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, 1997 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 1/2% Convertible Senior Debentures Due 2002 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 $6,342,769,953 as of March 2, 1998.
As of March 2, 1998, there were 55,562,285 shares of common stock
outstanding.
Documents Incorporated by Reference
-----------------------------------
Annual Report to Shareholders for year ended December 31, 1997 (in part) into
Parts I, II and IV and Registrant's Proxy Statement dated March 2, 1998 into
Parts I, III and IV.
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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")
and 100% of CFC Investment Company ("CFC-I"). The principal purpose of CFC is to
be a holding company for CIC and CFC-I and 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 engaged in the sale of life insurance and
accident and health insurance in 46 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 engaged in the
fire and casualty insurance business on a direct billing basis in 31
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 23 states. The business of CIC and CID is
conducted separately, and there are no plans for combining the business of
said companies.
CFC-I, organized 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.
Industry segment information for operating profits and identifiable
assets is included on page 30 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 4 through 9 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 (973 in 27 states at December 31, 1997) of
selectively appointed independent agents, most of whom own stock in the Company.
Gross written premiums by property/casualty lines increased 6% to $1.567 billion
in 1997. The Company's mix of property/casualty business did not change
significantly in 1997. Life and accident and health insurance (which constituted
only 4% of the Company's premium income for 1997) is also sold primarily through
property/casualty agencies and the growth rate of 11.5% was the result of
increased sales of both traditional and interest-sensitive products.
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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 losses and LAE.
The first table, providing a reconciliation of beginning and ending liability
balances for 1997, 1996, and 1995, is on page 27 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 1997 is presented on the next page.
The reconciliation referred to in the preceding paragraph shows a
1997 recognition of $119,654,000 redundancy in the December 31, 1996 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 written post-date
the coverages which 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,
in 1987 and 1989, the Company raised its retention limits from $500,000 to
$750,000 to $1,000,000, respectively, for casualty and property lines of
insurance. In 1995, the casualty and property lines retention limits were
further raised to $2,000,000.
There are no differences between the liability 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").
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
(Millions of Dollars)
Year Ended December 31 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ---------------------- ---- ---- ---- ---- ---- ---- ---- ----- ---- ---- ----
Net Liability for Unpaid Losses
and Loss Adjustment Expenses $ 534 $ 631 $ 742 $ 833 $ 986 $1,138 $1,293 $1,432 $1,581 $1,702 $1,777
Net Liability Reestimated as of:
One Year Later 548 671 751 869 956 1,098 1,200 1,306 1,429 1,582
Two Years Later 584 634 747 816 928 993 1,116 1,220 1,380
Three Years Later 544 622 696 795 823 949 1,067 1,214
Four Years Later 535 596 676 723 814 937 1,067
Five Years Later 523 580 635 720 824 943
Six Years Later 508 551 637 732 827
Seven Years Later 496 558 653 734
Eight Years Later 505 571 655
Nine Years Later 519 571
Ten Years Later 518
Net Cumulative Redundancy $ 16 $ 60 $ 87 $ 99 $ 159 $ 195 $ 226 $ 218 $ 201 $ 120
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net Cumulative Amount of
Liability Paid Through:
One Year Later $ 178 $ 204 $ 238 $ 232 $ 280 $ 310 $ 343 $ 368 $ 395 $ 453
Two Years Later 292 321 356 397 440 498 538 578 630
Three Years Later 362 390 446 493 546 612 663 709
Four Years Later 398 441 497 552 611 681 734
Five Years Later 427 467 528 588 647 718
Six Years Later 441 485 550 610 666
Seven Years Later 454 496 563 621
Eight Years Later 461 502 570
Nine Years Later 465 507
Ten Years Later 469
$1,200 $1,365 $1,510 $1,690 $1,824 $1,889
Gross Liability--End of Year
Reinsurance Recoverable 62 72 78 109 122 112
------ ------ ------ ------ ------ ------
Net Liability--End of Year $1,138 $1,293 $1,432 $1,581 $1,702 $1,777
====== ====== ====== ====== ====== ======
Gross Reestimated Liability--Latest
$1,035 $1,162 $1,319 $1,498 $1,699
Reestimated Recoverable--Latest 92 95 105 118 117
------ ------ ------ ------ ------
Net Reestimated Liability--Latest $ 943 $1,067 $1,214 $1,380 $1,582
====== ====== ====== ====== ======
Gross Cumulative Redundancy $ 195 $ 226 $ 218 $ 201 $ 120
====== ====== ====== ====== ======
The table above presents the development of balance sheet liabilities
for 1987 through 1997. 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 "cumulative redundancy" represents the aggregate change in the
estimates over all prior years. For example, the 1987 liability has developed a
$16,000,000 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.
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, 1997, the Company had paid $469,000,000 of
the currently estimated $518,000,000 of losses and LAE that have been incurred
as of the end of 1987; thus an estimated $49,000,000 of losses incurred as of
the end of 1987 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 1992, but
incurred in 1987, will be included in the cumulative deficiency or redundancy
amount for 1987 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 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 16 through 18 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, 1997, CFC employed 2,670 associates.
5
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ITEM 2. PROPERTIES
----------
CFC-I owns a fully leased 85,000 square feet office building in
downtown Cincinnati that is currently leased to Procter and Gamble Company, 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, 1997.
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
$10,724,475 as of December 31, 1997.
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 84% of the building,
unaffiliated tenants occupy approximately 11% of the building, and the balance
is available for Company expansion. The property is carried in the financial
statements at $10,399,094 as of December 31, 1997.
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 $4,010,201 as of December 31,
1997.
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 commission on March 2, 1998, 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
-------
This information is included in the Annual Report of the Registrant
to its shareholders on the inside back cover for the year ended December 31,
1997 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 12 and 13 for the year ended December 31, 1997 and
is incorporated herein by reference (see Exhibit 13 to this filing).
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
This information is included in the Annual Report of the Registrant
to its shareholders on pages 14 through 18 for the year ended December 31, 1997
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 19 to 30 for the
year ended December 31, 1997, are incorporated herein by
reference (see Exhibit 13 to this filing).
Independent Auditors' Report
Consolidated Balance Sheets--December 31, 1997 and 1996
Consolidated Statements of Income--Years ended December 31,
1997, 1996, and 1995
Consolidated Statements of Shareholders' Equity--Years ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows--Years ended December 31,
1997, 1996, and 1995.
Notes to Consolidated Financial Statements
(b) Supplementary Data
Selected quarterly financial data, included in the Annual
Report of the Registrant to its shareholders on the inside back
cover for the year ended December 31, 1997, 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,
1997.
PART III
CFC filed with the Commission on March 2, 1998 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.
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2. Financial Statement Schedules and Independent Auditors' Report:
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 11--Statement recomputation of per share earnings
for years ended December 31, 1997, 1996, and 1995
Exhibit 13--Material incorporated by reference from the annual
report of the registrant to its shareholders for the
year ended December 31, 1997
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 2,
1998--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
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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, 1997 and 1996, and for each
of the three years in the period ended December 31, 1997, and have issued our
report thereon dated February 4, 1998; such consolidated financial statements
and report are included in your 1997 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(a)(2). These 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 4, 1998
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SCHEDULE I
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
(000 omitted)
Amount at
Fair which shown in
Type of Investment Cost Value balance sheet
------------------ ---- ----- -------------
Fixed Maturities:
Bonds:
United States Government and government agencies and
authorities
The Cincinnati Insurance Company................... $ 2,250 $ 2,323 $ 2,323
The Cincinnati Indemnity Company................... 456 474 474
The Cincinnati Casualty Company.................... 403 428 428
The Cincinnati Life Insurance Company ............. 6,169 6,289 6,289
------------ ------------- ------------
Total................................................ 9,278 9,514 9,514
------------ ------------- ------------
States, municipalities and political subdivisions:
The Cincinnati Insurance Company................... 810,174 852,806 852,806
The Cincinnati Indemnity Company................... 8,553 9,438 9,438
The Cincinnati Casualty Company.................... 21,121 22,469 22,469
The Cincinnati Life Insurance Company.............. 3,216 3,517 3,517
------------ ------------- ------------
Total................................................ 843,064 888,230 888,230
------------ ------------- ------------
Public utilities:
The Cincinnati Insurance Company................... 38,330 40,679 40,679
The Cincinnati Casualty Company.................... 5,208 5,731 5,731
The Cincinnati Life Insurance Company.............. 30,903 32,925 32,925
Cincinnati Financial Corporation................... 430 500 500
------------ ------------- ------------
Total................................................ 74,871 79,835 79,835
------------ ------------- ------------
Convertibles and bonds with warrants attached:
The Cincinnati Insurance Company................... 78,425 82,503 82,503
The Cincinnati Life Insurance Company.............. 15,617 16,901 16,901
Cincinnati Financial Corporation................... 9,082 9,988 9,988
------------ ------------- ------------
Total................................................ 103,124 109,392 109,392
------------ ------------- ------------
All other corporate bonds:
The Cincinnati Insurance Company................... 610,918 662,932 662,932
The Cincinnati Indemnity Company................... 16,501 18,168 18,168
The Cincinnati Casualty Company.................... 34,031 38,173 38,173
The Cincinnati Life Insurance Company.............. 482,530 528,188 528,188
Cincinnati Financial Corporation................... 397,232 416,787 416,787
------------ ------------- ------------
Total................................................ 1,541,212 1,664,248 1,664,248
------------ ------------- ------------
TOTAL FIXED MATURITIES................................. $2,571,549 $2,751,219 $2,751,219
------------ ------------- ------------
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11
(000 omitted)
Amount at
Fair which shown in
Type of Investment Cost Value balance sheet
------------------ ---- ----- -------------
Equity Securities:
Common Stocks
Public Utilities
The Cincinnati Insurance Company................... $ 88,011 $ 252,429 $ 252,429
The Cincinnati Casualty Company.................... 3,697 9,503 9,503
The Cincinnati Life Insurance Company.............. 18,752 69,670 69,670
Cincinnati Financial Corporation................... 66,430 360,500 360,500
------------ ------------- ------------
Total.............................................. 176,890 692,102 692,102
------------ ------------- ------------
Banks, trust and insurance companies
The Cincinnati Insurance Company................... 210,744 1,000,427 1,000,427
The Cincinnati Casualty Company.................... 16,883 71,353 71,353
The Cincinnati Life Insurance Company.............. 40,094 147,070 147,070
Cincinnati Financial Corporation................... 364,129 2,443,424 2,443,424
------------ ------------- ------------
Total.............................................. 631,850 3,662,274 3,662,274
------------ ------------- ------------
Industrial miscellaneous and all other
The Cincinnati Insurance Company................... 371,041 842,887 842,887
The Cincinnati Indemnity Company................... 7,896 15,297 15,297
The Cincinnati Casualty Company.................... 18,203 38,577 38,577
The Cincinnati Life Insurance Company.............. 53,075 114,100 114,100
Cincinnati Financial Corporation................... 43,161 103,665 103,665
------------ ------------- ------------
Total.............................................. 493,376 1,114,526 1,114,526
------------ ------------- ------------
Nonredeemable preferred stocks
The Cincinnati Insurance Company................... 367,982 466,116 466,116
The Cincinnati Life Insurance Company.............. 49,340 56,793 56,793
Cincinnati Financial Corporation................... 6,417 7,460 7,460
------------ ------------- ------------
Total.............................................. 423,739 530,369 530,369
------------ ------------- ------------
TOTAL EQUITY SECURITIES $1,725,855 $5,999,271 $5,999,271
------------ ------------- ------------
Other Invested Assets:
Mortgage loans on real estate
The Cincinnati Life Insurance Company.............. $ 3,329 XXXXXX $ 3,329
CFC-I Investment Company........................... 8,236 XXXXXX 8,236
------------ ------------
Total.............................................. 11,565 XXXXXX 11,565
------------ ------------
Real estate
The Cincinnati Life Insurance Company.............. 4,010 XXXXXX 4,010
CFC-I Investment Company........................... 688 XXXXXX 688
------------ ------------
Total.............................................. 4,698 XXXXXX 4,698
------------ ------------
Policy loans
The Cincinnati Life Insurance Company.............. 20,035 XXXXXX 20,035
------------ ------------
Notes receivable
CFC-I Investment Company........................... 10,262 XXXXXX 10,262
------------ ------------
TOTAL OTHER INVESTED ASSETS............................... $ 46,560 XXXXXX $ 46,560
------------ ------------
TOTAL INVESTMENTS......................................... $4,343,964 XXXXXX $8,797,050
============ ============
