<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1998
REGISTRATION NO. 333-51677
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CINCINNATI FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
OHIO 31-0746871
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
CINCINNATI FINANCIAL CORPORATION HEADQUARTERS
6200 SOUTH GILMORE ROAD
FAIRFIELD, OHIO 45014
(513) 870-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
THEODORE F. ELCHYNSKI
SENIOR VICE PRESIDENT
6200 SOUTH GILMORE ROAD
FAIRFIELD, OHIO 45014
(513) 870-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
W. PHILIP SHEPARDSON, JR. EDWARD S. BEST
BECKMAN, WEIL, SHEPARDSON AND FALLER, MAYER, BROWN & PLATT
LLC 190 SOUTH LASALLE STREET
1200 MERCANTILE CENTER CHICAGO, ILLINOIS 60603
120 EAST FOURTH STREET (312) 782-0600
CINCINNATI, OHIO 45202
(513) 621-2100
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 14, 1998
PROSPECTUS
$350,000,000
CINCINNATI FINANCIAL CORPORATION
% DEBENTURES DUE 2028
--------
LOGO
Cincinnati Financial Corporation ("Cincinnati Financial" or the "Company") is
offering $350,000,000 aggregate principal amount of its % Debentures due
, 2028 (the "Debentures"). Interest on the Debentures will be payable
semiannually in arrears on and of each year, commencing
, 1998. The Debentures will mature on , 2028.
The Debentures are not redeemable prior to maturity.
The Debentures will be represented by global securities ("Global Securities")
registered in the name of the nominee of The Depository Trust Company ("DTC").
Beneficial interests in such certificates will be shown on, and transfers
thereof will be effected only through, records maintained by DTC's
participants. Owners of beneficial interests in the certificates representing
the Debentures will be entitled to physical delivery of Debentures in
certificated form in the amount of their respective beneficial interests only
under the limited circumstances described herein. See "Description of the
Debentures--Book-Entry, Delivery and Form."
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT COMPANY(1)(2)
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<S> <C> <C> <C>
Per Debenture............................ % % %
- ---------------------------------------------------------------------------------
Total.................................... $ $ $
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</TABLE>
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(1) Plus accrued interest, if any, from , 1998 to date of delivery.
(2) Before deducting expenses payable by the Company estimated at $375,000.
--------
The Debentures are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of Global Securities representing the Debentures
will be made through the facilities of DTC on or about , 1998,
against payment therefor in immediately available funds.
--------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
A.G. EDWARDS & SONS, INC.
MCDONALD & COMPANY
SECURITIES, INC.
, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE DEBENTURES,
INCLUDING PURCHASES OF THE DEBENTURES TO STABILIZE THEIR MARKET PRICE AND
PURCHASES OF THE DEBENTURES TO COVER ANY SHORT POSITION IN THE DEBENTURES
MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
FOR NORTH CAROLINA INVESTORS: THE DEBENTURES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR THE ADEQUACY
OF THIS DOCUMENT.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at Seven World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates, or at the Commission's worldwide
web site at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), relating
to the Debentures. This Prospectus does not contain all of the information set
forth in the Registration Statement as permitted by the rules and regulations
of the Commission. For information with respect to the Company and the
Debentures, reference is hereby made to such Registration Statement. The
Registration Statement may be inspected without charge by anyone at the office
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of all or any part thereof may be obtained from the Commission upon
payment of the prescribed fees. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in all respects by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated herein by
reference:
(i) the Company's Annual Report on Form 10-K for the year ended December 31,
1997; and
(ii) the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the Debentures shall be deemed to be
incorporated in this Prospectus by reference and to be a part hereof from the
date of filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein (or in the applicable Prospectus) or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
2
<PAGE>
The Company will provide, without charge to any person to whom a copy of this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any document incorporated by reference herein other than exhibits to
such document unless such exhibits are specifically incorporated by reference
in such document. Requests for such copies should be directed to the Company's
principal executive offices located at Cincinnati Financial Corporation
Headquarters, 6200 South Gilmore Road, Fairfield, Ohio 45014, Attention:
Investor Relations (telephone: 513-870-2000).
3
<PAGE>
THE COMPANY
GENERAL
Cincinnati Financial, through its subsidiaries, has written commercial and
personal property and casualty insurance since 1951. The Company's insurance
subsidiaries are licensed to write property and casualty insurance in all 50
states and the District of Columbia but focus on the Midwest and Southeast
regions of the United States, where the Company believes it has a significant
presence. Cincinnati Financial's property and casualty operations generated
$1.5 billion of net premiums written in 1997 and accounted for 96% of the
Company's 1997 premium income. The Company had total assets of $10.1 billion
and shareholders' equity of $5.1 billion as of March 31, 1998. Cincinnati
Financial also provides life, health and accident insurance and, to a lesser
extent, financing and leasing services.
The Company's property and casualty insurance subsidiaries are rated A++
(Superior) by A.M. Best Company ("A.M. Best"), placing them in the top 7% of
property and casualty insurers based on their A.M. Best ratings. These
subsidiaries also maintain AA+ (Excellent) claims-paying ability ratings from
Standard & Poor's Ratings Services, a division of The McGraw-Hill Company.
Cincinnati Financial distributes its products through a limited number of
independent agencies (970 at March 31, 1998), a significant number of which
own shares of the Company's stock. The Company believes that its strong
relationship with and commitment to servicing these agencies are key elements
in the Company's successful business operations and expansion. Its network of
68 field marketing representatives provides a local presence for the Company
and strengthens the Company's relationships with its agents. The Company also
supports its independent agencies with competitive products, rates and
compensation. For example, the Company offers multi-year policy terms (i.e.,
three to five years) on many of its commercial and personal lines products. In
a 1997 independent survey of 30,000 agents and brokers across 16 commercial
product lines, the Company earned the highest overall score.
Management has emphasized strict underwriting discipline and employee
productivity, and as a result, Cincinnati Financial has outperformed the
industry on an underwriting basis. The Company has achieved an average
combined ratio of 100.2% for the five years ended December 31, 1997, compared
to an industry average of 104.6% for the same period, based on industry data
provided by A.M. Best. Through the quarter ended March 31, 1998, the Company
has achieved an underwriting profit for the sixth consecutive quarter.
PROPERTY AND CASUALTY INSURANCE
The Company's principal insurance subsidiary, The Cincinnati Insurance
Company ("CIC"), actively underwrites fire, automobile, casualty, bonds, and
related forms of property and casualty insurance in 27 states. The Company's
other property and casualty subsidiaries are The Cincinnati Casualty Company
("CCC"), which operates on a direct billing basis, and The Cincinnati
Indemnity Company ("Cincinnati Indemnity"), which markets nonstandard policies
for preferred risk accounts. Net written property and casualty premiums
totaled $1.5 billion for 1997, an increase of 6.4% over the prior year. The
annual combined ratio for the Company's property and casualty operations was
97.7% for 1997.
Commercial Insurance
The Company generally targets small to medium-sized commercial accounts.
Cincinnati Financial's principal commercial lines products include commercial
multi-peril, commercial automobile and workers' compensation insurance, which
accounted for 36%, 20% and 19%, respectively, of 1997 commercial lines net
premiums written. The Company generated $987.3 million of commercial lines net
premiums written in 1997, representing approximately 67% of the Company's
total property and casualty net premiums written.
4
<PAGE>
Personal Insurance
The Company's principal personal lines products include personal automobile
and homeowners' insurance, which accounted for 59% and 29%, respectively, of
1997 personal lines net premiums written. Automobile insurance products
include both physical damage and liability coverages. Cincinnati Financial
generated $483.3 million of personal lines net premiums written in 1997,
representing approximately 33% of the Company's total property and casualty
net premiums written.
Underwriting
The Company's field marketing representatives have primary responsibility
for the underwriting of policy submissions, which the Company believes allows
it to be more responsive to the needs of its independent agents and their
prospective insureds. The Company also believes that, given the nature of its
target market, its field marketing representatives are generally better able
to evaluate submissions than a centralized underwriting department. The
Company believes that its strict underwriting discipline has contributed to
its average combined ratio of 100.2% over the last five years, compared to the
industry average of 104.6%. Despite a competitive pricing environment,
especially within the commercial lines market, Cincinnati Financial achieved
an underwriting profit in 1997 and its lowest annual combined ratio, 97.7%,
since 1988.
Distribution
By being very selective in its choice of agents, the Company develops
stronger relationships, earns more loyalty and expects a higher percentage of
agency premium. Consequently, Cincinnati Financial is represented by fewer
than 1,000 independent agencies. A typical agency's total annual production is
between $4 million and $5 million. The Company estimates that it receives
approximately 40% of the total annual production of agencies with which it has
a developed relationship. Agents are supported by a team of 68 field marketing
representatives who work from their homes, thus eliminating the expense of
branch offices. The Company seeks to further strengthen relationships with its
independent agents through innovative commission structures which include a
profit-sharing program.
Claims Management
The Company is committed to providing timely, personal and fair management
of claims. Claims management is provided by over 600 field claims
representatives who have the authority to adjust most claims in the field. The
Company believes its decentralized claims adjusting process allows the Company
to be more responsive to its insureds and claimants. The Company also believes
an efficient and fair adjustment of claims further strengthens its
relationships with its independent agencies. The Company has developed a
number of successful claims management programs to help identify and manage
potentially fraudulent claims.
Reserves
The Company's insurance reserve liabilities are estimated by Management
based upon Company experience data. The Company establishes property and
casualty insurance reserves, including adjustments of estimates, using
information from internal analysis and review by external actuaries, who
perform an annual review of the Company's reserves. The Company believes that
its high retention rates and multi-year policies better enable the Company to
evaluate its book of business, thus reducing uncertainty in establishing
reserves. Such reserves are related to various lines of business and will be
paid out over future periods.
Management believes that environmental exposures are minimal as a result of
the types of risks the Company has insured. Historically, most commercial
accounts written post-date the coverages which afford clean-up costs and
Superfund responses. The Company currently has approximately $59 million
reserved for environmental and asbestos losses, of which $17 million consist
of case reserves, $19 million consist of loss adjustment expense reserves and
$23 million consist of IBNR reserves.
5
<PAGE>
Reinsurance
The Company limits its maximum exposure to large risks or risks concentrated
in areas of exposure by reinsuring with (ceding to) other insurers or
reinsurers. The Company's current net retention levels are generally
$2,000,000 per claim. The Company reinsures with companies that have strong
claims-paying ratings. 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. The Company has
excess of loss treaties with Swiss Reinsurance Company, American Reinsurance
Company, Employers Reinsurance Company and General Reinsurance Corporation.
LIFE INSURANCE
Through The Cincinnati Life Insurance Company ("Cincinnati Life"), the
Company actively underwrites life insurance and accident and health insurance
in 29 states and has policies in force in 46 states and the District of
Columbia. Ordinary individual life insurance and annuity products constitute
the majority of Cincinnati Life's product lines. Cincinnati Life distributes
its products primarily through the Company's independent property and casualty
agencies. In addition, Cincinnati Life has established a worksite marketing
program and is developing relationships with independent life insurance agents
in markets outside of the property and casualty operations' geographic area.
Cincinnati Life generated $92.4 million of net premiums written in 1997 which
accounted for approximately 4% of the Company's total 1997 premium income.
FINANCIAL SERVICES
CFC Investment Company ("CFC Investment") leases and finances vehicles and
equipment for the Company's agents and their clients and owns certain real
estate in the Cincinnati metropolitan area. CFC Investment's leasing and
financing activities create an additional source of income for the Company
while serving to improve the Company's relationships with its independent
agents and such independent agents' relationships with their customers.
Approximately half of the leasing customer base is comprised of independent
property and casualty agencies and a large portion of the Company's business
comes from agent referrals of their commercial insurance clients. Many
agencies lease or finance agency management systems that are funded through
Cincinnati Financial under incentive agreements requiring specified levels of
premium growth and profitability. Net after-tax earnings in 1997 rose to $2.2
million versus $1.2 million in 1996.
INVESTMENTS
The Company's primary investment strategy is to achieve superior returns in
the form of capital appreciation and income, while maintaining sufficient
liquidity to meet both its immediate and long-term insurance obligations. The
Company implements this strategy through investing in equity securities and
medium-risk fixed maturity securities, which it believes have the potential
for ratings increases. The Company believes that investing in equity
securities offers it the opportunity to earn optimal returns through
increasing dividends and capital appreciation. The Company has utilized a
long-term, buy and hold strategy with respect to its equity portfolio,
resulting in an accumulation of significant unrealized gains on equity
investments. While the Company classifies all of its fixed maturity securities
as available for sale, the Company often holds such securities to maturity
absent a change in credit risk or the call of the securities by the issuer.
Equity and fixed income securities accounted for 70% and 30%, respectively,
of the Company's total invested assets and 59% and 41%, respectively, of the
total invested assets of the Company's insurance subsidiaries, at March 31,
1998. Investment grade securities represented 69% of Cincinnati Financial's
fixed income portfolio and 82% of the fixed income portfolio of the Company's
insurance subsidiaries at March 31, 1998. Tax-exempt securities, which are all
held by the Company's insurance subsidiaries, represented 32% of the Company's
fixed income portfolio at March 31, 1998. Neither the Company nor its
subsidiaries invest in derivative instruments or real-estate related
securities. For further information concerning the Company's investment
strategy and portfolio, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 2 of Notes to Consolidated
Financial Statements appearing elsewhere herein.
6
<PAGE>
YEAR 2000 ISSUES
The Company has continued system and network upgrades to address Year 2000
issues. Management believes that the few systems not yet Year 2000 compliant
will be technically compliant by mid-year 1999.
CORPORATE INFORMATION
The Company was incorporated in Ohio on March 4, 1992. The address of the
Company's principal executive office is Cincinnati Financial Corporation
Headquarters, 6200 South Gilmore Road, Fairfield, Ohio 45014 and its telephone
number is (513) 870-2000.
