<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
X Quarterly Report Under Section 13 or 15 (d) of the
--- Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
--- Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
--------------------
Commission File Number 0-4604
CINCINNATI FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
An Ohio Corporation 31-0746871
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6200 South Gilmore Road
Fairfield, Ohio 45014-5141
(Address of principal executive offices)
Registrant's telephone number, including area code: 513/870-2000
*Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X . NO .
----- -----
Securities registered pursuant to Section 12(g) of the Act:
$2.00 Par Common--165,048,000 shares outstanding at June 30, 1999
$43,073,000 of 5.5% Convertible Senior Debentures Due 2002
$419,607,000 of 6.9% Senior Debentures Due 2028
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(000's omitted)
(Unaudited)
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
- ------
Investments
Fixed Maturities (Cost: 1999--$2,700,584;
1998--$2,682,659) ............................... $ 2,712,676 $ 2,812,231
Equity Securities (Cost: 1999--$2,003,322;
1998--$1,943,206) ............................... 7,472,158 7,454,817
Other Invested Assets ............................. 61,380 57,902
Cash ................................................. 66,252 58,611
Investment Income Receivable ......................... 77,921 76,773
Finance Receivables .................................. 32,084 32,107
Premiums Receivable .................................. 175,901 164,412
Reinsurance Receivable ............................... 138,834 135,991
Prepaid Reinsurance Premiums ......................... 23,151 26,435
Deferred Acquisition Costs Pertaining to Unearned
Premiums and to Life Policies in Force ............ 143,793 142,896
Land, Buildings and Equipment for Company Use
(at Cost Less Accumulated Depreciation) ........... 70,357 53,639
Other Assets ......................................... 89,028 70,689
------------ ------------
Total Assets ................................... $ 11,063,535 $ 11,086,503
============ ============
LIABILITIES
Insurance Reserves:
Losses and Loss Expenses .......................... $ 2,078,818 $ 2,054,725
Life Policy Reserves .............................. 538,048 533,730
Unearned Premiums .................................... 460,143 459,695
Notes Payable ........................................ 50,000 -0-
5.5% Convertible Senior Debentures Due 2002 .......... 43,073 51,919
6.9% Senior Debentures Due 2028 ...................... 419,607 419,601
Federal Income Taxes
Current ........................................... 44,099 9,740
Deferred .......................................... 1,747,610 1,809,003
Other Liabilities .................................... 148,625 127,154
------------ ------------
Total Liabilities .............................. 5,530,023 5,465,567
------------ ------------
SHAREHOLDERS' EQUITY
Common Stock, $2 per Share; Authorized 200,000
Shares; Issued 1999--171,288; 1998--170,435
Shares; Outstanding 1999--165,048; 1998--166,681
Shares ............................................ 342,577 340,871
Paid-In Capital ...................................... 230,072 218,328
Retained Earnings .................................... 1,575,445 1,480,914
Accumulated Other Comprehensive Income ............... 3,573,853 3,678,019
------------ ------------
5,721,947 5,718,132
Less Treasury Shares at Cost (1999--6,240 Shares;
1998--3,754 Shares) ............................... (188,435) (97,196)
------------ ------------
Total Shareholders' Equity ..................... 5,533,512 5,620,936
------------ ------------
Total Liabilities and Shareholders' Equity .. $ 11,063,535 $ 11,086,503
============ ============
</TABLE>
Accompanying notes are an integral part of these financial statements.
