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, 1994
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--50,342,537 shares outstanding at March 31, 1994
$80,000,000 of 5-1/2% Convertible Senior Debentures Due 2002
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PART I
------
ITEM 1. FINANCIAL STATEMENTS
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1994 1993
-------------- --------------
ASSETS
- - ------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,253,317 $ 48,113,639
Investments
Fixed Maturities . . . . . . . . . . . . . . . . . . . 1,877,341,004 1,759,655,272
Equity Securities. . . . . . . . . . . . . . . . . . . 2,206,228,113 2,318,803,191
Other Invested Assets. . . . . . . . . . . . . . . . . 38,914,694 38,363,656
Finance Receivables. . . . . . . . . . . . . . . . . . 13,575,698 13,010,774
Premiums Receivable. . . . . . . . . . . . . . . . . . . 131,531,299 134,360,968
Reinsurance Receivable . . . . . . . . . . . . . . . . . 51,424,339 59,060,502
Prepaid Reinsurance Premiums . . . . . . . . . . . . . . 24,722,300 23,966,451
Investment Income Receivable . . . . . . . . . . . . . . 50,956,283 50,120,280
Land, Buildings and Equipment for Company Use (at Cost
Less Accumulated Depreciation) . . . . . . . . . . . . 32,420,429 31,336,331
Deferred Acquisition Costs Pertaining to Unearned
Premiums and to Life Policies in Force . . . . . . . . 104,166,675 104,090,953
Other Assets . . . . . . . . . . . . . . . . . . . . . . 19,054,441 21,406,477
-------------- --------------
Total Assets $4,579,588,592 $4,602,288,494
============== ==============
LIABILITIES
- - -----------
Insurance Reserves:
Unearned Premiums. . . . . . . . . . . . . . . . . . . $ 356,472,227 $ 362,012,334
Life Policy Reserves . . . . . . . . . . . . . . . . . 353,033,573 345,977,142
Losses and Loss Expenses . . . . . . . . . . . . . . . 1,461,037,099 1,402,508,455
Notes Payable. . . . . . . . . . . . . . . . . . . . . . 88,578,259 78,065,805
5-1/2% Convertible Senior Debentures Due 2002. . . . . . 80,000,000 80,000,000
Federal Income Taxes
Current. . . . . . . . . . . . . . . . . . . . . . . . 21,631,331 5,099,591
Deferred . . . . . . . . . . . . . . . . . . . . . . . 241,912,004 290,904,126
Other Liabilities. . . . . . . . . . . . . . . . . . . . 66,757,617 90,383,444
-------------- --------------
Total Liabilities 2,669,422,110 2,654,950,897
-------------- --------------
SHAREHOLDERS' EQUITY
- - --------------------
Common Stock, $2 per Share; Authorized 80,000,000
Shares; Issued 1994--50,355,115; 1993--50,313,161
Shares; Outstanding 1994--50,342,537; 1993--50,306,301
Shares . . . . . . . . . . . . . . . . . . . . . . . . 100,710,230 100,626,322
Paid-In Capital. . . . . . . . . . . . . . . . . . . . . 103,365,098 102,234,649
Retained Earnings. . . . . . . . . . . . . . . . . . . . 1,028,748,705 996,358,793
Unrealized Gain on Investments, Less Taxes . . . . . . . 677,886,773 748,513,998
-------------- --------------
1,910,710,806 1,947,733,762
Less Treasury Shares at Cost (1994--12,578 Shares;
1993--6,860 Shares). . . . . . . . . . . . . . . . . . (544,324) (396,165)
-------------- --------------
Total Shareholders' Equity . . . . . . . . . . . . . 1,910,166,482 1,947,337,597
-------------- --------------
Total Liabilities and Shareholders' Equity . . . . $4,579,588,592 $4,602,288,494
============== ==============
Accompanying notes are an integral part of these financial statements.
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended March 31,
----------------------------
Revenues: 1994 1993
---- ----
Premiums Earned:
Property and Casualty . . . . . . . . . . . . . . . . . . . . $ 281,727,271 $ 261,250,977
Life. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,729,336 9,755,476
Accident and Health . . . . . . . . . . . . . . . . . . . . . 1,811,567 1,916,653
------------- -------------
Net Premiums Earned . . . . . . . . . . . . . . . . . . . . 294,268,174 272,923,106
Investment Income, Less Expenses . . . . . . . . . . . . . . . . 63,774,572 58,756,638
Realized Gain on Investments . . . . . . . . . . . . . . . . . . 18,924,075 19,436,818
Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . 2,735,699 2,543,875
------------- -------------
Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . 379,702,520 353,660,437
------------- -------------
Benefits & Expenses:
Insurance Losses and Policyholder Benefits. . . . . . . . . . . 234,542,096 197,556,402
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . 53,463,326 53,168,594
Other Operating Expenses. . . . . . . . . . . . . . . . . . . . 20,555,397 20,452,417
Taxes, Licenses & Fees. . . . . . . . . . . . . . . . . . . . . 8,627,550 8,719,972
Increase in Deferred Acquisition. . . . . . . . . . . . . . . .
