<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995 Commission file number
0-4604
CINCINNATI FINANCIAL CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0746871
------------------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6200 S. Gilmore Road, Fairfield, Ohio 45014-5141
---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513)870-2000
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Exchange on Which
Title of Each Class Registered
------------------- ------------------
$2.00 Par, Common Over The Counter
5-1/2% Convertible Senior Debentures Due 2002 Over The Counter
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
The aggregate market value of voting stock held by nonaffiliates of
Cincinnati Financial Corporation was $2,919,384,518 as of March 1, 1996.
As of March 1, 1996, there were 53,090,056 shares of common stock
outstanding.
Documents Incorporated by Reference
-----------------------------------
Annual Report to Shareholders for year ended December 31, 1995 (in part)
into Parts I, II and IV and Registrant's Proxy Statement dated March 2, 1996
into Parts I, III and IV.
<PAGE> 2
PART I
ITEM 1. BUSINESS
--------
Cincinnati Financial Corporation ("CFC") was incorporated on September
20, 1968 under the laws of the State of Delaware. On April 4, 1992, the
shareholders voted to adopt an Agreement of Merger by means of which the
reincorporation of the Corporation from the State of Delaware to the State of
Ohio was accomplished. CFC owns 100% of The Cincinnati Insurance Company
("CIC") and 100% of CFC Investment Company ("CFC-I"). The principal purpose of
CFC is to be a holding company for CIC and CFC-I and in addition for the
purpose of acquiring other companies.
CIC, incorporated in August, 1950, is an insurance carrier
presently licensed to conduct multiple line underwriting in accordance with
Section 3941.02 of the Revised Code of Ohio. This includes the sale of fire,
automobile, casualty, bonds, and all related forms of property and casualty
insurance in 50 states, the District of Columbia, and Puerto Rico. CIC is not
authorized to write any other forms of insurance. CIC is in a highly
competitive industry and competes in varying degrees with a large number of
stock and mutual companies. CIC also owns 100% of the stock of the following
insurance companies.
1. The Cincinnati Life Insurance Company ("CLIC") incorporated in 1987
under the laws of Ohio for the purpose of acquiring the business of
Inter-Ocean and The Life Insurance Company of Cincinnati. CLIC
acquired The Life Insurance Company of Cincinnati and Inter-Ocean
Insurance Company on February 1, 1988. CLIC is engaged in the sale of
life insurance and accident and health insurance in 46 states and the
District of Columbia.
2. The Cincinnati Casualty Company ("CCC") (formerly the Queen City
Indemnity Company), incorporated in 1972 under the laws of Ohio, is
engaged in the fire and casualty insurance business on a direct
billing basis in 29 states. The business of CIC and CCC is conducted
separately, and there are no plans for combining the business of said
companies.
3. The Cincinnati Indemnity Company ("CID"), incorporated in 1988 under
the laws of Ohio, is engaged in the writing of nonpreferred personal
and casualty lines of insurance in 21 states. The business of CIC
and CID is conducted separately, and there are no plans for combining
the business of said companies.
CFC-I, organized in 1970, owns certain real estate in the Greater
Cincinnati area and is in the business of leasing of financing various items
principally automobiles, trucks, computer equipment, machine tools,
construction equipment, and office equipment.
Industry segment information for operating profits and identifiable
assets is included on page 30 of the Company's Annual Report to Shareholders
and is incorporated herein by reference (see Exhibit 13 to this filing).
As more fully discussed in pages 7, 9, and 11 through 13 in the
Company's Annual Report to Shareholders, incorporated herein by reference (see
Exhibit 13 to this filing), the Company sells insurance primarily in the
Midwest and Southeast through a network of a limited number (988 in 26
2
<PAGE> 3
states at December 31, 1995) of selectively appointed independent agents, most
of whom own stock in the Company. Gross written premiums by property/casualty
lines increased 7% to $1.377 billion in 1995. The Company's mix of
property/casualty business did not change significantly in 1995. Life and
accident and health insurance (which constituted only 4% of the Company's
premium income for 1995) is also sold primarily through property/casualty
agencies and did not change significantly in 1995.
The consolidated financial statements include the estimated liability
for unpaid losses and loss adjustment expenses ("LAE") of the Company's
property/casualty ("P/C") insurance subsidiaries. Property and casualty
insurance is written in 50 states, the District of Columbia, and Puerto Rico.
The liabilities for losses and LAE are determined using case-basis evaluations
and statistical projections and represent estimates of the ultimate net cost of
all unpaid losses and LAE incurred through December 31 of each year. These
estimates are subject to the effect of trends in future claim severity and
frequency. These estimates are continually reviewed; and as experience
develops and new information becomes known, the liability is adjusted as
necessary. Such adjustments, if any, are reflected in current operations.
The Company does not discount any of its property/casualty liabilities
for unpaid losses and unpaid loss adjustment expenses.
There are two tables used to present an analysis of losses and LAE.
The first table, providing a reconciliation of beginning and ending liability
balances for 1995, 1994, and 1993, is on page 27 in the Company's Annual Report
to Shareholders, incorporated herein by reference (see Exhibit 13 to this
filing). The second table, showing the development of the estimated liability
for the ten years prior to 1995 is presented on the next page.
The reconciliation referred to in the preceding paragraph shows a 1995
recognition of $126,509,000 redundancy in the December 31, 1994 liability.
This redundancy is due in part to the effects of settling case reserves
established in prior years for less than expected and also in part to the over
estimation of the severity of IBNR losses. Average severity continues to
increase primarily because of increases in medical costs related to workers'
compensation and auto liability insurance. Litigation expenses for recent
court cases on pending liability claims continue to be very costly; and
judgments continue to be high and difficult to estimate. Reserves for
environmental claims have been reviewed and the Company believes that the
reserves are adequate. Environmental exposures are minimal as a result of the
types of risks we have insured in the past. Historically, most commercial
accounts written post-date the coverages which afford clean-up costs and
Superfund responses.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and LAE. While anticipated price increases
due to inflation are considered in estimating the ultimate claim costs, the
increase in average severities of claims is caused by a number of factors that
vary with the individual type of policy written. Future average severities are
projected based on historical trends adjusted for anticipated changes in
underwriting standards, policy provisions, and general economic trends. These
trends are monitored based on actual development and are modified if necessary.
3
<PAGE> 4
The limits on risks retained by the Company vary by type of policy, and
risks in excess of the retention limits are reinsured. Because of the growth in
the Company's capacity to underwrite risks and reinsurance market conditions, in
1987 and 1989, the Company raised its retention limits from $500,000 to $750,000
to $1,000,000, respectively, for casualty and property lines of insurance. In
1995, the casualty and property lines retention limits were further raised to
$2,000,000.
There are no differences between the liability reported in the
accompanying consolidated financial statements in accordance with generally
accepted accounting principles ("GAAP") and that reported in the annual
statements filed with state insurance departments in accordance with statutory
accounting practices ("SAP").
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
(Millions of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
- ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability for Unpaid
Losses and Loss
Adjustment Expenses $272 $377 $534 $631 $742 $833 $986 $1,138 $1,293 $1,432 $1,581
Net Liability Reestimated
as of:
One Year Later 344 444 548 671 751 869 956 1,098 1,200 1,306
Two Years Later 382 460 584 634 747 816 928 993 1,116
Three Years Later 382 480 544 622 696 795 823 949
Four Years Later 383 452 535 596 676 723 814
Five Years Later 370 447 523 580 635 720
Six Years Later 370 443 508 551 637
Seven Years Later 367 429 496 502
Eight Years Later 364 431 505
Nine Years Later 366 439
Ten Years Later 370
Net Cumulative Redundancy
(Deficiency) $(98) $(62) $ 29 $129 $105 $113 $172 $ 189 $ 177 $ 126
===== ===== ===== ===== ==== ==== ==== ====== ===== ======
Net Cumulative Amount of
Liability Paid
Through:
One Year Later $137 $153 $178 $204 $238 $232 $280 $310 $343 $ 368
Two Years Later 217 247 292 321 356 397 440 498 538
Three Years Later 266 313 362 390 446 493 546 612
Four Years Later 300 351 398 441 497 552 611
Five Years Later 316 367 427 467 528 588
Six Years Later 324 387 441 485 550
Seven Years Later 338 394 454 496
Eight Years Later 340 402 461
Nine Years Later 348 408
Ten Years Later 349
Gross Liability--End of Year $1,200 $1,365 $1,510 $1,690
Reinsurance Recoverable 62 72 78 109
------ ------ ------ ------
Net Liability--End of Year $1,138 $1,293 $1,432 $1,581
====== ====== ====== ======
Gross Reestimated Liability--Latest $1,032 $1,203 $1,407
Reestimated Recoverable--Latest 83 87 101
------ ------- ------
Net Reestimated Liability--Latest $ 949 $1,116 $1,306
====== ====== ======
Gross Cumulative Redundancy $ 189 $ 177 $ 126
====== ====== ======
</TABLE>
The table above presents the development of balance sheet liabilities
for 1985 through 1995. The top line of the table shows the
4
<PAGE> 5
estimated liability for unpaid losses and LAE recorded at the balance sheet
date for each of the indicated years. This liability represents the estimated
amount of losses and LAE for claims arising in all prior years that are unpaid
at the balance sheet date, including losses that had been incurred but not yet
reported to the Company. The upper portion of the table shows the reestimated
amount of the previously recorded liability based on experience as of the end
of each succeeding year. The estimate is increased or decreased as more
information becomes known about the frequency and severity of claims for
individual years.
The "cumulative redundancy (deficiency)" represents the aggregate
change in the estimates over all prior years. For example, the 1987 liability
has developed a $29,000,000 redundancy over eight years and has been reflected
in income over the eight years. The effects on income of the past three years
of changes in estimates of the liabilities for losses and LAE for all accident
years is shown in the reconciliation table.
The lower section of the table shows the cumulative amount paid with
respect to the previously recorded liability as of the end of each succeeding
year. For example, as of December 31, 1995, the Company had paid $461,000,000
of the currently estimated $505,000,000 of losses and LAE that have been
incurred as of the end of 1987; thus an estimated $44,000,000 of losses
incurred as of the end of 1987 remain unpaid as of the current financial
statement date.
In evaluating this information, it should be noted that each amount
includes the effects of all changes in amounts for prior periods. For example,
the amount of deficiency or redundancy related to losses settled in 1992, but
incurred in 1987, will be included in the cumulative deficiency or redundancy
amount for 1987 and each subsequent year. This table does not present accident
or policy year development data which readers may be more accustomed to
analyzing. Conditions and trends that have affected development of the
liability in the past may not necessarily occur in the future. Accordingly, it
may not be appropriate to extrapolate future redundancies or deficiencies based
on this table.
The Company limits the maximum net loss that can arise by large risks
or risks concentrated in areas of exposure by reinsuring (ceding) with other
insurers or reinsurers. Related thereto, the Company's retention levels were
last increased from $1,000,000 to $2,000,000 in 1995. The Company reinsures
with only financially sound companies. The composition of its reinsurers has
not changed, and the Company has not experienced any uncollectible reinsurance
amounts or coverage disputes with its reinsurers in more than ten years.
Information concerning the Company's investment strategy and philosophy
is contained in page 32 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
5
<PAGE> 6
these securities to maturity unless there is a change in credit risk or the
securities are called by the issuer. Historically, municipal bonds (with
concentrations in the essential services, i.e. schools, sewer, water, etc.)
have been attractive to the Company due to their tax exempt features. Because
of Alternative Mininum Tax matters, the Company uses a blend of tax-exempt and
taxable fixed maturity securities. Investments in common stocks have been
made with an emphasis on securities with an annual dividend yield of at least 2
to 3 percent and annual dividend increases. The Company's strategy in equity
investments is to identify approximately 10 to 12 companies in which it can
accumulate 10 to 20 percent of their common stock. As a long-term investor, a
buy and hold strategy has been followed for many years, resulting in an
accumulation of a significant amount of unrealized appreciation on equity
securities.
As of December 31, 1995, CFC employed 2,289 persons.
ITEM 2. PROPERTIES
----------
CFC-I owns a fully leased 85,000 square feet office building in
downtown Cincinnati that is currently leased to Procter and Gamble Company, an
unaffiliated company, on a net, net, net lease basis. This property is carried
in the financial statements at $634,298 as of December 31, 1995.
CFC-I also owns the Home Office building located on 75 acres of land in
Fairfield, Ohio. This building contains approximately 380,000 square feet.
The John J. and Thomas R. Schiff & Company, an affiliated company, occupies
approximately 5,350 square feet, and the balance of the building is occupied by
CFC and its subsidiaries. The property is carried in the financial statements
at $12,450,028 as of December 31, 1995.
CFC-I also owns the Fairfield Executive Center which is located on the
northwest corner of the home office property in Fairfield, Ohio. This is a
four-story office building containing approximately 124,000 square feet. CFC
and its subsidiaries occupy approximately 47% of the building, unaffiliated
tenants occupy approximately 34% of the building, and the balance is available
for Company expansion. The property is carried in the financial statements at
$10,290,635 as of December 31, 1995.
