1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X Quarterly Report Under Section 13 or 15 (d) of the Securities
----- Exchange Act of 1934
For the Quarterly Period Ended March 31, 1998
Transition Report Pursuant to Section 13 or 15 (d) of the
----- Securities Exchange Act of 1934
----------------------------------
Commission File Number 0-4604
CINCINNATI FINANCIAL CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
An Ohio Corporation 31-0746871
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6200 South Gilmore Road
Fairfield, Ohio 45014-5141
(Address of principal executive offices)
Registrant's telephone number, including area code: 513/870-2000
*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.
YES X . NO .
--- ---
Securities registered pursuant to Section 12(g) of the Act:
$2.00 Par Common--166,753,020 shares outstanding at March 31, 1998
(Shares outstanding reflect the effects of a 3-for-1 stock
split effective to shareholders of record on April 24, 1998.)
$56,723,000 of 5.5% Convertible Senior Debentures Due 2002
2
PART I
------
ITEM 1. FINANCIAL STATEMENTS
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's omitted)
(Unaudited)
March 31, December 31,
1998 1997
-------------- --------------
ASSETS
- ------
Investments
Fixed Maturities (Cost: 1998--$2,614,127;
1997--$2,571,549) ..................................... $ 2,792,065 $ 2,751,219
Equity Securities (Cost: 1998--$1,812,209;
1997--$1,725,855) ..................................... 6,523,354 5,999,271
Other Invested Assets ................................... 47,852 46,560
Cash ....................................................... 75,895 80,168
Investment Income Receivable ............................... 74,872 74,520
Finance Receivables ........................................ 32,217 31,715
Premiums Receivable ........................................ 160,526 158,539
Reinsurance Receivable ..................................... 110,008 109,110
Prepaid Reinsurance Premiums ............................... 23,980 23,612
Deferred Acquisition Costs Pertaining to Unearned
Premiums and to Life Policies in Force .................. 135,304 135,313
Land, Buildings and Equipment for Company Use (at Cost
Less Accumulated Depreciation) .......................... 55,074 52,559
Other Assets ............................................... 29,576 30,839
-------------- --------------
Total Assets ......................................... $ 10,060,723 $ 9,493,425
============== ==============
LIABILITIES
- -----------
Insurance Reserves:
Losses and Loss Expenses ................................ $ 1,968,091 $ 1,936,534
Life Policy Reserves .................................... 494,261 482,447
Unearned Premiums .......................................... 440,697 443,054
Notes Payable .............................................. 281,100 280,558
5.5% Convertible Senior Debentures Due 2002 ................ 56,723 58,430
Federal Income Taxes
Current ................................................. 51,970 24,335
Deferred ................................................ 1,559,304 1,406,478
Other Liabilities .......................................... 143,162 144,624
-------------- --------------
Total Liabilities .................................... 4,995,308 4,776,460
-------------- --------------
SHAREHOLDERS' EQUITY
- --------------------
Common Stock, $2 per Share; Authorized 200,000
Shares; Issued 1998--169,787; 1997--169,391
Shares; Outstanding 1998--166,753; 1997--166,356
Shares .................................................. 339,574 338,782
Paid-In Capital ............................................ 208,916 203,282
Retained Earnings .......................................... 1,400,341 1,341,730
Accumulated Other Comprehensive Income ..................... 3,189,153 2,905,756
-------------- --------------
5,137,984 4,789,550
Less Treasury Shares at Cost (1998--3,034 Shares;
1997--3,035 Shares) ..................................... (72,569) (72,585)
-------------- --------------
Total Shareholders' Equity ........................... 5,065,415 4,716,965
-------------- --------------
Total Liabilities and Shareholders' Equity ........ $ 10,060,723 $ 9,493,425
============== ==============
Common Stock, Paid-In-Capital and Share figures reflect the effects of a 3-for-1
stock split effective to shareholders of record on April 24, 1998.
Accompanying notes are an integral part of these financial statements.