<PAGE> 3
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS FOR INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(000's omitted except per share data)
Six Months Ended June 30, Three Months Ended June 30,
Revenues: 1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Premiums Earned:
Property and Casualty ..................... $ 804,637 $ 758,459 $ 408,540 $ 380,059
Life ...................................... 32,336 30,397 16,804 16,269
Accident and Health ....................... 4,576 4,135 2,405 2,072
----------- ----------- ----------- -----------
Net Premiums Earned .................... 841,549 792,991 427,749 398,400
Investment Income, Less Expenses ............ 190,524 181,386 94,709 91,086
Realized Gain on Investments ................ 38,788 52,763 14,041 27,121
Other Income ................................ 7,119 3,991 4,822 1,971
----------- ----------- ----------- -----------
Total Revenues ............................ 1,077,980 1,031,131 541,321 518,578
----------- ----------- ----------- -----------
Benefits & Expenses:
Insurance Losses and Policyholder Benefits.. 611,097 591,339 286,631 321,208
Commissions ................................ 153,331 138,050 80,416 67,839
Other Operating Expenses ................... 73,232 73,532 35,425 37,411
Taxes, Licenses & Fees ..................... 23,667 25,837 13,459 13,016
Increase in Deferred Acquisition Costs
Pertaining to Unearned Premiums
and to Life Policies in Force .......... (898) (2,236) (796) (2,245)
Interest Expense ........................... 15,391 11,482 7,606 6,143
Other Expenses ............................. 3,758 3,881 2,239 2,292
----------- ----------- ----------- -----------
Total Benefits & Expenses ................. 879,578 841,885 424,980 445,664
----------- ----------- ----------- -----------
Income Before Income Taxes ................... 198,402 189,246 116,341 72,914
----------- ----------- ----------- -----------
Provision for Income Taxes:
Current ..................................... 52,974 44,810 32,135 12,883
Deferred .................................... (5,303) 1,408 (2,048) 1,181
----------- ----------- ----------- -----------
Total Provision for Income Taxes .......... 47,671 46,218 30,087 14,064
----------- ----------- ----------- -----------
Net Income ................................... $ 150,731 $ 143,028 $ 86,254 $ 58,850
=========== =========== =========== ===========
Average Shares Outstanding ................... 165,507 166,768 163,105 166,933
Average Shares Outstanding (diluted) ......... 170,028 172,272 167,750 172,384
Per Common Share:
Net Income.................................... $ .91 $ .86 $ .53 $ .35
===== ===== ===== =====
Net Income (diluted).......................... $ .89 $ .84 $ .52 $ .35
===== ===== ===== =====
Cash Dividends Declared....................... $ .34 $ .31 $. 17 $ .15
===== ===== ===== =====
</TABLE>
Accompanying notes are an integral part of these financial statements.
<PAGE> 4
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
(000's omitted)
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
Accumulated
Other Total
Common Stock Treasury Paid-In Retained Comprehensive Shareholders'
Shares Amount Stock Capital Earnings Income Equity
-------- ------ ------ ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Bal. Dec. 31,
1997 169,391 $338,782 $ (72,585) $ 203,282 $1,341,730 $ 2,905,756 $4,716,965
----------
Net Income 143,028 143,028
Change in Unreal.
Gains Net of
Inc. Taxes of
$240,399 446,455 446,455
----------
Comprehensive
Income 589,483
Div. Declared (51,206) (51,206)
Purchase/Issuance of
Treasury Shares (611) 19 (592)
Stock Options
Exercised 453 906 6,946 7,852
Conversion of
Debentures 375 750 4,831 5,581
------- -------- --------- --------- ----------- ----------- ----------
Bal. June 30,
1998 170,219 $340,438 $ (73,196) $ 215,078 $ 1,433,552 $ 3,352,211 $5,268,083
======= ======== ========= ========= =========== =========== ==========
Bal. Dec. 31,
1998 170,435 $340,871 $ (97,196) $ 218,328 $ 1,480,914 $ 3,678,019 $5,620,936
----------
Net Income 150,731 150,731
Change in Unreal.
Gains Net of
Inc. Taxes of
($ 56,089) (104,166) (104,166)
----------
Comprehensive
Income 46,565
Div. Declared (56,200) (56,200)
Purchase/Issuance of
Treasury Shares (91,239) 9 (91,230)
Stock Options
Exercised 258 517 4,078 4,595
Conversion of
Debentures 595 1,189 7,657 8,846
------- -------- --------- --------- ----------- ----------- ----------
Bal. June 30,
1999 171,288 $342,577 $(188,435) $ 230,072 $ 1,575,445 $ 3,573,853 $5,533,512
======= ======== ========= ========= =========== =========== ==========
</TABLE>
Accompanying notes are an integral part of these financial statements.
