SEC Filing | Cincinnati Financial Corporation

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 SEPTEMBER 30, 2000 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--160,868,000 shares outstanding at September 30, 2000 $30,814,000 of 5.5% Convertible Senior Debentures Due 2002 $419,624,000 of 6.9% Senior Debentures Due 2028 Page 1 of 11

2 PART I ITEM 1. FINANCIAL STATEMENTS CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's omitted) (Unaudited) September 30, December 31, 2000 1999 ------------ ------------ Assets Investments Fixed maturities (cost: 2000--$2,814,268; 1999--$2,692,154) .................................................... $ 2,681,305 $ 2,617,412 Equity securities (cost: 2000--$2,142,253; 1999--$2,022,555) .................................................... 7,763,586 7,510,918 Other invested assets ................................................... 68,318 65,909 Cash ....................................................................... 23,868 339,554 Investment income receivable ............................................... 84,265 80,128 Finance receivables ........................................................ 30,508 32,931 Premiums receivable ........................................................ 225,743 166,585 Reinsurance receivable ..................................................... 198,701 159,229 Prepaid reinsurance premiums ............................................... 26,262 24,684 Deferred acquisition costs pertaining to unearned premiums and to life policies in force .................................. 168,142 154,385 Land, buildings and equipment for company use (at cost less accumulated depreciation) .......................................... 120,651 107,784 Other assets ............................................................... 78,674 120,695 Assets held in separate accounts ........................................... 319,212 -0- ------------ ------------ Total Assets ......................................................... $ 11,789,235 $ 11,380,214 ============ ============ Liabilities Insurance reserves: Losses and loss expenses ................................................ $ 2,299,090 $ 2,154,149 Life policy reserves .................................................... 588,162 860,561 Unearned premiums .......................................................... 512,708 480,453 Notes payable .............................................................. 158,000 118,000 5.5% Convertible senior debentures due 2002 ................................ 30,814 36,759 6.9% Senior debentures due 2028 ............................................ 419,624 419,614 Federal income taxes Current ................................................................. 49,109 30,492 Deferred ................................................................ 1,742,259 1,719,673 Other liabilities .......................................................... 165,920 139,229 Liabilities related to separate accounts ................................... 319,212 -0- ------------ ------------ Total Liabilities .................................................... 6,284,897 5,958,930 ------------ ------------ Shareholders' Equity Common stock, $2 per share; authorized 200,000 Shares; issued 2000--172,728; 1999--171,862 Shares; outstanding 2000--160,868; 1999--162,021 Shares .................................................................. 345,457 343,725 Paid-in capital ............................................................ 251,892 237,859 Retained earnings .......................................................... 1,691,791 1,623,890 Accumulated other comprehensive income ..................................... 3,591,601 3,530,104 ------------ ------------ 5,880,741 5,735,578 Less treasury shares at cost (2000--11,860 shares; 1999--9,841 shares) ..................................................... (376,403) (314,294) ------------ ------------ Total Shareholders' Equity ........................................... 5,504,338 5,421,284 ------------ ------------ Total Liabilities and Shareholders' Equity ........................ $ 11,789,235 $ 11,380,214 ============ ============ Accompanying notes are an integral part of these financial statements. Page 2 of 11