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SCHEDULE II CINCINNATI FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(000 OMITTED)
Condensed Statements of Income (Parent Company Only)
For the Years ended December 31 1997 1996 1995
---- ---- ----
Income
- ------
Dividends from Subsidiaries............................... $ 125,000 $ 85,000 $ 149,000
Investment Income......................................... 87,312 81,220 65,839
Realized Gains on Investments............................. 4,415 2,232 742
Other..................................................... 99 0 0
------------ ------------- ------------
Total ................................................. $ 216,826 $ 168,452 $ 215,581
------------ ------------- ------------
Expenses
- --------
Interest.................................................. $ 20,306 $ 20,098 $ 17,229
Other..................................................... 8,568 6,620 3,071
------------ ------------- ------------
Total Expenses......................................... 28,874 26,718 20,300
------------ ------------- ------------
Income Before Taxes and Earnings of Subsidiaries.......... 187,952 141,734 195,281
Applicable Income Taxes................................... 11,066 9,760 8,286
------------ ------------- ------------
Net Income Before Change in Undistributed Earnings of
Subsidiaries........................................... 176,886 131,974 186,995
Increase in Undistributed Earnings of Subsidiaries........ 122,489 91,786 40,355
------------ ------------- ------------
Net Income............................................. $ 299,375 $ 223,760 $ 227,350
============ ============= ============
Condensed Balance Sheets (Parent Company Only)
December 31 1997 1996
---- ----
Assets
- ------
Cash....................................................................... $ 6,942 $ 5,494
Fixed Maturities, at Fair Value............................................ 427,275 435,368
Equity Securities, at Fair Value........................................... 2,915,049 1,641,291
Investment Income Receivable............................................... 18,569 18,341
Inter-Company Dividends Receivable......................................... 50,000 20,500
Equity in Net Assets of Subsidiaries....................................... 2,525,086 1,837,226
Finance Receivables........................................................ 7,829 -0-
Other Assets............................................................... 7,101 10,518
------------- ------------
Total Assets............................................................ $5,957,851 $3,968,738
============= ============
Liabilities
- -----------
Notes Payable.............................................................. $ 265,564 $ 262,098
Dividends Declared but Unpaid.............................................. 22,704 20,584
Federal Income Tax
Current................................................................. 10,729 9,422
Deferred................................................................ 863,298 425,543
5.5% Convertible Senior Debentures Due 2002................................ 58,430 79,847
Other Liabilities.......................................................... 20,161 8,355
------------- ------------
Total Liabilities....................................................... $1,240,886 $ 805,849
Stockholders' Equity....................................................... 4,716,965 3,162,889
------------- ------------
Total Liabilities and Stockholders' Equity.............................. $5,957,851 $3,968,738
============= ============
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SCHEDULE II CINCINNATI FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(000 OMITTED)
Condensed Statements of Cash Flows (Parent Company Only)
For the Years ended December 31 1997 1996 1995
---- ---- ----
Operating Activities
- --------------------
Net Income................................................ $ 299,375 $ 223,760 $ 227,350
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Amortization.......................................... (624) (782) (706)
Increase in investment income receivable.............. (228) (2,602) (4,590)
Increase in Current Federal Income Taxes Payable...... 1,307 1,733 2,236
Provision for Deferred Income Taxes................... 159 1,116 1,125
Increase in Dividends Receivable from
Subsidiaries........................................ (29,500) (7,973) (4,227)
Decrease (Increase) in Other Assets.................... 3,417 (6,928) 206
Increase (Decrease) in Other Liabilities.............. 11,806 3,391 (1,843)
Increase in Undistributed Earnings of Subsidiaries.... (122,489) (91,786) (40,355)
Realized Gains on Investments......................... (4,415) (2,232) (742)
------------ ------------- ------------
Net Cash Provided by Operating Activities................. 158,808 117,697 178,454
------------ ------------- ------------
Investing Activities
- --------------------
Sale of Fixed Maturity Investments........................ 62,712 78,701 44,063
Maturity of Fixed Maturity Investments.................... 77,380 6,807 14,641
Sale of Equity Security Investments....................... 9,982 36,825 19,830
Collection of Finance Receivables......................... 1,330 -0- -0-
Purchase of Fixed Maturity Investments.................... (119,592) (139,934) (203,081)
Purchase of Equity Security Investments................... (40,834) (52,282) (79,739)
Investment in Finance Receivables......................... (9,159) -0- -0-
------------ ------------- ------------
Net Cash Used in Investing Activities..................... (18,181) (69,883) (204,286)
------------ ------------- ------------
Financing Activities
- --------------------
Increase in Other Short-Term Borrowings................... 3,466 41,093 91,889
Payment of Cash Dividends................................. (88,405) (79,203) (69,542)
Purchase/Issuance of Treasury Shares...................... (60,714) (8,963) (287)
Proceeds from Stock Options Exercised..................... 6,474 3,399 4,113
------------ ------------- ------------
Net Cash (Used in) Provided by Financing Activities....... (139,179) (43,674) 26,173
------------ ------------- ------------
Increase in Cash.......................................... 1,448 4,140 341
Cash at Beginning of Year................................. 5,494 1,354 1,013
------------ ------------- ------------
Cash at End of Year....................................... $ 6,942 $ 5,494 $ 1,354
============ ============= ============
13
14
SCHEDULE III
CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR YEARS ENDED DECEMBER 31 1997, 1996, AND 1995
(000 omitted)
Column A Column B Column C Column D Column E Column F Column G
-------- -------- -------- -------- -------- -------- --------
Future
Policy
Deferred Benefits, Other Policy
Policy Losses, Claims &
Acquisition Claims & Unearned Benefits Premium Net
Segment Cost Expense Premiums Payable Revenue Investment
Losses Income
- --------------------------------------------------------------------------------------------------------------------------
1997
Property and Liability
Insurance..................... $ 83,759 $1,888,883 $442,078 $24,614 $1,453,526 $199,427
Life/Health Insurance......... 51,554 491,374 976 14,110 62,852 60,923
---------- ---------- --------- -------- ----------- ---------
Total......................... $135,313 $2,380,257 $443,054 $38,724 $1,516,378 $260,350
========== ========== ========= ======== =========== =========
1996
Property and Liability
Insurance..................... $ 79,914 $1,824,296 $424,487 $35,500 $1,366,544 $190,318
Life/Health Insurance......... 47,674 448,969 1,263 12,683 56,353 54,687
---------- ---------- --------- -------- ----------- ---------
Total......................... $127,588 $2,273,265 $425,750 $48,183 $1,422,897 $245,005
========== ========== ========= ======== =========== =========
1995
Property and Liability
Insurance..................... $ 76,365 $1,690,461 $407,254 $32,180 $1,263,257 $180,074
Life/Health Insurance......... 43,224 412,552 1,371 11,604 50,869 52,440
---------- ---------- --------- -------- --------- ---------
Total......................... $119,589 $2,103,013 $408,625 $43,784 $1,314,126 $232,514
========== ========== ========= ======== ========= =========
Column H Column I Column J Column K
-------- -------- -------- --------
Benefits, Amortization
Claims, of Deferred
Losses & Policy Other
Settlement Acquisition Operating Premium
Segment Expenses Costs Expenses Written
- ---------------------------------------------------------------------------------------------
1997
Property and Liability
Insurance..................... $ 994,274 $305,336 $130,960 $1,471,603
Life/Health Insurance......... 60,650 9,056 17,737 8,112(4)
---------- -------- --------- ----------
Total......................... $1,054,924 $314,392 $148,697 $1,479,715
========== ======== ========= ==========
1996
Property and Liability
Insurance..................... $1,030,157 $287,222 $ 98,844 $1,383,525
Life/Health Insurance......... 56,948 7,890 16,879 7,652(4)
---------- -------- --------- ----------
Total......................... $1,087,105 $295,112 $115,723 $1,391,177
========== ======== ========= ==========
1995
Property and Liability
Insurance..................... $ 913,139 $264,281 $ 87,420 $1,295,852
Life/Health Insurance......... 51,077 8,032 15,289 7,277(4)
---------- -------- --------- ----------
Total......................... $ 964,216 $272,313 $102,709 $1,303,129
========== ======== ========= ==========
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) Investment income amounts for the above insurance segments represent
investment income on the actual investment securities in each such segment.
Investment expenses, which are deducted from investment income, and other
operating expenses include both expenses incurred directly in the insurance
segments and expenses allocated to and among the insurance segments based
on historical usage factors. The life/health segment is conducted totally
within one subsidiary that has no other segments.
(4) Amounts represent written premiums on accident and health insurance business
only.
14
15
SCHEDULE IV CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
REINSURANCE
FOR YEARS ENDING DECEMBER 31, 1997, 1996, AND 1995
(000 omitted)
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Ceded to Assumed Percentage of
Gross Amount Other from Other Net Amount Amount Assumed to
Companies Companies Net
- ------------------------------------------------------------------------------------------------------------------------------------
1997
- ----
Life Insurance in Force...................... $ 10,844,743 $1,313,957 $ 13,631 $9,544,417 .1%
=============== ============= ============ ============
Premiums
Life/Health Insurance........................ $ 68,073 $ 5,357 $ 136 $ 62,852 .2%
Property/Liability Insurance................. 1,506,229 94,397 41,694 1,453,526 2.9%
--------------- ------------- ------------ ------------
Total Premiums............................... $ 1,574,302 $ 99,754 $ 41,830 $1,516,378 2.8%
=============== ============= ============ ============
1996
- ----
Life Insurance in Force...................... $ 9,775,948 $1,272,331 $ 15,919 $8,519,536 .2%
=============== ============= ============ ============
Premiums
Life/Health Insurance........................ $ 60,994 $ 4,749 $ 108 $ 56,353 .2%
Property/Liability Insurance................. 1,416,801 91,396 41,139 1,366,544 3.0%
--------------- ------------- ------------ ------------
Total Premiums............................... $ 1,477,795 $ 96,145 $ 41,247 $1,422,897 2.9%
=============== ============= ============ ============
1995
- ----
Life Insurance in Force...................... $ 8,328,764 $ 980,023 $ 20,047 $7,368,788 .3%
=============== ============= ============ ============
Premiums
Life/Health Insurance........................ $ 54,437 $ 3,713 $ 145 $ 50,869 .3%
Property/Liability Insurance................. 1,310,105 83,804 36,956 1,263,257 2.9%
--------------- ------------- ------------ ------------
Total Premiums............................... $ 1,364,542 $ 87,517 $ 37,101 $1,314,126 2.8%
=============== ============= ============ ============
15
16
SCHEDULE VI
CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
FOR YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(000 omitted)
Column A Column B Column C Column D Column E Column F Column G Column H Column I
-------- -------- -------- -------- -------- -------- -------- -------- --------
Reserves Amortization
for Unpaid Claims and Claim of
Deferred Claims and Discount, Adjustment Expenses Deferred
Affiliation Policy Claim if any, Net Incurred Related to Policy
with Acquisition Adjustment Deducted in Unearned Earned Investment (1) (2) Acquisition
Registrant Costs Expenses Column C Premiums Premiums Income Current Year Prior Years Costs
- ------------ --------- --------- ---------- ---------- ---------- ---------- ------------------------ ----------
Consolidated
Property-Casualty
Entities
1997 $ 83,759 $1,888,883 $ 0 $ 442,078 $1,453,526 $ 199,427 $1,115,140 $(119,654) $ 305,336
========== ========== ========== ========== ========== ========== ========== ========= ==========
1996 $ 79,914 $1,824,296 $ 0 $ 424,487 $1,366,544 $ 190,318 $1,183,251 $(151,996) $ 287,222
========== ========== ========== ========== ========== ========== ========== ========= ==========
1995 $ 76,365 $1,690,461 $ 0 $ 407,254 $1,263,257 $ 180,074 $1,040,541 $(126,509) $ 264,281
========== ========== ========== ========== ========== ========== ========== ========= ==========
Column J Column K
-------- --------
Paid
Claims and
Claim
Adjustment Premiums
Expenses Written
------------ -------------
Consolidated
Property-Casualty
Entities
1997 $ 921,253 $1,471,603
========== ==========
1996 $ 909,582 $1,383,525
========== ==========
1995 $ 765,315 $1,295,852
========== ==========
16
17
Index of Exhibits
Exhibit 11-- Statement recomputation of per share earnings for the years ended
December 31, 1997, 1996, and 1995
Exhibit 13-- Material incorporated by reference from the annual report of the
registrant to its shareholders for the year ended December 31, 1997
Exhibit 23-- Independent Auditors' Consent
Exhibit 27-- Financial Data Schedule
17
18
SIGNATURES
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/ Robert B. Morgan
- ------------------------- Chief Executive Officer March 19, 1998
Robert B. Morgan President
and Director
/s/ Theodore F. Elchynski
- ------------------------- Senior Vice President March 19, 1998
Theodore F. Elchynski Chief Financial Officer
Treasurer and Secretary
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ William F. Bahl
- -------------------------- Director March 23, 1998
William F. Bahl
/s/ Michael Brown
- -------------------------- Director March 19, 1998
Michael Brown
- -------------------------- Director March , 1998
Richard M. Burridge
- -------------------------- Director March , 1998
John E. Field
- -------------------------- Director March , 1998
William R. Johnson
/s/ Kenneth C. Lichtendahl
- -------------------------- Director March 20, 1998
Kenneth C. Lichtendahl
/s/ James G. Miller
- -------------------------- Senior Vice President March 19, 1998
James G. Miller Chief Investment Officer
and Director
18
19
Signature Title Date
--------- ----- ----
- -------------------------- Director March , 1998
Jackson H. Randolph
/s/ John J. Schiff
- -------------------------- Director March 14, 1998
John J. Schiff
/s/ John J. Schiff, Jr.
