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, 2001 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
5.5% Convertible Senior Debentures Due 2002 Over The Counter
6.9% Senior Debentures Due 2028 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 $5,535,939,403 as of March 1, 2002.
As of March 1, 2002, there were 161,797,960 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Annual Report to Shareholders for year ended December 31, 2001 (in part) into
Parts I, II and IV and Registrant's Proxy Statement dated March 8, 2002 into
Parts I, III and IV.
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"), 100% of CFC Investment Company ("CFC-I") and 100% of CinFin Capital
Management Company ("CinFin"). CFC is the parent for CIC, CFC-I and CinFin.
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 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 licensed for the sale of life
insurance and accident and health insurance in 48 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 licensed in the
fire and casualty insurance business on both a direct and agency billing
basis in 40 states. The business of CIC and CCC is conducted separately,
and there are no plans for combining the business of said companies. CCC
reinsures substantially all of their business to CIC.
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 31 states. The business of CIC and CID is
conducted separately, and there are no plans for combining the business of
said companies. CID reinsures substantially all of their business to CIC.
CFC-I, incorporated 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.
CinFin, incorporated in 1998, offers investment management services to
corporations, insurance agencies and companies, institutions, pension plans, and
high net worth individuals.
Industry segment information for revenues, income before income taxes,
and identifiable assets is included on page 46 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 10 through 17 in the Company's Annual
Report to Shareholders, incorporated herein by reference (see Exhibit 13 to this
filing), the Company primarily sells insurance through a network of a limited
number of selectively appointed independent agents. Net earned premiums by
property casualty lines increased 13% to $2.071 billion in 2001. The Company's
mix of property casualty business did not change significantly in 2001. Life and
accident and health insurance (which constituted 4% of the Company's premium
income for 2001) is sold primarily through property casualty agencies and
independent life agencies. The earned premium growth rate of 2% compares to 6%
growth in 2000 and 7% in 1999.
2
The consolidated financial statements include the estimated liability
for unpaid losses and loss adjustment expenses ("LAE") of the Company's property
casualty insurance subsidiaries. Property 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
(for estimates of unreported claims) 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 the liability for
losses and LAE. The first table, providing a reconciliation of beginning and
ending liability balances for 2001, 2000, and 1999, is on page 42 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 2001 is presented on the next
page.
The reconciliation referred to in the preceding paragraph shows
recognition of approximately $62 million in redundant reserves during 2001
related to the December 31, 2000 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 incurred but
not reported (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 are written with post-date coverages that
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. Average severities are 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 principal reason for differences between the property casualty
liabilities reported in the accompanying consolidated financial statements in
accordance with accounting principles generally accepted ("GAAP") in The United
States of America and that reported in the annual statements filed with state
insurance departments in accordance with statutory accounting practices ("SAP")
relates to the reporting of reinsurance recoverables which are recognized as
receivables for GAAP purposes and as an offset to reserves for SAP purposes.
3
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
(Millions of Dollars)
YEAR ENDED DECEMBER 31 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
- ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net liability for unpaid
losses and loss adjustment
expenses $986 $1,138 $1,293 $1,432 $1,581 $1,702 $1,777 $1,840 $1,932 $2,182 $2,352
Net liability reestimated as of:
One year later 956 1,098 1,200 1,306 1,429 1,582 1,623 1,724 1,912 2,120
Two years later 928 993 1,116 1,220 1,380 1,470 1,551 1,728 1,833
Three years later 823 949 1,067 1,214 1,279 1,405 1,520 1,636
Four years later 814 937 1,067 1,131 1,236 1,380 1,465
Five years later 824 943 1,103 1,106 1,227 1,326
Six years later 827 910 1,005 1,091 1,189
Seven years later 804 900 997 1,060
Eight years later 795 897 978
Nine years later 796 886
Ten years later 792
Net cumulative redundancy $194 $ 252 $ 315 $ 372 $ 392 $ 376 $ 312 $ 204 $ 99 $ 62
==== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net cumulative amount of
liability paid through:
One year later $280 $ 310 $ 343 $ 368 $ 395 $ 453 $ 499 $ 522 $ 591 $ 697
Two years later 440 498 538 578 630 732 761 853 943
Three years later 546 612 663 709 801 884 965 1,067
Four years later 611 681 734 802 881 992 1,075
Five years later 647 718 788 847 946 1,049
Six years later 666 743 814 885 977
Seven years later 676 760 838 902
Eight years later 689 777 848
Nine years later 701 783
Ten years later 705
$1,138 $1,293 $1,432 $1,581 $1,702 $1,777 $1,840 $1,932 $2,182 $2,352
Net liability--end of year
Reinsurance recoverable 62 72 78 109 122 112 138 161 219 513
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross liability--end of year $1,200 $1,365 $1,510 $1,690 $1,824 $1,889 $1,978 $2,093 $2,401 $2,865
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net liability reestimated--latest $ 886 $ 978 $1,060 $1,189 $1,326 $1,465 $1,636 $1,833 $2,120
Reestimated recoverable--latest 243 149 155 160 154 162 190 203 241
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross liability reestimated--latest $1,129 $1,127 $1,215 $1,349 $1,480 $1,627 $1,826 $2,036 $2,361
====== ====== ====== ====== ====== ====== ======= ======= =======
Gross cumulative redundancy $ 71 $ 238 $ 295 $ 341 $ 344 $ 262 $ 152 $ 57 $ 40
====== ====== ====== ====== ====== ====== ======= ======= =======
The table above presents the development of balance sheet liabilities
for 1991 through 2001. The top line of the table shows the estimated net
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
The "net cumulative redundancy" represents the aggregate change in the
estimates over all prior years. For example, the 1991 liability has developed a
$194 million 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 referred to above.
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, 2001, the Company had paid $705 million of
the currently estimated $792 million of losses and LAE that have been incurred
as of the end of 1991; thus an estimated $87 million of losses incurred as of
the end of 1991 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 1996, but
incurred in 1991, will be included in the cumulative deficiency or redundancy
amount for 1991 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 risks (ceding) with
other insurers or reinsurers. The Company's property casualty risk retention
program is affected by various factors, which include, but are not limited to,
the Company's changes in underwriting practices, the capacity to retain risks,
and reinsurance market conditions. The Companies property casualty working
treaties provide coverage up to $25,000,000 per occurrence, excess of retention
limits. The Company raised its casualty line per occurrence retention limits in
1995 and 1999 from $1,000,000 to $2,000,000 to $2,400,000, respectively, and
raised its property line per occurrence retention limits in 1995 from $1,000,000
to $2,000,000. The Company reinsures with only financially sound companies. The
composition of reinsurers in the Company's property casualty working treaties
changed effective January 1, 2002, reducing from four to three reinsurance
companies. 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 26 through 30 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 (focusing on 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 1.5 to 3 percent and annual dividend increases. The Company's strategy
in equity investments is to identify approximately 10 to 15 companies in which
it can accumulate 5 to 10 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, 2001, CFC employed 3,299 associates.
5
ITEM 2. PROPERTIES
----------
CFC owns the Home Office building located on 75 acres of land in
Fairfield, Ohio. This building contains approximately 615,000 square feet. The
John J. and Thomas R. Schiff & Company, an affiliated company, occupies
approximately 6,750 square feet, and the balance of the building is occupied by
CFC and its subsidiaries. The property, including land, is carried in the
financial statements at $86,835,820 as of December 31, 2001 and is classified as
"Property and equipment, net, for Company use."
CFC-I 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 96,000 rentable square feet.
CFC and its subsidiaries occupy approximately 38% of the building, unaffiliated
tenants occupy approximately 14% of the building, approximately 28% of the
building is available for future CFC usage and approximately 20% is available
for rent. The property is carried in the financial statements at $8,638,211 as
of December 31, 2001 and is classified as "Property and equipment, net, for
Company use."
CFC-I also owns an 85,000 square feet office building in downtown
Cincinnati that was leased to an unaffiliated company, on a net, net, net lease
basis that expired at the end of 2000. The building is currently available for
rent or for sale. This property is carried in the financial statements at
$535,000 as of December 31, 2001 and is classified as "Other invested assets."
CLIC owns a four-story office building in the Tri-County area of
Cincinnati containing approximately 102,000 rentable 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 $3,196,061 as of
December 31, 2001 and is classified as "Other invested assets."
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is involved in no material litigation other than routine
litigation incident to the nature of its insurance business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
CFC filed with the Securities and Exchange Commission (SEC) on March 8,
2002, a definitive proxy statement and an annual report pursuant to Regulation
14A and is incorporated herein by reference. No matters were submitted during
the fourth quarter of 2001.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
Cincinnati Financial Corporation had approximately 11,325 direct
shareholders of record as of December 31, 2001. The information related to the
market for the registrant's common stock is included in the Annual Report of the
Registrant to its shareholders on page 48 for the year ended December 31, 2001
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 18 and 19 for the year ended December 31, 2001 and is
incorporated herein by reference (see exhibit 13 to this filing).
6
ITEM 7 AND 7(A). MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE
-----------------------------------------------------------
DISCLOSURES ABOUT MARKET RISK
-----------------------------
This information is included in the Annual Report of the Registrant to
its shareholders on pages 20 to 33 for the year ended December 31, 2001 and is
incorporated herein by reference (see Exhibit 13 to this filing).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
(a) Financial Statements
The following Independent Auditor's Report and consolidated
financial statements of the Registrant and its subsidiaries,
included in the Annual Report of the Registrant to its
shareholders on pages 34 to 46 for the year ended December 31,
2001, are incorporated herein by reference (see Exhibit 13 to
this filing).
Independent Auditors' Report
Consolidated Balance Sheets--December 31, 2001 and 2000
Consolidated Statements of Income--Years ended December 31, 2001,
2000, and 1999
Consolidated Statements of Shareholders' Equity--Years ended
December 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows--Years ended December 31,
2001, 2000, and 1999.
Notes to Consolidated Financial Statements
(b) Supplementary Data
Selected quarterly financial data, included in the Annual Report
of the Registrant to its shareholders on page 33 for the year
ended December 31, 2001, 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,
2001.
PART III
CFC filed with the SEC on March 8, 2002 a definitive proxy statement
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.
7
2. Financial Statement Schedules:
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 V--Valuation Allowances and Qualifying Accounts
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 3(i)--Amended Articles of Incorporation of
Cincinnati Financial Corporation
incorporated by reference to the 1999 Annual
Report on Form 10K dated March 23, 2000.
Exhibit 3(ii)--Regulations of Cincinnati Financial
Corporation--incorporated by reference to
Exhibit 2 to registrant's Proxy Statement
dated March 2, 1992.
Exhibit 11--Statement re computation of per share earnings
for years ended December 31, 2001, 2000,
and 1999
Exhibit 13--Material incorporated by reference from
the annual report of the registrant to its
shareholders for the year ended December 31,
2001
Exhibit 21--Subsidiaries of the registrant--information
contained in Part I of this report
Exhibit 22--Published Report regarding matters submitted
to vote of securityholders--Notice of Annual
Meeting of Shareholders and Proxy Statement
dated March 8, 2002--incorporated by reference
to such document previously filed with
Securities and Exchange Commission,
Washington, D.C., 20549
Exhibit 23--Independent Auditors' Consent
(b) Reports on Form 8-K--NONE
8
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, 2001 and 2000, and for each
of the three years in the period ended December 31, 2001, and have issued our
report thereon dated February 6, 2002; such consolidated financial statements
and report are included in your 2001 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. These consolidated 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 6, 2002
9
SCHEDULE I
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2001
(in millions)
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 Indemnity Company................... $ 1 $ 1 $ 1
The Cincinnati Life Insurance Company ............. 3 4 4
------------- ------------- -------------
Total................................................ 4 5 5
------------- ------------- -------------
States, municipalities and political subdivisions:
The Cincinnati Insurance Company................... 955 982 982
The Cincinnati Casualty Company.................... 36 37 37
The Cincinnati Indemnity Company................... 16 16 16
The Cincinnati Life Insurance Company.............. 6 7 7
------------- ------------- -------------
Total................................................ 1,013 1,042 1,042
------------- ------------- -------------
Public utilities:
The Cincinnati Insurance Company................... 56 56 56
The Cincinnati Casualty Company.................... 1 1 1
The Cincinnati Life Insurance Company.............. 44 45 45
Cincinnati Financial Corporation................... 14 13 13
------------- ------------- -------------
Total................................................ 115 115 115
------------- ------------- -------------
Convertibles and bonds with warrants attached:
The Cincinnati Insurance Company................... 40 41 41
The Cincinnati Life Insurance Company.............. 15 15 15
Cincinnati Financial Corporation................... 14 15 15
------------- ------------- -------------
Total................................................ 69 71 71
------------- ------------- -------------
All other corporate bonds:
The Cincinnati Insurance Company................... 718 712 712
The Cincinnati Casualty Company.................... 42 42 42
The Cincinnati Indemnity Company................... 18 18 18
The Cincinnati Life Insurance Company.............. 677 677 677
Cincinnati Financial Corporation................... 356 328 328
------------- ------------- -------------
Total................................................ 1,811 1,777 1,777
------------- ------------- -------------
TOTAL FIXED MATURITIES................................. $ 3,012 $ 3,010 $ 3,010
------------- ------------- -------------
10
(in millions)
Amount at
Fair which shown in
Type of Investment Cost Value balance sheet
------------------ ---- ------ --------------
Equity securities:
Common stocks:
Public utilities:
The Cincinnati Insurance Company...................$ 105 $ 347 $ 347
The Cincinnati Casualty Company.................... 5 13 13
The Cincinnati Life Insurance Company.............. 21 86 86
Cincinnati Financial Corporation................... 83 535 535
----------------- -------------- --------------
Total.............................................. 214 981 981
----------------- -------------- --------------
Banks, trust and insurance companies:
The Cincinnati Insurance Company................... 337 1,347 1,347
The Cincinnati Casualty Company.................... 16 105 105
The Cincinnati Indemnity Company................... 1 1 1
The Cincinnati Life Insurance Company.............. 36 144 144
CinFin Capital Management Company.................. 0 1 1
Cincinnati Financial Corporation................... 477 3,934 3,934
----------------- -------------- --------------
Total.............................................. 867 5,532 5,532
----------------- -------------- --------------
Industrial, miscellaneous and all other:
The Cincinnati Insurance Company................... 534 1,184 1,184
The Cincinnati Casualty Company.................... 17 46 46
The Cincinnati Indemnity Company................... 4 9 9
The Cincinnati Life Insurance Company.............. 62 170 170
CinFin Capital Management Company.................. 0 1 1
Cincinnati Financial Corporation................... 103 184 184
----------------- -------------- --------------
Total.............................................. 720 1,594 1,594
----------------- -------------- --------------
Nonredeemable preferred stocks:
The Cincinnati Insurance Company................... 294 301 301
The Cincinnati Casualty Company.................... 7 9 9
The Cincinnati Indemnity Company................... 5 6 6
The Cincinnati Life Insurance Company.............. 57 59 59
Cincinnati Financial Corporation................... 10 13 13
----------------- -------------- --------------
Total.............................................. 373 388 388
----------------- -------------- --------------
TOTAL EQUITY SECURITIES $ 2,174 $ 8,495 $ 8,495
----------------- -------------- --------------
Other invested assets:
Mortgage loans on real estate:
The Cincinnati Life Insurance Company..............$ 2 XXXXXX $ 2
CFC Investment Company............................. 14 XXXXXX 14
----------------- --------------
Total.............................................. 16 XXXXXX 16
----------------- --------------
Real estate:
The Cincinnati Life Insurance Company.............. 3 XXXXXX 3
CFC Investment Company............................. 1 XXXXXX 1
----------------- --------------
Total.............................................. 4 XXXXXX 4
----------------- --------------
Policy loans -
The Cincinnati Life Insurance Company.............. 24 XXXXXX 24
----------------- --------------
Notes receivable -
CFC Investment Company............................. 22 XXXXXX 22
----------------- --------------
TOTAL OTHER INVESTED ASSETS...............................$ 66 XXXXXX $ 66
----------------- --------------
TOTAL INVESTMENTS.........................................$ 5,252 XXXXXX $ 11,571
================= ==============
11
SCHEDULE II CINCINNATI FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed statements of income (Parent company only) (in millions)
For the Years ended December 31 2001 2000 1999
---- ---- ----
INCOME
Dividends from subsidiaries............................... $ 134 $ 100 $ 175
Investment income......................................... 131 116 108
Realized losses on investments............................ (33) (37) (14)
-------------- ------------- --------------
Total ................................................. $ 232 $ 179 $ 269
-------------- ------------- --------------
EXPENSES
Interest.................................................. $ 40 $ 38 $ 34
Depreciation.............................................. 7 3 0
Other..................................................... 10 7 6
-------------- ------------- --------------
Total expenses......................................... 57 48 40
-------------- ------------- --------------
Income before taxes and earnings of subsidiaries.......... 175 131 229
Provision (benefit) for income taxes...................... (4) (5) 4
-------------- ------------- --------------
Net income before change in undistributed earnings of
subsidiaries........................................... 179 136 225
Increase (decrease) in undistributed earnings of
subsidiaries........................................... 14 (18) 30
-------------- ------------- --------------
Net income............................................. $ 193 $ 118 $ 255
============== ============= ==============
Condensed balance sheets (Parent company only) (in millions)
December 31 2001 2000
---- ----
ASSETS
Cash....................................................................... $ 12 $ 12
Fixed maturities, at fair value............................................ 356 322
Equity securities, at fair value........................................... 4,666 4,622
Investment income receivable............................................... 27 24
Equity in net assets of subsidiaries....................................... 2,893 2,971
Finance receivables........................................................ 0 1
Land, building and equipment............................................... 87 93
Federal income tax receivable.............................................. 1 3
Other assets............................................................... 29 19
--------------- -------------
Total assets............................................................ $ 8,071 $ 8,067
=============== =============
LIABILITIES
Notes payable.............................................................. $ 152 $ 139
Dividends declared but unpaid.............................................. 34 30
Deferred federal income tax................................................ 1,386 1,363
5.5% Convertible senior debentures due 2002................................ 6 30
6.9% Senior debentures due 2028............................................ 420 420
Other liabilities.......................................................... 17 8
Due to subsidiaries........................................................ 58 82
--------------- -------------
Total liabilities....................................................... $ 2,073 $ 2,072
--------------- -------------
SHAREHOLDERS' EQUITY
Common stock............................................................... 350 346
Other shareholders equity.................................................. 5,648 5,649
--------------- -------------
Total shareholders equity............................................... $ 5,998 $ 5,995
--------------- -------------
Total liabilities and stockholders' equity.............................. $ 8,071 $ 8,067
=============== =============
This condensed financial information should be read in conjunction with the
consolidated financial statements and notes included in the Registrant's 2001
Annual Report to Shareholders.