USE OF PROCEEDS
The net proceeds from the sale of the Debentures offered hereby (after
deducting underwriting discounts and commissions and estimated expenses of the
Offering) are estimated to be approximately $ million. A portion of the net
proceeds will be used to repay approximately $281 million of indebtedness and
the remaining net proceeds will be used for general corporate purposes,
including the financing of an expansion of the Company's headquarters. As of
March 31, 1998, the indebtedness to be repaid had maturities of 90 days or
less and had a weighted average interest rate equal to 6.24%.
7
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1998 and as adjusted to give effect to the offering of
the Debentures hereby and the application of the net proceeds therefrom. The
following table should be read in conjunction with the Company's Consolidated
Financial Statements, and the Notes thereto, appearing elsewhere herein.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------
AS
ACTUAL ADJUSTED
---------- ----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Short-term debt (including current maturities)......... $ 281,100 $ --
Long-term debt......................................... 56,723 406,723
---------- ----------
Total debt........................................... $ 337,823 $ 406,723
Shareholders' equity:
Common stock (par value $2 per share; 200,000
authorized,
169,391 issued) (1)................................. $ 339,574 $ 339,574
Paid-in capital (1).................................. 208,916 208,916
Retained earnings.................................... 1,400,341 1,400,341
Unrealized gains on investments...................... 3,189,153 3,189,153
---------- ----------
$5,137,984 $5,137,984
Less treasury shares at cost (3,034 shares) (1)...... (72,569) (72,569)
---------- ----------
Total shareholders' equity......................... $5,065,415 $5,065,415
---------- ----------
Total capitalization............................. $5,403,238 $5,472,138
========== ==========
</TABLE>
- --------
(1) Restated to account for 3-for-1 stock split payable May 15, 1998 to
shareholders of record at April 24, 1998.
8
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The selected consolidated financial information set forth below for the
Company as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997 are derived from the audited
financial statements included elsewhere herein. The selected consolidated
financial information set forth below for the Company as of December 31, 1995,
1994 and 1993 and for each of the years in the two-year period ended December
31, 1994 are derived from the audited financial statements not included
elsewhere herein. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements, and Notes thereto, included elsewhere
herein. The selected consolidated financial data as of and for the three-month
periods ended March 31, 1998 and 1997, reflect all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
results for such periods. The results for the three-month periods are not
indicative of the results to be expected for the full year or for any other
interim period.
<TABLE>
<CAPTION>
AT OR FOR
THREE MONTHS ENDED
MARCH 31, AT OR FOR YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993(1)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
INFORMATION:
Premium income......... $ 394,592 $ 372,983 $1,516,378 $1,422,897 $1,314,126 $1,219,033 $1,140,791
Investment income (less
expense).............. 90,300 84,231 348,597 327,307 300,015 262,649 239,436
Realized gains on
investments........... 25,642 24,303 69,230 47,946 30,781 19,557 51,529
Other income........... 2,020 2,220 8,179 10,599 10,729 11,267 10,396
Net income............. 84,178 74,047 299,375 223,760 227,350 201,230 216,024
BALANCE SHEET
INFORMATION:
Cash and invested
assets................ $9,439,166 $6,894,550 $8,877,218 $6,404,337 $5,545,328 $4,249,995 $4,154,648
Total assets........... 10,060,723 7,480,483 9,493,425 7,045,514 6,109,298 4,734,279 4,602,288
Reserves............... 2,462,352 2,334,220 2,418,981 2,321,448 2,146,798 1,922,392 1,748,484
Long-term obligations.. 56,723 79,804 58,430 79,847 80,000 80,000 80,000
Shareholders' equity... 5,065,415 3,433,922 4,716,965 3,162,889 2,657,971 1,940,047 1,947,338
OTHER PROPERTY AND
CASUALTY DATA--
STATUTORY BASIS:
Net premiums written... 376,577 354,520 $1,471,603 $1,383,525 $1,295,852 $1,190,824 $1,123,780
Policyholders' surplus. 2,426,634 1,522,376 2,148,746 1,393,954 1,073,497 790,870 809,985
Loss ratio............. 57.8% 59.0% 58.3% 61.6% 57.6% 63.3% 63.5%
Loss expense ratio..... 9.3 11.2 10.1 13.8 14.7 9.8 8.7
Underwriting expense
ratio................. 28.9 29.1 29.3 27.6 27.1 27.5 27.9
---------- ---------- ---------- ---------- ---------- ---------- ----------
Combined ratio (2)..... 96.0% 99.3% 97.7% 103.0% 99.4% 100.6% 100.1%
Ratio of net premiums
written to
policyholders' surplus
(3)................... 0.62x 0.93x 0.68x 0.99x 1.21x 1.51x 1.39x
RATIO OF EARNINGS TO
FIXED CHARGES (4)...... 22.0x 19.8x 19.4x 14.9x 17.8x 25.8x 36.8x
</TABLE>
- --------
(1) Earnings for the year ended December 31, 1993 include a $13,845,000 credit
for the 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 related to the effect of the 1993 increase in income tax rates
on deferred taxes recorded for various prior year items.
(2) The combined ratio is an industry measurement of the profitability of
property and casualty insurance underwriting. This ratio is the sum of the
ratio of incurred losses and loss adjustment expenses to net earned
premiums (the "loss and LAE ratio") and the ratio of underwriting expenses
incurred to net premiums written (the "underwriting expense ratio"). A
combined ratio less than 100% generally indicates an underwriting profit;
a combined ratio greater than 100% generally indicates an underwriting
loss.
(3) The ratio represents statutory net property and casualty premiums written
for the period indicated (for the three-month periods, statutory net
property and casualty premiums written have been annualized) divided by
statutory policyholders' surplus at the end of such period attributable to
the property and casualty business.
(4) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of net income before income tax expense (excluding interest costs
capitalized) plus fixed charges to the extent that such charges are
included in the determination of earnings. Fixed charges consist of
interest costs (including interest costs capitalized) plus one-third of
minimum rental payments under operating leases (estimated by Management to
be the interest factor of such rentals).
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is intended to supplement the data contained in the
Consolidated Financial Statements, and Notes thereto, of Cincinnati Financial
and its subsidiaries appearing elsewhere herein.
The Company has five subsidiaries. The lead property and casualty insurance
subsidiary, CIC, markets a broad range of business and personal policies in 27
states through an elite corps of 973 independent insurance agencies. Also
engaged in the property and casualty business are CCC, which works on a direct
billing basis, and Cincinnati Indemnity, which markets nonstandard policies
for preferred risk accounts. Cincinnati Life markets life, health and accident
policies through property and casualty agencies and independent life agencies.
CFC Investment complements the insurance subsidiaries with leasing, financing
and real estate services. Investment operations are the Company's primary
source of profits, with a total return strategy emphasizing investment in
fixed maturities securities as well as equity securities that contribute to
current earnings through dividend increases and add to net worth through long-
term appreciation.
The following discussion and related Consolidated Financial Statements, and
Notes thereto, appearing elsewhere herein contain certain forward-looking
statements that involve potential risks and uncertainties. The Company's
future results could differ materially from those discussed. Factors that
could cause or contribute to such differences include, but are not limited to:
unusually high levels of catastrophe losses due to changes in weather patterns
or other natural causes; changes in insurance regulations or legislation that
place the Company at a disadvantage in the marketplace; recession or other
economic conditions resulting in lower demand for insurance products;
sustained decline in overall stock market values negatively impacting the
Company's equity portfolio and the ability to generate investment income; and,
the potential inability of the Company and/or the independent agents with
which it works to complete the necessary information system changes required
to handle Year 2000 issues. Readers are cautioned that the Company undertakes
no obligation to review or update the forward-looking statements included in
this material.
RESULTS OF OPERATION
Three Months Ended March 31, 1998 and 1997
Premiums earned for the three months ended March 31, 1998 increased
$21,609,000, or 6%, over the three months ended March 31, 1997. For Cincinnati
Financial's property and casualty insurance companies, gross written premiums
increased $22,000,000 and gross earned premiums increased by $20,759,000. The
growth rate of the Company's property and casualty subsidiaries on a gross
written and earned basis was less than last year because the increase in new
business and some rate increases on personal lines business were offset by
lower premiums on workers' compensation coverages. The premium volume of
Cincinnati Life increased approximately 5% as the Company experienced
increases in both life and health insurance production. The premium growth in
Cincinnati Life was mainly attributable to increased sales of both traditional
and worksite marketing products. For the three-month period ended March 31,
1998, investment income, net of expenses, increased $6,069,000, or 7%, when
compared with the first three months of 1997. This increase was due to growth
of the investment portfolio itself generated by investing cash flows from
operations and the balance being derived primarily from dividend increases
from equity securities.
Realized gains on investments for the three months ended March 31, 1998
amounted to $25,642,000 compared to $24,303,000 for the comparable three-month
period ended March 31, 1997. The realized gains are predominantly the result
of the sale of equity securities and Management's decision to realize the
gains and reinvest the proceeds at higher yields.
Insurance losses and policyholder benefits (net of reinsurance recoveries)
increased $3,633,000, or 1%, for the first three months of 1998 over the same
period in 1997. Property and casualty company losses increased $2,758,000 in
the first quarter of 1998, compared to the first quarter of 1997. Catastrophic
claims were lower by
10
<PAGE>
$2,699,000 in the same period. Policyholder benefits increased $875,000 over
the first quarter of 1997 in Cincinnati Life. The increase is the result of a
higher incidence of death claims, health claims and related costs.
Other operating expenses increased $2,986,000 for the first quarter of 1998
compared to the first quarter of 1997. The increase was attributable to
increases in staff and costs associated with the upgrading of the Company's
computer systems to handle projected increases in premiums and to make the
Company's systems Year 2000 compliant.
Provision for income taxes, current and deferred, have increased by
$7,924,000 for the first three months of 1998 compared to the first three
months of 1997. The increase in federal taxes was primarily attributable to an
increase in the effective tax rate from 24.75% to 27.64% at March 31, 1997 and
1998.
In the first quarter of 1998, the Company experienced significantly more
unrealized gains in equity securities than in the first quarter of 1997,
resulting in comprehensive income of $367,575,000 in 1998, compared to
$315,418,000 in 1997.
Years Ended December 31, 1997, 1996 and 1995
Primarily as a result of continued market penetration and entry into new
states, the Company's revenues have increased at a compound annual rate of
8.3%, reaching $1.942 billion in 1997, with property/casualty net written
premiums growing at a compound annual rate of 7.7% to $1.472 billion over the
past five years. In the same five-year period, total net income, including
realized capital gains, grew at a compound annual rate of 11.8% to $299.4
million from $216.0 million while net operating income increased at a compound
annual rate of 11.5% to $254.4 million from $182.5 million in 1993. Book value
grew at a 22.2% compound annual rate over the same period.
A number of factors, including the Company's strong reputation among
independent insurance agencies and Management's belief that the Company can
achieve additional market penetration in states in which it currently
operates, have led Management to target $2 billion in direct written premiums
during the year 2000, up from $1.621 billion in 1997. At the same time, the
Company seeks to generate an underwriting profit and maximize annual growth in
investment income.
The following discusses and analyzes results for the three-year period
ending December 31, 1997 and provides insight into Management's strategic
direction for the Company.
<TABLE>
<CAPTION>
CHANGE CHANGE CHANGE CHANGE
1997 ($) (%) 1996 ($) (%) 1995
-------- ------ ------ -------- ------ ------ --------
(IN MILLIONS EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $1,942.4 $133.7 7% $1,808.7 $153.0 9% $1,655.7
Net Operating Income.... 254.4 61.8 32 192.6 (14.7) (7) 207.3
Net Capital Gains (after
tax)................... 45.0 13.8 44 31.2 11.2 56 20.0
Net Income.............. 299.4 75.6 34 223.8 (3.5) (2) 227.3
Catastrophe Losses...... 25.5 (39.2) (60) 64.7 37.6 138 27.1
</TABLE>
The Company's financial results for the three years ending December 31, 1997
reflect steady growth in new insurance business and high retention of renewal
business quoted on behalf of the Company's independent insurance agents,
offset by competitive property and casualty pricing. In addition, 1997 marked
a return to a more normal level of catastrophe losses from the unusually high
1996 level. Results for 1997 also reflect the Company's consistent
underwriting philosophy and strategy--maintaining high underwriting standards
by carefully evaluating individual risks, reviewing agency performance and
controlling overall expenses.
Net operating income for 1997 rose substantially over the prior year. The
Company generated 6.5% growth in pre-tax investment income and an underwriting
profit versus an underwriting loss in 1996, primarily due to lower catastrophe
losses. In 1996, net operating income declined 7% because of the catastrophe
losses, while pre-tax investment income rose 9.1%. The contribution from net
realized capital gains after-tax rose in both years primarily due to the sale
of equity securities.
11
<PAGE>
<TABLE>
<CAPTION>
CHANGE CHANGE CHANGE CHANGE
1997 ($) (%) 1996 ($) (%) 1995
-------- ------ ------ -------- ------ ------ --------
(IN MILLIONS EXCEPT PERCENTAGES AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
Property and Casualty
Insurance Operations:
Gross Written
Premiums............. $1,566.7 $90.7 6.1% $1,476.0 $98.6 7.2% $1,377.4
Net Written Premiums.. 1,471.6 88.1 6.4 1,383.5 87.6 6.8 1,295.9
Net Earned Premiums... 1,453.5 87.0 6.4 1,366.5 103.2 8.2 1,263.3
Loss and LAE Ratio.... 68.4% N/A (9.3) 75.4% N/A 4.3 72.3%
Expense Ratio......... 29.3 N/A 6.2 27.6 N/A 1.8 27.1
Combined Ratio........ 97.7 N/A (5.1) 103.0 N/A 3.6 99.4
</TABLE>
While premium growth rates have declined in 1997 and 1996, the Company's
property and casualty group continued to increase net written premiums at
rates well above estimated industry growth rates. In 1997 and 1996, the
primary source of growth was personal lines insurance, for which net written
premiums advanced 12.4% in 1997 (9.4% in 1996), while commercial lines
insurance growth was 3.6% (5.6% in 1996).
