<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998 Commission file number
0-4604
CINCINNATI FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0746871
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6200 S. Gilmore Road, Fairfield, Ohio 45014-5141
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 870-2000
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Exchange on Which
Title of Each Class Registered
- -------------------- -----------------
$2.00 Par, Common Over The Counter
5.5% Convertible Senior Debentures Due 2002 Over The Counter
6.9% Senior Debentures Due 2028 Over The Counter
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of voting stock held by nonaffiliates of
Cincinnati Financial Corporation was $5,055,263,346 as of March 2, 1999.
As of March 2, 1999, there were 165,906,871 shares of common stock
outstanding.
Documents Incorporated by Reference
-----------------------------------
Annual Report to Shareholders for year ended December 31, 1998 (in part) into
Parts I, II and IV and Registrant's Proxy Statement dated March 1, 1999 into
Parts I, III and IV.
<PAGE> 2
PART I
ITEM 1. BUSINESS
--------
Cincinnati Financial Corporation ("CFC") was incorporated on
September 20, 1968 under the laws of the State of Delaware. On April 4, 1992,
the shareholders voted to adopt an Agreement of Merger by means of which the
reincorporation of the Corporation from the State of Delaware to the State of
Ohio was accomplished. CFC owns 100% of The Cincinnati Insurance Company
("CIC"), 100% of CFC Investment Company ("CFC-I") and 100% of CinFin Capital
Management Company ("CinFin"). The principal purpose of CFC is to be a holding
company for CIC, CFC-I and CinFin in addition for the purpose of acquiring other
companies.
CIC, incorporated in August, 1950, is an insurance carrier presently
licensed to conduct multiple line underwriting in accordance with Section
3941.02 of the Revised Code of Ohio. This includes the sale of fire, automobile,
casualty, bonds, and all related forms of property and casualty insurance in 50
states, the District of Columbia, and Puerto Rico. CIC is not authorized to
write any other forms of insurance. CIC is in a highly competitive industry and
competes in varying degrees with a large number of stock and mutual companies.
CIC also owns 100% of the stock of the following insurance companies.
1. The Cincinnati Life Insurance Company ("CLIC") incorporated in 1987 under
the laws of Ohio for the purpose of acquiring the business of Inter-Ocean
and The Life Insurance Company of Cincinnati. CLIC acquired The Life
Insurance Company of Cincinnati and Inter-Ocean Insurance Company on
February 1, 1988. CLIC is licensed for the sale of life insurance and
accident and health insurance in 46 states and the District of Columbia.
2. The Cincinnati Casualty Company ("CCC") (formerly the Queen City Indemnity
Company), incorporated in 1972 under the laws of Ohio, is licensed in the
fire and casualty insurance business on a direct billing basis in 40
states. The business of CIC and CCC is conducted separately, and there are
no plans for combining the business of said companies.
3. The Cincinnati Indemnity Company ("CID"), incorporated in 1988 under the
laws of Ohio, is engaged in the writing of nonstandard personal and
casualty lines of insurance in 31 states. The business of CIC and CID is
conducted separately, and there are no plans for combining the business of
said companies.
CFC-I, incorporated in 1970, owns certain real estate in the Greater
Cincinnati area and is in the business of leasing or financing various items,
principally automobiles, trucks, computer equipment, machine tools, construction
equipment, and office equipment.
CinFin, incorporated, yet inactive, in 1998, will offer investment
management services to corporations, institutions, and high net worth
individuals.
Industry segment information for revenues, income before income
taxes, and identifiable assets is included on page 35 of the Company's Annual
Report to Shareholders and is incorporated herein by reference (see Exhibit 13
to this filing).
As more fully discussed in pages 7 through 13 in the Company's Annual
Report to Shareholders, incorporated herein by reference (see Exhibit 13 to this
filing), the Company sells insurance primarily in the Midwest and Southeast
through a network of a limited number (978 in 29 states at December 31, 1998) of
selectively appointed independent agents, most of whom own stock in the Company.
Gross written premiums by property/casualty lines increased 6% to $1.656 billion
in 1998. The Company's mix of property/casualty business did not change
significantly in 1998. Life and accident and health insurance (which constituted
only 4% of the Company's premium income for 1998) is also sold primarily through
property/casualty agencies and the growth rate of 11.4% was the result of
increased sales of both traditional and interest-sensitive products.
2
<PAGE> 3
The consolidated financial statements include the estimated liability
for unpaid losses and loss adjustment expenses ("LAE") of the Company's
property/casualty ("P/C") insurance subsidiaries. Property and casualty
insurance is written in 50 states, the District of Columbia, and Puerto Rico.
The liabilities for losses and LAE are determined using case-basis evaluations
and statistical projections and represent estimates of the ultimate net cost of
all unpaid losses and LAE incurred through December 31 of each year. These
estimates are subject to the effect of trends in future claim severity and
frequency. These estimates are continually reviewed; and as experience develops
and new information becomes known, the liability is adjusted as necessary. Such
adjustments, if any, are reflected in current operations.
The Company does not discount any of its property/casualty
liabilities for unpaid losses and unpaid loss adjustment expenses.
There are two tables used to present an analysis of losses and LAE.
The first table, providing a reconciliation of beginning and ending liability
balances for 1998, 1997, and 1996, is on page 31 in the Company's Annual Report
to Shareholders, incorporated herein by reference (see Exhibit 13 to this
filing). The second table, showing the development of the estimated liability
for the ten years prior to 1998 is presented on the next page.
The reconciliation referred to in the preceding paragraph shows a
1998 recognition of $153,311,000 redundancy in the December 31, 1997 liability.
This redundancy is due in part to the effects of settling case reserves
established in prior years for less than expected and also in part to the over
estimation of the severity of IBNR losses. Average severity continues to
increase primarily because of increases in medical costs related to workers'
compensation and auto liability insurance. Litigation expenses for recent court
cases on pending liability claims continue to be very costly; and judgments
continue to be high and difficult to estimate. Reserves for environmental claims
have been reviewed, and the Company believes that the reserves are adequate.
Environmental exposures are minimal as a result of the types of risks we have
insured in the past. Historically, most commercial accounts written post-date
the coverages which afford clean-up costs and Superfund responses.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and LAE. While anticipated price increases due
to inflation are considered in estimating the ultimate claim costs, the increase
in average severities of claims is caused by a number of factors that vary with
the individual type of policy written. Future average severities are projected
based on historical trends adjusted for anticipated changes in underwriting
standards, policy provisions, and general economic trends. These trends are
monitored based on actual development and are modified if necessary.
The limits on risks retained by the Company vary by type of policy,
and risks in excess of the retention limits are reinsured. Because of the growth
in the Company's capacity to underwrite risks and reinsurance market conditions,
in 1989 and 1995, the Company raised its retention limits from $750,000 to
$1,000,000 to $2,000,000, respectively, for casualty and property lines of
insurance.
There are no differences between the property/casualty liabilities
reported in the accompanying consolidated financial statements in accordance
with generally accepted accounting principles ("GAAP") and that reported in the
annual statements filed with state insurance departments in accordance with
statutory accounting practices ("SAP").
3
<PAGE> 4
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
(Millions of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability for Unpaid Losses and
Loss Adjustment Expenses $631 $ 742 $ 833 $ 986 $1,138 $ 1,293 $ 1,432 $ 1,581 $ 1,702 $ 1,777 $ 1,840
Net Liability Reestimated as of:
One Year Later 671 751 869 956 1,098 1,200 1,306 1,429 1,582 1,623
Two Years Later 634 747 816 928 993 1,116 1,220 1,380 1,470
Three Years Later 622 696 795 823 949 1,067 1,214 1,279
Four Years Later 596 676 723 814 937 1,067 1,131
Five Years Later 580 635 720 824 943 1,013
Six Years Later 551 637 732 827 910
Seven Years Later 558 653 734 804
Eight Years Later 571 655 731
Nine Years Later 571 657
Ten Years Later 574
Net Cumulative Redundancy $ 57 $ 85 $ 102 $ 182 $ 228 $ 280 $ 301 $ 302 $ 232 $ 154
====== ===== ===== ===== ====== ======= ======= ======= ======= =======
Net Cumulative Amount of Liability
Paid Through:
One Year Later $204 $ 238 $ 232 $ 280 $ 310 $ 343 $ 368 $ 395 $ 453 $ 499
Two Years Later 321 356 397 440 498 538 578 630 732
Three Years Later 390 446 493 546 612 663 709 801
Four Years Later 441 497 552 611 681 734 802
Five Years Later 467 528 588 647 718 788
Six Years Later 485 550 610 666 743
Seven Years Later 496 563 621 676
Eight Years Later 502 570 631
Nine Years Later 507 577
Ten Years Later 512
<S> <C> <C> <C> <C> <C> <C> <C>
Net Liability--End of Year $ 1,138 $ 1,293 $ 1,432 $ 1,581 $ 1,702 $ 1,777 $ 1,840
Reinsurance Recoverable 62 72 78 109 122 112 138
------- ------- ------- ------- ------- ------- -------
Gross Liability--End of Year $ 1,200 $ 1,365 $ 1,510 $ 1,690 $ 1,824 $ 1,889 $ 1,978
======= ======= ======= ======= ======= ======= =======
Net Reestimated Liability--Latest $ 910 $ 1,013 $ 1,131 $ 1,279 $ 1,470 $ 1,623
Reestimated Recoverable--Latest 96 107 113 123 118 118
------- ------- ------- ------- ------- -------
Gross Reestimated Liability--Latest $ 1,006 $ 1,120 $ 1,244 $ 1,402 $ 1,588 $ 1,741
======= ======= ======= ======= ======= =======
Gross Cumulative Redundancy $ 194 $ 245 $ 266 $ 288 $ 236 $ 148
======= ======= ======= ======= ======= =======
</TABLE>
The table above presents the development of balance sheet
liabilities for 1988 through 1998. The top line of the table shows the
estimated liability for unpaid losses and LAE recorded at the balance
sheet date for each of the indicated years. This liability represents
the estimated amount of losses and LAE for claims arising in all prior
years that are unpaid at the balance sheet date, including losses that
had been incurred but not yet reported to the Company. The upper
portion of the table shows the reestimated amount of the previously
recorded liability based on experience as of the end of each succeeding
year. The estimate is increased or decreased as more information
becomes known about the frequency and severity of claims for individual
years.