12
SCHEDULE II CINCINNATI FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed statements of cash flows (Parent company only) (in millions)
For the years ended December 31 2001 2000 1999
---- ---- ----
OPERATING ACTIVITIES
Net income................................................ $ 193 $ 118 $ 255
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 7 3 0
Increase in investment income receivable.............. (3) (1) (2)
Change in current federal income taxes................ 2 (7) (5)
Provision for deferred income taxes................... (3) (3) 1
Decrease in dividends receivable from
subsidiaries........................................ 0 0 20
(Increase) decrease in other assets................... (10) 48 (25)
Increase (decrease) in other liabilities.............. 9 (4) 3
Increase (decrease) in undistributed earnings of (14) 18 (30)
subsidiaries........................................
Realized losses on investments........................ 33 37 14
Non-cash dividend from subsidiary..................... (34) 0 0
------------- ------------- -------------
Net cash provided by operating activities................. 180 209 231
------------- ------------- -------------
INVESTING ACTIVITIES
Sale of fixed maturity investments........................ 16 10 42
Maturity of fixed maturity investments.................... 32 40 50
Sale of equity security investments....................... 36 21 62
Collection of finance receivables......................... 1 1 2
Purchase of fixed maturity investments.................... (71) (64) (95)
Purchase of equity security investments................... (47) (48) (94)
Investment in buildings and equipment..................... (1) (62) 0
------------- ------------- -------------
Net cash used in investing activities..................... (34) (102) (33)
------------- ------------- -------------
FINANCING ACTIVITIES
Increase in notes payable................................. 13 49 90
Payment of cash dividends................................. (132) (119) (110)
Purchase of treasury shares............................... (46) (67) (217)
Proceeds from stock options exercised..................... 9 11 7
Net transfers to (from) subsidiaries...................... 10 30 12
------------- ------------- -------------
Net cash used in financing activities..................... (146) (96) (218)
------------- ------------- -------------
Increase (decrease) in cash............................... 0 11 (20)
Cash at beginning of year................................. 12 1 21
------------- ------------- -------------
Cash at end of year....................................... $ 12 $ 12 $ 1
============= ============= =============
This condensed financial information should be read in conjunction with the
consolidated financial statements and notes included in the Registrant's 2001
Annual Report to Shareholders.
A subsidiary transferred land and a building to the Company valued at $34 during
2000. During 2001, the Company deemed this transfer a dividend.
Reclassifications - Certain prior year amounts included in the condensed
financial information of the registrant have been reclassified to conform with
the current year presentation.
13
SCHEDULE III
CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(in millions)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
-------- -------- -------- -------- -------- -------- --------
Future
Policy
Benefits, Other
Deferred Losses, Policy
Policy Claims & Claims & Net
Acquisition Expense Unearned Benefits Premium Investment
Segment Cost Losses Premiums Payable Revenue Income (3)
- ------------------------------------------------------------------------------------------------------------------------
2001
Commercial lines insurance.... $ -- (3) $2,457 $ 730 $ -- (3) $1,451 $ -- (3)
Personal lines insurance...... -- (3) 408 331 -- (3) 620 $ -- (3)
---- ------ ------ ------ ------ -----
Total property/liability
insurance................. 206 2,865 1,061 45 2,071 223
Life/health insurance......... 80 685 1 11 81 80
---- ------ ------ ------ ------ -----
Grand total................... $286 $3,550 $1,062 $ 56 $2,152 $ 303
==== ====== ====== ====== ====== =====
2000
Commercial lines insurance.... $ -- (3) $2,010 $ 608 $ -- (3) $1,231 $ -- (3)
Personal lines insurance...... -- (3) 391 313 -- (3) 596 $ -- (3)
---- ------ ------ ------ ------ ----
Total property/liability
insurance.................. 184 2,401 921 48 1,827 232
Life/health insurance......... 75 616 1 13 80 79
---- ------ ------ ------ ------ -----
Grand total................... $259 $3,017 $ 922 $ 61 $1,907 $ 302
==== ====== ====== ====== ====== =====
1999
Commercial lines insurance.... $ -- (3) $1,752 $ 541 $ -- (3) $1,088 $ -- (3)
Personal lines insurance...... -- (3) 341 294 -- (3) 569 $ -- (3)
---- ------ ------ ------ ------ -----
Total property/liability
insurance................. 163 2,093 835 37 1,657 208
Life/health insurance......... 63 870 1 15 75 70
---- ------ ------ ------ ------ -----
Grand total................... $226 $2,963 $ 836 $ 52 $1,732 $ 278
==== ====== ====== ====== ====== =====
COLUMN A COLUMN H COLUMN I COLUMN J COLUMN K
-------- -------- -------- -------- --------
Benefits, Amortization
Claims, of Deferred
Losses & Policy Other
Settlement Acquisition Operating Premiums
Segment Expenses Costs Expenses Written
- ----------------------------------------------------------------------------------------------
2001
Commercial lines insurance.... $1,077 $ -- (3) $ -- (3) $1,515
Personal lines insurance...... 514 -- (3) -- (3) 637
------ ---- ---- ------
Total property/liability
insurance................. 1,591 442 143 2,188
Life/health insurance......... 72 12 34 3 (4)
------ ----- ---- ------
Grand total................... $1,663 $ 454 $177 $2,191
====== ===== ==== ======
2000
Commercial lines insurance.... $1,036 $ -- (3) $ -- (3) $1,304
Personal lines insurance...... 472 -- (3) -- (3) 620
------ ----- ---- ------
Total property/liability
insurance................. 1,508 398 157 1,924
Life/health insurance......... 73 7 31 3 (4)
------ ----- ---- ------
Grand total................... $1,581 $ 405 $188 $1,926
====== ===== ==== ======
1999
Commercial lines insurance.... $ 794 $ -- (3) $ -- (3) $1,120
Personal lines insurance...... 393 -- -- 587
------ ----- ---- ------
Total property/liability
insurance................. 1,187 348 126 1,707
Life/health insurance......... 67 17 22 9 (4)
------ ----- ---- ------
Grand total................... $1,254 $ 365 $148 $1,716
====== ===== ==== ======
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) This segment information is not regularly allocated to segments and
reviewed by Company management in making decisions about resources to be
allocated to the segments and assess their performance.
(4) Amounts represent written premiums on accident and health insurance
business only.
14
SCHEDULE IV CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
REINSURANCE
FOR YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(in millions)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- -------
Ceded to Assumed from Percentage of
Gross Other Other Net Amount Assumed
Amount Companies Companies Amount to Net
- -----------------------------------------------------------------------------------------------------------------------------------
2001
Life insurance in force.................. $ 27,526 $ 14,510 $ 8 $ 13,024 .1%
======== ======== ====== ========
Premiums
Commercial lines insurance............... $ 1,549 $ 135 $ 37 $ 1,451 2.6%
Personal lines insurance................. 639 20 1 620 .1%
--------- -------- ------ --------
Total property/liability insurance..... 2,188 155 38 2,071 1.8%
Life/health insurance.................... 101 20 0 81 .2%
--------- -------- ------ --------
Grand total premiums..................... $ 2,289 $ 175 $ 38 $ 2,152 1.2%
========= ======== ====== ========
2000
Life insurance in force.................. $ 23,515 $ 11,259 $ 9 $ 12,265 .1%
========= ======== ====== ========
Premiums
Commercial lines insurance............... $ 1,285 $ 87 $ 33 $ 1,231 2.7%
Personal lines insurance................. 616 21 1 596 .1%
--------- -------- ------ --------
Total property/liability insurance..... 1,901 108 34 1,827 1.8%
Life/health insurance.................... 97 17 0 80 .2%
--------- -------- ------ --------
Grand total premiums..................... $ 1,998 $ 125 $ 34 $ 1,907 1.8%
========= ======== ====== ========
1999
Life insurance in force.................. $ 17,890 $ 6,335 $ 10 $ 11,565 .1%
========= ======== ====== ========
Premiums
Commercial lines insurance............... $ 1,125 $ 73 $ 36 $ 1,088 3.3%
Personal lines insurance................. 591 22 1 569 .2%
--------- -------- ------ --------
Total property/liability insurance..... 1,716 96 37 $ 1,657 2.2%
Life/health insurance.................... 85 10 0 75 .1%
--------- -------- ------ --------
Grand total premiums..................... $ 1,801 $ 106 $ 37 $ 1,732 2.1%
========= ======== ====== ========
15
SCHEDULE V
CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY CASUALTY INSURANCE OPERATIONS
FOR YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(in millions)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions
Balance at charged to Balance at
beginning of costs and Other end of
Description period expenses additions Deductions period
- -----------------------------------------------------------------------------------------------------------------------
2001
- ----
Allowance for
doubtful premium
installment
receivables 0 0 1 0 1
============== ============= ============== ============== =============
2000 AND 1999 None
- -------------
16
SCHEDULE VI
CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY CASUALTY INSURANCE OPERATIONS
FOR YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(in millions)
Column A Column B Column C Column D Column E Column F Column G
-------- -------- -------- -------- -------- -------- --------
Reserves
for Unpaid
Deferred Claims and Discount,
Affiliation Policy Claim if any, Net
with Acquisition Adjustment Deducted Unearned Earned Investment
Registrant Costs Expenses in Column C Premiums Premiums Income
- -------------------------------------------------------------------------------------------------
Consolidated
Property Casualty
Entities
2001 $ 206 $2,865 $ 0 $ 1,061 $ 2,017 $223
===== ====== ======= ======== ======= ====
2000 $ 184 $2,401 $ 0 $ 921 $ 1,827 $223
===== ====== ======= ======== ======= ====
1999 $ 163 $2,093 $ 0 $ 835 $ 1,657 $208
===== ====== ======= ======== ======= ====
Column A Column H Column I Column J Column K
-------- ------------------------- -------- ------- --------
Claims and Claim Amortization
Adjustment Expenses of Deferred Paid Claims
Affiliation Incurred Related to Policy and Claim
with (1) (2) Acquisition Adjustment Premiums
Registrant Current Year Prior Years Costs Expenses Written
- -----------------------------------------------------------------------------------------------------
Consolidated
Property Casualty
Entities
2001 $ 1,653 $ (62) $ 442 $ 1,421 $ 2,188
======= ====== ===== ======= =======
2000 $ 1,528 $ (20) $ 398 $ 1,258 $ 1,924
======= ====== ===== ======= =======
1999 $ 1,304 $ (116) $ 348 $ 1,096 $ 1,707
======= ====== ===== ======= =======
17
Index of Exhibits
Exhibit 3(i) -- Amended Articles of Incorporation of Cincinnati Financial
Corporation incorporated by reference to the 1999 Annual
Report on Form 10K dated March 23, 2000.
Exhibit 3(ii) -- Regulations of Cincinnati Financial
Corporation--incorporated by reference to Exhibit 2 to
registrant's Proxy Statement dated March 2, 1992
Exhibit 11 -- Statement re computation of per share earnings for the years
ended December 31, 2001, 2000, and 1999
Exhibit 13 -- Material incorporated by reference from the annual report
of the registrant to its shareholders for the year ended
December 31, 2001
Exhibit 21 -- Subsidiaries of the registrant--information contained in
Part I of this report
Exhibit 22 -- Published report regarding matters submitted to vote of
securityholders - Notice of Annual Meeting of Shareholders
and Proxy Statement dated March 8, 2002--incorporated by
reference to such document previously filed with Securities
and Exchange Commission, Washington, D.C., 20549
Exhibit 23 -- Independent Auditors' Consent
18
S I G N A T U R E S
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/ John J. Schiff, Jr. Chairman,
- -------------------------------------- Chief Executive March 15, 2002
John J. Schiff, Jr. Officer, President
and Director
/s/ Kenneth W. Stecher Senior Vice President,
- -------------------------------------- Secretary, Treasurer and March 15, 2002
Kenneth W. Stecher Chief Financial Officer
(Principal Accounting Officer)
/s/ William F. Bahl Director March 15, 2002
- --------------------------------------
William F. Bahl
/s/ James E. Benoski Vice Chairman, March 15, 2002
- -------------------------------------- Senior Vice President,
James E. Benoski Chief Insurance Officer
and Director
/s/ Michael Brown Director March 15, 2002
- --------------------------------------
Michael Brown
/s/ John E. Field Director March 15, 2002
- --------------------------------------
John E. Field
- -------------------------------------- Director
Kenneth C. Lichtendahl
/s/ James G. Miller Senior Vice President, March 15, 2002
- -------------------------------------- Chief Investment Officer
James G. Miller and Director
/S/ W. Rodney McMullen Director March 15, 2002
- --------------------------------------
W. Rodney McMullen
19
SIGNATURE TITLE DATE
--------- ----- ----
- -------------------------------------- Director
Robert C. Schiff
/s/ Thomas R. Schiff Director March 15, 2002
- --------------------------------------
Thomas R. Schiff
/s/ Frank J. Schultheis
- -------------------------------------- Director March 15, 2002
Frank J. Schultheis
/s/ Larry R. Webb
- -------------------------------------- Director March 15, 2002
Larry R. Webb
/s/ Alan R. Weiler Director March 15, 2002
- --------------------------------------
Alan R. Weiler
- -------------------------------------- Director
E. Anthony Woods
- -------------------------------------- Director
John M. Shepherd
20
EXHIBIT 11
CINCINNATI FINANCIAL CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(000's omitted except per share amounts)
2001 2000 1999
---- ---- ----
Basic Earnings per share:
Net income $ 193 $ 118 $ 255
============ =========== ============
Average shares outstanding 161 161 165
============ =========== ============
Net income per common share $ 1.20 $ .74 $ 1.55
============ =========== ============
Diluted earnings per share:
Net income $ 193 $ 118 $ 255
Interest on convertible debentures--net of tax 1 1 1
------------ ----------- ------------
Net income for per share calculation (diluted) $ 194 $ 119 $ 256
============ =========== ============
Average shares outstanding 161 161 165
Effective of dilutive securities:
5.5% convertible senior debentures 1 2 2
Stock options 0 1 2
------------ ----------- ------------
Total diluted shares 162 164 169
============ =========== ============
Net income per common share--diluted $ $ $
1.19 .73 1.52
============ =========== ============
EXHIBIT 13
Material incorporated by reference from the annual report of the registrant
to the shareholders for the year ended December 31, 2001.
17. SEGMENT INFORMATION
The Company is organized and operates principally in two industries and has
four reportable segments - commercial lines property casualty insurance,
personal lines property casualty insurance, life insurance and investment
operations. The accounting policies of the segments are the same as those
described in the basis of presentation. 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, which Company management regularly reviews to make
decisions about allocating resources to the segments and assessing their
performance, is summarized in the following table. Information regarding income
before income taxes and identifiable assets is not available for two reportable
segments - commercial lines and personal lines of property casualty insurance.
Years Ended December 31,
------------------------------------
2001 2000 1999
------- ------- -------
Revenues:
Commercial lines insurance.................... $ 1,451 $ 1,231 $ 1,088
Personal lines insurance...................... 620 596 569
Life insurance................................ 81 80 75
Investment operations......................... 396 413 386
Corporate and other........................... 13 11 10
------- ------- -------
Total revenues.............................. $ 2,561 $ 2,331 $ 2,128
======= ======= =======
Income before income taxes:
Property casualty insurance................... $ (92) $ (225)* $ 3
Life insurance................................ (1) 1 (1)
Investment operations......................... 358 379 356
Corporate and other........................... (44) (46) (36)
------- ------- -------
Total income before income taxes............ $ 221 $ 109* $ 322
======= ======= =======
Identifiable assets:
Property casualty insurance................... $ 6,954 $ 6,488 $ 5,800
Life insurance................................ 1,752 1,619 1,442
Corporate and other........................... 5,253 5,180 4,566
------- ------- -------
Total identifiable assets................... $13,959 $13,287 $11,808
======= ======= =======
*2000 results include a one-time net charge for asset impairment of $39 million,
before tax.
MAIN STREET:
OUR FOUNDATION AND OUR FUTURE
In an insurance climate marked by change and uncertainty, The Cincinnati
Insurance Companies' strong presence on America's Main Streets is a competitive
advantage.
For Cincinnati, Main Street is not so much a place as it is an approach, a
commitment to know and support the people we serve. It is a personal way of
doing business. It is an emphasis on the local market. It relies on
relationships, and it pays dividends.
Main Street is both our foundation and our future. We maintain our business
the way we built it, on America's Main Streets, through an elite corps of
agents. Independent agencies representing Cincinnati, 959 in all, place an
average of almost 20 percent of their business with the Company. These top
producers are committed to a long-term relationship with Cincinnati.
During 2001, the Company took steps to leverage our Main Street advantages
through our large and experienced field staff. This has meant more attention to
front-line underwriting, more involvement in renewal discussions, more
specialized expertise in claims adjusting and more inspections. It has meant
subdividing territories to increase points of contact. It has meant creating a
deeper and more personal understanding of our business from the ground up. And
in doing all of this, we remain confident that we can restore consistently
healthy profitability over the long term, despite the challenges our industry
faces.
THE MARKETPLACE
In 2001, insured property casualty losses were estimated at nearly $285
billion, including an estimated $30 billion to $45 billion in the aftermath of
September 11. Even before the terrorist attacks, property casualty insurers
faced rising claims severity, adverse court decisions and mounting losses due to
more than a decade of insufficient rates and overcapacity. Industry-wide,
excluding the 6-point impact of the World Trade Center losses, the combined
ratio for 2001 was estimated at 111.0 percent, up from 110.1 percent in 2000.
Such losses have created a market in which underwriting and pricing can and
must be re-evaluated. While some carriers are exiting product lines or enforcing
large, across-the-board price increases, Cincinnati continues to do business the
way we always have: on the local level, focusing on each relationship
separately. We work with agents case by case to recognize and accurately measure
exposures, then price each risk adequately and appropriately for the local
marketplace. Commercial lines pricing remains flexible to respond to each risk
in partnership with local agents who know their markets and their business. For
personal lines, we are seeking and obtaining regulatory approval for increases
where warranted. This customized approach means less immediate results but
longer-term success. By making decisions that are risk-specific, we give our
Company the opportunity to retain not just business, but high-quality business.
UNDERWRITING
Although Cincinnati outperformed the industry during 2001, reporting a
statutory combined ratio of 103.6 percent, we believe we can and we will do
better. The path to improved profitability begins with strong fundamentals, and
it begins at home on America's Main Streets.
Cincinnati measures results for every program in every line of business,
reviewing trends and taking action where justified. That process brought to the
forefront the need to seek regulatory approval for appropriate rate increases
for the homeowner line, which continues to experience increased loss severity.