During 1997 and 1996, the commercial insurance market experienced intense
price competition, most notably in workers' compensation where market-share
competition and mandated rate reductions in some states led to renewal account
discounts of as much as a third from the previous year's premium. The Company
is committed to prudent underwriting standards and emphasizing account
profitability. The emphasis on profitability contributed to the 53.2% pure
loss ratio for the commercial lines area, in line with the 54.8% reported in
1996.
As a result of market factors, direct written workers' compensation premiums
in 1997 declined 6% and growth in other commercial insurance lines was
limited. Management believes these competitive forces will continue for at
least the next six to twelve months. To help offset these pressures, the
Company is emphasizing personal lines insurance, entering new states to expand
market opportunities, pursuing a marketing strategy that permits field
representatives to spend more time assisting the independent insurance agents
and expanding its life insurance operations.
The Company sees heightened interest from independent insurance agents in
writing personal lines insurance as a means of buffering the price competition
in the commercial sector and stabilizing their revenue. The Company is taking
advantage of this trend by encouraging independent agents to move to the
Company their proven, profitable business. Agents who are streamlining
operations by reducing the number of carriers they represent have been rolling
over entire books of business to the Company.
Management believes Cincinnati Financial can achieve additional market
penetration by leveraging its strong relationships with independent agencies
and entering new states. The Company also can take advantage of key
competitive advantages of Cincinnati Financial's insurance products, for
example three- and five-year policies for many types of insurance coverage.
At year-end 1997, approximately 98% of the Company's property and casualty
premium volume was in states in which the Company has had a presence since
1994 or earlier. Over the past three years, the Company has added nine
marketing representatives in several established states, restructuring
territories so that each representative has fewer agencies to serve. This has
allowed field representatives to appoint additional agencies and, more
importantly, spend more time with each agent. During 1998, Management
anticipates adding two marketing territories in existing regions.
Entry into new states also has been a source of premium growth. During 1997,
the states the Company entered between 1994 and 1997 contributed more than $28
million of property and casualty premium volume. An example of these
successful new market entries is Minnesota, where premium volume reached $11.7
million in 1997, up from $800,000 in 1994. During 1996 and 1997, the Company
began marketing commercial lines in
12
<PAGE>
North Dakota and added personal lines in Arkansas, Maryland, Minnesota, North
Dakota, Pennsylvania and Vermont. During 1998, Management anticipates
beginning to market insurance products in Montana and in two planned upstate
New York territories. Five western states currently are being researched with
the intention of selecting one or two additional states in which to seek
approval during 1998 to market the Company's products in 1999. The Company's
criteria for entry into new states include a favorable regulatory climate.
The Company recorded a $24.8 million underwriting profit in 1997 compared
with an $45.0 million underwriting loss in 1996 and a $1.4 million
underwriting profit in 1995. The 1997 underwriting profit, reflected by a
combined ratio of 97.7%, was primarily the result of a more normal level of
catastrophe losses contributing to a seven point reduction in the loss and
loss adjustment expense ratio compared with 1996. The return to a more normal
level of catastrophe losses also helped offset a one and seven-tenths point
increase in the expense ratio. The underwriting loss in 1996, reflected by a
combined ratio of 103.0%, was the result of the higher catastrophe losses, as
well as a half percentage point increase in the expense ratio over 1995.
The expense ratio increased in both years as the Company raised spending on
staff and costs associated with upgrading technology and facilities to
accommodate anticipated growth in premium volume while making computer systems
Year 2000 compliant. Because the Company issues three- and five-year policies,
Management believes that Year 2000 compliance issues have been initiated for
most of the computer systems. Many systems are already Year 2000 compliant;
most other programs will be compliant by year-end 1998, with the balance
completed during 1999. Management believes this goal will be attained. The
Company's largest risk lies with Year 2000 compliance by its independent
agencies, which handle most of the customer billing and collections. In
response to this concern, the Company is proactively contacting agents
regarding this issue and will be monitoring each agency's actions closely.
Adding to expenses in 1997 were higher profit-sharing commissions to many of
the Company's independent insurance agents, due to the overall profitability
of the business they wrote.
In 1997, catastrophe losses accounted for 1.8% of the combined ratio, more
closely in line with the Company's historic results and in contrast to the
unusually high 4.7% from ten large storms in 1996. In 1995, catastrophe losses
accounted for 2.1% of the combined ratio. Due to the nature of catastrophic
events, Management is unable to predict accurately the frequency or potential
cost of such occurrences in the future; however, the Company has continued not
to market property and casualty insurance in California, not to write flood
insurance, to review exposure to huge disasters and reduce coverage in certain
coastal regions in an effort to control such catastrophe losses. For property
catastrophes, the Company retains the first $25 million of losses and is
reinsured to cover 95% of the losses from $25 million up to $200 million.
As discussed in the Notes to the Consolidated Financial Statements appearing
elsewhere herein, the Company's insurance reserve liabilities are estimated by
Management based upon Company experience data. The Company consistently has
established property and casualty insurance reserves, including adjustments of
estimates, using information from internal analysis and review by external
actuaries. Though uncertainty always exists as to the adequacy of established
reserves, Management believes this uncertainty is less than it otherwise would
be, due to the stability of the Company's book of business. Such reserves are
related to various lines of business and will be paid out over future periods.
Reserves for environmental claims have been reviewed and the Company
believes that the reserves are adequate. Environmental exposures are minimal
as a result of the types of risks the Company has insured in the past.
Historically, most commercial accounts written post-date the coverages which
afford clean-up costs and Superfund responses.
The Company's life insurance subsidiary, Cincinnati Life, had total net
premium income for 1997 of $62.9 million, up from $56.4 million in 1996 and
$50.9 million in 1995. Life insurance premiums were $54.7 million, $48.7
million and $43.6 million, respectively. Cincinnati Life contributed 10% of
the Company's operating income in 1997, 1996 and 1995.
13
<PAGE>
During 1997, the Company hired a new president for Cincinnati Life. Under
his direction, Cincinnati Life is expanding worksite marketing activities,
introducing a competitive new life insurance product series and researching
opportunities to sell life insurance in states in which the Company does not
have property and casualty agency representation. The initiatives, which were
undertaken in the second half of 1997, had little impact on results for the
year. Management believes, however, that opportunities exist to increase
Cincinnati Life's contribution to total operating income through expanded life
insurance sales.
Investment income rose 6.5% to $348.6 million in 1997 and increased 9.1% to
$327.3 million in 1996. The slower growth rate in 1997 reflected the amount of
fixed maturities investments called early and the generally lower interest
rate environment. The increases were primarily the result of investing the
cash flows from operating activities and dividend increases from equity
securities in the investment portfolio. In 1997, 34 of the 62 common stocks in
the Company's investment portfolio increased dividends during the year, adding
more than $8.1 million to future annualized investment earnings.
The Company's primary investment strategy is to maintain liquidity to meet
both immediate and long-term insurance obligations through the purchase and
maintenance of medium-risk, fixed maturity and equity securities, while
earning optimal returns on the equity portfolio through higher dividends and
capital appreciation. The Company's investment decisions on an individual
insurance company basis are influenced by insurance statutory requirements
designed to protect policyholders from investment risk. Cash generated from
insurance operations is invested almost entirely in corporate, municipal,
public utility and other fixed maturity securities or equity securities. Such
securities are evaluated prior to purchase based on yield and risk.
Investments in common stocks have emphasized securities with an annual
dividend yield of at least 2%-3% and annual dividend increases. The Company's
portfolio of equity investments had an average dividend yield to cost of 7.8%
at December 31, 1997. Management's strategy in equity investments includes
identifying approximately ten to twelve companies, for the core of the
investment portfolio, in which the Company can accumulate 10%-20% of their
common stock.
The Company's income tax expense was $95.2 million, $58.7 million and $67.8
million for 1997, 1996 and 1995, respectively, while the effective tax rate
was 24.12%, 20.77% and 22.98%, for the same periods. The higher tax rate in
1997 primarily was due to the strong underwriting profit recorded for the year
and higher capital gains. The lower rate in 1996 was 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
equity investments. The Company incurred no additional alternative minimum tax
expenses for 1997, 1996 and 1995.
CASH FLOW AND LIQUIDITY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Net cash provided by operating activities.. $ 427.0 $ 308.3 $ 389.5
Net cash used in investing activities...... (282.5) (224.8) (443.9)
Net cash (used) provided in financing
activities................................ (124.2) (43.7) 26.2
Net increase (decrease) in cash............ 20.2 39.9 (28.2)
Cash at beginning of year.................. 59.9 20.0 48.3
Cash at end of year........................ 80.2 59.9 20.0
Supplemental
Interest paid............................ 21.8 20.9 16.0
Income taxes paid........................ 95.5 65.0 67.0
</TABLE>
Over the past three years, operating cash flows have been sufficient to meet
operating needs and provide for financing needs and increased investment.
Management expects operating cash flow will continue to be the
14
<PAGE>
Company's primary source of funds because no substantial changes are
anticipated in the Company's mix of business nor are there plans to reduce
protection by ceded reinsurance agreements with financially stable reinsurance
companies. Further, the Company has no significant exposure to assumed
reinsurance. Assumed reinsurance comprised no more than 3% of gross premiums
in each of the last three years.
The change in net cash used in investing activities reflected a steady
increase over the three years in calls of fixed maturity investments, offset
in 1997 by increased purchases of fixed maturities and equity securities. Cash
flows used in net purchases of fixed maturity and equity securities,
respectively, amounted to $40.6 million and $62.1 million in the first quarter
of 1998, $122.6 million and $134.1 million in 1997, $98.0 million and $95.4
million in 1996, and $309.7 million and $114.9 million in 1995.
Over the three-year period, the primary increases in net cash used for
financing activities were for the payment of cash dividends and the purchase
of treasury shares.
Notes Payable--Increases in notes payable, primarily short-term debt used to
enhance liquidity, were reduced from $91.9 million in 1995 to $41.1 million in
1996 to $18.5 million in 1997 and to $0.5 million at March 31, 1998.
Management used short-term debt for cash management and other purposes.
Dividends--The Company has increased cash dividends to shareholders for 37
consecutive years and, periodically, the Board of Directors authorizes stock
dividends or splits. In February 1997, the Company's Board voted to increase
the regular quarterly dividend by four cents to an indicated annual rate of
$1.64 per share. On February 7, 1998, the Board authorized a 12.2% increase,
raising the regular quarterly dividend by five cents to an indicated annual
rate of $1.84. On April 4, 1998, the Board declared a three-for-one stock
split to be distributed on May 15, 1998, to shareholders of record as of April
24, 1998.
Since 1987, the Company's Board of Directors has authorized four additional
stock splits or stock dividends: a 5% stock dividend in 1996; a 5% stock
dividend in 1995; a three-for-one stock split in 1992; and, a 5% stock
dividend in 1987. After the stock split in 1998, a shareholder who purchased
one CIC share before 1957 would own 1,947 Cincinnati Financial shares, if all
shares from accrued stock dividends and splits were held. The Company's policy
for the past ten years has been to reinvest approximately 70% of net income in
future growth and to distribute remaining income as dividends. The ability of
the Company to continue paying cash dividends is subject to such factors as
the Board of Directors may deem relevant.
FINANCIAL CONDITION
Assets
Cash and marketable securities of $9.391 billion make up 93.3% of the
Company's $10.061 billion of assets; this compares with 93.0% at the end of
1997, 90.3% at the end of 1996 and 90.2% at the end of 1995. The Company has
only minor investments in real estate and mortgages, which are typically
illiquid. At March 31, 1998, the Company's portfolio of fixed maturity
securities had an average yield-to-cost of 8.3% and an average maturity of 12
years. For the insurance companies' purposes, strong emphasis has been placed
on purchasing current income-producing securities and maintaining such
securities as long as they continue to meet the Company's yield and risk
criteria. Historically, municipal bonds have been attractive due to their tax-
exempt feature. Essential service (e.g., schools, sewer, water, etc.) bonds
issued by municipalities are prevalent in this area. Many of these bonds are
not rated due to the small size of their offerings.
At March 31, 1998 and at year-end 1997 and 1996, investments totaling
approximately $872 million, $836 million and $729 million ($833 million, $797
million and $706 million at cost) of the Company's $9.363 billion, $8.797
billion and $6.344 billion investment portfolio related to securities rated
non-investment grade or not rated by Moody's Investors Service or Standard &
Poor's. Such investments, which tend to have higher yields, historically have
benefited the Company's results of operations. Further, many have been
upgraded to investment grade while owned by the Company.
15
<PAGE>
Because of alternative minimum tax considerations, the Company uses a blend
of tax-exempt and taxable fixed maturity securities. Tax exempt bonds
comprised 10% of invested assets as of March 31, 1998 and December 31, 1997,
compared with 14% at year-end 1996 and 16% at year-end 1995. Additional
information regarding the composition of investments, together with maturity
data regarding investments in fixed maturities, is included in the Notes to
Consolidated Financial Statements incorporated by reference herein.
Market Risk
The Company could incur losses due to adverse changes in market rates and
prices. The Company's primary market risk exposures are to changes in price
for equity securities and changes in interest rates and credit ratings for
fixed maturity securities. The Company could alter the existing investment
portfolios or change the character of future investments to manage exposure to
market risk. The Company, with the Board of Directors, administers and
oversees investment risk through the Investment Committee, which provides
executive oversight of investment activities. The Company has specific
investment guidelines and policies that define the overall framework used
daily by investment portfolio managers to limit the Company's exposure to
market risk.
Liabilities and Shareholders' Equity
At December 31, 1997, long- and short-term debt were 4%, insurance reserves
were 25% and total shareholders' equity was 50% of total assets, with
remaining liabilities consisting of unearned premiums, deferred income taxes
and other liabilities.
Debt--Total long- and short-term debt was less than 5% of total assets at
year-end 1997 and 1996. At December 31, 1997 and 1996, long-term debt
consisted of $58.4 million and $79.8 million, respectively, of convertible
debentures. Short-term debt is used to provide working capital as discussed
above.
