<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, 1996 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 $3,268,181,025 as of March 3, 1997.
As of March 3, 1997, there were 55,323,481 shares of common stock
outstanding.
Documents Incorporated by Reference
-----------------------------------
Annual Report to Shareholders for year ended December 31, 1996 (in
part) into Parts I, II and IV and Registrant's Proxy Statement dated March 3,
1997 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 22
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 or 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 5 through 11 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 (966 in
26
2
<PAGE> 3
states at December 31, 1996) of selectively appointed independent
agents, most of whom own stock in the Company. Gross written premiums
by property/casualty lines increased 7% to $1.476 billion in 1996. The
Company's mix of property/casualty business did not change
significantly in 1996. Life and accident and health insurance (which
constituted only 4% of the Company's premium income for 1996) is also
sold primarily through property/casualty agencies and the growth rate
of 10.8% was the result of increased sales of both traditional and
interest-sensitive products.
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 1996, 1995, and 1994, 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
1996 is presented on the next page.
The reconciliation referred to in the preceding paragraph
shows a 1996 recognition of $151,996,000 redundancy in the December 31,
1995 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 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability for Unpaid
Losses and Loss
Adjustment Expenses $377 $534 $631 $742 $833 $986 $1,138 $1,293 $1,432 $1,581 $1,702
Net Liability Reestimated
as of:
One Year Later 444 548 671 751 869 956 1,098 1,200 1,306 1,429
Two Years Later 460 584 634 747 816 928 993 1,116 1,220
Three Years Later 480 544 622 696 795 823 949 1,067
Four Years Later 452 535 596 676 723 814 937
Five Years Later 447 523 580 635 720 824
Six Years Later 443 508 551 637 732
Seven Years Later 429 496 502 653
Eight Years Later 431 505 571
Nine Years Later 439 519
Ten Years Later 454
Net Cumulative Redundancy
(Deficiency) $(77) $ 15 $ 60 $ 89 $101 $162 $ 201 $ 226 $ 212 $ 152
==== ==== ==== ==== ==== ==== ====== ====== ====== ======
Net Cumulative Amount of
Liability Paid
Through:
One Year Later $153 $178 $204 $238 $232 $280 $ 310 $ 343 $ 368 $ 395
Two Years Later 247 292 321 356 397 440 498 538 578
Three Years Later 313 362 390 446 493 546 612 663
Four Years Later 351 398 441 497 552 611 681
Five Years Later 367 427 467 528 588 647
Six Years Later 387 441 485 550 610
Seven Years Later 394 454 496 563
Eight Years Later 402 461 502
Nine Years Later 408 465
Ten Years Later 411
Gross Liability--End of Year $1,200 $1,365 $1,510 $1,690 $1,824
Reinsurance Recoverable 62 72 78 109 122
------ ------ ------ ------ ------
Net Liability--End of Year $1,138 $1,293 $1,432 $1,581 $1,702
====== ====== ====== ====== ======
Gross Reestimated Liability--Latest $1,027 $1,160 $1,330 $1,548
Reestimated Recoverable--Latest 90 93 110 119
------ ------ ------ ------
Net Reestimated Liability--Latest $ 937 $1,067 $1,220 $1,429
====== ====== ====== ======
Gross Cumulative Redundancy $ 201 $ 226 $ 212 $ 152
====== ====== ====== ======
</TABLE>
The table above presents the development of balance sheet
liabilities for 1986 through 1996. 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 $15,000,000 redundancy over nine
years and has been reflected in income over the nine 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, 1996, the Company
had paid $465,000,000 of the currently estimated $519,000,000 of losses
and LAE that have been incurred as of the end of 1987; thus an
estimated $54,000,000 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 on Pages 17 and 18 of the Annual Report to
Shareholders, incorporated herein by reference (see Exhibit 13 to this
filing). The Company's primary strategy is to maintain liquidity to
meet both its immediate and long-range insurance obligations through
the purchase and maintenance of medium-risk fixed maturity and equity
securities, while earning optimal returns on medium-risk equity
securities which offer growing dividends and capital appreciation. The
Company usually holds these securities to maturity unless there is a
change in credit risk or the securities are called by the issuer.
Historically, municipal bonds (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,
5
<PAGE> 6
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.
On November 22, 1996, the Board authorized repurchase of up to
three million of the Company's outstanding shares, as management deems
appropriate, over an unspecified period of time.
As of December 31, 1996, CFC employed 2,506 associates.
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 $577,557 as of
December 31, 1996.
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 $11,681,657 as of
December 31, 1996.
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 103,000 rentable square feet. CFC and its subsidiaries
occupy approximately 72% of the building, unaffiliated tenants occupy
approximately 15% of the building, and the balance is available for
Company expansion. The property is carried in the financial statements
at $10,585,051 as of December 31, 1996.
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 $4,286,722 as of December 31, 1996.
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 February 28, 1997, 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 the inside back cover for the year
ended December 31, 1996 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 14 and 15 for the year ended
December 31, 1996 and is incorporated herein by reference (see Exhibit
13 to this filing).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
This information is included in the Annual Report of the
Registrant to its shareholders on pages 16 through 18 for the year
ended December 31, 1996 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,
1996, are incorporated herein by reference (see
Exhibit 13 to this filing).
Independent Auditors' Report
Consolidated Balance Sheets--December 31, 1996 and
1995
Consolidated Statements of Income--Years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Shareholders'
Equity--Years ended December 31, 1996, 1995, and
1994
Consolidated Statements of Cash Flows--Years ended
December 31, 1996, 1995, and 1994.
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 30 for the year ended December 31, 1996, 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, 1996.
7
<PAGE> 8
PART III
CFC filed with the Commission on February 28, 1997 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, 1996, 1995,
and 1994
Exhibit 13--Material incorporated by reference from
the annual report of the registrant to its
shareholders for the year ended December 31, 1996
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 3, 1997 filed
with Securities and Exchange Commission,
Washington, D.C., 20549
Exhibit 23--Independent Auditors' Consent
Exhibit 27--Financial Data Schedule
(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, 1996 and 1995, and for each
of the three years in the period ended December 31, 1996, and have issued our
report thereon dated February 5, 1997; such consolidated financial statements
and report are included in your 1996 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 5, 1997
9
<PAGE> 10
SCHEDULE I
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
<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 . $ 2,250 $ 2,301 $ 2,301
The Cincinnati Indemnity Company . 203 211 211
The Cincinnati Casualty Company . 150 158 158
The Cincinnati Life Insurance
Company . . . . . . . . . . . . . 6,187 6,133 6,133
---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . 8,790 8,803 8,803
---------- ---------- ----------
States, municipalities and political
subdivisions:
The Cincinnati Insurance Company . 800,821 836,226 836,226
The Cincinnati Indemnity Company . 7,389 7,735 7,735
The Cincinnati Casualty Company . 26,475 28,083 28,083
The Cincinnati Life Insurance
Company . . . . . . . . . . . . 3,323 3,329 3,329
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 838,008 875,373 875,373
---------- ---------- ----------
Public Utilities:
The Cincinnati Insurance Company . 40,276 41,270 41,270
The Cincinnati Casualty Company . 6,533 7,230 7,230
The Cincinnati Life Insurance
Company . . . . . . . . . . . . 38,329 39,915 39,915
The Cincinnati Financial
Corporation . . . . . . . . . . 435 506 506
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 85,573 88,921 88,921
---------- ---------- ----------
Convertibles and Bonds with warrants
attached:
The Cincinnati Insurance Company . 93,022 96,314 96,314
The Cincinnati Life Insurance
Company . . . . . . . . . . . . 22,811 24,662 24,662
Cincinnati Financial Corporation . 9,796 10,649 10,649
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 125,629 131,625 131,625
---------- ---------- ----------
All other Corporate Bonds:
The Cincinnati Insurance Company . 507,862 545,279 545,279
The Cincinnati Indemnity Company . 16,507 17,588 17,588
The Cincinnati Casualty Company . 34,337 38,131 38,131
The Cincinnati Life Insurance
Company . . . . . . . . . . . . 404,285 431,871 431,871
Cincinnati Financial Corporation . 410,794 424,214 424,214
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 1,373,785 1,457,083 1,457,083
---------- ---------- ----------
TOTAL FIXED MATURITIES $2,431,785 $2,561,805 $2,561,805
---------- ---------- ----------
</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. . $ 93,310 $ 203,798 $ 203,798
The Cincinnati Casualty Company . . 5,011 11,069 11,069
The Cincinnati Life Ins. Company. . 24,409 65,588 65,588
Cincinnati Financial Corp . . . . . 68,296 273,005 273,005
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 191,026 553,460 553,460
---------- ---------- ----------
Banks, trust and insurance companies
The Cincinnati Insurance Company. . 142,252 515,335 515,335
The Cincinnati Casualty Company . . 18,016 42,353 42,353
The Cincinnati Life Ins. Company. . 35,350 81,695 81,695