It highlighted the need to more
carefully manage blanket and replacement property coverages and to limit the use
of credits and dividend-paying plans in establishing workers' compensation
policy pricing. It demonstrated the need to continue to aggressively
re-underwrite commercial auto policies to ensure that driver records are
current.
Personal lines account reviews determined that nearly 19 percent of our
homeowner property claims from 1996-2000 were related to water damage. Going
forward, rather than include that coverage as standard, we'll give policyholders
more choice of the coverage amount they need and the price they'll pay for it.
Water damage exclusions and endorsements developed in 2001 will begin to take
effect over the next year in most states.
Disciplined underwriting means knowing your book of business. Again, being
at home on America's Main Streets is a Cincinnati advantage.
Agencies generally sell Cincinnati products to their neighbors and to
organizations they know and understand. To ensure business remains
agent-focused, Cincinnati's property casualty field marketing representatives
are assigned to specific agencies, and their territories are divided according
to activity levels. The number of agency relationships each field representative
manages is kept to a minimum - 13 on average - allowing Cincinnati to provide
the personal service each agency deserves. During 2000, two additional field
representatives were assigned to established marketing territories, raising the
total number of property casualty marketing territories to 76. In 2002, the
Company plans to split and staff another six or more new territories.
Policyholders, too, deserve intense, local, personal attention, and they
get it from agents, engineers, marketing representatives, claims representatives
and loss control specialists. On-site inspections, photographs, building cost
estimates, loss trend and risk analyses increasingly are part of the process
used to insure to value, providing business owners and homeowners with the
coverage they need to repair or replace their property.
This attention to detail is part of the process in new business discussions
and in renewals. Once a policy is on the books, an entire team of people works
to help the agent monitor the risk, regardless of whether loss activity occurs.
Agents, field claims representatives and field marketing representatives review
many account renewals together. Where losses are reported, we take an even
closer look. The number of in-depth risk reports increased more than 200 percent
in 2001. These reports from claims representatives include on-site inspections
and detailed analyses to help underwriters at renewal time. Where exposures have
changed, all of this detail allows for more accurate coverage amounts, terms and
conditions, as well as premiums.
CLAIMS
Cincinnati is in the business of paying claims promptly, fairly and
personally.
Our policy is to contact a claimant within 24 hours of receiving notice
from the agent that a loss has occurred. Local claims representatives move
quickly to assess losses and estimate costs. Specialized training and dedicated
storm teams aid them in handling claims fairly and accurately.
During 2001:
- Nearly 500 claims representatives and trainees participated in schools to
enhance claims handling techniques for workers' compensation, physical damage,
fire loss investigation, settlement negotiation and other claims skills.
- Midway through the year, we designated staff in larger metropolitan areas
as specialists who work to contain costs for large property losses.
- More than 150 people specifically assigned to storm duty responded
immediately to areas affected by severe weather. Storm duty teams help free
local claims representatives to handle non-catastrophe claims in a timely and
personal manner.
Additionally, new resources are helping verify, control and recoup costs.
Re-pricing of auto physical damage estimates helped save an average of $80 each
on repairs during a 2001 pilot project in just a few territories.
And a special Recovery and Subrogation Group in 2001 regained $40 million,
nearly an 11 percent increase over 2000, through sale of assets recovered or
salvaged from losses and recapture of payments that were the responsibility of a
third party.
PRODUCTS AND SERVICES
To better serve the independent agents for whom and by whom Cincinnati was
founded, we committed resources to new tools and new products to protect their
policyholders.
New products included a Credit Union Blanket Bond and the Executive CEO
policy.The latter meets the needs of individuals with higher-valued homes. Each
policy comes with a building survey, giving the homeowner the security of
knowing replacement value is covered and giving Cincinnati an accurate premium
for that value.
Property valuation software introduced in October 2001 and available on
Cincinnati's agency extranet further helps determine replacement value of
commercial buildings. This software provides information on geographic values,
construction costs and other variables, working as a supplement to on-site
inspections to ensure that the policyholder buys adequate protection.
Cincinnati continues to invest in and roll out tools to speed processing
and cut costs at the local level and at headquarters. More than 500 agency
representatives visit our agency extranet weekly to download software, print
forms and check Company news or ratings. This number will grow significantly as
we bring software applications online. Other technology initiatives in
development, test or pilot stages include imaging projects, online production
and loss reports and policy quoting and processing systems.
LIFE INSURANCE
The Cincinnati Life Insurance Company enhances local independent agents'
ability to deliver financial protection to their communities. At the same time,
policyholders benefit from the personal, local service that is unique to the
Cincinnati family of insurance companies.
Distributed primarily through agents representing Cincinnati's property
casualty group, Cincinnati Life helps those agents increase their revenue
streams with a full line of whole, term and universal life products, fixed
annuities, disability income and long term care products. For the Company,
Cincinnati Life offers the benefits of strengthening the relationship with
agents and providing a steady cash flow to fuel investments and return. Life
operations contributed $30 million to Cincinnati Financial Corporation's $210
million in net operating income for the year.
OUR COMMUNITIES,
OUR RESPONSIBILITIES
The Cincinnati Insurance Companies - like the people who work for the
Company and represent our products - are committed to our communities. We
demonstrate that commitment with the same local emphasis on all of our business
practices.
In the agent community, we support our partners with outstanding service.
Senior management travels to annual sales meetings in 28 cities to meet, greet
and listen to agents. We support the education and training of agents by
offering producer schools, agency management and executive liability
roundtables, life product seminars and commercial and personal lines schools.
These sessions aid in everything from agency accounting to selling skills. And
many of these programs are held in cities around the country, making it possible
for agency associates to stay close to home while earning necessary education
credits.
Beyond the frequent direct contact we have with our agents, we support
their businesses through subsidiaries such as CFC Investment Company and CinFin
Capital Management.
CFC Investment Company helps local independent agents, their clients and
the general public develop their businesses through equipment and vehicle loans
and leases, as well as real estate loans. This support helps agencies expand to
better serve customers in their communities.
CinFin Capital Management, the Company's asset management services
subsidiary, is another service to our agencies. CinFin invites agencies and
their clients to benefit from an investment strategy that mirrors that of the
Company. Clients with assets under CinFin management - typically agencies,
pension plans, corporations, endowment funds and high net-worth individuals -
receive the personal, customized attention for which The Cincinnati Insurance
Companies are known.
We also serve agents and policyholders by continuing education for Company
associates. In 2001, more than 1,000 field and headquarters associates
participated in online courses to improve both technical and interpersonal
skills. Additionally, 38 claims representative trainees graduated in 2001. For
the second year in a row, five classes of trainees graduated from our
professional underwriting school.
In the insurance community, Cincinnati Financial is a responsible citizen,
working to protect the integrity of our industry. Our philosophy on legislative
and regulatory issues is consistent with our philosophy on business practices:
Keep decision-making as close as possible to the local level.
That brings us to our namesake community - the Greater Cincinnati region.
Cincinnati-based associates have a tradition of supporting the arts, education
and other community-related activities in our hometown. As a Company and
personally, we commit to living and working every day as part of a proud
community. Headquarters associates give generously to organized fund drives such
as the Fine Arts Fund and United Way, volunteering for service activities
ranging from tutoring and mentoring students to special events like blood and
food donations.
Our mission is to grow profitably and enhance the ability of local
independent insurance agents to deliver quality financial protection to the
people and businesses they serve. Whether field representatives or headquarters
associates, we fulfill this mission agency by agency, community by community.
Cincinnati is at home on America's Main Streets.
4. PROPERTY CASUALTY LOSSES AND LOSS EXPENSES
Activity in the reserve for losses and loss expenses is summarized as
follows:
Years Ended December 31,
-------------------------------------
2001 2000 1999
------ ------ ------
Balance at January 1 $2,401 $2,093 $1,978
Less reinsurance receivable 219 161 138
------ ----- ------
Net balance at January 1 2,182 1,932 1,840
------ ----- ------
Incurred related to:
Current year 1,653 1,528 1,304
Prior years (62) (20) (116)
------ ----- ------
Total incurred 1,591 1,508 1,188
------ ----- ------
Paid related to:
Current year 724 667 574
Prior years 697 591 522
------ ----- ------
Total paid 1,421 1,258 1,096
------ ----- ------
Net balance at December 31 2,352 2,182 1,932
Plus reinsurance receivable 513 219 161
------ ----- ------
Balance at December 31 $2,865 $2,401 $2,093
====== ===== ======
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss expenses decreased by $62, $20 and $116 in 2001,
2000 and 1999. 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 $67 and $72 at December 31, 2001 and 2000, respectively, for
certain life health losses and loss checks payable.
PRICE RANGE OF COMMON STOCK
Shares are traded on the Nasdaq National Market and the 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 intra-day high and low
prices.
2001 2000
------------------------------------------ ------------------------------------------
Quarter 1st 2nd 3rd 4th 1st 2nd 3rd 4th
------ ------ ------ ------ ------ ------ ------ ------
High $41.25 $42.92 $42.20 $42.93 $37.98 $43.31 $40.63 $40.38
Low 34.75 34.00 34.36 36.33 26.19 31.00 31.44 32.56
Dividends paid .19 .21 .21 .21 .17 .19 .19 .19
SELECTED FINANCIAL INFORMATION
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
(dollars in millions except per share data)
Years Ended December 31,
--------------------------------------------------------------------
2001 2000 1999 1998
---- ---- ---- ----
INCOME STATEMENT DATA (GAAP)
Net earned premiums ............................. $ 2,152 $ 1,907 $ 1,732 $ 1,613
Net investment income ........................... 421 415 387 368
Revenues ........................................ 2,561 2,331 2,128 2,054
Net operating income ............................ 210 120** 255 199
Net capital (losses) gains ...................... (17) (2) -- 43
Net income ...................................... 193 118** 255 242
Net operating income per common share:
Basic ......................................... 1.31 .75** 1.55 1.19
Diluted ....................................... 1.29 .74** 1.52 1.16
Net income per common share:
Basic ......................................... 1.20 .74** 1.55 1.45
Diluted ....................................... 1.19 .73** 1.52 1.41
Cash dividends per common share:
Declared ...................................... .84 .76 .68 .61 1/3
Paid .......................................... .82 .74 .66 1/3 .59 2/3
- ---------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (GAAP)
Total assets .................................... $ 13,959 $ 13,287 $ 11,808 $ 11,482
Long term debt .................................. 426 449 456 472
Shareholders' equity ............................ 5,998 5,995 5,421 5,621
Book value per share ............................ 37.07 37.26 33.46 33.72
- ---------------------------------------------------------------------------------------------------------------------
RATIO DATA (GAAP)
Loss ratio ...................................... 66.6% 71.1% 61.6% 65.4%
LAE ratio ....................................... 10.1 11.3 10.0 9.3
Expense ratio ................................... 28.2 30.4** 28.6 29.6
Combined ratio .................................. 104.9% 112.8%** 100.2% 104.3%
- ---------------------------------------------------------------------------------------------------------------------
PROPERTY CASUALTY SUBSIDIARY STATUTORY DATA*
Net written premiums ............................ $ 2,188* $ 1,936 $ 1,681 $ 1,558
Net earned premiums ............................. 2,067 1,828 1,658 1,543
Net investment income ........................... 223 223 208 204
Unearned premiums ............................... 1,033 507 455 432
Loss reserves ................................... 1,886 1,730 1,513 1,432
Loss adjustment expense reserves ................ 466 452 419 408
Policyholders' surplus .......................... 2,533 3,172 2,852 3,020
Loss ratio ...................................... 66.8% 71.1% 61.6% 65.4%
LAE ratio ....................................... 10.1 11.3 10.0 9.3
Expense ratio ................................... 26.7* 29.2** 28.8 29.5
Combined ratio .................................. 103.6%* 111.6%** 100.4% 104.2%
- ---------------------------------------------------------------------------------------------------------------------
Note: The selected financial information above allows for a more complete
analysis of results of operations and should not be considered a
substitute for any GAAP measure of performance. The statutory basis data
presented above for the year ended December 31, 2001 reflects the
adoption of the Codification of Statutory Accounting Principles
(Codification) on January 1, 2001, as required by the State of Ohio, as
more fully discussed in the Management Discussion beginning on Page 20.
Property casualty subsidiary statutory data for the year ended December
31, 2000 has been reclassified for comparative purposes; information was
not readily available to reclassify earlier years' statutory data
presented above.
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------------------------------
$ 1,516 $ 1,423 $ 1,314 $ 1,219 $ 1,141 $ 1,039 $ 948
349 327 300 263 239 219 193
1,942 1,809 1,656 1,513 1,442 1,304 1,161
254 193 207 189 183*** 148 141
45 31 20 12 33 23 5
299 224 227 201 216*** 171 146
1.54 1.15 1.24 1.13 1.10*** .90 .86
1.49 1.11 1.20 1.09 1.06*** .87 .86
1.81 1.34 1.36 1.21 1.30*** 1.04 .90
1.77 1.31 1.33 1.18 1.27*** 1.03 .89
.54 2/3 .48 2/3 .42 2/3 .38 2/3 .34 .31 .27 2/3
.53 1/3 .47 2/3 .42 .37 1/3 .33 1/3 .30 .27
- ----------------------------------------------------------------------------------------------------------------------------------
$ 9,867 $ 7,397 $ 6,439 $ 5,037 $ 4,888 $ 4,357 $ 3,750
58 80 80 80 80 80 --
4,717 3,163 2,658 1,940 1,947 1,714 1,441
28.35 18.95 15.80 11.63 11.70 10.37 8.79
- ----------------------------------------------------------------------------------------------------------------------------------
58.3% 61.6% 57.6% 63.3% 63.5% 63.8% 61.6%
10.1 13.8 14.7 9.8 8.7 9.0 9.2
30.0 28.2 27.8 27.8 28.5 29.9 30.2
98.4% 103.6% 100.1% 100.9% 100.7% 102.7% 101.0%
- ----------------------------------------------------------------------------------------------------------------------------------
$ 1,472 $ 1,384 $ 1,296 $ 1,191 $ 1,124 $ 1,015 $ 930
1,454 1,367 1,263 1,170 1,092 992 903
199 190 180 162 153 142 126
418 402 385 354 334 302 280
1,374 1,319 1,274 1,213 1,100 961 826
403 383 307 219 193 177 160
2,473 1,608 1,269 999 1,012 934 736
58.3% 61.6% 57.6% 63.3% 63.5% 63.8% 61.6%
10.1 13.8 14.7 9.8 8.7 9.0 9.2
29.6 27.6 26.9 26.9 27.4 29.0 28.9
98.0% 103.0% 99.2% 100.0% 99.6% 101.8% 99.7%
- ----------------------------------------------------------------------------------------------------------------------------------
* 2001 property casualty subsidiary statutory data excludes the effects of a
$402 million one-time adjustment to recognize net written premiums on the
basis of the policy contract term rather than the policy billing period as
of January 1, 2001, as required to conform with Codification of Statutory
Accounting Principles.
** 2000 results include a one-time net charge for asset impairment of $39
million, before tax; $25 million, or 16 cents per share, net of tax. The
charge affected the statutory expense ratio and combined ratio by 1.7
percentage points and the GAAP expense ratio and combined ratio by 2.1
percentage points.
*** 1993 earnings include a net credit for $14 million, or 8 cents per share,
cumulative effect of a change in the method of accounting for income taxes
to conform with SFAS No. 109 and a net charge of $9 million, or 5 cents per
share, related to the effect of the 1993 19 increase in income tax rates on
deferred taxes recorded for various prior year items.
MANAGEMENT DISCUSSION
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
INTRODUCTION
The following discussion highlights significant factors influencing the
consolidated results of operations and financial position of Cincinnati
Financial Corporation (CFC). It should be read in conjunction with the
consolidated financial statements and related notes beginning on Page 35 and the
11-year summary of selected financial information on Pages 18 and 19.
CFC had six subsidiaries at year-end 2001. The lead property casualty
insurance subsidiary, The Cincinnati Insurance Company, markets a broad range of
business and personal policies in 31 states through an elite corps of 959
independent insurance agencies. Other members of the property casualty group are
The Cincinnati Casualty Company and The Cincinnati Indemnity Company, which
provide the Company with flexibility in underwriting, pricing and billing. The
Cincinnati Life Insurance Company markets life, long term care and disability
income policies and annuities through property casualty agencies and independent
life agencies. CFC Investment Company complementsthe insurance subsidiaries with
commercial leasing, financing and real estate services. The Company's sixth
subsidiary, CinFin Capital Management Company, provides asset management
services to institutions, corporations and individuals with $500,000 minimum
accounts. The Company's segments are defined based upon the components of the
Company for which financial information is used internally to evaluate segment
performance and determine the allocation of resources.
Investment operations are CFC's primary source of profits. A total-return
strategy emphasizes investment in fixed-maturity securities, as well as equity
securities that contribute to current earnings through dividend increases and
add to net worth through long-term price appreciation.
SAFE HARBOR STATEMENT
The following discussion contains 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 causes; the
frequency and severity of claims; environmental events or changes; changes in
insurance regulations, legislation or court decisions that place the Company at
a disadvantage in the marketplace; adverse outcomes from litigation or
administrative proceedings; recession or other economic conditions resulting in
lower demand for insurance products; sustained decline in overall stock market
values negatively affecting the Company's equity portfolio; delays in the
development, implementation and benefits of technology enhancements; and
decreased ability to generate growth in investment income.
Further, the Company's insurance businesses are subject to the effects of
changing social, economic and regulatory environments. Public and regulatory
initiatives have included efforts to adversely influence and restrict premium
rates, restrict the ability to cancel policies, impose underwriting standards
and expand overall regulation. The ultimate changes and eventual effects, if
any, of these initiatives are uncertain. Readers are cautioned that the Company
undertakes no obligation to review or update the forward-looking statements
included in this material.
Readers are cautioned that the Company undertakes no obligation to review or
update the forward-looking statements included in this material.
INSURANCE REGULATORY OVERSIGHT
The Company's insurance subsidiaries, in common with other insurers based in
the United States, are subject to extensive governmental regulation and
supervision in the various states and jurisdictions in which they transact
business. The laws and regulations of Ohio, the state of domicile of the
Company's insurance subsidiaries, have the most significant impact on their
operations.
For public reporting, insurance companies prepare financial statements in
accordance with accounting principles generally accepted in the United States
(GAAP). However, certain data also must be calculated according to statutory
accounting rules, based on Statutory Accounting Principles, and must be reported
to state insurance departments per the National Association of Insurance
Commissioners (NAIC), the oversight organization for state insurance
regulations.