Equity--Shareholders' equity has continued to grow as a percentage of total
assets, reaching 50% for 1997 from 45% for 1996 and 44% for 1995, due to
retained earnings and unrealized appreciation of investments. Statutory risk-
based capital requirements became effective for life insurance companies in
1993 and for property and casualty companies in 1994. The Company's capital
has been well above required amounts in each year since those effective dates.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Shareholders' equity excluding retained
earnings and unrealized gains on investments........ $ 469.5 $ 502.3 $ 342.0
Retained earnings.................................... 1,341.7 1,132.9 1,156.6
Unrealized gains on investments...................... 2,905.8 1,527.7 1,159.4
-------- -------- --------
Total shareholders' equity......................... $4,717.0 $3,162.9 $2,658.0
======== ======== ========
</TABLE>
As a long-term investor, the Company has followed a buy-and-hold strategy
for more than 38 years. A significant amount of unrealized appreciation on
equity investments has been generated as a result of this policy. Unrealized
appreciation on equity investments, before deferred income taxes, was $4.273
billion as of December 31, 1997 and constituted 49% of the total investment
portfolio; 71% of the equities investment portfolio; and, after deferred
income taxes, 59% of total shareholders' equity. Such unrealized appreciation,
before deferred income taxes, amounted to $2.203 billion and $1.618 billion,
at year-end 1996 and 1995, respectively.
On November 22, 1996, the Board of Directors authorized the repurchase of up
to three million of the Company's outstanding shares. As of March 31, 1998,
the Company had repurchased 934,000 shares (before the 1998 three-for-one
stock split), and plans to repurchase the remaining 2,066,000 shares as
Management deems appropriate over an unspecified period of time.
16
<PAGE>
DESCRIPTION OF THE DEBENTURES
The Debentures are to be issued under an Indenture (the "Indenture") between
the Company and The First National Bank of Chicago, as Trustee (the
"Trustee"), a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following summaries of the
material provisions of the Indenture and the Debentures do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Indenture, including the definitions therein
of certain terms, and such Debentures. Wherever particular articles, sections
or defined terms of an Indenture are referred to, it is intended that such
articles, sections or defined terms shall be incorporated herein by reference,
and the statement in connection with which such reference is made is qualified
in its entirety by such reference.
GENERAL
The Debentures will be unsecured and unsubordinated obligations of the
Company limited in aggregate principal amount to $350,000,000 and will mature
on , 2028. Payment of the principal of and interest on the Debentures
will rank pari passu with all other unsecured and unsubordinated debt of the
Company.
The Debentures will be issued only in fully registered form without coupons
in denominations of $1,000 and any integral multiple thereof. No service
charge will be made for any registration of transfer or exchange of Offered
Debentures, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
The Debentures will bear interest at the rate per annum set forth on the
cover page of this Prospectus from , 1998, or from the most recent
interest payment date to which interest has been paid or provided for, payable
semiannually in arrears on and of each year, beginning on
, 1998, to the persons in whose names the Debentures are registered at
the close of business on the next preceding or , as the case may
be.
The Debentures are not redeemable prior to maturity.
BOOK-ENTRY, DELIVERY AND FORM
The Debentures will be issued in the form of fully registered Global
Securities. The Global Securities will be deposited with, or on behalf of, The
Depository Trust Company, New York, New York (the "Depository") and registered
in the name of the Depository's nominee.
Except as set forth below, the Global Securities may be transferred, in
whole and not in part, only to another nominee of the Depository or to a
successor of the Depository or its nominee.
The Depository has advised the Company and the Underwriters as follows: It
is a limited-purpose trust company which was created to hold securities for
its participating organizations (the "Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. Participants include securities brokers and dealers (including
the Underwriters), banks, trust companies, clearing corporations and certain
other organizations. Access to the Depository's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("indirect participants"). Persons who are not
Participants may beneficially own securities held by the Depository only
through Participants or indirect participants.
The Depository has also advised that pursuant to procedures established by
it (i) upon the issuance by the Company of the Debentures, the Depository will
credit the accounts of Participants designated by the
17
<PAGE>
Underwriters with the principal amount of the Debentures purchased by the
Underwriters, and (ii) ownership of beneficial interests in the Global
Securities will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depository (with respect to
Participants' interests), the Participants and the indirect participants. The
laws of some states require that certain persons take physical delivery in
definitive form of securities which they own. Consequently, the ability to
transfer beneficial interests in the Global Securities is limited to such
extent.
So long as a nominee of the Depository is the registered owner of the Global
Securities, such nominee will be considered the sole owner or holder of the
Debentures for all purposes under the Indenture. Except as provided below,
owners of beneficial interests in the Global Securities will not be entitled
to have Debentures registered in their names, will not receive or be entitled
to receive physical delivery of Debentures in definitive form and will not be
considered the owners or holders thereof under the Indenture.
Neither the Company, the Trustee, any Paying Agent nor the Registrar will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Global
Securities, or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
Principal and interest payments on the Global Securities registered in the
name of the Depository's nominee will be made by the Company through the
Paying Agent to the Depository's nominee as the registered owner of the Global
Securities. Under the terms of the Indenture, the Company and the Trustee will
treat the persons in whose names the Debentures are registered as the owners
of such Debentures for the purpose of receiving payments of principal and
interest on such Debentures and for all other purposes whatsoever. Therefore,
neither the Company, the Trustee nor any Paying Agent has any direct
responsibility or liability for the payment of principal or interest on the
Debentures to owners of beneficial interests in the Global Securities. The
Depository has advised the Company and the Trustee that its present practice
is, upon receipt of any payment of principal or interest, to credit
immediately the accounts of the Participants with payment in amounts
proportionate to their respective holdings in principal amount of beneficial
interests in the Global Securities as shown on the records of the Depository.
Payments by Participants and indirect participants to owners of beneficial
interests in the Global Securities will be governed by standing instructions
and customary practices, as is now the case with securities held for the
accounts of customers in bearer form or in "street name" and will be the
responsibility of such Participants or indirect participants.
If the Depository is at any time unwilling or unable to continue as
depository and a successor depository is not appointed by the Company within
90 days, the Company will issue Debentures in definitive form in exchange for
the Global Securities. In addition, the Company may at any time determine not
to have the Debentures represented by Global Securities and, in such event,
will issue Debentures in definitive form in exchange for the Global
Securities. In either instance, an owner of a beneficial interest in the
Global Securities will be entitled to have Debentures equal in principal
amount to such beneficial interest registered in its name and will be entitled
to physical delivery of such Debentures in definitive form. Debentures so
issued in definitive form will be issued in denominations of $1,000 and
integral multiples thereof and will be issued in registered form only, without
coupons.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Debentures will be made by the Underwriters in
immediately available funds. All payments of principal and interest will be
made by the Company in immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. In contrast, the
Debentures will trade in the Depository's Same-Day Funds Settlement System
until maturity, and secondary market trading activity in the Debentures will
therefore be required by the Depository to settle in immediately available
funds.
18
<PAGE>
COVENANTS
Limitation on Liens of Stock of Subsidiaries
The Indenture prohibits the Company and its Subsidiaries from directly or
indirectly creating, assuming, incurring or permitting to exist any
Indebtedness secured by any lien on the capital stock of any Designated
Subsidiary unless the Debentures (and, if the Company so elects, any other
Indebtedness of the Company that is not subordinate to the Debentures and with
respect to which the governing instruments require, or pursuant to which the
Company is otherwise obligated, to provide such security) shall be secured
equally and ratably with such Indebtedness for at least the time period such
other Indebtedness is so secured.
The term "Designated Subsidiary" means any present or future consolidated
subsidiary of the Company, the consolidated net worth of which constitutes at
least 10% of the consolidated net worth of the Company. As of March 31, 1998,
the Company's Designated Subsidiaries were CIC and Cincinnati Life.
"Indebtedness" is defined in the Indenture as the principal of and any
premium and interest due on indebtedness of a Person, whether outstanding on
the date of such Indenture or thereafter created, incurred or assumed, which
is (a) indebtedness for money borrowed, and (b) any amendments, renewals,
extensions, modifications and refunds of any such indebtedness. For the
purposes of this definition, "indebtedness for money borrowed" means (i) any
obligation of, or any obligation guaranteed by, such Person for the repayment
of borrowed money, whether or not evidenced by bonds, debentures, notes or
other written instruments, (ii) any obligation of, or any such obligation
guaranteed by, such Person evidenced by bonds, debentures, notes or similar
written instruments, including obligations assumed or incurred in connection
with the acquisition of property, assets or businesses (provided, however,
that the deferred purchase price of any other business or property or assets
shall not be considered Indebtedness if the purchase price thereof is payable
in full within 90 days from the date on which such indebtedness was created),
and (iii) any obligations of such Person as lessee under leases required to be
capitalized on the balance sheet of the lessee under generally accepted
accounting principles and leases of property or assets made as part of any
sale and lease-back transaction to which such Person is a party. For purposes
of this covenant only, Indebtedness also includes any obligation of, or any
obligation guaranteed by, any Person for the payment of amounts due under a
swap agreement or similar instrument or agreement, or under a foreign currency
hedge exchange or similar instrument or agreement.
Limitations on Disposition of Stock of Designated Subsidiaries
The Indenture also provides that so long as any Debentures are outstanding
and except in a transaction otherwise governed by such Indenture, the Company
may not issue, sell, transfer or otherwise dispose of any shares of,
securities convertible into, or warrants, rights or options to subscribe for
or purchase shares of, capital stock (other than preferred stock having no
voting rights of any kind) of any Designated Subsidiary, and will not permit
any Designated Subsidiary to issue (other than to the Company) any shares
(other than director's qualifying shares) of, or securities convertible into,
or warrants, rights or options to subscribe for or purchase shares of, capital
stock (other than preferred stock having no voting rights of any kind) of any
Designated Subsidiary, if, after giving effect to any such transaction and the
issuances of the maximum number of shares issuable upon the conversion or
exercise of all such convertible securities, warrants, rights or options, the
Company would own, directly or indirectly, less than 80% of the shares of such
Designated Subsidiary (other than preferred stock having no voting rights of
any kind); provided, however, that (i) any issuance, sale, transfer or other
disposition permitted by the Company may only be made for at least a fair
market value consideration as determined by the Board of Directors pursuant to
a Board Resolution adopted in good faith and (ii) the foregoing shall not
prohibit any such issuance or disposition of securities if required by any law
or any regulation or order of any governmental or insurance regulatory
authority. Notwithstanding the foregoing, (i) the Company may merge or
consolidate any Designated Subsidiary into or with another direct wholly owned
Subsidiary of the Company and (ii) the Company may, subject to the provisions
set forth in "Consolidation, Merger and Sale of Assets" below, sell, transfer
or otherwise dispose of the entire capital stock of any Designated Subsidiary
at one time for at least a fair market value consideration as determined by
the Board of Directors pursuant to a Board Resolution adopted in good faith.
19
<PAGE>
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that the Company may, without the consent of the
Holders, consolidate with, or sell, lease or convey all or substantially all
of its assets to, or merge into any other corporation, provided that in any
such case, (i) the successor corporation shall be a corporation organized and
existing under the laws of the United States or a State thereof, and such
corporation shall expressly assume the due and punctual payment of the
principal of (and premium, if any) and interest on all the applicable
Debentures, according to their tenor, and the due and punctual performance and
observance of all the covenants and conditions of the Indenture to be
performed by the Company by supplemental indenture satisfactory to the
applicable Trustee, executed and delivered to the applicable Trustee by such
corporation; and (ii) immediately after giving effect to such transaction, no
Default shall have occurred and be continuing.
Other than the covenants described above, the Indenture does not contain any
covenants or other provisions designed to afford holders of the Debentures
protection in the event of a takeover, recapitalization or a highly leveraged
transaction involving the Company.
MODIFICATION OF THE INDENTURE
With the consent of the holders ("Holders") of more than 50% in aggregate
principal amount of the Debentures then outstanding under the Indenture,
waivers, modifications and alterations of the terms of the Indenture may be
made which affect the rights of the Holders of the Debentures, except that no
such modification or alteration may be made which will (a) extend the time or
terms of payment of the principal at maturity of, or the interest on, any of
the Debentures, or reduce principal or premium or the rate of interest,
without the consent of the Holder thereof, or (b) without the consent of all
of the Holders of the Debentures then outstanding, reduce the percentage of
the Debentures the Holders of which are required to consent (i) to any such
supplemental indenture, (ii) to rescind and annul a declaration that the
Debentures are due and payable as a result of the occurrence of an Event of
Default, (iii) to waive any past Event of Default under the Indenture and its
consequences, and (iv) to waive compliance with certain other provisions
contained in the Indenture. In addition, as indicated under "Events of
Default" below, Holders of more than 50% in aggregate principal amount of the
Debentures then outstanding may waive past Events of Default in certain
circumstances and may direct the Trustee in enforcement of remedies. The
Company and the Trustee may, without the consent of any Holders, modify and
supplement the Indenture (i) to evidence the succession of another corporation
to the Company under the Indenture; (ii) to evidence and provide for the
replacement of the Trustee; (iii) with the Company's concurrence, to add to
the covenants of the Company for the benefit of the Holders; (iv) to modify
the Indenture to permit the qualification of any supplemental indenture under
the Trust Indenture Act of 1939; and (v) for certain other purposes.