3 CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (000's omitted except per share data) Nine Months Ended September 30, Three Months Ended September 30, 2000 1999 2000 1999 ----------- ----------- --------- --------- Revenues: Premiums earned: Property and casualty ................................. $ 1,345,746 $ 1,223,758 $ 465,657 $ 419,121 Life .................................................. 55,198 48,081 18,183 15,745 Accident and health ................................... 2,396 6,573 920 1,997 ----------- ----------- --------- --------- Net premiums earned ................................ 1,403,340 1,278,412 484,760 436,863 Investment income, less expenses ....................... 311,650 288,345 102,630 97,821 Realized gains on investments .......................... 27,769 39,779 10,145 991 Other income ........................................... 7,108 9,745 2,255 2,626 ----------- ----------- --------- --------- Total revenues ........................................ 1,749,867 1,616,281 599,790 538,301 ----------- ----------- --------- --------- Benefits & expenses: Insurance losses and policyholder benefits ............. 1,065,279 943,159 418,384 332,062 Commissions ............................................ 259,853 235,209 90,147 81,878 Other operating expenses ............................... 121,897 110,366 41,160 37,134 Taxes, licenses & fees ................................. 42,164 37,724 14,851 14,057 Increase in deferred acquisition costs pertaining to unearned premiums and to life policies in force ...................... (13,757) (5,462) (6,753) (4,564) Interest expense ....................................... 29,195 23,369 8,093 7,978 Other expenses ......................................... 53,799 4,472 42,639 714 ----------- ----------- --------- --------- Total benefits & expenses ............................. 1,558,430 1,348,837 608,521 469,259 ----------- ----------- --------- --------- Income before income taxes ............................... 191,437 267,444 (8,731) 69,042 ----------- ----------- --------- --------- Provision for income taxes: Current ................................................. 42,331 59,664 1,304 6,690 Deferred ................................................ (10,528) 3 (15,612) 5,306 ----------- ----------- --------- --------- Total provision for income taxes ...................... 31,803 59,667 (14,308) 11,996 ----------- ----------- --------- --------- Net income ............................................... $ 159,634 $ 207,777 $ 5,577 $ 57,046 =========== =========== ========= ========= Average shares outstanding ............................... 160,924 164,542 159,732 162,638 Average shares outstanding (diluted) ..................... 164,158 169,057 161,560 167,232 Per common share: Net income ............................................... $ .99 $ 1.26 $ .03 $ .35 =========== =========== ========= ========= Net income (diluted) ..................................... $ .98 $ 1.24 $ .03 $ .34 =========== =========== ========= ========= Cash dividends declared .................................. $ .57 $ .51 $ .19 $ .17 =========== =========== ========= ========= Accompanying notes are an integral part of these financial statements. Page 3 of 11

4 CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) (000's omitted) NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 Accumulated Other Total Common Stock Treasury Paid-In Retained Comprehensive Shareholders' Shares Amount Stock Capital Earnings Income Equity -------- ------ ------ ------- -------- -------- -------- Bal. Dec. 31, 1998 170,435 $340,871 $ (97,196) $ 218,328 $1,480,914 $ 3,678,019 $5,620,936 ---------- Net Income 207,777 207,777 Change in unreal. gains net of inc. taxes of $316,779 (588,305) (588,305) ---------- Comprehensive income (380,528) Div. declared (84,138) (84,138) Purchase/issuance of treasury shares (129,309) 12 (129,297) Stock options exercised 326 651 5,098 5,749 Conversion of debentures 600 1,200 7,726 8,926 ---- ------ -------- ------ ------- -------- ------ Bal. Sept. 30, 1999 171,361 $342,722 $ (226,505) $ 231,164 $ 1,604,553 $ 3,089,714 $5,041,648 ======= ======== ========== ========= =========== =========== ========== Bal. Dec. 31, 1999 171,862 $343,725 $ (314,294) $ 237,859 $ 1,623,890 $ 3,530,104 $5,421,284 ---------- Net income 159,634 159,634 Change in unreal. gains net of inc. taxes of $(33,114) 61,497 61,497 ------- Comprehensive income 221,431 Div. declared (91,732) (91,732) Purchase/issuance of treasury shares (62,109) 9 (62,100) Stock options exercised 467 934 8,878 9,812 Conversion of debentures 399 798 5,146 (1) 5,943 ---- ------ -------- ------ ------- -------- ------ Bal. Sept. 30, 2000 172,728 $ 345,457 $ (376,403) $ 251,892 $ 1,691,791 $ 3,591,601 $5,504,338 ======== ========= ========== ========= =========== =========== ========== Accompanying notes are an integral part of these financial statements. Page 4 of 11