4
<PAGE> 5
The "net cumulative redundancy" represents the aggregate change in
the estimates over all prior years. For example, the 1988 liability has
developed a $57,000,000 redundancy over ten years and has been reflected in
income over the ten years. The effects on income of the past three years of
changes in estimates of the liabilities for losses and LAE for all accident
years is shown in the reconciliation table, referred to above.
The lower section of the table shows the cumulative amount paid with
respect to the previously recorded liability as of the end of each succeeding
year. For example, as of December 31, 1998, the Company had paid $512,000,000 of
the currently estimated $574,000,000 of losses and LAE that have been incurred
as of the end of 1988; thus an estimated $62,000,000 of losses incurred as of
the end of 1988 remain unpaid as of the current financial statement date.
In evaluating this information, it should be noted that each amount
includes the effects of all changes in amounts for prior periods. For example,
the amount of deficiency or redundancy related to losses settled in 1993, but
incurred in 1988, will be included in the cumulative deficiency or redundancy
amount for 1988 and each subsequent year. This table does not present accident
or policy year development data which readers may be more accustomed to
analyzing. Conditions and trends that have affected development of the liability
in the past may not necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on this
table.
The Company limits the maximum net loss that can arise by large risks
or risks concentrated in areas of exposure by reinsuring (ceding) with other
insurers or reinsurers. Related thereto, the Company's retention levels were
last increased from $1,000,000 to $2,000,000 in 1995. The Company reinsures with
only financially sound companies. The composition of its reinsurers has not
changed, and the Company has not experienced any uncollectible reinsurance
amounts or coverage disputes with its reinsurers in more than ten years.
Information concerning the Company's investment strategy and
philosophy is contained on pages 18 through 22 of the Annual Report to
Shareholders, incorporated herein by reference (see Exhibit 13 to this filing).
The Company's primary strategy is to maintain liquidity to meet both its
immediate and long-range insurance obligations through the purchase and
maintenance of medium-risk fixed maturity and equity securities, while earning
optimal returns on medium-risk equity securities which offer growing dividends
and capital appreciation. The Company usually holds these securities to maturity
unless there is a change in credit risk or the securities are called by the
issuer. Historically, municipal bonds (with concentrations in the essential
services, i.e. schools, sewer, water, etc.) have been attractive to the Company
due to their tax exempt features. Because of Alternative Minimum Tax matters,
the Company uses a blend of tax-exempt and taxable fixed maturity securities.
Investments in common stocks have been made with an emphasis on securities with
an annual dividend yield of at least 2 to 3 percent and annual dividend
increases. The Company's strategy in equity investments is to identify
approximately 10 to 12 companies in which it can accumulate 10 to 20 percent of
their common stock. As a long-term investor, a buy and hold strategy has been
followed for many years, resulting in an accumulation of a significant amount of
unrealized appreciation on equity securities.
As of December 31, 1998, CFC employed 2,770 associates.
5
<PAGE> 6
ITEM 2. PROPERTIES
----------
CFC-I owns a fully leased 85,000 square feet office building in downtown
Cincinnati that is currently leased to Procter and Gamble Company, an
unaffiliated company, on a net, net, net lease basis. This property is carried
in the financial statements at $535,000 as of December 31, 1998.
CFC-I also owns the Home Office building located on 75 acres of land in
Fairfield, Ohio. This building contains approximately 380,000 square feet. The
John J. and Thomas R. Schiff & Company, an affiliated company, occupies
approximately 5,350 square feet, and the balance of the building is occupied by
CFC and its subsidiaries. The property is carried in the financial statements at
$10,832,005 as of December 31, 1998.
CFC-I also owns the Fairfield Executive Center which is located on the
northwest corner of the home office property in Fairfield, Ohio. This is a
four-story office building containing approximately 103,000 rentable square
feet. CFC and its subsidiaries occupy approximately 91% of the building and
unaffiliated tenants occupy approximately 9% of the building. The property is
carried in the financial statements at $9,890,539 as of December 31, 1998.
The CLIC owns a four-story office building in the Tri-County area of
Cincinnati containing approximately 127,000 square feet. At the present time,
100% of the building is currently being leased by an unaffiliated tenant. This
property is carried in the financial statements at $3,807,796 as of December 31,
1998.
In addition, the Company is in the process of constructing another Home
Office building to be used by CFC and its subsidiaries. This building is
identical and sits adjacent to the current Home Office building. The total
cost of the building is expected to be approximately $60 million. As of December
31, 1998, the Company had paid $10.6 million of such costs.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
The Company is involved in no material litigation other than routine
litigation incident to the nature of the insurance industry.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
CFC filed with the commission on March 2, 1999, definitive proxy statements
and annual reports pursuant to Regulation 14A. Material filed was the same as
that described in Item 4 and is incorporated herein by reference. No matters
were submitted during the fourth quarter.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
- -------------------------------------------------------------------------
This information is included in the Annual Report of the Registrant to its
shareholders on the inside back cover for the year ended December 31, 1998 and
is incorporated herein by reference (see Exhibit 13 to this filing).
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
This information is included in the Annual Report of the Registrant to its
shareholders on pages 14 and 15 for the year ended December 31, 1998 and
is incorporated herein by reference (see Exhibit 13 to this filing).
6
<PAGE> 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
This information is included in the Annual Report of the Registrant
to its shareholders on pages 16 through 22 for the year ended December 31, 1998
and is incorporated herein by reference (see Exhibit 13 to this filing).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
(a) Financial Statements
The following consolidated financial statements of the
Registrant and its subsidiaries, included in the Annual Report
of the Registrant to its shareholders on pages 23 to 35 for the
year ended December 31, 1998, are incorporated herein by
reference (see Exhibit 13 to this filing).
Independent Auditors' Report
Consolidated Balance Sheets--December 31, 1998 and 1997
Consolidated Statements of Income--Years ended December 31,
1998, 1997, and 1996
Consolidated Statements of Shareholders' Equity--Years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows--Years ended December 31,
1998, 1997, and 1996.
Notes to Consolidated Financial Statements
(b) Supplementary Data
Selected quarterly financial data, included in the Annual
Report of the Registrant to its shareholders on page 22 for the
year ended December 31, 1998, is incorporated herein by
reference (see Exhibit 13 to this filing).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There were no disagreements on accounting and financial disclosure
requirements with accountants within the last 24 months prior to December 31,
1998.
PART III
CFC filed with the Commission on March 2, 1999 definitive proxy
statements pursuant to regulation 14-A. Material filed was the same as that
described in Item 10, Directors and Executive Officers of the Registrant; Item
11, Executive Compensation; Item 12, Security Ownership of Certain Beneficial
Owners and Management; Item 13, Certain Relationships and Related Transactions,
and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) Filed Documents. The following documents are filed as part of
this report:
1. Financial Statements--incorporated herein by reference
(see Exhibit 13 to this filing) as listed in Part II of this
Report.
7
<PAGE> 8
2. Financial Statement Schedules and Independent Auditors'
Report:
Independent Auditors' Report
Schedule I--Summary of Investments
Other than Investments in Related Parties
Schedule II--Condensed Financial Information of Registrant
Schedule III--Supplementary Insurance Information
Schedule IV--Reinsurance
Schedule VI--Supplemental Information Concerning
Property-Casualty Insurance Operations
All other schedules are omitted because they are not
required, inapplicable or the information is included in
the financial statements or notes thereto.
3. Exhibits:
Exhibit 11--Statement recomputation of per share earnings
for years ended December 31, 1998, 1997, and
1996
Exhibit 13--Material incorporated by reference from the
annual report of the registrant to its
shareholders for the year ended December
31, 1998
Exhibit 21--Subsidiaries of the registrant--information
contained in Part I of this report
Exhibit 22--Published Report regarding matters
submitted to vote of securityholders--notice
of Annual Meeting of Shareholders and Proxy
Statement dated March 1, 1999--incorporated
by reference to such document previously
filed with Securities and Exchange
Commission, Washington, D.C., 20549
Exhibit 23--Independent Auditors' Consent
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K--NONE
8
<PAGE> 9
INDEPENDENT AUDITORS' REPORT
To The Shareholders and Board of Directors of
Cincinnati Financial Corporation
We have audited the consolidated financial statements of Cincinnati Financial
Corporation and its subsidiaries as of December 31, 1998 and 1997, and for each
of the three years in the period ended December 31, 1998, and have issued our
report thereon dated February 4, 1999; such consolidated financial statements
and report are included in your 1998 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the consolidated
financial statement schedules of Cincinnati Financial Corporation and its
subsidiaries, listed in Item 14(a)(2). These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such consolidated financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
/S/ Deloitte & Touche LLP
Cincinnati, Ohio
February 4, 1999
9
<PAGE> 10
SCHEDULE I
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
(000 omitted)
Amount at
which shown
Fair in balance
Type of Investment Cost Value sheet
------------------ ---- ----- ------------
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government and government agencies and
authorities
The Cincinnati Insurance Company................... $ 2,250 $ 2,318 $ 2,318
The Cincinnati Indemnity Company................... 455 499 499
The Cincinnati Casualty Company.................... 403 456 456
The Cincinnati Life Insurance Company ............. 5,935 6,250 6,250
------------ ------------- ------------
Total................................................ 9,043 9,523 9,523
------------ ------------- ------------
States, municipalities and political subdivisions:
The Cincinnati Insurance Company................... 834,022 883,173 883,173
The Cincinnati Indemnity Company................... 9,123 9,507 9,507
The Cincinnati Casualty Company.................... 17,879 19,198 19,198
The Cincinnati Life Insurance Company.............. 4,576 5,325 5,325
------------ ------------- ------------
Total................................................ 865,600 917,203 917,203
------------ ------------- ------------
Public utilities:
The Cincinnati Insurance Company................... 29,482 32,149 32,149
The Cincinnati Casualty Company.................... 5,210 5,643 5,643