DEFEASANCE, SATISFACTION AND DISCHARGE TO MATURITY OR REDEMPTION
Defeasance. If the Company shall deposit with the Trustee, in trust, at or
before maturity or redemption, lawful money or direct obligations of the
United States or obligations the principal of and interest on which are
guaranteed by the United States (or by such other government) in such amounts
and maturing at such times that the proceeds of such obligations to be
received upon the respective maturities and interest payment dates of such
obligations will provide funds sufficient, in the opinion of a nationally-
recognized firm of independent public accountants, to pay when due the
principal (and premium, if any) and interest to maturity or to the redemption
date, as the case may be, with respect to the Debentures then outstanding,
then the Company may cease to comply with the terms of the Indenture,
including the restrictive covenants described under "Limitation on Liens of
Stock of Subsidiaries" and "Limitations on Disposition of Stock of Designated
Subsidiaries" above and the Events of Default described in clauses (c) and (d)
under "Events of Default" below, except for (i) the Company's obligation to
duly and punctually pay the principal of (and premium, if any) and interest on
the Debentures if the Debentures are not paid from the money or securities
held by the Trustee, and (ii) the Events of Default described in clauses (a),
(b), (c) and (d) under "Events of Default" below, and (iii) certain other
provisions of the Indenture including, among others, those relating to
registration, transfer and exchange, lost or
20
<PAGE>
stolen securities and maintenance of place of payment. Defeasance of the
Debentures is subject to the satisfaction of certain specified conditions,
including, among others, (i) the absence of an Event of Default at the date of
the deposit, and (ii) the perfection of the Holders' security interest in such
deposit.
Satisfaction and Discharge. Upon the deposit of money or securities
contemplated above and the satisfaction of certain conditions, the Company may
also cease to comply with its obligation duly and punctually to pay the
principal of (and premium, if any) and interest on the Debentures, or with any
Events of Default with respect thereto, and thereafter the Holders of the
Debentures shall be entitled only to payment out of the money or securities
deposited with the Trustee. Such conditions include, among others, except in
certain limited circumstances involving a deposit made within one year of
maturity or redemption, (i) the absence of an Event of Default at the date of
deposit or on the 91st day thereafter, (ii) the delivery to the Trustee by the
Company of an opinion of nationally-recognized tax counsel, or receipt by the
Company from, or publication of a ruling by the United States Internal Revenue
Service, to the effect that Holders of the Debentures will not recognize
income, gain or loss for Federal income tax purposes as a result of such
deposit and discharge and will be subject to Federal income tax on the same
amounts and in the same manner and at the same times as would have been the
case if such deposit and discharge had not occurred, and (iii) that such
satisfaction and discharge will not result in the delisting of the Debentures
from any nationally-recognized exchange on which they are listed.
Federal Income Tax Consequences. Under current Federal income tax law, the
deposit and defeasance described above under "Defeasance" will not result in a
taxable event to any Holder of Debentures or otherwise affect the Federal
income tax consequences of an investment in the Debentures.
The Federal income tax treatment of the deposit and discharge described
above under "Satisfaction and Discharge" is not clear. A deposit and discharge
may be treated as a taxable exchange of such Debentures for beneficial
interests in the trust consisting of the deposited money or securities. In
that event, a Holder of Debentures may be required to recognize gain or loss
equal to the difference between the Holder's adjusted basis for the Debentures
and the amount realized in such exchange (which generally will be the fair
market value of the Holder's beneficial interest in such trust). Thereafter,
such Holder may be required to include in income a share of the income, gain
and loss of the trust. As described above, it is generally a condition to such
a deposit and discharge to obtain an opinion of tax counsel, or receipt by the
Company from, or publication of a ruling by the United States Internal Revenue
Service, to the effect that such deposit and discharge will not alter the
Holders' tax consequences that would have been applicable in the absence of
the deposit and discharge. Purchasers of the Debentures should consult their
own advisors with respect to the tax consequences to them of such deposit and
discharge, including the applicability and effect of tax laws other than
Federal income tax law.
EVENTS OF DEFAULT
With respect to the Debentures, an Event of Default is defined in the
Indenture as being: (a) default for 30 days in payment of any interest on the
Debentures; (b) failure to pay principal or premium with respect to the
Debentures, if any, when due; (c) failure to observe or perform any other
covenant in the Indenture or Debentures (other than a covenant or warranty, a
default in whose performance or whose breach is specifically dealt with in the
section of the Indenture governing Events of Default), if such failure
continues for 30 days after written notice by the Trustee or the Holders of at
least 25% in aggregate principal amount of the Debentures then outstanding;
(d) uncured or unwaived failure to pay principal of or interest on any other
obligation for borrowed money of the Company beyond any period of grace with
respect thereto if (i) the aggregate principal amount of any such obligation
is in excess of $50,000,000 and (ii) the default in such payment is not being
contested by the Company in good faith and by appropriate proceedings; or (e)
certain events of bankruptcy, insolvency, receivership or reorganization. The
Trustee or the Holders of 25% in aggregate principal amount of the outstanding
Debentures may declare the Debentures immediately due and payable upon the
occurrence of any Event of Default (after expiration of any applicable grace
period); in certain cases, the Holders of a majority in principal amount of
the Debentures then outstanding may waive any past default and its
consequences, except a default in the payment of principal, premium, if any,
or interest (including sinking fund payments).
21
<PAGE>
Each Indenture provides that the Trustee shall, within 90 days after the
occurrence of a default with respect the Debentures which is continuing, give
to the Holders of the Debentures notice of all uncured defaults known to it
(the term default to include the events specified above without grace
periods); provided that, except in the case of default in the payment of
principal (or premium, if any) or interest on any of the Debentures, the
Trustee shall be protected in withholding such notice if it in good faith
determines that the withholding notice is in the interest of the Debenture
Holders.
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default with respect to the Debentures shall occur
and be continuing, the Indenture provides that the Trustee shall be under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders of Debentures outstanding
unless such Holders shall have offered to the Trustee reasonable indemnity.
The right of a Holder to institute a proceeding with respect to the Indenture
is subject to certain conditions precedent including notice and indemnity to
the Trustee, but the Holder has a right to receipt of principal, premium, if
any, and interest (subject to certain limitations with respect to defaulted
interest) on their due dates or to institute suit for the enforcement thereof.
So long as the Debentures remain outstanding the Company will be required to
furnish annually to the Trustee an Officers' Certificate stating whether, to
the best of the knowledge of the signers, the Company is in default under any
of the provisions of the Indenture, and specifying all such defaults, and the
nature thereof, of which they have knowledge. The Company will also be
required to furnish to the Trustee copies of certain reports filed by the
Company with the Commission.
The Holders of a majority in principal amount of the Debentures outstanding
will have the right to direct the time, method and place for conducting any
proceeding for any remedy available to the Trustee, or exercising any power or
trust conferred on the Trustee, provided that such direction shall be in
accordance with law and the provisions of the Indenture, provided that the
Trustee may decline to follow any such direction if the Trustee shall
determine on the advice of counsel that the proceeding may not be lawfully
taken or would be materially or unjustly prejudicial to Holders not joining in
such direction. The Trustee will be under no obligation to act in accordance
with such direction unless such Holders shall have offered the Trustee
reasonable security or indemnity against costs, expenses and liabilities which
may be incurred thereby.
INFORMATION CONCERNING THE TRUSTEE
The Company may from time to time borrow from the Trustee or an affiliate
thereof or otherwise maintain other banking transactions with the Trustee or
an affiliate thereof in the ordinary course of business.
Under the Indenture, the Trustee is required to transmit annual reports to
all Holders regarding its eligibility as Trustee under the Indenture and
certain related matters.
22
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated as of , 1998, the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters
has severally agreed to purchase, the principal amount of Debentures set forth
opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITERS DEBENTURES
------------ ------------
<S> <C>
Salomon Brothers Inc........................................ $
Credit Suisse First Boston Corporation......................
A.G. Edwards & Sons, Inc....................................
McDonald & Company Securities, Inc..........................
------------
Total.................................................... $350,000,000
============
</TABLE>
The Company has been advised by the Underwriters that they propose initially
to offer the Debentures to the public at the public offering price set forth
on the cover page of this Prospectus, and to certain dealers at such price
less a concession not in excess of % of the principal amount of the
Debentures. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of % of the principal amount of the Debentures to
certain other dealers. After the initial public offering, the public offering
price and such concessions may be changed.
In connection with this Offering, certain Underwriters and their affiliates
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the Debentures. Such transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M, pursuant to
which such persons may bid for or purchase Debentures for the purpose of
stabilizing their market price. The Underwriters also may create a short
position for the account of the Underwriters by selling more Debentures in
connection with the Offering than they are committed to purchase from the
Company, and in such case may purchase Debentures in the open market following
completion of the Offering to cover such short position. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Debentures at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
The Company does not presently intend to list the Debentures on any
exchange. The Company has been advised by the Underwriters that they intend to
make a market in the Debentures but that they are not obligated to do so and
may discontinue market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Debentures.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended, or contribute to payments the
Underwriters may be required to make in respect thereof.
LEGAL OPINIONS
The validity of the Debentures will be passed upon for the Company by
Beckman, Weil, Shepardson and Faller, LLC, Cincinnati, Ohio, and for the
Underwriters by Mayer, Brown & Platt, Chicago, Illinois. The attorneys at
Beckman, Weil, Shepardson and Faller, LLC representing the Company in this
Offering beneficially own approximately 20,100 shares of the Company's common
stock.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997 included in
this Prospectus and the related financial statement schedules incorporated in
this Prospectus by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 have been audited by Deloitte & Touche llp,
independent auditors, as stated in their reports appearing herein and
incorporated herein by reference, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
23
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Cincinnati Financial Corporation:
Condensed Interim Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998 and 1997... F-2
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 1998 and 1997.............................................. F-3
Condensed Consolidated Statement of Shareholders' Equity for the Three
Months Ended March 31, 1998 and 1997................................. F-4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997........................................ F-5
Notes to Condensed Consolidated Financial Statements.................. F-6
Annual Financial Statements
Independent Auditor's Report.......................................... F-8
Consolidated Balance Sheets as of December 31, 1997 and 1996.......... F-9
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995.................................................. F-10
Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995..................................... F-11
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.................................................. F-12
Notes to Consolidated Financial Statements............................ F-13
</TABLE>
F-1
<PAGE>
PART I
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000'S OMITTED)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Investments
Fixed Maturities (Cost: 1998--$2,614,127; 1997--
$2,571,549)....................................... $ 2,792,065 $2,751,219
Equity Securities (Cost: 1998--$1,812,209; 1997--
$1,725,855)....................................... 6,523,354 5,999,271
Other Invested Assets.............................. 47,852 46,560
Cash................................................. 75,895 80,168
Investment Income Receivable......................... 74,872 74,520
Finance Receivables.................................. 32,217 31,715
Premiums Receivable.................................. 160,526 158,539
Reinsurance Receivable............................... 110,008 109,110
Prepaid Reinsurance Premiums......................... 23,980 23,612
Deferred Acquisition Costs Pertaining to Unearned
Premiums and to Life Policies in Force.............. 135,304 135,313
Land, Buildings and Equipment for Company Use (at
Cost Less Accumulated Depreciation)................. 55,074 52,559
Other Assets......................................... 29,576 30,839
----------- ----------
Total Assets..................................... $10,060,723 $9,493,425
=========== ==========
LIABILITIES
Insurance Reserves:
Losses and Loss Expenses........................... $ 1,968,091 $1,936,534
Life Policy Reserves............................... 494,261 482,447
Unearned Premiums.................................... 440,697 443,054
Notes Payable........................................ 281,100 280,558
5.5% Convertible Senior Debentures Due 2002.......... 56,723 58,430
Federal Income Taxes
Current............................................ 51,970 24,335
Deferred........................................... 1,559,304 1,406,478
Other Liabilities.................................... 143,162 144,624
----------- ----------
Total Liabilities................................ 4,995,308 4,776,460
----------- ----------
SHAREHOLDERS' EQUITY
Common Stock, $2 per Share; Authorized 200,000
Shares; Issued 1998--169,787; 1997--169,391 Shares;
Outstanding 1998--166,753; 1997--166,356 Shares..... 339,574 338,782
Paid-In Capital...................................... 208,916 203,282
Retained Earnings.................................... 1,400,341 1,341,730
Accumulated Other Comprehensive Income............... 3,189,153 2,905,756
----------- ----------
5,137,984 4,789,550
Less Treasury Shares at Cost (1998--3,034 Shares;
1997--3,035 Shares.................................. (72,569) (72,585)
----------- ----------
Total Shareholders' Equity....................... 5,065,415 4,716,965
----------- ----------
Total Liabilities and Shareholders' Equity..... $10,060,723 $9,493,425
=========== ==========
</TABLE>
Common Stock, Paid-In-Capital and Share figures reflect the effects of a 3-
for-1 stock split effective to shareholders of record on April 24, 1998.
Accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1998 1997
-------- --------
(000'S OMITTED
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Revenue:
Premiums Earned:
Property and Casualty..................................... $378,400 $357,500
Life...................................................... 14,128 13,533
Accident and Health....................................... 2,064 1,950
-------- --------
Net Premiums Earned..................................... 394,592 372,983
Investment Income, Less Expenses.......................... 90,300 84,231
Realized Gain on Investments.............................. 25,642 24,303
Other Income.............................................. 2,020 2,220
-------- --------
Total Revenues.......................................... 512,554 483,737
-------- --------
Benefits & Expenses:
Insurance Losses and Policyholder Benefits................ 270,131 266,498
Commissions............................................... 70,211 67,443
Other Operating Expenses.................................. 36,121 33,135
Taxes, Licenses & Fees.................................... 12,821 11,982
Increase in Deferred Acquisition Costs Pertaining to
Unearned Premiums and to Life Policies in Force.......... 9 (174)
Interest Expense.......................................... 5,338 5,037
Other Expenses............................................ 1,590 1,538
-------- --------
Total Benefits & Expenses............................... 396,221 385,459
-------- --------
Income Before Income Taxes.................................. 116,333 98,278
-------- --------
Provision for Income Taxes:
Current................................................... 31,927 20,236
Deferred.................................................. 228 3,995
-------- --------
Total Provision for Income Taxes........................ 32,155 24,231
-------- --------
Net Income.................................................. $ 84,178 $ 74,047
======== ========
Average Shares Outstanding.................................. 166,601 166,437
======== ========
Average Shares Outstanding (diluted)........................ 172,538 172,817
======== ========
Per Common Share:
Net Income................................................ $ .51 $ .44
======== ========
Net Income (diluted)...................................... $ .49 $ .43
======== ========
Cash Dividends Declared................................... $ .1533 $ .1367
======== ========
</TABLE>
Per share amounts reflect the effects of a 3-for-1 stock split effective to
shareholders of record on April 24, 1998.
Accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON STOCK TREASURY PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT STOCK CAPITAL EARNINGS INCOME EQUITY
------- -------- -------- -------- ---------- ------------- -------------
(000'S OMITTED)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1996................... 167,486 $334,972 $(11,217) $178,547 $1,132,880 $1,527,707 $3,162,889
----------
Net Income.............. 74,047 74,047
Change in Unrealized
Gains Net of Income
Taxes of $129,969...... 241,371 241,371
----------
Comprehensive Income.... 315,418
Dividends Declared...... (22,688) (22,688)
Purchase/Issuance of
Treasury Shares........ (23,070) 17 (23,053)
Stock Options Exercised. 101 202 1,112 1,314
Conversion of
Debentures............. 3 6 37 43
------- -------- -------- -------- ---------- ---------- ----------
Balance March 31, 1997.. 167,590 $335,180 $(34,287) $179,713 $1,184,239 $1,769,078 $3,433,923
======= ======== ======== ======== ========== ========== ==========
Balance December 31,
1997................... 169,391 $338,782 $(72,585) $203,282 $1,341,730 $2,905,756 $4,716,965
Net Income.............. 84,178 84,178
Change in Unrealized
Gains Net of Income
Taxes of $152,599...... 283,397 283,397
----------
Comprehensive Income.... 367,575
Dividends Declared...... (25,567) (25,567)
Purchase/Issuance of
Treasury Shares........ 16 14 30
Stock Options Exercised. 281 562 4,142 4,704
Conversion of
Debentures............. 115 230 1,478 1,708
------- -------- -------- -------- ---------- ---------- ----------
Balance March 31, 1998.. 169,787 $339,574 $(72,569) $208,916 $1,400,341 $3,189,153 $5,065,415
======= ======== ======== ======== ========== ========== ==========
</TABLE>
Common Stock, Paid-In-Capital and Share figures reflect the effects of a 3-
for-1 stock split effective to shareholders of record on April 24, 1998.
Accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
(000'S OMITTED)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 84,178 $ 74,047
Adjustments to reconcile operating income to net cash
provided by operating activities:
Depreciation and amortization........................ 2,626 2,503
Increase in investment income receivable............. (352) (2,179)
(Increase) decrease in premiums receivable........... (1,987) 2,852
(Increase) decrease in reinsurance receivable........ (898) 14,481
Increase in prepaid reinsurance premiums............. (368) (294)
Increase in deferred acquisition costs............... 9 (174)
Decrease in accounts receivable...................... 3,811 216
Decrease in other assets............................. 3,663 44,215
Increase in loss and loss expense reserves........... 31,557 2,866
Increase in life policy reserves..................... 11,814 9,906
Decrease in unearned premiums........................ (2,357) (3,675)
Decrease in other liabilities........................ (4,327) (3,274)
Decrease in deferred income taxes.................... 228 4,102
Realized gains on investments........................ (25,642) (24,303)
Increase in current income taxes..................... 27,394 20,129
Other................................................ (5,645) (2,528)
--------- ---------
Net cash provided by operating activities.......... 123,704 138,890
--------- ---------
Cash flows from investing activities:
Sale of fixed maturities............................... 3,034 78,236
Call or maturity of fixed maturities investments....... 79,408 9,264
Sale of equity securities investments.................. 80,437 61,472
Collection of finance receivables...................... 3,426 2,716
Purchase of fixed maturities investments............... (123,074) (179,683)
Purchase of equity securities investments.............. (142,547) (93,175)
Investment in land, buildings and equipment............ (5,946) (2,632)
Investment in finance receivables...................... (3,928) (4,177)
Investment in other invested assets.................... (1,359) (38)
--------- ---------
Net cash used in investing activities.............. (110,549) (128,017)
--------- ---------
Cash flows from financing activities:
Proceeds from stock options exercised.................. 4,704 1,314
Purchase/Issuance of treasury shares................... 30 (23,053)
Increase in notes payable.............................. 542 1,853
Payment of cash dividends to shareholders.............. (22,704) (20,585)
--------- ---------
Net cash used in financial activities.............. (17,428) (40,471)
--------- ---------
Net decrease in cash..................................... (4,273) (29,598)
Cash at beginning of period.............................. 80,168 59,934
--------- ---------
Cash at end of period.................................... $ 75,895 $ 30,336
========= =========
Supplemental disclosures of cash flow information
Interest paid.......................................... $ 4,248 $ 5,256
========= =========
Income taxes paid...................................... $ 0 $ 0
========= =========
</TABLE>
Accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I--ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries, each of which is wholly owned, and are presented
in conformity with generally accepted accounting principles. All significant
inter-company investments and transactions have been eliminated in
consolidation. The December 31, 1997 consolidated balance sheet amounts are
derived from the audited financial statements but do not include all
disclosures required by generally accepted accounting principles.
Investments--Fixed maturities and equity securities have been classified as
available for sale and are carried at fair values at March 31, 1998 and
December 31, 1997.
Unrealized Gains and Losses (000's omitted)--The increases (decreases) in
unrealized gains for fixed maturities and equity securities (net of income tax
effect) for the three-month periods ended March 31 are as follows:
<TABLE>
<CAPTION>
FIXED EQUITY
MATURITIES SECURITIES TOTAL
---------- ---------- --------
<S> <C> <C> <C>
1998....................................... $ (1,126) $284,523 $283,397
1997....................................... $(16,883) $258,254 $241,371
</TABLE>
Such amounts are included as additions to and deductions from shareholders'
equity.
Reinsurance (000's omitted)--Premiums earned are net of $24,054 and $24,205
of premium on ceded business for March 31, 1998 and 1997, respectively.
Insurance losses and policyholder benefits in the accompanying consolidated
statements of income are net of $11,954 and $13,010 reinsurance recoveries for
March 31, 1998 and 1997, respectively.
NOTE II--STOCK OPTIONS
The Company has primarily qualified stock option plans under which options
are granted to employees of the Company at prices which are not less than
market price at the date of grant and which are exercisable over ten-year
periods. On March 31, 1998, outstanding options for Stock Option Plan No. III
totalled 49,614 shares with a purchase price of $7.34, outstanding options for
Stock Plan No. IV totalled 2,834,211 shares with purchase prices ranging from
a low of $7.46 to a high of $42.88 and outstanding options for Stock Plan V
totalled 1,419,405 shares with purchase prices ranging from a low of $20.48 to
a high of $45.38. These amounts reflect the effects of a 3-for-1 stock split
effective to shareholders of record on April 24, 1998.
NOTE III--INTERIM ADJUSTMENTS
The preceding summary of condensed financial statements for Cincinnati
Financial Corporation and consolidated subsidiaries are unaudited, but the
Company believes that all adjustments (consisting only of normal recurring
accruals) necessary for fair presentation have been made. The results of
operations for this interim period are not necessarily an indication of
results to be expected for the remaining nine months of the year.
NOTE IV--SUBSEQUENT EVENTS
On April 4, 1998, the Company's authorized capital was increased to
200,000,000 shares of common stock and a 3-for-1 stock split, in the form of a
200% stock dividend, was declared to shareholders of record April 24, 1998, to
be distributed May 15, 1998.
Cincinnati Financial Corporation filed a Form S-3 Registration Statement
with the Securities and Exchange Commission on May 1, 1998, to issue
$350,000,000 of debentures due 2028. The offering will be completed in late
May 1998.
F-6
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE V--FINANCIAL ACCOUNTING PRONOUNCEMENTS
Comprehensive Income--In the first quarter of 1998, the Company adopted
Statement of Financial Accounting Standard (SFAS) No. 130 "Reporting
Comprehensive Income." This statement requires financial statement reporting
of comprehensive income, which includes net income and other items, such as
the change in unrealized gains on investments, net of income taxes. The
accompanying consolidated financial statements have reflected the effects of
this pronouncement.
Segment Information--SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" is effective for the Company in 1998 and
will require additional disclosures for the Company's operating segments in
the annual consolidated financial statement. Beginning in 1999, certain
segment information is required to be reported quarterly.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Cincinnati Financial
Corporation:
We have audited the consolidated balance sheets of Cincinnati Financial
Corporation and subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996 and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Deloitte & Touche llp
Cincinnati, Ohio
February 4, 1998
(April 24, 1998 as to the effects of the stock split
and comprehensive income described in Note 1)
F-8
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000'S OMITTED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, at fair value (cost: 1997--
$2,571,549; 1996--$2,431,785)...................... $2,751,219 $2,561,805
Equity securities, at fair value (cost: 1997--
$1,725,855; 1996--$1,537,189)...................... 5,999,271 3,740,180
Other invested assets............................... 46,560 42,419
Cash.................................................. 80,168 59,933
Investment income receivable.......................... 74,520 70,446
Finance receivables................................... 31,715 26,864
Premiums receivable................................... 158,539 162,045
Reinsurance receivable................................ 109,110 115,906
Prepaid reinsurance premiums.......................... 23,612 22,924
Deferred acquisition costs pertaining to unearned
premiums and to life policies in force............... 135,313 127,588
Land, buildings and equipment for Company use (at
cost, less accumulated depreciation: 1997--$97,248;
1996--$85,541)....................................... 52,559 50,071
Other assets.......................................... 30,839 65,333
---------- ----------
Total assets ..................................... $9,493,425 $7,045,514
========== ==========
LIABILITIES
Insurance reserves
Losses and loss expenses............................ $1,936,534 $1,881,167
Life policy reserves................................ 482,447 440,281
Unearned premiums..................................... 443,054 425,750
Other liabilities..................................... 168,959 116,589
Deferred income taxes................................. 1,406,478 676,893
Notes payable......................................... 280,558 262,098
5.5% convertible senior debentures due 2002........... 58,430 79,847
---------- ----------
Total liabilities................................. 4,776,460 3,882,625
---------- ----------
SHAREHOLDERS' EQUITY
Common stock, par value--$2 per share; authorized
200,000 shares; issued, 1997--169,391; 1996--167,486. 338,782 334,972
Paid-in capital....................................... 203,282 178,547
Retained earnings..................................... 1,341,730 1,132,880
Accumulated other comprehensive income................ 2,905,756 1,527,707
---------- ----------
4,789,550 3,174,106
Less treasury shares at cost (1997--3,035 shares;
1996--576 shares).................................... (72,585) (11,217)
---------- ----------
Total shareholders' equity........................ 4,716,965 3,162,889
---------- ----------
Total liabilities and shareholders' equity........ $9,493,425 $7,045,514
========== ==========
</TABLE>
Adjusted to reflect 3 for 1 stock split payable May 15 to shareholders of
record April 24.
Accompanying notes are an integral part of this statement.
F-9
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(000'S OMITTED EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE
Premium income
Property and casualty.................... $1,453,526 $1,366,544 $1,263,257
Life..................................... 54,742 48,694 43,551
Accident and health...................... 8,110 7,659 7,318
---------- ---------- ----------
Net premiums earned...................... 1,516,378 1,422,897 1,314,126
Investment income.......................... 348,597 327,307 300,015
Realized gains on investments.............. 69,230 47,946 30,781
Other income............................... 8,179 10,599 10,729
---------- ---------- ----------
Total revenues......................... 1,942,384 1,808,749 1,655,651
---------- ---------- ----------
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits. 1,054,924 1,087,105 964,216
Commissions................................ 282,690 259,291 244,862
Other operating expenses................... 139,030 117,034 97,909
Taxes, licenses and fees................... 48,573 43,392 38,887
Increase in deferred acquisition costs
pertaining to unearned premiums and to
life policies in force ................... (7,725) (7,999) (10,086)
Interest expense........................... 20,821 20,102 17,231
Other expenses............................. 9,512 7,403 7,444
---------- ---------- ----------
Total benefits and expenses............ 1,547,825 1,526,328 1,360,463
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................. 394,559 282,421 295,188
---------- ---------- ----------
PROVISION FOR INCOME TAXES
Current.................................... 107,046 67,827 76,012
Deferred................................... (11,862) (9,166) (8,174)
---------- ---------- ----------
Total provision for income taxes....... 95,184 58,661 67,838
---------- ---------- ----------
NET INCOME................................. $ 299,375 $ 223,760 $ 227,350
========== ========== ==========
PER COMMON SHARE
Net Income................................. $ 1.81 $ 1.34 $ 1.36
========== ========== ==========
Net Income (diluted)....................... $ 1.77 $ 1.31 $ 1.33
========== ========== ==========
Cash dividends (declared).................. $ .55 $ .49 $ .43
========== ========== ==========
</TABLE>
Per share amounts reflect the effects of a 3-for-1 stock split effective to
shareholders of record on April 24, 1998.
Accompanying notes are an integral part of this statement.
F-10
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(000'S OMITTED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON TREASURY PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME EQUITY
-------- -------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $302,616 $ (914) $(95,952) $1,133,105 $ 601,192 $1,940,047
----------
Net income.............. 227,350 227,350
Change in unrealized
gains on investments... 858,763 858,763
Income taxes on
unrealized gains....... (300,567) (300,567)
----------
Comprehensive income.... 785,546
Dividends declared...... (71,262) (71,262)
5% stock dividend at
market................. 15,129 117,252 (132,566)* (185)
Purchase/issuance of
treasury shares........ (470) 182 (288)
Stock options exercised. 759 3,354 4,113
-------- -------- -------- ---------- ---------- ----------
Balance, December 31,
1995................... 318,504 (1,384) 24,836 1,156,627 1,159,388 $2,657,971
----------
Net income.............. 223,760 223,760
Change in unrealized
gains on investments... 566,644 566,644
Income taxes on
unrealized gains....... (198,325) (198,325)
----------
Comprehensive income.... 592,029
Dividends declared...... (81,498) (81,498)
5% stock dividend at
market................. 15,913 149,844 (166,009)* (252)
Purchase/issuance of
treasury shares........ (9,833) 870 (8,963)
Stock options exercised. 534 2,865 3,399
Conversion of
debentures............. 21 132 153
-------- -------- -------- ---------- ---------- ----------
Balance, December 31,
1996................... 334,972 (11,217) 178,547 1,132,880 1,527,707 3,162,889
----------
Net income.............. 299,375 299,375
Change in unrealized
gains on investments... 2,120,075 2,120,075
Income taxes on
unrealized gains....... (742,026) (742,026)
----------
Comprehensive income.... 1,677,424
Dividends declared...... (90,525) (90,525)
Purchase/issuance of
treasury shares........ (61,368) 654 (60,714)
Stock options exercised. 931 5,543 6,474
Conversion of
debentures............. 2,879 18,538 21,417
-------- -------- -------- ---------- ---------- ----------
Balance, December 31,
1997................... $338,782 $(72,585) $203,282 $1,341,730 $2,905,756 $4,716,965
======== ======== ======== ========== ========== ==========
</TABLE>
- -------
*Includes $183,718 and $251,851 for fractional shares paid in April 1995 and
1996, respectively.