- -------------------------- Chairman of the March 19, 1998
John J. Schiff, Jr. Board and
Director
/s/ Robert C. Schiff
- -------------------------- Director March 23, 1998
Robert C. Schiff
/s/ Thomas R. Schiff
- -------------------------- Director March 19, 1998
Thomas R. Schiff
- -------------------------- Director March , 1998
Frank J. Schultheis
- -------------------------- Director March , 1998
Larry R. Webb
- -------------------------- Director March , 1998
Alan R. Weiler
19
1
EXHIBIT 11
CINCINNATI FINANCIAL CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(000's omitted except per share amounts)
1997 1996 1995
---- ---- ----
Basic Earnings per share:
Net income $ 299,375 $ 223,760 $ 227,350
============ =========== ============
Average shares outstanding 55,179 55,736 55,668
============ =========== ============
Net income per common share $ 5.43 $ 4.01 $ 4.08
============ =========== ============
Diluted earnings per share:
Net income $ 299,375 $ 223,760 $ 227,350
Interest on convertible debentures--net of tax 2,712 2,859 2,860
------------ ----------- ------------
Net income for per share calculation (diluted) $ 302,087 $ 226,619 $ 230,210
============ =========== ============
Average shares outstanding 55,179 55,736 55,668
Effective of dilutive securities:
5.5% convertible senior debentures 1,309 1,789 1,793
Stock options 443 256 221
------------ ----------- ------------
Total dilutive shares 56,931 57,781 57,682
============ =========== ============
Net income per common share--diluted $ 5.31 $ 3.92 $ 3.99
============ =========== ============
1
EXHIBIT 13
Material incorporated by reference from the annual report of the registrant to
the shareholders for the year ended December 31, 1997.
Segment information from page 30 (incorporated into Item 1).
16. SEGMENT INFORMATION
(000's omitted)
The Company operates principally in two industries--property and casualty
insurance and life insurance. Information concerning the Company's operations in
different industries is presented below. Revenue is primarily from unaffiliated
customers. Identifiable assets by industry are those assets that are used in the
Company's operations in each industry. Corporate assets are principally cash and
marketable securities.
Income Before Income Taxes
-------------------------------------
1997 1996 1995
---------- ---------- ----------
Property/casualty insurance ............................... $ 28,955 $ (44,449) $ 2,894
Life/health insurance ..................................... 2,763 (2,906) (2,512)
Investment income (less required interest on life reserves) 321,620 305,211 279,346
Realized gains on investments ............................. 69,230 47,946 30,781
Other ..................................................... 865 3,337 4,979
General corporate expenses ................................ (28,874) (26,718) (20,300)
--------- --------- ---------
Total .................................................. $ 394,559 $ 282,421 $ 295,188
========= ========= =========
Identifiable Assets
-------------------------------------
1997 1996 1995
---------- ---------- ----------
Property/casualty insurance ............................... $4,953,259 $3,986,658 $3,526,900
Life/health insurance ..................................... 1,094,445 902,354 809,418
Other ..................................................... 66,227 53,351 44,487
Corporate assets .......................................... 3,379,494 2,103,151 1,728,493
---------- ---------- ----------
Total .................................................. $9,493,425 $7,045,514 $6,109,298
========== ========== ==========
2
Text data from pages 4 through 9 (incorporated into Item 1).
TARGETING THE YEAR 2000 AND BEYOND:
EXPANDING THE PRODUCT LINE, EXTENDING OUR REACH
The Cincinnati Insurance Companies are preparing to welcome the next millennium
as a larger, more aggressive competitor. Our target is to reach $2 billion in
direct written premium during the year 2000. Along with this growth, we are
renewing our commitments to provide products people need; to operate profitably;
to deliver prompt and personal service; to listen and learn continuously; and to
build financial strength that benefits agents, policyholders, shareholders,
associates and community.
PROPERTY AND CASUALTY INSURANCE
Net written property and casualty premiums reached $1.472 billion, up 6.4
percent. The combined loss and expense ratio improved to 97.7 percent, our best
annual ratio since 1988. This profitability and an all-time high of $202.6
million in new business helped offset depressed pricing of commercial accounts.
COMMERCIAL INSURANCE
Net written premiums for commercial insurance grew only 3.6 percent to
$987.3 million with a 53.2 percent pure loss ratio. We had to write more
accounts, more carefully, to compensate for the lower premium pricing brought
about by intense price competition. Total direct workers' compensation premium
fell 6 percent despite $30.1 million in new business. While we expect low
pricing to prevail into 1998, strong unit growth and underwriting quality of our
accounts position us favorably for longer-term growth.
Sales of our new Commercial Output Policy (COP) began in October. Our
agents wrote 26 COP policies for a total of $1.7 million by year-end. This
product offers flexible pricing and coverage for larger property risks. As
agencies consolidate and eliminate carriers, they need to represent a company
that can handle complex, marquee accounts. We expect the COP and the Special
Accounts Marketing
3
Program (SAMP) for larger accounts to become an important source of growth. In
the first month of 1998, total SAMP premiums were already $3.0 million versus
$7.8 million in all of 1997.
Working with professional trade associations, we continued to gain
endorsements of our products and access to their members for our local agents.
In several states, associations of dentists, funeral service providers or water
quality dealers recommend Cincinnati coverage and service.
Other popular commercial products attained production milestones this year.
The Cincinnati Commercial Umbrella crossed the $100 million mark and Employment
Practices Liability Insurance, on the market for less than two years, reached $4
million. We will heighten our product advantages during 1998 with introduction
of an improved Property Optional Coverage endorsement, an improved
Businessowners Policy and a new Worldwide Commercial General Liability
endorsement.
Cincinnati earned the highest overall score on surveys of 30,000 agents
across 16 commercial product lines, according to Property/Casualty Rates &
Ratings newsletter (August, 1997). Cincinnati was named Company of the Year by
the Young Agents Committee of the Independent Insurance Agents of North
Carolina, where we market primarily commercial insurance. And Cincinnati earned
the top spot on an agent survey conducted by the Professional Independent
Insurance Agents of Illinois, our second largest state by premium volume.
PERSONAL INSURANCE
On the personal insurance side, net written premiums grew 12.4 percent to
$484.3 million with a 68.9 percent pure loss ratio. Profitability is improving
due to homeowner and automobile rate increases approved in many states. While
some premium growth came from these increases, much of it comes from new
business as our agents look for stable markets and achieve economies by reducing
the number of carriers they represent. Some insurers have reduced writings in
order to remedy high concentration of risk in certain regions. Others have
reduced coverages or experimented with distribution methods. Agents are weighing
other carriers' lack of focus against our commitment and are giving us their
prime personal insurance accounts.
1998 product innovations will include a new Master Group Personal Umbrella
Liability Policy. Electronic funds transfer and other flexible billing options
may boost worksite marketing. We will capitalize on renewed agent interest in
stable, personal lines business by "blitzing" 50 agencies with our
interdepartmental teams empowered to remove all barriers to production, from
systems issues to producer education.
4
EXPANSION ACTIVITIES
The Cincinnati Insurance Companies are represented by fewer than 1,000
agencies while some other insurers appoint many thousands. We are from the "do
more with less" school of thought. By being very selective in our
representation, we can invest in better relationships, earn more loyalty and
expect a higher percentage of agency premium. This will not change as we
diversify geographically by reaching into new states, and as we increase market
penetration by forming new territories in established ones. Our count should
remain fairly stable, with new agencies taking the place of consolidated
agencies or agencies discontinued for not living up to our expectations. During
1997, we made 34 new agency appointments. During 1998, we expect to appoint 84.
We are appointing financially strong, sales-oriented agencies that invest
in technology and people to grow with us in the future. These elite agencies
have put out the welcome mat for us as we began marketing in new states and
expanded established territories. During 1997, we opened North Dakota and split
off new marketing territories in several profitable areas where we wanted to
increase service and do more business. We staffed new territories in Wisconsin,
Missouri, Tennessee, Illinois and Michigan. Plans for 1998 call for opening
Montana and two upstate New York territories, as well as adding territories in
Louisville and Greater Atlanta. Additionally, some territories where we market
commercial insurance will be opened for personal insurance. We are evaluating
possible entry over future years into five new states--Delaware, Idaho, Oregon,
Utah and Washington.
LIFE INSURANCE
The Cincinnati Life Insurance Company contributed $29.2 million to net
income, up 10.2 percent over last year. Net operating income rose 23.3 percent
to $24.8 million. Total net written premiums grew 7.6 percent to $92.4 million.
Direct term life insurance premiums rose 16.8 percent to $14.8 million.
Near the end of 1997, we rolled out a new term policy to launch the Life
Horizons product series. We will introduce additional new and improved Life
Horizons products at the rate of about one per
5
quarter during 1998, including low-cost universal life, guaranteed whole life
and worksite universal life policies.
Cincinnati Life has an established expertise in the worksite marketing
area, which brings convenient payroll deduction policies and professional agent
service to underserved consumers. Direct premiums from worksite marketing rose
8.9 percent to $13.3 million in 1997. Worksite marketing is increasing in
popularity among employers in search of valuable low-cost benefits. We plan to
market worksite products aggressively during 1998.
We continue to develop the life insurance production network made up of
Cincinnati's property and casualty agents, which was the source of approximately
93 percent of new life premiums in 1997. Additionally, we have begun appointing
independent life agencies to sell our products in states such as California and
Texas, where Cincinnati has no property and casualty agents. As we form these
complementary, nonconflicting independent life agent relationships, our
property and casualty agencies will benefit from product development, field
representative training, streamlining of processes and our higher profile.