The Cincinnati Life Insurance Company.............. 21,017 22,630 22,630
------------ ------------- ------------
Total................................................ 55,709 60,422 60,422
------------ ------------- ------------
Convertibles and bonds with warrants attached:
The Cincinnati Insurance Company................... 74,362 74,696 74,696
The Cincinnati Life Insurance Company.............. 14,630 15,020 15,020
Cincinnati Financial Corporation................... 11,368 11,938 11,938
------------ ------------- ------------
Total................................................ 100,360 101,654 101,654
------------ ------------- ------------
All other corporate bonds:
The Cincinnati Insurance Company................... 628,963 666,330 666,330
The Cincinnati Indemnity Company................... 13,813 15,044 15,044
The Cincinnati Casualty Company.................... 44,810 48,060 48,060
The Cincinnati Life Insurance Company.............. 535,410 574,228 574,228
Cincinnati Financial Corporation................... 428,951 419,767 419,767
------------ ------------- ------------
Total................................................ 1,651,947 1,723,429 1,723,429
------------ ------------- ------------
TOTAL FIXED MATURITIES................................. $2,682,659 $2,812,231 $2,812,231
------------ ------------- ------------
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
(000 omitted)
Amount at
which shown
Fair in balance
Type of Investment Cost Value sheet
------------------ ---- ----- ------------
<S> <C> <C> <C>
Equity Securities:
Common Stocks:
Public utilities
The Cincinnati Insurance Company................... $ 92,668 $ 340,208 $ 340,208
The Cincinnati Casualty Company.................... 3,697 11,110 11,110
The Cincinnati Life Insurance Company.............. 18,752 88,620 88,620
Cincinnati Financial Corporation................... 66,429 503,380 503,380
------------ ------------- --------------
Total.............................................. 181,546 943,318 943,318
------------ ------------- --------------
Banks, trust and insurance companies
The Cincinnati Insurance Company................... 323,905 1,280,397 1,280,397
The Cincinnati Casualty Company.................... 15,817 86,249 86,249
The Cincinnati Indemnity Company................... 725 806 806
The Cincinnati Life Insurance Company.............. 40,094 163,457 163,457
Cincinnati Financial Corporation................... 413,892 3,130,553 3,130,553
------------ ------------- --------------
Total.............................................. 794,433 4,661,462 4,661,462
------------ ------------- --------------
Industrial miscellaneous and all other
The Cincinnati Insurance Company................... 407,904 1,060,878 1,060,878
The Cincinnati Indemnity Company................... 5,505 12,678 12,678
The Cincinnati Casualty Company.................... 23,997 52,093 52,093
The Cincinnati Life Insurance Company.............. 53,075 134,283 134,283
Cincinnati Financial Corporation................... 70,852 147,901 147,901
------------ ------------- --------------
Total.............................................. 561,333 1,407,833 1,407,833
------------ ------------- --------------
Nonredeemable preferred stocks
The Cincinnati Insurance Company................... 290,750 323,105 323,105
The Cincinnati Casualty Company.................... 2,500 2,325 2,325
The Cincinnati Indemnity Company................... 934 990 990
The Cincinnati Life Insurance Company.............. 72,989 73,817 73,817
Cincinnati Financial Corporation................... 38,721 41,967 41,967
------------ ------------- --------------
Total.............................................. 405,894 442,204 442,204
------------ ------------- --------------
TOTAL EQUITY SECURITIES $1,943,206 $7,454,817 $ 7,454,817
------------ ------------- --------------
Other Invested Assets:
Mortgage loans on real estate
The Cincinnati Life Insurance Company.............. $ 3,043 XXXXXX $ 3,043
CFC-I Investment Company........................... 11,510 XXXXXX 11,510
------------ --------------
Total.............................................. 14,553 XXXXXX 14,553
------------ --------------
Real estate
The Cincinnati Life Insurance Company.............. 3,808 XXXXXX 3,808
CFC-I Investment Company........................... 664 XXXXXX 664
------------ --------------
Total.............................................. 4,472 XXXXXX 4,472
------------ --------------
Policy loans
The Cincinnati Life Insurance Company.............. 22,424 XXXXXX 22,424
------------ --------------
Notes receivable
CFC-I Investment Company........................... 16,453 XXXXXX 16,453
------------ --------------
TOTAL OTHER INVESTED ASSETS............................... $ 57,902 XXXXXX $ 57,902
- ----------------------------------------------------------- ------------ --------------
TOTAL INVESTMENTS......................................... $4,683,767 XXXXXX $10,324,950
============ ==============
</TABLE>
11
<PAGE> 12
SCHEDULE II CINCINNATI FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(000 OMITTED)
<TABLE>
<CAPTION>
Condensed Statements of Income (Parent Company Only)
For the Years ended December 31 1998 1997 1996
---- ---- ----
Income
- ------
<S> <C> <C> <C>
Dividends from Subsidiaries............................... $ 75,000 $ 125,000 $ 85,000
Investment Income......................................... 95,106 87,312 81,220
Realized Losses (Gains) on Investments.................... (23) 4,415 2,232
Other..................................................... 2,739 99 0
------------ ------------- ------------
Total ................................................. $ 172,822 $ 216,826 $ 168,452
------------ ------------- ------------
Expenses
- --------
Interest.................................................. $ 27,070 $ 20,306 $ 20,098
Other..................................................... 9,305 8,568 6,620
------------ ------------- ------------
Total Expenses......................................... 36,375 28,874 26,718
------------ ------------- ------------
Income Before Taxes and Earnings of Subsidiaries.......... 136,447 187,952 141,734
Applicable Income Taxes................................... 9,372 11,066 9,760
------------ ------------- ------------
Net Income Before Change in Undistributed Earnings of
Subsidiaries........................................... 127,075 176,886 131,974
Increase in Undistributed Earnings of Subsidiaries........ 114,492 122,489 91,786
------------ ------------- ------------
Net Income............................................. $ 241,567 $ 299,375 $ 223,760
============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
Condensed Balance Sheets (Parent Company Only)
December 31 1998 1997
---- ----
<S> <C> <C>
Assets
- ------
Cash....................................................................... $ 21,421 $ 6,942
Fixed Maturities, at Fair Value............................................ 431,704 427,275
Equity Securities, at Fair Value........................................... 3,823,801 2,915,049
Investment Income Receivable............................................... 21,431 18,569
Inter-Company Dividends Receivable......................................... 20,000 50,000
Equity in Net Assets of Subsidiaries....................................... 2,911,439 2,525,086
Finance Receivables........................................................ 4,221 7,829
Other Assets............................................................... 41,778 7,101
------------- ------------
Total Assets............................................................ $7,275,795 $5,957,851
============= ============
Liabilities
- -----------
Notes Payable.............................................................. $ 0 $ 265,564
Dividends Declared but Unpaid.............................................. 25,564 22,704
Federal Income Tax
Current................................................................. 8,316 10,729
Deferred................................................................ 1,133,387 863,298
5.5% Convertible Senior Debentures Due 2002................................ 51,919 58,430
6.9% Senior Debentures Due 2028............................................ 419,601 0
Other Liabilities.......................................................... 16,072 20,161
------------- ------------
Total Liabilities....................................................... $1,654,859 $1,240,886
Stockholders' Equity....................................................... 5,620,936 4,716,965
------------- ------------
Total Liabilities and Stockholders' Equity.............................. $7,275,795 $5,957,851
============= ============
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
SCHEDULE II CINCINNATI FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(000 OMITTED)
Condensed Statements of Cash Flows (Parent Company Only)
For the Years ended December 31
1998 1997 1996
---- ---- ----
Operating Activities
- --------------------
<S> <C> <C> <C>
Net Income............................................ $ 241,567 $ 299,375 $ 223,760
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Amortization........................................ (385) (624) (782)
Increase in Investment Income Receivable............ (2,862) (228) (2,602)
(Decrease) Increase in Current Federal Income
Taxes Payable....................................... (2,413) 1,307 1,733
Provision for Deferred Income Taxes................. 642 159 1,116
Decrease (Increase) in Dividends Receivable
from Subsidiaries................................... 30,000 (29,500) (7,973)
(Increase) Decrease in Other Assets................. (34,677) 3,417 (6,928)
(Decrease) Increase in Other Liabilities............ (4,089) 11,806 3,391
Increase in Undistributed Earnings of Subsidiaries.. (114,492) (122,489) (91,786)
Realized Losses (Gains) on Investments.............. 23 (4,415) (2,232)
--------- --------- ---------
Net Cash Provided by Operating Activities............. 113,314 158,808 117,697
--------- --------- ---------
Investing Activities
- --------------------
Sale of Fixed Maturity Investments.................... 30,805 62,712 78,701
Maturity of Fixed Maturity Investments................ 68,396 77,380 6,807
Sale of Equity Security Investments................... 7,125 9,982 36,825
Collection of Finance Receivables..................... 3,608 1,330 -0-
Purchase of Fixed Maturity Investments................ (132,759) (119,592) (139,934)
Purchase of Equity Security Investments............... (116,530) (40,834) (52,282)
Investment in Finance Receivables..................... -0- (9,159) -0-
--------- --------- ---------
Net Cash Used in Investing Activities................. (139,355) (18,181) (69,883)
========= ========= =========
Financing Activities
- --------------------
(Decrease) Increase in Other Short-Term Borrowings.... (265,564) 3,466 41,093
Proceeds from Issue of 6.9% Senior Debentures......... 419,593 0 0
Payment of Cash Dividends............................. (99,522) (88,405) (79,203)
Purchase/Issuance of Treasury Shares.................. (24,301) (60,714) (8,963)
Proceeds from Stock Options Exercised................. 10,314 6,474 3,399
------ --------- ---------
Net Cash Provided by (Used in) Financing Activities... 40,520 (139,179) (43,674)
------ --------- ---------
Increase in Cash...................................... 14,479 1,448 4,140
Cash at Beginning of Year............................. 6,942 5,494 1,354
Cash at End of Year................................... $ 21,421 $ 6,942 $ 5,494
========= ========= =========
</TABLE>
13
<PAGE> 14
SCHEDULE III
CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(000 omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H
-------- -------- -------- -------- -------- -------- -------- --------
Future
Policy
Benefits Other Benefits,
Deferred Losses, Policy Claims
Policy Claims & Claims & Net Losses &
Acquisition Expense Unearned Benefits Premium Investment Settlement
Segment Cost Losses Premiums Payable Revenue Income(3) Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Commercial Lines Insurance ......... $ --(3) $1,644,823 $ 287,148 $ --(3) $1,019,463 $ -- $ 725,621