3
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(000's omitted except per share data)
Three Months Ended March 31,
Revenues: 1998 1997
--------- ---------
Premiums Earned:
Property and Casualty ......................... $ 378,400 $ 357,500
Life .......................................... 14,128 13,533
Accident and Health ........................... 2,064 1,950
--------- ---------
Net Premiums Earned ........................ 394,592 372,983
Investment Income, Less Expenses ................ 90,300 84,231
Realized Gain on Investments .................... 25,642 24,303
Other Income .................................... 2,020 2,220
--------- ---------
Total Revenues ................................ 512,554 483,737
--------- ---------
Benefits & Expenses:
Insurance Losses and Policyholder Benefits ..... 270,131 266,498
Commissions .................................... 70,211 67,443
Other Operating Expenses ....................... 36,121 33,135
Taxes, Licenses & Fees ......................... 12,821 11,982
Increase in Deferred Acquisition Costs
Pertaining to Unearned Premiums
and to Life Policies in Force .............. 9 (174)
Interest Expense ............................... 5,338 5,037
Other Expenses ................................. 1,590 1,538
--------- ---------
Total Benefits & Expenses ..................... 396,221 385,459
--------- ---------
Income Before Income Taxes ....................... 116,333 98,278
--------- ---------
Provision for Income Taxes:
Current ......................................... 31,927 20,236
Deferred ........................................ 228 3,995
--------- ---------
Total Provision for Income Taxes .............. 32,155 24,231
--------- ---------
Net Income ....................................... $ 84,178 $ 74,047
========= =========
Average Shares Outstanding ....................... 166,601 166,437
========= =========
Average Shares Outstanding (diluted) ............. 172,538 172,817
========= =========
Per Common Share:
Net Income .................................. $ .51 $ .44
========= =========
Net Income (diluted) ........................ $ .49 $ .43
========= =========
Cash Dividends Declared ..................... $ .1533 $ .1367
========= =========
Per share amounts reflect the effects of a 3-for-1 stock split effective to
shareholders of record on April 24, 1998.
Accompanying notes are an integral part of these financial statements.
4
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company and
all of its subsidiaries, each of which is wholly owned, and are presented in
conformity with generally accepted accounting principles. All significant
inter-company investments and transactions have been eliminated in
consolidation. The December 31, 1997 consolidated balance sheet amounts are
derived from the audited financial statements but do not include all disclosures
required by generally accepted accounting principles.
INVESTMENTS--Fixed maturities and equity securities have been classified as
available for sale and are carried at fair values at March 31, 1998 and December
31, 1997.
UNREALIZED GAINS AND LOSSES (000's omitted)--The increases (decreases) in
unrealized gains for fixed maturities and equity securities (net of income tax
effect) for the three-month periods ended March 31 are as follows:
Fixed Equity
Maturities Securities Total
---------- ---------- -----
1998 $ (1,126) $ 284,523 $ 283,397
----
1997 $ (16,883) $ 258,254 $ 241,371
----
Such amounts are included as additions to and deductions from shareholders'
equity.
REINSURANCE (000's omitted)--Premiums earned are net of $24,054 and $24,205 of
premium on ceded business for March 31, 1998 and 1997, respectively. Insurance
losses and policyholder benefits in the accompanying consolidated statements of
income are net of $11,954 and $13,010 reinsurance recoveries for March 31, 1998
and 1997, respectively.
NOTE II - 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. On
March 31, 1998, outstanding options for Stock Option Plan No. III totalled
49,614 shares with a purchase price of $7.34, outstanding options for Stock Plan
No. IV totalled 2,834,211 shares with purchase prices ranging from a low of
$7.46 to a high of $42.88 and outstanding options for Stock Plan V totalled
1,419,405 shares with purchase prices ranging from a low of $20.48 to a high of
$45.38. These amounts reflect the effects of a 3-for-1 stock split effective to
shareholders of record on April 24, 1998.