Cincinnati's property and casualty Claims Department is now funding claims
settlements with Cincinnati Life annuity purchases. A total of 45 of these
structured settlements brought in $8.3 million of annuity premium in 1997.
During the first month of 1998, four cases were settled with $2 million in
annuity premium. This inter-company cooperation provides secure income and
convenience for claimants, while keeping funds in our investment stream.
FINANCIAL SERVICES
CFC Investment Company leases and finances equipment and vehicles for
independent agencies, their commercial clients and other businesses. 1997 net
after-tax earnings rose to $2.2 million versus $1.2 million in 1996. Gross
receivables have doubled over the past three years, reaching $62.8 million at
year-end 1997.
The leasing customer base is 50 percent independent property casualty
agents and a large portion of our business comes from agent referrals of their
commercial insurance clients. Many agencies lease or finance agency management
systems that Cincinnati Insurance funds under incentive agreements requiring
specified levels of premium growth and profitability.
We have begun to deploy a leasing field sales force, improving support for
agencies and their clients while providing direct availability of our financial
services to businesses. During the first part of 1998, our fourth field sales
territory should open and our representative will begin calling on lease/finance
prospects in Illinois and Wisconsin.
6
TARGETING THE YEAR 2000 AND BEYOND
SUPERIOR SERVICE AND PEOPLE--BRIDGES
TO PROFITABILITY
Under today's competitive conditions, running our business profitably
requires a commitment to invest, on the customer's behalf, in state-of-the-art
technical and human resources. During 1997, we sharpened our service advantages:
PROCESS IMPROVEMENT--Every department is examining internal and
interdepartmental processes. By discovering and recognizing internal customers,
we have been able to restructure workflows and stream-line processes, gaining
speed and accuracy. Cross-functional teams formed in many areas to find the best
way to deliver timely, personal service. Whether processing a policy change,
examining a claim, calculating a premium or commission, introducing a new
product or evaluating proposed territory expansions, we found room to improve
and made positive changes.
In the Commercial Lines Department, service requests rose 18 percent over
1996 to 565,000, yet service complaints declined 16 percent versus last year.
Four years ago, work-in-progress files held in the department averaged 12,000
per month; now fewer than 4,000 files were pending for 54 of the past 56 weeks.
TECHNOLOGY--New systems are presenting us with opportunities to eliminate
duplicate effort, speed service and communicate more effectively. This year, the
Information Systems Department introduced systems and training for accounting,
leasing and investment functions. They continued system and network upgrades to
address Year 2000 issues; the few systems not yet compliant will be by mid-year
1999. In Commercial Lines, the DocuSolve typing system proved to be a powerful
tool to improve processing time. DocuSolve cut training time by 50 percent and
cut errors affecting accounting and premium audit functions. Our goal is that
raters and typists will have access to online procedures and
7
underwriting guidelines. New software will allow us to bypass paper files and
bring key policy pages online.
Information Systems rolled out software and completed training to upgrade
and standardize software, including a new e-mail system, on all company personal
computers. They installed a super data server for an Intranet-based policy
processing and administration system now under development. A single, integrated
system will replace the current manual work processes between our field and
headquarters operations. We will connect headquarters to our Intranet as early
as this year, then connect field staff and agents in 1999.
CLAIMS MANAGEMENT--The timely, personal, fair claims service we provide cements
our agents' bond with clients. Claims management programs are introducing new
conveniences and economies for consumers. Our Subrogation and Salvage unit
recovered $30.9 million in 1997, up 24 percent over 1996 recoveries. Similar
success came from fraud investigation efforts and managed care techniques
applied to workers' compensation claims. A glass program and an auto estimate
service will soon bring consumers new options for quick, easy repairs at a cost
savings.
EDUCATION--We continue extensive programs to train professional associates,
encouraging them to acquire industry credentials and certifications, develop
customer service awareness and acquire computer skills. New programs in 1997
included a school to develop new Cincinnati Life field marketing representatives
with a level of technical expertise, company knowledge and authority parallel to
that of our property and casualty field marketing representatives. New programs
for agents included alternative risk transfer seminars, designed to increase
awareness of market trends and make them informed, strong competitors.
PUBLIC RESPONSIBILITY--We serve our agents and our industry by being active
participants in the legislative and regulatory processes impacting your Company.
We study proposals and take positions in support of tort reform and against
activist state Supreme Court candidates. We support private enterprise solutions
versus unfunded federal assumption of liability for catastrophic claims. 1997
activities included work to preserve the deduction for dividends received so
taxation of the same income at multiple levels would not occur. We supported the
Commerce Committee version of banking reform legislation, which affirms state
authority over insurance, whether transactions are made by an insurance company
or by a bank. We believe strong state regulation serves the public and our
industry better than any proposals for dual federal/state regulation of
insurance.
8
Loss and loss expenses in Notes to Financial Statements from page 27
(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,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Balance at January 1 ........ $ 1,824,296 $ 1,690,461 $ 1,510,150
Less reinsurance receivable 121,881 109,719 78,125
----------- ----------- -----------
Net balance at January 1 .... 1,702,415 1,580,742 1,432,025
----------- ----------- -----------
Incurred related to:
Current year .............. 1,115,140 1,183,251 1,040,541
Prior years ............... (119,654) (151,996) (126,509)
----------- ----------- -----------
Total incurred .............. 995,486 1,031,255 914,032
----------- ----------- -----------
Paid related to:
Current year .............. 467,843 514,186 396,856
Prior years ............... 453,410 395,396 368,459
----------- ----------- -----------
Total paid .................. 921,253 909,582 765,315
----------- ----------- -----------
Net balance at December 31 .. 1,776,648 1,702,415 1,580,742
Plus reinsurance receivable 112,235 121,881 109,719
----------- ----------- -----------
Balance at December 31 ...... $ 1,888,883 $ 1,824,296 $ 1,690,461
=========== =========== ===========
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss expenses decreased by $119,654,000, $151,996,000
and $126,509,000 in 1997, 1996 and 1995. 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 $47,651,000 and $56,871,000 at December 31, 1997 and 1996,
respectively, for certain life/health losses and loss checks payable.
9
"Price range of Common Stock" section from the inside back cover
(incorporated into Item 5).
PRICE RANGE OF COMMON STOCK
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.
1997 1996
-------------------------------------------- ----------------------------------------------
Quarter 1st 2nd 3rd 4th 1st 2nd 3rd 4th
-------- -------- -------- --------- -------- -------- ---------- ---------
High..................... $ 73 1/4 $ 82 1/2 $ 83 3/4 $ 140 3/4 $ 64 1/4 $ 63 1/2 $ 58 13/16 $ 65 3/16
Low...................... 62 67 3/8 78 1/2 83 7/8 57 5/8 57 3/8 54 54 1/4
Dividend Paid............ .37 .41 .41 .41 .32 .37 .37 .37
10
"Selected Financial Information" from pages 12 and 13 (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,
-------------------------------------------------------------------------
1997 1996 1995 1994
------------ ------------ ------------ ------------
TOTAL ASSETS........................................ $ 9,493,425 $ 7,045,514 $ 6,109,298 $ 4,734,279
LONG-TERM OBLIGATIONS............................... $ 58,430 $ 79,847 $ 80,000 $ 80,000
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Premium Income...................................... $ 1,516,378 $ 1,422,897 $ 1,314,126 $ 1,219,033
Investment Income (Less Expense).................... 348,597 327,307 300,015 262,649
Realized Gains on Investments....................... 69,230 47,946 30,781 19,557
Other Income........................................ 8,179 10,599 10,729 11,267
NET INCOME BEFORE REALIZED GAINS
ON INVESTMENTS
In Total............................................ $ 254,375 $ 192,595 $ 207,342 $ 188,538
Per Common Share.................................... 4.61 3.45 3.72 3.40
NET INCOME
In Total............................................ $ 299,375 $ 223,760 $ 227,350 $ 201,230
Per Common Share.................................... 5.43 4.01 4.08 3.62
Per Common Share (Diluted).......................... 5.31 3.92 3.99 3.54
- -----------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED
Per Common Share.................................... $ 1.64 $ 1.46 $ 1.28 $ 1.16
- -----------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PAID
Per Common Share.................................... $ 1.60 $ 1.43 $ 1.26 $ 1.12
- -----------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND CASUALTY OPERATIONS
Gross Premiums Written.............................. $ 1,566,688 $ 1,476,011 $ 1,377,426 $ 1,287,280
Net Premiums Written................................ 1,471,603 1,383,525 1,295,852 1,190,824
Premiums Earned..................................... 1,453,526 1,366,544 1,263,257 1,169,940
Loss Ratio.......................................... 58.3% 61.6% 57.6% 63.3%
Loss Expense Ratio.................................. 10.1 13.8 14.7 9.8
Underwriting Expense Ratio.......................... 29.3 27.6 27.1 27.5
------------ ------------ ------------ ------------
Combined Ratio...................................... 97.7% 103.0% 99.4% 100.6%
Investment Income Before Taxes...................... $ 199,427 $ 190,318 $ 180,074 $ 162,260
Property and Casualty Reserves
Unearned Premiums................................... $ 418,465 $ 401,562 $ 385,418 $ 353,697
Losses.............................................. 1,373,950 1,319,286 1,274,180 1,213,383
Loss Adjustment Expense............................. 402,698 383,135 306,570 218,642
Statutory Policyholders' Surplus.................... $ 2,468,944 $ 1,608,084 $ 1,268,597 $ 998,595
- -----------------------------------------------------------------------------------------------------------------------------------
* 1993 earnings include a credit for $13,845,000 ($.25 per share) cumulative
effect of a change in the method of accounting for income taxes to conform
with FASB Statement No. 109 and a net charge of $8,641,000 ($.16 per share)
related to the effect of the 1993 increase in income tax rates on deferred
taxes recorded for various prior year items.
11
Cincinnati Financial Corporation and Subsidiaries
1993 1992 1991 1990 1989 1988 1987
- ------------- ------------- ------------ ------------ ------------ ------------ ------------
$ 4,602,288 $ 4,098,713 $ 3,513,749 $ 2,626,156 $ 2,602,990 $ 2,163,341 $ 1,828,032
$ 80,000 $ 80,000 $ 182 $ 202 $ 753 $ 890 $ 3,898
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1,140,791 $ 1,038,772 $ 947,576 $ 871,196 $ 813,313 $ 754,335 $ 747,266
239,436 218,942 193,220 167,425 149,285 130,885 108,915
51,529 35,885 7,641 1,488 4,678 6,423 3,845
10,396 10,552 12,698 8,822 7,134 10,281 7,686
$ 182,530* $ 147,669 $ 141,273 $ 128,052 $ 111,477 $ 124,618 $ 90,714
3.30* 2.69 2.59 2.37 2.08 2.34 1.74
$ 216,024* $ 171,325 $ 146,280 $ 128,962 $ 114,490 $ 128,748 $ 93,154
3.91* 3.12 2.69 2.38 2.14 2.42 1.79
3.81* 3.08 2.67 2.37 2.11 2.40 1.76
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1.02 $ .93 $ .83 $ .73 $ .66 $ .52 $ .45
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1.00 $ .90 $ .81 $ .71 $ .63 $ .51 $ .43
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1,216,766 $ 1,089,901 $ 996,807 $ 896,204 $ 845,346 $ 782,143 $ 763,925
1,123,780 1,014,971 930,296 838,554 790,971 718,853 702,785
1,092,135 992,335 903,465 828,046 771,205 712,771 687,429
63.5% 63.8% 61.6% 61.6% 61.6% 55.1% 61.8%
8.7 9.0 9.2 9.0 9.0 10.1 10.4
27.9 29.0 28.9 29.0 29.1 30.7 27.5
- ------------- ------------- ------------ ------------ ------------ ------------ ------------
100.1% 101.8% 99.7% 99.6% 99.7% 95.9% 99.7%
$ 153,190 $ 141,958 $ 126,332 $ 110,827 $ 97,661 $ 84,379 $ 67,871
$ 333,550 $ 302,473 $ 280,404 $ 254,000 $ 244,011 $ 224,545 $ 218,840
1,100,051 960,571 825,952 692,081 616,730 522,162 449,159
193,305 177,262 160,260 140,501 124,993 109,323 84,359
$ 1,011,609 $ 933,529 $ 735,557 $ 477,355 $ 494,460 $ 422,521 $ 346,623
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data adjusted for three-for-one stock split in 1992 and stock
dividends of 5 percent in 1996, 1995 and 1987.