Personal Lines Insurance ........... --(3) 333,637 171,722 --(3) 523,176 -- 427,262
---------- ---------- ---------- ------- ---------- -------- ----------
Total Property/Liability Insurance 86,611 1,978,460 458,870 50,422 1,542,639 -- 1,152,883
Life/Health Insurance .............. 56,285 544,093 825 15,480 70,096 -- 68,235
---------- ---------- ---------- ------- ---------- -------- ----------
Grand Total ........................ $ 142,896 $2,522,553 $ 459,695 $65,902 $1,612,735 $ -- $1,221,118
========== ========== ========== ======= ========== ======== ==========
1997
Commercial Lines Insurance ......... $ --(3) $1,567,436 $ 285,401 $ --(3) $ 983,761 $ -- $ 624,639
Personal Lines Insurance ........... --(3) 321,447 156,677 --(3) 469,765 -- 370,847
Total Property/Liability Insurance 83,759 1,888,883 442,078 24,614 1,453,526 -- 995,486
---------- ---------- ---------- ------- ---------- -------- ----------
Life/Health Insurance .............. 51,554 491,374 976 14,110 62,852 -- 59,438
---------- ---------- ---------- ------- ---------- -------- ----------
Grand Total ........................ $ 135,313 $2,380,257 $ 443,054 $38,724 $1,516,378 $ -- $1,054,924
========== ========== ========== ======= ========== ======== ==========
1996
Commercial Lines Insurance ......... $ --(3) $1,528,093 $ 282,796 $ --(3) $ 947,007 $ -- $ 669,169
Personal Lines Insurance ........... --(3) 296,203 141,691 --(3) 419,537 -- 362,086
---------- ---------- ---------- ------- ---------- -------- ----------
Total Property/Liability Insurance 79,914 1,824,296 424,487 35,500 1,366,544 -- 1,031,255
Life/Health Insurance .............. 47,674 448,969 1,263 12,683 56,353 -- 55,850
---------- ---------- ---------- ------- ---------- -------- ----------
Grand Total ........................ $ 127,588 $2,273,265 $ 425,750 $48,183 $1,422,897 $ -- $1,087,105
========== ========== ========== ======= ========== ======== ==========
<CAPTION>
Column A Column I Column J Column K
-------- -------- -------- --------
Amortization
of Deferred
Policy Other
Acquisition Operating Premium
Segment Costs Expenses Written
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Commercial Lines Insurance ......... $ --(3) $ --(3) $1,019,786
Personal Lines Insurance ........... --(3) --(3) 537,795
---------- -------- ----------
Total Property/Liability Insurance 365,183 91,414 1,557,581
Life/Health Insurance .............. 11,465 20,655 8,392(4)
---------- -------- ----------
Grand Total ........................ $ 376,648 $112,069 $1,565,973
========== ======== ==========
1997
Commercial Lines Insurance ......... $ --(3) $ --(3) $ 987,446
Personal Lines Insurance ........... --(3) --(3) 484,157
Total Property/Liability Insurance 305,336 130,960 1,471,603
---------- -------- ----------
Life/Health Insurance .............. 9,056 17,737 8,112(4)
---------- -------- ----------
Grand Total ........................ $ 314,392 $148,697 $1,479,715
========== ======== ==========
1996
Commercial Lines Insurance ......... $ --(3) $ --(3) $ 952,791
Personal Lines Insurance ........... --(3) --(3) 430,734
---------- -------- ----------
Total Property/Liability Insurance 287,222 98,844 1,383,525
Life/Health Insurance .............. 7,890 16,879 7,652(4)
---------- -------- ----------
Grand Total ........................ $ 295,112 $115,723 $1,391,177
========== ======== ==========
</TABLE>
Notes to Schedule III:
- ----------------------
(1) The sum of columns C, D, & E is equal to the sum of Losses and loss
expense reserves, Life policy reserves, and Unearned premium reserves
reported in the Company's consolidated balance sheets.
(2) The sum of columns I & J is equal to the sum of Commissions, Other
operating expenses, Taxes, licenses, and fees, Increase in deferred
acquisition costs, and other expenses shown in the consolidated
statement of income, less other expenses not applicable to the above
insurance segments.
(3) This segment information is not regularly allocated to segments and
reviewed by Company management in making decisions about resources to
be allocated to the segments and assess their performance.
(4) Amounts represent written premiums on accident and health insurance
business only.
14
<PAGE> 15
SCHEDULE IV CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
REINSURANCE
FOR YEARS ENDING DECEMBER 31, 1998, 1997, AND 1996
(000 omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- -------- -------- -------- -------- -------- --------
Ceded to Assumed from Percentage of
Gross Other Other Net Amount Assumed
Amount Companies Companies Amount to Net
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
- ----
Life Insurance in Force ............ $13,048,209 $ 3,080,996 $ 11,647 $ 9,978,860 .1%
=========== =========== =========== ===========
Premiums
Commercial Lines Insurance ......... $ 1,055,769 $ 74,251 $ 37,945 $ 1,019,463 3.7%
Personal Lines Insurance ........... 544,153 21,822 845 523,176 .2%
----------- ----------- ----------- -----------
Total Property/Liability Insurance 1,599,922 96,073 38,790 1,542,639 2.5%
----------- ----------- ----------- -----------
Life/Health Insurance .............. 75,657 5,682 121 70,096 .2%
----------- ----------- ----------- -----------
Grand Total Premiums ............... $ 1,675,579 $ 101,755 $ 38,911 $ 1,612,735 2.4%
=========== =========== =========== ===========
1997
- ----
Life Insurance in Force ............ $10,844,743 $ 1,313,957 $ 13,631 $ 9,544,417 .1%
=========== =========== =========== ===========
Premiums
Commercial Lines Insurance ......... $ 1,016,586 $ 74,137 $ 41,157 $ 983,606 4.2%
Personal Lines Insurance ........... 489,643 20,260 537 469,920 .1%
----------- ----------- ----------- -----------
Total Property/Liability Insurance 1,506,229 94,397 41,694 1,453,526 2.9%
----------- ----------- ----------- -----------
Life/Health Insurance .............. 68,073 5,357 136 62,852 .2%
----------- ----------- ----------- -----------
Grand Total Premiums ............... $ 1,574,302 $ 99,754 $ 41,830 $ 1,516,378 2.8%
=========== =========== =========== ===========
1996
- ----
Life Insurance in Force ............ $ 9,775,948 $ 1,272,331 $ 15,919 $ 8,519,536 .2%
=========== =========== =========== ===========
Premiums
Commercial Lines Insurance ......... $ 978,460 $ 72,219 $ 40,681 $ 946,922 4.3%
Personal Lines Insurance ........... 438,341 19,177 458 419,622 .1%
----------- ----------- ----------- -----------
Total Property/Liability Insurance 1,416,801 91,396 41,139 1,366,544 3.0%
----------- ----------- ----------- -----------
Life/Health Insurance .............. 60,994 4,749 108 56,353 .2%
----------- ----------- ----------- -----------
Grand Total Premiums ............... $ 1,477,795 $ 96,145 $ 41,247 $ 1,422,897 2.9%
=========== =========== =========== ===========
</TABLE>
15
<PAGE> 16
SCHEDULE VI
CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
FOR YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(000 omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G
- -------- -------- -------- -------- -------- -------- --------
Reserves
for Unpaid
Deferred Claims and Discount,
Affiliation Policy Claim if any, Net
with Acquisition Adjustment Deducted in Unearned Earned Investment
Registrant Costs Expenses Column C Premiums Premiums Income
- ------------------------------------------------------------------------------------------
Consolidated
Property-Casualty
Entities
<C> <C> <C> <C> <C> <C> <C>
1998 $86,611 $1,978,460 $0 $458,870 $1,542,639 $203,919
==== ======= ========== == ======== ========== ========
1997 $83,759 $1,888,883 $0 $442,078 $1,453,526 $199,427
==== ======= ========== == ======== ========== ========
1996 $79,914 $1,824,296 $0 $424,487 $1,366,544 $190,318
==== ======= ========== == ======== ========== ========
Column A Column B Column C Column D Column E Column F Column G
- -------- -------- -------- -------- -------- -------- --------
<CAPTION>
Amortization
Claims and Claim of
Adjustment Expenses Deferred Paid Claims
Affiliation Incurred Related to Policy and Claim
with (1) (2) Acquisition Adjustment Premiums
Registrant Current Year Prior Years Costs Expenses Written
- ----------------------------------------------------------------------------------------
Consolidated
Property-Casualty
Entities
<S> <C> <C> <C> <C> <C>
1998 $1,306,194 $(153,311) $365,183 $1,089,208 $1,557,581
==== ========== ========= ======== ========== ==========
1997 $1,115,140 $(119,654) $305,336 $921,253 $1,471,603
==== ========== ========= ======== ========== ==========
1996 $1,183,251 $(151,996) $287,222 $909,582 $1,383,525
==== ========== ========= ======== ========== ==========
</TABLE>
16
<PAGE> 17
Index of Exhibits
Exhibit 11--Statement recomputation of per share earnings for the years ended
December 31, 1998, 1997, and 1996
Exhibit 13--Material incorporated by reference from the annual report of the
registrant to its shareholders for the year ended December 31,
1998
Exhibit 21--Subsidiaries of the registrant--information contained in Part I of
this report
Exhibit 22--Notice of Annual Meeting of Shareholders and Proxy Statement
dated March 1, 1999--incorporated by reference to such document
previously filed with Securities and Exchange Commission,
Washington, D.C., 20549
Exhibit 23--Independent Auditors' Consent
Exhibit 27--Financial Data Schedule
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CINCINNATI FINANCIAL CORPORATION
Signature Title Date
--------- ----- ----
/s/ Robert B. Morgan Chief Executive March 12, 1999
- ------------------------ Officer, President
Robert B. Morgan and Director
/s/ Theodore F. Elchynski Senior Vice President March 12, 1999
- --------------------------- Chief Financial Officer
Theodore F. Elchynski Treasure and Secretary
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ William F. Bahl Director March 12, 1999
- --------------------------
William F. Bahl
Director March ,1999
- --------------------------
Michael Brown
/s/ Richard Burridge Director March 12, 1999
- --------------------------
Richard Burridge
- ------------------------- Director March , 1999
John E. Field
- ------------------------- Director March , 1999
William R. Johnson
/s/ Kenneth C. Lichtendahl Director March 12, 1999
- ----------------------------
Kenneth C. Lichtendahl
- ---------------------------- Senior Vice President March , 1999
James G. Miller Chief Investment officer
and Director
18
<PAGE> 19
Signature Title Date
--------- ----- ----
/S/ Jackson H. Randolph Director March 12, 1999
- ----------------------------------
Jackson H. Randolph
/S/ John J. Schiff, Jr. Chairman of the March 12, 1999
- ---------------------------------- Board and
John J. Schiff, Jr. Director
Director March , 1999
- ----------------------------------
Robert C. Schiff
/S/ Thomas R. Schiff Director March 12, 1999
- ----------------------------------
Thomas R. Schiff
Director March , 1999
- ----------------------------------
Frank J. Schultheis
/S/ Larry R. Webb Director March 12, 1999
- ----------------------------------
Larry R. Webb
/S/ Alan R. Weiler Director March 12, 1999
- ----------------------------------
Alan R. Weiler
Director March , 1999
- ----------------------------------
E. Anthony Woods
19
<PAGE> 1
EXHIBIT 11
CINCINNATI FINANCIAL CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Basic Earnings per share:
<S> <C> <C> <C>
Net income $241,567 $299,375 $223,760
======== ======== ========
Average shares outstanding 166,821 165,538 167,209
======== ======== ========
Net income per common share $ 1.45 $ 1.81 $ 1.34
======== ======== ========
Diluted earnings per share:
Net income $241,567 $299,375 $223,760
Interest on convertible debentures--net of tax 1,918 2,712 2,859
-------- ------- --------
Net income for per share calculation (diluted) $243,485 $302,087 $226,619
======== ======== ========
Average shares outstanding 166,821 165,538 167,209
Effective of dilutive securities:
5.5% convertible senior debentures 3,490 3,928 5,368
Stock options 1,767 1,329 769
-------- -------- --------
Total dilutive shares 172,078 170,795 173,346
======== ======== ========
Net income per common share--diluted $ 1.41 $ 1.77 $ 1.31
======== ======== ========
</TABLE>
Per share amounts reflect the effects of a three-for-one stock split effective
to shareholders of record on April 24, 1998.