The CLIC owns a four-story office building in the Tri-County area of
Cincinnati containing approximately 127,000 square feet. At the present time,
100% of the building is currently being leased by an unaffiliated tenant. This
property is carried in the financial statements at $4,560,999 as of December
31, 1995.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is involved in no material litigation other than routine
litigation incident to the nature of the insurance industry.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
CFC filed with the commission on March 4, 1996, definitive proxy
statements and annual reports pursuant to Regulation 14A. Material filed was
the same as that described in Item 4 and is incorporated herein by reference.
No matters were submitted during the fourth quarter.
6
<PAGE> 7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
-----------------------------------------------------
STOCKHOLDER MATTERS
-------------------
This information is included in the Annual Report of the Registrant to
its shareholders on page 5 for the year ended December 31, 1995 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, 1995 and is
incorporated herein by reference (see Exhibit 13 to this filing).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
This information is included in the Annual Report of the Registrant to
its shareholders on pages 30 through 32 for the year ended December 31, 1995
and is incorporated herein by reference (see Exhibit 13 to this filing).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
(a) Financial Statements
The following consolidated financial statements of the
Registrant and its subsidiaries, included in the Annual
Report of the Registrant to its shareholders on pages 19 to
30 for the year ended December 31, 1995, are incorporated
herein by reference (see Exhibit 13 to this filing).
Independent Auditors' Report
Consolidated Balance Sheets--December 31, 1995 and 1994
Consolidated Statements of Income--Years ended
December 31, 1995, 1994, and 1993
Consolidated Statements of Shareholders' Equity--Years
ended December 31, 1995, 1994, and 1993
Consolidated Statements of Cash Flows--Years ended
December 31, 1995, 1994, and 1993.
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 1 for
the year ended December 31, 1995, 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,
1995.
7
<PAGE> 8
PART III
CFC filed with the Commission on March 4, 1996 definitive proxy
statements pursuant to regulation 14- A. Material filed was the same as that
described in Item 10, Directors and Executive Officers of the Registrant; Item
11, Executive Compensation; Item 12, Security Ownership of Certain Beneficial
Owners and Management; Item 13, Certain Relationships and Related Transactions,
and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) Filed Documents. The following documents are filed as part of this
report:
1. Financial Statements--incorporated herein by reference (see
Exhibit 13 to this filing) as listed in Part II of this
Report.
2. Financial Statement Schedules and Independent Auditors'
Report:
Independent Auditors' Report
Schedule I-- Summary of Investments
Other than Investments in Related Parties
Schedule II-- Condensed Financial Information of Registrant
Schedule III-- Supplementary Insurance Information
Schedule IV-- Reinsurance
Schedule VI-- Supplemental Information Concerning
Property-Casualty Insurance Operations
All other schedules are omitted because they are not
required, inapplicable or the information is included in
the financial statements or notes thereto.
3. Exhibits:
Exhibit 11--Statement re computation of per share earnings
for years ended December 31, 1995, 1994, and 1993
Exhibit 13--Material incorporated by reference from the
annual report of the registrant to its shareholders
for the year ended December 31, 1995
Exhibit 21--Subsidiaries of the registrant--information
contained in Part I of this report.
Exhibit 22--Notice of Annual Meeting of Shareholders and
Proxy Statement dated March 4, 1996 filed with
Securities and Exchange Commission, Washington, D.C.,
20549
Exhibit 23--Independent Auditors' Consent
Exhibit 27--Financial Data Schedule
Exhibit 28--Information from reports furnished to state
insurance regulatory authorities
(b) Reports on Form 8-K--NONE
8
<PAGE> 9
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, 1995 and 1994, and for each
of the three years in the period ended December 31, 1995, and have issued our
report thereon dated February 9, 1996; such consolidated financial statements
and report are included in your 1995 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the consolidated
financial statement schedules of Cincinnati Financial Corporation and its
subsidiaries, listed in Item 14(a)(2). These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
/S/ Deloitte & Touche LLP
Cincinnati, Ohio
February 9, 1996
9
<PAGE> 10
SCHEDULE I
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
(000 omitted)
Amount at
which shown
Fair in balance
Type of Investment Cost Value sheet
------------------ ---- ----- -----------
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government and
government agencies and
authorities
The Cincinnati Insurance Company . $ 252 $ 278 $ 278
The Cincinnati Indemnity Company . 203 223 223
The Cincinnati Casualty Company . 150 171 171
The Cincinnati Life Insurance
Company . . . . . . . . . . . . . 3,750 3,812 3,812
---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . 4,355 4,484 4,484
---------- ---------- ----------
States, municipalities and political
subdivisions:
The Cincinnati Insurance Company . 761,037 800,271 800,271
The Cincinnati Indemnity Company . 6,897 7,367 7,367
The Cincinnati Casualty Company . 48,569 52,175 52,175
The Cincinnati Life Insurance
Company . . . . . . . . . . . . 3,638 3,933 3,933
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 820,141 863,746 863,746
---------- ---------- ----------
Public Utilities:
The Cincinnati Insurance Company . 40,171 40,417 40,417
The Cincinnati Casualty Company . 6,520 7,431 7,431
The Cincinnati Life Insurance
Company . . . . . . . . . . . . 35,274 37,013 37,013
The Cincinnati Financial
Corporation . . . . . . . . . . 900 1,020 1,020
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 82,865 85,881 85,881
---------- ---------- ----------
Convertibles and Bonds with warrants
attached:
The Cincinnati Insurance Company . 144,518 148,533 148,533
The Cincinnati Casualty Company . 1,533 1,400 1,400
The Cincinnati Life Insurance
Company . . . . . . . . . . . . 22,261 22,959 22,959
Cincinnati Financial Corporation . 12,770 12,889 12,889
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 181,082 185,781 185,781
---------- ---------- ----------
All other Corporate Bonds:
The Cincinnati Insurance Company . 435,362 480,375 480,375
The Cincinnati Indemnity Company . 16,510 17,809 17,809
The Cincinnati Casualty Company . 53,573 60,367 60,367
The Cincinnati Life Insurance
Company . . . . . . . . . . . . 354,233 389,686 389,686
Cincinnati Financial Corporation . 350,597 358,866 358,866
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 1,210,275 1,307,103 1,307,103
---------- ---------- ----------
TOTAL FIXED MATURITIES $2,298,718 $2,446,995 $2,446,995
---------- ---------- ----------
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
(000 omitted)
Amount at
which shown
Fair in balance
Type of Investment Cost Value sheet
------------------ ---- ----- -----------
<S> <C> <C> <C>
Equity Securities:
Common Stocks
Public Utilities
The Cincinnati Insurance Company. . $ 74,079 $ 174,714 $ 174,714
The Cincinnati Casualty Company . . 7,762 14,382 14,382
The Cincinnati Life Ins. Company. . 26,130 67,177 67,177
Cincinnati Financial Corp . . . . . 75,519 268,094 268,094
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 183,490 524,367 524,367
---------- ---------- ----------
Banks, trust and insurance companies
The Cincinnati Insurance Company. . 80,545 319,847 319,847
The Cincinnati Casualty Company . . 3,716 19,004 19,004
The Cincinnati Life Ins. Company. . 14,185 34,026 34,026
Cincinnati Financial Corporation. . 280,118 962,943 962,943
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 378,564 1,335,820 1,335,820
---------- ---------- ----------
Industrial miscellaneous and all other
The Cincinnati Insurance Company . 237,714 421,109 421,109
The Cincinnati Indemnity Company . 8,576 10,624 10,624
The Cincinnati Casualty Company. . 21,723 30,095 30,095
The Cincinnati Life Ins. Company . 40,791 64,250 64,250
Cincinnati Financial Corporation . 55,473 78,201 78,201
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . 364,277 604,279 604,279
---------- ---------- ----------
Nonredeemable preferred stocks
The Cincinnati Insurance Company. 399,873 458,023 458,023
The Cincinnati Casualty Company . 9,793 12,503 12,503
The Cincinnati Life Ins. Company. 64,458 80,259 80,259
Cincinnati Financial Corporation. 23,216 26,511 26,511
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . 497,340 577,296 577,296
---------- ---------- ----------
TOTAL EQUITY SECURITIES . . . . . . . . . . $1,423,671 $3,041,762 $3,041,762
---------- ---------- ----------
Other Invested Assets:
Mortgage loans on real estate
The Cincinnati Life Ins. Company. . . $ 1,983 XXXXXXXXXX $ 1,983
CFC-I Investment Company . . . . . . 3,506 XXXXXXXXXX 3,506
---------- ----------
Total . . . . . . . . . . . . . . . . 5,489 XXXXXXXXXX 5,489
---------- ----------
Real Estate
The Cincinnati Life Ins. Company. . . 4,561 XXXXXXXXXX 4,561
CFC-I Investment Company . . . . . . 10,925 XXXXXXXXXX 10,925
---------- ----------
Total . . . . . . . . . . . . . . . . . . 15,486 XXXXXXXXXX 15,486
---------- ----------
Policy Loans
The Cincinnati Life Ins. Company. . . 18,827 XXXXXXXXXX 18,827
---------- ----------
TOTAL OTHER INVESTED ASSETS . . . . . . . . 39,802 XXXXXXXXXX 39,802
---------- ----------
TOTAL INVESTMENTS . . . . . . . . . . . . . $3,762,191 XXXXXXXXXX $5,528,559
========== ==========
</TABLE>
11
<PAGE> 12
SCHEDULE II CINCINNATI FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(OOO OMITTED)
Condensed Statements of Income (Parent Company Only)
<TABLE>
<CAPTION>
For the Years ended December 31 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income
- ------
Dividends from Subsidiaries $149,000 $ 78,000 $ 140,000
Investment Income 65,839 50,276 38,679
Realized Gains on Investments 742 (453) 3,063
-------- ---------- ----------
Total Income $215,581 $ 127,823 $ 181,742
-------- ---------- ----------
Expenses
- --------
Interest $ 17,229 $ 9,937 $ 7,389
Other 3,071 3,119 2,643
-------- ---------- ----------
Total Expenses 20,300 13,056 10,032
-------- ---------- ----------
Income Before Taxes and
Cumulative Effect of
Accounting Change and
Earnings of Subsidiaries 195,281 114,767 171,710
Applicable Income Taxes 8,286 5,113 10,890
-------- ---------- ----------
Income Before
Cumulative Effect of
Accounting Change and Undistributed
Earnings of Subsidiaries 186,995 109,654 160,820
Cumulative Effect of a Change
in Accounting for Taxes 0 0 507
-------- ---------- ----------
Net Income Before Change in
Undistributed Earnings of
Subsidiaries 186,995 109,654 161,327
Increase in Undistributed
Earnings of Subsidiaries 40,355 91,576 54,697
-------- ---------- ----------
Net Income $227,350 $ 201,230 $ 216,024
======== ========== ==========
<CAPTION>
Condensed Balance Sheets (Parent Company Only)
December 31 1995 1994
---- ----
<S> <C> <C>
Assets
- ------
Cash $ 1,354 $ 1,013
Fixed Maturities, at Fair Value 372,776 208,698
Equity Securities, at Fair Value 1,335,749 945,688
Investment Income Receivable 15,739 11,149
Inter-Company Dividends Receivable 12,527 8,300
Equity in Net Assets of Subsidiaries 1,569,026 1,196,940
Other Assets 3,590 3,796
---------- ----------
Total Assets $3,310,761 $2,375,584
========== ==========
Liabilities
- -----------
Notes Payable $ 221,005 $ 129,116
Dividends Declared but Unpaid 18,038 16,134
Federal Income Tax
Current 7,689 5,453
Deferred 321,094 198,027
5.5% Convertible Senior Debentures
Due 2002 80,000 80,000
Other Liabilities 4,964 6,807
---------- ----------
Total Liabilities $ 652,790 $ 435,537
Stockholders' Equity 2,657,971 1,940,047
---------- ----------
Total Liabilities and Stockholders' Equity $3,310,761 $2,375,584
========== ==========
</TABLE>
12
<PAGE> 13
SCHEDULE II CINCINNATI FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(OOO OMITTED)
Condensed Statements of Cash Flows (Parent Company Only)
<TABLE>
<CAPTION>
For the Years ended December 31 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating Activities
- --------------------
Net Income $ 227,350 $ 201,230 $ 216,024
Adjustments to Reconcile Net
Income to Net Cash Provided
by Operating Activities:
Amortization (706) (188) (62)
Increase in investment
income receivable (4,590) (2,576) (1,745)
Increase in Current Federal
Income Taxes Payable 2,236 607 489
Provision for Deferred
Income Taxes 1,125 0 5,865
Decrease (Increase) in
Dividends Receivable
from Subsidiaries (4,227) 7,700 (16,000)
Decrease (Increase) in
Other Assets 206 1,820 (2,832)
(Decrease) Increase in Accrued
Expenses and Other Liabilities (1,843) 1,407 (12,637)
Increase in Undistributed