12
"Management Discussion" from pages 14 through 18 (incorporated into
Items 1 and 7).
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) has five subsidiaries. The lead
property and casualty insurance subsidiary, The Cincinnati Insurance Company,
markets a broad range of business and personal policies in 27 states through an
elite corps of 973 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
nonstandard policies for preferred risk accounts. The Cincinnati Life Insurance
Company markets life, health and accident policies through property and casualty
agencies and independent life agencies. CFC Investment Company complements the
insurance subsidiaries with leasing, financing and real estate services.
Investment operations are CFC's primary source of profits, with a total return
strategy emphasizing investment in fixed maturities securities as well as equity
securities that contribute to current earnings through dividend increases and
add to net worth through long-term 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 impacting the Company's equity portfolio and the
ability to generate investment income; and, the potential inability of the
Company and/or the independent agents with which it works to complete the
necessary information system changes required to handle the Year 2000 issue.
Readers are cautioned that the Company undertakes no obligation to review or
update the forward-looking statements included in this material.
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
8.3%, reaching $1.942 billion in 1997, with property/casualty net written
premiums growing at a 7.7% rate to $1.472 billion over the past five years. In
the same five-year period, total net income, including realized capital gains,
grew at an 11.8% rate to $299.4 million, or $5.43 per share, from $216.0
million, or $3.91, while net operating income increased at an 11.5% rate to
$254.4 million, or $4.61 per share, from $182.5 million, or $3.30, in 1993. Book
value grew at a 22.2% compound rate over the same period to $85.06 per share
from $31.26.
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,
have led management to target $2 billion in direct written premiums during the
year 2000, up from $1.621 billion in 1997. At the same time, the Company seeks
to generate an underwriting profit and maximize annual growth in investment
income.
The following discusses and analyzes results for the three-year period
ending December 31, 1997 and provides insight into management's strategic
direction for the Company.
- -----------------------------------------------------------------------------------------------------------------------------------
(000,000 omitted except 1997 CHANGE CHANGE 1996 Change Change 1995 Change Change
per share data and ratios) $ % $ % $ %
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $1,942.4 $133.7 7 $1,808.7 $153.0 9 $1,655.7 $143.2 9
Net Operating Income 254.4 61.8 32 192.6 (14.7) (7) 207.3 18.8 10
Net Capital Gains (after tax) 45.0 13.8 44 31.2 11.2 56 20.0 7.3 58
Net Income 299.4 75.6 34 223.8 (3.5) (2) 227.3 26.2 13
- -----------------------------------------------------------------------------------------------------------------------------------
Net Operating Income Per Share $ 4.61 $ 1.16 34 $ 3.45 $ (.30) (7) $ 3.72 $ .32 9
Net Capital Gains Per Share .82 .26 46 .56 .20 54 .36 .14 68
Net Income Per Share $ 5.43 $ 1.42 35 $ 4.01 $ (.10) (2) $ 4.08 $ .46 13
- -----------------------------------------------------------------------------------------------------------------------------------
Catastrophe Losses $ 25.5 $ (39.2) (60) $ 64.7 $ 37.6 138 $ 27.1 $ 6.4 31
Catastrophe Losses
Per Share (after tax) .30 (.45) (60) .75 .44 142 .31 .07 28
- -----------------------------------------------------------------------------------------------------------------------------------
The Company's financial results for the three years ending December 31,
1997 reflect steady growth in new insurance business and high retention of
renewal business quoted on behalf of the Company's independent insurance agents,
offset by competitive property and casualty pricing. In addition, 1997 marked a
return to a more normal level of catastrophe losses from the unusually high 1996
level. Results for 1997 also reflect the Company's consistent underwriting
philosophy and strategy-maintaining high underwriting standards by carefully
evaluating individual risks, reviewing agency performance and controlling
overall expenses.
Net operating income for 1997 rose substantially over the prior year. The
Company generated 6.5% growth in pre-tax investment income and an underwriting
profit versus an
13
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
underwriting loss in 1996, primarily due to lower catastrophe losses. In 1996,
net operating income declined 7% because of the catastrophe losses, while
pre-tax investment income rose 9.1%. The contribution from net realized capital
gains after-tax rose in both years primarily due to the sale of equity
securities.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
(000,000 omitted except 1997 CHANGE CHANGE 1996 Change Change 1995 Change Change
per share data and ratios) $ % $ % $ %
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Written Premiums $1,566.7 $ 90.7 6.1 $1,476.0 $ 98.6 7.2 $1,377.4 $ 90.1 7.0
Net Written Premiums 1,471.6 88.1 6.4 1,383.5 87.6 6.8 1,295.9 105.1 8.8
Net Earned Premiums 1,453.5 87.0 6.4 1,366.5 103.2 8.2 1,263.3 93.4 8.0
Loss and LAE Ratio 68.4% N/A (9.3) 75.4% n/a 4.3 72.3% n/a (1.1)
Expense Ratio 29.3% N/A 6.2 27.6% n/a 1.8 27.1% n/a (1.5)
Combined Ratio 97.7% N/A (5.1) 103.0% n/a 3.6 99.4% n/a (1.2)
- -----------------------------------------------------------------------------------------------------------------------------------
PREMIUMS--While premium growth rates have declined in 1997 and 1996, the
Company's property and casualty group continued to increase net written premiums
at rates well above estimated industry growth rates. In 1997 and 1996, the
primary source of growth was personal lines insurance, for which net written
premiums advanced 12.4% in 1997 (9.4% in 1996), while commercial lines insurance
growth was 3.6% (5.6% in 1996).
During 1997 and 1996, the commercial insurance market experienced intense
price competition, most notably in workers' compensation where market-share
competition and mandated rate reductions in some states led to renewal account
discounts of as much as a third from the previous year's premium. The Company is
committed to prudent underwriting standards and emphasizing account
profitability. The emphasis on profitability contributed to the 53.2% pure loss
ratio for the commercial lines area, in line with the 54.8% reported in 1996.
As a result of the market factors, direct written workers' compensation
premiums in 1997 declined 6% and growth in other commercial insurance lines was
limited. Management believes these competitive forces will continue for at least
the next six to twelve months. To help offset these pressures, the Company is
emphasizing personal lines insurance, entering new states to expand market
opportunities, pursuing a marketing strategy that permits field representatives
to spend more time assisting the independent insurance agents and expanding its
life insurance operations.
The Company sees heightened interest from independent insurance agents in
writing personal lines insurance as a means of buffering the price competition
in the commercial sector and stabilizing their revenue. CFC is taking advantage
of this trend by encouraging independent agents to move to the Company their
proven, profitable business. Agents who are streamlining operations by reducing
the number of carriers they represent have been rolling-over entire books of
business to the Company.
Management believes CFC can achieve additional market penetration by
leveraging its strong relationships with independent agencies and entering new
states. The Company also can take advantage of key competitive advantages of
CFC's insurance products, for example three- and five-year policies for many
types of insurance coverage.
At year-end 1997, approximately 98% of the Company's property and casualty
premium volume was in states in which the Company has had a presence since 1994
or earlier. Over the past three years, the Company has added nine marketing
representatives in several established states, restructuring territories so that
each representative has fewer agencies to serve. This has allowed field
representatives to appoint additional agencies and, more importantly, spend more
time with each agent. During 1998, management anticipates adding two marketing
territories in existing regions.
Entry into new states also has been a source of premium growth. At year-end
1997, the states the Company entered between 1994 and 1997 contributed more than
$28 million of property and casualty premium volume. An example of these
successful new market entries is Minnesota, where premium volume reached $11.7
million in 1997, up from $800,000 in 1994. During 1996 and 1997, the Company
began marketing commercial lines in North Dakota and added personal lines in
Arkansas, Maryland, Minnesota, North Dakota, Pennsylvania and Vermont. During
1998, management anticipates beginning to market insurance products in Montana
and in two planned upstate New York territories. Five western states currently
are being researched with the intention of selecting one or two additional
states in which to seek approval during 1998 to market the Company's products in
1999. The Company's criteria for entry into new states include a favorable
regulatory climate.
EXPENSES--The Company recorded a $24.8 million underwriting profit in 1997
compared with an $45.0 million underwriting loss in 1996 and a $1.4 million
underwriting profit in 1995. The 1997 underwriting profit, reflecting a combined
ratio of 97.7%, was primarily the result of a more normal level of catastrophe
losses contributing to a seven point reduction in the loss and loss adjustment
expense ratio compared with 1996. The return to a more normal level of
catastrophe losses also helped offset a one and seven-tenths point increase in
the expense ratio. The underwriting loss in 1996, reflecting a combined ratio of
103.0%, was the result of the higher catastrophe losses, as well as a half
percentage point increase in the expense ratio over 1995.
14
MANAGEMENT DISCUSSION (CONTINUED)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
The expense ratio increased in both years as the Company raised spending on
staff and costs associated with upgrading technology and facilities to
accommodate anticipated growth in premium volume while making computer systems
Year 2000 compliant. Because the Company issues three- and five- year policies,
management believes that Year 2000 compliance issues have been initiated for
most of the computer systems. Many systems are already Year 2000 compliant; most
other programs will be compliant by year-end 1998, with the balance completed
during 1999. Management believes this goal will be attained. CFC's largest risk
lies with Year 2000 compliance by its independent agencies, which handle most of
the customer billing and collections. In response to this concern, CFC is
proactively contacting agents regarding this issue and will be monitoring each
agency's actions closely. Adding to expenses in 1997 were higher profit-sharing
commissions to many of the Company's independent insurance agents, due to the
overall profitability of the business they wrote.
In 1997, catastrophe losses accounted for 1.8% of the combined ratio, more
closely in line with the Company's historic results and in contrast to the
unusually high 4.7% from ten large storms in 1996. In 1995, catastrophe losses
accounted for 2.1% of the combined ratio. 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, 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 in an effort to control such catastrophe losses. For property
catastrophes, the Company retains the first $25 million of losses and is
reinsured to cover 95% of the losses from $25 million up to $200 million.
As discussed in the Notes to the Consolidated Financial Statements, the
Company's insurance reserve liabilities are estimated by management based upon
Company experience data. 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 that the 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 written post-date the coverages, which
afford clean-up costs and Superfund responses.
LIFE AND ACCIDENT AND HEALTH--CFC's life insurance subsidiary had total net
premium income for 1997 of $62.9 million, up from $56.4 million in 1996 and
$50.9 million in 1995. Life insurance premiums were $54.7 million, $48.7 million
and $43.6 million, respectively. The life insurance subsidiary contributed 10%
of CFC's operating income in 1997, 1996 and 1995.
During 1997, the Company hired a new president for the life insurance
subsidiary. Under his direction, the life insurance subsidiary is expanding
worksite marketing activities, introducing a competitive new life insurance
product series and researching opportunities to sell life insurance in states in
which the Company does not have property and casualty agency representation. The
initiatives, which were undertaken in the second half of 1997, had little impact
on results for the year. Management believes, however, that opportunities exist
to increase the life insurance subsidiary's contribution to total operating
income through expanded life insurance sales.