Cincinnati Financial Corporation. . 326,028 1,274,234 1,274,234
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 521,646 1,913,617 1,913,617
---------- ---------- ----------
Industrial miscellaneous and all other
The Cincinnati Insurance Company. . 300,320 585,938 585,938
The Cincinnati Indemnity Company. . 7,896 12,056 12,056
The Cincinnati Casualty Company . . 21,723 36,915 36,915
The Cincinnati Life Ins. Company. . 47,338 85,451 85,451
Cincinnati Financial Corporation. . 49,724 87,124 87,124
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 427,001 807,484 807,484
---------- ---------- ----------
Nonredeemable preferred stocks
The Cincinnati Insurance Company. . 351,146 409,986 409,986
The Cincinnati Life Ins. Company. . 39,953 48,704 48,704
Cincinnati Financial Corporation. . 6,417 6,929 6,929
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . 397,516 465,619 465,619
---------- ---------- ----------
TOTAL EQUITY SECURITIES . . . . . . . $1,537,189 $3,740,180 $3,740,180
---------- ---------- ----------
Other Invested Assets:
Mortgage loans on real estate
The Cincinnati Life Ins. Company. . . $ 3,594 XXXXXXXXXX $ 3,594
CFC-I Investment Company . . . . . . 5,613 XXXXXXXXXX 5,613
---------- ----------
Total . . . . . . . . . . . . . . . . 9,207 XXXXXXXXXX 9,207
---------- ----------
Real Estate
The Cincinnati Life Ins. Company. . . 4,287 XXXXXXXXXX 4,287
CFC-I Investment Company . . . . . . 11,162 XXXXXXXXXX 11,162
---------- ----------
Total . . . . . . . . . . . . . . . . 15,449 XXXXXXXXXX 15,449
---------- ----------
Policy Loans
The Cincinnati Life Ins. Company. . . 19,178 XXXXXXXXXX 19,178
---------- ----------
Notes Receivable
CFC-I Investment Company . . . . . . 9,170 XXXXXXXXXX 9,170
---------- ----------
TOTAL OTHER INVESTED ASSETS . . . . . $ 53,004 XXXXXXXXXX $ 53,004
---------- ----------
TOTAL INVESTMENTS . . . . . . . . . . $4,021,978 XXXXXXXXXX $6,354,989
========== ==========
</TABLE>
11
<PAGE> 12
SCHEDULE II CINCINNATI FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(OOO OMITTED)
<TABLE>
<CAPTION>
Condensed Statements of Income (Parent Company Only)
For the Years ended December 31 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income
- ------
Dividends from Subsidiaries $ 85,000 $ 149,000 $ 78,000
Investment Income 81,220 65,839 50,276
Realized Gains on Investments 2,232 742 (453)
-------- --------- ---------
Total Income $168,452 $ 215,581 $ 127,823
-------- --------- ---------
Expenses
- --------
Interest $ 20,098 $ 17,229 $ 9,937
Other 6,620 3,071 3,119
-------- --------- ---------
Total Expenses 26,718 20,300 13,056
-------- --------- ---------
Income Before Taxes and
Earnings of Subsidiaries 141,734 195,281 114,767
Applicable Income Taxes 9,760 8,286 5,113
-------- --------- ---------
Net Income Before Change in
Undistributed Earnings of
Subsidiaries 131,974 186,995 109,654
Increase in Undistributed
Earnings of Subsidiaries 91,786 40,355 91,576
-------- --------- ---------
Net Income $223,760 $ 227,350 $ 201,230
======== ========= =========
Condensed Balance Sheets (Parent Company Only)
December 31 1996 1995
---- ----
Assets
- ------
Cash $ 5,494 $ 1,354
Fixed Maturities, at Fair Value 435,368 372,776
Equity Securities, at Fair Value 1,641,291 1,335,749
Investment Income Receivable 18,341 15,739
Inter-Company Dividends Receivable 20,500 12,527
Equity in Net Assets of Subsidiaries 1,837,226 1,569,026
Other Assets 10,518 3,590
---------- ----------
Total Assets $3,968,738 $3,310,761
========== ==========
Liabilities
- -----------
Notes Payable $ 262,098 $ 221,005
Dividends Declared but Unpaid 20,584 18,038
Federal Income Tax
Current 9,422 7,689
Deferred 425,543 321,094
5.5% Convertible Senior Debentures
Due 2002 79,847 80,000
Other Liabilities 8,355 4,964
---------- ----------
Total Liabilities $ 805,849 $ 652,790
Stockholders' Equity 3,162,889 2,657,971
---------- ----------
Total Liabilities and Stockholders' Equity $3,968,738 $3,310,761
========== ==========
</TABLE>
12
<PAGE> 13
SCHEDULE II CINCINNATI FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(OOO OMITTED)
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows (Parent Company Only)
For the Years ended December 31 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating Activities
- --------------------
Net Income $ 223,760 $ 227,350 $ 201,230
Adjustments to Reconcile Net
Income to Net Cash Provided
by Operating Activities:
Amortization (782) (706) (188)
Increase in investment
income receivable (2,602) (4,590) (2,576)
Increase in Current Federal
Income Taxes Payable 1,733 2,236 607
Provision for Deferred
Income Taxes 1,116 1,125 0
(Increase) Decrease in
Dividends Receivable
from Subsidiaries (7,973) (4,227) 7,700
(Increase) Decrease in
Other Assets (6,928) 206 1,820
Increase (Decrease) in
Other Liabilities 3,391 (1,843) 1,407
Increase in Undistributed
Earnings of Subsidiaries (91,786) (40,355) (91,576)
Realized (Gains) Losses on
Investments (2,232) (742) 453
--------- --------- ---------
Net Cash Provided by Operating
Activities 117,697 178,454 118,877
--------- --------- ---------
Investing Activities
- --------------------
Sale of Fixed Maturity Invest. 78,701 44,063 17,224
Maturity of Fixed Maturity Invest. 6,807 14,641 2,794
Sale of Equity Security Invest. 36,825 19,830 25,268
Purchase of Fixed
Maturity Investments (139,934) (203,081) (86,711)
Purchase of Equity
Security Investments (52,282) (79,739) (70,874)
--------- --------- ---------
Net Cash Used in
Investing Activities (69,883) (204,286) (112,299)
--------- --------- ---------
Financing Activities
- --------------------
Increase in Other
Short-Term Borrowings 41,093 91,889 51,050
Payment of Cash Dividends (79,203) (69,542) (62,436)
Purchase/Issuance of Treasury
Shares (8,963) (287) (460)
Proceeds from Stock
Options Exercised 3,399 4,113 3,745
--------- --------- ---------
Net Cash (Used in) Provided by
Financing Activities (43,674) 26,173 (8,101)
--------- --------- ---------
Increase (Decrease) in Cash 4,140 341 (1,523)
Cash at Beginning of Year 1,354 1,013 2,536
--------- --------- ---------
Cash at End of Year $ 5,494 $ 1,354 $ 1,013
========= ========= =========
</TABLE>
13
<PAGE> 14
SCHEDULE III CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(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>
1996
Property
and Liability
Insurance $ 79,914 $1,824,296 $424,487 $35,500 $1,366,544
Life/Health
Insurance 47,674 448,969 1,263 12,683 56,353
-------- ---------- -------- ------- ----------
Total $127,588 $2,273,265 $425,750 $48,183 $1,422,897
======== ========== ======== ======= ==========
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
======== ========== ======== ======= ==========
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>
1996
Property
and Liability
Insurance $190,318 $1,030,157 $287,222 $ 98,844 $1,383,525
Life/Health
Insurance 54,687 56,948 7,890 16,879 7,652(4)
-------- ---------- -------- -------- ----------
Total $245,005 $1,087,105 $295,112 $115,723 $1,391,177
======== ========== ======== ======== ==========
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 $162,260 $ 854,804 $244,856 $ 80,205 $1,190,824
Life/Health
Insurance 48,339 46,010 8,824 14,579 7,204(4)
-------- ---------- -------- -------- ----------
Total $210,599 $ 900,814 $253,680 $ 94,784 $1,198,028
======== ========== ======== ======== ==========
</TABLE>
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.
<PAGE> 15
SCHEDULE IV
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
REINSURANCE
FOR YEARS ENDING DECEMBER 31, 1996, 1995, AND 1994
(000 omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Ceded to Assumed Percentage of
Gross Other from Other Net Amount Assumed
Amount Companies Companies Amount to Net
---------- ---------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
1996
- ----
Life Insurance in Force $9,775,948 $1,272,331 $ 15,919 $8,519,536 .2%
========== ========== ======== ==========
Premiums
Life/Health Insurance $ 60,994 $ 4,749 $ 108 $ 56,353 .2%
Property/Liability Ins. 1,416,801 91,396 41,139 1,366,544 3.0%
---------- --------- -------- ----------
Total Premiums $1,477,795 $ 96,145 $ 41,247 $1,422,897 2.9%
========== ========== ======== ==========
1995
- ----
Life Insurance in Force $8,328,764 $ 980,023 $ 20,047 $7,368,788 .3%
========== ========== ======== ==========
Premiums
Life/Health Insurance $ 54,437 $ 3,713 $ 145 $ 50,869 .3%
Property/Liability Ins. 1,310,105 83,804 36,956 1,263,257 2.9%
---------- --------- -------- ----------
Total Premiums $1,364,542 $ 87,517 $ 37,101 $1,314,126 2.8%
========== ========== ======== ==========
1994
- ----
Life Insurance in Force $7,473,906 $ 855,389 $ 23,102 $6,641,619 .3%
========== ========== ======== ==========
Premiums
Life/Health Insurance $ 52,251 $ 3,303 $ 145 $ 49,093 .3%
Property/Liability Ins. 1,207,036 100,842 63,746 1,169,940 5.4%
---------- --------- -------- ----------
Total Premiums $1,259,287 $ 104,145 $ 63,891 $1,219,033 5.2%
========== ========== ======== ==========
</TABLE>
<PAGE> 16
SCHEDULE VI
<TABLE>
<CAPTION>
CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
FOR YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(000 omitted)
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Reserves
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
1996 $79,914 $1,824,296 $-0- $424,487 $1,366,544
======= ========== ==== ======== ==========
1995 $76,365 $1,690,461 $-0- $407,254 $1,263,257
======= ========== ==== ======== ==========
1994 $69,169 $1,510,150 $-0- $377,764 $1,169,940
======= ========== ==== ======== ==========
Column A 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
1996 $190,318 $1,183,251 $(151,996) $287,222 $909,582 $1,383,525
======== ========== ========= ======== ======== ==========
1995 $180,074 $1,040,541 $(126,509) $264,281 $765,315 $1,295,852
======== ========== ========= ======== ======== ==========
1994 $162,260 $ 948,581 $ (92,892) $244,856 $717,025 $1,190,824
======== ========== ========= ======== ======== ==========
</TABLE>
<PAGE> 17
Index of Exhibits
Exhibit 11-- Statement re computation of per share earnings for the years
ended December 31, 1996, 1995, and 1994.
Exhibit 13-- Material incorporated by reference from the annual report of the
registrant to its shareholders for the year ended
December 31, 1996.