Earnings of Subsidiaries (40,355) (91,576) (54,697)
Realized Gains (Losses) on
Investments (742) 453 (3,063)
--------- --------- ---------
Net Cash Provided by Operating
Activities 178,454 118,877 131,342
--------- --------- ---------
Investing Activities
- --------------------
Sale of Fixed Maturity Invest. 44,063 17,224 18,417
Maturity of Fixed Maturity Invest. 14,641 2,794 15,368
Sale of Equity Security Invest. 19,830 25,268 18,180
Purchase of Fixed
Maturity Investments (203,081) (86,711) (93,580)
Purchase of Equity
Security Investments (79,739) (70,874) (58,867)
--------- --------- ---------
Net Cash Used in
Investing Activities (204,286) (112,299) (100,482)
--------- --------- ---------
Financing Activities
- --------------------
Increase in Other
Short-Term Borrowings 91,889 51,050 11,114
Payment of Cash Dividends (69,542) (62,436) (55,103)
(Purchase) Issuance of Treasury
Shares) (287) (460) 5,179
Proceeds from Stock
Options Exercised 4,113 3,745 7,102
--------- --------- ---------
Net Cash Provided (Used)
in Financing Activities 26,173 (8,101) (31,708)
--------- --------- ---------
Increase (Decrease) in Cash 341 (1,523) (848)
Cash at Beginning of Year 1,013 2,536 3,384
--------- --------- ---------
Cash at End of Year $ 1,354 $ 1,013 $ 2,536
========= ========= =========
</TABLE>
13
<PAGE> 14
SCHEDULE III CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(000 omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- -------- -------- -------- -------- -------- --------
Future
Policy
Benefits, Other
Deferred Losses, Policy
Policy Claims & Claims &
Acquisition Expense Unearned Benefits Premium
Segment Cost Losses Premiums Payable Revenue
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995
Property
and Liability
Insurance $ 76,365 $1,690,461 $407,254 $32,180 $1,263,257
Life/Health
Insurance 43,224 412,552 1,371 11,604 50,869
-------- ---------- -------- ------- ----------
Total $119,589 $2,103,013 $408,625 $43,784 $1,314,126
======== ========== ======== ======== ==========
1994
Property
and Liability
Insurance $ 69,169 $1,510,150 $377,764 $24,654 $1,169,940
Life/Health
Insurance 40,334 378,432 1,655 11,856 49,093
-------- ---------- -------- ------- ----------
Total $109,503 $1,888,582 $379,419 $36,510 $1,219,033
======== ========== ======== ======= ==========
1993
Property
and Liability
Insurance $ 64,086 $1,365,052 $357,515 $21,582 $1,092,135
Life/Health
Insurance 40,005 354,028 1,762 10,557 48,656
-------- ---------- -------- ------- ----------
Total $104,091 $1,719,080 $359,277 $32,139 $1,140,791
======== ========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
- -------- -------- -------- -------- -------- ----------
Benefits, Amortization
Claims of Deferred
Net Losses & Policy Other
Investment Settlement Acquisition Operating Premium
Segment Income Expenses Costs Expenses Written
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995
Property
and Liability
Insurance $180,074 $913,139 $264,281 $ 87,420 $1,295,852
Life/Health
Insurance 52,440 51,077 8,032 15,289 7,277(4)
-------- -------- -------- -------- ----------
Total $232,514 $964,216 $272,313 $102,709 $1,303,129
======== ======== ========= ======== ==========
1994
Property
and Liability
Insurance $165,260 $854,804 $244,856 $ 80,205 $1,190,824
Life/Health
Insurance 48,339 46,010 8,824 14,579 7,204(4)
-------- -------- -------- -------- ----------
Total $213,599 $900,814 $253,680 $ 94,784 $1,198,028
======== ======== ======== ======== ==========
1993
Property
and Liability
Insurance $168,190 $788,318 $235,704 $ 75,635 $1,123,780
Life/Health
Insurance 45,844 44,160 7,760 13,146 7,459(4)
-------- -------- -------- -------- ----------
Total $214,034 $832,478 $243,464 $ 88,781 $1,131,239
======== ======== ======== ======== ==========
<FN>
Notes to Schedule III:
- ---------------------
(1) The sum of columns C, D, & E is equal to the sum of Losses and loss expense reserves, Life policy reserves, and Unearned
premium reserves reported in the Company's consolidated balance sheets.
(2) The sum of columns I & J is equal to the sum of Commissions, Other operating expenses, Taxes, licenses, and fees, Increase
in deferred acquisition costs, and Other expenses shown in the consolidated statements of income, less other expenses not
applicable to the above insurance segments.
(3) Investment income amounts for the above insurance segments represent investment income on the actual investment securities
in each such segment. Investment expenses, which are deducted from investment income, and other operating expenses include
both expenses incurred directly in the insurance segments and expenses allocated to and among the insurance segments based
on historical usage factors. The life/health segment is conducted totally within one subsidiary that has no other segments.
(4) Amounts represent written premiums on accident and health insurance business only.
</TABLE>
14
<PAGE> 15
SCHEDULE IV
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
REINSURANCE
FOR YEARS ENDING DECEMBER 31, 1995, 1994, AND 1993
(000 omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D
-------- -------- -------- --------
Ceded to Assumed
Gross Other from Other
Amount Companies Companies
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995
- ----
Life Insurance in Force $8,328,764 $980,023 $ 20,047
========== ======== ========
Premiums
Life/Health Insurance $ 54,437 $ 3,713 $ 145
Property/Liability Ins. 1,310,105 83,804 36,956
---------- -------- --------
Total Premiums $1,364,542 $ 87,517 $ 37,101
========== ======== ========
1994
- ----
Life Insurance in Force $7,473,906 $855,389 $ 23,102
========== ======== ========
Premiums
Life/Health Insurance $ 52,251 $ 3,303 $ 145
Property/Liability Ins. 1,207,036 100,842 63,746
---------- -------- --------
Total Premiums $1,259,287 $104,145 $ 63,891
========== ======== ========
1993
- ----
Life Insurance in Force $6,740,142 $761,452 $ 25,712
========== ======== ========
Premiums
Life/Health Insurance $ 51,011 $ 2,521 $ 166
Property/Liability Ins. 1,114,330 87,820 65,625
---------- -------- --------
Total Premiums $1,165,341 $ 90,341 $ 65,791
========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Column A Column E Column F
-------- -------- --------
Percentage of
Net Amount Assumed
Amount to Net
- ------------------------------------------------------------------
<S> <C> <C>
1995
- ----
Life Insurance in Force $7,368,788 .3%
========== ====
Premiums
Life/Health Insurance $ 50,869 .3%
Property/Liability Ins. 1,263,257 2.9%
---------- ----
Total Premiums $1,314,126 2.8%
========== ====
1994
- ----
Life Insurance in Force $6,641,619 .3%
========== ====
Premiums
Life/Health Insurance $ 49,093 .3%
Property/Liability Ins. 1,169,940 5.4%
---------- ----
Total Premiums $1,219,033 5.2%
========== ====
1993
- ----
Life Insurance in Force $6,004,402 .4%
========== ====
Premiums
Life/Health Insurance $ 48,656 .3%
Property/Liability Ins. 1,092,135 6.0%
---------- ----
Total Premiums $1,140,791 5.8%
========== ====
</TABLE>
15
<PAGE> 16
SCHEDULE VI
CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
FOR YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(000 omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- -------- -------- -------- -------- -------- -------
Reserves for
Deferred Unpaid Claims Discount,
Affiliation Policy and Claim if any,
with Acquisition Adjustment Deducted in Unearned Earned
Registrant Costs Expenses Column C Premiums Premiums
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated
Property-Casualty
Entities
1995 $76,365 $1,690,461 $-0- $407,254 $1,263,257
======= ========== ==== ======== ==========
1994 $69,169 $1,510,150 $-0- $377,764 $1,169,940
======= ========== ==== ======== ==========
1993 $64,086 $1,365,052 $-0- $357,515 $1,092,135
======= ========== ==== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
Column G Column H Column I Column J Column K
-------- -------- -------- -------- --------
Claims and
Claim
Adjustment
Expenses
Incurred
Related to Amortization Paid
---------- of Deferred Claims
Affiliation Net (1) (2) Policy and Claim
with Investment Current Prior Acquisition Adjustment Premiums
Registrant Income Year Years Costs Expenses Written
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated
Property-Casualty
Entities
1995 $180,074 $1,040,541 $(126,509) $264,281 $765,315 $1,295,852
======== ========== ========= ======== ======== ==========
1994 $165,260 $ 948,581 $ (92,892) $244,856 $717,025 $1,190,824
======== ========== ========= ======== ======== ==========
1993 $168,190 $ 828,978 $ (39,769) $235,704 $633,681 $1,123,780
======== ========== ========= ======== ======== ==========
</TABLE>
16
<PAGE> 17
Index of Exhibits
Exhibit 11-- Statement re computation of per share earnings for the
years ended December 31, 1995, 1994, and 1993.
Exhibit 13-- Material incorporated by reference from the annual report
of the registrant to the shareholders for the year ended December
31, 1995.
Exhibit 23-- Independent Auditors' Consent
Exhibit 27-- Financial Data Schedule
Exhibit 28-- Information from reports furnished to state insurance
regulatory authorities.
17
<PAGE> 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
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert B. Morgan
- -------------------------------------- Chief Executive March 19, 1996
Robert B. Morgan Officer, President
and Director
/s/ Robert J. Driehaus
- -------------------------------------- Financial Vice President March 19, 1996
Robert J. Driehaus Treasurer and Director
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ William F. Bahl
- -------------------------------------- Director March 19, 1996
William F. Bahl
-------------------------------------- Secretary and March , 1996
Vincent H. Beckman Director
/s/ Michael Brown
- -------------------------------------- Director March 19, 1996
Michael Brown
-------------------------------------- Director March , 1996
Richard M. Burridge
-------------------------------------- Director March , 1996
John E. Field
-------------------------------------- Director March , 1996
David R. Huhn
/s/ Kenneth C. Lichtendahl
- -------------------------------------- Director March 19, 1996
Kenneth C. Lichtendahl
/s/ Jackson H. Randolph
- -------------------------------------- Director March 19, 1996
Jackson H. Randolph
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
- ----------------------------------------- Director March , 1996
John J. Schiff
/s/ John J. Schiff, Jr.
- ----------------------------------------- Chairman of the March 19, 1996
John J. Schiff, Jr. Board and
Director
/s/ Robert C. Schiff
- ----------------------------------------- Director March 19, 1996
Robert C. Schiff
/s/ Thomas R. Shiff
- ----------------------------------------- Director March 19, 1996
Thomas R. Schiff
- ----------------------------------------- Director March , 1996
Frank J. Schultheis
- ----------------------------------------- Director March , 1996
Larry R. Webb
- ----------------------------------------- Director March , 1996
Alan R. Weiler
</TABLE>
<PAGE> 1
EXHIBIT 11
CINCINNATI FINANCIAL CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands except for per share amounts)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Weighted average shares outstanding 53,017 52,878* 52,625*
Equivalent shares assumed to be
outstanding for:
Stock options: 215 220* 337*
Convertible debentures 1,707 1,707* 1,707*
-------- -------- --------
Number of shares for primary
computation 54,939 54,805* 54,669*
Other dilutive equivalent shares--stock options 86 -- --
-------- -------- --------
Number of shares assuming full
dilution 55,025 54,805* 54,669*
======== ======== ========
Net income before cumulative effect
of change in accounting for income
taxes $227,350 $201,230 $202,179
Interest on convertible debentures--net of tax 2,860 2,860 2,858
Cumulative effect of change in
accounting for income taxes -0- -0- 13,845
-------- -------- --------
Net income for per share computation $230,210 $204,090 $218,882
======== ======== ========
Earnings per share:
Primary before cumulative effect of
change in accounting for income
taxes $ 4.19 $ 3.72* $ 3.75*
Cumulative effect of change in
accounting for income taxes -0- -0- .25*
-------- -------- --------
Total Primary $ 4.19 $ 3.72* $ 4.00*
======== ======== ========
Fully Diluted $ 4.18 $ 3.72* $ 4.00*
======== ======== ========
<FN>
*Adjusted to reflect a 5% stock dividend declared in February 1995.
</TABLE>
18
<PAGE> 1
EXHIBIT 13
Material incorporated by reference from the annual report of the registrant to
the shareholders for the year ended December 31, 1995.
Segment information from page 30 (incorporated into Item 1).
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
15. SEGMENT INFORMATION
The Company operates principally in two industries-- property and casualty
insurance and life insurance. Information concerning the Company's operations in
different industries is presented below (000's omitted). Revenue is primarily
from unaffiliated customers. Identifiable assets by industry are those assets
that are used in the Company's operations in each industry. Corporate assets are
principally cash and marketable securities.
