer-Meek-Weiler Agency, Inc., commissions of
$1,235,464.
Frank J. Schultheis is a director of the Corporation, The Cincinnati Insurance
Company and The Cincinnati Indemnity Company, and a principal owner and
President of Schultheis Insurance Agency, Inc. and a principal owner and
Secretary of Hoosierland Insurance Agency, Inc. and Salem Insurance Agency,
Inc., all of which are insurance agencies which represent a number of insurance
companies including the Corporation's insurance affiliates. During the year
ended December 31, 1996, the Corporation's insurance affiliates paid those
agencies $1,900,288, $216,530 and $626,396, respectively.
In addition, on January 25, 1995, Salem Insurance Agency, Inc. purchased the
assets of an insurance agency owned by CFC Investment Company, one of the
Corporation's affiliated companies, for consideration totalling $2,290,730. On
December 20, 1995, a partnership in which Mr. Schultheis is a 25 percent
partner purchased the real estate occupied by the agency for the amount of
$300,000. The selling price for the agency assets was determined by management
of the Corporation, based upon an appraisal of the asset by a professional
appraiser. The price for the real estate was determined through an appraisal
obtained from an independent source. As part of the payment of the purchase
price for the assets of the insurance agency, Salem Insurance Agency, Inc.
executed two Promissory Notes totalling $1,850,000 and which bear interest at
the prime rate of interest. By December 31, 1996, the principal balance of
those Notes had been reduced to $1,519,239.
The foregoing agencies are paid at the same commission rates and have the same
agent's contract with the Corporation's insurance affiliates as other agents of
those companies in similar geographic areas. Each of the aforementioned
agencies has employees and solicitors who are not directors or executive
officers of the Corporation's insurance affiliates.
INDEPENDENT PUBLIC ACCOUNTANTS
As has been the Corporation's practice, independent auditors for the current
year will not be selected by the Board of Directors prior to the Annual Meeting
of the Shareholders.
Representatives from Deloitte & Touche LLP which served as the Corporation's
independent auditors for the last calendar year, will be present at the meeting
and will be afforded the opportunity to make any statements they wish and to
answer appropriate questions.
SHAREHOLDER PROPOSALS
The Corporation has not received any shareholder proposals which are required
to be presented at the 1997 Annual Meeting of Shareholders. Any shareholder who
wishes a proposal to be considered for presentation at the 1998 Annual Meeting
of Shareholders must submit the proposal to Cincinnati Financial Corporation,
P.O. Box 145496, Cincinnati, Ohio, 45250-5496, on or before November 1, 1997.
OTHER BUSINESS
The management does not know of any other matter or business which may be
brought before the meeting; but if any other matter or business comes before
the meeting, it is intended that a vote will be cast pursuant to the
accompanying proxy in accordance with the judgment of the person or persons
voting the same.
/s/ THEODORE F. ELCHYNSKI
- -------------------------
Theodore F. Elchynski
Secretary
March 3, 1997
(12)
15
Account #
Number of Shares*
PROXY
CINCINNATI FINANCIAL CORPORATION
P.O. BOX 145496, CINCINNATI, OHIO, 45250-5496
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints John J. Schiff, Theodore F. Blchynski, and
James G. Miller, or any one of them, with power of substitution, as Proxies,
and hereby authorizes them to represent and to vote, as designated below, all
the shares of Cincinnati Financial Corporation held of record on February 10,
1997, at the Annual Meeting of Shareholders to be held on April 5, 1997, or any
adjournment thereof.
1. ELECTION OF DIRECTORS [ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY
below (except as specified to vote for all nominees
to the contrary below) listed below
William F. Bahl, Kenneth C. Lichtendahl, Jackson H. Randolph, John J.
Schiff, Jr.
Instructions: To withhold authority to vote for any individual nominee, write
that nominee's name on the space provided below.
- ------------------------------------------------------------------------------
2. In their discretion, the Proxies are authorized to vote upon such other
business as may come before the meeting.
This proxy when properly executed will be voted in the manner directed herein
by the undersigned shareholder. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED FOR ALL NOMINEES LISTED.
Please sign exactly as name appears. When shares are held by joint tenants,
both should sign. When signing as attorney, executor, administrator, trustee,
or guardian, please give full title as such. If a corporation, please sign in
full corporate name by President or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
Please mark, sign, date, and return the proxy promptly using the enclosed
envelope.
- -------------------- ------------------------- ----------------------- 1997
Signature Signature if held jointly Dated
* Number of shares includes those held in your name directly and those in your
dividend reinvestment account, if applicable.