Exhibit 23-- Independent Auditors' Consent
Exhibit 27-- Financial Data Schedule
17
<PAGE> 18
SIGNATURES
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 24, 1997
- ------------------------------------- Officer, President
Robert B. Morgan and Director
/s/ ROBERT J. DRIEHAUS Senior Vice President March 11, 1997
- ------------------------------------- Chief Financial Officer
Robert J. Driehaus and Director
(Principal Financial Officer)
/s/ THEODORE F. ELCHYNSKI Senior Vice President March 11, 1997
- ------------------------------------- Treasurer and Secretary
Theodore F. Elchynski (Principal Accounting Officer)
/s/ WILLIAM F. BAHL Director March 24, 1997
- -------------------------------------
William F. Bahl
Director March , 1997
- -------------------------------------
Michael Brown
Director March , 1997
- -------------------------------------
Richard M. Burridge
Director March , 1997
- -------------------------------------
John E. Field
Director March , 1997
- -------------------------------------
William R. Johnson
/s/ KENNETH C. LICHTENDAHL Director March 24, 1997
- -------------------------------------
Kenneth C. Lichtendahl
/s/ JAMES G. MILLER Senior Vice President March 12, 1997
- ------------------------------------- Chief Investment Officer
James G. Miller and Director
</TABLE>
22
<PAGE> 19
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JACKSON H. RANDOLPH Director March 24, 1997
- ---------------------------------------
Jackson H. Randolph
/s/ JOHN J. SCHIFF Director March 11, 1997
- ---------------------------------------
John J. Schiff
/s/ JOHN J. SCHIFF, JR. Chairman of the March 22, 1997
- --------------------------------------- Board and
John J. Schiff, Jr. Director
Director March , 1997
- ---------------------------------------
Robert C. Schiff
/s/ THOMAS R. SCHIFF Director March 24, 1997
- ---------------------------------------
Thomas R. Schiff
Director March , 1997
- ---------------------------------------
Frank J. Schultheis
Director March , 1997
- ---------------------------------------
Larry R. Webb
Director March , 1997
- ---------------------------------------
Alan R. Weiler
</TABLE>
23
<PAGE> 1
EXHIBIT 11
<TABLE>
<CAPTION>
CINCINNATI FINANCIAL CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands except for per share amounts)
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Weighted average shares outstanding 55,736 55,668* 55,522*
Equivalent shares assumed to be
outstanding for:
Stock options: 258 226* 231*
Convertible debentures 1,789 1,792* 1,792*
-------- -------- --------
Number of shares for primary
computation 57,783 57,686* 57,545*
Other dilutive equivalent shares--
stock options 71 90* --
-------- -------- --------
Number of shares assuming full
dilution 57,854 57,776* 57,545*
======== ======== ========
Net income $223,760 $227,350 $201,230
Interest on convertible debentures--
net of tax 2,859 2,860 2,860
-------- -------- --------
Net income for per share computation $226,619 $230,210 $204,090
======== ======== ========
Earnings per share:
Total Primary $ 3.92 $ 3.99* $ 3.54*
======== ======== ========
Fully Diluted $ 3.92 $ 3.98* $ 3.54*
======== ======== ========
</TABLE>
*Adjusted to reflect a 5% stock dividend paid in April 1996.
<PAGE> 1
EXHIBIT 13
Material incorporated by reference from the annual report of the registrant to
the shareholders for the year ended December 31, 1996.
Cinncinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Segment information from page 30 (incorporated into Item 1)
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
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Property/casualty insurance ..................................... $ (44,449) $ 2,894 $ (5,703)
Life/health insurance ........................................... (2,906) (2,512) (1,691)
Investment income (less required interest on life reserves) ..... 305,211 279,346 244,347
Realized gains on investments ................................... 47,946 30,781 19,557
Other ........................................................... 3,337 4,979 5,874
General corporate expenses ...................................... (26,718) (20,300) (13,056)
----------- ----------- -----------
Total ........................................................ $ 282,421 $ 295,188 $ 249,328
=========== =========== ===========
Identifiable Assets
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Property/casualty insurance ..................................... $ 3,986,658 $ 3,526,900 $ 2,830,788
Life/health insurance ........................................... 902,354 809,418 689,838
Other ........................................................... 53,351 44,487 44,006
Corporate assets ................................................ 2,103,151 1,728,493 1,169,647
----------- ----------- -----------
Total ........................................................ $ 7,045,514 $ 6,109,298 $ 4,734,279
=========== =========== ===========
</TABLE>
<PAGE> 2
Text data from pages 5 through 11 (incorporated into Item 1)
RANKINGS (BASED ON 1995 RESULTS)
FORBES (JANUARY 13, 1997)
Cincinnati Financial Corporation is the 14th most profitable property and
casualty company among publicly-traded U.S. stock insurers, based on an average
five-year return on equity of 11.3 percent. Our 12-month profit margin (net
income divided by sales) of 11.9 percent is third among the top 28 ranked
insurers.
FINANCIAL WORLD (AUGUST 12, 1996)
The Cincinnati Insurance Companies rank fifth among the 50 largest property
and casualty groups based on growth, profitability and financial strength.
FORTUNE (APRIL 29, 1996)
Based on revenues, Cincinnati Financial Corporation ranks as the 21st
largest U.S. publicly-traded property and casualty insurer or reinsurer. Our 14
percent ratio of profits to revenues is the highest of any company ranked in
this category.
FORBES (APRIL 22, 1996)
Listed with $103,300 in profits per employee, Cincinnati Financial
Corporation is the most productive publicly-traded U.S. property and casualty
company excluding reinsurers.
High catastrophe losses such as those experienced this year are a reminder
that the best protection for policyholders is exceptionally strong surplus. Our
$3.163 billion surplus makes it possible for us to compete aggressively for
desirable insurance accounts and invest for both current earnings and long-term
appreciation. It has been the source of 36 years of increasing dividends to
shareholders.
GROWTH OPPORTUNITIES: COMMERCIAL LINES
Agents placed more than $153 million in new commercial accounts with
Cincinnati this year. This willingness to make us their "go-to" company for new
business helps offset what most observers are calling the most difficult
commercial pricing environment since 1989. Unit growth is part of the answer to
declining rates and we are trying to find new ways to pursue it in profitable
lines.
In the workers' compensation line, for example, agents wrote $31.1 million
in new business. Yet, fierce competition and mandated rate reductions held the
increase in premiums written by our agents to less than $1 million. Underwriting
considerations take first priority as we select and price these risks.
UPSIZED ACCOUNTS
Our Special Accounts Marketing Program attracts accounts with average
initial premiums in the $100,000 range, including package policies, umbrella
liability and workers' compensation. More than 200 new large accounts have been
written since 1992. Many Main Street businesses we have insured for decades have
prospered, growing into multi-state risks that now require sophisticated
underwriting and service. By serving the flagship businesses of their
communities, our agents acquire powerful centers of influence.
Increased availability of technical expertise is a sales advantage in the
large account arena. This year we located loss control representatives in
Illinois, Indiana, Michigan and Pennsylvania. Graduates of the first Cincinnati
loss control training school will offer services to agents and insured
businesses across our operating territories during 1997. Bond representatives
also staffed new positions in Georgia and Illinois this year and are slated for
the Carolinas during 1997. They assist insured businesses with fidelity and
surety bonds and directors and officers liability policies.
LEVERAGED RELATIONSHIPS
Many agencies are successfully targeting increased sales of Cincinnati's
Dentist's Package Policy and Funeral Director's Policy, gaining access through
new endorsements from professional trade associations. During 1996, for
instance, 1,500 funeral directors in Michigan and Ohio learned that they could
have state-of-the-art policies serviced by local agents instead of central
administrators. During 1997, we will reach out to more associations to spread
the word about our exceptional professional liability products and local
service.
This trade association program channels a steady stream of referrals to
agents. Similarly, a reciprocal arrangement brings our agents referrals from a
European insurer who has no U.S. operations and whose policyholders are
relocating here. We are alert to opportunities presented, even to a regional
insurer like Cincinnati, by the global economy.
<PAGE> 3
INDEPENDENT AGENTS: THE VALUE-ADDED DISTRIBUTION SYSTEM
A SHIFTING PARADIGM
The Independent Insurance Agents of America released a study revealing
significant trends. There are now 44,000 agencies, down from 53,000 in 1987.
Average premium volume rose from $2.7 million to $4.5 million during this
period. Agency staffs grew to 10.1 persons versus nine people.
The majority of agency principals are under age 55. Market share for
independent agency companies is 76 percent and growing for commercial lines,
33.5 percent and declining for personal lines of insurance.
Cincinnati's agency census stands at 966 agencies in 65 territories within
26 states. Our agencies report that total volume with all of their carriers is
$7 million on average, $1.5 million of which they place with Cincinnati. Our
agencies represent 6.9 companies versus the median 7.1 carriers.
AN ELITE CORPS
Today's agencies are fewer, larger and more productive. As a selective
insurer with a strong franchise, we appoint agencies with marketing energy,
underwriting sense, a commitment to automation, healthy balance sheets and
perpetuation plans. Our agencies tend to be the acquirers and the growers, not
the acquired or stagnant.
These entrepreneurs run sales organizations. Their operations are
increasingly automated. They know we expect to be one of their top two carriers
and get most of their preferred business after just a few years. Agencies that
don't meet expectations risk losing their appointments or sharing their
territory with a competing agent. Our strategy is to have fewer agencies, to
know them better and to make sure they know our appetite for preferred business.
The
<PAGE> 4
people who sell our products don't send a lot of business we don't want to
write. This saves time and money for both the agent and Cincinnati.
Lower underwriting expenses allow more latitude for generous profit sharing
that differentiates our agency contract. We expect our agents to be high touch,
hands-on underwriters who operate high-tech, efficient operations. They earn
their pay by providing superior service to policyholders and superior quality
and quantity of premium to us. Another expense advantage is our local field
staff and decentralized structure. Marketing and claims representatives work out
of their homes in the agents' communities. They are vested with power to make
decisions and to act without going through a branch office.
CUSTOMER SATISFACTION AND THE FRANCHISE
Our agencies thrive because we focus on them as customers. We continue to
thrive because we listen to them. In Maryland, Arkansas and Minnesota, states
activated in early 1995, we had 1996 premium volume of $17.4 million. Agents
there welcomed us with their commercial business, and now that our regulatory
filings are approved, they are preparing to give us personal and life accounts.
New states typically have developed to about $25 million after six or seven
years. Customer satisfaction that creates demand for our franchise is an
extremely valuable resource.
To optimize that resource, we are expanding to new areas. We're also
dividing existing territories where more frequent visits to agencies will bring
us more business. During 1996, we added territories in eastern Pennsylvania and
Columbus, Cleveland and Cincinnati, Ohio. In early 1997, we are opening
territories in North Dakota; Springfield, Missouri; and Milwaukee, Wisconsin;
northern Michigan; South Dakota; Louisville, Kentucky; and two New York
territories. Over the next few years, we plan to appoint 78 agencies in this
year's new territories.
GROWTH OPPORTUNITIES: PERSONAL LINES
STABILITY COUNTS
Our message is getting through loud and clear to agents-- writing personal
lines is not a sideline for The Cincinnati Insurance Companies. This business
constitutes 31.1 percent of total net written premium volume. Relatively stable
pricing and high account retention give us steady results and help our agencies
weather market swings. This year's new personal lines direct business rose 20
percent to an all-time high of $46 million.
At a time when other carriers are walking away from the personal lines
market or experimenting with direct distribution, agents appreciate our rock
solid commitment. As they streamline their operations by reducing the number of
companies they represent, we find them willing to roll over entire books of
seasoned, profitable business.