<PAGE> 1
EXHIBIT 13
SEGMENT INFORMATION FROM PAGE 35 (INCORPORATED INTO ITEM 1).
16. 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 the basis of presentation. Revenue is primarily from unaffiliated
customers. Identifiable assets by segment are those assets, including investment
securities, used in the Company's operations in each industry. Corporate and
other identifiable assets are principally cash and marketable securities.
Segment information, 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>
Years Ended December 31,
REVENUES 1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Commercial lines insurance ........ $ 1,019,463 $ 983,605 $ 946,923
Personal lines insurance .......... 523,176 469,921 419,621
Life insurance .................... 70,096 62,852 56,353
Investment operations ............. 433,302 417,827 375,253
Corporate and other ............... 8,252 8,179 10,599
------------ ------------ ------------
Total revenues ................. $ 2,054,289 $ 1,942,384 $ 1,808,749
============ ============ ============
INCOME BEFORE INCOME TAXES
Property and casualty insurance ... $ (59,438) $ 28,955 $ (44,449)
Life insurance .................... (1,776) 2,763) (2,906)
Investment operations ............. 403,925 390,850 353,157
Corporate and other ............... (35,604) (28,009) (23,381)
------------ ------------ ------------
Total income before income taxes $ 307,107 $ 394,559 $ 282,421
============ ============ ============
IDENTIFIABLE ASSETS
Property and casualty insurance ... $ 5,483,137 $ 4,953,259 $ 3,986,658
Life insurance .................... 1,203,908 1,094,445 902,354
Corporate and other ............... 4,399,458 3,445,721 2,156,502
------------ ------------ ------------
Total identifiable assets ...... $ 11,086,503 $ 9,493,425 $ 7,045,514
============ ============ ============
</TABLE>
35
<PAGE> 2
TEXT DATA FROM PAGES 7 THROUGH 13 (INCORPORATED INTO ITEM 1).
IS CFC'S GEOGRAPHICAL EXPANSION DRIVING HIGHER CATASTROPHE LOSSES?
BOB MORGAN:
"No. Broader geographical scope is a positive. Roughly 75 percent of 1998
catastrophe losses occurred in core states--the dozen highest volume states
where we've marketed for 15 years or longer. We had about $100 million in
business from states entered since 1994--Maryland, Arkansas, Minnesota, North
Dakota, Montana and New York. We're on a good pace but don't have the volume
that creates catastrophe exposure."
J.F. SCHERER:
"Generally, we launch new territories with commercial business, appointing
agencies for personal lines as the relationship becomes established and they
understand our field underwriting philosophy. While we're moving more quickly
now to introduce personal lines, those newer states just don't have the
concentration of personal policies often associated with catastrophe claims."
"Field personnel operate out of their homes and come around often to build
personal relationships. They will tackle just about anything and it makes life
easier."
John H. Root, The A.C. Root Agency, Inc., Clinton, IA
TIM TIMMEL:
"Hail in Kentucky and Hurricane Georges across several southern states led
this year's storm claims activity. Only two of our 29 states escaped this year's
severe weather, and those were North Dakota and Montana, two newer states."
ARE YOU CHANGING THE WAY YOU WORK WITH AGENTS?
J.F. SCHERER:
"We don't take a cookie-cutter approach to who represents us and how we treat
them. Our agencies come in all sizes and have different appetites. Our job is to
be quick and flexible enough to stay attuned to larger, as well as smaller,
agencies. Marketing representatives in the field have an enormous amount of
authority and decision-making flexibility to work with each agency differently,
as justified by the particular circumstance.
"We'll ask agents to consolidate the carriers in their offices and give us a
larger portion of their business. Average agency volume is about $8.8 million
and our part of that is about $1.6 million per agency, just shy of 20 percent
penetration. There is opportunity."
"Many companies tell us how much they value their relationships with
agents...but it is an honor to represent a company that `walks the talk.'"
Terry L. Williams, CIC, Langford Insurance Agency, Vienna, VA
JACK SCHIFF, JR.:
"We continue to help them build their own success in their communities.
Agencies can differentiate themselves by having an exclusive Cincinnati contract
and getting the benefits of our claim service for their policyholders. We give
them a valuable franchise."
HOW WILL YOU INCREASE AGENCY PENETRATION?
TOM JOSEPH:
"More and better insurance products extend our capabilities to meet changing
needs. For example, this year we introduced Worldwide Commercial General
Liability, Actual Loss Sustained Business Income and Contractors' Limited
Pollution Liability. We updated our
7
<PAGE> 3
Building and Personal Property coverage form and package policies for artisan
contractors and religious institutions."
LARRY PLUM:
"We'll make doing business with Cincinnati easier. We'll offer agencies
incentive loans, agency perpetuation planning, advice from management
consultants and peer roundtables. In 1998, we started sending people into
agents' offices to process the transfer of blocks of business from other
carriers to Cincinnati. In 1999, we'll help agents develop best practices for
personal lines marketing. In 2000, agents will have a new direct bill option."
"Cincinnati is by far the best in the commercial market. Their umbrella is as
broad as I've seen and their rates are competitive."
Dick Lash, Hubbard-Insurance Agency, Farmville, VA
BOB MORGAN:
"We'll ask for business. Marketing representatives, executives,
underwriters...we'll all increase our presence in agencies."
WHAT IS CFC DOING TO OVERCOME COMMERCIAL MARKETPLACE CHALLENGES?
JACK SCHIFF, JR.:
"We have the underwriting expertise and discipline to leave business on the
table when there is no reasonable profit expectation. Years of industry price
competition have created thin margins, so we look closely at risks with
unsatisfactory loss records and sustain the relationship by correcting the rate.
We nurture the agency relationship and encourage renewal business."
"It was my first experience working with the special risks unit. Thanks for
your `We can make this happen!' approach."
Michael S. Steiner, CPCU, CIC, Steiner Insurance Agency, Inc., Wooster, OH
J.F. SCHERER:
"Carriers are standing in line to write policies at any price. Our greatest
strength is informed and experienced underwriters sitting in the agent's office
or the policyholder's business and discerning if we should accept the risk, if
it needs an innovative form, what price should be charged. That's why agents
gave Cincinnati $218 million of new business in 1998, enough to offset soft
pricing and increase property and casualty net written premiums 5.8 percent.
Commercial premiums grew 3.3 percent with a 61 percent loss ratio. We balance
growth and profitability."
TOM JOSEPH:
"We compete on value more than price. That means rapid quoting ability, claim
service superiority, loss control services for workers' compensation accounts,
broad coverages backed by financial strength. We are positioning ourselves to
handle larger, more sophisticated accounts. We have filings in all 50 states so
we can handle multi-state risks."
"Our claims representative met me at an insured's on a holiday to assess a
loss and made instant contacts with VIP clients at our request."
Steven L. Squires, CPCU, CIC
Norman E. Johnson, Inc., Madison, WI
8
<PAGE> 4
We have filings in all 50 states so we can handle multi-state risks. Our
special accounts unit helped remove barriers to writing 82 new jumbo accounts
with premiums averaging over $100,000 each."
WHAT IS CFC DOING TO DRIVE PROFITABLE GROWTH IN PERSONAL LINES?
BOB MORGAN:
"Profitable is the operative word. While personal insurance premiums grew 11
percent in 1998, the loss ratio was 73.8 percent. We're addressing this with
homeowners rate increases in the three to five percent range in selected
territories and with a 1999 re-underwriting program for about 200 agencies."
LARRY PLUM:
"Cincinnati maintains quality features other insurers have restricted, such
as our guaranteed replacement cost, a three-year guarantee that rates won't
increase, water damage coverage and an economic way to cover home businesses. In
1999, we'll have electronic transfer technology in our property casualty
worksite marketing program. It will give us billing flexibility to be a player
as the payroll deduction market takes off."
J.F. SCHERER:
"More agents are recognizing the stability a solid personal lines book brings
and how welcome that is. We allow the agent both the responsibility and
privilege of deciding which policyholders get written. Cross-functional teams of
marketing, underwriting, claims and information systems people continue to show
agents the why and how of rolling over profitable business, moving it to
Cincinnati from other carriers less committed to this marketplace and to agency
distribution."
"Thank you. Cincinnati has once again proven why our agency's trust in
placing two-thirds of our volume with you is not misplaced."
Chuck Mason, Mason Insurance Agency, Inc., Orange, VA
ARE CHANGES INITIATED BY CINCINNATI LIFE'S NEW LEADERS HAVING AN IMPACT?
TED ELCHYNSKI:
"Cincinnati Life's net income decreased to $21.5 million this year from $29.2
million last
9
<PAGE> 5
year. The difference came from a $6.5 million swing in net realized capital
gains and higher expenses to revamp the product line and expand distribution."
DAVE POPPLEWELL:
"Activity is already picking up with introduction of our first wave of
LifeHorizons brand products. In the second half of 1998, we introduced a new
non-smoker worksite marketing product agents like, plus competitive term
insurance products and a Roth IRA. Net written premiums rose
"Our agency exceeded our 1998 life production goal. We couldn't have done it
without your brilliant underwriting."