5 CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000's omitted) Nine Months Ended September 30, 2000 1999 ---- ---- Cash flows from operating activities: Net income ............................................................. $ 159,634 $ 207,777 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization ....................................... 12,446 10,269 Impairment loss ..................................................... 39,100 -0- Increase in investment income receivable ............................ (9,069) (2,786) Increase in premiums receivable ..................................... (59,158) (17,937) Increase in reinsurance receivable .................................. (39,472) (1,522) Decrease in prepaid reinsurance premiums ............................ (1,578) 2,217 Increase in deferred acquisition costs .............................. (13,757) (5,462) Decrease in accounts receivable ..................................... 19,992 10,574 Decrease (increase) in other assets ................................. (17,213) (28,911) Increase in loss and loss expense reserves .......................... 144,941 72,498 Increase in life policy reserves .................................... 35,363 13,852 Increase in unearned premiums ....................................... 32,255 13,911 Increase (decrease) in other liabilities ............................ 33,258 31,387 Increase (decrease) in deferred income taxes ........................ (10,528) 3 Realized gains on investments ....................................... (27,769) (39,779) Increase in current income taxes .................................... 18,616 6,941 Transfer of cash to separate account ................................ Net cash provided by operating activities ....................... 317,061 273,032 --------- --------- Cash flows from investing activities: Sale of fixed maturities ............................................ 7,965 55,554 Call or maturity of fixed maturities investments .................... 201,683 257,385 Sale of equity securities investments ............................... 125,125 135,005 Collection of finance receivables ................................... 11,320 12,226 Purchase of fixed maturities investments ............................ (641,308) (349,109) Purchase of equity securities investments ........................... (198,237) (199,421) Investment in land, buildings and equipment, net .................... (26,725) (54,822) Investment in finance receivables ................................... (8,897) (13,393) Investment in other invested assets ................................. (2,607) (5,037) --------- --------- Net cash used in investing activities ........................... (531,681) (161,612) --------- --------- Cash flows from financing activities: Proceeds from stock options exercised ............................... 9,812 5,749 Purchase/issuance of treasury shares ................................ (62,100) (129,297) Decrease in notes payable ........................................... 40,000 83,000 Payment of cash dividends to shareholders ........................... (88,777) (81,764) --------- --------- Net cash used in financial activities ........................... (101,065) (122,312) --------- --------- Net decrease in cash ...................................................... (315,685) (10,892) Cash at beginning of period ............................................... 339,554 58,611 --------- --------- Cash at end of period ..................................................... $ 23,869 $ 47,719 ========= ========= Supplemental disclosures of cash flow information Interest paid .......................................................... $ 21,801 $ 15,348 ========= ========= Income taxes paid ...................................................... $ 21,396 $ 52,000 ========= ========= Supplemental disclosure of noncash activity - During the second quarter, the Company established a separate account. This resulted in a noncash transfer to the separate account of the following: $300,818 from investments, $307,762 from life policy reserves, $11,394 from cash, $8,984 from accounts payable securities, $4,932 from investment income receivable, $540 from other liabilities, and $142 from accounts receivable securities. Accompanying notes are an integral part of these financial statements. Page 5 of 11

6 CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE I - ACCOUNTING POLICIES The condensed 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 accounting principles generally accepted in the United States of America. All significant inter-company investments and transactions have been eliminated in consolidation. The December 31, 1999 consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America. 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 three months of the year. INVESTMENTS--Fixed maturities and equity securities have been classified as available for sale and are carried at fair values at September 30, 2000 and December 31, 1999. 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 nine-month and three-month periods ended September 30 are as follows: Nine Months Ended September 30, Three Months Ended September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Fixed maturities $(37,844) $(118,039) $ 2,525 $ (41,677) Equity securities 99,342 (470,266) 662,935 (442,462) -------- --------- -------- --------- Total $ 61,498 $(588,305) $665,460 $(484,139) ======== ========= ======== ========= Such amounts are included as additions to and deductions from shareholders' equity. REINSURANCE (000's omitted)--Premiums earned are net of premiums on ceded business, and insurance losses and policyholder benefits are net of reinsurance recoveries in the accompanying statements of income for the nine-month and three-month periods ended September 30 as follows: Nine Months Ended September 30, Three Months Ended September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Ceded premiums $88,868 $77,404 $31,466 $25,841 Reinsurance recoveries $86,143 $39,243 $26,852 $15,237 WRITE DOWN OF CAPITALIZED SOFTWARE - During the third quarter of 2000, the Company recorded a $39.1 million ($25.4 million after tax, or 16 cents per share) non-cash charge to write off a substantial portion of previously capitalized costs related to the development of "next-generation" software to process property/casualty policies. Management conducted a review of the project, including an assessment by an independent firm, which was substantially completed in July 2000. After missing several deliverable dates, management decided in July 2000 that the project design would not perform as originally intended. The decision required the application software under development to be abandoned and a new application to be purchased or developed. The $39.1 million charge is included in "other expenses" in the accompanying consolidated statements of income. Page 6 of 11