While not a substitute for any GAAP measure of performance, statutory data
frequently is used by industry analysts and other recognized reporting sources
to facilitate comparisons of the performance of insurance companies. When
appropriate, the following discussion makes use of statutory data to analyze
trends or to make comparisons to industry performance. Estimated industry data
included below is taken from materials published by A.M. Best Company, a leading
insurance industry analytical and rating agency, and presented on a statutory
basis. Statutory data for the Company is labeled as such and all other data is
prepared based on accounting principles generally accepted in the United States.
NAIC adopted the Codification of Statutory Accounting Principles
(Codification) in March 1998. Codification, which is intended to standardize
regulatory accounting and reporting to state insurance departments, became
effective January 1, 2001. However, statutory accounting principles will
continue to be established by individual state laws and permitted practices.
Ohio required adoption of Codification, with certain modifications, for the
preparation of statutory-basis financial statements effective January 1, 2001.
Codification is now incorporated into the NAIC
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Accounting Practices and Procedures Manual. The effects of
the Company's adoption of Codification are discussed below.
The NAIC uses risk-based capital (RBC) formulas for both property casualty
and life insurers, which serve as an early warning tool for the NAIC and the
state regulators to identify companies that are undercapitalized and merit
further regulatory action. The Company's property casualty and life companies
have more than sufficient capital to meet the RBC requirements.
EFFECTS OF CODIFICATION OF STATUTORY ACCOUNTING PRACTICES
The effect of adopting Codification is reported as a cumulative-effect type
change in accounting principle for the Company's insurance subsidiaries'
statutory financial statements as of January 1, 2001. This means that the
January 1, 2001 balances of the Company's insurance subsidiaries' statements of
admitted assets, liabilities and capital and surplus have been adjusted to the
amounts that would have been reported had Codification been in effect since the
subsidiaries began operations. Accordingly, the significant changes to statutory
surplus were as follows: For the property casualty companies - deferred tax
assets of $314 million, consisting primarily of taxes on the timing of loss
reserves and unearned premiums; deferred tax liabilities of $701 million,
comprised mainly of taxes on net unrealized gains; guaranty fund assessments and
premium tax liabilities of $11 million; and earned- but-unbilled premium
receivables of $6 million, with a resulting decrease in surplus of $392 million.
For the life company - deferred tax liabilities of $62 million, comprised mainly
of taxes on net unrealized gains, and a corresponding decrease in surplus.
Additionally, prior to 2001, the Company's property casualty insurance
subsidiaries recognized written premiums as they were billed throughout the
policy period, which was a previously acceptable method. Beginning on January 1,
2001, these companies began recognizing written premiums on an annualized basis
at the effective date of the policy as required by Codification. This method of
recognizing written premiums had no effect on statutory income or surplus
because earned premiums were unaffected. To account for unbooked premium related
to policies with effective dates prior to January 1, 2001, the Company recorded
a written premium adjustment on January 1, 2001 of $402 million that will appear
in 2001 statutory financial reports submitted to insurance regulatory
authorities. Since this adjustment affected written premiums only and was
one-time in nature, it has been excluded from comparisons of written premiums
between 2001 and 2000 in this report. Written premiums presented throughout this
report for 2000 have been reclassified to conform with the 2001 presentation
based on contractual period; information was not readily available to reclassify
earlier years' statutory data.
RESULTS OF OPERATIONS
THREE-YEAR HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------
2001 CHANGE 2000 Change 1999 Change
(dollars in millions % Pro % %
except per share data) Forma*
- ---------------------------------------------------------------------------------------------------------------------------
Revenue $ 2,561 9.9 $2,331 9.5 $ 2,128 3.6
Net operating
income $ 210 44.1 $ 146* (43.0) $ 255 28.1
Net capital losses (17) (870.8) (2) (359.8) -- nm
Net income $ 193 34.4 $ 144* (43.5) $ 255 5.4
Net income $ 193 63.3 $ 118 (53.5) $ 255 5.4
- ----------------------------------------------------------------------------------------------------------------------------
Per Share Data (diluted):
Net operating
income $ 1.29 43.3 $ .90* (40.8) $ 1.52 31.0
Net capital losses (.10) (900.0) (.01) nm -- nm
Net income $ 1.19 33.7 $ .89* (41.4) $ 1.52 7.8
Net income $ 1.19 63.0 $ .73 (52.0) $ 1.52 7.8
- ----------------------------------------------------------------------------------------------------------------------------
Note: The selected financial information presented above allows for a more
complete analysis of results of operations and should not be considered as
a substitute for any GAAP measures of performance.
* In 2000, the Company incurred a one-time net charge for asset impairment of
$39 million, before tax; $25 million, or 16 cents per share, net of tax. Pro
forma amounts exclude the one-time charge for comparison purposes.
Revenue growth in each of the past three years primarily reflected higher
contributions from property casualty earned premiums and investment income. In
2001, the growth rate for property casualty earned premiums rose for the fourth
consecutive year because of strong growth in the Company's commercial insurance
lines.
Revenue from investment income rose 2.8 percent in 2001 on a comparable
basis, below the 6.0 percent growth rate in 2000 and 5.1 percent growth in 1999,
due to the lower interest rate environment. Growth rates are calculated
excluding $5 million in interest earned in 2000 from a $303 million
single-premium bank-owned life insurance (BOLI) policy booked at the end of
1999.
Excluding a one-time charge for asset impairment in 2000, net operating
income in 2001 rose 44.1 percent over 2000, primarily because of a decline in
the underwriting loss in 2001. In 2000, higher losses and $72 million
(after-tax) in additional reserves related to uninsured motorists coverage
resulted in a 43.0 percent decline in net operating income compared with the
prior year's record level. In 1999, net operating earnings increased 28.1
percent principally due to lower catastrophe losses.
The one-time charge of $25 million (after-tax) recorded in 2000 expensed
impaired assets related to development of next-generation software to process
property casualty policies. For comparison purposes all data discussed below
excludes the charge, unless otherwise indicated.
MANAGEMENT DISCUSSION (continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
The Company reported a net capital loss of $17 million in 2001 as detailed
in Investment Operations. The net capital loss was $2 million in 2000 and less
than $1 million in 1999. Book value was $37.07 at year-end 2001, below the
record $37.26 at year-end 2000, but up from $33.46 at year-end 1999. The
decrease in 2001 was primarily due to an increase in outstanding shares as
convertible debenture conversions offset a modest $3 million increase in total
shareholders' equity.
PROPERTY CASUALTY INSURANCE OPERATIONS
PROPERTY CASUALTY INSURANCE PREMIUMS
Cincinnati leverages its strong relationships with independent insurance
agents in 31 states to market property casualty insurance. In 2001,
approximately 98 percent of the Company's agency direct written premium volume
was in the 26 states in which the Company has had a presence for more than five
years. In 2001, the Company's 959 independent insurance agencies generated an
average of approximately $2.3 million each in agency direct written premiums; no
single agency accounted for more than 1.3 percent of the Company's total agency
direct written premiums.Further, agencies in Ohio contributed 25 percent and
Georgia, Illinois, Indiana, Michigan and Pennsylvania each contributed between 5
percent and 10 percent of premium volume in 2001. Factors that distinguish the
Company in the insurance marketplace include:
- - Single-channel distribution strategy that emphasizes the value of independent
agents and their knowledge of the local markets.
- - Local field staff that enhances service and accountability by providing 24/7
availability and local decision-making authority. The field marketing staff
is responsible for the selection of new independent agents as well as
underwriting and pricing of new commercial business.
- - Widely recognized, high-quality claims service via locally based field claims
staff in conjunction with independent agents. To help ensure prompt claims
service, the Company provides most agents with authority to pay claims
immediately up to $2,500 and assigns claims representatives to agencies. In
total, the Company pays an average of $5 million per business day in claims.
- - Innovative products and services that meet the needs of the Company's
independent agents and their customers, including the availability of
three-year policy terms for many types of insurance coverage. In 2001, both
new and updated policies were introduced to further meet the needs of agents
and their customers, including the new Credit Union Blanket Bond and improved
broadening endorsements for commercial general liability and business auto as
well as updated dentist, printer and homeowner-auto packages.
- - Emphasis on improving customer service through the creation of smaller
marketing territories, permitting local field marketing representatives to
devote more time to each independent agent. During 2001, two additional field
representatives were assigned to established marketing territories. Since the
beginning of 1997, the Company has subdivided 10 territories in established
states. During 2002, the Company plans to split and staff another six or more
territories. Smaller territories allow marketing representatives to increase
the level of service as well as expand the opportunities to ask for and earn
new business.
- - Programs to support agency growth, including education programs for agents
and staff, and financing for buildings and equipment. In 2001, the insurance
subsidiaries augmented ongoing training programs with a number of special
events, including seminars held around the country to encourage cross-selling
by expanding awareness of the Company's products among producing agents. CFC
Investment Company offers convenient, competitive equipment and vehicle
leases and loans for independent insurance agents, their commercial customers
and other businesses and also provides commercial real estate loans to agents
to help them operate and expand their businesses.
By leveraging these characteristics, the Company has expanded property casualty
total net written premiums more rapidly than the estimated industry growth rate
in each of the past three years.
The Company's total net earned premiums grew 13.3 percent in 2001, 10.3
percent in 2000 and 7.4 percent in 1999. For 2001 only, GAAP net earned premiums
were $6 million higher than statutory net earned premiums due to certain
adjustments required by statutory Codification.
Property Casualty Insurance Subsidiary Premiums (GAAP)
- -------------------------------------------------------------------------------
(dollars in millions) 2001 CHANGE 2000 Change 1999 Change
% % %
- -------------------------------------------------------------------------------
Commercial lines
net earned
premiums $1,453 17.9 $1,232 13.3 $1,088 6.7
Personal lines
net earned
premiums 620 4.0 596 4.6 570 8.9
Total net
earned premiums $2,073 13.3 $1,828 10.3 $1,658 7.4
- -------------------------------------------------------------------------------
The primary source of growth in 2001 was firmer pricing on new and renewal
commercial business. Premium growth in states in which the Company has had a
presence for more than five years was a healthy 13.9 percent in 2001, reflecting
the continued opportunities available to Cincinnati. Expansion states, where the
Company has operated for fewer than five years, also were a factor in overall
growth, with agency direct premiums of $33 million in 2001 compared with $16
million in 2000. Over the past five years, the Company began marketing
commercial lines insurance in North Dakota, Montana, upstate New York, Idaho and
Utah, and began writing or expanding personal lines in states that were
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
previously commercial-only territories: Maryland, Michigan, Minnesota, Montana,
North Dakota and Pennsylvania.
Commercial Lines
Commercial lines premiums rose to 70.0 percent of total net earned premiums
in 2001 from 67.4 percent in 2000 and 65.6 percent in 1999, reflecting the
higher rate of growth in that segment as the market continued the strengthening
that began in the second half of 1999 after years of intense price competition.
Industry-wide growth in net written commercial insurance premiums was 10.0
percent in 2001 compared with 7.2 percent in 2000.
The Company's standard approach is to write three-year policies, an
advantage in the commercial lines market. Exceptions often include business new
to the agency or, in certain local competitive marketplaces, when a policy is
aggressively priced. Within those multi-year packages, automobile, workers'
compensation, professional liability and most umbrella liability coverages
remain subject to annual adjustment. Management estimates that approximately 70
percent of the commercial written premiums is subject to annual adjustment or
re-pricing. Multi-year packages are offered at rates that may be slightly higher
than single-year or annually-adjusted rates. By reducing annual administrative
efforts, multi-year policies reduce the Company's and agency's expenses and the
incentive for the policyholder to shop for a new policy every year.
In 2001, new commercial lines business written directly by Cincinnati agents
reached $220 million, just short of the all-time high of $230 million recorded
in 2000. 2001 growth was excellent given the priority placed on underwriting
activities during this period.
Personal Lines
During 2001, the personal insurance market grew less rapidly than the
commercial insurance market due to continuing competition. Industry-wide growth
in net written personal lines premiums was estimated at 7.0 percent, up from 3.7
percent in 2000.
Cincinnati's personal lines net earned premium growth rate was 4.0 percent
in 2001 compared with 4.6 percent in 2000 and 8.9 percent in 1999. Growth in
2001 reflected a 14 percent increase in personal lines new business to $52
million. The Company introduced a new homeowner policy for higher valued homes
and an updated personal auto program. Emphasis on writing homeowner coverage
limits at full replacement value also began to contribute to total personal
lines premium growth. These factors should contribute to premium growth in 2002
and beyond, as well.
The Company has received regulatory approvals for homeowner rate increases
averaging approximately 10 percent. In the fourth quarter of 2001, increases
took effect in several states, including Ohio and Illinois. Further, rate
increases will take effect in four major states in the first quarter of 2002 and
in several additional states in the second quarter. As a result, management
estimates an increase in homeowner premium of 7 percent to 8 percent in 2002 as
new business is written and existing one- and three-year policies begin to
renew.
The personal lines automation project, launched at the end of 2000, now is
testing key components and preparing for release to agencies in a pilot state in
mid-2002. Sequential roll-out to other states will follow, extending over
several years. The objectives are to create next-generation software for
personal lines products; to build a single-entry data processing system to
streamline policy issue; to speed up processing time to improve cash flow; and
to offer direct billing, a feature frequently requested by agents. The
automation program is expected to contribute to personal lines growth in future
years. The total amount invested in development of this new software through
December 31, 2001 was $8 million.
PROPERTY CASUALTY INSURANCE PROFITABILITY
The discussion of profitability is based on GAAP data, except for the
following statutory analysis of results versus industry performance and the
accident year analysis of loss data.
The Company recorded a statutory net underwriting loss of $108 million in
2001, compared with underwriting losses of $210 million in 2000 and $13 million
in 1999.
In 2001, the Company's statutory combined ratio was 103.6 percent. This
measure of profitability was above the 101.3 percent (statutory basis) the
Company averaged in the second half of the 1990s and which the Company has
stated is its target for future performance. However, the 2001 ratio was
considerably better than the industry's estimated 117 percent combined ratio,
which included approximately 6 points for World Trade Center losses.
Cincinnati's September 11 losses were a relatively minor $9 million, adding only
0.4 percentage points to the Company's statutory combined ratio.
The 2000 statutory combined ratio for Cincinnati was 109.9 percent,
including 6 points for a $110 million reserve addition and excluding a one-time
charge for asset impairment. The $110 million pre-tax addition to reserves, net
of reinsurance, was an estimate of past uninsured and underinsured motorist
(UM/UIM) losses incurred but not yet reported (IBNR) resulting from two Ohio
Supreme Court decisions. Even including the reserve addition, the Company's
statutory combined ratio was below the estimated industry ratio of 110.1
percent.
In 1999, Cincinnati's statutory combined ratio was 100.4 percent comparing
favorably with the estimated industry average of 107.8 percent.
On a GAAP basis, the Company's combined ratio was 104.9 percent in 2001,
112.8 percent in 2000 (110.7 percent excluding the asset impairment charge or
104.7 excluding both the asset impairment charge and the reserve addition) and
100.2 percent in 1999, a trend similar to that seen in the statutory data.
The following contributed to the Company's underwriting results:
Loss and LAE Trends
Excluding catastrophe losses, the total loss and loss adjustment expense
(LAE) ratio in 2001 was 6.1 percentage points less than the level recorded in
2000 (essentially unchanged from 2000 when the reserve addition is excluded) and
4.2 percentage points higher than 1999. The total loss and LAE ratio for both
2001 and 2000
MANAGEMENT DISCUSSION (continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
was primarily affected by the increase in severity of losses of all sizes when
compared with 1999, the first year the Company collected data on losses and
reserve adjustments by size categories.
Property Casualty Subsidiary Losses Incurred Analysis (GAAP)
Over the three-year period, the following changes occurred in the loss
patterns:
- -------------------------------------------------------------------------------
(dollars in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Losses $1 million or more $ 71 $ 58 $ 36
Losses $250 thousand to $1 million 143 118 89
Development and reserve
increases of $250 thousand or more 122 114 90
Other losses 981 961 770
Total losses incurred excluding
catastrophe losses $ 1,317 $ 1,251 $ 985
Catastrophe losses 64 50 37
Total losses $ 1,381 $ 1,301 $ 1,022
- -------------------------------------------------------------------------------
AS A PERCENT OF NET EARNED PREMIUMS:
Losses $1 million or more 3.4% 3.2% 2.2%
Losses $250 thousand to $1 million 6.9 6.5 5.4
Development and reserve
increases of $250 thousand or more 5.9 6.2 5.4
Other losses 47.3 52.5 46.4
Loss ratio excluding catastrophe losses 63.5% 68.4% 59.4%
Catastrophe loss ratio 3.1 2.7 2.2
Total loss ratio 66.6% 71.1% 61.6%
- -------------------------------------------------------------------------------
- - Losses $1 million or more - The average size of new losses of $1 million or
more, net of reinsurance, declined over the three-year period. Rising overall
severity and frequency was the primary factor in the increased contribution
of losses of this size over the past three years. While total large losses
rose $13 million, or 22.1 percent in 2001 compared with 2000, claim count
rose by 30.0 percent. Between 2000 and 1999, total large losses increased by
$22 million, or 62.7 percent, while claim count rose by 66.7 percent. With
the number of in-force policies increasing over the three-year period, the
Company would have expected some increase in the number of large losses.
However, the rate at which total large losses increased over the period was
greater than the growth in the overall business, which management believes
was due to escalating legal costs, medical costs and jury verdicts along with
inflated perceived values caused by announcements of sensational "celebrity"
pay contracts.
- - Losses $250,000 to $1 million - New losses in this range over the past three
years were driven by factors similar to those affecting losses of $1 million
or more. These losses, in total, increased by 21.5 percent in 2001, while
claim count rose by 19.4 percent. In 2000, these losses in total rose 32.0
percent with a 33.3 percent rise in frequency.
- - Development and reserve increases of $250,000 or more - In 2001, as the
Company adapted to the changing environment and began establishing larger
initial reserves to more accurately reflect severity trends, the number of
claims requiring case reserve adjustments declined. For losses
requiring reserve adjustments, however, the average increase in 2001 was 17.5
percent, a rate exceeding that of the growth in the overall business and
reflecting the rising overall severity.
- - Other losses - This category includes adverse development and reserve
increases less than $250,000 and IBNR. Following its initial rise of 24.7
percent in 2000, due to rising severity, the total of all other losses and
case reserve adjustments rose 2.1 percent in 2001, stabilizing at 47.3
percent of net earned premiums.
As these trends developed, management concluded that the most effective
means of returning the Company's loss ratio to its historic levels will be
through pricing and rate increases, which the Company has been implementing. In
addition, in 2001, the Company continued efforts to leverage its strong local
presence in field territories. Insurance-to-value initiatives are designed to
ensure the policyholders pay for coverage amounts appropriate for exposures.
Field marketing representatives have been meeting with every agency to reaffirm
agreements on the extent of frontline renewal underwriting to be performed by
local agents. Claims representatives have been conducting on-site inspections
and preparing full risk reports on every account reporting a loss above $100,000
and on accounts of concern.