<PAGE> 5
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(000's omitted)
Six Months Ended June 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 150,731 $ 143,028
Adjustments to reconcile operating income to net cash
provided by operating activities:
Depreciation and amortization ....................... 6,701 5,285
Increase in investment income receivable ............ (1,148) (991)
Increase in premiums receivable ..................... (11,489) (14,392)
Increase in reinsurance receivable .................. (2,842) (18,988)
Decrease (increase) in prepaid reinsurance premiums.. 3,284 (1,436)
Increase in deferred acquisition costs .............. (898) (2,236)
Decrease (increase) in accounts receivable .......... 13,145 (274)
Increase in other assets ............................ (14,662) (31,249)
Increase in loss and loss expense reserves .......... 24,092 90,211
Increase in life policy reserves .................... 4,318 27,526
Increase in unearned premiums ....................... 449 5,302
Increase (decrease) in other liabilities ............ 18,965 (40,458)
(Decrease) increase in deferred income taxes ........ (5,303) 1,408
Realized gains on investments ....................... (38,787) (52,763)
Increase (decrease) in current income taxes ......... 34,359 (22,682)
Other ............................................... (16,824) (5,763)
--------- ---------
Net cash provided by operating activities ........ 164,091 81,528
--------- ---------
Cash flows from investing activities:
Sale of fixed maturities ............................ 42,531 26,302
Call or maturity of fixed maturities investments .... 215,108 175,833
Sale of equity securities investments ............... 95,770 181,342
Collection of finance receivables ................... 8,838 7,180
Purchase of fixed maturities investments ............ (268,629) (242,643)
Purchase of equity securities investments ........... (123,012) (243,355)
Investment in land, buildings and equipment ......... (24,318) (9,737)
Investment in finance receivables ................... (8,814) (7,870)
Investment in other invested assets ................. (3,595) (3,850)
--------- ---------
Net cash used in investing activities ............ (66,121) (116,798)
--------- ---------
Cash flows from financing activities:
Debenture issue ..................................... 0 419,594
Proceeds from stock options exercised ............... 4,594 7,852
Purchase/Issuance of treasury shares ................ (91,229) (592)
Increase (decrease) in notes payable ................ 50,000 (279,152)
Payment of cash dividends to shareholders ........... (53,694) (48,273)
--------- ---------
Net cash used in financial activities ............ (90,329) 99,429
--------- ---------
Net increase in cash ...................................... 7,641 64,159
Cash at beginning of period ............................... 58,611 80,168
--------- ---------
Cash at end of period ..................................... $ 66,252 $ 144,327
========= =========
Supplemental disclosures of cash flow information
Interest paid .......................................... $ 15,331 $ 23,119
Income taxes paid ...................................... $ 18,000 $ 65,301
</TABLE>
Accompanying notes are an integral part of these financial statements.
<PAGE> 6
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company and
all of its subsidiaries, each of which is wholly owned, and are presented in
conformity with generally accepted accounting principles. All significant
inter-company investments and transactions have been eliminated in
consolidation. The December 31, 1998 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 June 30, 1999 and December
31, 1998.
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 six-month and three-month periods ended June 30 are as follows:
<TABLE>
<CAPTION>
Fixed Equity
Maturities Securities Total
---------- ---------- -----
<S> <C> <C> <C>
Six-Month Periods Ended
June 30, 1999 $ (76,362) $ (27,804) $ (104,166)
June 30, 1998 $ (224) $ 446,679 $ 446,455
Three-Month Periods Ended
June 30, 1999 $ (51,899) $ 138,415 $ 86,516
June 30, 1998 $ 902 $ 162,156 $ 163,058
</TABLE>
Such amounts are included as additions to and deductions from shareholders'
equity.
REINSURANCE (000's omitted)--Premiums earned are net of premiums on ceded
business, and insurance losses and policyholder benefits are net of reinsurance
recoveries in the accompanying statements of income for the six-month and
three-month periods ended June 30 as follows:
<TABLE>
<CAPTION>
Ceded Reinsurance
Premiums Recoveries
-------- ----------
<S> <C> <C>
Six-Month Periods Ended
June 30, 1999 $ 51,563 $ 24,006
June 30, 1998 $ 48,980 $ 35,252
Three-Month Periods Ended
June 30, 1999 $ 24,998 $ 12,717
June 30, 1998 $ 24,926 $ 23,298
</TABLE>
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
June 30, 1999, outstanding options for Stock Plan No. IV totalled 2,523,387
shares with purchase prices ranging from a low of $7.46 to a high of $42.88,
outstanding options for Stock Plan V totalled 1,422,638 shares with purchase
prices ranging from a low of $20.48 to a high of $45.38 and outstanding options
for Stock Plan VI totalled 1,393,851 shares with purchase prices ranging from a
low of $33.75 to a high of $41.47.