<TABLE>
<CAPTION>
Income Before Income Taxes,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Property/casualty insurance ............................... $ 2,894 $ (5,703) $ (3,429)
Life/health insurance ..................................... (2,512) (1,691) 357
Investment income (less required interest on life reserves) 279,346 244,347 222,992
Realized gains on investments ............................. 30,781 19,557 51,529
Other ..................................................... 4,979 5,874 5,578
General corporate expenses ................................ (20,300) (13,056) (10,032)
----------- ----------- -----------
Total .................................................. $ 295,188 $ 249,328 $ 266,995
=========== =========== ===========
<CAPTION>
Identifiable Assets
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Property/casualty insurance ............................... $ 3,526,900 $ 2,830,788 $ 2,736,960
Life/health insurance ..................................... 809,418 689,838 688,516
Other ..................................................... 44,487 44,006 42,822
Corporate assets .......................................... 1,728,493 1,169,647 1,133,990
----------- ----------- -----------
Total .................................................. $ 6,109,298 $ 4,734,279 $ 4,602,288
=========== =========== ===========
</TABLE>
30
<PAGE> 2
Text data from pages 7, 9, and 11 through 13 (incorporated into Item 1).
PROPERTY CASUALTY INSURANCE
Gross written premiums increased at a slightly higher rate during 1995, up
7 percent to $1.377 billion versus 5.8 percent and $1.287 billion in 1994.
This year's combined loss and expense ratio is our best since 1988. The
ratio improved to 99.4 percent versus 100.6 percent in 1994. These ratios near
the break-even point include catastrophe losses of 2.1 percent and 1.8 percent,
respectively, for 1995 and 1994. Hurricanes Erin in August and Opal in October
brought in more than 5,500 claims with a $21.2 million total price tag. Other
nameless storms during the second quarter brought our total catastrophe losses
for 1995 to $27.2 million versus $20.7 million in 1994.
Outside, storms are raging as weather experts predict more of the same or
worse. Inside our industry, carriers are waging price wars. Here too,
forecasters predict no relief. Through all kinds of weather and all kinds of
market conditions, our principal achievement is consistent and profitable
growth. Our 1995 growth rate is approximately double the estimated industry
growth rate. Superior profitability is indicated by our 99.4 percent combined
ratio versus 106.1 percent estimated for the industry.
COMMERCIAL LINES
Gross written premiums from commercial lines of insurance reached $965.7
million, up 8.1 percent. The loss and allocated loss adjustment expense ratio
improved to 65.1 percent from 1994's 67 percent.
Times like these call for aggressive action in every aspect of operations.
Working from our strengths, we are energized and confident that we are going in
the right direction:
AGGRESSIVE ON PRICING: When it is necessary to compete on pricing to get or
keep good business, we do it. Competitors who have entered our marketing
territories are pricing for strategy, not profit. Agents are giving us their
above average new and renewal accounts, but at increasingly discounted premium.
The unprofitability of workers' compensation has been considerably reduced by
the positive effects of managed care, loss control and state reforms. We have
had to file rate decreases in selected states to compete for this desirable
business. The pricing pendulum swings and doesn't center.
AGGRESSIVE ON BRINGING DIFFERENTIATED PRODUCTS TO MARKET: Our target market
is savvy consumers who understand that not all policies are created equal and
who appreciate the expertise and service their agent offers. We are
exceptionally aggressive in providing points of difference that give our agents
selling advantages. New coverages introduced during 1995 and early 1996 address
our society's changing legal and social environment.
- - Who would have guessed a few years ago that employees would be taking
employers to court over their employment practices? Now a host of federal, state
and local statutes, as well as court decisions, define discrimination related to
hiring, firing,
7
<PAGE> 3
disciplining, promoting or demoting, granting leave of absence or even giving a
reference for an ex-employee. Every day we hear about companies, large and
small, sued over sexual harassment alleged against an owner or supervisor.
Affordable coverage for employment-related liability has not been readily
available in the standard market until now. Cincinnati is introducing Employment
Practices Liability Insurance, a timely coverage created by some of our sharpest
associates in an unprecedented collaboration across our Commercial Lines, Legal,
Claims, Sales and Research & Development Departments.
- - Insurance reporters and risk managers seem to have suddenly discovered gaps in
liability coverage for injuries caused by substances classified as pollutants.
Cincinnati has already addressed the gap. We added limited coverage, at no extra
charge, for injuries due to release of toxic vapors and created a unique
optional endorsement for businesses that want broad coverage for bodily injury
caused by pollutants.
- - We're aggressive about improving existing products too. One of our premier
products, the Dentist's Package Policy, is being fine tuned for the second time
in three years. We're determined to keep our professional liability coverages
state of the art, with built-in advantages and options no one can match.
AGGRESSIVE ON EXTENDING OUR REACH: New relationships are opening doors for
our agents. Cincinnati recently became the endorsed insurer of the Ohio Funeral
Directors Association. Associations accustomed to doing business with direct
insurers are awakening to the added value of connecting their members with local
agents.
New relationships are helping us get and retain prosperous accounts that
have grown to Fortune 500 size, including several marquee accounts with brand
names recognized all over the world. During 1995, we formed an alliance with
Gothaer USA, Inc., a German insurer, increasing our ability to handle accounts
with European exposures. A Special Marketing Program is now in place to make
sure we do what it takes to service larger accounts.
The Sales & Marketing Department appointed 33 agencies to sell our
commercial policies in Arkansas, Maryland and Minnesota during 1995. Production
in these new states reached $9.6 million. We're off to a fast start and planning
to keep up the pace, with rapid introduction of personal lines products in these
and several other states.
PERSONAL LINES
Gross written premiums from personal lines of insurance rose 4.6 percent to
$411.7 million. The loss and allocated loss adjustment expense ratio of 66.7
percent compares to 64.5 percent in 1994, reflecting this year's hurricane
losses.
During 1995, a large national insurer withdrew from some territories where
its risks were too concentrated. Other carriers are going through mergers,
acquisitions and restructuring. The Cincinnati Insurance Companies are seizing
opportunities to aggressively capitalize on uncertainty in the marketplace.
Agents are rolling over entire
9
<PAGE> 4
books of personal lines business from national carriers, looking to regional
insurers like Cincinnati for stability and quality markets.
We are going out and asking for good personal lines business, analyzing our
rates, upgrading products and improving software to remove all barriers to
growth in individual agencies and across the board. Over the past year, we filed
improved homeowners and family auto policies and introduced our new Residential
Business Program in most states. Twenty-five million Americans now work out of
their homes--but their homeowners policies don't cover business inventory,
equipment and liability. The Residential Business Program lets agents add
coverage for many eligible classes of home businesses, at very affordable rates
compared to a full-fledged commercial policy.
LIFE INSURANCE
The Cincinnati Life Insurance Company contributed net operating earnings of
$20.7 million in 1995 versus $20.2 million in 1994. This year's total net
earnings of $25 million include $4.3 million of capital gains compared to 1994
net earnings of $22 million with $1.8 million of capital gains. Earned premiums
rose to $50.9 million from $49.1 million in 1994.
Customers of Cincinnati's property casualty insurance agencies often look
to them for additional professional assistance with individual financial
planning, business perpetuation and estate preservation. Cincinnati Life gives
agents resources necessary to provide appropriate products and services.
We start by helping identify, recruit and train life insurance producers
for property casualty agencies. Established life producers can meet state
licensing requirements by earning continuing education credits for attending
approved Cincinnati Life seminars at our headquarters or field locations. During
1995, advanced sales seminars addressed how to best serve wealthier clients who
need more complex planning and products. Product and service orientation
seminars kept producers up to date on underwriting guidelines, sales techniques
and product improvements.
We continue to meet demand for guaranteed life insurance policies with
fixed, budgetable premiums and fixed death benefits. Sales of guaranteed
policies reached $4.1 million during 1995, up 17.8 percent from 1994. Guarantees
are currently popular with policyholders who want absolute assurance, before
they buy, that proposed costs, values and benefits will not change during the
policy period, no matter
11
<PAGE> 5
how the interest rate climate changes. During 1995, Cincinnati Life took steps
to heighten our advantage in this market. We extended preferred nonsmoker rates
to policies with face amounts $100,000 and higher, made rates more competitive
on our guaranteed whole life policies and introduced guaranteed term life
policies with 10-, 15- or 20-year policy periods.
Many businesses insured through Cincinnati's property casualty insurance
agents participate in Cincinnati Life's payroll deduction programs. Their
employees make convenient, affordable payments to buy individually owned,
portable life insurance policies. Expense conscious employers simply administer
payroll deductions for them, paying nothing out of pocket to deliver a
significant benefit. Payroll deduction premiums grew 12 percent to $10.9 million
during 1995. With our quality products and time-tested processes, Cincinnati
Life is positioned for further growth in payroll deduction sales.
FINANCIAL SERVICES
CFC Investment Company's gross lease, notes and finance receivables reached
$39.5 million as of December 31, 1995, up 27 percent from $31.2 million at this
time last year. Receivables include $13 million in leases managed for
Cincinnati's insurance subsidiaries. We continue to develop new vendor
relationships and add to our marketing staff, our goal being growth of
receivables and profits.
1995 net income was $272,000 versus $1.8 million in 1994. The decrease is
due to an accounting adjustment related to 1994.
CFC Investment Company writes convenient, competitive equipment and vehicle
leases and loans for insurance agents and their business clients. Agents
expanding, acquiring or relocating their offices are eligible for commercial
real estate loans. These transactions support strategic business partnerships of
The Cincinnati Insurance Companies. We welcome every opportunity to join in the
growth plans of strong Cincinnati agencies.
Several investment properties owned or managed by CFC Investment Company
continue to operate profitably due to high occupancy rates. As leases expire,
offices in our nearby Fairfield Executive Center are being converted for
Cincinnati departments crowded out of CFC Headquarters by growth of our
insurance business.
12
<PAGE> 6
INVESTMENTS
Our income-oriented strategy yielded $300 million of pre-tax investment
income in 1995. This 14.2 percent increase over 1994's $262.6 million exceeds
the insurance industry's estimated investment earnings growth rate of 10.4
percent.
Securities selected for our portfolio must have both the potential for
appreciation and the ability to generate a steady stream of cash flow. We
receive much of our return on securities as dividends and coupon payments,
reaping the benefits of compound growth by reinvesting this cash flow. This
scenario has been effective due to concentration in higher yielding bank and
utility stocks as well as convertible preferred stocks and bonds. We steer clear
of trendy instruments with inherent risk and potential for heavy loss of
principal.
Lower interest rates sparked confidence and created positive financial
markets during 1995. High year-end market values contrast with 1994's depressed
year-end values. Total market value of our portfolio rose 31 percent to $5.529
billion as of December 31, 1995 versus $4.212 billion at this time last year.
Net unrealized appreciation of invested assets grew $558 million, contributing
to record high assets of $6.109 billion and shareholders' equity of $2.658
billion. Book value rose 35 percent to $49.77 per share.
Congress is pushing for a capital gains tax rate reduction. The Investment
Department is monitoring this and other congressional activity that may affect
our strategies to increase current earnings and long-term appreciation.
13
<PAGE> 7
Loss and loss expenses in Notes to Financial Statements from page 27
(incorporated into Item 1).
4. LOSSES AND LOSS EXPENSES
Activity in the reserve for losses and loss expenses is summarized as
follows (000's omitted):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1 ........ $ 1,510,150 $ 1,365,052 $ 1,200,182
Less reinsurance receivable 78,125 71,691 62,349
----------- ----------- -----------
Net balance at January 1 ... 1,432,025 1,293,361 1,137,833
----------- ----------- -----------
Incurred related to:
Current year .............. 1,040,541 948,581 828,978
Prior years ............... (126,509) (92,892) (39,769)
----------- ----------- -----------
Total incurred .............. 914,032 855,689 789,209
----------- ----------- -----------
Paid related to:
Current year .............. 396,856 373,721 323,616
Prior years ............... 368,459 343,304 310,065
----------- ----------- -----------
Total paid .................. 765,315 717,025 633,681
----------- ----------- -----------
Net balance at December 31 .. 1,580,742 1,432,025 1,293,361
Plus reinsurance receivable 109,719 78,125 71,691
----------- ----------- -----------
Balance at December 31 ...... $ 1,690,461 $ 1,510,150 $ 1,365,052
=========== =========== ===========
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss expenses (net of reinsurance recoveries of
($9,441,000), $8,211,000 and $1,064,000 in 1995, 1994 and 1993, respectively)
decreased by $126,509,000, $92,892,000 and $39,769,000 in 1995, 1994 and 1993.
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 $53,073,000 and $42,147,000 at December 31, 1995 and 1994,
respectively, for certain life/health losses and loss checks payable.
27
<PAGE> 8
"Price range of Common Stock" section from page 5 (incorporated into Item 5).