NOTE III - INTERIM ADJUSTMENTS
The preceding summary of financial information for Cincinnati Financial
Corporation and consolidated subsidiaries is unaudited, but the Company believes
that all adjustments (consisting only of normal recurring accruals) necessary
for fair presentation have been made. The results of operations for this interim
period is not necessarily an indication of results to be expected for the
remaining nine months of the year.
NOTE IV - SUBSEQUENT EVENTS
On April 4, 1998, the Company's authorized capital was increased to 200,000,000
shares of common stock and a 3-for-1 stock split, in the form of a 200% stock
dividend, was declared to shareholders of record April 24, 1998, to be
distributed May 15, 1998.
5
Cincinnati Financial Corporation filed a Form S-3 Registration Statement with
the Securities and Exchange Commission on May 1, 1998, to issue $350,000,000 of
debentures due 2028. The offering will be completed in late May 1998.
NOTE V - FINANCIAL ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME--SFAS No. 130 "Reporting Comprehensive Income" is 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. The accompanying
consolidated financial statements have reflected the effects of this
pronouncement.
SEGMENT INFORMATION--SFAS No. 131 "Disclosures About Segments of an Enterprise
and Related Information" is effective for the Company in 1998 and will require
additional disclosures for the Company's operating segments in the annual
consolidated financial statement. Beginning in 1999, certain segment information
is required to be reported quarterly.
6
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
------------------------------------------
(000's omitted)
Accumulated
Other Total
Common Stock Treasury Paid-In Retained Comprehensive Shareholders'
Shares Amount Stock Capital Earnings Income Equity
-------- ------ ------ ------- -------- -------- -------
Bal. Dec. 31,
1996 167,486 $334,972 $ (11,217) $ 178,547 $1,132,880 $ 1,527,707 $3,162,889
----------
Net Income 74,047 74,047
Change in Unreal.
Gains Net of
Inc. Taxes of
$129,969 241,371 241,371
--------
Comprehensive
Income 315,418
Div. Declared (22,688) (22,688)
Purchase/Issuance of
Treasury Shares (23,070) 17 (23,053)
Stock Options
Exercised 101 202 1,112 1,314
Conversion of
Debentures 3 6 37 43
------- --------- --------- --------- ----------- ----------- ----------
Bal. March 31,
1997 167,590 $335,180 $ (34,287) $ 179,713 $ 1,184,239 $ 1,769,078 $3,433,923
======= ======== ========= ========= =========== =========== ==========
Bal. Dec. 31,
1997 169,391 $338,782 $ (72,585) $ 203,282 $ 1,341,730 $ 2,905,756 $4,716,965
----------
Net Income 84,178 84,178
Change in Unreal.
Gains Net of
Inc. Taxes of
$152,599 283,397 283,397
--------
Comprehensive
Income 367,575
Div. Declared (25,567) (25,567)
Purchase/Issuance of
Treasury Shares 16 14 30
Stock Options
Exercised 281 562 4,142 4,704
Conversion of
Debentures 115 230 1,478 1,708
------- --------- --------- --------- ----------- ----------- ----------
Bal. March 31,
1998 169,787 $ 339,574 $ (72,569) $ 208,916 $ 1,400,341 $ 3,189,153 $5,065,415
======= ========= ========= ========= =========== =========== ==========
Common Stock, Paid-In-Capital and Share figures reflect the effects of a 3-for-1
stock split effective to shareholders of record on April 24, 1998.
Accompanying notes are an integral part of these financial statements.