The welcome mat is out in states where we previously marketed commercial
lines only. Agents in states just recently opened for commercial lines are ready
to commit and anxious for early introduction of personal lines. During 1996, we
initiated personal lines marketing in Vermont and Arkansas and appointed 25
agencies to sell personal auto insurance in Michigan. Slated for 1997 are
Maryland (homeowner only), Pennsylvania, Minnesota and North Dakota.
RATES IMPROVING
We anticipate approval in many jurisdictions of 5 percent auto rate
increases and 5-10 percent homeowner rate increases. The homeowner pure loss
ratio was 89.1 percent in 1996 due to a combination of rate inadequacy and
unusually frequent, severe storms. Expected rate increases and more normal
weather should return profitability to this line, which grew 11.5 percent during
1996. Auto premiums grew 8.3 percent with a 70.4 percent pure loss ratio.
MEETING OUR CUSTOMER
We're creating more opportunities to listen and respond to agents, our
customers. In addition to regular visits from their field marketing
representative, most agencies are visited annually by their underwriters. Many
agencies send producers or staff members to sales schools in Cincinnati.
Personal Lines executives and underwriters escort teams of knowledgeable,
empowered associates from Sales, Claims and Information Systems to agencies,
"blitzing" them with practical strategies and services designed to overcome any
obstacles increasing their Cincinnati personal lines business. Blitz teams
offered solutions to 60 agencies this year, gaining commitments of more than $3
million in premium.
<PAGE> 5
OPERATIONAL EFFICIENCY
PLANNING FOR TOMORROW
How can an organization in a growth mode assure that it will continue to
exceed customer expectations?
This is our challenge. Operational efficiency is the resource we have drawn
upon historically to get our competitive edge. Our associates do more with less,
while our departmental structure and internal processes allow us to deliver as
promised.
Cincinnati's decentralized field structure, lacking branch offices with
their layers of management, is one of the reasons that our noncommission
expenses are low. This savings gives us built-in flexibility to weather market
volatility and to price risks competitively.
The Long-Range Planning Committee recognizes that what worked when we were
a $100 million company may not work when we are a $2 billion company and beyond.
During 1996, they took the lead with several forward-looking initiatives
designed to reinvent internal processes and enhance growth, profitability and
our reputation for unparalleled service:
- - In the Commercial Lines Department, volunteers are forming cross-functional
teams, taking ownership of their work and finding new ways to improve service.
Goals, assignments and rewards are team decisions. People close to the work
control its flow and take responsibility for its progress.
- - Creative new contingency plans call for flexible staffing with
cross-departmental redeployment of associates to avoid service lags during peak
processing periods.
<PAGE> 6
- - The Information Systems Department commissioned an appraisal of our technical
direction. Recommendations move us toward integrated systems that give everyone
access, online and real time with no duplicate entry at headquarters, in the
field or in agencies. A new technical blueprint for our future will
accommodate policy issue, processing and printing either at CFC Headquaters or
an agency.
PAYING CLAIMS IS OUR BUSINESS
One of the secrets to Cincinnati's successful catastrophe claims handling
is undoubtedly cross-territorial sharing of responsibility. When a disaster
strikes, claims representatives from across the country volunteer to join storm
duty teams. Responsibilities shift as the volunteers travel to the disaster site
and do whatever it takes to help our policyholders. Of 11,718 catastrophe
claims filed during 1996, our worst catastrophe year ever, 96.5 percent are
now closed.
An efficient claims operation does more than adjust and pay claims. We work
to control recoverable or fraudulent insurance losses. At the end of 1996, a new
Subrogation and Salvage Unit was established to concentrate on recovering
claims-related costs and property. Another claims unit, Special Investigations,
is now staffed with ten investigators who do surveillance in fraudulent claims
situations.
The Illinois Department of Insurance placed Cincinnati at the top of a
recent list of insurers with the fewest complaints. Other state departments have
published such lists from time to time and we have consistently placed very
well. Claims handling proficiency is a resource that creates goodwill for your
Company among claimants and also among regulators responsible for the oversight
of our operations and products in their states.
GROWTH OPPORTUNITIES
THE CINCINNATI LIFE INSURANCE COMPANY
Many property and casualty agencies are becoming interested in ways to
mitigate the effects of weak commercial lines pricing. This is increasing our
opportunity to do more life insurance business with the 966 agencies
representing Cincinnati Insurance. On a statutory basis, 1996 Cincinnati Life
premiums written directly by our property and casualty agents rose 13 percent to
$78.2 million, accounting for most of the $89.3 million written premium total.
Currently, the top 50 agencies produce 44 percent of total new premium.
There is high growth potential as we gain deeper commitments from agencies that
are just beginning to market life insurance or just beginning to place it with
Cincinnati Life. Our first Life Agents Roundtable was held in February to plan
our future with selected agents.
1996 brought a focus on worksite marketing. These payroll deduction
programs are marketed as an employee benefit offered at little or no cost to
employers. Agents find that many of their commercial property and casualty
accounts are appropriate prospects. Payroll deduction premiums rose 11.9 percent
in 1996. We are supporting agents by offering meetings and workshops on
strategies for worksite marketing and on business and estate planning.
Cooperation with the property and casualty side is developing with regard
to their claim settlements. New arrangements have increased opportunities to
utilize Cincinnati Life annuities in structured settlements for Cincinnati
property and casualty claimants.
During 1996, Cincinnati Life located a marketing representative in
Minnesota to establish relationships with agencies. Minnesota was just opened in
1995 by Cincinnati Insurance. We are being aggressive about life business in
newer states, where agents are very excited about the Cincinnati franchise.
During 1996, we established a life regional director to work with our Arkansas
agents.
CFC INVESTMENT COMPANY
CFC Investment Company, our leasing and financing affiliate, increased
gross lease, notes and finance receivables by 34 percent to $53.2 million. Net
earnings were $1.2 million versus $272,000 in the prior year, which was affected
by a one-time accounting adjustment. As with all of the Company's operations, a
local presence seems to be a key factor. We placed leasing representatives in
our first field positions in 1995. This has been very successful and will
continue with new representatives going to Rockford, Illinois and Toledo, Ohio
during 1997.
<PAGE> 7
PRODUCT ADVANTAGES
ALL POLICIES ARE NOT ALIKE
Ever since the 1950s, when Cincinnati Insurance pioneered a combination
homeowner/auto policy, our product strategy has been to exceed expectations.
While some policies and coverages are fairly standard, Cincinnati often adds
some unique coverage or feature that agents can sell. An Executive Homeowner
Policy that includes earthquake...an Umbrella Liability Policy that has no
general aggregate limit...specialty package policies that combine property,
general liability and professional liability in one package policy. And, of
course, Cincinnati is known for offering multi-year guaranteed rates. This
feature gives policyholders rate stability and the convenience of a budgetable
expense over three or five years on a wide variety of coverages.
Cincinnati products are developed based on fresh market data. Our agents
are our real research and development department. Because we take every
opportunity to visit them and invite them to visit us, we receive constant
feedback about coverage products their clients need.
We launched improved Builders' Risk Coverage, Contractor's Errors and
Omissions and a new Employment Practices Liability Insurance (EPLI) during 1996.
The need for and terms of EPLI products are rapidly evolving. We took the lead
in the marketplace by making available protection against employment-related
discrimination and sexual harassment claims for small and medium-sized
employers. The exposure to risk has been growing for most businesses, but
coverage previously available primarily from excess and surplus carriers
required large minimum premiums inappropriate for small businesses. After less
than a year, annualized premiums reached approximately $1 million for this new
product.
During 1997 we are rolling out an improved Excess Liability Policy and
several new products. Our Special Accounts Marketing area developed a Commercial
Output Policy, a property cover for manufacturing risks. The Bond Department
will add Notary Public Errors
<PAGE> 8
and Omissions Coverage and the Service Industry Bond, the latter designed for
service businesses that work on their customers' premises--caterers, carpet
cleaners, locksmiths and many others. A new Metalworkers Package Policy offers
enhanced coverages to contractors such as machine shops, electrical parts
manufacturers, tool manufacturers, sheet metal or engraving operations.
AGENT-FOCUSED AND AGENT APPROVED
Consumer and agent surveys on homeowner, auto and commercial insurance
products consistently determine that Cincinnati is the insurer of choice.
Property/Casualty Rates & Ratings newsletter publishes results of monthly
surveys of 3,000 agents and brokers. Each issue looks at a different line of
commercial insurance in performance categories of competitiveness on pricing,
speedy responses, flexibility and reasonableness, timeliness of quotes,
technical expertise and efficient, fair claims payment.
The August issue summarized results for the previous 12 months. Cincinnati
achieved the highest score, taking the top spot for every single criterion in
the overall results computed across all surveyed lines. For individual product
surveys, Cincinnati earned higher overall scores than any other company for
commercial auto, commercial multi-peril and commercial general liability.
GROWTH OPPORTUNITY: INVESTMENTS
INCOME PLUS APPRECIATION
The Company's strong capital position means that, unlike some insurers, we
have the opportunity to be total return driven. Equities and equity-linked
convertibles provide us with increased cash flow and income through dividends,
plus higher net worth through long-term capital appreciation.
Approximately 60 percent of our portfolio is invested in equities. During
1996, the equity portfolio returned 24.4 percent versus the S & P 500's 22.1
percent return. Our return has topped the S & P's four of the past five years.
Eight of our ten largest stocks returned 22 percent or more, with our bank
stocks performing especially well. Barnett Bank returned 44 percent. National
City increased their cash dividend almost 25 percent and Fifth Third Bancorp
raised theirs 11.5 percent. In total, 36 of our 54 common stock holdings
increased dividends, adding gross annualized income of $7.3 million.
Selection of stocks with records of steadily increasing dividends has
resulted in a growth rate much higher than rates achieved by other insurers for
investment income. This year's 9.1 percent growth compares to estimated negative
growth for the industry.
MAKING MONEY WITH BONDS
We continue to see opportunities to make money with bonds only when there
is potential for upgrades. Our strategy is to acquire securities with credit
ratings single-A or lower, which excludes government bonds, in order to get
sufficient yield. During 1996, this strategy was rewarded with 84 bond upgrades.
As we begin 1997, the market is at a high level so we will continue to purchase
convertibles and bonds.
Our investment approach puts a premium on growing surplus. The rate of
return on equity including unrealized capital gains was 20.3 percent for 1996.