These and other actions are expected to contribute to further
improvement in loss results and lead to improved profitability.
Loss Trends by Business Line
The loss and LAE ratio for commercial lines was 74.1 percent in 2001,
compared with 84.0 percent in 2000 (75.7 percent when the reserve addition is
excluded) and 72.9 percent in 1999. Catastrophe losses contributed 1.9 percent,
1.5 percent and 2.3 percent to the commercial loss and LAE ratio in 2001, 2000
and 1999, respectively.
The loss and LAE ratio for personal lines was 82.9 percent in 2001, compared
with 79.2 percent for 2000 (77.9 percent when the reserve addition is excluded)
and 69.1 percent in 1999. Catastrophe losses contributed 5.8 percent, 5.3
percent and 2.1 percent to the personal lines' loss and LAE ratio in 2001, 2000
and 1999, respectively.
Cincinnati Financial Corporation and Subsidiaries
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Property Casualty Subsidiary Accident Year Loss Analysis
Results by accident year, excluding catastrophe losses, for selected business
lines are as follows as of December 31, 2001:
- -------------------------------------------------------------------------------
2001 2000 1999 1998
- -------------------------------------------------------------------------------
STATUTORY NET EARNED PREMIUMS (dollars in millions)
All lines $2,067 $1,828 $1,658 $1,543
Commercial auto 221 179 154 142
Workers' compensation 252 208 185 182
Homeowner 191 180 166 150
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STATUTORY ACCIDENT YEAR LOSSES AND LAE (dollars in millions)
All lines $1,580 $1,494 $1,259 $1,206
Commercial auto 184 185 175 152
Workers' compensation 208 195 161 135
Homeowner 160 153 120 131
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STATUTORY ACCIDENT YEAR LOSS AND LAE RATIOS (percent)
All lines 76.4% 81.7% 75.9% 78.1%
Commercial auto 83.3 103.1 113.4 106.9
Workers' compensation 82.6 93.9 87.1 74.1
Homeowner 83.7 85.2 72.3 86.8
- -------------------------------------------------------------------------------
Within commercial lines, the commercial auto and workers' compensation lines
were the most significant contributors to the higher losses in accident years
2001 and 2000 when compared with 1999. Based on the Company's historic trends
for reserve accuracy and its intent to reflect higher severity in its initial
reserve activity, management believes that the improvement in 2001 accident year
loss ratios, basically resulting from higher premiums, indicates that the
Company's strategies are reducing the impact of greater losses in these business
lines.
The most significant cause of the higher loss and LAE ratio between 2001 and
1999 in personal lines was weakening profitability in the homeowner line, an
industry-wide trend. In 2000, the Company began a personal auto re-underwriting
program that reviewed and strengthened underwriting standards, requiring motor
vehicle reports for many insured drivers and commitments that some agencies will
provide the Company with specific premium volume increases. That program helped
mitigate the higher losses in 2001 and 2000.
In 2001, the Company expanded the re-underwriting program to include
homeowner coverages, emphasizing homeowner coverage limits at full replacement
value. In addition, account reviews determined that water damage was a
significant cause of homeowner property claims. Going forward, rather than
including that coverage as standard, policyholders will be given the opportunity
to select water damage coverage as a policy addition, in coverage amounts
needed. New water damage exclusions and endorsements will begin to take effect
over the next year in several states. Homeowner rate increases averaging 10
percent are scheduled to go into effect in the coming year for new and renewal
policies. Insurance to value, rate increases, specific charges for water
coverages and agency-by-agency reviews should help improve results in the
homeowner line over the next several years.
Catastrophe Losses
The contribution to the loss ratio of catastrophe losses at 3.1 percentage
points in 2001, 2.7 points in 2000, and 2.2 points in 1999 approximated the
Company's historic range.
2001 catastrophe losses totaled $64 million, net of reinsurance and before
taxes, including $9 million for losses related to events of September 11, 2001.
Reported direct losses accounted for only $300,000 of that total, with the
remainder arising from the Company's participation in an aircraft insurance pool
and other reinsurance agreements.
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, in an effort to control such catastrophe losses, the Company does not
market property casualty insurance in California, does not write flood
insurance, reviews exposure to huge disasters and continues to reduce coverage
in certain coastal regions.
Property Casualty Subsidiary Profitability Ratios (GAAP)
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2001 2000 1999
Pro Forma*
- -------------------------------------------------------------------------------
Commercial loss and LAE ratio
including catastrophe losses 74.1% 84.0% 72.9%
Personal loss and LAE ratio
including catastrophe losses 82.9% 79.2% 69.1%
- -------------------------------------------------------------------------------
Loss ratio excluding catastrophe
losses 63.5% 68.4% 59.4%
LAE ratio 10.1 11.3 10.0
Loss and LAE ratio excluding
catastrophe losses 73.6% 79.7% 69.4%
Catastrophe loss and LAE ratio 3.1 2.7 2.2
Loss and LAE ratio 76.7% 82.4% 71.6%
Expense ratio excluding
policyholder dividends 27.4 27.3* 28.2
Policyholder dividend ratio .8 1.0 .4
Combined ratio 104.9% 110.7%* 100.2%
Combined ratio 104.9% 112.8% 100.2%
- -------------------------------------------------------------------------------
* In 2000, the Company incurred a one-time net charge for asset impairment of
$39 million. Including the charge, the expense ratio was 29.4% and the
combined ratio was 112.8%. Pro forma results exclude the charge for
comparison purposes.
EXPENSE RATIO
The expense ratio, excluding the one-time charge to expense software
development assets in 2000, remained relatively stable over the past three
years, as the Company maintained its level of investment in staff and costs
associated with upgrading technology and facilities.
POLICYHOLDER DIVIDEND RATIO
Policyholder dividends as a percent of net earned premiums declined by 0.2
percentage points in 2001 after increasing
MANAGEMENT DISCUSSION (continued)
Cincinnati Financial Corporation and Subsidiaries
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0.6 percentage points in 2000 over 1999 due to growth in workers' compensation
premiums, particularly in Wisconsin, where these policies are structured to
include policyholder dividends. The improvement in 2001 reflected the Company's
decision to move many workers' compensation policies to The Cincinnati Casualty
Company, a subsidiary company that writes non-participating workers'
compensation policies. As a result of this decision, the policyholder dividend
ratio should further decline in 2002.
LIFE AND ACCIDENT HEALTH OPERATIONS (GAAP)
- -------------------------------------------------------------------------------
(dollars in millions) 2001 CHANGE 2000 Change 1999 Change
% % %
- -------------------------------------------------------------------------------
Gross written
premiums* $ 122 (10.7) $ 137 (66.5) $ 409 317.1
Net written
premiums* 102 (14.2) 119 (70.1) 398 331.1
Earned premiums 81 1.7 80 6.2 75 6.6
Other income 3 33.6 2 (32.1) 3 na
Investment income 80 1.3 79 12.5 70 7.7
Total revenues 158 -- 158 9.9 144 8.8
Total expenses 120 6.6 112 5.3 107 4.8
Net operating
income 30 (8.1) 32 14.9 28 19.1
Net capital losses (4) (136.0) (2) 40.0 (3) (19.0)
Net income 26 (15.4) 31 20.3 26 19.1
Total assets 1,761 8.6 1,621 12.0 1,447 19.6
Shareholder's equity 552 5.2 525 13.3 463 (11.8)
- -------------------------------------------------------------------------------
*Statutory basis
The Company's life insurance subsidiary had statutory net written premiums
of $102 million in 2001. In 2000, net written premiums were $119 million,
including a single $20 million BOLI policy and a separate account. In 1999, net
written premiums were $398 million, including a $303 million BOLI premium.
Excluding BOLI premiums, net written premiums rose 3.0 percent in 2001, compared
with increases of 3.8 percent in 2000 and 3.6 percent in 1999. Written premiums
have been restated to exclude annuity deposits not involving life contingencies,
which are not recognized as written premium under statutory rules.
In 2001, net operating income was down 8.1 percent from the prior year
primarily due to higher expenses related to charges for automation and policy
audits and incentives. In 2000 and 1999, net operating income rose 14.9 percent
and 19.1 percent, respectively, due to growth in investment income, favorable
mortality experience, expense control and continued growth. The life insurance
subsidiary contributed 14 percent of CFC's operating income in 2001 compared
with 27 percent in 2000 and 11 percent in 1999.
An important part of Cincinnati Life's strategic mission is to round out
accounts while improving persistency for the Company. Term and worksite
insurance products are well suited to cross- serving by the Company's property
casualty agency force, 90 percent of which now do business with Cincinnati Life.
Agents find that offering worksite marketing to employees of their small
commercial accounts provides a benefit to the employees at low cost to the
employer. To further the cross-selling opportunities with property casualty
agencies, new and enhanced term products will be introduced in early 2002.
FEDERAL INCOME TAXES
Investment operations are the Company's primary source of profits. The
Company pursues a strategy of investing in tax-advantaged fixed maturities and
equity securities to minimize its overall tax liability and maximize after-tax
earnings.
Reflecting that strategy, the Company's income tax expense (benefit) was $28
million, $(9) million and $67 million for 2001, 2000 and 1999, respectively,
while the effective tax rate was 12.7 percent, (8.9) percent, and 20.8 percent
for the same periods.
The statutory net underwriting losses in each of the past three years served
to further reduce the Company's tax expense. The differences in income tax
expense and the effective tax rate during the period were primarily the
Company's tax-exempt interest and dividends received exclusion. The 1999 tax
rate was consistent with historical experience, and management anticipates that
the effective tax rate will approximate that level if the Company achieves its
performance objectives.
INVESTMENT OPERATIONS
The market value of the Company's investments was $11.571 billion and
$11.316 billion at year-end 2001 and 2000, respectively. These investments made
up 82.9 percent of the Company's $13.959 billion assets at year-end 2001
compared with 85.2 percent at year-end 2000.
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 bonds and equity securities. The
Company's investment decisions on an individual insurance company basis are
influenced by insurance regulatory and 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 or equity securities. Such securities are evaluated
prior to purchase based on yield and risk. Investments are primarily
publicly-traded securities, classified as available-for-sale in the accompanying
financial statements. Changes in the fair value of these securities are reported
in other comprehensive income, net of tax.
The Company invests in convertible bonds and convertible preferred stocks.
The Company believes the conversion features enhance the overall value of the
security when purchased. Management does not believe that investments in
convertible securities (market value of $442 million at December 31, 2001) pose
any significant risk to the Company or its portfolio due to the
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
relatively high quality of the securities. Consequently, management
intends to continue to invest in convertible securities in the future.
Information regarding the composition of investments, together with maturity
data regarding investments in fixed maturity obligations, is included in the
Notes to Consolidated Financial Statements.
INVESTMENT INCOME
Pre-tax investment income reached a new record of $421 million in 2001;
however, reflecting the lower interest rate environment, the growth rate for
investment income slowed to 2.8 percent, compared with 6.0 percent in 2000,
excluding interest income recorded from the BOLI policy, and 5.1 percent in
1999. The growth was primarily the result of investing the cash flows from
operating activities and dividend increases from equity securities in the
investment portfolio. In 2001, 26 of the 44 common stocks in the Company's
investment portfolio increased dividends during the year, adding more than $18
million to gross investment earnings on an annualized basis.
Investment income was affected over the past three years by decreased cash
available for the investment portfolio due to the repurchase of the Company's
common stock and the reinvestment of called or redeemed bonds at lower interest
rates.
NET CAPITAL LOSSES
The Company reported a net capital loss of $17 million in 2001 following net
capital losses of $2 million in 2000 and less than $1 million in 1999.
Included in the 2001 loss were asset impairments of $47 million related to
non-investment grade corporate bonds, recognized because management viewed the
declines as "other than temporary." (See Asset Impairment discussion in
Significant Accounting Policies on Page 32 for factors considered by
management.) During 2001 the corporate bond market experienced the highest
default rates since 1990-1991. The Company is taking an aggressive approach,
selling or writing down issues for management believes it may not be able to
recoup lost value.
In addition, the Company adopted SFAS No. 133 "Accounting for Derivative
Financial Instruments and Hedging Activities" on January 1, 2001. Convertible
securities (both fixed maturities and preferred stocks) have been divided
between the host contract and the derivative financial instrument according to
SFAS No. 133 for valuation purposes. The host contract continues to be accounted
for as an available-for-sale security and the conversion feature has been marked
to market and the related change in value recorded as net capital gains
(losses). Prior to the adoption of SFAS No. 133, these changes in value affected
only the Company's balance sheet. The impact in 2001 was a $9 million net
capital gain, before tax. Net capital gains (losses) in prior years were not
affected by SFAS No. 133.
MARKET RISK
Market risk is the risk that the Company's portfolio may incur losses due to
changes in price for equity securities and changes in interest rates and credit
ratings for fixed-maturity securities. Actively managing market risk is integral
to the Company's operations. The Company may change the character of future
investments purchased or sold or alter the existing asset portfolios to manage
exposure to market risk within defined tolerance ranges.
The Company administers and oversees the investment risk management process
primarily through the Investment Committee of the Board of Directors, which
provides executive oversight of investment activities. The Company has specific
guidelines and policies that define the overall framework for managing market
and other investment risks, including the accountabilities and controls over
these activities. These guidelines are applied daily by investment portfolio
managers.
EXPOSURE TO CHANGES IN PRICE FOR EQUITY SECURITIES
Equity price risk is the risk that the Company will incur economic losses
due to adverse changes in a particular equity investment or group of equity
investments. At year-end 2001 and 2000, investments totaling approximately
$8.495 billion and $8.526 billion ($2.174 billion and $2.068 billion at cost) of
the Company's $11.571 billion and $11.316 billion investment portfolio related
to equity securities.
The equity emphasis is on common stocks with an annual dividend yield of
approximately 1.5 percent to 3 percent and with annual dividend increases. The
Company's portfolio of equity investments had an average dividend yield-to-cost
of 9.4 percent at December 31, 2001. Management's strategy in equity investments
includes identifying, for the core of the investment portfolio, approximately 10
to 15 companies, in which the Company can accumulate 5 percent to 10 percent of
their common stock.
While the Company's financial position would be impacted by changes in the
market valuation of these investments, in 2001, the Company's equity portfolio
outperformed the Standard & Poor's (S&P) 500 Index, a common measure of market
performance, gaining 0.7 percent vs. a decline of 11.9 percent for the Index.
Over the past five years, the portfolio performed similarly, with an average
annual return of 20.2 percent compared with a 10.7 percent rate for the S&P 500
Index. While past performance cannot guarantee future returns, management
believes the Company's investment style - focused on companies that pay and
increase dividends to shareholders - offers some protection in down markets. A
prolonged downturn in the stocks of financial institutions would make future
comparisons with the S&P 500 Index more difficult.
At December 31, 2001, the Company held six individual equity investments
that accounted for approximately 90 percent of the after-tax net unrealized
appreciation of the entire investment portfolio. The Company's largest equity
holding is Fifth Third Bancorp (Nasdaq:FITB) common stock, of which the Company
held 72.8 million shares at a cost of $283 million at December 31, 2001. The
market value of the Company's Fifth Third Bancorp position was $4.464 billion at
year-end 2001, or 53 percent of its total equity portfolio. The after-tax
unrealized gain represented by the Company's Fifth Third Bancorp position was
MANAGEMENT DISCUSSION (continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
$2.717 billion, or 66 percent of the Company's total after-tax unrealized gains
at year-end 2001. The Fifth Third Bancorp position represented $16.80 of the
Company's total book value of $37.07 per share at year-end 2001. If Fifth Third
Bancorp's common stock were to decline by 20 percent from its closing price of
$61.33 at year-end 2001, the impact on CFC would be an $893 million reduction in
assets and a $580 million reduction in after-tax unrealized gains. This would
reduce shareholders' equity by 10 percent and book value by $3.59 per share.
EXPOSURE TO CHANGES IN INTEREST RATES AND CREDIT RATINGS
FOR FIXED-MATURITY SECURITIES
Interest rate risk is the risk that the Company will incur economic losses
due to adverse changes in interest rates. This risk arises from the Company's
exposure to interest rates through investing activities. The Company invests
substantial funds in interest-sensitive assets and also has certain
interest-sensitive liabilities. Credit rating risk is the risk that the Company
will incur economic losses due to credit downgrades by Moody's Investors Service
and/or Standard & Poor's. At year-end 2001 and 2000, investments totaling
approximately $3.010 billion and $2.721 billion ($3.012 billion and $2.803
billion at amortized cost) of the Company's $11.571 billion and $11.316 billion
investment portfolio related to fixed-maturity securities.
Interest rate risk is lessened through the maturity structure of the
fixed-income portfolio. At December 31, 2001, the Company's portfolio of
fixed-maturity securities had a weighted average yield- to-cost of 7.8 percent,
a weighted average maturity of 9.8 years and a weighted average modified
duration of 6.1 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.
By maintaining a well diversified, fixed-income portfolio, the Company
attempts to mitigate overall credit risk. No individual fixed-income issuer's
securities account for more than 1.7 percent of the fixed-income portfolio.
Historically, municipal bonds have been attractive due to their tax-exempt
status. Essential service (e.g., schools, sewer, water, etc.) bonds issued by
municipalities are prevalent in this area. The Company maintains a diversified
portfolio of municipal bonds. While no single municipal issuer accounts for more
than 1 percent of the tax-exempt bond portfolio, concentrations within
individual states can be high. Holdings in the top five states account for 63
percent of the municipal portfolio.
Because of alternative minimum tax matters, the Company uses a blend of
tax-exempt and taxable fixed-maturity securities. Tax-exempt bonds comprised 9
percent of invested assets as of December 31, 2001, unchanged from year-end
2000.
At year-end 2001 and 2000, approximately $1.240 billion and $1.079 billion
($1.208 billion and $1.067 billion at amortized cost) of the investment
portfolio was related to corporate bonds rated as investment grade. Bonds with a
Moody's rating at or above Baa are considered investment grade. A majority of
the bonds not rated by Moody's are investment grade for statutory purposes and
are related to small, tax-exempt bond issues. The breakdown of the Company's
fixed-income portfolio based on Moody's ratings is as follows:
- -------------------------------------------------------------------------------
Moody's Rating Market Value Percent of Total
(dollars in millions)
- -------------------------------------------------------------------------------
Aaa, Aa, A $ 966 32.1%
Baa 788 26.2
Ba 399 13.3
B 308 10.2
Caa 67 2.2
Ca, C 7 0.2
Not rated 475 15.8
------ ------
Total $3,010 100.0%
- -------------------------------------------------------------------------------
At year-end 2001 and 2000, approximately $652 million and $585 million ($718
million and $706 million at amortized cost) of the investment portfolio were
corporate bonds rated as non-investment grade. Such investments tend to have
higher yields and are inherently more risky and illiquid since the risk of
default by the issuer, as exhibited by rating, is higher. Historically, they
have benefited the Company's results of operations and in general are less
sensitive to interest rate fluctuations. Many have been upgraded to investment
grade while owned. In 2001, however, the Company recorded losses in its
non-investment grade bond portfolio due to deteriorating economic conditions and
tightening credit standards. The Company continues to closely monitor this class
of investments.