NOTE III - INTERIM ADJUSTMENTS
The preceding summary of financial information for Cincinnati Financial
Corporation and consolidated subsidiaries is unaudited, but the Company believes
that all adjustments (consisting only of normal recurring accruals) necessary
for fair presentation have been made. The results of operations for this interim
period is not necessarily an indication of results to be expected for the
remaining six months of the year.
<PAGE> 7
NOTE IV - SEGMENT INFORMATION
The Company is organized and operates principally in two industries and has four
reportable segments--commercial lines property and casualty insurance, personal
lines property and casualty insurance, life insurance and investment operations.
The accounting policies of the segments are the same as those described in Note
I Accounting Policies. Revenue is primarily from unaffiliated customers.
Identifiable assets by segment are those assets, including investment
securities, used in the Company's operations in each industry. Corporate and
other identifiable assets are principally cash and marketable securities.
Segment information, for which results are regularly reviewed by Company
management in making decisions about resources to be allocated to the segments
and assess their performance, is summarized as follows (000's omitted):
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
---------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Commercial lines insurance ........... $ 525,560 $ 503,601 $ 267,105 $ 252,038
Personal lines insurance ............. 279,077 254,858 141,435 128,021
Life insurance ....................... 36,912 34,532 19,209 18,341
Investment operations ................ 229,312 234,149 108,750 118,207
Corporate and other .................. 7,119 3,991 4,822 1,971
------------ ------------ ------------ ------------
Total revenues ................... $ 1,077,980 $ 1,031,131 $ 541,321 $ 518,578
============ ============ ============ ============
INCOME BEFORE INCOME TAXES
Property and casualty insurance ...... $ 702 $ (16,716) $ 21,538 $ (32,011)
Life insurance ....................... 345 2,583 207 2,229
Investment operations ................ 214,199 219,770 101,316 111,079
Corporate and other .................. (16,844) (16,391) (6,720) (8,383)
------------ ------------ ------------ ------------
Total income before income taxes.. $ 198,402 $ 189,246 $ 116,341 $ 72,914
============ ============ ============ ============
IDENTIFIABLE ASSETS
Property and casualty insurance ...... $ 5,538,591 $ 5,306,991
Life insurance ....................... 1,193,884 1,179,135
Corporate and other .................. 4,331,060 3,997,921
------------ ------------
Total identifiable assets ........ $ 11,063,535 $ 10,484,047
============ ============
</TABLE>
NOTE V - FINANCIAL ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - SFAS No. 133 "Accounting For
Derivative Instruments and Hedging Activities" is effective for the Company in
2001. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The effects of the Statement to the Company are not
yet known.
<PAGE> 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (000's omitted)
This Management Discussion is intended to supplement the data contained in the
financial statements and related notes of Cincinnati Financial Corporation and
subsidiaries. The following discussion, related consolidated financial
statements and accompanying notes 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 agencies with which it works to complete the
necessary information system changes required to handle the Year 2000 issue.
Readers are cautioned that the Company undertakes no obligation to review or
update the forward-looking statements included in this material.
Premiums earned for the six months ended June 30, 1999 have increased $48,558
(6%) over the six months ended June 30, 1998. Also, premiums earned have
increased $29,349 (7%) for the three months ended June 30, 1999 over the three
months ended June 30, 1998. For the six-month and three-month periods ended June
30, 1998, the growth rate of our property and casualty subsidiaries is more than
last year on an earned premium basis. This growth rate is greater than last year
because of increases in new business and some rate increases on personal lines
business along with some price firming in the commercial lines market. The
premium growth of our life and health subsidiary increased 7% for the six months
ended June 30, 1999 and 5% for the three months ended June 30, 1999 compared to
the comparable periods of 1998. The premium growth in our life subsidiary is
mainly attributable to increased sales of both traditional and
interest-sensitive products. This increase is less than last year, partially due
to the sale of a block of final expense policies in the second quarter, with
premiums of $700,000 during 1999. For the six-month and three-month periods
ended June 30, 1999, investment income, net of expenses, has increased $9,138
(5%) and $3,623 (4%) when compared with the first six months and second three
months of 1998, respectively. This increase is the result of the growth of the
investment portfolio because of investing cash flows from operations and
dividend increases from equity securities.