7 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 September 30, 2000, outstanding options for Stock Plan No. IV totaled 2,104,608 shares with purchase prices ranging from a low of $7.71 to a high of $42.87, outstanding options for Stock Plan V totaled 1,197,604 shares with purchase prices ranging from a low of $20.47 to a high of $45.37 and outstanding options for Stock Plan VI totaled 2,788,108 shares with purchase prices ranging from a low of $29.38 to a high of $41.47. NOTE III - SEGMENT INFORMATION The Company is organized and operates principally in two industries and has four reportable segments--commercial lines property and casualty insurance, personal lines property and casualty insurance, life insurance and investment operations. The accounting policies of the segments are the same as those described in Note I - Accounting Policies. Revenue is primarily from unaffiliated customers. Identifiable assets by segment are those assets, including investment securities, used in the Company's operations in each industry. Corporate and other identifiable assets are principally cash and marketable securities. Segment information, for which results are regularly reviewed by Company management in making decisions about resources to be allocated to the segments and assess their performance, is summarized as follows (000's omitted): Nine Months Ended Three Months Ended September 30, September 30, ------------- ------------- 2000 1999 2000 1999 ----------- ----------- --------- --------- REVENUES Commercial lines insurance ......... $ 900,338 $ 800,362 $ 316,310 $ 274,802 Personal lines insurance ........... 445,408 423,396 149,347 144,319 Life insurance ..................... 57,594 54,654 19,103 17,742 Investment operations .............. 339,419 328,124 112,775 98,813 Corporate and other ................ 7,108 9,745 2,255 2,625 ----------- ----------- --------- --------- Total revenues ................. $ 1,749,867 $ 1,616,281 $ 599,790 $ 538,301 =========== =========== ========= ========= INCOME BEFORE INCOME TAXES Property and casualty insurance .... $ (92,062) $ (14,044) $(106,364) $ (14,745) Life insurance ..................... (276) 618 (3,709) 273 Investment operations .............. 315,777 305,448 111,649 91,249 Corporate and other ................ (32,002) (24,578) (10,307) (7,735) ----------- ----------- --------- --------- Total income before income taxes $ 191,437 $ 267,444 $ (8,731) $ 69,042 =========== =========== ========= ========= IDENTIFIABLE ASSETS Property and casualty insurance .... $ 5,576,697 $ 5,213,500 Life insurance ..................... 1,522,859 1,128,606 Corporate and other ................ 4,689,679 4,063,379 ----------- ----------- Total identifiable assets ...... $11,789,235 $10,405,485 =========== =========== Page 7 of 11

8 NOTE IV - FINANCIAL ACCOUNTING PRONOUNCEMENTS DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") SFAS No.133 "Accounting for Derivative Instruments and Hedging Activities" (amended by SFAS Nos. 137 and 138). The Company has appointed a team to implement SFAS No. 133 that includes inventorying and valuing embedded derivatives (embedded in investments, insurance contracts, annuities, etc.), and addressing various other SFAS No. 133 related issues (documentation, transition, reporting, etc.). The Company plans to adopt SFAS No. 133, as amended, on January 1, 2001. The impact of these statements is dependent upon the Company's derivative positions and market conditions existing at the date of adoption. Based on existing interpretations of the requirements of SFAS No. 133, as amended, the impact of adoption is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows. TRANSFERS OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES - In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 140 replaces SFAS No. 125 and addresses certain issues not previously addressed in SFAS no. 125. SFAS No. 140 is effective for transfers and servicing occurring after March 31, 2001. Additionally, SFAS No. 140 is effective for disclosures about securitizations and collateral and for the recognition and reclassification of collateral for fiscal years ending after December 15, 2000. The Company does not expect that SFAS No. 140 will have a material effect on its financial statements. REVENUE RECOGNITION - In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements". SAB No. 101 summarizes some of the staff's interpretations of the application of accounting principles generally accepted in the United States of America to revenue recognition. The Company will adopt SAB No. 101 when required in the fourth quarter of 2000. At present, the Company does not expect that SAB No. 101 will have a material effect on its financial statements. Page 8 of 11