7
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000's omitted)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income .......................................... $ 84,178 $ 74,047
Adjustments to reconcile operating income to net cash
provided by operating activities:
Depreciation and amortization .................... 2,626 2,503
Increase in investment income receivable ......... (352) (2,179)
(Increase) decrease in premiums receivable ....... (1,987) 2,852
(Increase) decrease in reinsurance receivable .... (898) 14,481
Increase in prepaid reinsurance premiums ......... (368) (294)
Increase in deferred acquisition costs ........... 9 (174)
Decrease in accounts receivable .................. 3,811 216
Decrease in other assets ......................... 3,663 44,215
Increase in loss and loss expense reserves ....... 31,557 2,866
Increase in life policy reserves ................. 11,814 9,906
Decrease in unearned premiums .................... (2,357) (3,675)
Decrease in other liabilities .................... (4,327) (3,274)
Decrease in deferred income taxes ................ 228 4,102
Realized gains on investments .................... (25,642) (24,303)
Increase in current income taxes ................. 27,394 20,129
Other ............................................ (5,645) (2,528)
------------- -------------
Net cash provided by operating activities ..... 123,704 138,890
------------- -------------
Cash flows from investing activities:
Sale of fixed maturities ......................... 3,034 78,236
Call or maturity of fixed maturities investments . 79,408 9,264
Sale of equity securities investments ............ 80,437 61,472
Collection of finance receivables ................ 3,426 2,716
Purchase of fixed maturities investments ......... (123,074) (179,683)
Purchase of equity securities investments ........ (142,547) (93,175)
Investment in land, buildings and equipment ...... (5,946) (2,632)
Investment in finance receivables ................ (3,928) (4,177)
Investment in other invested assets .............. (1,359) (38)
------------- -------------
Net cash used in investing activities ......... (110,549) (128,017)
------------- -------------
Cash flows from financing activities:
Proceeds from stock options exercised ............ 4,704 1,314
Purchase/Issuance of treasury shares ............. 30 (23,053)
Increase in notes payable ........................ 542 1,853
Payment of cash dividends to shareholders ........ (22,704) (20,585)
------------- -------------
Net cash used in financial activities ......... (17,428) (40,471)
------------- -------------
Net decrease in cash ................................... (4,273) (29,598)
Cash at beginning of period ............................ 80,168 59,934
------------- -------------
Cash at end of period .................................. $ 75,895 $ 30,336
============= =============
Supplemental disclosures of cash flow information
Interest paid ....................................... $ 4,248 $ 5,256
============= =============
Income taxes paid ................................... $ 0 $ 0
============= =============
Accompanying notes are an integral part of these financial statements.
8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (000's omitted)
Premiums earned for the three months ended March 31, 1998 have increased $21,609
(6%) over the three months ended March 31, 1997. For our property and casualty
insurance companies, gross written premiums increased $22,000 and gross earned
premiums increased by $20,759. The growth rate of our property and casualty
subsidiaries on a gross written and earned basis is less than last year. The
growth rate is less than last year because the increase in new business and some
rate increases on personal lines business were offset by lower premiums on
workers' compensation coverages. The premium volume of our life and health
company has increased approximately 5% as the Company had increases in both life
and health insurance production. The premium growth in our life subsidiary is
mainly attributable to increased sales of both traditional and work site
marketing products. For the three-month period ended March 31, 1998, investment
income, net of expenses, has increased $6,069 (7%) when compared with the first
three months of 1997. This increase is the result of the growth of the
investment portfolio because of investing cash flows from operations and
dividend increases from equity securities.
Realized gains on investments for the three months ended March 31, 1998 amounted
to $25,642 compared to $24,303 for the comparable three-month period ended March
31, 1997. The realized gains are predominantly the result of the sale of equity
securities and management's decision to realize the gains and reinvest the
proceeds at higher yields.
Insurance losses and policyholder benefits (net of reinsurance recoveries)
increased $3,633 (1%) for the first three months of 1998 over the same period in
1997. Property and casualty company losses increased $2,758 in the first quarter
of 1998, compared to the first quarter of 1997. Catastrophic claims were lower
by $2,699 in the same period. Policyholder benefits increased $875 over the
first quarter of 1997 in the life insurance subsidiary. The increase is the
result of a higher incidence of death claims, health claims, and related costs.