<PAGE> 9
Loss and loss expenses in notes to Financial Statements from page 27
(incorporated into Item 1)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
5. 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,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1 ........ $ 1,690,461 $ 1,510,150 $ 1,365,052
----------- ----------- -----------
Less reinsurance receivable 109,719 78,125 71,691
----------- ----------- -----------
Net balance at January 1 .... 1,580,742 1,432,025 1,293,361
----------- ----------- -----------
Incurred related to:
Current year .............. 1,183,251 1,040,541 948,581
Prior years ............... (151,996) (126,509) (92,892)
----------- ----------- -----------
Total incurred .............. 1,031,255 914,032 855,689
----------- ----------- -----------
Paid related to:
Current year .............. 514,186 396,856 373,721
Prior years ............... 395,396 368,459 343,304
----------- ----------- -----------
Total paid .................. 909,582 765,315 717,025
----------- ----------- -----------
Net balance at December 31 .. 1,702,415 1,580,742 1,432,025
Plus reinsurance receivable 121,881 109,719 78,125
----------- ----------- -----------
Balance at December 31 ...... $ 1,824,296 $ 1,690,461 $ 1,510,150
=========== =========== ===========
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss expenses decreased by $151,996,000, $126,509,000
and $92,892,000 in 1996, 1995 and 1994. 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 $56,871,000 and $53,073,000 at December31, 1996 and 1995,
respectively, for certain life/health losses and loss checks payable.
<PAGE> 10
"Price range of Common Stock" section from the inside back cover (incorporated
into Item 5)
PRICE RANGE OF COMMON STOCK
Cincinnati Financial Corporation had approximately 9,935 shareholders of
record as of December 31, 1996. Most of CFC's 2,506 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>
1996
Quarter 1st 2nd 3rd 4th
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
High $64 1/4 $63 1/2 $58 13/16 $65 3/16
Low 57 5/8 57 3/8 54 54 1/4
Dividend Paid .32 .37 .37 .37
1995*
Quarter 1st 2nd 3rd 4th
- ------------------------------------------------------------
High $51 9/16 $55 1/2 $53 9/16 $63 9/16
Low 46 1/16 49 1/2 48 13/16 51 9/16
Dividend Paid .29 .32 .32 .32
</TABLE>
* Adjusted to reflect a 5 percent stock dividend paid in April, 1996.
<PAGE> 11
"Selected Financial Information" from pages 14 and 15 (incorporated into Item 6)
SELECTED FINANCIAL INFORMATION
(000's omitted except per share data)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
TOTAL ASSETS........................................ $ 7,045,514 $ 6,109,298 $ 4,734,279 $ 4,602,288
LONG-TERM OBLIGATIONS............................... $ 79,847 $ 80,000 $ 80,000 $ 80,000
- -----------------------------------------------------------------------------------------------------------------------------
REVENUES
Premium Income...................................... $ 1,422,897 $ 1,314,126 $ 1,219,033 $ 1,140,791
Investment Income (Less Expense).................... 327,307 300,015 262,649 239,436
Realized Gains on Investments....................... 47,946 30,781 19,557 51,529
Other Income........................................ 10,599 10,729 11,267 10,396
NET INCOME BEFORE REALIZED GAINS
ON INVESTMENTS
In Total............................................ $ 192,595 $ 207,342 $ 188,538 $ 182,530*
Per Common Share.................................... 3.38 3.64 3.32 3.23*
NET INCOME
In Total............................................ $ 223,760 $ 227,350 $ 201,230 $ 216,024*
Per Common Share.................................... 3.92 3.99 3.54 3.81*
- -----------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED
Per Common Share.................................... $ 1.46 $ 1.28 $ 1.16 $ 1.02
- -----------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PAID
Per Common Share.................................... $ 1.43 $ 1.26 $ 1.12 $ 1.00
- -----------------------------------------------------------------------------------------------------------------------------
PROPERTY AND CASUALTY OPERATIONS
Gross Premiums Written.............................. $ 1,476,011 $ 1,377,426 $ 1,287,280 $ 1,216,766
Net Premiums Written................................ 1,383,525 1,295,852 1,190,824 1,123,780
Premiums Earned..................................... 1,366,544 1,263,257 1,169,940 1,092,135
Loss Ratio.......................................... 61.6% 57.6% 63.3% 63.5%
Loss Expense Ratio.................................. 13.8% 14.7% 9.8% 8.7%
Underwriting Expense Ratio.......................... 27.6% 27.1% 27.5% 27.9%
Combined Ratio...................................... 103.0% 99.4% 100.6% 100.1%
Investment Income Before Taxes...................... $ 190,318 $ 180,074 $ 162,260 $ 153,190
Property and Casualty Reserves
Unearned Premiums................................... $ 401,562 $ 385,418 $ 353,697 $ 333,550
Losses.............................................. 1,319,286 1,274,180 1,213,383 1,100,051
Loss Adjustment Expense............................. 383,135 306,570 218,642 193,305
Statutory Policyholders' Surplus.................... $ 1,608,084 $ 1,268,597 $ 998,595 $ 1,011,609
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 1993 earnings include a credit for $13,845,000 ($.24 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 $8,641,000 ($.15 per share) related
to the effect of the 1993 increase in income tax rates on deferred taxes
recorded for various prior year items.
<PAGE> 12
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988 1987 1986
- ------------- ------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$ 4,098,713 $ 3,513,749 $ 2,626,156 $ 2,602,990 $ 2,163,341 $ 1,828,032 $ 1,581,591
$ 80,000 $ 182 $ 202 $ 753 $ 890 $ 3,898 $ 8,468
- -------------------------------------------------------------------------------------------------------------------
$ 1,038,772 $ 947,576 $ 871,196 $ 813,313 $ 754,335 $ 747,266 $ 666,892
218,942 193,220 167,425 149,285 130,885 108,915 90,875
35,885 7,641 1,488 4,678 6,423 3,845 13,881
10,552 12,698 8,822 7,134 10,281 7,686 1,932
$ 147,669 $ 141,273 $ 128,052 $ 111,477 $ 124,618 $ 90,714 $ 83,477
2.66 2.57 2.35 2.06 2.33 1.71 1.56
$ 171,325 $ 146,280 $ 128,962 $ 114,490 $ 128,748 $ 93,154 $ 93,471
3.08 2.67 2.37 2.11 2.40 1.76 1.75
- -------------------------------------------------------------------------------------------------------------------
$ .93 $ .83 $ .73 $ .66 $ .52 $ .45 $ .38
- -------------------------------------------------------------------------------------------------------------------
$ .90 $ .81 $ .71 $ .63 $ .51 $ .43 $ .37
- -------------------------------------------------------------------------------------------------------------------
$ 1,089,901 $ 996,807 $ 896,204 $ 845,346 $ 782,143 $ 763,925 $ 686,026
1,014,971 930,296 838,554 790,971 718,853 702,785 639,861
992,335 903,465 828,046 771,205 712,771 687,429 601,472
63.8% 61.6% 61.6% 61.6% 55.1% 61.8% 60.5%
9.0% 9.2% 9.0% 9.0% 10.1% 10.4% 10.1%
29.0% 28.9% 29.0% 29.1% 30.7% 27.5% 25.9%
101.8% 99.7% 99.6% 99.7% 95.9% 99.7% 96.5%
$ 141,958 $ 126,332 $ 110,827 $ 97,661 $ 84,379 $ 67,871 $ 54,791
$ 302,473 $ 280,404 $ 254,000 $ 244,011 $ 224,545 $ 218,840 $ 203,745
960,571 825,952 692,081 616,730 522,162 449,159 321,221
177,262 160,260 140,501 124,993 109,323 84,359 56,147
$ 933,529 $ 735,557 $ 477,355 $ 494,460 $ 422,521 $ 346,623 $ 274,764
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Per share data adjusted for three-for-one stock split in 1992 and stock
dividends of 5 percent in 1996, 1995 and 1987.
<PAGE> 13
Management Discussion from pages 16 through 18 (incorporated into Item 1 and 7)
MANAGEMENT DISCUSSION
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
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 $223.8million net income for 1996 reflected a $3.6million,
1.6 percent, decrease from 1995. Net income for 1995 and 1994, respectively,
reflected a 13percent increase and 6.9percent decrease from the preceding years.
Realized gains on investments (net of income taxes) were $31.2million for 1996,
compared to $20million in 1995 and $12.7million in 1994. The effect on income
per share (adjusted to reflect 5percent stock dividends paid in April,1996 and
1995) of various matters discussed herein is illustrated in the following
summary:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Net income excluding
the items below................ $4.11 $3.95 $3.56
Realized gains................... .54 .35 .22
Catastrophe losses............... (.73) (.31) (.24)
----- ----- -----
Net income per share............. $3.92 $3.99 $3.54
===== ===== =====
</TABLE>
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 $1.367 billion for 1996, an increase of 8.2 percent over 1995. 1995
and 1994 reflected increases of 8 percent and 7.1 percent, respectively. The
combined loss and expense ratio for the Company's property and casualty
operations was 103 percent for 1996, 99.4 percent for 1995 and 100.6 percent for
1994. The catastrophe losses affected the combined loss and expense ratio by
4.7 percent, 2.1 percent and 1.8 percent for the years 1996, 1995 and 1994,
respectively. The expense ratio increased .5 percent for the year 1996, while it
had declined by .4 percent for the years 1995 and 1994. The increase in 1996 is
attributable to increases in staff and costs associated with the upgrading of
our computer systems to handle projected increases in written premium and to
make our systems year-2000 compliant.
The Company incurred catastrophe losses of $64.7 million, $27.1 million and
$20.7 million in 1996, 1995 and 1994, 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 $200 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 was $56.4 million, $50.9
million and $49.1 million for the years 1996, 1995 and 1994, respectively.
The increase of 10.8% for the year 1996 compared to the relatively
no-growth years of 1995 and 1994 was the result of increased sales of both
traditional and interest-sensitive products. The Company continues to help our
independent agents identify, recruit and train life insurance producers for
their agencies; and these efforts are resulting in increased life insurance
sales.
Investment income increased 9.1 percent to $327.3million in 1996.
Investment income was $300 million in 1995 and $262.6 million in 1994,
increases of 14.2 percent and 9.7 percent, respectively. Increases in
investment income have principally been the result of investing the cash flows
from operating activities and dividend increases from equity securities.
The Company's income tax expense was $58.7 million, $67.8 million and
$48.1 million for 1996, 1995 and 1994, respectively. The Company's effective tax
rate was 20.77%, 22.98% and 19.29% for 1996, 1995 and 1994, respectively. The
lower 1996 effective tax rate is partially the result of a higher percentage of
net income earned from tax-exempt interest on state, municipal and political
subdivision fixed maturities and dividends received on our equity investments.