Costs Pertaining to Unearned
Premiums and to Life Policies
in Force. . . . . . . . . . . . . . . . . . . . . . . . . . . (75,723) (2,400,014)
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . 1,938,566 1,642,761
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 759,937 846,144
------------- -------------
Total Expenses. . . . . . . . . . . . . . . . . . . . . . . . 319,811,149 279,986,276
------------- -------------
Income Before Income Taxes and Cumulative Effect of a Change in
Accounting Principle . . . . . . . . . . . . . . . . . . . . . 59,891,371 73,674,161
------------- -------------
Provision (Benefit) for Income Taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,354,007 20,734,026
Deferred. . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,962,106) (4,297,681)
------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,391,901 16,436,345
------------- -------------
Income Before Cumulative Effect of Change in Accounting for
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 48,499,470 57,237,816
Cumulative Effect of Change in Accounting for Income Taxes . . . -0- 13,844,678
------------- -------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,499,470 $ 71,082,494
Increase (Decrease) in Unrealized Gains on Fixed Maturities and
Equity Investments . . . . . . . . . . . . . . . . . . . . . . $(108,657,240) $ 76,770,729
Less Provision (Benefit) for Federal Income
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,030,015) 26,102,048
------------- -------------
Increase (Decrease) in Unrealized Gains on Fixed Maturities
and Equity Investments Less Applicable Federal Income Taxes . . $ (70,627,225) $ 50,668,681
============= =============
Weighted Average Shares Outstanding . . . . . . . . . . . . . . . 52,214,919 52,052,673
============= =============
Per Common Share:
Net Income Before Cumulative Effect of Change in Accounting
for Income Taxes. . . . . . . . . . . . . . . . . . . . . . . $ .94 $1.12
Cumulative Effect of Change in Accounting for Income Taxes. . . -0- .26
----- -----
Total Net Income . . . . . . . . . . . . . . . . . . . . . . . $ .94 $1.38
===== =====
Cash Dividends Declared . . . . . . . . . . . . . . . . . . . . $ .32 $ .28
===== =====
Accompanying notes are an integral part of these financial statements.
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1994
---------------------------------
Unrealized
Common Stock Treasury Paid-In Retained Gains on
Shares Amount Stock Capital Earnings Investments
------ ------ -------- -------- -------- -----------
Balance December 31,
1993 50,313,161 $100,626,322 $(396,165) $102,234,649 $996,358,793 $748,513,998
Net Income 48,499,470
Effect of Change in
Accounting for
Fixed Maturity
Investments, Net
of Income Taxes of
$42,721,703 79,340,305
Change in Unrealized
Gains on Fixed
Maturity and Equity
Investments, Net of
Income Taxes of
$80,751,747 (149,967,530)
Dividends Declared (16,109,558)
Purchase of Treasury
Stock (148,159) (1,448)
Stock Issued Upon
Exercise of Stock
Options 41,954 83,908 1,131,897
---------- ------------ ---------- ------------ ------------- ------------
Balance March 31,
1994 50,355,115 $100,710,230 $(544,324) $103,365,098 $1,028,748,705 $677,886,773
========== ============ ========== ============ ============== ============
Accompanying notes are an integral part of these financial statements.