Other operating expenses increased $2,986 for the first quarter of 1998 compared
to the first quarter of 1997. The increase is attributable to increases in staff
and costs associated with the upgrading of our computer systems to handle
projected increases in premium and to make our systems year 2000 compliant.
Provision for income taxes, current and deferred, have increased by $7,923 for
the first three months of 1998 compared to the first three months of 1997. The
increase in federal taxes is primarily attributable to an increase in the
effective tax rate from 24.75% to 27.64% at March 31, 1997 and 1998.
In the first quarter of 1998, the Company experienced significantly more
unrealized gains in equity securities than in the first quarter of 1997,
resulting in comprehensive income of $367,575 in 1998, compared to $315,418 in
1997.
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.
On November 22, 1996, the Board authorized repurchase of up to three million of
the Company's outstanding shares. As of March 31, 1998 the Company has
repurchased 934 shares, before the 1998 three-for-one split, and plans to
repurchase the remaining 2,066 shares as management deems appropriate, over an
unspecified period of time.
9
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The Company is involved in no material litigation other than routine litigation
incident to the nature of the insurance industry.
ITEM 2. Changes in Securities
---------------------
There have been no material changes in securities during the first quarter.
At the Annual Meeting of the Board of Directors, which occurred on April 4,
1998, the directors approved a 3-for-1 stock split in the form of a 200% stock
dividend to be distributed on May 15, 1998 to shareholders of record on April
24, 1998.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
The Company has not defaulted on any interest or principal payment, and no
arrearage in the payment of dividends has occurred.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No special matters were voted upon by security holders during the first quarter.
On April 4, 1998, the Company's authorized capital was increased to 200,000,000
shares of common stock.
ITEM 5. Other Information
-----------------
No matters to report.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits included:
Exhibit 11--Statement re Computation of Per Share Earnings.
Exhibit 27--Financial Data Schedule
(b) The Company was not required to file any reports on Form 8-K
during the quarter ended March 31, 1998.
Signature
Pursuant to the requirements 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
--------------------------------
(Registrant)
Date May 11, 1998
-----------------
By/s/ T.F. Elchynski
--------------------
T.F. Elchynski
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
1
EXHIBIT 11
CINCINNATI FINANCIAL CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR THE QUARTER ENDED MARCH 31,
(000's omitted except per share data)
1998 1997
-------- --------
Basic Earnings per share:
Net income $ 84,178 $ 74,047
======== ========
Average shares outstanding 166,601 166,437
======== ========
Net income per common share $ .51 $ .44
======== ========
Diluted earnings per share:
Net income $ 84,178 $ 74,047
Interest on convertible debentures--net of tax 497 713
-------- --------
Net income for per share calculation (diluted) $ 84,675 $ 74,760
======== ========
Average shares outstanding 166,601 166,437
Effective of dilutive securities:
5.5% convertible senior debentures 3,813 5,365
Stock options 2,124 1,015
-------- --------
Total dilutive shares 172,538 172,817
======== ========
Net income per common share--diluted $ .49 $ .43
======== ========
7
1,000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
2,792,065
0
0
6,523,354
11,536
4,630
9,363,271
75,895
2,256
135,304
10,060,723
2,417,619
440,697
41,126
15,870
337,823
0
0
339,574
4,725,841
10,060,723
394,592
90,300
25,642
2,020
270,131
82,749
43,341
116,333
32,155
84,178
0
0
0
84,178
.51
.49
1,776,648
0
0
0
0
1,805,385
0
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
$3,607 which is classified as Other Policyholder Funds
Equals the sum of Notes Payable and the 5.5% Convertible Senior Debenture
Equals the Total Shareholders' Equity
Equals the Sum of Commissions, Other Operating Expenses, Taxes and licenses
and Fees, Increase in deferred acquisition costs, Interest expense and other
expenses
Equals the net reserve for unpaid claims for the property casualty
subsidiaries less loss checks payable as of December 31, 1997
Equals the net reserve for unpaid claims for the property casualty
subsidiaries less loss checks payable as of March 31, 1998