The Company incurred no additional alternative minimum tax expense for 1996,
1995 and 1994. 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.
<PAGE> 14
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CASH FLOWS AND LIQUIDITY
Net cash provided by operating activities amounted to $308.3 million,
$389.5 million and $328.5 million for 1996, 1995 and 1994, 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 5 percent of gross premiums in each of the
last three years.
The Company used $224.8 million in 1996, $443.9 million in 1995 and
$320.2 million in 1994 in investing activities. Cash flows used in net purchases
of fixed maturity and equity securities, respectively, amounted to $98 million
and $95.4 million in 1996, $309.7 million and $114.9 million in 1995 and
$209.1 million and $92.2million in 1994.
Notes payable increased $41.1 million in 1996, $91.9 million in 1995 and
$51.1 million in 1994. The growth of the Company required increased cash flows
for the operating and investing activities.
Cash and marketable securities of $6.362 billion make up 90.3 percent of
the Company's $7.046 billion of assets; this compares to 90.2 percent in 1995.
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.
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, 1996
has an average yield-to-cost of 8.3 percent and an average maturity of 12years.
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, 1996 and 1995, investments totaling approximately
$729 million and $813 million, respectively ($706 million and $789 million at
cost), of the Company's $6.355 billion and $5.536 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
14 percent of invested assets as of December 31, 1996, compared to 16 percent in
1995 and 18 percent in 1994.
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, 1996 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 38 years.
Unrealized
<PAGE> 15
MANAGEMENT DISCUSSION
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
appreciation, before deferred income taxes, on equity investments was
$2.203 billion as of December 31, 1996 and constituted 35 percent of the total
investment portfolio; 59 percent of the equities investment portfolio; and,
after deferred income taxes, 45 percent of total shareholders' equity. Such
unrealized appreciation, before deferred income taxes, amounted to $1.618
billion and $941 million at December 31, 1995 and 1994, respectively.
SHAREHOLDERS' EQUITY AND LONG- AND SHORT-TERM DEBT
At December 31, 1996, shareholders' equity was $3.163 billion.
Shareholders' equity was 45 percent of assets in 1996, 44 percent in 1995 and
41 percent in 1994. During 1996, shareholders' equity increased $505 million.
This increase included a $368 million increase in unrealized appreciation on
investments discussed above, net of income tax effects. During 1995 and 1994,
respectively, shareholders' equity increased $718 million and decreased $7
million, of which $558 million increase and $227 million decrease were related
to the change in unrealized appreciation on 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, 1996 and 1995. At December 31, 1996 and
1995, long-term debt consisted of $80 million of convertible debentures.
Short-term debt amounted to $262 million, up from $221 million in 1995 and $129
million in 1994. The additional borrowings were used to provide additional
working capital as previously discussed in the Cash Flows and Liquidity section
of Management Discussion.
<PAGE> 16
Independent Auditor's Report and Financial Statements from pages 19 through 30
(incorporated into Items 8 and 14)
INDEPENDENT AUDITORS' REPORT
[DELOITTE & TOUCHE LLP 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 December31, 1996 and 1995 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December31, 1996. 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, 1996 and 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 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.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
February 5, 1997
<PAGE> 17
CONSOLIDATED BALANCE SHEETS
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, at fair value (cost: 1996--$2,431,785,000;
1995--$2,298,718,000) .................................... $ 2,561,805,000 $ 2,446,995,000
Equity securities, at fair value (cost: 1996--$1,537,189,000;
1995--$1,423,671,000) .................................... 3,740,180,000 3,041,762,000
Other invested assets ....................................... 53,004,000 46,963,000
Cash ........................................................... 59,933,000 20,019,000
Investment income receivable ................................... 70,446,000 65,045,000
Finance receivables ............................................ 26,864,000 20,282,000
Premiums receivable ............................................ 162,045,000 161,117,000
Reinsurance receivable ......................................... 115,906,000 103,683,000
Prepaid reinsurance premiums ................................... 22,924,000 21,835,000
Deferred acquisition costs pertaining to unearned
premiums and to life policies in force ...................... 127,588,000 119,589,000
Land, buildings and equipment for Company use (at cost, less
accumulated depreciation: 1996--$82,820,000;
1995--$73,153,000) .......................................... 39,486,000 33,056,000
Other assets ................................................... 65,333,000 28,952,000
--------------- ---------------
Total assets ............................................. $ 7,045,514,000 $ 6,109,298,000
=============== ===============
LIABILITIES
Insurance reserves
Losses and loss expenses .................................... $ 1,881,167,000 $ 1,743,534,000
Life policy reserves ........................................ 440,281,000 403,264,000
Unearned premiums .............................................. 425,750,000 408,624,000
Other liabilities .............................................. 116,589,000 107,060,000
Deferred income taxes .......................................... 676,893,000 487,840,000
Notes payable .................................................. 262,098,000 221,005,000
5.5% convertible senior debentures due 2002 .................... 79,847,000 80,000,000
--------------- ---------------
Total liabilities ........................................ 3,882,625,000 3,451,327,000
--------------- ---------------
SHAREHOLDERS' EQUITY
Common stock, par value--$2 per share; authorized
80,000,000 shares; issued, 1996--55,828,615;
1995--53,084,081 ............................................ 111,657,000 106,168,000
Paid-in capital ................................................ 401,862,000 237,172,000
Retained earnings .............................................. 1,132,880,000 1,156,627,000
Unrealized gains on investments ................................ 1,527,707,000 1,159,388,000
--------------- ---------------
3,174,106,000 2,659,355,000
Less treasury shares at cost (1996--192,139 shares;
1995--27,147 shares) ........................................ (11,217,000) (1,384,000)
--------------- ---------------
Total shareholders' equity ............................... 3,162,889,000 2,657,971,000
--------------- ---------------
Total liabilities and shareholders' equity ............... $ 7,045,514,000 $ 6,109,298,000
=============== ===============
</TABLE>
Accompanying notes are an integral part of this statement.
<PAGE> 18
Consolidated Statements of Income
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
REVENUE
Premium income
Property and casualty ............. $ 1,366,544,000 $ 1,263,257,000 $ 1,169,940,000
Life .............................. 48,694,000 43,551,000 41,888,000
Accident and health ............... 7,659,000 7,318,000 7,205,000
--------------- --------------- ---------------
Net premiums earned ............... 1,422,897,000 1,314,126,000 1,219,033,000
Investment income .................... 327,307,000 300,015,000 262,649,000
Realized gains on investments ........ 47,946,000 30,781,000 19,557,000
Other income ......................... 10,599,000 10,729,000 11,267,000
--------------- --------------- ---------------
Total revenues .................... 1,808,749,000 1,655,651,000 1,512,506,000
--------------- --------------- ---------------
BENEFITS AND EXPENSES
Insurance losses and policyholder
benefits .......................... 1,087,105,000 964,216,000 900,814,000
Commissions .......................... 259,291,000 244,862,000 230,551,000
Other operating expenses ............. 117,034,000 97,909,000 85,405,000
Taxes, licenses and fees ............. 43,392,000 38,887,000 39,070,000
Increase in deferred acquisition costs
pertaining to unearned premiums and
to life policies in force ......... (7,999,000) (10,086,000) (5,412,000)
Interest expense ..................... 20,102,000 17,231,000 9,961,000
Other expenses ....................... 7,403,000 7,444,000 2,789,000
--------------- --------------- ---------------
Total benefits and expenses ....... 1,526,328,000 1,360,463,000 1,263,178,000
--------------- --------------- ---------------
INCOME BEFORE INCOME TAXES .............. 282,421,000 295,188,000 249,328,000
--------------- --------------- ---------------
PROVISION FOR INCOME TAXES
Current .............................. 67,827,000 76,012,000 64,229,000
Deferred ............................. (9,166,000) (8,174,000) (16,131,000)
--------------- --------------- ---------------
58,661,000 67,838,000 48,098,000
--------------- --------------- ---------------
NET INCOME .............................. $ 223,760,000 $ 227,350,000 $ 201,230,000
=============== =============== ===============
PER COMMON SHARE
Net Income ........................... $ 3.92 $ 3.99* $ 3.54*
=============== =============== ===============
Cash dividends (declared) ............ $ 1.46 $ 1.28* $ 1.16*
=============== =============== ===============
</TABLE>
*Adjusted to reflect a 5 percent stock dividend paid in April, 1996.
Accompanying notes are an integral part of this statement.
<PAGE> 19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Treasury Paid-In
Stock Stock Capital
---------------- ---------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1993............ $ 100,626,000 $ (396,000) $ 102,235,000
Effect of a change in accounting for
fixed maturity investments, net
of income taxes of $42,722,000.....
Net income............................
Change in unrealized
gains on investments...............
Income taxes on unrealized
gains..............................
Dividends declared....................
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
Net income............................
Change in unrealized
gains on investments...............
Income taxes on unrealized
gains..............................
Dividends declared....................
5% stock dividend at market........... 5,043,000 127,338,000
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
Net income............................
Change in unrealized
gains on investments...............
Income taxes on unrealized
gains..............................
Dividends declared....................
5% stock dividend at market........... 5,304,000 160,453,000
Purchase/issuance of treasury shares.. (9,833,000) 870,000
Stock options exercised............... 178,000 3,221,000
Conversion of debentures.............. 7,000 146,000
---------------- ---------------- --------------
Balance, December 31, 1996............ $ 111,657,000 $ (11,217,000) $ 401,862,000
================ ================ ==============
Unrealized
Retained Gains on
Earnings Investments
----------------- -----------------
<S> <C> <C>
Balance, December 31, 1993............ $ 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..
Stock options exercised...............
----------------- -----------------
Balance, December 31, 1994............ 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........... (132,566,000)*
Purchase/issuance of treasury shares..
Stock options exercised...............
----------------- -----------------
Balance, December 31, 1995............ 1,156,627,000 1,159,388,000
Net income............................ 223,760,000
Change in unrealized
gains on investments............... 566,644,000
Income taxes on unrealized
gains.............................. (198,325,000)
Dividends declared.................... (81,498,000)
5% stock dividend at market........... (166,009,000)*
Purchase/issuance of treasury shares..
Stock options exercised...............
Conversion of debentures..............
----------------- -----------------
Balance, December 31, 1996............ $ 1,132,880,000 $ 1,527,707,000
================= =================
</TABLE>
*Includes $183,718 and $251,851 for fractional shares paid in April, 1995 and
1996, respectively.
Accompanying notes are an integral part of this statement.