While interest rates for U.S. treasuries traded at or close to their lowest
level of the past 20 years, the corporate bond market saw a greater deviation in
2001. Companies with pristine balance sheets and no perceived risk of accounting
irregularities followed the treasury market with the lowering of yields. Any
company with known or perceived credit or liquidity concerns saw its borrowing
cost (interest rate) increase dramatically.
The Company currently is developing financial planning models to further
incorporate other analytical tools in assessing market risks. Management
believes the new models will improve the Company's ability to measure the impact
on bond values of changes in interest rates. Understanding the impact of
interest rate changes should allow for a better matching of the Company's assets
and liabilities.
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
OUTLOOK
Management is targeting continued growth in excess of the industry average.
In 2002, industry analysts are projecting 10.4 percent net written premium
growth for the property casualty insurance market. The Company's further
objectives are to return to historic profitability levels in its insurance
segments and to maintain above industry-average investment income growth.
PROPERTY CASUALTY INSURANCE OPERATIONS
Factors that contribute to the positive outlook for total premium growth
include the growing strength of the commercial insurance marketplace, the
Company's strong competitive position and its reputation among independent
insurance agencies and management's belief that the Company can achieve
additional market penetration in states in which it currently operates.
Management has concluded, however, that the higher-than-historic levels of
severity, an industry-wide phenomenon, is a permanent shift; and that
underwriting and pricing must be adjusted appropriately. The re-underwriting
efforts begun in 2000 and 2001 have begun to address that issue. In this
context, over the course of 2002, management anticipates improvement in the
statutory combined ratio from the 103.6 percent reported for 2001.
Management has targeted a return to its five-year (1995-99) average
statutory and GAAP combined ratio of 101.3 percent, including policyholder
dividends. Assuming a normal level of catastrophes, management believes it could
reach that level by the end of 2002. Industry analysts are projecting a 107.5
percent statutory combined ratio for the property casualty insurance industry in
2002.
To obtain reinsurance coverage in 2002, the Company is paying rates
substantially higher than in 2001. Management anticipates the impact of the
higher reinsurance rates on 2002 earnings per share will be approximately 12
cents, after tax.
INVESTMENT OPERATIONS
Management believes that with the resumption of a favorable pricing
environment and continued growth in new business, strong cash flow from
insurance operations should contribute to continued above industry-average
investment income growth. With market sentiment indicating an economic recovery
in 2002, the Company's value-driven focus on income-generating securities of
growing businesses should help it reach its goal.
Continued weakness in the economy, however, could keep many non-investment
grade securities under pressure. Similar to many financial institutions, the
Company has and will continue to tighten its standards to adjust for credit
risk. Currently, CFC sees convertible securities and investment-grade fixed
maturities offering the best risk-adjusted returns. CFC will continue to invest
in common stocks of companies with good management teams that have growth in
earnings, revenues and dividends.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
- -------------------------------------------------------------------------------
(dollars in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Net cash provided by
operating activities $ 540 $ 370 $ 697
Net cash used in investing
activities (359) (513) (205)
Net cash used in financing activities (148) (136) (211)
Net increase (decrease) in cash $ 33 $(279) $ 281
Cash at beginning of year 60 339 58
Cash at end of year $ 93 $ 60 $ 339
SUPPLEMENTAL:
Interest paid $ 41 $ 40 $ 32
Income taxes paid 9 33 55
Cash flow from operations was sufficient to meet operating needs in 2001,
2000 and 1999, with short-term borrowings utilized for financing activities.
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.
In 2001, cash flow from operations rose $170 million over 2000, primarily
because of growth in insurance operations and the improved operating results.
The higher level of premiums in 2001 resulted in a $140 million increase in
unearned premiums.
While reinsurance receivables rose in 2001 by $300 million primarily due to
a $286 million receivable from the Company's participation in a United States
Aircraft Insurance Group (USAIG) insurance pool, this was mostly offset by a
$315 million increase in the related loss and loss expense reserves.
The primary reason for the decline in cash flow from operations between 2000
and 1999 was the 1999 year-end sale of the BOLI policy, which added $303 million
to 1999 results, combined with larger underwriting losses in 2000.
Management is aware that future liquidity could be impacted by disasters
that are in excess of catastrophe treaties, which provide coverage for gross
losses up to $200 million. The Company has no significant exposure to assumed
reinsurance, which accounted for no more than 2.3 percent of net premiums in
each of the last three years and is expected to remain at this level. In 2002,
however, the change in the Company's ceded reinsurance agreements will result in
higher ceded premiums and higher retention by the Company, which will increase
incurred losses.
The higher level of available cash in 2001 was used primarily for investing
activities. Net cash used in investing activities declined by $154 million in
2001, after rising by $308 million in 2000 as the $303 million from the sale of
the BOLI policy in 1999 was invested primarily in fixed-maturity securities.
During 2000 and 1999, a large number of the Company's fixed-maturity investments
MANAGEMENT DISCUSSION (continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
were called by the issuers. The overall decline in interest rates in 2001
substantially reduced the number of bond calls.
Net cash used in financing activities rose $12 million in 2001 after
declining by $75 million in 2000. The modest increase in 2001 primarily
reflected the higher level of dividends paid during the year and a $39 million
decrease in short-term borrowing due to a lower level of stock repurchase. The
decline in 2000 was primarily due to the $150 million reduction in cash used to
purchase treasury shares from the unusually high level in 1999. Over the
three-year period, the increase in notes payable declined steadily due to the
reduced level of borrowing for treasury share purchases.
LIABILITIES
At December 31, 2001, total long- and short-term debt was 4.4 percent and
insurance reserves were 25.8 percent of total assets, with remaining liabilities
consisting of unearned premiums, deferred income taxes, declared but unpaid
dividends and other liabilities.
DEBT
At December 31, 2001, and December 31, 2000, long-term debt consisted of
$426 million and $449 million, respectively, of convertible and senior
debentures, neither of which is encumbered by rating triggers.
Notes payable, primarily short-term debt through two bank lines of credit,
used to enhance liquidity and provide working capital,increased to $183 million
in 2001 from $170 million in 2000 and $118 million in 1999. Management has used
short- term debt for purchase of treasury shares and other purposes. At December
31, 2001, the Company had $92 million of available borrowing capacity on its
$175 million and $100 million lines of credit.
There are two financial covenants for the Company's $175 million line of
credit. First, consolidated net worth on the last day of each fiscal quarter
shall not be less than $5.0 billion or $4.5 billion if such reduction in
consolidated net worth is due solely to unrealized losses in the Company's
portfolio of debt and equity investments; at year-end 2001, the Company's
consolidated net worth was $6.0 billion. Second, the Company's consolidated
ratio of indebtedness for borrowed money to net worth, at any time during each
fiscal quarter, shall not exceed the ratio of 0.25-to-1.00; as of year-end
2001, the ratio of indebtedness to net worth was 0.10-to-1.00. The Company's
$100 million line of credit has no financial covenants.
During the second quarter of 2001, CFC Investment Company entered into an
interest rate swap as a cash hedge of variable interest payments for certain
variable-rate debt obligations ($31 million notional amount). Under this
interest rate swap contract, the Company agreed to pay a fixed rate of interest
for a seven-year period. The contract is considered to be a hedge against
changes in the amount of future cash flows associated with the related interest
payments. Accordingly, the related unrealized gain or loss on this contract is a
component of comprehensive income. The interest swap contract is reflected at
fair value in the Company's balance sheet. The unrealized loss at December 31,
2001 was insignificant. The net effect of this transaction was to fix the
interest cost on the short-term loan.
The Company has no off-balance sheet arrangements.
Ratings
Insurers are rated on their financial strength and claims-paying ability to
provide consumers with comparative information in the insurance industry. Among
other factors, the ratings focus on items such as results of operations, capital
resources and minimum policyholders' surplus requirements as well as qualitative
analysis.
In 2001, Standard & Poor's changed their rating of the Company's senior
debentures to A+ Strong from AA- Very Strong and their ratings of the Company's
insurance subsidiaries to AA- Very Strong from AA+ Very Strong. Their decision
reflected their outlook for the overall insurance industry, and, within that
context, the Company.
Other leading rating firms have maintained their ratings of the Company; A.
M. Best, the leading insurance company rating firm, awards CFC's property
casualty companies the A++ Superior rating, assigned to less than 3 percent of
insurer groups. A.M. Best awards Cincinnati Life the A+ Superior rating. Moody's
has maintained an A2 rating on the corporate debentures and an Aa3 ratings of
the property casualty companies.
The Company believes its financial position is strong; however, the rating
agencies could decide to lower its ratings in the future. The following table
summarizes the Company's current debt and financial strength ratings:
- -------------------------------------------------------------------------------
A.M BEST S&P MOODY'S
- -------------------------------------------------------------------------------
CINCINNATI FINANCIAL CORPORATION
Convertible Senior Debentures aa A+ A2
Senior Debentures aa A+ A2
THE CINCINNATI INSURANCE COMPANIES
Property Casualty Group
(and each subsidiary) A++ AA- Aa3
Cincinnati Life A+ AA- --
- -------------------------------------------------------------------------------
DIVIDENDS
CFC has increased cash dividends to shareholders for 41 consecutive years
and, periodically, the Board of Directors authorizes stock dividends or splits.
In February 2002, the Board of Directors authorized a 6 percent increase in the
regular quarterly dividend to an indicated annual rate of 89 cents. In February
2001, the Board authorized a 10.5 percent increase; and in February 2000, an
11.8 percent increase. Over the past 10 years, the Company has paid an average
of 35 percent to 40 percent of net income as dividends, with the remaining 60
percent to 65 percent reinvested for future growth. The ability of the Company
to continue paying cash dividends is subject to factors as the Board of
Directors may deem relevant.
Since 1992, the Company's Board also has authorized four stock splits or
stock dividends: a three-for-one stock split in 1998; a 5 percent stock dividend
in 1996; a 5 percent stock dividend in
Cincinnati Financial Corporation and Subsidiaries
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1995; and, a three-for-one stock split in 1992. After the stock split in 1998, a
shareholder who purchased one Cincinnati Insurance share before 1957 would own
1,947 CFC shares if all shares from accrued stock dividends and splits were held
and cash dividends not reinvested.
COMMON STOCK REPURCHASE
The CFC Board of Directors believes that stock repurchases can help fulfill
the Company's commitment to enhancing shareholder value. Consequently, the
Company's Board of Directors has authorized the repurchase of outstanding
shares.
At December 31, 2001, 7.9 million shares remained authorized for repurchase
at any time in the future. The Company has purchased 1.2 million shares at a
cost of $46 million, 2.1 million shares at a cost of $66 million and 6.1 million
shares at a cost of $217 million during the years ended December 31, 2001, 2000
and 1999, respectively. Shares repurchased total 13.0 million at a total cost to
the Company of $423 million, since the inception of the share repurchase program
in 1996.
SHAREHOLDERS' EQUITY
At year-end 2001, total shareholders' equity was 43.0 percent of total
assets.
- -------------------------------------------------------------------------------
(dollars in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Common stock, paid-in capital
less treasury stock $ 207 $ 219 $ 267
Retained earnings 1,678 1,620 1,624
Accumulated other
comprehensive income 4,113 4,156 3,530
Total shareholders' equity $5,998 $5,995 $5,421
- -------------------------------------------------------------------------------
As a long-term investor, the Company has followed a buy-and-hold strategy
for more than 40 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 $6.321
billion and $6.458 billion at year-end 2001 and 2000, respectively. It
constituted 54.6 percent of the total investment portfolio; 74.4 percent of the
equity investment portfolio; and, after deferred income taxes, 68.5 percent of
total shareholders' equity at year-end 2001. The unrealized appreciation is
primarily due to the Company's holdings in Fifth Third Bancorp and Alltel
Corporation (NYSE:AT) common stock.
OTHER ITEMS
REINSURANCE
The Company has finalized new property casualty catastrophe reinsurance
treaty and new property and casualty working reinsurance treaties with
reinsurers that have written the Company's treaties for more than 10 years.
Under the new programs, 2002 ceded premiums are estimated to be $86 million,
compared with $68 million in 2001 and $47 million in 2000. The Company received
no ceding commissions in 1999 or 2000, nor will it receive any in 2002. The
Company received $9 million in ceding commissions in 2001.
Under the new property catastrophe reinsurance treaty, the Company will
retain the first $25 million of losses, 40 percent of losses from $25 million to
$45 million and 5 percent of losses from $45 million to $200 million. The
Company has the financial ability to absorb catastrophe losses at that level,
and the revised reinsurance agreement is a means of balancing reinsurance costs
and risks. Previously, the Company retained the first $25 million of property
catastrophe losses and 5 percent of losses from $25 million up to $200 million.
Under the new 2002 property working treaty, the Company retains 100 percent
of the first $2 million in losses and 20 percent of the next $3 million up to $5
million. Losses in excess of $5 million are covered at 100 percent up to $25
million. In 2001 and 2000, the Company retained 100 percent of the first $2
million in losses, and losses in excess of $2 million were covered at 100
percent up to $25 million. Under the new 2002 casualty working treaty, the
Company retains 100 percent of the first $2 million in losses and 40 percent of
the next $2 million, up to $4 million. Losses in excess of $4 million are
covered at 100 percent up to $25 million. In 2001 and 2000, the Company retained
100 percent of the first $2 million in losses and 20 percent of the next $2
million up to $4 million. Losses in excess of $4 million were covered at 100
percent up to $25 million.
The Company's reinsurance programs will include terrorism coverages with
certain limitations. On commercial risks over $50 million in exposures, however,
the Company will need to purchase separate coverage or assume the risk of the
loss. Risks already insured by the Company are grandfathered in with terrorism
coverage.
USAIG POOL PARTICIPATION
CFC, through The Cincinnati Insurance Company, participates in USAIG, a
joint underwriting association of individual insurance companies that
collectively function as a worldwide insurance market for all types of aviation
and aerospace accounts. Member participation is renewed annually and each
member's share of premiums, losses, expenses and profits is in proportion to
their contracted participation level. Each member company of USAIG must adhere
to financial rating, statutory surplus and security agreement requirements. The
member companies are required to fund a trust account at a depository bank to
meet 100 percent of their respective net liabilities.
USAIG has a reinsurance program for its members. Companies participating in
the USAIG reinsurance program are all rated A or higher by A.M. Best.
Reinsurance recoverables on behalf of unauthorized reinsurers participating in
the pool are backed by Letters of Credit and trust funds from these reinsurers.
The pool has two governing committees to which each member company may
appoint a representative. The General Policy Committee meets periodically to
review, among other things, reinsurance credit exposure, trends in the
reinsurance marketplace
MANAGEMENT DISCUSSION (continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
and to evaluate exceptions to the approved reinsurer list that may arise. The
Advisory Council, which includes all member companies, meets annually.
The managers of USAIG issue policies in the name of one or more of the
member companies. All business written in The Cincinnati Insurance Company name
is treated in the Company's accounts as direct premium and losses and is then
ceded to USAIG. For the years ended December 31, 2001, 2000 and 1999, direct
business earned and then ceded was $57 million, $39 million and $27 million,
while direct losses and LAE incurred and then ceded were $314 million, $7
million and $14 million, respectively. The Company then assumed its contracted
share of the pool's operating results. CFC's participation share for policy
years 2001, 2000 and 1999 was 10 percent, resulting in USAIG-related
underwriting losses of $3 million, $2 million and $2 million for the years
ending December 31, 2001, 2000 and 1999, respectively. The 2001 underwriting
loss included $4 million related to the events of September 11, 2001, and the
American Airlines flight 587 accident in Queens, New York in November 2001.
Since The Cincinnati Insurance Company was named as the designated insurer
for American Airlines policy year 2000 business, the gross losses and
recoverables resulting from all American Airlines accidents were recorded on its
2001 financial statements. Management expects to recover 100 percent of the
reinsurance recoverables associated with these accidents.
SIGNIFICANT ACCOUNTING POLICIES
PROPERTY CASUALTY INSURANCE LOSS RESERVES
As discussed in the Notes to the Consolidated Financial Statements,
management establishes the Company's liabilities for insurance reserves,
including adjustments of estimates, based upon Company experience and
information from internal analysis. Though uncertainty always exists as to the
adequacy of established reserves, management believes this uncertainty is
mitigated by the historic 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 these reserves are adequate at this time. Environmental
exposures are minimal as a result of the types of risks the Company has insured
in the past. Historically, most of the Company's commercial accounts were
written with post-date coverages that afford clean-up costs and Superfund
responses.
The Company monitors trends in the industry, relevant court cases, current
legislative activity and other current events in an effort to ascertain new or
additional exposures to loss. For example, the $110 million IBNR reserve, net of
reinsurance, established in 2000 for past uninsured and underinsured motorist
losses incurred but not yet reported, was the result of two Ohio Supreme Court
decisions. The court rulings affected all auto insurers in the state, and
Cincinnati acted conservatively to clear the way for long-term performance
improvements benefiting shareholders and policyholders. Prior to the
establishment of the reserve, the Company incurred losses in 2000 and 1999 of
$28 million and $12 million, respectively, related to these uninsured motorist
claims. In 2001, the Company identified $54 million of case reserves for these
exposures, leaving $56 million of IBNR. Management believes that the remaining
reserves are adequate for losses incurred, but not yet reported.
Insurance loss reserves are affected directly by management's reserving
philosophy. The Company's claims management team has an average of 23 years of
experience in the industry and 20 years of experience with the Company. The
Company's outside actuary provides management with an opinion regarding the
acceptable range for adequate reserves based on generally accepted actuarial
guidelines. Historically, the Company has established adequate reserves, falling
in the upper half of the actuary's recommended range. However, if the Company
were slow to recognize and respond to unusual claim and loss patterns, such as
those caused by the risk factors cited in the Company's safe harbor statement,
it could lead to a rise in IBNR due to the expectation of higher losses. Higher
IBNR would lead to a higher loss and LAE ratio; each percentage point increase
in the loss and LAE ratio would reduce operating income by $21 million, pre-tax
(based on 2001 net earned premiums). Adjustments to prior years could be
material.
LIFE INSURANCE POLICY RESERVES
Policy reserves for traditional life insurance policies 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. Management uses standard mortality rates for
its policies and conservative withdrawal rates. Estimates of future earnings are
based on long-term interest rates that range from 3 percent to 7 percent.