Bob Redel, CLU, ChFC, LUTCF, AEP,
Naught-Naught Agency, Jefferson City, MO
20 percent. We project that premiums could grow at a 15-20 percent compound rate
over the next five years.
"1999 roll-outs will include more products where we have a core competency,
like Long-Term Guarantee Universal Life and Last Survivor Universal Life. We're
working on giving agents a complete line, supplying non-core products through
private label agreements with a third party--long-term care, disability income
and equity products, including variable life. Cincinnati Life should be ready to
meet the needs of 80-85 percent of an agent's clients. Agents will have a full
range of choices to fund retirements and estate plans, preserve assets, provide
pure life protection for some folks and appeal to others who want
interest-sensitive products."
WHAT STEPS ARE PLANNED TO INCREASE THE CONTRIBUTION FROM THIS BUSINESS AREA?
DAVE POPPLEWELL:
"We'll increase penetration in property casualty agencies with this new
generation of policies, and we'll develop an increased role for regional
directors in finding business life solutions for commercial lines customers. To
lower unit costs and accelerate revenues, we've started to appoint independent
life agents and worksite marketers in Texas, California and other locations
where Cincinnati has chosen not to have a property casualty presence. We can
leverage our worksite marketing expertise and that's a booming market."
BOB MORGAN:
"Our professionalism and knowledge of the market surpasses our competitors.
We have a better persistency ratio than our competitors. Our goal, over the next
five years, is to more than double this year's $110 million of written premium.
People are going to be excited about the results."
HOW DOES YOUR LEASING COMPANY COMPLEMENT THE INSURANCE OPERATIONS?
TED ELCHYNSKI:
"CFC Investment Company increased revenues 16.7 percent and net income
"It is phenomenal how quickly your department responds when it really
counts--at the time the promise of the policy is completed."
Dannie R. Fouts, CLU, Hummel & Plum
Life Insurance Agency, Circleville, OH
10
<PAGE> 6
36.5 percent in 1998, to just over $3 million. That's mainly from vehicle and
equipment leasing and financing services we make available to agents and their
business insurance customers. This year we initiated a real estate mortgage
program for owner-occupied buildings and wrote a lot of incentive leases for
agents who agreed to meet premium production goals. We wrote a $1 million lease
this year for a Maryland agent and see some golden opportunities to write more
of these larger leases. Our growing field staff is calling on agents and their
business policyholders in more areas."
WHAT PROGRESS IS CFC MAKING TOWARD YOUR $2 BILLION PREMIUM GOAL?
J.F. SCHERER:
"Two years ago, our planning committee looked ahead at all of the milestones
we'll reach in the year 2000. It will be our 50th anniversary and our new $65
million headquarters building will be completed. Our new CEO will be in place
and major technology initiatives will cause dramatic changes as agents, field
associates and headquarters share policy information via an intranet. We
suggested an ambitious goal for total property casualty and life premiums, ~$2
billion in direct written premium for the year 2000, to get our associates and
agents on board for these changes and geared up to make the most of the
opportunities they bring."
JACK SCHIFF, JR.:
"This year's total direct written premiums exceeded $1.7 billion. The year
2000 goal may yet be attainable with great effort and help from the marketplace,
in the form of firmer prices for some commercial lines. We'll balance growth
with profitability. But the goal was never about just reaching some magical
premium level. It's about improving our processes, taking our service and
technology to the next level, inviting associates at all levels to step forward
with ideas and take ownership of the Company's success in the next millennium.
That's where we see clear progress."
"Our insured would not change companies for the lower premium. The service
has been excellent and that was the final deciding factor."
John D. Smith, CIC, Clark/Colton Insurance
Agency, Inc., Hinsdale, NH
TIM TIMMEL:
"Operationally, we're continuing to be innovative and productive. By
educating associates, adopting the team approach and targeting process
improvement, the commercial lines area handled 14 percent more files with no
additional work hours and 27 percent fewer processing errors in 1998 versus
1997. They are now sending out cross-sell information about leasing services
with their policies, dissolving department boundaries to meet corporate goals.
The Claims Department reduced glass replacement costs while preserving customer
choice, potentially saving about $2 million per year. And they've offered
claimants the settlement option of Cincinnati Life annuities, doubling the
structured settlement annuities written in 1998 to $16.7 million."
"Cincinnati's loss control recommendations are based on sound risk management
principles and are well received by our clients."
Ken Kratovil, ARM, AAI
Wagner Agency, Inc., Pittsburgh,PA
TED ELCHYNSKI:
"Associates have increased their knowledge and skills to prepare for
challenges of the next few years. Technology training for systems like the one
implemented this year for accounting is
11
<PAGE> 7
extensive. Over the years leading up to 2000, we're investing $9.5 million to
upgrade or replace systems. Ninety percent of that work is done now. Costs are
now leveling off, but we'll continue to see benefits of increased efficiency in
areas from claims to underwriting and from personnel to life insurance."
"I was impressed with the corporate culture and accessibility of the
executives. Your people and their collective experience is your greatest asset."
John Daloisio, CPCU, CLU, Echnoz, Scalzott &
Schutzman Insurance Group, Kittanning, PA
HOW DID CFC'S INVESTMENT PORTFOLIO PERFORM IN 1998?
JIM MILLER:
"Our 5.6 percent growth rate for investment income was very good by industry
standards. Income of $368 million was a record, yet short of the double-digit
growth we target internally for two reasons. One, we had less cash to invest due
to catastrophe claims payments. Two, low interest rates led to a high rate of
bond calls and proceeds couldn't be reinvested at comparable yields. That's why
we invested in shorter-term bonds, keeping those funds liquid, and in tax-exempt
municipal bonds, where higher after-tax yields flow to net income. Plus, we
repurchased 736,240 shares of CFC stock during 1998, paying $33.86 per share on
average. "
JACK SCHIFF, JR.:
"On the bright side, dividends from our equity portfolio rose. We're
concentrated in 57 stocks and 43 of them announced dividend increases in 1998,
adding $16.4 million to annualized dividend income. We have an equity focus and
a total return philosophy, so we look to equities for both income and
appreciation. At the end of 1998, equity values rose, increasing net worth. The
balance sheet shows shareholders' equity up 19.2 percent to $5.621 billion and
assets up 16.8 percent to $11.087 billion. Those are all-time highs."
BOB MORGAN
"Our investment team really has an expertise in high-yield bonds, municipal
bonds, convertibles and common stock. We formed CinFin Capital Management this
year and will begin during 1999 to offer asset management services externally,
to other companies and insurance agencies. We'll start slowly in Ohio then
expand to other states where we market insurance, over the coming years."
ARE CINCINNATI FINANCIAL'S STRENGTHS DOCUMENTED BY OBJECTIVE, EXTERNAL
EVALUATION?
JIM MILLER:
"This was Cincinnati Financial's first full year in the S&P 500 Index, and we
think that's a comment on our consistency and strength. Standard & Poor's
evaluated our financial strength as AA- and Moody's gave us an A2 for our
30-year senior debenture offering in May. They assigned an Aa3 insurance rating
to the property casualty group, looking at our strong franchise as a regional
agency underwriter, sound balance sheet with modest leverage and above-average
underwriting profitability."
J.F. SCHERER:
"Having the highest Best's rating, A++ Superior, shows the financial strength
of our insurance companies. Independent surveys confirm our
12
<PAGE> 8
product and service strengths, too. Crittenden's(TM) Property/Casualty Ratings
newsletter surveys thousands of agents across the country. They selected
Cincinnati as the leading writer of commercial lines, with the best
Business-owners Policy in the Mid-west and the best umbrella liability, inland
marine and commercial auto coverages nationwide. A consumer magazine ranked
Cincinnati among the top personal auto insurers. These ratings really help our
agents at the point of sale."
DAVE POPPLEWELL:
"Cincinnati's new AA+ rating from Standard & Poor's will help attract
independent life agencies we plan to appoint in areas where Cincinnati isn't
already a known name. Cincinnati Life, as well as the Cincinnati property
casualty group, qualified again for Ward Financial Group's Benchmark 50. That's
a list of insurers that give the best value to shareholders and policyholders,
as measured by five years of quantitative data."
"Your storm team worked for three weeks and closed over 80 percent of the
hail claims. The `advertising' we received from this service cannot be
purchased."
John D. Van Groll, Insurance Management, Inc.,
Little Chute, WI
WHAT DOES CFC DO TO BENEFIT THE GENERAL PUBLIC, AS WELL AS AGENTS, POLICYHOLDERS
AND SHAREHOLDERS?
BOB MORGAN:
"Cincinnati Financial is an active corporate citizen. We work with the
community, especially in the arts and education areas. Key executives lend their
leadership, associates volunteer their service, and we support well-managed
nonprofits with modest financial contributions. It's also our duty to
proactively study regulatory and legislative issues that could impact the
Company's ability to do our best for shareholders and policyholders. In 1999,
we'll work to support a proposal allowing insurers to set up policyholder safety
reserves for future catastrophe losses. We'll monitor the financial services
modernization debate and urge Congress to pass legislation that preserves state
regulation of insurance."
"I commend your support and thank you for your interest and dedication to our
young people. It is refreshing to have the support of the community behind us."
Karen Norton, Business Education,
Midview High School, Grafton, OH
13
<PAGE> 9
LOSS AND LOSS EXPENSES IN NOTES TO FINANCIAL STATEMENT FROM PAGE 31
(INCORPORATED INTO ITEM 5).
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,
-------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1 .......... $1,888,883 $1,824,296 $1,690,461
Less reinsurance receivable. 112,235 121,881 109,719
---------- ---------- ----------
Net balance at January 1....... 1,776,648 1,702,415 1,580,742
---------- ---------- ----------
Incurred related to:
Current year................ 1,306,194 1,115,140 1,183,251
Prior years ................ (153,311) (119,654) (151,996)
---------- ---------- ----------
Total incurred................. 1,152,883 995,486 1,031,255
---------- ---------- ----------
Paid related to:
Current year................ 590,366 467,843 514,186
Prior years ................ 498,842 453,410 395,396
---------- ---------- ----------
Total paid..................... 1,089,208 921,253 909,582
---------- ---------- ----------
Net balance at December 31..... 1,840,323 1,776,648 1,702,415
Plus reinsurance receivable. 138,138 112,235 121,881
---------- ---------- ----------
Balance at December 31...... $1,978,461 $1,888,883 $1,824,296
========== ========== ==========
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss expenses decreased by $153,311,000, $119,654,000
and $151,996,000 in 1998, 1997 and 1996. 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 $76,264,000 and $47,651,000 at December 31, 1998 and 1997,
respectively, for certain life/health losses and loss checks payable.