<PAGE> 20
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 223,760,000 $ 227,350,000 $201,230,000
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation and amortization.......................... 7,100,000 9,641,000 9,923,000
Increase in investment income receivable............... (5,401,000) (8,976,000) (5,949,000)
Increase in premiums receivable........................ (928,000) (19,145,000) (7,611,000)
Increase in reinsurance receivable..................... (12,223,000) (36,558,000) (8,064,000)
(Increase) decrease in prepaid reinsurance premiums.... (1,089,000) 2,231,000 (100,000)
Increase in deferred acquisition costs................. (7,999,000) (10,086,000) (5,412,000)
(Increase) decrease in accounts receivable............. (2,080,000) (3,900,000) 1,209,000
Increase in loss and loss expense reserves............. 137,633,000 191,237,000 149,790,000
Increase in life policy reserves....................... 37,017,000 33,169,000 24,118,000
Increase in unearned premiums.......................... 17,126,000 26,505,000 20,107,000
Increase (decrease) in other liabilities............... 6,984,000 9,522,000 (7,274,000)
Decrease in deferred income taxes...................... (9,272,000) (8,174,000) (16,131,000)
Realized gains on investments.......................... (47,946,000) (30,781,000) (19,557,000)
Other.................................................. (34,343,000) 7,472,000 (7,801,000)
--------------- --------------- ---------------
Net cash provided by operating activities........... 308,339,000 389,507,000 328,478,000
--------------- --------------- ---------------
Cash flows from investing activities:
Sale of fixed maturities investments...................... 219,131,000 118,986,000 83,360,000
Call or maturity of fixed maturities investments.......... 247,205,000 187,320,000 207,843,000
Sale of equity securities investments..................... 257,981,000 255,542,000 250,722,000
Collection of finance receivables......................... 10,449,000 8,222,000 6,567,000
Purchase of fixed maturities investments.................. (564,317,000) (616,001,000) (500,283,000)
Purchase of equity securities investments................. (353,340,000) (370,445,000) (342,949,000)
Investment in land, buildings and equipment............... (18,555,000) (10,806,000) (11,356,000)
Investment in finance receivables......................... (17,032,000) (12,335,000) (9,725,000)
Increase in other invested assets......................... (6,273,000) (4,398,000) (4,416,000)
--------------- --------------- ---------------
Net cash used in investing activities............... (224,751,000) (443,915,000) (320,237,000)
--------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from stock options exercised..................... 3,399,000 4,113,000 3,745,000
Purchase/issuance of treasury shares...................... (8,963,000) (287,000) (460,000)
Increase in notes payable................................. 41,093,000 91,889,000 51,050,000
Payment of cash dividends to shareholders................. (79,203,000) (69,542,000) (62,436,000)
--------------- --------------- ---------------
Net cash (used) provided in financing activities.... (43,674,000) 26,173,000 (8,101,000)
--------------- --------------- ---------------
Net increase (decrease) in cash.............................. 39,914,000 (28,235,000) 140,000
Cash at beginning of year.................................... 20,019,000 48,254,000 48,114,000
--------------- --------------- ---------------
Cash at end of year.......................................... $ 59,933,000 $ 20,019,000 $ 48,254,000
=============== =============== ===============
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 20,922,000 $ 16,001,000 $ 10,216,000
=============== =============== ===============
Income taxes paid......................................... $ 65,000,000 $ 67,000,000 $ 71,192,000
=============== =============== ===============
</TABLE>
Accompanying notes are an integral part of this statement.
<PAGE> 21
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 10 1/2%. Interest rates on approximately $296,000,000 and $271,000,000 of
such reserves at December 31, 1996 and 1995, 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, 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--Deferred tax liabilities and assets are computed using the tax
rates in effect for the time when temporary differences in book and taxable
income are estimated to reverse. Deferred income taxes are recognized for
numerous temporary differences between the Company's taxable income and
book-basis income and other changes in shareholders' equity. Such temporary
differences relate primarily to unrealized
<PAGE> 22
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
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.
RECLASSIFICATIONS--Certain prior year amounts have been reclassified to conform
with 1996 classifications.
2. INVESTMENTS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Investment income summarized by investment category (000's omitted):
Interest on fixed maturities.................................................. $ 208,907 $ 186,071 $ 158,015
Dividends on equity securities................................................ 118,932 111,458 103,307
Other investment income....................................................... 5,744 6,480 5,434
---------- ---------- -----------
Total...................................................................... 333,583 304,009 266,756
Less investment expenses...................................................... 6,276 3,994 4,107
---------- ---------- -----------
Net investment income...................................................... $ 327,307 $ 300,015 $ 262,649
========== ========== ===========
Realized gains on investments summarized by investment category
(000's omitted):
Fixed maturities:
Gross realized gains....................................................... $ 20,823 $ 14,466 $ 13,570
Gross realized losses...................................................... (10,207) (7,263) (6,058)
Equity securities:
Gross realized gains....................................................... 47,310 38,705 31,785
Gross realized losses...................................................... (9,980) (15,127) (19,740)
---------- ---------- -----------
Realized gains on investments.............................................. $ 47,946 $ 30,781 $ 19,557
========== ========== ===========
Change in unrealized gains on investments summarized by investment
category (000's omitted):
Fixed maturities.............................................................. $ (18,257) $ 181,475 $ (154,883)
Equity securities............................................................. 584,901 677,288 (193,828)
---------- ---------- -----------
Change in unrealized gains on investments.................................. $ 566,644 $ 858,763 $ (348,711)
========== ========== ===========
</TABLE>
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Analysis of cost, gross unrealized gains, gross unrealized losses and fair value
as of December 31, 1996 and 1995 (000's omitted):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
1996 Cost Gains Losses Value
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Fixed maturities:
States, municipalities and political subdivisions.. $ 838,008 $ 38,457 $ 1,092 $ 875,373
Convertibles and bonds with warrants attached...... 125,629 7,626 1,630 131,625
Public utilities................................... 85,573 3,697 349 88,921
United States government and government
agencies and authorities........................ 8,790 156 143 8,803
All other corporate bonds.......................... 1,373,785 88,713 5,415 1,457,083
------------- ------------- ------------ -------------
Total........................................... $ 2,431,785 $ 138,649 $ 8,629 $ 2,561,805
============= ============= ============ =============
Equity securities..................................... $ 1,537,189 $ 2,207,805 $ 4,814 $ 3,740,180
============= ============= ============ =============
1995
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
============= ============= ============ =============
</TABLE>
Maturity dates for investments in fixed maturity securities as of December 31,
1996 (000's omitted):
<TABLE>
<CAPTION>
Fair % of
Cost Value Fair Value
------------- ------------ ----------
Maturity dates occurring:
<S> <C> <C> <C>
One year or less................................... $ 64,453 $ 68,063 2.7
After one year through five years.................. 192,039 202,923 7.9
After five years through ten years................. 959,396 1,006,854 39.3
After ten years.................................... 1,215,897 1,283,965 50.1
------------- ------------ -----
Total........................................... $ 2,431,785 $ 2,561,805 100.0
============= ============ =====
</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>
1996 1995
--------------------------------- ---------------------------------
Fair Fair
Cost Value Cost Value
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Fifth Third Bancorp common stock...... $ 238,087 $ 1,331,625 $ 185,345 $ 988,417
Alltel Corporation common stock....... $ 95,720 $ 399,252 $ 95,720 $ 375,392
</TABLE>
3. DEFERRED ACQUISITION COSTS
Acquisition costs incurred and capitalized during 1996, 1995 and 1994
amounted to $303,111,000, $282,399,000 and $259,092,000, respectively.
Amortization of deferred acquisition costs was $295,112,000, $272,313,000 and
$253,680,000 for 1996, 1995 and 1994, respectively.
4. CONVERTIBLE SENIOR DEBENTURES
The convertible senior debentures are convertible by the debenture holders
into shares of common stock at a conversion price of $44.63 (22.41 shares for
each $1,000 principal). At December 31, 1996 and 1995, the fair value of the
debentures approximated $115,000,000 and $112,000,000, respectively.
<PAGE> 24
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
5. 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,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1 ........ $ 1,690,461 $ 1,510,150 $ 1,365,052
Less reinsurance receivable 109,719 78,125 71,691
----------- ----------- -----------
Net balance at January 1 .... 1,580,742 1,432,025 1,293,361
----------- ----------- -----------
Incurred related to:
Current year .............. 1,183,251 1,040,541 948,581
Prior years ............... (151,996) (126,509) (92,892)
----------- ----------- -----------
Total incurred .............. 1,031,255 914,032 855,689
----------- ----------- -----------
Paid related to:
Current year .............. 514,186 396,856 373,721
Prior years ............... 395,396 368,459 343,304
----------- ----------- -----------
Total paid .................. 909,582 765,315 717,025
----------- ----------- -----------
Net balance at December 31 .. 1,702,415 1,580,742 1,432,025
Plus reinsurance receivable 121,881 109,719 78,125
----------- ----------- -----------
Balance at December 31 ...... $ 1,824,296 $ 1,690,461 $ 1,510,150
=========== =========== ===========
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss expenses decreased by $151,996,000, $126,509,000
and $92,892,000 in 1996, 1995 and 1994. 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 $56,871,000 and $53,073,000 at December 31, 1996 and 1995,
respectively, for certain life/health losses and loss checks payable.
6. 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>
1996 1995
--------- --------
<S> <C> <C>
Ordinary/Traditional Life...... $ 123,473 $111,442
Universal Life................. 183,967 166,634
Annuities...................... 112,496 104,625
Industrial..................... 16,881 17,411
Other.......................... 3,464 3,152
--------- --------
Total........................ $ 440,281 $403,264
========= ========
</TABLE>
At December 31, 1996 and 1995, the fair value associated with the annuities
shown above approximated $114,000,000 and $105,000,000, respectively.
7. NOTES PAYABLE
The Company and subsidiaries had no compensating balance requirement on
debt for either 1996 or 1995. Notes payable in the accompanying balance sheets
are short term, and interest rates charged on such borrowings ranged from 4.75%
to 8.50% during 1996 which resulted in an average interest rate of 6.34%. At
December 31, 1996 and 1995, the fair value of the notes payable approximated the
carrying value and the weighted average interest rate approximated 6.12% and
6.51%, respectively.
8. REINSURANCE
Property and casualty premium income in the accompanying statements of
income includes approximately $41,139,000, $36,956,000 and $63,746,000 of earned
premiums on assumed business and is net of approximately $91,396,000,
$83,805,000 and $100,842,000 of earned premiums on ceded business for 1996, 1995
and 1994, respectively.