Realized gains on investments for the six months ended June 30, 1999 amounted to
$38,788 compared to $52,763 for the six-month period ended June 30, 1998, and
$14,041 for the three-month period ended June 30, 1999 compared to $27,121 for
the three-month period ended June 30, 1998. 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. Other equity securities
are sold at the discretion of management and reinvested in other equity
securities.
Insurance losses and policyholder benefits (net of reinsurance recoveries)
increased $19,758 (3%) for the first six months of 1999 over the same period in
1998 and decreased $34,577 for the second quarter when compared to the second
quarter of 1998. The losses and benefits of the property and casualty companies
have increased $19,394 for the six-month period and decreased $34,797 for the
second quarter of 1999 compared to the comparable periods for 1998. The property
and casualty losses for the first six months and for the second quarter of 1999
have decreased because of lower catastrophic losses. Catastrophe losses were
$31,037 and $57,289, respectively, for the first six months of 1999 and 1998 and
were $7,452 and $54,226, respectively, for the second quarter of 1999 and 1998.
These losses were substantially lower for the first six months and second
quarter of 1999 compared to the comparable periods of 1998 because of lower
incidence and severity of these weather-related claims. Policyholder benefits of
the life insurance subsidiary increased $364 for the first six months of 1999
over the same period of 1998 and increased $220 for the second quarter when
compared to the second quarter of 1998. The majority of the six-month and second
quarter increase is the result of a higher incidence of death claims and life
related costs.
<PAGE> 9
Commission expenses increased $15,281 for the six-month period ended June 30,
1999 compared to the same period of 1998 and increased $12,577 for the second
quarter of 1999 compared to the same period in 1998. The increase is primarily
attributable to higher contingency commissions. Other operating expenses
decreased $300 for the six-month period ended June 30, 1999 compared to the same
period for 1998 and decreased $1,986 for the second quarter of 1999 compared to
the same period in 1998. The decreases are attributable to the adoption of
Statement of Position (SOP) 98-1, capitalizing internal information systems
costs. This amounts to $4,525 in the first six months of 1999 and $2,444 in the
second quarter. Excluding these costs, the increase in other operating expenses
increased $4,225 in the first six months of 1999 and $458 in the second quarter
of 1999. These increases are attributable to increases in staff and other costs
related to our growth in business. Interest expense increased $3,909 for the
six-month period ended June 30, 1999 compared to the same period for 1998 and
increased $1,463 for the second quarter of 1999 compared to the same period in
1998. The increase is attributable to a higher interest rate of the 30-year
senior debentures compared to the short-term debt previously held, and an
increase in debt of $40,000 in the second quarter. Taxes, licenses and fees
decreased $2,170 for the six-month period ended June 30, 1999 compared to the
same period in 1998, attributable to decreases in tax rates in our domicile
state, Ohio, and related lower retaliatory taxes. Second quarter 1999 taxes,
licenses and fees increased $443, compared to second quarter 1998.
In the first six months of 1999, the Company experienced unrealized losses in
investments, compared to unrealized gains in investments in the first six months
of 1998, resulting in comprehensive income of $46,565 in 1999, compared to
$589,483 in 1998. The second quarter of 1999 resulted in unrealized gains in
investments of $86,516, compared to unrealized gains in investments of $163,058
in the second quarter 1998, resulting in comprehensive income of $172,770 and
$221,908 for the second quarter of 1999 and 1998, respectively.
Provision for income taxes, current and deferred, have increased by $1,453 for
the first six months of 1999 compared to the first six months of 1998 and have
increased $16,023 for the second quarter of 1999 compared to the second quarter
of 1998. The effective tax rates for the six months ended June 30, 1999 and 1998
were 24.0% and 24.4%, respectively. Second quarter effective tax rates were
25.9% and 19.3%, for 1999 and 1998, respectively.