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. Interest rates on
approximately $471 million of such reserves are periodically adjusted based upon
market conditions. Assuming a 1 percent increase or decrease in each of the
assumed rates, the effect on these policy reserves would range from an increase
of $5 million to a decrease of $5 million, respectively.
ASSET IMPAIRMENT
The Company's Asset Impairment Committee continually monitors investments
and other assets that have fair values that are less than carrying amounts for
signs of other-than-temporary impairment. Factors such as the amount and timing
of declines in fair values, the significance of the declines, the length of time
(six to nine months) of the declines, duration of fixed-maturity securities, and
interest payment defaults, among others, are considered when determining
investment impairment. Invested assets and property and equipment are monitored
for signs of impairment such as
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
significant decreases in market value of assets, changes in legal factors or in
the business climate, an accumulation of costs in excess of the amount
originally expected to acquire or construct an asset, or other such factors
indicating that the carrying amount may not be recoverable.
Fixed maturities (bonds and notes) and equity securities (common and
preferred stocks) are classified as available-for-sale and recorded at fair
value in the financial statements.
Unrealized gains and losses on investments held as available for sale, net
of taxes, are included in shareholders' equity as accumulated other
comprehensive income. Other-than-temporary declines in the fair value of
investments are recognized in earnings when facts and circumstances indicate
such write-downs are warranted.
During the years ended December 31, 2001, 2000 and 1999, the Company had
realized losses amounting to $105 million, $118 million and $70 million, which
compared with realized gains of $80 million, $116 million and $69 million,
respectively. At December 31, 2001, there were unrealized losses in the
investment portfolio amounting to approximately $83 million and unrealized gains
of $4.190 billion, net of tax. Given current market conditions, the Company
could record additional other- than-temporary impairments during 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Notes to the Consolidated Financial Statements for a
description of recently issued accounting pronouncements. The impact of adopting
new accounting pronouncements will not materially affect the Company's financial
condition or results of operations.
RELATED-PARTY TRANSACTIONS
Related-party transactions are covered in detail in the Company's Proxy
Statement dated March 8, 2002. The related- party transactions consist primarily
of commissions paid to agents of the Company who also are directors of the
Company or its subsidiaries. In total, these commissions represented less than 4
percent of the commissions paid by the Company's insurance subsidiaries in 2001.
INDEPENDENT AUDITORS' REPORT
DELOITTE
& TOUCHE
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, 2001 and 2000 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 2001. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
February 6, 2002
CONSOLIDATED BALANCE SHEETS
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
(dollars in millions except per share data)
December 31,
------------------------
2001 2000
-------- --------
ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2001-$3,012;
2000-$2,803) ................................................. $ 3,010 $ 2,721
Equity securities, at fair value (cost: 2001-$2,174;
2000-$2,068) ................................................. 8,495 8,526
Other invested assets .............................................. 66 69
Cash ............................................................... 93 60
Investment income receivable ....................................... 93 86
Finance receivable ................................................. 27 31
Premiums receivable ................................................ 732 652
Reinsurance receivable ............................................. 515 215
Prepaid reinsurance premium ........................................ 28 15
Deferred policy acquisition costs .................................. 286 259
Property and equipment, net, for Company use
(accumulated depreciation: 2001-$135; 2000-$124) ................ 125 122
Other assets ....................................................... 99 173
Separate accounts .................................................. 390 358
-------- --------
Total assets ................................................. $ 13,959 $ 13,287
======== ========
LIABILITIES
Insurance reserves
Losses and loss expenses ........................................ $ 2,932 $ 2,473
Life policy reserves ............................................ 674 605
Unearned premium ................................................... 1,062 922
Other liabilities .................................................. 293 257
Deferred income tax ................................................ 2,001 2,058
Notes payable ...................................................... 183 170
6.9% senior debenture due 2028 ..................................... 420 420
5.5% convertible senior debenture due 2002 ......................... 6 29
Separate accounts .................................................. 390 358
-------- --------
Total liabilities ............................................ 7,961 7,292
-------- --------
SHAREHOLDERS' EQUITY
Common stock, par value-$2 per share; authorized 200 million shares;
issued: 2001-175 million shares; 2000-173 million shares ........ 350 346
Paid-in capital .................................................... 284 254
Retained earnings .................................................. 1,678 1,620
Accumulated other comprehensive income-unrealized gains
on investments and derivatives .................................. 4,113 4,156
-------- --------
6,425 6,376
Less treasury stock at cost (2001-13 million shares;
2000-12 million shares) ............................................ (427) (381)
-------- --------
Total shareholders' equity ...................................... 5,998 5,995
-------- --------
Total liabilities and shareholders' equity ...................... $ 13,959 $ 13,287
======== ========
Accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENTS OF INCOME
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
(dollars in millions except per share data)
Years Ended December 31,
-----------------------------------
2001 2000 1999
------- ------- -------
REVENUES
Net earned premiums
Property casualty ........................... $ 2,071 $ 1,827 $ 1,657
Life ........................................ 77 77 66
Accident health ............................. 4 3 9
------- ------- -------
Net earned premiums ...................... 2,152 1,907 1,732
Net investment income .......................... 421 415 387
Realized losses on investments ................. (25) (2) (1)
Other income ................................... 13 11 10
------- ------- -------
Total revenues ........................... 2,561 2,331 2,128
------- ------- -------
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits ..... 1,663 1,581 1,254
Commissions .................................... 392 351 316
Other operating expenses ....................... 184 172 152
Taxes, licenses and fees ....................... 72 56 60
Increase in deferred policy acquisition costs .. (27) (33) (17)
Interest expense ............................... 39 37 33
Other expenses ................................. 17 19 8
Asset impairment-software written off .......... -- 39 --
------- ------- -------
Total benefits and expenses .............. 2,340 2,222 1,806
------- ------- -------
INCOME BEFORE INCOME TAXES ..................... 221 109 322
------- ------- -------
PROVISION (BENEFIT) FOR INCOME TAXES
Current ..................................... 62 (11) 77
Deferred .................................... (34) 2 (10)
------- ------- -------
Total provision (benefit) for income taxes 28 (9) 67
------- ------- -------
NET INCOME ..................................... $ 193 $ 118 $ 255
======= ======= =======
PER COMMON SHARE
Net income (basic) .......................... $ 1.20 $ .74 $ 1.55
======= ======= =======
Net income (diluted) ........................ $ 1.19 $ .73 $ 1.52
======= ======= =======
Accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
(dollars in millions)
ACCUMULATED
OTHER TOTAL
COMMON TREASURY PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME EQUITY
----- ----- ------- -------- ------ ------
Balance, December 31, 1998 ............. $ 341 $ (97) $ 218 $1,481 $3,678 $5,621
Net income ............................. 255 255
Change in accumulated other
comprehensive income, net ........... (148) (148)
------
Comprehensive income ................... 107
Dividends declared ..................... (112) (112)
Purchase/issuance of
treasury shares ..................... (217) (217)
Stock options exercised ................ 1 6 7
Conversion of debentures ............... 2 13 15
------ ------ ------ ------ ------ ------
Balance, December 31, 1999 ............. 344 (314) 237 1,624 3,530 5,421
Net income ............................. 118 118
Change in accumulated other
comprehensive income, net ........... 626 626
------
Comprehensive income ................... 744
Dividends declared ..................... (122) (122)
Purchase/issuance of
treasury shares ........................ (67) (67)
Stock options exercised ................ 1 10 11
Conversion of debentures ............... 1 7 8
------ ------ ------ ------ ------ ------
Balance, December 31, 2000 ............. 346 (381) 254 1,620 4,156 5,995
Net income ............................. 193 193
Change in accumulated other
comprehensive income, net ........... (43) (43)
------
Comprehensive income ................... 150
Dividends declared ..................... (135) (135)
Purchase/issuance of
treasury shares ..................... (46) (46)
Stock options exercised ................ 1 10 11
Conversion of debentures ............... 3 20 23
------ ------ ------ ------ ------ ------
Balance, December 31, 2001 ............. $ 350 $ (427) $ 284 $1,678 $4,113 $5,998
====== ====== ====== ====== ====== ======
Accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
(dollars in millions)
Years Ended December 31,
-----------------------------
2001 2000 1999
----- ------ -----
Cash flows from operating activities:
Net income ................................................... $ 193 $ 118 $ 255
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................................ 25 18 16
Realized loss on investments ................................. 25 2 1
Asset impairment-software written off ........................ -- 39 --
Interest credited to contract holders ........................ 19 24 20
Changes in:
Investment income receivable ......................... (7) (11) (3)
Premiums and reinsurance receivable .................. (399) (153) (65)
Deferred policy acquisition costs .................... (27) (33) (17)
Other assets ......................................... 37 (72) 2
Loss and loss expense reserves ....................... 459 319 99
Life policy reserves ................................. 44 42 316
Unearned premiums .................................... 140 85 47
Other liabilities .................................... 22 53 15
Current income tax ................................... 43 (63) 21
Deferred income tax .................................. (34) 2 (10)
----- ----- -----
Net cash provided by operating activities ............ 540 370 697
----- ----- -----
Cash flows from investing activities:
Sale of fixed maturities investments ......................... 35 4 62
Call or maturity of fixed maturities investments ............. 218 302 316
Sale of equity securities investments ........................ 223 294 197
Collection of finance receivables ............................ 16 15 16
Purchase of fixed maturities investments ..................... (531) (796) (423)
Purchase of equity securities investments .................... (295) (272) (246)
Investment in property and equipment ......................... (15) (44) (102)
Investment in finance receivables ............................ (12) (13) (17)
Investment in other invested assets .......................... 2 (3) (8)
----- ----- -----
Net cash used in investing activities ................ (359) (513) (205)
----- ----- -----
Cash flows from financing activities:
Payment of cash dividends to shareholders .................... (132) (119) (110)
Purchase/issuance of treasury shares ......................... (44) (67) (217)
Increase in notes payable .................................... 13 52 118
Proceeds from stock options exercised ........................ 9 11 7
Contract holder funds deposited .............................. 24 19 19
Contract holder funds withdrawn .............................. (18) (32) (28)
----- ----- -----
Net cash used in provided by financing activities .... (148) (136) (211)
----- ----- -----
Net increase (decrease) in cash ...................................... 33 (279) 281
Cash at beginning of year ............................................ 60 339 58
----- ----- -----
Cash at end of year .................................................. $ 93 $ 60 $ 339
===== ===== =====
Supplemental disclosures of cash flow information:
Interest paid ................................................ $ 41 $ 40 $ 32
Income taxes paid ............................................ 9 33 55
Conversion of 5.5% senior debentures to common stock ......... 24 7 15
Conversion of fixed maturity to equity security investments .. 51 12 83
Supplemental disclosure of noncash activity - During 2000, the Company
established a separate account. This resulted in a noncash transfer to the
separate account of the following: $301 from investments, $308 from life policy
reserves, $11 from cash, $8 from accounts receivable/payable securities, $5 from
investment income receivable and $1 from other liabilities.
Accompanying notes are an integral part of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
ALL DOLLAR AMOUNTS IN MILLIONS, EXCEPT SHARE DATA, UNLESS
OTHERWISE STATED.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Cincinnati Financial Corporation (Company), through
four insurance subsidiaries, sells insurance, primarily in the Midwest and
Southeast regions of the United States of America through a network of local
independent agents. Insurance products include fire, automobile, casualty, bonds
and all related forms of property casualty insurance as well as life insurance,
long term care, disability income policies and annuities.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of the Company and 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 balances and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
PROPERTY 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 deferred and earned
on a pro rata basis over the terms of the policies. The portion of written
premiums applicable to the unexpired terms of the policies is recorded as
unearned premiums. Losses and loss expense reserves are based on claims reported
prior to the end of the year and estimates of unreported claims, based upon
facts in each claim and the Company's experience with similar claims. The
establishment of appropriate reserves, including reserves for catastrophes, is
an inherently uncertain process. Reserve estimates are regularly reviewed and
updated, using the most current information available. Any resulting adjustments
are reflected in current operations.
LIFE INSURANCE - Premiums for traditional life insurance and certain life
contingent annuities are recognized as secure when due. 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 percent to 7 percent.
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. Interest rates on
approximately $471 and $414 of such reserves at December 31, 2001 and 2000,
respectively, are periodically adjusted based upon market conditions.
ACCIDENT 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 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 and reinsurers. 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), including embedded derivatives, are classified as
available for sale and are stated at fair values. The Company now accounts for
the fair value of embedded derivatives separately in its consolidated balance
sheets.
Unrealized gains and losses on investments, net of income taxes associated
therewith, are included in shareholders' equity in accumulated other
comprehensive income. Realized gains and losses on sales of investments are
recognized in net income on a specific identification basis.
Investment income consists primarily of interest and dividends. Interest is
recognized on an accrual basis, and dividends are recorded at the ex-dividend
date.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES - The Company
invests in certain financial instruments that contain embedded options, such as
convertible debt and convertible preferred stock. The Company also entered into
an interest rate swap agreement as a cash flow hedge during 2001 in order to fix
an interest rate related to certain of its variable rate debt obligations ($31
notional amount). Upon adoption of Statement of Financial Accounting Standards
(SFAS) No. 133 "Accounting for Derivative Financial Instruments and Hedging
Activities," as amended, on January 1, 2001, changes in the fair value of the
Company's derivative financial instruments and its interest rate swap agreement
began to be either recognized periodically in income or shareholders' equity (as
a component of accumulated other comprehensive income). Neither the adoption of
SFAS No. 133 nor any subsequent changes in fair values of these instruments have
had a significant impact on the accompanying consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT - Property and equipment is at cost less accumulated
depreciation. The Company provides depreciation based on estimated useful lives
using straight-line and accelerated methods. Depreciation expense recorded in
2001, 2000 and 1999 was $25, $20 and $18, respectively. The Company reviews
property and equipment for impairment whenever events or changes in
circumstances, such as significant decreases in market values of assets, changes
in legal factors or in the business climate, an accumulation of costs
significantly in excess of the amount originally expected to acquire or
construct an asset, or other such factors indicate that the carrying amount may
not be recoverable.
The Company capitalizes costs related to computer software developed for
internal use during the application development stage of software development
projects. These costs generally consist of certain external, payroll and
payroll-related costs. During 2000, the Company wrote off $39 of previously
capitalized costs related to the development of next-generation software to
process property casualty policies.
FEDERAL INCOME TAXES - Deferred income 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 income taxes associated with unrealized appreciation (except
the amounts related to the effect of income tax rate changes) are charged to
shareholders' equity in accumulated other comprehensive income, and deferred
taxes associated with other differences are charged to income.
SEPARATE ACCOUNTS - The Company issues variable life contracts with
guaranteed minimum returns, the assets and liabilities of which are legally
segregated and recorded as assets and liabilities of the separate accounts.
Minimum investment returns and account values are guaranteed by the Company and
also include death benefits to beneficiaries of the contract holders.
The assets of the separate accounts are carried at fair value. Separate
account liabilities primarily represent the contract holders' claims to the
related assets and are carried at the fair value of the assets. In the event
that the asset value of contract holders' accounts is projected below the value
guaranteed by the Company, a liability is established through a charge to the
Company's earnings. Investment income and realized capital gains and losses of
the separate accounts generally accrue directly to the contract holders and,
therefore, are not included in the Company's Consolidated Statements of Income.
Revenues and expenses for the Company related to the separate accounts consist
of contractual fees, percentages of net realized capital gains and losses, and
mortality, surrender and expense risk charges.
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 and assets held in separate
accounts) are based on quoted market prices, where available. 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 debentures are based on the quoted
market prices for such debentures.
NEW ACCOUNTING PRONOUNCEMENTS - On June 29, 2001, SFAS No. 141 "Business
Combinations"was approved by the Financial Accounting Standards Board (FASB).
The Company's adoption of SFAS No. 141 on July 1, 2001 had no effect on its
consolidated financial statements.
On June 29, 2001, SFAS No. 142 "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company is required to implement SFAS No. 142 on
January 1, 2002. The Company does not expect that SFAS No. 142 will have a
material effect on its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of. It supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," while retaining
the fundamental provisions of Statement No. 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used and (b)
measurement of long-lived assets to be disposed of by sale. It also supersedes
the accounting and reporting provisions of Accounting Principles Board Opinion
No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions."
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
The Company does not expect these standards will have a material effect on its
consolidated financial statements.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with current-year classifications.
2. INVESTMENTS
Years Ended December 31,
----------------------------
2001 2000 1999
---- ---- ----
Investment income summarized by investment category:
Interest on fixed maturities ......................................... $ 226 $ 222 $ 219
Dividends on equity securities ....................................... 193 186 165
Other investment income .............................................. 7 11 8
----- ----- -----
Total .............................................................. 426 419 392
Less investment expenses ............................................. 5 4 5
Net investment income .............................................. $ 421 $ 415 $ 387
===== ===== =====
Realized (losses) gains on investments summarized by investment category:
Fixed maturities:
Gross realized gains ............................................... $ 6 $ 8 $ 11
Gross realized losses .............................................. (73) (76) (49)
Equity securities:
Gross realized gains ............................................... 65 108 58
Gross realized losses .............................................. (32) (42) (21)
Embedded derivatives ............................................... 9 -- --
----- ----- -----
Realized losses on investments ..................................... $ (25) $ (2) $ (1)
===== ===== =====
Change in unrealized (losses) gains on investments summarized
by investment category:
Fixed maturities ..................................................... $ 79 $ (7) $(204)
Equity securities .................................................... (145) 969 (23)
----- ----- -----
Change in unrealized (losses) gains on investments ................. $ (66) $ 962 $(227)
===== ===== =====
Contractual maturity dates for investments in fixed maturity securities as of
December 31, 2001:
AMORTIZED FAIR % OF
COST VALUE FAIR VALUE
---- ----- ----------
Maturity dates occurring:
One year or less ....................................... $ 168 $ 169 5.6
After one year through five years ...................... 720 721 24.0
After five years through ten years ..................... 975 958 31.8
After ten years ........................................ 1,149 1,162 38.6
----- ----- ----
Total ................................................ $3,012 $3,010 100.0
====== ====== =====
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, 2001, investments with a cost of $63 and fair value of $64
were on deposit with various states in compliance with certain regulatory
requirements.