Common Stock, Paid-In-Capital and Share figures reflect the effects of a 3-
for-1 stock split effective to shareholders of record on April 24, 1998.
Accompanying notes are an integral part of this statement.
F-11
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 299,375 $ 223,760 $ 227,350
Adjustments to reconcile net income to net
cash flows provided by operating
activities:
Depreciation and amortization............. 11,327 7,100 9,641
Increase in investment income receivable.. (4,074) (5,401) (8,976)
Decrease (increase) in premiums
receivable............................... 3,506 (928) (19,145)
Decrease (increase) in reinsurance
receivable............................... 6,796 (12,223) (36,558)
(Increase) decrease in prepaid reinsurance
premiums................................. (688) (1,089) 2,231
Increase in deferred acquisition costs.... (7,725) (7,999) (10,086)
Increase in accounts receivable........... (7,230) (2,080) (3,900)
Decrease (increase) in other assets....... 42,084 (31,538) (6,773)
Increase in loss and loss expense
reserves................................. 55,367 137,633 191,237
Increase in life policy reserves.......... 42,166 37,017 33,169
Increase in unearned premiums............. 17,304 17,126 26,505
Increase in other liabilities............. 49,672 6,984 9,522
Decrease in deferred income taxes......... (11,862) (9,272) (8,174)
Realized gains on investments............. (69,230) (47,946) (30,781)
Other..................................... 169 (2,805) 14,245
--------- --------- ---------
Net cash provided by operating
activities............................. 426,957 308,339 389,507
--------- --------- ---------
Cash flows from investing activities:
Sale of fixed maturities investments........ 138,741 219,131 118,986
Call or maturity of fixed maturities
investments................................ 376,496 247,205 187,320
Sale of equity securities investments....... 266,296 257,981 255,542
Collection of finance receivables........... 8,588 10,449 8,222
Purchase of fixed maturities investments.... (637,858) (564,317) (616,001)
Purchase of equity securities investments... (400,405) (353,340) (370,445)
Investment in land, buildings and equipment. (16,485) (17,798) (10,538)
Investment in finance receivables........... (13,439) (17,032) (12,335)
Increase in other invested assets........... (4,471) (7,030) (4,666)
--------- --------- ---------
Net cash used in investing activities... (282,537) (224,751) (443,915)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from stock options exercised....... 6,474 3,399 4,113
Purchase/issuance of treasury shares........ (60,714) (8,963) (287)
Increase in notes payable................... 18,460 41,093 91,889
Payment of cash dividends to shareholders... (88,405) (79,203) (69,542)
--------- --------- ---------
Net cash (used) provided in financing
activities............................. (124,185) (43,674) 26,173
--------- --------- ---------
Net increase (decrease) in cash............... 20,235 39,914 (28,235)
Cash at beginning of year..................... 59,933 20,019 48,254
--------- --------- ---------
Cash at end of year........................... $ 80,168 $ 59,933 $ 20,019
========= ========= =========
Supplemental disclosures of cash flow
information:
Interest paid............................... $ 21,823 $ 20,922 $ 16,001
========= ========= =========
Income taxes paid........................... $ 95,488 $ 65,000 $ 67,000
========= ========= =========
</TABLE>
Accompanying notes are an integral part of this statement.
F-12
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $324,000,000 and $296,000,000 of such reserves
at December 31, 1997 and 1996, 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
F-13
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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--
Fixed maturities (bonds and notes) and equity securities (common and
preferred stocks) are classified as available for sale and 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 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 weighted average number of
common shares outstanding during each of the respective years. The calculation
of net income per common share (diluted) assumes the conversion of convertible
senior debentures and the exercise of stock options.
Fair Value Disclosures--
Fair values for investments in fixed maturity securities (including
redeemable preferred stock) 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.
F-14
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock split--
On April 4, 1998, the Company's authorized capital stock was increased to
200,000,000 shares of common stock and a three-for-one stock split was
declared that is effective for shareholders of record as of April 24, 1998.
The financial statements, notes and other references to share and per share
data have been retroactively restated to reflect the stock split for all
periods presented.
Comprehensive Income--
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income". This
statement requires financial statement reporting of comprehensive income,
which includes net income and other items, such as the change in unrealized
gains on investments, net of income taxes. The financial statements and notes
have been retroactively restated to conform to SFAS 130 requirements.
Other--
SFAS No. 128 "Earnings Per Share" was adopted in 1997, and all prior period
earnings per share data has been restated.
SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information" will be effective for the Company in 1998 and will require
additional disclosures for the Company's operating segments.
Reclassifications--
Certain prior year amounts have been reclassified to conform with 1997
classifications.
2. INVESTMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
---------- -------- --------
(000'S OMITTED)
<S> <C> <C> <C>
Investment income summarized by investment
category:
Interest on fixed maturities................ $ 218,065 $208,907 $186,071
Dividends on equity securities.............. 128,403 118,932 111,458
Other investment income..................... 6,865 5,744 6,480
---------- -------- --------
Total..................................... 353,333 333,583 304,009
Less investment expenses.................... 4,736 6,276 3,994
---------- -------- --------
Net investment income..................... $ 348,597 $327,307 $300,015
========== ======== ========
Realized gains on investments summarized by
investment category:
Fixed maturities:
Gross realized gains...................... $ 22,075 $ 20,823 $ 14,466
Gross realized losses..................... (6,732) (10,207) (7,263)
Equity securities:
Gross realized gains...................... 62,337 47,310 38,705
Gross realized losses..................... (8,450) (9,980) (15,127)
---------- -------- --------
Realized gains on investments............. $ 69,230 $ 47,946 $ 30,781
========== ======== ========
Change in unrealized gains on investments
summarized by investment category:
Fixed maturities............................ $ 49,650 $(18,257) $181,475
Equity securities........................... 2,070,425 584,901 677,288
---------- -------- --------
Change in unrealized gains on investments. $2,120,075 $566,644 $858,763
========== ======== ========
</TABLE>
F-15
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Analysis of cost, gross unrealized gains, gross unrealized losses and fair
value as of December 31, 1997 and 1996 (000's omitted):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
1997 ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturities:
States, municipalities and
political subdivisions.......... $ 843,064 $ 47,811 $2,645 $ 888,230
Convertibles and bonds with
warrants attached............... 103,124 7,973 1,705 109,392
Public utilities................. 74,871 4,982 18 79,835
United States government and
government agencies and
authorities..................... 9,278 258 22 9,514
All other corporate bonds........ 1,541,212 125,174 2,138 1,664,248
---------- ---------- ------ ----------
Total.......................... $2,571,549 $ 186,198 $6,528 $2,751,219
========== ========== ====== ==========
Equity securities.................. $1,725,855 $4,277,294 $3,878 $5,999,271
========== ========== ====== ==========
1996
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
========== ========== ====== ==========
</TABLE>
Contractual maturity dates for investments in fixed maturity securities as of
December 31, 1997 (000's omitted):
<TABLE>
<CAPTION>
FAIR % OF
COST VALUE FAIR VALUE
---------- ---------- ----------
<S> <C> <C> <C>
Maturity dates occurring:
One year or less.......................... $ 58,119 $ 58,306 2.1
After one year through five years......... 337,683 360,838 13.1
After five years through ten years........ 905,388 958,526 34.9
After ten years........................... 1,270,359 1,373,549 49.9
---------- ---------- -----
Total................................... $2,571,549 $2,751,219 100.0
========== ========== =====
</TABLE>
Actual maturities may differ from contractual maturities when there exists a
right to call or prepay obligations with or without call or prepayment
penalties.
At December 31, 1997, investments with a cost of $51,585,000 were on deposit
with various states in compliance with certain regulatory requirements.
F-16
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investments in companies that exceed 10% of the Company's shareholders'
equity include the following as of December 31 (000's omitted):
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
FAIR FAIR
COST VALUE COST VALUE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Fifth Third Bancorp common
stock..................... $255,089 $2,612,607 $238,087 $1,331,625
Alltel Corporation common
stock..................... $ 95,810 $ 522,527 $ 95,720 $ 399,252
</TABLE>
3. DEFERRED ACQUISITION COSTS
Acquisition costs incurred and capitalized during 1997, 1996 and 1995
amounted to $322,117,000, $303,111,000 and $282,399,000, respectively.
Amortization of deferred acquisition costs was $314,392,000, $295,112,000 and
$272,313,000 for 1997, 1996 and 1995, respectively.
4. LOSSES AND LOSS EXPENSES
Activity in the reserve for losses and loss expenses is summarized as
follows (000's omitted):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1.................. $1,824,296 $1,690,461 $1,510,150
Less reinsurance receivable......... 121,881 109,719 78,125
---------- ---------- ----------
Net balance at January 1.............. 1,702,415 1,580,742 1,432,025
---------- ---------- ----------
Incurred related to:
Current year........................ 1,115,140 1,183,251 1,040,541
Prior years......................... (119,654) (151,996) (126,509)
---------- ---------- ----------
Total incurred........................ 995,486 1,031,255 914,032
---------- ---------- ----------
Paid related to:
Current year........................ 467,843 514,186 396,856
Prior years......................... 453,410 395,396 368,459
---------- ---------- ----------
Total paid............................ 921,253 909,582 765,315
---------- ---------- ----------
Net balance at December 31............ 1,776,648 1,702,415 1,580,742
Plus reinsurance receivable......... 112,235 121,881 109,719
---------- ---------- ----------
Balance at December 31................ $1,888,883 $1,824,296 $1,690,461
========== ========== ==========
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss expenses decreased by $119,654,000, $151,996,000
and $126,509,000 in 1997, 1996 and 1995. 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 $47,651,000 and $56,871,000 at December 31, 1997 and 1996,
respectively, for certain life/health losses and loss checks payable.
F-17
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LIFE POLICY RESERVES
Life policy reserves have been calculated using the account value basis for
universal life and annuity policies and primarily the Basic Table (select)
mortality basis for ordinary/traditional, industrial and other policies.
Following is a summary of such reserves (000's omitted):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Ordinary/traditional life.............................. $137,734 $123,473
Universal life......................................... 202,696 183,967
Annuities.............................................. 121,284 112,496
Industrial............................................. 16,470 16,881
Other.................................................. 4,263 3,464
-------- --------
Total................................................ $482,447 $440,281
======== ========
</TABLE>
At December 31, 1997 and 1996, the fair value associated with the annuities
shown above approximated $123,000,000 and $114,000,000, respectively.
6. NOTES PAYABLE
The Company and subsidiaries had no compensating balance requirement on debt
for either 1997 or 1996. Notes payable in the accompanying balance sheets are
short term, and interest rates charged on such borrowings ranged from 5.14% to
8.50% during 1997 which resulted in an average interest rate of 6.14%. At
December 31, 1997 and 1996, the fair value of the notes payable approximated
the carrying value and the weighted average interest rate approximated 6.44%
and 6.12%, respectively.
7. CONVERTIBLE SENIOR DEBENTURES
The convertible senior debentures are convertible by the debenture holders
into shares of common stock at a conversion price of $14.88 (67.23 shares for
each $1,000 principal). At December 31, 1997 and 1996, the fair value of the
debentures approximated $175,000,000 and $115,000,000, respectively.
8. REINSURANCE
Property and casualty premium income in the accompanying statements of
income includes approximately $41,694,000, $41,139,000 and $36,956,000 of
earned premiums on assumed business and is net of approximately $94,397,000,
$91,396,000 and $83,805,000 of earned premiums on ceded business for 1997,
1996 and 1995, respectively.
Written premiums for 1997, 1996 and 1995 consist of the following (000's
omitted):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Direct business....................... $1,523,915 $1,433,340 $1,338,205
Assumed business...................... 42,773 42,671 39,221
Ceded business........................ (95,085) (92,486) (81,574)
---------- ---------- ----------
Net................................. $1,471,603 $1,383,525 $1,295,852
========== ========== ==========
</TABLE>
Insurance losses and policyholder benefits in the accompanying statements of
income are net of approximately $34,744,000, $44,770,000 and $40,316,000 of
reinsurance recoveries for 1997, 1996 and 1995, respectively.
F-18
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FEDERAL INCOME TAXES
Significant components of the Company's net deferred tax liability as of
December 31, 1997 and 1996 are as follows (000's omitted):
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gains on investments.................... $1,558,580 $816,554
Deferred acquisition costs......................... 42,936 38,966
Other.............................................. 10,514 8,447
---------- --------
Total.............................................. 1,612,030 863,967
---------- --------
Deferred tax assets:
Losses and loss expense reserves................... 127,994 133,692
Unearned premiums.................................. 29,293 28,109
Life policy reserves............................... 19,460 15,962
Other.............................................. 28,805 9,311
---------- --------
Total.............................................. 205,552 187,074
---------- --------
Net deferred tax liability........................... $1,406,478 $676,893
========== ========
</TABLE>
The provision for federal income taxes is based upon a consolidated income
tax return for the Company and subsidiaries.