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
1994 1993
---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 48,499,470 $ 71,082,494
Adjustments to reconcile operating income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . 2,178,070 2,399,514
(Decrease) increase in net unearned premiums . . . . (6,295,956) 4,629,887
Increase in net life policy reserves . . . . . . . . 7,056,431 8,357,686
Increase in net loss and loss expense reserves . . . 66,164,808 39,812,738
Decrease (increase) in net premiums receivable . . . 2,829,669 (5,510,012)
Increase in deferred acquisition costs . . . . . . . (75,722) (2,400,013)
(Decrease) increase in other liabilities . . . . . . (25,649,675) 8,221,834
Increase in investment income receivable . . . . . . (836,003) (2,261,364)
Decrease in policy loans and accounts
receivable . . . . . . . . . . . . . . . . . . . . 3,231,902 2,153,577
Decrease in deferred income taxes. . . . . . . . . . (10,962,107) (30,605,562)
Increase in current income taxes . . . . . . . . . . 16,531,740 24,127,315
Realized gain on investments . . . . . . . . . . . . (18,924,075) (19,436,818)
Other. . . . . . . . . . . . . . . . . . . . . . . . (391,115) (1,207,078)
------------ -------------
Net cash provided by operating activities. . . . . 83,357,437 99,364,198
------------ -------------
Cash flows from investing activities:
Sale of fixed maturities investments . . . . . . . . 24,314,205 30,063,784
Maturity of fixed maturities investments . . . . . . 99,484,580 80,820,715
Sale of equity securities investments. . . . . . . . 38,406,775 49,424,751
Collection of mortgage loans . . . . . . . . . . . . 236,835 660,430
Collection of finance receivables. . . . . . . . . . 1,549,313 1,496,668
Purchase of fixed maturities investments . . . . . . (156,711,199) (150,001,334)
Purchase of equity securities investments. . . . . . (100,233,806) (117,994,725)
Investment in mortgage loans . . . . . . . . . . . . (690,943) (353,699)
Investment in land, buildings and equipment. . . . . (3,190,298) (1,842,989)
Investment in finance receivables. . . . . . . . . . (2,114,237) (1,699,833)
Investment in real estate and other. . . . . . . . . (761,872) (289,343)
------------ -------------
Net cash used in investing activities. . . . . . . (99,710,647) (109,715,575)
------------ -------------
Cash flows from financing activities:
Proceeds from stock options exercised. . . . . . . . 1,215,805 2,170,595
(Purchase) Issuance of treasury shares . . . . . . . (149,607) 19,300
Increase in notes payable. . . . . . . . . . . . . . 10,512,454 123,291
Payment of cash dividends to shareholders. . . . . . (14,085,764) (12,991,085)
------------ -------------
Net cash used in financing activities. . . . . . . (2,507,112 (10,677,899)
------------ -------------
Net decrease in cash . . . . . . . . . . . . . . . . . . (18,860,322) (21,029,276)
Cash at beginning of period. . . . . . . . . . . . . . . 48,113,639 49,982,702
------------ -------------
Cash at end of period. . . . . . . . . . . . . . . . . . $ 29,253,317 $ 28,953,426
============ =============
Supplemental disclosures of cash flow information
Interest paid. . . . . . . . . . . . . . . . . . . . . $ 751,533 $ 582,249
============ =============
Income taxes paid. . . . . . . . . . . . . . . . . . . $ 6,000,000 $ -0-
============ =============
Accompanying notes are an integral part of these financial statements.
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CINCINNATI FINANCIAL CORPORATION
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, 1993 consolidated balance sheet amounts are
derived from the audited financial statements but do not include all
disclosures required by generally accepted accounting principles.
INVESTMENTS--The Company adopted Statement of Financial Accounting Standards
(SFAS) 115 "Accounting for Certain Investments in Debt and Equity Securities"
effective January 1, 1994. With the adoption of SFAS 115, fixed maturities
have been classified as available for sale and are stated at fair values at
March 31, 1994, while fixed maturities were primarily carried at amortized
costs at December 31, 1993. Equity securities have been classified as
available for sale and are carried at fair values for March 31, 1994 and
December 31, 1993.
UNREALIZED GAINS AND LOSSES--As indicated in the accompanying consolidated
statement of shareholders' equity for the three-month period ended March 31,
1994, the Company had an unrealized loss of $149,967,530. For the quarter,
fixed maturity and equity securities investments reflected decreases in
unrealized gains (net of income tax effects) of $28,436,090 and $121,531,440,
respectively. For the three-month period ended March 31, 1993, the Company had
an unrealized gain on equity securities investments of $50,668,681 (net of
income tax effects). Such amounts are included as additions to and deductions
from shareholders' equity. In the three-month period ended March 31, 1993, the
Company had unrealized gains on fixed maturity investments of $8,335,809 (net
of income tax effects). During this quarter, the unrealized gains on fixed
maturity investments were neither recognized in income for the period nor as a
change in shareholders' equity.