PRICE RANGE OF COMMON STOCK
Cincinnati Financial Corporation had approximately 9,555 shareholders of
record as of December 31, 1995. Most of CFC's 2,289 associates own stock in
their Company.
CFC shares are traded nationally over the counter. Closing sale price is
quoted under the symbol CINF on the National Market List of the NASDAQ (National
Association of Securities Dealers Automated Quotation System). Tables below show
the price range reported for each quarter based on daily last sale prices.
<TABLE>
<CAPTION>
1995
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Quarter 1st 2nd 3rd 4th
High $54 1/8 $58 1/4 $56 1/4 $66 3/4
Low 48 1/3 52 51 1/4 54 1/8
Dividend Paid .30 .34 .34 .34
<CAPTION>
1994
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Quarter 1st 2nd 3rd 4th
High $55 1/2 $51 2/3 $53 3/4 $51 1/4
Low 48 3/4 47 2/3 49 1/4 43 3/4
Dividend Paid .27 .30 .30 .30
</TABLE>
5
<PAGE> 9
"Selected Financial Information" from pages 18 and 19 (incorporated into
Item 6).
SELECTED FINANCIAL INFORMATION
(000's omitted except per share data)
<TABLE>
<CAPTION>
Cincinnati Financial Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1995 1994 1993 1992
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
TOTAL ASSETS........................................ $ 6,109,298 $ 4,734,279 $ 4,602,288 $ 4,098,713
LONG-TERM OBLIGATIONS............................... $ 80,000 $ 80,000 $ 80,000 $ 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES
Premium Income...................................... $ 1,314,126 $ 1,219,033 $ 1,140,791 $ 1,038,772
Investment Income (Less Expense).................... 300,015 262,649 239,436 218,942
Realized Gains on Investments....................... 30,781 19,557 51,529 35,885
Other Income........................................ 10,729 11,267 10,396 10,552
NET INCOME BEFORE REALIZED GAINS
ON INVESTMENTS
In Total............................................ $ 207,342 $ 188,538 $ 182,530* $ 147,669
Per Common Share.................................... 3.83 3.49 3.39* 2.79
NET INCOME
In Total............................................ $ 227,350 $ 201,230 $ 216,024* $ 171,325
Per Common Share.................................... 4.19 3.72 4.00* 3.23
- ------------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED
Per Common Share.................................... $ 1.34 $ 1.22 $ 1.07 $ .98
- ------------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PAID
Per Common Share.................................... $ 1.32 $ 1.18 $ 1.05 $ .95
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 1993 earnings include a credit for $13,845,000 ($.25 per share) cumulative
effect of a change in the method of accounting for income taxes to conform
with FASB Statement No. 109 and a net charge of $8,641,000 ($.16 per share)
related to the effect of the 1993 increase in income tax rates on deferred
taxes recorded for various prior year items.
18
<PAGE> 10
<TABLE>
<CAPTION>
Cincinnati Financial Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
1991 1990 1989 1988 1987 1986 1985
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL ASSETS $3,513,749 $2,626,156 $2,602,990 $2,163,341 $1,828,032 $1,581,591 $1,272,242
LONG-TERM OBLIGATIONS $ 182 $ 202 $ 753 $ 890 $ 3,898 $ 8,468 $ 8,825
- ----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Premium Income $ 947,576 $ 871,196 $ 813,313 $ 754,335 $ 747,266 $ 666,892 $ 513,864
Investment Income (Less Expense) 193,220 167,425 149,285 130,885 108,915 90,875 76,561
Realized Gains on Investments 7,641 1,488 4,678 6,423 3,845 13,881 3,528
Other Income 12,698 8,822 7,134 10,281 7,686 1,932 2,554
NET INCOME BEFORE REALIZED GAINS
ON INVESTMENTS
In Total $ 141,273 $ 128,052 $ 111,477 $ 124,618 $ 90,714 $ 83,477 $ 52,452
Per Common Share 2.70 2.47 2.16 2.45 1.80 1.64 1.05
NET INCOME
In Total $ 146,280 $ 128,962 $ 114,490 $ 128,748 $ 93,154 $ 93,471 $ 54,993
Per Common Share 2.80 2.49 2.22 2.52 1.85 1.84 1.10
- ----------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED
Per Common Share $ .87 $ .77 $ .69 $ .55 $ .47 $ .40 $ .37
- ----------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PAID
Per Common Share $ .85 $ .75 $ .66 $ .54 $ .45 $ .39 $ .36
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Per share data adjusted for three-for-one stock split in 1992, two-for-one stock
split in 1985 and stock dividends of 5 percent in 1995 and 1987.
19
<PAGE> 11
"Management Discussion" from pages 30 through 32 (incorporated into
Items 1 and 7).
MANAGEMENT DISCUSSION
This Management Discussion is intended to supplement the data contained in
the financial statements and related notes of Cincinnati Financial Corporation
and subsidiaries.
RESULTS OF OPERATIONS
The Company's $227.3 million net income for 1995 reflected a $26.1 million,
13 percent, increase over 1994. Net income for 1994 and 1993, respectively,
reflected a 6.9 percent decrease and 26.1 percent increase from the preceding
years. Realized gains on investments (net of income taxes) were $20 million for
1995, compared to $12.7 million in 1994 and $33.5 million in 1993. The effect on
income per share (adjusted to reflect a 5 percent stock dividend declared in
February,1995) of various matters discussed herein is illustrated in the
following summary:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net income excluding
the items below................ $4.15 $3.74 $3.57
Realized gains................... .36 .23 .61
Catastrophe losses............... (.32) (.25) (.27)
Effect of tax rate change:
Unrealized appreciation........ -0- -0- (.21)
Other prior year differences... -0- -0- .05
Cumulative effect of accounting
change......................... -0- -0- .25
----- ----- -----
Net income per share............. $4.19 $3.72 $4.00
===== ===== =====
</TABLE>
30
<PAGE> 12
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
The Company has continued in the same lines of property casualty business
and has continued not to market in California and not to write flood insurance.
The Company continues to review exposure for huge disasters and to reduce
coverage in certain coastal areas. Developing newer territories has helped the
property and casualty operations increase premium income. Net premium income
amounted to $1.263 billion for 1995, an increase of 8 percent over 1994. 1994
and 1993 reflected increases of 7.1 percent and 10 percent, respectively. The
combined loss and expense ratio for the Company's property and casualty
operations was 99.4 percent for 1995, 100.6 percent for 1994 and 100.1 percent
for 1993. The catastrophe losses affected the loss expense ratio by 2.1 percent,
1.8 percent and 2.1 percent for the years 1995, 1994 and 1993, respectively. The
Company has been able to control the growth of operating expenses; and along
with increased premiums written, the expense ratio has declined by .4 percent
for the years 1995 and 1994 and 1.1 percent for 1993.
The Company incurred catastrophe losses of $27.2 million, $20.7 million and
$22.6 million in 1995, 1994 and 1993, respectively. For property catastrophes,
the Company retains the first $25 million of losses and then has reinsurance to
cover 95 percent of the losses from $25 million up to $175 million.
Uncertainty always exists as to the adequacy of established reserves. The
Company has consistently established property casualty insurance reserves,
including adjustment of estimates as facts become known, using information from
internal analysis and review by external actuaries. Because of the stability of
the Company's book of business, management believes that uncertainty as to
reserves is less than it otherwise would be.
Total life and accident and health premium income remained relatively level
over the past three years at $50.9 million, $49.1 million and $48.7 million for
1995, 1994 and 1993, respectively.
Investment income increased 14.2 percent to $300 million in 1995.
Investment income was $262.6 million in 1994 and $239.4 million in 1993,
increases of 9.7 percent and 9.4 percent, respectively. Increases in investment
income have principally been the result of investing the cash flows from
operating and financing activities and the Company's strategy to shift to
relatively more investments in securities whose income is taxable and higher
yielding than tax-exempt investments.
The Company's income tax expense was $67.8 million, $48.1 million and $64.8
million for 1995, 1994 and 1993, respectively. The Company's effective tax rate
was 22.98%, 19.29% and 24.28% for 1995, 1994 and 1993, respectively. The higher
1995 effective tax rate partly reflects the shift to relatively more taxable
investments. As discussed in the Notes to Consolidated Financial Statements,
1993 income tax expense includes an $11.2 million charge and a $2.6 million
credit related to the effect of the income tax rate change on unrealized
appreciation on investments in equity securities and on other prior years'
temporary book-tax differences. The Company incurred no additional alternative
minimum tax expense for 1995, 1994 or 1993. The alternative minimum basis
effectively taxes certain income that is exempt from taxation on a regular tax
basis.
Statutory risk-based capital requirements became effective for life
companies in 1993 and for property casualty companies in 1994. The Company's
capital was well above the minimum required amounts.
CASH FLOWS AND LIQUIDITY
Net cash provided by operating activities amounted to $385.4 million,
$325.8 million and $363.2 million for 1995, 1994 and 1993, respectively.
Operating cash flows have been sufficient to meet operating needs and provide
for financing needs and increased investments. Management expects that this
situation will continue because of no substantial changes in the Company's mix
of business, protection by reinsurance agreements with financially stable
companies and no significant exposure to assumed reinsurance. Assumed
reinsurance comprised no more than 6 percent of gross premiums in each of the
last three years.
The Company used $439.8 million in 1995, $317.6 million in 1994 and $333.3
million in 1993 in investing activities. Net cash flows used in additions to
fixed maturity and equity securities, respectively, amounted to $310 million and
$115 million in 1995, $209 million and $92 million in 1994 and $113 million and
$212 million in 1993.
Notes payable increased $92 million in 1995, $51 million in 1994 and $11
million in 1993. The growth of the Company required increased cash flows for the
operating and investing activities.
Cash and marketable securities of $5.509 billion make up 90.2 percent of
the Company's $6.109 billion of assets; this compares to 89.2 percent in 1994.
The Company has only minor investments in real estate and mortgages, which are
typically illiquid. Information regarding the composition of investments,
together with maturity data regarding investments in fixed maturities, is
included in the Notes to Consolidated Financial Statements. As discussed in such
notes, the Company's insurance reserve liabilities are estimated by management
based upon Company experience data. Such reserves are related to various lines
of business and will be paid out over various future periods. The Company has
continued to utilize some short-term debt.
31
<PAGE> 13
MANAGEMENT DISCUSSION (continued)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
INVESTMENTS
The Company's primary investment strategy is to maintain liquidity to meet
both immediate and long-range insurance obligations through the purchase and
maintenance of medium-risk, fixed maturity and equity securities, while earning
optimal returns on medium-risk equity securities which offer growing dividends
and capital appreciation.
The Company's investment decisions on an individual insurance company basis
are influenced by insurance statutory requirements, which are designed to
protect policyholders from investment risk. Cash generated from insurance
operations is almost entirely invested in either corporate, governmental,
municipal, public utility and other fixed maturity securities or equity
securities. Such securities are evaluated prior to purchase based on yield and
risk criteria.
The Company's portfolio of fixed maturity securities at December 31, 1995
has an average yield-to-cost of 8.4 percent and an average maturity of 12.1
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.
Historically, municipal bonds have been attractive due to their tax-exempt
feature. Concentrations in the essential service (i.e., schools, sewer, water,
etc.) bonds issued by municipalities are prevalent in this area. Due to the
small size of several of these offerings, many of these bonds are not rated by a
rating agency.
At December 31, 1995 and 1994, investments totaling approximately $813
million and $532 million, respectively ($789 million and $563 million at cost),
of the Company's $5.529 billion and $4.212 billion investment portfolio relate
to securities that are rated noninvestment grade or that are not rated by
Moody's Investors Service or Standard & Poor's. Such investments have
historically had a beneficial effect on the Company's results of operations.
Because of alternative minimum tax matters, the Company uses a blend of
tax-exempt and taxable fixed maturity securities. Tax-exempt bonds comprise 16
percent of invested assets as of December 31, 1995, compared to 18 percent in
1994 and 1993.
Investments in common stocks have been made with emphasis on securities
with an annual dividend yield of at least 2 percent to 3 percent and annual
dividend increases. The Company's portfolio of equity investments at December
31, 1995 has an average dividend yield to cost of 8 percent. Strategy in equity
investments continues to include identifying approximately 10 to 12 companies in
which the Company can accumulate 10 percent to 20 percent of their common stock.
As a long-term investor, the Company has followed a buy-and-hold strategy
for many years. A significant amount of unrealized appreciation on equity
investments has been generated as a result of this policy for over 37 years.
Unrealized appreciation, before deferred income taxes, on equity investments was
$1.618 billion as of December 31, 1995 and constituted 29 percent of the total
investment portfolio; 53 percent of the equities investment portfolio; and,
after deferred income taxes, 40 percent of total shareholders' equity. Such
unrealized appreciation, before deferred income taxes, amounted to $941 million
and $1.135 billion at December 31, 1994 and 1993, respectively.
SHAREHOLDERS' EQUITY AND LONG- AND
SHORT-TERM DEBT
At December 31, 1995, shareholders' equity was $2.658 billion.