9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (000's omitted) This Management Discussion is intended to supplement the data contained in the financial statements and related notes of Cincinnati Financial Corporation and subsidiaries. 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; undertakes no obligation to review or update the forward-looking statements included in this material. Premiums earned for the nine months ended September 30, 2000 have increased $124,928 (10%) over the nine months ended September 30, 1999. Also, premiums earned have increased $47,897 (11%) for the three months ended September 30, 2000 over the three months ended September 30, 1999. For the nine-month and three-month periods ended September 30, 2000, the premium growth rate of our property and casualty subsidiaries is more than last year because of increases in new commercial business along with some price firming in the commercial lines market. The premium growth of our life and health subsidiary increased 5% for the nine months ended September 30, 2000 and 8% for the three months ended September 30, 2000 compared to the same periods of 1999. The premium growth in our life subsidiary is mainly attributable to increased sales of both traditional and work site marketing products. For the nine-month and three-month periods ended September 30, 2000, investment income, net of expenses, has increased $23,305 (8%) and $4,809 (5%) when compared with the first nine months and third quarter of 1999, respectively. The nine-month increase includes $5.4 million from a $302.9 million premium for a bank-owned life insurance (BOLI) policy booked at the end of 1999. Effective April 1, 2000, BOLI interest income is excluded from investment income as the life company has adopted separate account accounting. Excluding BOLI interest income, pre-tax investment income rose 6 percent to $306.2 million versus a comparable $288.3 million in the first nine months of 1999. 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 nine months ended September 30, 2000 amounted to $27,769 compared to $39,779 for the nine-month period ended September 30, 1999, and $10,145 for the three-month period ended September 30, 2000 compared to $992 for the three-month period ended September 30, 1999. The realized gains are predominantly the result of the sale of preferred equity securities and management's decision to realize the gains and reinvest the proceeds at higher yields. Other equity securities are sold at the discretion of management and reinvested in other equity securities. Insurance losses and policyholder benefits (net of reinsurance recoveries) increased $122,120 (13%) for the first nine months of 2000 over the same period in 1999 and increased $86,321 for the third quarter when compared to the third quarter of 1999. The losses and benefits of the property and casualty companies have increased $118,648 for the nine-month period and increased $87,349 for the third quarter of 2000 compared to the comparable periods for 1999. Catastrophe losses were $46,942 and $38,841 respectively, for the first nine months of 2000 and 1999 and were $15,455 and $7,804 respectively, for the third quarter of 2000 and 1999. Policyholder benefits of the life insurance subsidiary increased $3,832 for the first nine months of 2000 over the same period of 1999 and decreased ($775) for the third quarter when compared to the third quarter of 1999. The majority of the third quarter increase is the result of a lower incidence of death claims and life related costs. Page 9 of 11

10 Commission expenses increased $24,644 (10%) for the nine-month period ended September 30, 2000 compared to the same period of 1999 and increased $8,268 (10%) for the third quarter of 2000 compared to the same period in 1999. The increase is primarily attributable to increased written premiums. Other operating expenses increased $11,531 (10%) for the nine-month period ended September 30, 2000 compared to the same period for 1999 and increased $3,113 (8%) for the third quarter of 2000 compared to the same period in 1999. These increases are attributable to increases in staff and costs associated to our investment in technology to support future growth. Interest expense increased $5,826 (25%) for the nine-month period ended September 30, 2000 compared to the same period for 1999 and increased $1,029 (13%) for the third quarter of 2000 compared to the same period in 1999. The increase is attributable to an increase in debt of $40,000 in the first nine months and higher short term interest rates. Taxes, licenses and fees increased $4,440 (12%) for the nine-month period ended September 30, 2000 compared to the same period in 1999. Third quarter 2000 taxes, licenses and fees increased $794 (6%), compared to third quarter 1999. In the first nine months of 2000, the Company experienced an increase in unrealized gains in investments of $61,498, compared to a decrease in unrealized gains in investments in the first nine months of 1999 of $588,305, resulting in comprehensive income of $221,131 in 2000, compared to $(380,528) in 1999. The third quarter of 2000 resulted in increased unrealized gains in investments of $665,460, compared to decreased unrealized gains in investments of $484,139 in the third quarter 1999, resulting in comprehensive income of $693,089 and $(427,093) for the third quarter of 2000 and 1999, respectively. Provision for income taxes, current and deferred, have decreased by $27,864 for the first nine months of 2000 compared to the first nine months of 1999 and have decreased $26,304 for the third quarter of 2000 compared to the third quarter of 1999. The effective tax rates for the nine months ended September 30, 2000 and 1999 were 16.6% and 22.3%, respectively. Third quarter effective tax rates were (163.9%) and 17.4%, for 2000 and 1999, respectively. Rates were lower primarily because of underwriting losses in the property casualty operations in the third quarter 2000. On February 6, 1999, the Board authorized repurchase of up to seventeen million of the Company's outstanding shares, with the intent to complete the repurchase by December 31, 2000. This authorization supersedes the previous authorization of nine million shares. As of September 30, 2000, the Company has repurchased 7,739 shares, leaving 9,261 future repurchased shares authorized. ITEM 3. Quantitative and Qualitative Disclosures About 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. The market risks associated with the Company's investment portfolios have not changed materially from those disclosed at year-end 1999. Page 10 of 11