REINSURANCE--Premiums earned are net of $24,585,613 and $19,795,538 of premium
on ceded business for March 31, 1994 and 1993, respectively. Insurance losses
and policyholder benefits in the accompanying statements of income are net of
$3,429,385 and $7,356,903 of reinsurance recoveries for March 31, 1994 and
1993, 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 a five-year period,
or over a ten-year period if granted on or after
7
July 25, 1990. On March 31, 1994, outstanding options for Stock Option Plan
No. III totalled 107,352 shares with purchase prices ranging from a low of
$13.08 to a high of $26.17 and outstanding options for Stock Option Plan No. IV
totalled 733,978 shares with purchase prices ranging from a low of $24.67 to a
high of $62.25.
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
interim periods are not necessarily indications of results to be expected for
this year.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Net Premiums earned for the three months ended March 31, 1994 have increased
$21,345,068 (8%) over the three months ended March 31, 1993. The growth rate
of our property and casualty subsidiaries on a gross written basis is less than
last year; but with lower increases in the cost of reinsurance, our premiums
earned increased 8% in the three-month periods ended March 31, 1994 and March
31, 1993. The premium growth is attributable to new business and rate
increases. The premium volume of our life and health company has increased
approximately 7% as increases in life insurance production more than offset
decreased annuity and accident and health insurance sales. For the three-month
period ended March 31, 1994, Investment Income, net of expenses, has increased
$5,017,934 (9%) when compared with the first three months of 1993. This
increase is the result of the growth of the investment portfolio because of
investing cash flows from increased premiums written. The growth is less than
last year because of lower yields on new investments and less cash flow because
of increased catastrophe claim payments.
Realized gains on investments for the three months ended March 31, 1994
amounted to $18,924,075 compared to $19,436,818 for comparable three-month
period ended March 31, 1993. 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 $36,985,694 (19%) for the first three months of 1994 over the same
period in 1993. The losses and benefits of the property and casualty companies
have increased $39,202,172 because of the growth of new business and a higher
incidence and severity of claims. The catastrophe losses for the first quarter
of 1994 were $18.8 million compared to $11.2 million in 1993 and were higher
than last year because of increased severity of these weather related claims.
Policyholder benefits decreased $2,216,478 over the first quarter of 1993 in
the life insurance subsidiary. The majority of the decrease is the result of a
lower incidence of death claims and related costs.
Provision for income taxes, current and deferred, have decreased by $5,044,444
for the first three months of 1994 compared to the first three months of 1993.
The decrease in federal taxes is attributable to lower taxable income in our
property and casualty companies because of a higher incidence and severity of
losses and lower capital gains for the corporation. These decreases more than
offset increases in taxable income in the life insurance company, the
noninsurance companies, and taxable investment income.
Unrealized appreciation will fluctuate with changes in the overall fixed
maturities and equity securities markets. Unrealized appreciation related to
the Company's equity investment portfolio decreased in the first quarter of
1994 by $186,971,418 ($121,531,440 decrease in shareholders' equity, net of
deferred income taxes) while, for the first quarter of 1993, it increased by
$76,770,729 ($50,668,681 increase in shareholders' equity, net of deferred
income taxes). The Company's equity investment portfolio continues to be
primarily investments in common stocks of public utility companies and
financial institutions.
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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.
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.
ITEM 5. Other Information
-----------------
No matters to report.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit included:
Exhibit 11--Statement re Computation of Per Share Earnings.
(b) The Company was not required to file any reports on Form
8-K during the quarter ended March 31, 1994.
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 12, 1994
-------------------------
By/s/ Robert J. Driehaus
-----------------------------------
R. J. Driehaus
Financial Vice President & Treasurer
(Principal Financial Officer)
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EXHIBIT 11
CINCINNATI FINANCIAL CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR THE QUARTER ENDED MARCH 31,
(in thousands except for per share amounts)
1994 1993
---- ----
Weighted average shares outstanding 50,319 50,010
Equivalent shares assumed to be
outstanding for:
Stock options 270 417
Convertible debentures 1,626 1,626
------- -------
Number of shares for primary
computation 52,215 52,053
Other dilutive equivalent shares--
stock options 0 1
------- -------
Number of shares assuming full
dilution 52,215 52,054
======= =======
Net income before cumulative effect of
change in accounting for income taxes $48,499 $57,238
Interest on convertible debentures--
net of tax 715 716
------- -------
$49,214 $57,954
Cumulative effect of change in accounting
for income taxes 0 13,845
------- -------
Net income for per share computation $49,214 $71,799
======= =======
Earnings per share:
Primary before cumulative effect of
change in accounting for income taxes $ .94 $ 1.12
Cumulative effect of change in accounting
for income taxes 0 .26
------- -------
Total Primary $ .94 $ 1.38
======= =======
Fully Diluted $ .94 $ 1.38
======= =======
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