Analysis of cost or amortized cost, gross unrealized gains, gross unrealized
losses and fair value as of December 31:
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
2001 COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
Fixed maturities:
States, municipalities and political subdivisions .............. $1,013 $ 37 $ 8 $1,042
Convertibles and bonds with warrants attached .................. 69 6 4 71
Public utilities ............................................... 115 3 3 115
United States government and government agencies and authorities 4 1 -- 5
All other corporate bonds ...................................... 1,811 57 91 1,777
------ ------ ------ ------
Total ........................................................ $3,012 $ 104 $ 106 $3,010
====== ====== ====== ======
Equity securities ................................................ $2,174 $6,342 $ 21 $8,495
====== ====== ====== ======
2000
Fixed maturities:
States, municipalities and political subdivisions .............. $ 947 $ 38 $ 2 $ 983
Convertibles and bonds with warrants attached .................. 77 1 10 68
Public utilities ............................................... 81 3 1 83
United States government and government agencies and authorities 7 -- -- 7
All other corporate bonds ...................................... 1,691 40 151 1,580
------ ------ ------ ------
Total ........................................................ $2,803 $ 82 $ 164 $2,721
====== ====== ====== ======
Equity securities ................................................ $2,068 $6,518 $ 60 $8,526
====== ====== ====== ======
The fair value of the conversion features embedded in convertible securities
amounted to $9 at December 31, 2001.
Investments in companies that exceed 10 percent of the Company's
shareholders' equity include the following as of December 31:
2001 2000
---- ----
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
Fifth Third Bancorp common stock ............ $ 283 $4,464 $269 $4,330
Alltel Corporation common stock ............. $ 119 $ 813 $119 $ 823
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
3. DEFERRED ACQUISITION COSTS
Acquisition costs incurred and capitalized during 2001, 2000 and 1999
amounted to $481, $438 and $382, respectively. Amortization of deferred
acquisition costs was $454, $405 and $365 for 2001, 2000 and 1999, respectively.
4. PROPERTY CASUALTY LOSSES AND LOSS EXPENSES
Activity in the reserve for losses and loss expenses is summarized as
follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
---- ---- ----
Balance at January 1 ................................ $ 2,401 $ 2,093 $ 1,978
Less reinsurance receivable ....................... 219 161 138
------- ------- -------
Net balance at January 1 ............................ 2,182 1,932 1,840
------- ------- -------
Incurred related to:
Current year ...................................... 1,653 1,528 1,304
Prior years ....................................... (62) (20) (116)
------- ------- -------
Total incurred ...................................... 1,591 1,508 1,188
------- ------- -------
Paid related to:
Current year ...................................... 724 667 574
Prior years ....................................... 697 591 522
------- ------- -------
Total paid .......................................... 1,421 1,258 1,096
------- ------- -------
Net balance at December 31 .......................... 2,352 2,182 1,932
Plus reinsurance receivable ....................... 513 219 161
------- ------- -------
Balance at December 31 ............................ $ 2,865 $ 2,401 $ 2,093
======= ======= =======
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss expenses decreased by $62, $20 and $116 in 2001,
2000 and 1999. 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 $67 and $72 at December 31, 2001 and 2000, 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 as of December 31:
2001 2000
---- ----
Ordinary/traditional life $184 $171
Universal life .......... 272 251
Annuities ............... 199 163
Industrial .............. 15 15
Other ................... 4 5
--- ---
Total ................. $674 $605
==== ====
At December 31, 2001 and 2000, the fair value associated with the annuities
shown above approximated $213 and $179, respectively.
6. NOTES PAYABLE
The Company and subsidiaries had no compensating balance requirement on
debt for either 2001 or 2000. The Company had two lines of credit with
commercial banks amounting to $275 in 2001 (expiring in 2002) and $225 in 2000,
of which $183 and $170 were in use at December 31, 2001 and 2000. Interest rates
charged on such borrowings ranged from 2.32 percent to 7.40 percent during 2001,
which resulted in an average interest rate of 5.27 percent. At December 31,
2001, the fair value of the notes payable approximated the carrying value and
the weighted average interest rate approximated 4.34 percent.
The Company entered an interest rate swap agreement during 2001, which
expires in 7 years, to hedge future cash flows (thereby obtaining a fixed
interest rate) related to certain variable rate debt obligations ($31 notional
amount). This swap is reflected at fair value in the accompanying balance sheet
and the unrealized loss at December 31, 2001, which is insignificant, is a
component of comprehensive income. The Company does not expect any significant
amounts to be reclassified into earnings as a result of interest rate changes in
the next 12 months.
7. SENIOR DEBENTURES
The Company issued $420 of senior debentures due in 2028 in 1998. The
convertible senior debentures due in 2002 are convertible by the debenture
holders into shares of common stock at a conversion price of $14.88 per share
(67.23 shares for each one thousand dollars principal). At December 31, 2001 and
2000, the fair value of the debentures approximated $415 and $450, respectively.
8. SHAREHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS
The insurance subsidiaries paid cash dividends to the Company of
approximately $100, $100 and $175 in 2001, 2000 and 1999, 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 percent of statutory surplus or 100
percent 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 may be paid only with approval of the insurance
department of the subsidiaries' domiciliary state. During 2002, the total
dividends that may be paid to the Company without regulatory approval are
approximately $257.
One million shares of common stock were available for future stock option
grants, as of December 31, 2001.
The Company's Board of Directors has authorized the repurchase of
outstanding shares. At December 31, 2001, 7.9 million shares remain authorized
for repurchase at any time in the future. The Company has purchased 13.0 million
shares at a cost of $423 million between the inception of the share repurchase
program in 1996 and December 31, 2001.
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Declared cash dividends per share were $.84, $.76 and $.68 as of December 31,
2001, 2000 and 1999, respectively.
ACCUMULATED OTHER COMPREHENSIVE INCOME - The change in unrealized gains on
investments and derivatives included:
2001 2000 1999
----- ----- -----
Unrealized holding (losses) gains on
securities and derivatives arising
during the period ....................... $(100) $ 960 $(228)
Reclassification adjustment:
Net realized loss on investments ........ 34 2 1
Income taxes on above ...................... 23 (336) 79
----- ----- -----
Change in unrealized (losses) gains
on securities and derivatives, net ...... $ (43) $ 626 $(148)
===== ===== =====
Income taxes relate to each component above ratably.
9. REINSURANCE
Property casualty premium income in the accompanying statements of income
includes approximately $38, $34 and $37 of earned premiums on assumed business
and is net of approximately $155, $108 and $96 of earned premiums on ceded
business for 2001, 2000 and 1999, respectively.
Written premiums consist of the following:
Years Ended December 31,
---------------------------------------------
2001 2000 1999
------- ------- -------
Direct ................ $ 2,315 $ 1,987 $ 1,764
Assumed ............... 41 36 37
Ceded ................. (168) (99) (94)
------- ------- -------
Net ................ $ 2,188 $ 1,924 $ 1,707
======= ======= =======
Insurance losses and policyholder benefits in the accompanying statements
of income are net of approximately $422, $109 and $63 of reinsurance recoveries
for 2001, 2000 and 1999, respectively.
10. FEDERAL INCOME TAXES
Significant components of the Company's net deferred tax liability are as
follows as of December 31:
2001 2000
------ ------
Deferred tax liabilities:
Unrealized gains on investments and derivatives ... $2,208 $2,232
Deferred acquisition costs ........................ 100 82
Other ............................................. 26 28
------ ------
Total ............................................. 2,334 2,342
------ ------
Deferred tax assets:
Losses and loss expense reserves .................. 187 178
Unearned premiums ................................. 83 64
Life policy reserves .............................. 20 19
Tax credit carryforward ........................... 9 10
Other ............................................. 34 13
------ ------
Total ............................................. 333 284
------ ------
Net deferred tax liability ........................... $2,001 $2,058
====== ======
The provision for federal income taxes is based upon a consolidated income
tax return for the Company and subsidiaries.
The differences between the statutory federal rates and the Company's
effective federal income tax rates are as follows:
2001 2000 1999
---- ---- ----
Tax at statutory rate ................... 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
Tax-exempt municipal bonds ........... (7.9) (15.1) (5.1)
Dividend exclusion ................... (16.0) (30.4) (9.2)
Other ................................ 1.6 1.6 .1
---- ---- ----
Effective rate .......................... 12.7% (8.9)% 20.8%
==== ==== ====
No provision has been made (at December 31, 2001, 2000 and 1999) for
federal income taxes on approximately $14 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.
11. NET INCOME PER COMMON SHARE
Basic earnings per share is computed based on the weighted average number
of shares outstanding. Diluted earnings per share is computed based on the
weighted average number of common and dilutive potential common shares
outstanding. For the Company, dilutive potential common shares consist of
outstanding stock options and shares issuable under its 5.5 percent convertible
senior debentures (debentures). The computations of basic and diluted earnings
per share are as follows:
Years Ended December 31,
------------------------
2001 2000 1999
----- ---- -----
Numerator:
Net income (basic) ............................ $ 193 $118 $ 255
Effect of debentures .......................... 1 1 1
----- ---- -----
Net income (diluted) .......................... $ 194 $119 $ 256
===== ==== =====
Denominator (in millions):
Weighted average common shares outstanding .... 161 161 165
Effect of:
Debentures ................................. 1 2 2
Stock options .............................. - 1 2
----- ---- -----
Adjusted weighted average shares .............. 162 164 169
===== ==== =====
Earnings per share:
Basic ......................................... $1.20 $.74 $1.55
===== ==== =====
Diluted ....................................... $1.19 $.73 $1.52
===== ==== =====
Options to purchase 1 million shares of common stock were outstanding
during 2001, 2000 and 1999, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
12. PENSION PLAN
The Company and subsidiaries sponsor a defined contribution plan (401(k)
savings plan) and a defined benefit pension plan covering substantially all
employees. Benefits for the defined benefit plan 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 summarized information on the Company's defined benefit pension plan:
Years Ended December 31,
------------------------
2001 2000
----- -----
Change in benefit obligation:
Benefit obligation at beginning of year ........... $ 88 $ 76
Service cost ...................................... 6 5
Interest cost ..................................... 7 6
Actuarial loss (gain) ............................. 8 6
Benefits paid ..................................... (3) (5)
----- -----
Benefit obligation at end of year ................. $ 106 $ 88
===== =====
Change in plan assets:
Fair value of plan assets at beginning of year .... $ 160 $ 148
Actual return on plan assets ...................... (10) 17
Benefits paid ..................................... (3) (5)
----- -----
Fair value of plan assets at end of year .......... $ 147 $ 160
===== =====
Funded status:
Funded status at end of year ...................... $ 41 $ 72
Unrecognized net actuarial gain ................... (43) (76)
Unrecognized net transitional asset ............... (2) (2)
Unrecognized prior service cost ................... 9 9
----- -----
Prepaid (accrued) pension cost .................... $ 5 $ 3
===== =====
The fair value of the Company's stock comprised $22 and $23 of the plan's
assets at December 31, 2001 and 2000, respectively.
The following summarizes the assumptions for the plan:
Years Ended December 31,
------------------------
2001 2000
---- ----
Discount rate .......................... 7.00% 7.25%
Expected return on plan assets ......... 8.00 8.00
Rate of compensation increase .......... 5-7 5-7
The components of the net periodic benefit cost are as follows:
Years Ended December 31,
--------------------------------
2001 2000 1999
---- ---- ----
Service cost .......................... $ 6 $ 5 $ 5
Interest cost ......................... 7 6 5
Expected return on plan assets ........ (12) (11) (9)
Amortization of actuarial gain ........ (3) (3) (1)
---- ---- ---
Net pension expense ................... $ (2) $ (3) -
==== ==== ===
13. STATUTORY ACCOUNTING INFORMATION
Accounting principles generally accepted in the United States of America
differ in certain respects from statutory insurance accounting practices
prescribed or permitted for insurance companies by regulatory authorities.
The National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles (the Codification). The
Codification, which is intended to standardize regulatory accounting and
reporting to state insurance departments, became effective January 1, 2001.
However, statutory accounting principles will continue to be established by
individual state laws and permitted practices. Ohio, the domiciliary state of
the Company's insurance subsidiaries, required adoption of the Codification with
certain modifications for the preparation of statutory financial statements
effective January 1, 2001. The following table reconciles consolidated net
income for the years ended December 31, and shareholders' equity at December 31,
as reported herein in conformity with GAAP, with total statutory net income and
capital and surplus of the Company's insurance subsidiaries prepared in
accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities:
Net Income
----------------------------
2001 2000 1999
---- ---- ----
Balance per GAAP ........................... $ 193 $ 118 $ 255
Deferred policy acquisition costs .......... (27) (33) (17)
Deferred income taxes ...................... (30) 5
Income from derivatives .................... (5) - -
Parent company and undistributed net
income of certain subsidiaries .......... (49) (39) (53)
Other ...................................... 22 14 46
----- ----- -----
Balance per statutory accounting practices . $ 104 $ 65 $ 231
===== ===== =====
Balances by major business type:
Property casualty insurance ................ $ 89 $ 35 $ 210
Life insurance ............................. 15 30 21
----- ----- -----
$ 104 $ 65 $ 231
===== ===== =====
Shareholders' Equity
--------------------
2001 2000
------- -------
Balance per GAAP ............................... $ 5,998 $ 5,995
Deferred policy acquisition costs .............. (286) (259)
Deferred income taxes .......................... 140 687
Parent company and undistributed net
income of certain subsidiaries .............. (3,127) (3,078)
Reserves and non-admitted assets ............... (141) (110)
Other .......................................... (51) (63)
------- -------
Balance per statutory accounting practices ..... $ 2,533 $ 3,172
======= =======
Balances by major business type:
Property casualty insurance .................... $ 2,153 $ 2,761
Life insurance ................................. 380 411
------- -------
$ 2,533 $ 3,172
======= =======
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Adopting the Codification reduced statutory capital and surplus as of
January 1, 2001 by $392 for the property casualty insurance subsidiaries and $62
for the life insurance subsidiary.
14. TRANSACTIONS WITH AFFILIATED PARTIES
The Company paid certain officers and directors, or insurance agencies of
which they are shareholders, commissions of approximately $14, $14 and $13 on
premium volume of approximately $95, $87 and $83 for 2001, 2000 and 1999,
respectively.
15. CONTINGENCIES
Various litigation and claims against the Company and its subsidiaries are
in process and pending and principally result from normal insurance activities.
Based upon a review of open matters with legal counsel, management believes that
the outcomes of such matters will not have a material effect upon the Company's
consolidated financial position or results of operations.
16. 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:
Years Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
Net income As reported $ 193 $ 118 $ 255
Pro forma 182 108 246
Net income per
common share As reported $1.20 $ .74 $1.55
(basic) Pro forma 1.14 .67 1.49
Net income per
common share As reported $1.19 $ .73 $1.52
(diluted) Pro forma 1.13 .66 1.47
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 2001, 2000 and
1999, respectively: dividend yield of 2.20 percent, 2.11 percent and 2.36
percent; expected volatility of 25.54 percent, 24.92 percent and 22.89 percent;
risk-free interest rates of 5.54 percent, 5.30 percent and 6.81 percent; and
expected lives of 10 years for all years. Compensation expense in the pro forma
disclosures is not indicative of future amounts as options vest over several
years and additional grants are generally made each year.
A summary of options information follows:
Years Ended December 31,
------------------------
Weighted-Average
2001 Shares Exercise Price
------ --------------
Outstanding at beginning of year .......... 6,153,218 $ 29.05
Granted ................................... 1,132,200 36.41
Exercised ................................. (558,039) 16.30
Forfeited/revoked ......................... (123,550) 33.82
---------
Outstanding at end of year ................ 6,603,829 31.30
=========
Options exercisable at end of year ........ 4,327,005
Weighted-average fair value of
options granted during the year ........ $ 13.31
2000
Outstanding at beginning of year .......... 5,460,140 $ 27.57
Granted ................................... 1,294,600 31.08
Exercised ................................. (520,679) 18.48
Forfeited/revoked ......................... (80,843) 29.57
---------
Outstanding at end of year ................ 6,153,218 29.05
=========
Options exercisable at end of year ........ 3,694,725
Weighted-average fair value of
options granted during the year ........ $ 10.56
1999
Outstanding at beginning of year .......... 4,940,591 $ 25.11
Granted ................................... 1,011,800 35.46
Exercised ................................. (414,703) 16.55
Forfeited/revoked ......................... (77,548) 32.89
---------
Outstanding at end of year ................ 5,460,140 27.57
=========
Options exercisable at end of year ........ 3,224,461
Weighted-average fair value of
options granted during the year ........ $ 14.40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Options outstanding and exercisable consisted of the following at
December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
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RANGE OF WEIGHTED-AVERAGE
EXERCISE REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- ------ ------ ---------------- -------------- ------ --------------
$12.14 TO 15.79 195,295 1.07 YRS $13.43 195,295 $13.43
$15.95 TO 20.47 433,509 3.57 YRS 18.93 433,509 18.93
$20.50 TO 23.00 1,064,123 4.62 YRS 21.26 1,064,123 21.26
$26.41 TO 29.72 1,052,939 8.85 YRS 29.60 372,268 29.41
$32.06 TO 33.75 741,736 7.05 YRS 33.62 501,916 33.63
$33.88 TO 39.88 2,223,367 8.09 YRS 35.50 972,811 34.44
$40.16 TO 45.37 892,860 6.59 YRS 42.78 787,083 43.07
--------- -------- ------ --------- ------
6,603,829 6.83 YRS $31.30 4,327,005 $29.74
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SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Cincinnati Financial Corporation and Subsidiaries
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(dollars in millions except per share data)
Financial data for each quarter in the two years ended December 31:
2001
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Quarter 1st 2nd 3rd 4th Full Year
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Revenues ............................... $618 $645 $ 644 $ 654 $2,561
Income before income taxes ............. 97 51 34 39 221
Net income ............................. 72 49 36 36 193
Net income per common share (basic) .... .45 .30 .22 .23 1.20
Net income per common share (diluted)... .44 .30 .22 .22 1.19
2000
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Quarter 1st 2nd 3rd 4th Full Year
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Revenues ............................... $571 $579 $ 600 $ 581 $2,331
Income before income taxes ............. 104 97 (9)* (83) 109*
Net income ............................. 79 75 6* (41) 118*
Net income per common share (basic) .... .49 .46 .03* (.26) .74*
Net income per common share (diluted)... .48 .45 .03* (.26) .73*
Note: The sum of the quarterly reported amounts may not equal the full year as
each is computed independently.
*Third-quarter and full-year 2000 results include a one-time net charge for
asset impairment of $39 million, before tax; $25 million, or 16 cents per share,
net of tax.
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-85953 (on Form S-8), No. 333-24815 (on Form S-8), No. 333-24817 (on Form
S-8), No. 333-49981 (on Form S-8), and No. 33-48970 (on Form S-4) of Cincinnati
Financial Corporation of our reports dated February 6, 2002, appearing in and
incorporated by reference in the Annual Report on Form 10-K of Cincinnati
Financial Corporation for the year ended December 31, 2001.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
March 22, 2002