11 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 third quarter. 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 third quarter. ITEM 5. Other Information No matters to report. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 3(i) --Amended Articles of Incorporation of Cincinnati Financial Corporation - incorporated by reference to Exhibit 3(i) of the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Exhibit 3(ii) --Regulations of Cincinnati Financial Corporation - incorporated by reference to Exhibit 2 to registrant Proxy Statement dated March 2, 1992. 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 September 30, 2000. 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 November 13, 2000 ------------------------ By /s/ Kenneth W. Stecher -------------------------------- Kenneth W. Stecher Senior Vice President (Principal Financial Officer) Page 11 of 11

1 EXHIBIT 11 CINCINNATI FINANCIAL CORPORATION STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (000's omitted except per share data) Nine Months Ended Three Months Ended September 30, September 30, ----------------------- ------------------------- 2000 1999 2000 1999 -------- -------- --------- -------- Basic earnings per share: Net income ................................... $159,634 $207,777 $ 5,577 $ 57,046 ======== ======== ========= ======== Average shares outstanding ................... 160,924 164,542 159,732 162,638 ======== ======== ========= ======== Net income per common share .................. $ .99 $ 1.26 $ .03 $ .35 ======== ======== ========= ======== Diluted earnings per share: Net income ................................... $159,634 $207,777 $ 5,577 $ 57,046 Interest on convertible debentures-- net of tax.................................. 946 1,239 -0- 381 -------- -------- --------- -------- Net income for per share calculation (diluted)................................... $160,580 $209,016 $ 5,577 $ 57,427 ======== ======== ========= ======== Average shares outstanding ................... 160,924 164,542 159,732 162,638 Effective of dilutive securities: 5.5% convertible senior debentures .......... 2,072 2,889 -0- 2,889 Stock options ............................... 1,162 1,626 1,828 1,705 -------- -------- --------- -------- Total dilutive shares ........................ 164,158 169,057 161,560 167,232 ======== ======== ========= ======== Net income per common share--diluted ......... $ .98 $ 1.24 $ .03 $ .34 ======== ======== ========= ======== ANTI-DILUTIVE SECURITIES - According to the provisions of SFAS No. 128 "Earnings Per Share", the Company's 5.5% convertible senior debentures due 2002, representing approximately 2,072 shares in conversion, were not included in the computation of diluted earnings per share for the three months ended September 30, 2000 because to do so would be antidilutive. Options to purchase approximately 970 and 904 shares of the Company, with exercise prices ranging from $37.88 to $45.37 per share were outstanding at both September 30, 2000 and 1999, but were not included in the computation of diluted earnings per share for the three-month periods ended September 30, 2000 and 1999 since inclusion of these options would have anti-dilutive effects as the options' exercise prices exceeded the respective average market prices of the Company's shares. Options to purchase 1,158 and 995 shares of the Company, with exercise prices ranging from $34.50 to $45.37 and $36.63 to $45.37 per share, were outstanding at September 30, 2000 and 1999, respectively and not included in the nine-month period computations of diluted earnings per share due to anti-dilutive effects.

7 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 2,681,305 0 0 7,763,586 17,040 4,073 10,513,209 23,868 3,951 168,142 11,789,235 2,810,853

512,708 71,631

22,277 608,438

0 0 345,457

5,158,881

11,789,235 1,403,340 311,650 27,769 7,108 1,065,279 290,046

203,105

191,437 31,803 159,634 0 0 0 159,634 .99 .98 1,931,767

0 0 0 0 2,015,744

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 $4,768 which is classified as Other Policyholder Funds Equals the sum of Notes payable, the 5.5% Convertible Senior Debentures and the 6.9% Senior Debentures Equals the total Shareholders' Equity Equals the sum of Commissions, Other operating expenses, Taxes 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 as of December 31, 1999 Equals the net reserve for unpaid claims for the property casualty subsidiaries as of Sept 30, 2000