Shareholders' equity was 44 percent of assets in 1995, 41 percent in 1994 and 42
percent in 1993. During 1995, shareholders' equity increased $718 million. This
increase was the result of a $558 million increase in unrealized appreciation on
fixed maturity and equity investments discussed above, net of income tax
effects. During 1994 and 1993, respectively, shareholders' equity decreased $7
million and increased $234 million, of which $147 million decrease and $61
million increase were related to the change in unrealized appreciation on equity
investments discussed above, net of income tax effects. Long-term and short-term
debt each amounted to less than 5 percent of total assets at December 31, 1995
and 1994. At December 31, 1995 and 1994, long-term debt consisted of $80 million
of convertible debentures. Short-term debt amounted to $221 million, up from
$129 million in 1994 and $78 million in 1993. The additional borrowings were
used to provide additional working capital as previously discussed in the Cash
Flows and Liquidity section of Management Discussion.
32
<PAGE> 14
Independent Auditors' Report and Financial Statements from pages 19 thru 30
(incorporated into Item 8).
INDEPENDENT AUDITORS' REPORT
[LOGO]
To the Shareholders and Board of Directors of Cincinnati Financial
Corporation:
We have audited the consolidated balance sheets of Cincinnati Financial
Corporation and subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Cincinnati Financial
Corporation and subsidiaries at December 31, 1995 and 1994 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in the Notes to Consolidated Financial Statements, the
Company changed its method of accounting for fixed maturity investments to
conform with Statement of Financial Accounting Standards (SFAS) No.115 effective
January 1, 1994 and its method of accounting for income taxes to conform with
SFAS No.109 effective January 1, 1993.
/s/ Delotte & Touche LLP
Cincinnati, Ohio
February 9, 1996
19
<PAGE> 15
CONSOLIDATED BALANCE SHEETS
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, at fair value (cost: 1995--$2,298,718,000;
1994--$1,976,314,000) ............................................ $ 2,446,995,000 $ 1,943,116,000
Equity securities, at fair value (cost: 1995--$1,423,671,000;
1994--$1,289,444,000) ............................................ 3,041,762,000 2,230,247,000
Other invested assets ............................................... 39,802,000 38,816,000
Cash ................................................................... 20,019,000 48,254,000
Investment income receivable ........................................... 65,045,000 56,069,000
Finance receivables .................................................... 20,282,000 16,169,000
Premiums receivable .................................................... 161,117,000 141,972,000
Reinsurance receivable ................................................. 103,683,000 67,125,000
Prepaid reinsurance premiums ........................................... 21,835,000 24,066,000
Deferred acquisition costs pertaining to unearned
premiums and to life policies in force .............................. 119,589,000 109,503,000
Land, buildings and equipment for Company use (at cost, less
accumulated depreciation: 1995--$73,153,000;
1994--$64,819,000) .................................................. 33,056,000 32,673,000
Other assets ........................................................... 36,113,000 26,269,000
--------------- ---------------
Total assets ..................................................... $ 6,109,298,000 $ 4,734,279,000
=============== ===============
LIABILITIES
Insurance reserves
Losses and loss expenses ............................................ $ 1,743,534,000 $ 1,552,297,000
Life policy reserves ................................................ 403,264,000 370,095,000
Unearned premiums ...................................................... 408,624,000 382,119,000
Other liabilities ...................................................... 107,060,000 85,158,000
Deferred income taxes .................................................. 487,840,000 195,447,000
Notes payable .......................................................... 221,005,000 129,116,000
5.5% convertible senior debentures due 2002 ............................ 80,000,000 80,000,000
--------------- ---------------
Total liabilities ................................................ 3,451,327,000 2,794,232,000
--------------- ---------------
SHAREHOLDERS' EQUITY
Common stock, par value--$2 per share; authorized
80,000,000 shares; issued, 1995--53,084,081;
1994--50,435,974 .................................................... 106,168,000 100,872,000
Paid-in capital ........................................................ 237,172,000 105,792,000
Retained earnings ...................................................... 1,156,627,000 1,133,105,000
Unrealized gains on investments ........................................ 1,159,388,000 601,192,000
--------------- ---------------
2,659,355,000 1,940,961,000
Less treasury shares at cost (1995--27,147 shares;
1994--18,033 shares) ................................................ (1,384,000) (914,000)
--------------- ---------------
Total shareholders' equity ....................................... 2,657,971,000 1,940,047,000
--------------- ---------------
Total liabilities and shareholders' equity ....................... $ 6,109,298,000 $ 4,734,279,000
=============== ===============
</TABLE>
Accompanying notes are an integral part of this statement.
20
<PAGE> 16
CONSOLIDATED STATEMENTS OF INCOME
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
REVENUE
Premium income
Property and casualty ................................. $ 1,263,257,000 $ 1,169,940,000 $ 1,092,135,000
Life .................................................. 43,551,000 41,888,000 41,169,000
Accident and health ................................... 7,318,000 7,205,000 7,487,000
--------------- --------------- ---------------
Net premiums earned ................................... 1,314,126,000 1,219,033,000 1,140,791,000
Investment income ........................................ 300,015,000 262,649,000 239,436,000
Realized gains on investments ............................ 30,781,000 19,557,000 51,529,000
Other income ............................................. 10,729,000 11,267,000 10,396,000
--------------- --------------- ---------------
Total revenues ........................................ 1,655,651,000 1,512,506,000 1,442,152,000
--------------- --------------- ---------------
BENEFITS AND EXPENSES
Insurance losses and policyholder
benefits .............................................. 964,216,000 900,814,000 832,478,000
Commissions .............................................. 244,862,000 230,551,000 220,830,000
Other operating expenses ................................. 97,909,000 85,405,000 83,357,000
Taxes, licenses and fees ................................. 38,887,000 39,070,000 35,088,000
Increase in deferred acquisition costs
pertaining to unearned premiums and
to life policies in force ............................. (10,086,000) (5,412,000) (6,757,000)
Interest expense ......................................... 17,231,000 9,961,000 7,389,000
Other expenses ........................................... 7,444,000 2,789,000 2,772,000
--------------- --------------- ---------------
Total benefits and expenses ........................... 1,360,463,000 1,263,178,000 1,175,157,000
--------------- --------------- ---------------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF
AN ACCOUNTING CHANGE ..................................... 295,188,000 249,328,000 266,995,000
--------------- --------------- ---------------
PROVISION FOR INCOME TAXES
Current .................................................. 76,012,000 64,229,000 71,119,000
Deferred ................................................. (8,174,000) (16,131,000) (6,303,000)
--------------- --------------- ---------------
67,838,000 48,098,000 64,816,000
--------------- --------------- ---------------
INCOME BEFORE CUMULATIVE EFFECT
OF AN ACCOUNTING CHANGE .................................. 227,350,000 201,230,000 202,179,000
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING FOR INCOME TAXES ........................... -0- -0- 13,845,000
--------------- --------------- ---------------
NET INCOME .................................................. $ 227,350,000 $ 201,230,000 $ 216,024,000
=============== =============== ===============
PER COMMON SHARE
Income before cumulative effect of an
accounting change ..................................... $ 4.19 $ 3.72* $ 3.75*
Cumulative effect of a change in accounting
for income taxes ...................................... -0- -0- .25*
--------------- --------------- ---------------
Net income ............................................... $ 4.19 $ 3.72* $ 4.00*
=============== =============== ===============
Cash dividends (declared) ................................ $ 1.34 $ 1.22* $ 1.07*
=============== =============== ===============
</TABLE>
*Adjusted to reflect a 5 percent stock dividend declared in February, 1995.
Accompanying notes are an integral part of this statement.
21
<PAGE> 17
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Common Treasury Paid-In Retained Gains on
Stock Stock Capital Earnings Investments
------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 .................... $ 100,146,000 $ (2,491,000) $ 92,529,000 $ 836,533,000 $ 687,059,000
Net income .................................... 216,024,000
Change in unrealized
gains on investments ....................... 93,255,000
Income taxes on unrealized
gains ...................................... (31,800,000)
Dividends declared ............................ (56,198,000)
Purchase/issuance of treasury shares .......... 2,095,000 3,084,000
Stock options exercised ....................... 480,000 6,622,000
------------- ------------- ------------- -------------- --------------
Balance, December 31, 1993 .................... 100,626,000 (396,000) 102,235,000 996,359,000 748,514,000
Effect of a change in accounting for
fixed maturity investments, net
of income taxes of $ 42,722,000 ........... 79,340,000
Net income .................................... 201,230,000
Change in unrealized
gains on investments ....................... (348,711,000)
Income taxes on unrealized
gains ...................................... 122,049,000
Dividends declared ............................ (64,484,000)
Purchase/issuance of treasury shares .......... (518,000) 58,000
Stock options exercised ....................... 246,000 3,499,000
------------- ------------- ------------- -------------- --------------
Balance, December 31, 1994 .................... 100,872,000 (914,000) 105,792,000 1,133,105,000 601,192,000
Net income .................................... 227,350,000
Change in unrealized
gains on investments ....................... 858,763,000
Income taxes on unrealized
gains ...................................... (300,567,000)
Dividends declared ............................ (71,262,000)
5% stock dividend at market ................... 5,043,000 127,338,000 (132,566,000)
Purchase/issuance of treasury shares .......... (470,000) 182,000
Stock options exercised ....................... 253,000 3,860,000
------------- ------------- ------------- -------------- --------------
Balance, December 31, 1995 .................... $ 106,168,000 $ (1,384,000) $ 237,172,000 $1,156,627,000 $1,159,388,000
============= ============= ============= ============== ==============
</TABLE>
Accompanying notes are an integral part of this statement.
22
<PAGE> 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1995 1994 1993
------------- ------------- -------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income ................................................. $ 227,350,000 $ 201,230,000 $ 216,024,000
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation and amortization ........................... 9,641,000 9,923,000 10,466,000
Increase in investment income receivable ................ (8,976,000) (5,949,000) (3,121,000)
Increase in premiums receivable ......................... (19,145,000) (7,611,000) (10,199,000)
Increase in reinsurance receivable ...................... (36,558,000) (8,064,000) (7,511,000)
Decrease (increase) in prepaid reinsurance premiums ..... 2,231,000 (100,000) (5,266,000)
Increase in deferred acquisition costs .................. (10,086,000) (5,412,000) (6,757,000)
(Increase) decrease in policy loans
and accounts receivable .............................. (14,801,000) 1,008,000 (8,045,000)
Increase in loss and loss expense reserves .............. 191,237,000 149,790,000 166,995,000
Increase in life policy reserves ........................ 33,169,000 24,118,000 29,208,000
Increase in unearned premiums ........................... 26,505,000 20,107,000 36,937,000
Increase (decrease) in other liabilities ................ 9,522,000 (7,274,000) 20,374,000
Decrease in deferred income taxes ....................... (8,174,000) (16,131,000) (20,148,000)
Realized gains on investments ........................... (30,781,000) (19,557,000) (51,529,000)
Other ................................................... 14,245,000 (10,258,000) (4,238,000)
------------- ------------- -------------
Net cash provided by operating activities ............ 385,379,000 325,820,000 363,190,000
------------- ------------- -------------
Cash flows from investing activities:
Sale of fixed maturities investments ....................... 118,986,000 83,360,000 118,064,000
Maturity of fixed maturities investments ................... 187,320,000 207,843,000 287,096,000
Sale of equity securities investments ...................... 255,542,000 250,722,000 200,775,000
Collection of finance receivables .......................... 8,222,000 6,567,000 6,523,000
Purchase of fixed maturities investments ................... (616,001,000) (500,283,000) (518,339,000)
Purchase of equity securities investments .................. (370,445,000) (342,949,000) (412,630,000)
Investment in land, buildings and equipment ................ (10,806,000) (11,356,000) (7,648,000)
Investment in finance receivables .......................... (12,335,000) (9,725,000) (7,471,000)
(Increase) decrease in other invested assets ............... (270,000) (1,758,000) 279,000
------------- ------------- -------------
Net cash used in investing activities ................ (439,787,000) (317,579,000) (333,351,000)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from stock options exercised ...................... 4,113,000 3,745,000 7,102,000
(Purchase) issuance of treasury shares ..................... (287,000) (460,000) 5,179,000
Increase in notes payable .................................. 91,889,000 51,050,000 11,114,000
Payment of cash dividends to shareholders .................. (69,542,000) (62,436,000) (55,103,000)
------------- ------------- -------------
Net cash provided (used) in financing activities ..... 26,173,000 (8,101,000) (31,708,000)
------------- ------------- -------------
Net (decrease) increase in cash ............................... (28,235,000) 140,000 (1,869,000)
Cash at beginning of year ..................................... 48,254,000 48,114,000 49,983,000
------------- ------------- -------------
Cash at end of year ........................................... $ 20,019,000 $ 48,254,000 $ 48,114,000
============= ============= =============
Supplemental disclosures of cash flow information:
Interest paid .............................................. $ 16,001,000 $ 10,216,000 $ 7,543,000
============= ============= =============
Income taxes paid .......................................... $ 67,000,000 $ 71,192,000 $ 67,000,000
============= ============= =============
</TABLE>
Accompanying notes are an integral part of this statement.