<PAGE> 10
"PRICE RANGE OF COMMON STOCK" SECTION FROM THE INSIDE BACK COVER (INCORPORATED
INTO ITEM 5).
PRICE RANGE OF COMMON STOCK
Shares are traded nationally over the counter. Closing sale price is quoted
under the symbol CINF on the National Market List of Nasdaq (National
Association of Securities Dealers Automated Quotation System). Tables below show
the price range reported for each quarter based on daily last sale prices.
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- ---------------------------------------------
Quarter 1st 2nd 3rd 4th 1st 2nd 3rd 4th
--------- --------- ------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High................... $45 3/8 $45 21/64 $39 1/8 $40 $24 27/64 $27 1/2 $27 29/32 $46 29/32
Low.................... 41 21/64 36 5/8 30 3/4 31 5/8 20 31/32 22 29/64 26 11/64 27 31/32
Dividend paid.......... .13 2/3 .15 1/3 .15 1/3 .15 1/3 .12 1/3 .13 2/3 .13 2/3 .13 2/3
</TABLE>
Price ranges reflect the effects of a three-for-one stock split effective to
shareholders of record on April 24, 1998.
<PAGE> 11
"SELECTED FINANCIAL INFORMATION" FROM PAGES 14 AND 15 (INCORPORATED INTO ITEM
6).
SELECTED FINANCIAL INFORMATION
(000's omitted except per share data and ratios)
<TABLE>
<CAPTION>
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
TOTAL ASSETS ..................... $11,086,503 $ 9,493,425 $ 7,045,514 $ 6,109,298
LONG-TERM OBLIGATIONS ............ $ 471,520 $ 58,430 $ 79,847 $ 80,000
- --------------------------------------------------------------------------------------------------------
REVENUES
Premium Income ................... $ 1,612,735 $ 1,516,378 $ 1,422,897 $ 1,314,126
Investment Income (Less Expense) . 367,993 348,597 327,307 300,015
Realized Gains on Investments .... 65,309 69,230 47,946 30,781
Other Income ..................... 8,252 8,179 10,599 10,729
NET INCOME BEFORE REALIZED
GAINS ON INVESTMENTS
In Total ......................... $ 199,116 $ 254,375 $ 192,595 $ 207,342
Per Common Share ................. 1.19 1.54 1.15 1.24
NET INCOME
In Total ......................... $ 241,567 $ 299,375 $ 223,760 $ 227,350
Per Common Share ................. 1.45 1.81 1.34 1.36
Per Common Share (Diluted) ....... 1.41 1.77 1.31 1.33
- --------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED
Per Common Share ................. $.61 1/3 $ .54 2/3 $ .48 2/3 $ .42 2/3
- --------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PAID
Per Common Share ................. $ .59 2/3 $ .53 1/3 $ .47 2/3 $ .42
- --------------------------------------------------------------------------------------------------------
PROPERTY AND CASUALTY OPERATIONS
Gross Premiums Written ........... $ 1,656,476 $ 1,566,688 $ 1,476,011 $ 1,377,426
Net Premiums Written ............. 1,557,581 1,471,603 1,383,525 1,295,852
Premiums Earned .................. 1,542,639 1,453,526 1,366,544 1,263,257
Loss Ratio ....................... 65.4% 58.3% 61.6% 57.6%
Loss Expense Ratio ............... 9.3 10.1 13.8 14.7
Underwriting Expense Ratio ....... 28.9 29.3 27.6 27.1
................................. ----------- ----------- ----------- -----------
Combined Ratio ................... 103.6% 97.7% 103.0% 99.4%
Investment Income Before Taxes ... $ 203,919 $ 199,427 $ 190,318 $ 180,074
Property and Casualty Reserves
Unearned Premiums ................ $ 432,436 $ 418,465 $ 401,562 $ 385,418
Losses ........................... 1,432,212 1,373,950 1,319,286 1,274,180
Loss Adjustment Expense .......... 408,113 402,698 383,135 306,570
Statutory Policyholders' Surplus . $ 3,019,828 $ 2,472,532 $ 1,608,084 $ 1,268,597
- --------------------------------------------------------------------------------------------------------
</TABLE>
*1993 earnings include a credit for $13,845 ($.08 per share) cumulative effect
of a change in the method of accounting for income taxes to conform with SFAS
No. 109 and a net charge of $8,641 ($.05 per share) related to the effect of the
1993 increase in income tax rates on deferred taxes recorded for various prior
year items.
14
<PAGE> 12
<TABLE>
<CAPTION>
Cincinnati Financial Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988
- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$4,734,279 $4,602,288 $4,098,713 $3,513,749 $2,626,156 $2,602,990 $2,163,341
$ 80,000 $ 80,000 $ 80,000 $ 182 $ 202 $ 753 $ 890
- --------------------------------------------------------------------------------------------------------------
$1,219,033 $1,140,791 $1,038,772 $ 947,576 $ 871,196 $ 813,313 $ 754,335
262,649 239,436 218,942 193,220 167,425 149,285 130,885
19,557 51,529 35,885 7,641 1,488 4,678 6,423
11,267 10,396 10,552 12,698 8,822 7,134 10,281
$ 188,538 $ 182,530* $ 147,669 $ 141,273 $ 128,052 $ 111,477 $ 124,618
1.13 1.10* .90 .86 .79 .69 .78
$ 201,230 $ 216,024* $ 171,325 $ 146,280 $ 128,962 $ 114,490 $ 128,748
1.21 1.30* 1.04 .90 .79 .71 .81
1.18 1.27* 1.03 .89 .79 .70 .80
- --------------------------------------------------------------------------------------------------------------
$ .38 2/3 $ .34 $ .31 $ .27 2/3 $ .24 1/3 $ .22 $ .17 1/3
- --------------------------------------------------------------------------------------------------------------
$ .37 1/3 $ .33 1/3 $ .30 $ .27 $ .23 2/3 $ .21 $ .17
- --------------------------------------------------------------------------------------------------------------
$1,287,280 $1,216,766 $1,089,901 $ 996,807 $ 896,204 $ 845,346 $ 782,143
1,190,824 1,123,780 1,014,971 930,296 838,554 790,971 718,853
1,169,940 1,092,135 992,335 903,465 828,046 771,205 712,771
63.3% 63.5% 63.8% 61.6% 61.6% 61.6% 55.1%
9.8 8.7 9.0 9.2 9.0 9.0 10.1
27.5 27.9 29.0 28.9 29.0 29.1 30.7
- ---------- ---------- ---------- ---------- ---------- ---------- ----------
100.6% 100.1% 101.8% 99.7% 99.6% 99.7% 95.9%
$ 162,260 $ 153,190 $ 141,958 $ 126,332 $ 110,827 $ 97,661 $ 84,379
$ 353,697 $ 333,550 $ 302,473 $ 280,404 $ 254,000 $ 244,011 $ 224,545
1,213,383 1,100,051 960,571 825,952 692,081 616,730 522,162
218,642 193,305 177,262 160,260 140,501 124,993 109,323
$ 998,595 $1,011,609 $ 933,529 $ 735,557 $ 477,355 $ 494,460 $ 422,521
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Per share data adjusted for three-for-one stock splits in 1998 and 1992 and
stock dividends of 5 percent in 1996 and 1995.
15
<PAGE> 13
"MANAGEMENT DISCUSSION" FROM PAGES 16 THROUGH 22 (INCORPORATED INTO ITEMS 1
AND 7).
MANAGEMENT DISCUSSION
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
INTRODUCTION
This Management Discussion is intended to supplement the data contained in
the financial statements and related notes of Cincinnati Financial Corporation
and subsidiaries.
Cincinnati Financial Corporation (CFC) had six subsidiaries at year-end 1998.
The lead property and casualty insurance subsidiary, The Cincinnati Insurance
Company, markets a broad range of business and personal policies in 29 states
through an elite corps of 978 independent insurance agencies. Also engaged in
the property and casualty business are The Cincinnati Casualty Company, which
works on a direct billing basis, and The Cincinnati Indemnity Company, which
markets nonstandard policies for preferred risk accounts. The Cincinnati Life
Insurance Company markets life, health and accident policies through property
and casualty agencies and independent life agencies. CFC Investment Company
complements the insurance subsidiaries with leasing, financing and real estate
services. Investment operations are CFC'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. During 1998, the
Company incorporated a sixth subsidiary, CinFin Capital Management Company. The
new subsidiary was established to provide investment management services to
institutions, corporations and individuals with $500,000 minimum accounts. In
January 1999, CinFin started to conduct business with approximately $150 million
in assets under management.
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.
RESULTS OF OPERATION
OVERVIEW OF RESULTS
Primarily as a result of continued market penetration and entry into new states,
CFC revenues have increased at a compound annual rate of 7.3%, reaching $2.054
billion in 1998, with property/casualty net written premiums growing at a 6.7%
rate to $1.558 billion over the past five years. In the same five-year period,
total net income, including realized capital gains, grew at a 2.3% rate to
$241.6 million, or $1.45 per share, from $201.2 million, or $1.21. Net operating
income increased at a 1.8% rate to $199.1 million, or $1.19 per share, from
$188.5 million, or $1.13, in 1994. Excluding catastrophe losses and an
adjustment for SFAS No. 109 in 1993, total net income over the five-year period
grew at a compound rate of 6.9%, while net operating income increased at a 7.2%
rate. Book value grew at a 23.5% compound rate over the same period to $33.72
per share from $11.65.
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 an ambitious $2 billion in total direct written
premiums for the year 2000, up from $1.732 billion in 1998. At the same time,
the Company seeks to generate an underwriting profit and maximize annual growth
in investment income.