Written premiums for 1996, 1995 and 1994 consist of the following (000's
omitted):
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Direct business..... $1,433,340 $1,338,205 $1,233,948
Assumed business.... 42,671 39,221 53,332
Ceded business...... (92,486) (81,574) (96,456)
---------- ---------- ----------
Net............... $1,383,525 $1,295,852 $1,190,824
========== ========== ==========
</TABLE>
Insurance losses and policyholder benefits in the accompanying statements
of income are net of approximately $44,770,000, $40,316,000 and $33,645,000 of
reinsurance recoveries for 1996, 1995 and 1994, respectively.
9. FEDERAL INCOME TAXES
Significant components of the Company's net deferred tax liability as of
December 31, 1996 and 1995 are as follows (000's omitted):
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on investments... $ 816,554 $618,229
Deferred acquisition costs....... 38,966 37,981
Other............................ 8,447 10,379
--------- --------
Total............................ 863,967 666,589
--------- --------
Deferred tax assets:
Losses and loss expense reserves. 133,692 128,758
Unearned premiums................ 28,109 27,008
Life policy reserves............. 15,962 16,844
Other............................ 9,311 6,139
--------- --------
Total............................ 187,074 178,749
--------- --------
Net deferred tax liability......... $ 676,893 $487,840
========= ========
</TABLE>
The provision for federal income taxes is based upon a consolidated income
tax return for the Company and subsidiaries.
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
The differences between the statutory federal rates and the Company's
effective federal income tax rates are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
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....... (6.41) (6.10) (7.40)
Dividend exclusion............... (8.50) (8.04) (8.71)
Other............................ .68 2.12 .40
----- ----- -----
Effective rate..................... 20.77 22.98 19.29
===== ===== =====
</TABLE>
No provision has been made (at December 31, 1996, 1995 and 1994) 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, 1996 and 1995 (000's omitted):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Actuarial present value of
accumulated benefit obligation
(vested benefits: 1996--$29,704;
1995--$27,873) ................... $ 30,740 $ 28,770
======== ========
Plan assets at fair value .......... $ 92,740 $ 79,210
Actuarial present value of projected
benefit obligation ............... 54,208 49,425
-------- --------
Plan assets in excess of projected
benefit obligation ............... 38,532 29,785
Unrecognized net transition asset at
January 1, 1987 ($7,774 amortized
over 21 years) ................... (4,072) (4,442)
Unrecognized prior service costs ... (437) (476)
Unrecognized net gain .............. (34,730) (25,138)
-------- --------
Accrued pension cost ............... $ (707) $ (271)
======== ========
</TABLE>
Net pension expense for 1996, 1995 and 1994 includes the following
components (000's omitted):
1996 1995 1994
------- -------- --------
Service cost for current year. $ 3,306 $ 2,555 $ 2,682
Interest cost................. 3,572 3,014 2,788
Actual return on plan assets.. (15,057) (20,717) 1,571
Net amortization and deferral. 8,615 14,720 (7,009)
------- -------- --------
Net pension expense........... $ 436 $ (428) $ 32
======= ======== ========
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation as of December31 was 7%, 6.75%
and 7.25% in 1996, 1995 and 1994, 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, 1996, 1995 and 1994.
11. SHAREHOLDERS' EQUITY AND RESTRICTION
The insurance subsidiaries paid cash dividends to the Company of
approximately $77,027,000, $143,773,000 and $85,700,000 in 1996, 1995 and 1994,
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 1997, the total dividends that can
be paid to the Company without regulatory approval are approximately
$159,281,000.
521,735 shares of common stock were available for future stock option
grants, as of December 31, 1996.
12. 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,
---------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net income:
Property/casualty insurance
subsidiaries............. $136,041 $152,003 $125,684
Life/health insurance
subsidiary............... $ (1,812) $ 7,096 $ 13,438
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Shareholders' equity:
Property/casualty insurance subsidiaries $1,378,681 $1,048,343
Life/health insurance subsidiary ....... $ 214,130 $ 195,100
</TABLE>
13. TRANSACTION WITH AFFILIATED PARTIES
The Company paid certain officers and directors, or insurance agencies of
which they are shareholders, commissions of approximately $10,874,000,
$10,034,000 and $7,824,000 on premium volume of approximately $70,418,000,
$60,720,000 and $45,811,000 for 1996, 1995 and 1994, respectively.
<PAGE> 26
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
14. STOCK OPTIONS
The Company has primarily qualified stock option plans under which options
are granted to employees of the Company at prices which are not less than market
price at the date of grant and which are exercisable over ten-year periods. The
Company applies APB Opinion 25 and related Interpretations in accounting for
these plans. Accordingly, no compensation cost has been recognized for the stock
option plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No.123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C> <C>
Net income As reported $ 223,760,000 $ 227,350,000
Pro forma 221,683,000 227,106,000
Net income per common share As reported $ 3.92 $ 3.99
Pro forma 3.89 3.98
</TABLE>
In determining the pro forma amounts above, the fair value of each option
was estimated on the date of grant using the Binomial option-pricing model with
the following weighted-average assumptions used for grants in 1996 and 1995,
respectively: dividend yield of 2.26% for both years; expected volatility of
20.50% and 21.28%; risk-free interest rates of 6.56% and 5.73%; and expected
lives of 10 years for both years. Compensation cost comprehended in the above
pro forma disclosures is not indicative of future amounts (when the SFAS No.123
methodology will be applied to outstanding nonvested awards).
A summary of options information for the years ended December 31, 1996,
1995 and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------- ---------------------------- ---------------------------
Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average
Exercise Price Exercise Price Exercise Price
------- ------- ------- -------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 895,249 $ 40.24 892,131 $ 36.19 963,263 $33.71
Granted 512,603 60.76 155,713 53.17 85,995 45.05
Exercised (90,926) 37.38 (136,291) 29.18 (135,401) 25.19
Forfeited/Revoked (58,762) 58.68 (16,304) 39.91 (21,726) 38.77
--------- -------- --------
Outstanding at end of year 1,258,164 47.93 895,249 40.24 892,131 35.98
========= ======== ========
Options exercisable at end of year 652,010 641,655 566,175
Weighted-average fair value of
options granted during the year $ 20.41 $ 15.80
</TABLE>
Options outstanding at December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------- -----------------------------------
Range of Weighted-Average
Exercise Remaining Weighted-Average Weighted-Average
Prices Number Contractual Life Exercise Price Number Exercise Price
------ ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
$ 12 to 16 75,840 1.10 yrs $ 12.91 75,840 $12.91
23 to 32 57,966 3.58 yrs 25.57 57,966 25.57
35 to 43 295,444 5.11 yrs 36.90 295,444 36.90
45 to 60 451,239 7.93 yrs 52.57 222,760 50.19
63 to 65 377,675 9.35 yrs 61.49 0 0
--------- -------
12 to 65 1,258,164 7.08 yrs 47.93 652,010 37.64
========= =======
</TABLE>
<PAGE> 27
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
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Property/casualty insurance ............................... $ (44,449) $ 2,894 $ (5,703)
Life/health insurance ..................................... (2,906) (2,512) (1,691)
Investment income (less required interest on life reserves) 305,211 279,346 244,347
Realized gains on investments ............................. 47,946 30,781 19,557
Other ..................................................... 3,337 4,979 5,874
General corporate expenses ................................ (26,718) (20,300) (13,056)
----------- ----------- -----------
Total .................................................. $ 282,421 $ 295,188 $ 249,328
=========== =========== ===========
Identifiable Assets
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Property/casualty insurance ............................... $ 3,986,658 $ 3,526,900 $ 2,830,788
Life/health insurance ..................................... 902,354 809,418 689,838
Other ..................................................... 53,351 44,487 44,006
Corporate assets .......................................... 2,103,151 1,728,493 1,169,647
----------- ----------- -----------
Total .................................................. $ 7,045,514 $ 6,109,298 $ 4,734,279
=========== =========== ===========
</TABLE>
<PAGE> 28
Selected Quarterly Financial Data from page 30 (incorporated into Item 8)
SELECTED QUARTERLY FINANCIAL DATA
Financial data for each quarter in the two years ended December 31 (000's
omitted except per share data)
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 451,798 $ 442,042 $ 455,681 $ 459,227 $ 1,808,749
Income Before Income Taxes.............. 76,449 67,022 58,658 80,291 282,421
Net Income.............................. 59,448 54,396 46,949 62,966 223,760
Net Income Per Share.................... 1.04 .95 .82 1.10 3.92
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*................... 1.11 .97 1.03 .88 3.99
</TABLE>
* Adjusted to reflect a 5 percent stock dividend paid in April, 1996.
Note: The sum of the quarterly reported amounts may not equal the full year as
each is computed independently.
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the 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 5, 1997, appearing in and
incorporated by reference in the Annual Report on Form 10-K of Cincinnati
Financial Corporation for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
March 18, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 2,561,805
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,740,180
<MORTGAGE> 9,207
<REAL-ESTATE> 15,449
<TOTAL-INVEST> 6,354,989<F1>
<CASH> 59,933
<RECOVER-REINSURE> 6,984
<DEFERRED-ACQUISITION> 127,588
<TOTAL-ASSETS> 7,045,514
<POLICY-LOSSES> 2,269,993<F2>
<UNEARNED-PREMIUMS> 425,750
<POLICY-OTHER> 48,183<F2>
<POLICY-HOLDER-FUNDS> 11,216
<NOTES-PAYABLE> 341,945<F3>
<COMMON> 100,440<F4>
0
0
<OTHER-SE> 3,062,449<F4>
<TOTAL-LIABILITY-AND-EQUITY> 7,045,514
1,422,897
<INVESTMENT-INCOME> 327,307
<INVESTMENT-GAINS> 47,946
<OTHER-INCOME> 10,599
<BENEFITS> 1,087,105
<UNDERWRITING-AMORTIZATION> 295,112<F5>
<UNDERWRITING-OTHER> 144,111<F5>
<INCOME-PRETAX> 282,421
<INCOME-TAX> 58,661
<INCOME-CONTINUING> 223,760
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 223,760
<EPS-PRIMARY> 3.92
<EPS-DILUTED> 3.92
<RESERVE-OPEN> 1,580,742
<PROVISION-CURRENT> 1,183,251
<PROVISION-PRIOR> (151,996)
<PAYMENTS-CURRENT> 514,186
<PAYMENTS-PRIOR> 395,396
<RESERVE-CLOSE> 1,702,415
<CUMULATIVE-DEFICIENCY> (151,996)
<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 $3,272 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>