INVESTMENT INCOME AND INVESTMENTS--Investment income rose 6.5% to $348.6 million
in 1997 and increased 9.1% to $327.3 million in 1996. The slower growth rate in
1997 reflected the amount of fixed maturities investments called early and the
generally lower interest rate environment. The increases were primarily the
result of investing the cash flows from operating activities and dividend
increases from equity securities in the investment portfolio. In 1997, 34 of the
62 common stocks in the Company's investment portfolio increased dividends
during the year, adding more than $8.1 million to future annualized investment
earnings.
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 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%-3% and annual dividend increases. The Company's
portfolio of equity investments had an average dividend yield to cost of 7.8% at
December 31, 1997. Management's strategy in equity investments includes
identifying approximately ten to twelve companies, for the core of the
investment portfolio, in which the Company can accumulate 10%-20% of their
common stock.
15
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
INTEREST AND INCOME TAXES--The Company's income tax expense was $95.2 million,
$58.7 million and $67.8 million for 1997, 1996 and 1995, respectively, while the
effective tax rate was 24.12%, 20.77% and 22.98%, 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 lower rate in 1996 was
partially the result of a higher percentage of net income earned from tax-exempt
interest on state, municipal and political subdivision fixed maturities and
dividends received on equity investments. The Company incurred no additional
alternative minimum tax expenses for the three years.
CASH FLOW AND LIQUIDITY
- --------------------------------------------------------------------------
(000,000 omitted) 1997 1996 1995
- --------------------------------------------------------------------------
Net cash provided by operating activities $427.0 $308.3 $389.5
Net cash used in investing activities (282.5) (224.8) (443.9)
Net cash (used) provided in financing (124.2) (43.7) 26.2
activities
Net increase (decrease) in cash 20.2 39.9 (28.2)
Cash at beginning of year 59.9 20.0 48.3
Cash at end of year 80.2 59.9 20.0
Supplemental
Interest paid 21.8 20.9 16.0
Income taxes paid 95.5 65.0 67.0
- --------------------------------------------------------------------------
CASH FLOW--Over the past three years, operating cash flows have been 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 reflected a steady
increase over the three years in calls of fixed maturity investments, offset in
1997 by increased purchases of fixed maturities and equity securities. Cash
flows used in net purchases of fixed maturity and equity securities,
respectively, amounted to $122.6 million and $134.1 million in 1997, $98.0
million and $95.4 million in 1996, and $309.7 million and $114.9 million in
1995.
Over the three-year period, the primary increases in net cash used for
financing activities were for the payment of cash dividends and the purchase of
treasury shares.
Notes Payable-- Increases in notes payable, primarily short-term debt used
to enhance liquidity, were reduced from $91.9 million in 1995 to $41.1 million
in 1996 to $18.5 million in 1997. Management used short-term debt for cash
management and other purposes.
Dividends -- CFC has increased cash dividends to shareholders for 37
consecutive years and, periodically, the Board of Directors authorizes stock
dividends or splits. In February 1997, the CFC Board voted to increase the
regular quarterly dividend by four cents to an indicated annual rate of $1.64
per share. On February 7, 1998, the Board authorized a 12.2% increase, raising
the regular quarterly dividend by five cents to an indicated annual rate of
$1.84. At the same time, the Board 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, contingent upon shareholder approval of a proposal to
increase authorized shares to 200 million from 80 million.
Since 1987, the Company's Board of Directors has authorized four additional
stock splits or stock dividends:
16
MANAGEMENT DISCUSSION (CONTINUED)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
a 5% stock dividend in 1996; a 5% stock dividend in 1995; a three-for-one stock
split in 1992; and, a 5% stock dividend in 1987. After the stock dividend in
1996, a shareholder who purchased one Cincinnati Insurance share before 1957
would own 649 CFC shares, if all shares from accrued stock dividends and splits
were held. The Company's policy for the past ten years has been to reinvest
approximately 70% of net income in future growth and to distribute remaining
income as dividends. 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 $8.831 billion make up 93.0% of the
Company's $9.493 billion assets; this compares with 90.3% in 1996 and 90.2% in
1995. The Company has only minor investments in real estate and mortgages, which
are typically illiquid. At December 31, 1997, the Company's portfolio of fixed
maturity securities had an average yield-to-cost of 8.4% and an average maturity
of 12 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 1997 and 1996, investments totaling approximately $836 million
and $729 million ($797 million and $706 million at cost) of the Company's $8.797
billion and $6.344 billion investment portfolio related to securities rated
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-exempt and taxable fixed maturity securities. Tax exempt bonds comprise 10%
of invested assets as of December 31, 1997, compared with 14% at year-end 1996
and 16% at year-end 1995. 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.
MARKET RISK--The Company could incur losses due to adverse changes in market
rates and prices. The Company's primary market risk exposures are to 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 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, 1997, long- and short-term
debt were 4%, insurance reserves were 25% and total shareholders' equity was 50%
of total assets, with remaining liabilities consisting of unearned premiums,
deferred income taxes and other liabilities.
Debt--Total long- and short-term debt was less than 5% of total assets at
year-end 1997 and 1996. At December 31, 1997 and 1996, long-term debt consisted
of $58.4 million and $79.8 million, respectively, of convertible debentures.
Short-term debt is used to provide working capital as discussed above.
Equity--Shareholders' equity has continued to grow as a percentage of total
assets, reaching 50% for 1997 from 45% for 1996 and 44% for 1995, due to
retained earnings and unrealized appreciation of investments. 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 omitted) 1997 1996 1995
- ------------------------------------------------------------------------
Shareholders' equity excluding retained $ 469.5 $ 502.3 $ 342.0
earnings and unrealized gains on
investments
Retained earnings 1,341.7 1,132.9 1,156.6
Unrealized gains on investments 2,905.8 1,527.7 1,159.4
Total shareholders' equity $4,717.0 $3,162.9 $2,658.0
- ------------------------------------------------------------------------
As a long-term investor, the Company has followed a buy-and-hold strategy
for more than 38 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 $4.273
billion as of December 31, 1997 and constituted 49% of the total investment
portfolio; 71% of the equities investment portfolio; and, after deferred income
taxes, 59% of total shareholders' equity. Such unrealized appreciation, before
deferred income taxes, amounted to $2.203 billion and $1.618 billion, at
year-end 1996 and 1995, respectively.
On November 22, 1996, the Board of Directors authorized the repurchase of
up to three million of the Company's outstanding shares as management deemed
appropriate over an unspecified period of time. As of December 31, 1997, the
Company had repurchased 934,041 shares, at an accumulated cost of $68.1 million.
17
Independent Auditors' Report and Financial Statements from pages 19 thru 30
(incorporated into Items 8 and 14).
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, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
February 4, 1998
18
CONSOLIDATED BALANCE SHEETS
(000's omitted)
Cincinnati Financial Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------
December 31,
1997 1996
----------- -----------
ASSETS
Investments
Fixed maturities, at fair value (cost: 1997--$2,571,549;
1996--$2,431,785) ................................................ $ 2,751,219 $ 2,561,805
Equity securities, at fair value (cost: 1997--$1,725,855;
1996--$1,537,189) ................................................ 5,999,271 3,740,180
Other invested assets ............................................... 46,560 42,419
Cash ................................................................... 80,168 59,933
Investment income receivable ........................................... 74,520 70,446
Finance receivables .................................................... 31,715 26,864
Premiums receivable .................................................... 158,539 162,045
Reinsurance receivable ................................................. 109,110 115,906
Prepaid reinsurance premiums ........................................... 23,612 22,924
Deferred acquisition costs pertaining to unearned
premiums and to life policies in force .............................. 135,313 127,588
Land, buildings and equipment for Company use (at cost, less
accumulated depreciation: 1997--$97,248; 1996--$85,541) ............. 52,559 50,071
Other assets ........................................................... 30,839 65,333
----------- -----------
Total assets ..................................................... $ 9,493,425 $ 7,045,514
=========== ===========
LIABILITIES
Insurance reserves
Losses and loss expenses ............................................ $ 1,936,534 $ 1,881,167
Life policy reserves ................................................ 482,447 440,281
Unearned premiums ...................................................... 443,054 425,750
Other liabilities ...................................................... 168,959 116,589
Deferred income taxes .................................................. 1,406,478 676,893
Notes payable .......................................................... 280,558 262,098
5.5% convertible senior debentures due 2002 ............................ 58,430 79,847
----------- -----------
Total liabilities ................................................ 4,776,460 3,882,625
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, par value--$2 per share; authorized 80,000 shares; issued,
1997--56,464; 1996--55,829 .......................................... 112,927 111,657
Paid-in capital ........................................................ 429,137 401,862
Retained earnings ...................................................... 1,341,730 1,132,880
Unrealized gains on investments ........................................ 2,905,756 1,527,707
----------- -----------
................................................................ 4,789,550 3,174,106
Less treasury shares at cost (1997--1,012 shares; 1996--192 shares) .... (72,585) (11,217)
----------- -----------
Total shareholders' equity ....................................... 4,716,965 3,162,889
----------- -----------
Total liabilities and shareholders' equity ....................... $ 9,493,425 $ 7,045,514
=========== ===========
Accompanying notes are an integral part of this statement.
19
CONSOLIDATED STATEMENTS OF INCOME
(000's omitted except per share data)
Cincinnati Financial Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
REVENUE
Premium income
Property and casualty ........................... $ 1,453,526 $ 1,366,544 $ 1,263,257
Life ............................................ 54,742 48,694 43,551
Accident and health ............................. 8,110 7,659 7,318
----------- ----------- -----------
Net premiums earned ............................. 1,516,378 1,422,897 1,314,126
Investment income .................................. 348,597 327,307 300,015
Realized gains on investments ...................... 69,230 47,946 30,781
Other income ....................................... 8,179 10,599 10,729
----------- ----------- -----------
Total revenues .................................. 1,942,384 1,808,749 1,655,651
----------- ----------- -----------
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits ......... 1,054,924 1,087,105 964,216
Commissions ........................................ 282,690 259,291 244,862
Other operating expenses ........................... 139,030 117,034 97,909
Taxes, licenses and fees ........................... 48,573 43,392 38,887
Increase in deferred acquisition costs pertaining to
unearned premiums and to life policies in force . (7,725) (7,999) (10,086)
Interest expense ................................... 20,821 20,102 17,231
Other expenses ..................................... 9,512 7,403 7,444
----------- ----------- -----------
Total benefits and expenses ..................... 1,547,825 1,526,328 1,360,463
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ............................ 394,559 282,421 295,188
----------- ----------- -----------
PROVISION FOR INCOME TAXES
Current ............................................ 107,046 67,827 76,012
Deferred ........................................... (11,862) (9,166) (8,174)
----------- ----------- -----------
Total provision for income taxes ................ 95,184 58,661 67,838
----------- ----------- -----------
NET INCOME ............................................ $ 299,375 $ 223,760 $ 227,350
=========== =========== ===========
PER COMMON SHARE
Net Income ......................................... $ 5.43 $ 4.01 $ 4.08
=========== =========== ===========
Net Income (diluted) ............................... $ 5.31 $ 3.92 $ 3.99
=========== =========== ===========
Cash dividends (declared) .......................... $ 1.64 $ 1.46 $ 1.28
=========== =========== ===========
Accompanying notes are an integral part of this statement.