The Company has been working on the Year 2000 project for several years to
address potential problems within the Company's operations that could result
from the century change. The corporate Information Systems Department is
primarily responsible for this endeavor and has a designated team of Company
associates assigned to this effort. This team has access to key associates in
all areas of the Company's operations as well as to outside consultants and
resources on an as-needed basis.
The Information Systems Department provides a comprehensive report on a
quarterly basis for corporate management and the Audit Committee of the Board of
Directors. This report identifies progress against the plan as well as
projections on specific issues.
We have identified computer systems (both hardware and software), including
equipment with embedded computer chips, that were not Year 2000 compliant;
determined what revisions or replacements would be needed to achieve compliance;
prioritized and proceeded to implement those revisions or replacements;
instituted testing procedures to ensure that the revisions and fixes are
operational; and moved the compliant systems into production. Additional
in-depth testing, both internal and third-party related, took place in the first
six months of 1999. All mission critical systems are completed. Non mission
critical systems are substantially complete. Compliant versions of a few vendor
supplied non mission critical products have not yet been provided. Year 2000
compliant work around for these situations have been determined.
As part of the overall review of Year 2000, the Company is verifying with
certain key outside vendors, where a significant business relationship exists to
determine their Year 2000 compliance status and plans. Because the Company
markets products through independent agencies, it is of paramount importance
that those approximately 1,000 agencies (1,300 offices) successfully transition
to a Year 2000 compliant processing system. We are actively working with those
agencies. As of June 30, 1999, nearly all of the agencies' processing systems
have been made compliant. The remaining agencies have plans to get them
compliant by September 30, 1999. Phone and personal interviews are being used to
verify the progress of the agencies.
<PAGE> 10
Contingency planning for the Year 2000 includes standard backup and recovery
procedures to be followed in the event of a critical system failure. While we do
not expect any unusual kinds of failure as a result of specific Year 2000
related changes, our departments have determined contingency plans for our
critical processes in the event that there should be a Year 2000 problem.
Should the Company or a third party with whom the Company transacts business
have a system failure due to the century change, it is believed it will not
result in more than a minor delay in processing or reporting, with no material
financial impact.
We previously budgeted $9.5 million pretax to resolve the Year 2000 issues, and
have increased it to $10.0 million pretax. This encompasses the costs of
modifications, the salaries of the associates primarily assigned to this effort
and the fees of outside consultants for this effort. As of June 30, 1999, the
Company incurred approximately $9.5 million of these costs. The expenses
incurred during the first six months of 1999 were approximately $1.7 million.
Although the Company's project has gone well and our internal systems are now
ready for the year 2000, we cannot predict the overall outcome or the success of
the Year 2000 project, or that third-party systems are or will be Year 2000
compliant, or that the costs required to address the Year 2000 issue or the
impact of a failure to achieve substantial Year 2000 compliance will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
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.
CFC, 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.
On February 6, 1999, the Board authorized repurchase of up to seventeen million
of the Company's outstanding shares, with the intent to complete the repurchase
by December 31, 2000. This authorization supersedes the previous authorization
of nine million shares. As of June 30, 1999, the Company has repurchased 2,120
shares, leaving 14,880 future repurchased shares authorized.
<PAGE> 11
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is involved in no material litigation other than routine litigation
incident to the nature of the insurance industry.
ITEM 2. Changes in Securities
There have been no material changes in securities during the second quarter.
ITEM 3. Defaults Upon Senior Securities
The Company has not defaulted on any interest or principal payment, and no
arrearage in the payment of dividends has occurred.
ITEM 4. Submission of Matters to a Vote of Security Holders
On April 3, 1999, the registrant held its Annual Meeting of Stockholders for
which the Board of Directors solicited proxies; all nominees named in the
Registrant's Proxy Statement were elected. A proposal for Stock Option Plan No.
VI was approved.