The differences between the statutory federal rates and the Company's
effective federal income tax rates are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
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...................... (4.44) (6.41) (6.10)
Dividend exclusion.............................. (6.54) (8.50) (8.04)
Other........................................... .10 .68 2.12
----- ----- -----
Effective rate.................................... 24.12 20.77 22.98
===== ===== =====
</TABLE>
No provision has been made (at December 31, 1997, 1996 and 1995) 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.
F-19
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(000'S OMITTED EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
1997
Net income per common share.......... $299,375 165,538 $1.81
=====
Effect of dilutive securities:
5.5% convertible senior
debentures...................... 2,712 3,928
Stock options.................... 1,329
-------- -------
Net income per common share
(diluted)........................... $302,087 170,795 $1.77
======== ======= =====
1996
Net income per common share.......... $223,760 167,209 $1.34
=====
Effect of dilutive securities:
5.5% convertible senior
debentures...................... 2,859 5,368
Stock options.................... 769
-------- -------
Net income per common share
(diluted)........................... $226,619 173,346 $1.31
======== ======= =====
1995
Net income per common share.......... $227,350 167,003 $1.36
=====
Effect of dilutive securities:
5.5% convertible senior
debentures...................... 2,860 5,378
Stock options.................... 665
-------- -------
Net income per common share
(diluted)........................... $230,210 173,046 $1.33
======== ======= =====
</TABLE>
Options to purchase 76,000, 1,458,000 and 372,000 shares of common stock were
outstanding during 1997, 1996 and 1995, respectively, but were not included in
the computation of net income per common share (diluted) because the options'
exercise prices were greater than the average market price of the common
shares.
F-20
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. 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, 1997 and 1996 (000's omitted):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation (vested benefits: 1997--$34,094; 1996--
$29,704)............................................ $ 35,202 $ 30,740
======== ========
Plan assets at fair value............................ $133,470 $ 92,740
Actuarial present value of projected benefit
obligation.......................................... 61,457 54,208
-------- --------
Plan assets in excess of projected benefit
obligation.......................................... 72,013 38,532
Unrecognized net transition asset at January 1, 1987
($7,774 amortized over 21 years).................... (3,702) (4,072)
Unrecognized prior service costs..................... (397) (437)
Unrecognized net gain................................ (68,558) (34,730)
-------- --------
Accrued pension cost................................. $ (644) $ (707)
======== ========
</TABLE>
Net pension expense for 1997, 1996 and 1995 includes the following
components (000's omitted):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost for current year.............. $ 3,449 $ 3,306 $ 2,555
Interest cost.............................. 3,938 3,572 3,014
Actual return on plan assets............... (43,752) (15,057) (20,717)
Net amortization and deferral.............. 36,302 8,615 14,720
-------- -------- --------
Net pension expense........................ $ (63) $ 436 $ (428)
======== ======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation as of December 31 was 6.75%, 7% and
6.75% in 1997, 1996 and 1995, 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, 1997,
1996 and 1995.
12. SHAREHOLDERS' EQUITY AND RESTRICTION
The insurance subsidiaries paid cash dividends to the Company of
approximately $95,500,000, $77,027,000 and $143,773,000 in 1997, 1996 and
1995, 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 1998,
the total dividends that can be paid to the Company without regulatory
approval are approximately $246,941,000.
942,534 shares of common stock were available for future stock option
grants, as of December 31, 1997.
F-21
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On November 22, 1996, the Board of Directors of the Company authorized the
repurchase of up to three million of the Company's outstanding shares as
management deemed appropriate, over an unspecified period of time. As of
December 31, 1997, the Company had repurchased 934,041 shares before the
three-for-one split.
13. STATUTORY ACCOUNTING INFORMATION
Net income and shareholders' equity, as determined in accordance with
statutory accounting practices for the Company's insurance subsidiaries, are
as follows (000's omitted):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net income:
Property/casualty insurance subsidiaries.... $212,808 $136,041 $152,003
Life/health insurance subsidiary............ $ 6,261 $ (1,812) $ 7,096
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C> <C>
Shareholders' equity:
Property/casualty insurance subsidiaries...... $2,148,746 $1,393,954
Life/health insurance subsidiary.............. $ 320,198 $ 214,130
</TABLE>
14. TRANSACTION WITH AFFILIATED PARTIES
The Company paid certain officers and directors, or insurance agencies of
which they are shareholders, commissions of approximately $11,780,000,
$10,874,000 and $10,034,000 on premium volume of approximately $78,727,000,
$70,418,000 and $60,720,000 for 1997, 1996 and 1995, respectively.
15. 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net income As reported $299,375 $223,760 $227,350
Pro forma 296,078 221,665 227,106
Net income per common share As reported $ 1.81 $ 1.34 $ 1.36
Pro forma 1.80 1.33 1.36
Net income per common share (dilut-
ed) As reported $ 1.77 $ 1.31 $ 1.33
Pro forma 1.75 1.30 1.33
</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 1997, 1996
and 1995, respectively: dividend yield of 1.22%, 2.26% and 2.26%; expected
volatility of 19.67%, 20.5% and 21.3%; risk-free interest rates of 5.89%,
6.56% and 5.73%; and expected lives of ten years for all 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 additional
outstanding nonvested awards).
F-22
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of options information for the years ended December 31, 1997, 1996
and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
(000'S OMITTED EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 3,774,492 $15.98 2,685,747 $13.41 2,676,393 $12.06
Granted................. 655,437 20.97 1,537,809 20.25 467,139 17.72
Exercised............... (465,429) 11.31 (272,778) 12.46 (408,873) 9.73
Forfeited/revoked....... (32,229) 17.96 (176,286) 19.56 (48,912) 13.30
--------- --------- ---------
Outstanding at end of
year................... 3,932,271 17.88 3,774,492 15.98 2,685,747 13.41
========= ========= =========
Options exercisable at
end of year............ 2,108,790 1,956,030 1,924,965
Weighted-average fair
value of options
granted during the
year................... $ 7.66 $ 6.85 $ 5.27
</TABLE>
Options outstanding at December 31, 1997 consisted 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>
$ 4 to
5 102,168 .25 yrs $ 4.59 102,168 $ 4.59
7 to
10 146,979 2.50 yrs 8.41 146,979 8.41
11 to
14 713,289 4.15 yrs 12.35 713,289 12.35
15 to
19 891,810 6.57 yrs 16.82 688,713 16.75
20 to
21 1,446,525 8.31 yrs 20.38 457,641 20.35
22 to
23 499,500 9.28 yrs 22.69 0 n/a
26 to
33 132,000 9.75 yrs 30.26 0 n/a
--------- ---------
3,932,271 6.91 yrs 17.88 2,108,790 14.87
========= =========
</TABLE>
F-23
<PAGE>
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. 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. 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
----------------------------------
1997 1996 1995
---------- ---------- ----------
(000'S OMITTED)
<S> <C> <C> <C>
Property/casualty insurance................ $ 28,955 $ (44,449) $ 2,894
Life/health insurance...................... 2,763 (2,906) (2,512)
Investment income (less required interest
on life reserves)......................... 321,620 305,211 279,346
Realized gains on investments.............. 69,230 47,946 30,781
Other...................................... 865 3,337 4,979
General corporate expenses................. (28,874) (26,718) (20,300)
---------- ---------- ----------
Total.................................... $ 394,559 $ 282,421 $ 295,188
========== ========== ==========
<CAPTION>
IDENTIFIABLE ASSETS
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Property/casualty insurance................ $4,953,259 $3,986,658 $3,526,900
Life/health insurance...................... 1,094,445 902,354 809,418
Other...................................... 66,227 53,351 44,487
Corporate assets........................... 3,379,494 2,103,151 1,728,493
---------- ---------- ----------
Total.................................... $9,493,425 $7,045,514 $6,109,298
========== ========== ==========
</TABLE>
F-24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN OR INCOR-
PORATED BY REFERENCE IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER CON-
TAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, ANY SUCH INFORMATION OR REP-
RESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER, DEALER OR AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OF-
FERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE AS OF
WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
The Company............................................................... 4
Use of Proceeds........................................................... 7
Capitalization............................................................ 8
Selected Consolidated Financial and Other Information..................... 9
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 10
Description of The Debentures............................................. 17
Underwriting.............................................................. 23
Legal Opinions............................................................ 23
Experts................................................................... 23
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$350,000,000
CINCINNATI FINANCIAL CORPORATION
% DEBENTURES DUE 2028
LOGO
--------
PROSPECTUS
, 1998
--------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
A.G. EDWARDS & SONS, INC.
MCDONALD & COMPANY
SECURITIES, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with the
issuance and distribution of the securities registered hereby, other than
underwriting discounts and commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $103,250
Trustee's fees and expenses..................................... 5,000
Printing expenses............................................... 10,000
Rating agency fees.............................................. 200,000
Accounting fees and expenses.................................... 5,000
Legal fees and expenses......................................... 30,000
Blue Sky fees and expenses...................................... 1,000
Miscellaneous................................................... 20,750
--------
Total....................................................... $375,000
========
</TABLE>
- --------
(1) Other than the SEC registration fee, all fees and expenses are estimates.
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 1701.13(E) of the Ohio Revised Code provides that a corporation may
indemnify or agree to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding whether civil, criminal, administrative, or investigative,
other than an action by or in the right of the corporation, by reason of the
fact that the person is or was a director, officer, employee, or agent of the
corporation, or is or was serving at its request as a director, trustee,
officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit, or proceeding if
the person is determined under the procedure described in the Section to have
(a) acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and (b) had no
reasonable cause to believe the conduct was unlawful in the case of any
criminal action or proceeding. However, with respect to expenses actually and
reasonably incurred in connection with the defense or settlement of any action
or suit by or in the right of the corporation to procure a judgment in its
favor, no indemnification is to be made (i) in respect of any claim, issue, or
matter as to which such person was adjudged liable for negligence or
misconduct in the performance of such person's duty to the corporation unless,
and only to the extent that, it is determined by the court upon application
that, despite the adjudication of liability, such person is fairly and
reasonably entitled to indemnity for such expenses as the court deems proper,
or (ii) in respect of any action or suit in which the only liability asserted
against a director is in connection with the alleged making of an unlawful
loan, dividend or distribution of corporate assets. The Section also provides
that such person shall be indemnified against expenses actually and reasonably
incurred by the person to the extent successful in defense of the actions
referred to above, or in defense of any claim, issue, or matter therein.
The Company's Amended Articles of Incorporation provide for the
indemnification of officers and directors of the Company to the fullest extent
permitted by law. The above is a general summary of certain provisions of the
Ohio Revised Code and is subject in all cases to the specific provisions
thereof.
The Company maintains an insurance policy covering its directors and
officers against certain civil liabilities, including liabilities under the
Securities Act of 1933.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See Exhibit Index included herewith which is incorporated herein by
reference.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
or 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy and expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby further undertakes that:
For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
For purposes of determining any liability under the Securities Act of 1933,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, CINCINNATI
FINANCIAL CORPORATION CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT
IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED
THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN CINCINNATI, OHIO, ON THE 13TH DAY OF MAY, 1998.
Cincinnati Financial Corporation
Robert B. Morgan
By: _________________________________
Robert B. Morgan
Chief Executive Officer
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THE 13TH DAY OF MAY, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
Robert B. Morgan Chief Executive Officer (Principal
___________________________________________ Executive Officer); Director
Robert B. Morgan
Theodore F. Elchynski Senior Vice President (Principal Financial
___________________________________________ and Accounting Officer)
Theodore F. Elchynski
* Director
___________________________________________
William F. Bahl
* Director
___________________________________________
Michael Brown
Director
___________________________________________
Richard M. Burridge
* Director
___________________________________________
John E. Field
* Director
___________________________________________
William R. Johnson
* Director
___________________________________________
</TABLE> Kenneth C. Lichtendahl
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Director
___________________________________________
James G. Miller
Director
___________________________________________
Jackson H. Randolph
Director
___________________________________________
John J. Schiff
* Director
___________________________________________
John J. Schiff, Jr.
Director
___________________________________________
Robert C. Schiff
* Director
___________________________________________
Thomas R. Schiff
* Director
___________________________________________
Frank J. Schultheis
Director
___________________________________________
Larry R. Webb
Director
___________________________________________
</TABLE> Alan R. Weiler
/s/ Theodore F. Elchynski
*By: ________________________________
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement**
4.1 Form of Indenture between the Company and The First National Bank of
Chicago*
5.1 Opinion of Beckman, Weil, Shepardson and Faller, LLC**
12.1 Statement Re: Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Beckman, Weil, Shepardson and Faller, LLC (included in
Exhibit 5.1)**
23.2 Consent of Deloitte & Touche LLP
24.1 Powers of Attorney**
25.1 Statement of Eligibility of The First National Bank of Chicago, as
Trustee, on Form T-1**
</TABLE>
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*To be filed by amendment.
**Previously filed.
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands except ratios)
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
- ---------------------------------------------------------- -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings Before Income Taxes $116,333 $ 98,278 $394,559 $282,421 $295,188 $249,328 $266,995
- ---------------------------------------------------------- -------------------------------------------------------
FIXED CHARGES
Interest Expense 5,338 5,037 20,821 20,102 17,231 9,961 7,389
One third rent expense 199 195 635 246 307 108 68
Total Fixed Charges 5,537 5,232 21,456 20,348 17,538 10,069 7,457
Earnings Available for Fixed Charges 121,870 103,510 416,015 302,769 312,726 259,397 274,452
Ratio 22.0x 19.8x 19.39x 14.88x 17.83x 25.76x 36.80x
</TABLE>
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-51677 of Cincinnati Financial Corporation of our report dated February 4,
1998 appearing in the Prospectus, which is a part of such Registration
Statement, and to the incorporation by reference of our report dated February 4,
1998 relating to the financial statement schedules appearing in the Annual
Report on Form 10-K of Cincinnati Financial Corporation for the year ended
December 31, 1997 and the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Cincinnati, Ohio
May 12, 1998