20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(000's omitted)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
UNREALIZED
COMMON TREASURY PAID-IN RETAINED GAINS ON
STOCK STOCK CAPITAL EARNINGS INVESTMENTS
-------------- -------------- -------------- -------------- -------------
Balance, December 31, 1994................ $ 100,872 $ (914) $ 105,792 $ 1,133,105 $ 601,192
Net income................................ 227,350
Change in unrealized gains on
investments............................ 858,763
Income taxes on unrealized gains.......... (300,567)
Dividends declared........................ (71,262)
5% stock dividend at market............... 5,043 127,338 (132,566)*
Purchase/issuance of treasury shares...... (470) 182
Stock options exercised................... 253 3,860
-------------- -------------- -------------- -------------- -------------
Balance, December 31, 1995................ 106,168 (1,384) 237,172 1,156,627 1,159,388
Net income................................ 223,760
Change in unrealized gains on
investments............................ 566,644
Income taxes on unrealized gains.......... (198,325)
Dividends declared........................ (81,498)
5% stock dividend at market............... 5,304 160,453 (166,009)*
Purchase/issuance of treasury shares...... (9,833) 870
Stock options exercised................... 178 3,221
Conversion of debentures.................. 7 146
-------------- -------------- -------------- -------------- -------------
Balance, December 31, 1996................ 111,657 (11,217) 401,862 1,132,880 1,527,707
Net income................................ 299,375
Change in unrealized gains on
investments............................ 2,120,075
Income taxes on unrealized gains.......... (742,026)
Dividends declared........................ (90,525)
Purchase/issuance of treasury shares...... (61,368) 654
Stock options exercised................... 310 6,164
Conversion of debentures.................. 960 20,457
-------------- -------------- -------------- -------------- -------------
Balance, December 31, 1997................ $ 112,927 $ (72,585) $ 429,137 $ 1,341,730 $ 2,905,756
============== ============== ============== ============== =============
*Includes $183,718 and $251,851 for fractional shares paid in April 1995 and
1996, respectively.
Accompanying notes are an integral part of this statement.
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income ........................................... $ 299,375 $ 223,760 $ 227,350
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation and amortization ..................... 11,327 7,100 9,641
Increase in investment income receivable .......... (4,074) (5,401) (8,976)
Decrease (increase) in premiums receivable ........ 3,506 (928) (19,145)
Decrease (increase) in reinsurance receivable ..... 6,796 (12,223) (36,558)
(Increase) decrease in prepaid reinsurance premiums (688) (1,089) 2,231
Increase in deferred acquisition costs ............ (7,725) (7,999) (10,086)
Increase in accounts receivable ................... (7,230) (2,080) (3,900)
Decrease (increase) in other assets ............... 42,084 (31,538) (6,773)
Increase in loss and loss expense reserves ........ 55,367 137,633 191,237
Increase in life policy reserves .................. 42,166 37,017 33,169
Increase in unearned premiums ..................... 17,304 17,126 26,505
Increase in other liabilities ..................... 49,672 6,984 9,522
Decrease in deferred income taxes ................. (11,862) (9,272) (8,174)
Realized gains on investments ..................... (69,230) (47,946) (30,781)
Other ............................................. 169 (2,805) 14,245
--------- --------- ---------
Net cash provided by operating activities ...... 426,957 308,339 389,507
--------- --------- ---------
Cash flows from investing activities:
Sale of fixed maturities investments ................. 138,741 219,131 118,986
Call or maturity of fixed maturities investments ..... 376,496 247,205 187,320
Sale of equity securities investments ................ 266,296 257,981 255,542
Collection of finance receivables .................... 8,588 10,449 8,222
Purchase of fixed maturities investments ............. (637,858) (564,317) (616,001)
Purchase of equity securities investments ............ (400,405) (353,340) (370,445)
Investment in land, buildings and equipment .......... (16,485) (17,798) (10,538)
Investment in finance receivables .................... (13,439) (17,032) (12,335)
Increase in other invested assets .................... (4,471) (7,030) (4,666)
--------- --------- ---------
Net cash used in investing activities .......... (282,537) (224,751) (443,915)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from stock options exercised ................ 6,474 3,399 4,113
Purchase/issuance of treasury shares ................. (60,714) (8,963) (287)
Increase in notes payable ............................ 18,460 41,093 91,889
Payment of cash dividends to shareholders ............ (88,405) (79,203) (69,542)
--------- --------- ---------
Net cash (used) provided in financing activities (124,185) (43,674) 26,173
--------- --------- ---------
Net increase (decrease) in cash ......................... 20,235 39,914 (28,235)
Cash at beginning of year ............................... 59,933 20,019 48,254
--------- --------- ---------
Cash at end of year ..................................... $ 80,168 $ 59,933 $ 20,019
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid ........................................ $ 21,823 $ 20,922 $ 16,001
========= ========= =========
Income taxes paid .................................... $ 95,488 $ 65,000 $ 67,000
========= ========= =========
Accompanying notes are an integral part of this statement.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS--Cincinnati Financial Corporation (the "Company") sells
insurance primarily in the Midwest and Southeast 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 generally accepted accounting principles.
Generally accepted accounting principles 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 generally
accepted accounting principles 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 $324,000,000 and $296,000,000 of
such reserves at December 31, 1997 and 1996, 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.
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. 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.
23
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
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 convertible debentures are based on
the quoted market prices for such debentures.
OTHER--Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings
Per Share" was adopted in 1997, and all prior period earnings per share data has
been restated.
SFAS No. 130 "Reporting Comprehensive Income" will be effective for the
Company in 1998. This statement requires financial statement reporting of
comprehensive income, which includes net income and other items, such as the
change in unrealized gains on investments, net of income taxes.
SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information " will be effective for the Company in 1998 and will require
additional disclosures for the Company's operating segments.
RECLASSIFICATIONS--Certain prior year amounts have been reclassified to conform
with 1997 classifications.
2. INVESTMENTS
(000'S omitted)
Year Ended December 31,
1997 1996 1995
----------- ----------- -----------
Investment income summarized by investment category:
Interest on fixed maturities ............................................ $ 218,065 $ 208,907 $ 186,071
Dividends on equity securities .......................................... 128,403 118,932 111,458
Other investment income ................................................. 6,865 5,744 6,480
----------- ----------- -----------
Total .............................................................. 353,333 333,583 304,009
Less investment expenses ................................................ 4,736 6,276 3,994
----------- ----------- -----------
Net investment income .............................................. $ 348,597 $ 327,307 $ 300,015
=========== =========== ===========
Realized gains on investments summarized by investment category:
Fixed maturities:
Gross realized gains ............................................... $ 22,075 $ 20,823 $ 14,466
Gross realized losses .............................................. (6,732) (10,207) (7,263)
Equity securities:
Gross realized gains ............................................... 62,337 47,310 38,705
Gross realized losses .............................................. (8,450) (9,980) (15,127)
----------- ----------- -----------
Realized gains on investments ...................................... $ 69,230 $ 47,946 $ 30,781
=========== =========== ===========
Change in unrealized gains on investments summarized by
investment category:
Fixed maturities ........................................................ $ 49,650 $ (18,257) $ 181,475
Equity securities ....................................................... 2,070,425 584,901 677,288
----------- ----------- -----------
Change in unrealized gains on investments .......................... $ 2,120,075 $ 566,644 $ 858,763
=========== =========== ===========
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Cincinnati Financial Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Analysis of cost, gross unrealized gains, gross unrealized losses and fair value
as of December 31, 1997 and 1996 (000's omitted):
GROSS GROSS
UNREALIZED UNREALIZED FAIR
1997 COST GAINS LOSSES VALUE
------------- ------------- ------------- -------------
Fixed maturities:
States, municipalities and political subdivisions.... $ 843,064 $ 47,811 $ 2,645 $ 888,230
Convertibles and bonds with warrants attached........ 103,124 7,973 1,705 109,392
Public utilities..................................... 74,871 4,982 18 79,835
United States government and government
agencies and authorities.......................... 9,278 258 22 9,514
All other corporate bonds............................ 1,541,212 125,174 2,138 1,664,248
------------- ------------- ------------- -------------
Total............................................. $ 2,571,549 $ 186,198 $ 6,528 $ 2,751,219
============= ============= ============= =============
Equity securities....................................... $ 1,725,855 $ 4,277,294 $ 3,878 $ 5,999,271
============= ============= ============= =============
1996
Fixed maturities:
States, municipalities and political subdivisions.... $ 838,008 $ 38,457 $ 1,092 $ 875,373
Convertibles and bonds with warrants attached........ 125,629 7,626 1,630 131,625
Public utilities..................................... 85,573 3,697 349 88,921
United States government and government
agencies and authorities.......................... 8,790 156 143 8,803
All other corporate bonds............................ 1,373,785 88,713 5,415 1,457,083
------------- ------------- ------------- -------------
Total............................................. $ 2,431,785 $ 138,649 $ 8,629 $ 2,561,805
============= ============= ============= =============
Equity securities....................................... $ 1,537,189 $ 2,207,805 $ 4,814 $ 3,740,180
============= ============= ============= =============
Contractual maturity dates for investments in fixed maturity securities as of
December 31, 1997 (000's omitted):
FAIR % OF
COST VALUE FAIR VALUE
------------- ------------ ----------
Maturity dates occurring:
One year or less................................... $ 58,119 $ 58,306 2.1
After one year through five years.................. 337,683 360,838 13.1
After five years through ten years................. 905,388 958,526 34.9
After ten years.................................... 1,270,359 1,373,549 49.9
------------- ------------ -----
Total........................................... $ 2,571,549 $ 2,751,219 100.0
============= ============ =====
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, 1997, investments with a cost of $51,585,000 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):
1997 1996
------------------------------ -----------------------------
FAIR Fair
COST VALUE Cost Value
------------- ---------- ------------ -------------
Fifth Third Bancorp common stock...................... $ 255,089 $ 2,612,607 $ 238,087 $ 1,331,625
Alltel Corporation common stock....................... $ 95,810 $ 522,527 $ 95,720 $ 399,252
3. DEFERRED ACQUISITION COSTS
Acquisition costs incurred and capitalized during 1997, 1996 and 1995
amounted to $322,117,000, $303,111,000 and $282,399,000, respectively.
Amortization of deferred acquisition costs was $314,392,000, $295,112,000 and
$272,313,000 for 1997, 1996 and 1995, respectively.
25
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,
------------------------
1997 1996 1995
--------- --------- ---------
Balance at January 1 .............. $ 1,824,296 $ 1,690,461 $ 1,510,150
Less reinsurance receivable ..... 121,881 109,719 78,125
--------- --------- ---------
Net balance at January 1 .......... 1,702,415 1,580,742 1,432,025
--------- --------- ---------
Incurred related to:
Current year .................... 1,115,140 1,183,251 1,040,541
Prior years ..................... (119,654) (151,996) (126,509)
--------- --------- ---------
Total incurred .................... 995,486 1,031,255 914,032
--------- --------- ---------
Paid related to:
Current year .................... 467,843 514,186 396,856
Prior years ..................... 453,410 395,396 368,459
--------- --------- ---------
Total paid ........................ 921,253 909,582 765,315
--------- --------- ---------
Net balance at December 31 ........ 1,776,648 1,702,415 1,580,742
Plus reinsurance receivable ..... 112,235 121,881 109,719
--------- --------- ---------
Balance at December 31 ............ $ 1,888,883 $ 1,824,296 $ 1,690,461
=========== =========== ===========
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss expenses decreased by $119,654,000, $151,996,000
and $126,509,000 in 1997, 1996 and 1995. 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 $47,651,000 and $56,871,000 at December 31, 1997 and 1996,
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):
1997 1996
---- ----
Ordinary/traditional life...... $ 137,734 $ 123,473
Universal life................. 202,696 183,967
Annuities...................... 121,284 112,496
Industrial..................... 16,470 16,881
Other.......................... 4,263 3,464
--------- ---------
Total........................ $ 482,447 $ 440,281
========= =========
At December 31, 1997 and 1996, the fair value associated with the annuities
shown above approximated $123,000,000 and $114,000,000, respectively.
6. NOTES PAYABLE
The Company and subsidiaries had no compensating balance requirement on
debt for either 1997 or 1996. Notes payable in the accompanying balance sheets
are short term, and interest rates charged on such borrowings ranged from 5.14%
to 8.50% during 1997 which resulted in an average interest rate of 6.14%. At
December 31, 1997 and 1996, the fair value of the notes payable approximated the
carrying value and the weighted average interest rate approximated 6.44% and
6.12%, respectively.
7. CONVERTIBLE SENIOR DEBENTURES
The convertible senior debentures are convertible by the debenture holders
into shares of common stock at a conversion price of $44.63 (22.41 shares for
each $1,000 principal). At December 31, 1997 and 1996, the fair value of the
debentures approximated $175,000,000 and $115,000,000, respectively.