23
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS--Cincinnati Financial Corporation (the "Company")
sells insurance primarily in the Midwest and Southeast through a network of
local independent agents. Insurance products sold include fire, automobile,
casualty, bonds and all related forms of property and casualty insurance as well
as life insurance and accident and health insurance.
BASIS OF PRESENTATION--The consolidated financial statements include the
accounts of the Company and its subsidiaries, each of which is wholly owned, and
are presented in conformity with generally accepted accounting principles.
Generally accepted accounting principles differ in certain respects from
statutory insurance accounting practices prescribed or permitted for insurance
companies by regulatory authorities. All significant inter-company balances and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. The accompanying consolidated financial statements include
estimates for such items as insurance reserves and income taxes. Actual results
could differ from those estimates.
PROPERTY AND CASUALTY INSURANCE-- Expenses incurred in the issuance of
policies are deferred and amortized over the terms of the policies. Anticipated
investment income is not considered in determining if a premium deficiency
related to insurance contracts exists. Policy premiums are included in income on
a pro rata basis over the terms of the policies. Losses and loss expense
reserves are based on claims reported prior to the end of the year and estimates
of unreported claims.
LIFE INSURANCE--Policy acquisition costs are deferred and amortized over
the premium paying period of the policies. Life policy reserves are based on
anticipated rates of mortality derived primarily from industry experience data,
anticipated withdrawal rates based principally on Company experience and
estimated future interest earnings using initial interest rates ranging from 3%
to 101/2%. Interest rates on approximately $271,000,000 and $246,000,000 of such
reserves at December 31, 1995 and 1994, respectively, are periodically adjusted
based upon market conditions.
Payments received for investment, limited pay and universal life-type
contracts are recognized as income only to the extent of the current cost of
insurance and policy administration, with the remainder recognized as
liabilities and included in life policies reserves.
ACCIDENT AND HEALTH INSURANCE--Expenses incurred in the issuance of
policies are deferred and amortized over a five-year period. Policy premium
income, unearned premiums and reserves for unpaid losses are accounted for in
substantially the same manner as property and casualty insurance discussed
above.
REINSURANCE--In the normal course of business, the Company seeks to reduce
losses that may arise from catastrophes or other events that cause unfavorable
underwriting results by reinsuring certain levels of risk in various areas of
exposure with other insurance companies, reinsurers and involuntary state pools.
Reinsurance contracts do not relieve the Company from any obligation to
policyholders. Although the Company historically has not experienced
uncollectible reinsurance, failure of reinsurers to honor their obligations
could result in losses to the Company. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy.
The Company also assumes some reinsurance from other insurance companies,
reinsurers and involuntary state pools. Such assumed reinsurance activity is
recorded principally on the basis of reports received from the ceding companies.
INVESTMENTS--The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" effective January 1, 1994. With the adoption of SFAS No. 115, fixed
maturities (bonds and notes) have been classified as available for sale and are
stated at fair values. Prior to 1994, fixed maturities were principally stated
at amortized cost. Equity securities (common and preferred stocks) are stated at
fair values.
Unrealized gains and losses on investments carried at fair value, net of
income taxes associated therewith, are included in shareholders' equity.
Realized gains and losses on sales of investments are recognized in net income
on a specific identification basis.
INCOME TAXES--As further discussed below, effective January 1, 1993, the
Company adopted SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109
requires deferred tax liabilities and assets to be computed using the tax rates
in effect for the time when temporary differences in book and taxable income are
estimated to
24
<PAGE> 20
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
reverse and limits the amount of deferred tax assets that can be
recognized. Deferred income taxes are recognized for numerous temporary
differences between the Company's taxable income and book-basis income and other
changes in shareholders' equity. Such temporary differences relate primarily to
unrealized gains on investments and differences in the recognition of deferred
acquisition costs and insurance reserves. Deferred taxes associated with
unrealized appreciation (except the amounts related to the effect of income tax
rate changes) are charged to shareholders' equity, and deferred taxes associated
with other differences are charged to income.
EARNINGS PER SHARE--Net income per common share is based on the average
number of shares and equivalent shares outstanding during each of the respective
years. Stock options and convertible debentures are treated as common stock
equivalents.
FAIR VALUE DISCLOSURES--Fair values for investments in fixed maturity
securities (including redeemable preferred stock) 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 convertible debentures are based on
the quoted market prices for such debentures.
2. INVESTMENTS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Investment income summarized by investment category (000's omitted):
Interest on fixed maturities ................................................. $ 186,071 $ 158,015 $ 150,732
Dividends on equity securities ............................................... 111,458 103,307 87,415
Other investment income ...................................................... 6,480 5,434 5,306
--------- --------- ---------
Total ..................................................................... 304,009 266,756 243,453
Less investment expenses ..................................................... 3,994 4,107 4,017
--------- --------- ---------
Net investment income ..................................................... $ 300,015 $ 262,649 $ 239,436
========= ========= =========
Realized gains on investments summarized by investment category
(000's omitted):
Fixed maturities:
Gross realized gains ...................................................... $ 14,466 $ 13,570 $ 32,361
Gross realized losses ..................................................... (7,263) (6,058) (7,168)
Equity securities:
Gross realized gains ...................................................... 38,705 31,785 36,134
Gross realized losses ..................................................... (15,127) (19,740) (9,798)
--------- --------- ---------
Realized gains on investments ............................................. $ 30,781 $ 19,557 $ 51,529
========= ========= =========
Change in unrealized gains on investments summarized by investment category
(000's omitted):
Fixed maturities ............................................................. $ 181,475 $(154,883) $ 8,492
Equity securities ............................................................ 677,288 (193,828) 84,763
--------- --------- ---------
Change in unrealized gains on investments ................................. $ 858,763 $(348,711) $ 93,255
========= ========= =========
</TABLE>
25
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Analysis of cost, fair value, gross unrealized gains and gross unrealized losses
as of December 31, 1995 and 1994 (000's omitted):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
1995 Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturities:
States, municipalities and political subdivisions ....... $ 820,141 $ 47,168 $ 3,563 $ 863,746
Convertibles and bonds with warrants attached ........... 181,082 8,925 4,226 185,781
Public utilities ........................................ 82,865 4,135 1,119 85,881
United States government and government
agencies and authorities ............................. 4,355 129 0 4,484
All other corporate bonds ............................... 1,210,275 104,806 7,978 1,307,103
---------- ---------- ---------- ----------
Total ................................................ $2,298,718 $ 165,163 $ 16,886 $2,446,995
========== ========== ========== ==========
Equity securities .......................................... $1,423,671 $1,625,461 $ 7,370 $3,041,762
========== ========== ========== ==========
1994
Fixed maturities:
States, municipalities and political subdivisions ....... $ 777,995 $ 23,591 $ 32,099 $ 769,487
Convertibles and bonds with warrants attached ........... 182,576 8,113 10,352 180,337
Public utilities ........................................ 78,347 1,078 4,679 74,746
United States government and government
agencies and authorities ............................. 4,100 71 34 4,137
All other corporate bonds ............................... 933,296 16,668 35,555 914,409
---------- ---------- ---------- ----------
Total ................................................ $1,976,314 $ 49,521 $ 82,719 $1,943,116
========== ========== ========== ==========
Equity securities .......................................... $1,289,444 $ 977,580 $ 36,777 $2,230,247
========== ========== ========== ==========
</TABLE>
Maturity dates for investments in fixed maturity securities as of December 31,
1995 (000's omitted):
<TABLE>
<CAPTION>
Fair
Cost Value
---------- ----------
<S> <C> <C>
Maturity dates occurring:
One year or less .................................................... $ 67,606 $ 69,589
After one year through five years ................................... 147,984 156,734
After five years through ten years .................................. 879,396 929,038
After ten years ..................................................... 1,203,732 1,291,634
---------- ----------
Total ............................................................ $2,298,718 $2,446,995
========== ==========
</TABLE>
Investments in companies that exceed 10% of the Company's shareholders' equity
include the following as of December 31 (000's omitted):
<TABLE>
<CAPTION>
1995 1994
--------------------- ----------------------
Fair Fair
Cost Value Cost Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fifth Third Bancorp common stock ............... $185,345 $988,417 $157,843 $623,040
Alltel Corporation common stock ................ $ 95,720 $375,392 $ 95,810 $383,346
</TABLE>
26
<PAGE> 22
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
3. DEFERRED ACQUISITION COSTS
Acquisition costs incurred and capitalized during 1995, 1994 and 1993
amounted to $282,399,000, $259,092,000 and $250,221,000, respectively.
Amortization of deferred acquisition costs was $272,313,000, $253,680,000 and
$243,464,000 for 1995, 1994 and 1993, respectively.
4. LOSSES AND LOSS EXPENSES
Activity in the reserve for losses and loss expenses is summarized as
follows (000's omitted):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1 .............................. $ 1,510,150 $ 1,365,052 $ 1,200,182
Less reinsurance receivable ..................... 78,125 71,691 62,349
----------- ----------- -----------
Net balance at January 1 ......................... 1,432,025 1,293,361 1,137,833
----------- ----------- -----------
Incurred related to:
Current year .................................... 1,040,541 948,581 828,978
Prior years ..................................... (126,509) (92,892) (39,769)
----------- ----------- -----------
Total incurred .................................... 914,032 855,689 789,209
----------- ----------- -----------
Paid related to:
Current year .................................... 396,856 373,721 323,616
Prior years ..................................... 368,459 343,304 310,065
----------- ----------- -----------
Total paid ........................................ 765,315 717,025 633,681
----------- ----------- -----------
Net balance at December 31 ........................ 1,580,742 1,432,025 1,293,361
Plus reinsurance receivable ..................... 109,719 78,125 71,691
----------- ----------- -----------
Balance at December 31 ............................ $ 1,690,461 $ 1,510,150 $ 1,365,052
=========== =========== ===========
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss expenses (net of reinsurance recoveries of
($9,441,000), $8,211,000 and $1,064,000 in 1995, 1994 and 1993, respectively)
decreased by $126,509,000, $92,892,000 and $39,769,000 in 1995, 1994 and 1993.
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 $53,073,000 and $42,147,000 at December 31, 1995 and 1994,
respectively, for certain life/health losses and loss checks payable.
5. LIFE POLICY RESERVES
Life policy reserves have been calculated using the account value basis for
universal life and annuity policies and primarily the Basic Table (select)
mortality basis for ordinary/traditional, industrial and other policies.
Following is a summary of such reserves (000's omitted):
<TABLE>
<CAPTION>
1995 1994
-------- ---------
<S> <C> <C>
Ordinary/Traditional Life...... $111,442 $ 103,197
Universal Life................. 166,634 147,599
Annuities...................... 104,625 98,750
Industrial..................... 17,411 18,032
Other.......................... 3,152 2,517
-------- ---------
Total........................ $403,264 $ 370,095
======== =========
</TABLE>
At December 31, 1995 and 1994, the fair value associated with the annuities
shown above approximated $105,000,000 and $99,000,000, respectively.
6. NOTES PAYABLE
The Company and subsidiaries had no compensating debt balance for either
1995 or 1994. Notes payable in the accompanying balance sheets are short term
and interest rates charged on such borrowings ranged from 5.18% to 9.00% during
1995 which resulted in an average interest rate of 7.19%. At December 31, 1995
and 1994, the fair value of the notes payable approximated the carrying value
and the weighted average interest rate approximated 6.51% and 6.77%,
respectively.
7. CONVERTIBLE SENIOR DEBENTURES
The convertible senior debentures are convertible by the debenture holders
into shares of common stock at a conversion price of $46.86 (21.34 shares for
each $1,000 principal). At December 31, 1995 and 1994, the fair value of the
debentures approximated $112,000,000 and $88,800,000, respectively.
8. REINSURANCE
Property and casualty premium income in the accompanying statements of
income includes approximately $36,956,000, $63,746,000, and $65,625,000 of
earned premiums on assumed business and is net of approximately $83,805,000,
$100,842,000 and $87,819,000 of premiums on ceded business for 1995, 1994 and
1993, respectively.
Written premiums for 1995, 1994 and 1993 consist of the following (000's
omitted):
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Direct business ............................. $ 1,338,205 $ 1,233,948 $ 1,145,185
Assumed business ............................ 39,221 53,332 71,581
Ceded business .............................. (81,574) (96,456) (92,986)
----------- ----------- -----------
Net ....................................... $ 1,295,852 $ 1,190,824 $ 1,123,780
=========== =========== ===========
</TABLE>
Insurance losses and policyholder benefits in the accompanying statements
of income are net of approximately $40,316,000, $33,645,000 and $25,995,000 of
reinsurance recoveries for 1995, 1994 and 1993, respectively.