<TABLE>
<CAPTION>
Shares (000's)
--------------
For Against/Abstain
--- ---------------
<S> <C> <C>
James G. Miller .......... 142,351 1,043
Thomas R. Schiff ......... 142,348 1,046
Frank J. Schultheiss ..... 142,201 1,193
Larry R. Webb ............ 142,201 1,193
Stock Option Plan No. VI.. 134,490 8,904
</TABLE>
ITEM 5. Other Information
No matters to report.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits included:
Exhibit 11--Statement Re Computation of Per Share
Earnings. Exhibit 27--Financial Data Schedule
(b) The Company was not required to file any reports on Form
8-K during the quarter ended June 30, 1999.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CINCINNATI FINANCIAL CORPORATION
--------------------------------
(Registrant)
Date August 12, 1999
-----------------------------------
By /s/ Kenneth W. Stecher
--------------------------------
Kenneth W. Stecher
Senior Vice President
(Principal Financial Officer)
<PAGE> 12
EXHIBIT 11
CINCINNATI FINANCIAL CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(000's omitted except per share data)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
----------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income $150,731 $143,028 $ 86,254 $ 58,850
======== ======== ======== ========
Average shares outstanding 165,507 166,768 163,105 166,933
======== ======== ======== ========
Net income per common share $ .91 $ .86 $ .53 $ .35
======== ======== ======== ========
Diluted earnings per share:
Net income $150,731 $143,028 $ 86,254 $ 58,850
Interest on convertible debentures--net of tax 858 981 408 484
-------- -------- -------- --------
Net income for per share calculation (diluted) $151,589 $144,009 $ 86,662 $ 59,334
======== ======== ======== ========
Average shares outstanding 165,507 166,768 163,105 166,933
Effective of dilutive securities:
5.5% convertible senior debentures 2,895 3,553 2,895 3,553
Stock options 1,626 1,951 1,750 1,898
-------- -------- -------- --------
Total dilutive shares 170,028 172,272 167,750 172,384
======== ======== ======== ========
Net income per common share--diluted $ .89 $ .84 $ .52 $ .35
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 2,712,676
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 7,472,158
<MORTGAGE> 14,301
<REAL-ESTATE> 4,379
<TOTAL-INVEST> 10,246,214<F1>
<CASH> 66,252
<RECOVER-REINSURE> 3,499
<DEFERRED-ACQUISITION> 143,793
<TOTAL-ASSETS> 11,063,535
<POLICY-LOSSES> 2,573,001<F2>
<UNEARNED-PREMIUMS> 460,143
<POLICY-OTHER> 38,752
<POLICY-HOLDER-FUNDS> 18,931<F2>
<NOTES-PAYABLE> 512,680<F3>
0
0
<COMMON> 342,577<F4>
<OTHER-SE> 5,190,935<F4>
<TOTAL-LIABILITY-AND-EQUITY> 11,063,535
841,549
<INVESTMENT-INCOME> 190,524
<INVESTMENT-GAINS> 38,788
<OTHER-INCOME> 7,119
<BENEFITS> 611,097
<UNDERWRITING-AMORTIZATION> 177,509<F5>
<UNDERWRITING-OTHER> 90,972<F5>
<INCOME-PRETAX> 198,402
<INCOME-TAX> 47,671
<INCOME-CONTINUING> 150,731
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150,731
<EPS-BASIC> .91
<EPS-DILUTED> .89
<RESERVE-OPEN> 1,840,323<F6>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,906,048<F7>
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Equals the sum of Fixed maturities, Equity securities and other Invested
assets.
<F2>Equals the sum of Life policy reserves and Losses and loss expenses less the
Life Company liability for Supplementary contracts without Life contingencies
of $5,113 which is classified as Other Policyholder Funds.
<F3>Equals the sum of Notes payable, the 5.5% Convertible Senior Debentures and the
6.9% Senior Debentures.
<F4>Equals the total Shareholders' Equity.
<F5>Equals the sum of Commissions, Other operating expenses, Taxes and licenses and
fees, Increase in deferred acquisition costs, Interest expense and other
expenses.
<F6>Equals the net reserve for unpaid claims for the property casualty subsidiaries
less loss checks payable as of December 31, 1998.
<F7>Equals the net reserve for unpaid claims for the property casualty subsidiaries
less loss checks payable as of June 30, 1999.
</FN>
</TABLE>