8. REINSURANCE
Property and casualty premium income in the accompanying statements of
income includes approximately $41,694,000, $41,139,000 and $36,956,000 of earned
premiums on assumed business and is net of approximately $94,397,000,
$91,396,000 and $83,805,000 of earned premiums on ceded business for 1997, 1996
and 1995, respectively.
Written premiums for 1997, 1996 and 1995 consist of the following (000's
omitted):
1997 1996 1995
---- ---- ----
Direct business..... $1,523,915 $1,433,340 $1,338,205
Assumed business.... 42,773 42,671 39,221
Ceded business...... (95,085) (92,486) (81,574)
---------- ---------- ----------
Net............... $1,471,603 $1,383,525 $1,295,852
========== ========== ==========
Insurance losses and policyholder benefits in the accompanying statements
of income are net of approximately $34,744,000, $44,770,000 and $40,316,000 of
reinsurance recoveries for 1997, 1996 and 1995, respectively.
9. FEDERAL INCOME TAXES
Significant components of the Company's net deferred tax liability as of
December 31, 1997 and 1996 are as follows (000's omitted):
1997 1996
---- ----
Deferred tax liabilities:
Unrealized gains on investments...... $1,558,580 $816,554
Deferred acquisition costs........... 42,936 38,966
Other................................ 10,514 8,447
---------- --------
Total................................ 1,612,030 863,967
---------- --------
Deferred tax assets:
Losses and loss expense reserves..... 127,994 133,692
Unearned premiums.................... 29,293 28,109
Life policy reserves................. 19,460 15,962
Other................................ 28,805 9,311
---------- --------
Total................................ 205,552 187,074
---------- --------
Net deferred tax liability............. $1,406,478 $676,893
========== ========
The provision for federal income taxes is based upon a consolidated income
tax return for the Company and subsidiaries.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
The differences between the statutory federal rates and the Company's
effective federal income tax rates are as follows:
1997 1996 1995
PERCENT Percent Percent
------- ------- -------
Tax at statutory rate.............. 35.00 35.00 35.00
Increase (decrease) resulting from:
Tax-exempt municipal bonds....... (4.44) (6.41) (6.10)
Dividend exclusion............... (6.54) (8.50) (8.04)
Other............................ .10 .68 2.12
----- ----- -----
Effective rate..................... 24.12 20.77 22.98
===== ===== =====
No provision has been made (at December 31, 1997, 1996 and 1995) 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.
10. NET INCOME PER COMMON SHARE
(000's omitted except per share data)
Income Shares Per Share
1997 (Numerator) (Denominator) Amount
--------- ----------- ---------
Net income per common share... $299,375 55,179 $5.43
=====
Effect of dilutive securities:
5.5% convertible senior
debentures................. 2,712 1,309
Stock options.............. 443
Net income per common share --------- ------
(diluted)................... $ 302,087 56,931 $5.31
========= ====== =====
1996
Net income per common share... $ 223,760 55,736 $4.01
Effect of dilutive securities: =====
5.5% convertible senior
debentures................. 2,859 1,789
Stock options.............. 256
--------- ------
Net income per common share
(diluted)................... $ 226,619 57,781 $3.92
========= ====== =====
1995
Net income per common share... $227,350 55,668 $4.08
Effect of dilutive securities: =====
5.5% convertible senior
debentures................. 2,860 1,793
Stock options.............. 221
--------- ------
Net income per common share
(diluted)................... $ 230,210 57,682 $3.99
========= ====== =====
Options to purchase 25,000, 486,000 and 124,000 shares of common stock were
outstanding during 1997, 1996 and 1995, 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.
11. 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 the plan's
funded status and the amounts recognized in the Company's balance sheets as of
December 31, 1997 and 1996 (000's omitted):
1997 1996
---- ----
Actuarial present value of
accumulated benefit obligation
(vested benefits: 1997--$34,094;
1996--$29,704)........................ $ 35,202 $ 30,740
========= ========
Plan assets at fair value.............. $ 133,470 $ 92,740
Actuarial present value of projected
benefit obligation................... 61,457 54,208
--------- --------
Plan assets in excess of projected
benefit obligation................... 72,013 38,532
Unrecognized net transition asset at
January 1, 1987 ($7,774 amortized
over 21 years)....................... (3,702) (4,072)
Unrecognized prior service costs....... (397) (437)
Unrecognized net gain.................. (68,558) (34,730)
--------- --------
Accrued pension cost................... $ (644) $ (707)
========= ========
Net pension expense for 1997, 1996 and 1995 includes the following
components (000's omitted):
1997 1996 1995
---- ---- ----
Service cost for current year. $ 3,449 $ 3,306 $ 2,555
Interest cost................. 3,938 3,572 3,014
Actual return on plan assets.. (43,752) (15,057) (20,717)
Net amortization and deferral. 36,302 8,615 14,720
------- -------- --------
Net pension expense........... $ (63) $ 436 $ (428)
======= ======== ========
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation as of December 31 was 6.75%,
7% and 6.75% in 1997, 1996 and 1995, respectively. The rates of increase in
future compensation levels were 5% to 7% for each year. The expected long-term
rate of return on retirement plan assets, consisting principally of equity
securities (including those of the Company), was 8% as of December 31, 1997,
1996 and 1995.
27
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
12. SHAREHOLDERS' EQUITY AND RESTRICTION
The insurance subsidiaries paid cash dividends to the Company of
approximately $95,500,000, $77,027,000 and $143,773,000 in 1997, 1996 and 1995,
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 1998, the total dividends that can
be paid to the Company without regulatory approval are approximately
$246,941,000.
314,178 shares of common stock were available for future stock option
grants, as of December 31, 1997.
On November 22, 1996, the Board of Directors of the Company authorized the
repurchase of up to three million of the Company's outstanding shares as
management deemed appropriate, over an unspecified period of time. As of
December 31, 1997, the Company had repurchased 934,041 shares.
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,
------------------------
1997 1996 1995
---- ---- ----
Net income:
Property/casualty insurance
subsidiaries............. $ 212,808 $136,041 $ 152,003
Life/health insurance
subsidiary............... $ 6,261 $ (1,812) $ 7,096
December 31,
------------
1997 1996
---- ----
Shareholders' equity:
Property/casualty insurance
subsidiaries $ 2,148,746 $ 1,393,954
Life/health insurance subsidiary. $ 320,198 $ 214,130
14. TRANSACTION WITH AFFILIATED PARTIES
The Company paid certain officers and directors, or insurance agencies of
which they are shareholders, commissions of approximately $11,780,000,
$10,874,000 and $10,034,000 on premium volume of approximately $78,727,000,
$70,418,000 and $60,720,000 for 1997, 1996 and 1995, 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:
1997 1996 1995
---- ---- ----
Net income As reported $ 299,375 $ 223,760 $ 227,350
Pro forma 296,078 221,665 227,106
Net income per common share As reported $ 5.43 $ 4.01 $ 4.08
Pro forma 5.41 3.98 4.08
Net income per common share As reported $ 5.31 $ 3.92 $ 3.99
(diluted) Pro forma 5.25 3.89 3.99
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 1997, 1996 and
1995, respectively: dividend yield of 1.22%, 2.26% and 2.26%; expected
volatility of 19.67%, 20.5% and 21.3%; risk-free interest rates of 5.89%, 6.56%
and 5.73%; and expected lives of ten years for all years. Compensation cost
comprehended in the above pro forma disclosures is not indicative of future
amounts (when the SFAS No.123 methodology will be applied to additional
outstanding nonvested awards).
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Cincinnati Financial Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
(000's omitted except per share data)
A summary of options information for the years ended December 31, 1997, 1996
and 1995 follows:
1997 1996 1995
SHARES WEIGHTED-AVERAGE Shares Weighted-Average Shares Weighted-Average
--------------------------- ------------------------- -------------------------
EXERCISE PRICE Exercise Price Exercise Price
--------- -------------- --------- -------------- ------- --------------
Outstanding at beginning of year 1,258,164 $ 47.93 895,249 $ 40.24 892,131 $ 36.19
Granted 218,479 62.91 512,603 60.76 155,713 53.17
Exercised (155,143) 33.93 (90,926) 37.38 (136,291) 29.18
Forfeited/revoked (10,743) 53.89 (58,762) 58.68 (16,304) 39.91
--------- --------- -------
Outstanding at end of year 1,310,757 53.64 1,258,164 47.93 895,249 40.24
========= ===== ========= ===== ======= =====
Options exercisable at end of year 702,930 652,010 641,655
Weighted-average fair value of
options granted during the year $ 22.97 $ 20.55 $ 15.80
Options outstanding at December 31, 1997 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
------ ------ ---------------- -------------- ------ --------------
$ 12 TO 15 34,056 .25 YRS $ 13.77 34,056 $ 13.77
22 TO 31 48,993 2.50 YRS 25.22 48,993 25.22
33 TO 44 237,763 4.15 YRS 37.04 237,763 37.04
46 TO 57 297,270 6.57 YRS 50.45 229,571 50.24
59 TO 64 482,175 8.31 YRS 61.13 152,547 61.05
67 TO 69 166,500 9.28 YRS 68.06 0 N/A
79 TO 100 44,000 9.75 YRS 90.79 0 N/A
--------- -------
1,310,757 6.91 YRS 53.64 702,930 44.61
========= ======= =====
29
"Selected Quarterly Financial Data" from the inside back cover
(incorporated into Item 8).
SELECTED QUARTERLY FINANCIAL DATA
(000's omitted except per share data)
Financial data for each quarter in the two years ended December 31,
1997
---------------------------------------------------------------------------------
Quarter 1ST 2ND 3RD 4TH FULL YEAR
---------------------------------------------------------------------------------
Revenues.................................... $ 483,737 $ 484,203 $ 492,038 $ 482,406 $ 1,942,384
Income Before Income Taxes.................. 98,278 100,341 101,964 93,975 394,559
Net Income.................................. 74,047 75,830 77,000 72,498 299,375
Net Income Per Common Share................. 1.33 1.37 1.42 1.32 5.43
Net Income Per Common Share (Diluted)....... 1.30 1.33 1.37 1.28 5.31
1996
---------------------------------------------------------------------------------
Quarter 1st 2nd 3rd 4th Full Year
---------------------------------------------------------------------------------
Revenues.................................... $ 451,798 $ 442,042 $ 455,681 $ 459,227 $ 1,808,749
Income Before Income Taxes.................. 76,449 67,022 58,658 80,291 282,421
Net Income.................................. 59,448 54,396 46,949 62,966 223,760
Net Income Per Common Share................. 1.07 .98 .84 1.13 4.01
Net Income Per Common Share (Diluted)....... 1.04 .95 .82 1.10 3.92
Note: The sum of the quarterly reported amounts may not equal the full year as
each is computed independently.
1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements 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), and No. 33-48970 (on Form S-4) of Cincinnati
Financial Corporation of our reports dated February 4, 1998, appearing in and
incorporated by reference in the Annual Report on Form 10-K of Cincinnati
Financial Corporation for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
/S/ Deloitte & Touche LLP
Cincinnati, Ohio
March 23, 1998
7
1,000
YEAR
DEC-31-1997
JAN-01-1997
DEC-31-1997
2,751,219
0
0
5,999,271
11,565
4,698
8,797,050
80,168
2,432
135,313
9,493,425
2,376,951
443,054
38,724
15,204
338,988
0
0
112,927
4,604,038
9,493,425
1,516,378
348,597
69,230
8,179
1,054,924
314,392
178,509
394,559
95,184
299,375
0
0
0
299,375
5.43
5.31
1,702,415
1,115,140
(119,654)
467,843
453,410
1,776,648
(119,654)
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 $3,306 which is classified as Other Policyholder Funds
Equals the sum of Notes Payable and the 5 1/2% Convertible 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