27
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
9. FEDERAL INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes," and recognized in 1993 income the $13,845,000 cumulative
effect on prior years of the change in method of accounting for income taxes.
Income tax rates were increased during 1993; and, as a result of the use of SFAS
No.109, the Company also charged to 1993 income $11,245,000 of taxes related to
the effect of the change in rates on unrealized appreciation on equity
investments at the date the rate increases were signed into law. Further, under
SFAS No. 109, the effect ($2,604,000) of the change on accumulated temporary
differences as of January 1, 1993 was credited to income. Under the previous
methods of accounting for income taxes, the net $8,641,000 charge to income
would not have been recognized.
Significant components of the Company's net deferred tax liability as of
December 31, 1995 and 1994 are as follows (000's omitted):
<TABLE>
<CAPTION>
1995 1994
--------- --------
Deferred tax liabilities:
<S> <C> <C>
Unrealized gain on investments........ $ 618,229 $317,662
Deferred acquisition costs............ 37,981 34,691
Other................................. 10,379 11,970
--------- --------
Total................................. 666,589 364,323
--------- --------
Deferred tax assets:
Losses and loss expense reserves...... 128,758 122,665
Unearned premiums..................... 27,008 24,786
Life policy reserves.................. 16,844 15,570
Other................................. 6,139 5,855
--------- --------
Total................................. 178,749 168,876
--------- --------
Net deferred tax liability.............. $ 487,840 $195,447
========= ========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994 1993
Percent Percent Percent
------- ------- -------
<S> <C> <C> <C>
Tax at statutory rate ...................... 35.00 35.00 35.00
Increase (decrease) resulting from:
Tax-exempt municipal bonds ............... (6.10) (7.40) (7.61)
Dividend exclusion ....................... (8.04) (8.71) (6.73)
Effect of rate change on unrealized
appreciation ............................ 4.21
Other .................................... 2.12 .40 (.59)
----- ----- -----
Effective rate ............................. 22.98 19.29 24.28
===== ===== =====
</TABLE>
No provision has been made (at December 31, 1995, 1994 and 1993) for
federal income taxes on approximately $14,000,000 of the life insurance
subsidiary's retained earnings, since such taxes will become payable only to the
extent that such retained earnings are distributed as dividends or exceed
limitations prescribed by tax laws. The Company does not contemplate any such
dividend.
10. PENSION PLAN
The Company and subsidiaries have a defined benefit pension plan covering
substantially all employees. Benefits are based on years of credited service and
compensation level. Contributions to the plan are based on the frozen entry age
actuarial cost method. Pension expense is composed of several components that
are determined using the projected unit credit actuarial cost method and based
on certain actuarial assumptions. The following table sets forth the plan's
funded status and the amounts recognized in the Company's balance sheets as of
December 31, 1995 and 1994 (000's omitted):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Actuarial present value of
accumulated benefit obligation
(vested benefits: 1995--$27,873;
1994--$22,650) .......................... $ 28,770 $ 23,452
======== ========
Plan assets at fair value ............... $ 79,210 $ 59,699
Actuarial present value of projected
benefit obligation .................... 49,425 39,523
-------- --------
Plan assets in excess of projected
benefit obligation .................... 29,785 20,176
Unrecognized net transition asset at
January 1, 1987 ($7,774 amortized
over 21 years) ........................ (4,442) (4,813)
Unrecognized prior service costs ........ (476) (516)
Unrecognized net gain ................... (25,138) (15,546)
-------- --------
Accrued pension cost .................... $ (271) $ (699)
======== ========
</TABLE>
28
<PAGE> 24
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Net pension expense for 1995, 1994 and 1993 includes the following
components (000's omitted):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Service cost for current year ................. $ 2,555 $ 2,682 $ 2,297
Interest cost ................................. 3,014 2,788 2,429
Actual return on plan assets .................. (20,717) 1,571 (2,593)
Net amortization and deferral ................. 14,720 (7,009) (2,254)
-------- -------- --------
Net pension expense ........................... $ (428) $ 32 $ (121)
======== ======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation as of December 31 was 6.75%,
7.25% and 6.75% in 1995, 1994 and 1993, respectively. The rates of increase in
future compensation levels were 5% to 7% for each year. The expected long-term
rate of return on retirement plan assets, consisting principally of equity
securities (including those of the Company), was 8% as of December 31, 1995,
1994 and 1993.
11. SHAREHOLDERS' EQUITY AND
RESTRICTION
The insurance subsidiaries paid cash dividends to the Company of
approximately $143,773,000, $85,700,000 and $119,000,000 in 1995, 1994 and 1993,
respectively. Dividends paid to the Company by insurance subsidiaries are
restricted by regulatory requirements of the insurance subsidiaries' domiciliary
state. Generally, the maximum dividend that may be paid without prior regulatory
approval is limited to the greater of 10% of statutory surplus or 100% of
statutory net income for the prior calendar year, up to the amount of statutory
unassigned surplus as of the end of the prior calendar year. Dividends exceeding
these limitations can be paid only with approval of the insurance department of
the subsidiaries' domiciliary state. During 1996, the total dividends that can
be paid to the Company without regulatory approval are approximately
$172,577,000.
2,559,934 shares of common stock were reserved as of December 31, 1995 for
the issuance of debenture conversions and stock options.
12. 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. A
summary of options information for the years ended December 31, 1995, 1994 and
1993 and the related range of prices per share for the year ended December 31,
1995 follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Shares under option
($12.46 to $64.50)........ 852,617 849,648 917,393
Options exercisable
($12.46 to $59.29)........ 611,100 539,214 450,090
Options exercised
($23.50 to $59.29)........ 126,561 128,954 252,015
</TABLE>
At December 31, 1995, the average purchase price of the shares under option
was $42.25 and the aggregate market value of the shares under option was
approximately $55,633,000; such options expire on dates ranging from November
28, 1997 to December 12, 2005.
SFAS No.123, "Accounting for Stock-Based Compensation," defines a fair
value based method of accounting for stock-based compensation but permits
compensation expense to continue to be measured using the intrinsic value based
method previously used. The Company intends to continue measuring compensation
expense using the intrinsic value based method and under the provisions of SFAS
No.123, which must be adopted in 1996, will be required to make proforma
disclosures of net income and earnings per share as if the fair value method had
been used.
13. STATUTORY ACCOUNTING INFORMATION
Net income and shareholders' equity, as determined in accordance with
statutory accounting practices for the Company's insurance subsidiaries, are as
follows (000's omitted):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net income:
Property/casualty insurance
subsidiaries................... $ 152,003 $ 125,684 $131,151
Life/health insurance
subsidiary..................... $ 7,096 $ 13,438 $ 14,577
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
------------- ----------
<S> <C> <C>
Shareholders' equity:
Property/casualty insurance subsidiaries.... $ 1,077,047 $ 776,813
Life/health insurance subsidiary............ $ 195,100 $ 207,725
</TABLE>
14. TRANSACTION WITH AFFILIATED PARTIES
The Company paid certain officers and directors, or insurance agencies of
which they are shareholders, commissions of approximately $10,034,000,
$7,824,000 and $9,405,000 on premium volume of approximately $60,720,000,
$45,811,000 and $50,723,000 for 1995, 1994 and 1993, respectively.
29
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
15. SEGMENT INFORMATION
The Company operates principally in two industries-- property and casualty
insurance and life insurance. Information concerning the Company's operations in
different industries is presented below (000's omitted). Revenue is primarily
from unaffiliated customers. Identifiable assets by industry are those assets
that are used in the Company's operations in each industry. Corporate assets are
principally cash and marketable securities.
<TABLE>
<CAPTION>
Income Before Income Taxes,
---------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Property/casualty insurance ...................................... $ 2,894 $ (5,703) $ (3,429)
Life/health insurance ............................................ (2,512) (1,691) 357
Investment income (less required interest on life reserves) ...... 279,346 244,347 222,992
Realized gains on investments .................................... 30,781 19,557 51,529
Other ............................................................ 4,979 5,874 5,578
General corporate expenses ....................................... (20,300) (13,056) (10,032)
----------- ----------- -----------
Total ......................................................... $ 295,188 $ 249,328 $ 266,995
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Identifiable Assets
---------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Property/casualty insurance ...................................... $ 3,526,900 $ 2,830,788 $ 2,736,960
Life/health insurance ............................................ 809,418 689,838 688,516
Other ............................................................ 44,487 44,006 42,822
Corporate assets ................................................. 1,728,493 1,169,647 1,133,990
----------- ----------- -----------
Total ......................................................... $ 6,109,298 $ 4,734,279 $ 4,602,288
=========== =========== ===========
</TABLE>
30
<PAGE> 26
"Selected Quarterly Financial Data" from page 1 (incorporated into Item 8).
SELECTED QUARTERLY FINANCIAL DATA
Financial data for each quarter in the two years ended December 31, 1995 (000's
omitted except per share data)
<TABLE>
<CAPTION>
1995
---------------------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 414,688 $ 405,023 $ 416,658 $ 419,283 $ 1,655,651
Income Before Income Taxes.............. 83,823 69,629 76,973 64,763 295,188
Net Income.............................. 63,245 55,141 58,603 50,362 227,350
Net Income Per Share.................... 1.17 1.02 1.08 .93 4.19
</TABLE>
<TABLE>
<CAPTION>
1994
---------------------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 379,703 $ 378,821 $ 381,726 $ 372,256 $ 1,512,506
Income Before Income Taxes.............. 59,891 75,969 56,867 56,601 249,328
Net Income.............................. 48,500 59,083 47,552 46,095 201,230
Net Income Per Share(2)................. .90 1.09 .88 .85 3.72
</TABLE>
(1) 1993 earnings include a credit for $13,845,000 ($.25 per share) cumulative
effect of a change in the method of accounting for income taxes to conform
with FASB Statement No. 109 and a net charge of $8,641,000 ($.16 per share)
related to the effect of the 1993 increase in income tax rates on deferred
taxes recorded for various prior year items.
(2) Adjusted to reflect a 5 percent stock dividend declared in February, 1995.
(3) Includes common stock equivalents for stock options and convertible
debentures.
Note: The sum of the quarterly reported amounts may not equal the full year as
each is computed independently.
1
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
2-71575 (on Form S-8), Registration Statement No. 33-34127 (on Form S-8), and
Registration Statement No. 33-48970 (on Form S-4) of Cincinnati Financial
Corporation of our reports dated February 9, 1996, appearing in and
incorporated by reference in the Annual Report on Form 10-K of Cincinnati
Financial Corporation for the year ended December 31, 1995.
DELOITTE & TOUCHE LLP
/S/ Deloitte & Touche LLP
Cincinnati, Ohio
March 20, 1996
20
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 2,446,995
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,041,762
<MORTGAGE> 5,489
<REAL-ESTATE> 15,486
<TOTAL-INVEST> 5,528,559<F1>
<CASH> 20,019
<RECOVER-REINSURE> 1,493
<DEFERRED-ACQUISITION> 119,589
<TOTAL-ASSETS> 6,109,298
<POLICY-LOSSES> 2,090,672<F2>
<UNEARNED-PREMIUMS> 408,624
<POLICY-OTHER> 53,073<F2>
<POLICY-HOLDER-FUNDS> 7,740
<NOTES-PAYABLE> 301,005<F3>
<COMMON> 104,784<F4>
0
0
<OTHER-SE> 2,553,187<F4>
<TOTAL-LIABILITY-AND-EQUITY> 6,109,298
1,314,126
<INVESTMENT-INCOME> 300,015
<INVESTMENT-GAINS> 30,781
<OTHER-INCOME> 10,729
<BENEFITS> 964,216
<UNDERWRITING-AMORTIZATION> 272,313<F5>
<UNDERWRITING-OTHER> 123,934<F5>
<INCOME-PRETAX> 295,188
<INCOME-TAX> 67,838
<INCOME-CONTINUING> 227,350
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 227,350
<EPS-PRIMARY> 4.19
<EPS-DILUTED> 4.18
<RESERVE-OPEN> 1,432,025
<PROVISION-CURRENT> 1,040,541
<PROVISION-PRIOR> (126,509)
<PAYMENTS-CURRENT> 396,856
<PAYMENTS-PRIOR> 368,459
<RESERVE-CLOSE> 1,580,742
<CUMULATIVE-DEFICIENCY> (126,509)
<FN>
<F1>Equals the sum of Fixed Maturities, Equity Securities and other Invested
Assets
<F2>Equals the sum of Life Policy Reserves and Losses and Loss Expenses less
the Life Company liability for Supplementary Contracts without Life
Contingencies of $3,053 which is classified as Other Policyholder Funds
<F3>Equals the sum of Notes Payable and the 5-1/2% Convertible Senior Debenture
<F4>Equals the Total Shareholders Equity
<F5>Equals the Sum of Commissions, Other Operating Expenses, Taxes licenses and
Fees, Increase in deferred acquisition costs, Interest expense and other
expenses
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 28
Information from reports furnished to state insurance regulatory authorities.
22