The following table and discussion analyze results for the three-year period
ending December 31, 1998 and provide insight into management's strategic
direction.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(000,000 omitted except 1998 Change Change 1997 Change Change 1996 Change Change
per share data and ratios) $ % $ % $ %
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ........................ $2,054.3 $111.9 6 $1,942.4 $133.7 7 $1,808.7 $153.0 9
Net Operating Income ........... 199.1 (55.3) (22) 254.4 61.8 32 192.6 (14.7) (7)
Net Capital Gains (after tax) .. 42.5 (2.5) (6) 45.0 13.8 44 31.2 11.2 56
Net Income ..................... 241.6 (57.8) (19) 299.4 75.6 34 223.8 (3.5) (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Operating Income Per Share . $ 1.19 $ (.35) (23) $ 1.54 $ .39 34 $ 1.15 $ (.09) (7)
Net Capital Gains Per Share .... .26 (.01) (4) .27 .08 42 .19 .07 58
Net Income Per Share ........... $ 1.45 $ (.36) (20) $ 1.81 $ .47 35 $ 1.34 $ (.02) (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Catastrophe Losses (before tax) $ 93.5 $ 68.0 267 $ 25.5 $ (39.2) (60) $ 64.7 $ 37.6 138
Catastrophe Losses Per Share
(after tax) ................. .36 .26 260 .10 (.15) (60) .25 .15 150
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 14
MANAGEMENT DISCUSSION
(continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
The Company's financial results for the three years ending December 31, 1998
reflect growth in new insurance business and retention of renewal customers
through the Company's independent insurance agents, offset by highly competitive
property and casualty pricing. However, frequent and severe storms pushed
catastrophe losses to an all-time high in 1998 of $93.5 million. The previous
high had been $64.7 million in 1996. Results for 1998 do reflect the Company's
consistent underwriting philosophy and strategy of maintaining high underwriting
standards by carefully evaluating individual risks, reviewing agency performance
and controlling overall expenses.
While the Company generated 5.6% growth in pre-tax investment income, net
operating income for 1998 declined from the prior-year level due to catastrophe
losses and large property losses. In 1997, net operating income rose 32% and
pre-tax investment income rose 6.5%. The contribution from net realized capital
gains declined slightly in 1998 but rose in 1997, primarily due to the sale of
equity securities.
<TABLE>
<CAPTION>
PROPERTY AND CASUALTY INSURANCE OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------------
(000,000 omitted except 1998 Change Change 1997 Change Change 1996 Change Change
per share data and ratios) $ % $ % $ %
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Written Premiums ......... $1,656.5 $ 89.8 5.7 $1,566.7 $ 90.7 6.1 $1,476.0 $ 98.6 7.2
Net Written Premiums ........... 1,557.6 86.0 5.8 1,471.6 88.1 6.4 1,383.5 87.6 6.8
Net Earned Premiums ............ 1,542.6 90.1 6.2 1,453.5 87.0 6.4 1,366.5 103.2 8.2
Loss and LAE Ratio ............. 74.7% n/a 9.2 68.4% n/a (9.3) 75.4% n/a 4.3
Expense Ratio .................. 28.9% n/a (1.4) 29.3% n/a 6.2 27.6% n/a 1.8
Combined Ratio ................. 103.6% n/a 6.0 97.7% n/a (5.1) 103.0% n/a 3.6
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PREMIUMS
While premium growth rates declined in 1998 and 1997, the Company's property and
casualty group continued to increase net written premiums at rates well above
the industry average. In 1998 and 1997, the primary source of growth was
personal lines insurance, for which net written premiums advanced 11.0% in 1998
(12.4% in 1997), while commercial lines insurance growth was 3.3% (3.6% in
1997).
During 1998, the commercial insurance market continued to experience the
intense price competition that began prior to 1996. The impact was seen 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. Although the Company is committed to
prudent underwriting standards and emphasizing account profitability, the lower
pricing combined with large property losses to produce a 61.1% pure loss ratio
for the commercial lines area, higher than the 53.2% reported in 1997.
As a result of the market factors, direct written premiums from account
renewals for the commercial insurance lines declined in 1998. New business
premiums offset this decline and generated modest overall premium growth. Total
new business in direct written premiums in the property and casualty area rose
7.6%, reaching an all-time high of $218 million on a new business policy count
of more than 148,500. Management cannot predict when the pricing pressures in
the commercial insurance area will be alleviated. To help offset these
pressures, the Company is working harder to underwrite accounts even more
closely by:
- systematically re-underwriting the personal lines book of business,
- 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. CFC is taking advantage
of this trend by encouraging independent agents to move their proven, profitable
business to the Company. 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 CFC can achieve additional market penetration by
leveraging its strong relationships with independent agencies and entering new
states. The Company also can distinguish itself through key competitive
advantages of the insurance products, for example three- and five-year policies
for many types of insurance coverage.
For the year 1998, approximately 97% 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
17
<PAGE> 15
MANAGEMENT DISCUSSION
(continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
the past five years, the Company added seven marketing representatives in
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. This
program was essentially completed in 1998, with only one marketing territory
division anticipated in 1999.
Entry into new states also has been a source of premium growth. The states
the Company entered between 1994 and 1998 contributed more than $102.4 million
of property and casualty premium volume over the five-year period. A very
successful example of a new market entry is Minnesota, where premium volume
reached $18.2 million in 1998, up from $800,000 in 1994. From 1996 through 1998,
the Company began marketing commercial lines in North Dakota, Montana and
upstate New York and added personal lines in Arkansas, Maryland, Minnesota,
North Dakota, Pennsylvania and Vermont. Idaho and Utah have been selected to
seek approval to market the Company's products in 1999. Three additional states
currently are being researched. The Company's criteria for entry into new states
include a favorable regulatory climate and no residual market.
EXPENSES
The Company recorded a $64.5 million statutory underwriting loss in 1998
compared with a $24.8 million underwriting profit in 1997 and a $45.0 million
underwriting loss in 1996. The 1998 underwriting loss, reflecting a combined
ratio of 103.6%, was primarily the result of catastrophe losses, which added 6.1
points to the loss and loss adjustment expense ratio, as well as large fire
losses. That compared with a 1.8 point impact of catastrophe losses on a
combined ratio of 97.7% in 1997. The underwriting loss in 1996, reflecting a
combined ratio of 103.0%, was the result of higher catastrophe losses, as well
as a half of one percentage point increase in the expense ratio over 1995. 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 for 95% of losses from $25 million up to $200
million.
After rising in 1997 and 1996, the expense ratio in 1998 declined slightly
because the Company reached a sustainable level of investment in staff and costs
associated with upgrading technology and facilities. These investments will help
the Company accommodate anticipated growth in premium volume while making
computer systems Year 2000 compliant. (See Year 2000 discussion on page 19.)
As discussed in the Notes to the Consolidated Financial Statements, the
Company's liabilities for insurance reserves are estimated by management based
upon Company experience. 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, at this time, these 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 coverages that afford clean-up costs and Superfund responses.
LIFE AND ACCIDENT AND HEALTH
CFC's life insurance subsidiary had total net premium income for 1998 of $70.1
million, up from $62.9 million in 1997 and $56.4 million in 1996. Life insurance
premiums were $61.7 million, $54.7 million and $48.7 million, respectively. The
life insurance subsidiary contributed 12% of CFC's operating income in 1998 and
10% of CFC operating income in 1997 and 1996.
During 1997, the Company hired a new president for the life insurance
subsidiary. Under his direction, the life insurance subsidiary is expanding
worksite marketing activities, introducing a competitive new life insurance
product series and researching opportunities to sell life insurance in areas
where the Company does not have property and casualty agency representation. The
initiatives, which began in the second half of 1997, appeared to have a
measurable impact on 1998 results. Management believes that opportunities exist
to further increase the life insurance subsidiary's contribution to total
operating income through expanded life insurance sales.
INVESTMENT INCOME AND INVESTMENTS
Investment income rose 5.6% to $368.0 million in 1998 and increased 6.5% to
$348.6 million in 1997 primarily as a result of investing the cash flows from
operating activities and collection of dividend increases from equity securities
in the investment portfolio. The slower growth rate in 1998 again reflected the
volume of fixed maturities investments being called early and the generally
lower interest rate environment. In 1998, 43 of the 57 common stocks in the
Company's investment portfolio increased dividends during the year, adding more
than $16.0 million to future annualized investment earnings.
The Company's primary investment strategy is to maintain liquidity to meet
both immediate and long-range insurance
18
<PAGE> 16
MANAGEMENT DISCUSSION
(continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
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
regulatory 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 8.0%
at December 31, 1998. 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.
INTEREST AND INCOME TAXES
The Company's income tax expense was $65.5 million, $95.2 million and $58.7
million for 1998, 1997 and 1996, respectively, while the effective tax rate was
21.34%, 24.12% and 20.77% for the same periods. The lower rates in 1998 and 1996
were partially the result of a higher percentage of net income earned from
tax-exempt interest on state, municipal and political subdivision fixed
maturities and from dividends received on equity investments. The higher tax
rate in 1997 primarily was due to the strong underwriting profit recorded for
the year and higher capital gains. The Company incurred no additional
alternative minimum tax expenses for the three years.
YEAR 2000 COMPLIANCE
Because the Company issues three- and five- year policies, it 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
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 management
and the Audit Committee of the Board of Directors. This report identifies
progress against the plan as well as projections on specific issues.
Percent of Hardware/Software Applications Year 2000 Compliant
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Actual as of Planned as of Planned as of
December 31, December 31, June 30,
1998 1998 1999
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Mission critical systems 90% 90% 100%
All other systems 90% 90% 100%
- -----------------------------------------------------------------------
</TABLE>
The Company has 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
19
<PAGE> 17
MANAGEMENT DISCUSSION
(continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
revisions or replacements; instituted testing procedures to ensure that the
revisions and fixes are operational; and moved the compliant systems into
production. As of December 31, 1998, approximately 90% of the applications had
either been modified to be compliant or had been replaced by purchased compliant
systems. Additional in-depth testing, both internal and third-party related, is
planned into 1999. Management believes that all critical systems will be Year
2000 compliant by June 30, 1999.
As part of the overall review of Year 2000, the Company is verifying with
certain key outside vendors, and with others 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 migrate to a Year 2000 compliant processing system. The Company is
actively working with those agencies. As of December 1998, nearly all of the
agencies' processing systems had either been made compliant or the agencies had
plans to be compliant by June 30, 1999. Phone and personal interviews are being
used to verify the progress of the agencies.
Contingency planning for the Year 2000 includes standard backup and recovery
procedures to be followed in the event of a critical system failure. While
management does not expect any unusual failures as a result of specific Year
2000-related changes, by June 30, 1999, the Company plans to develop specific
backup procedures for the Year 2000 to minimize the effect of any potential
problems.
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 delay in processing or reporting, with no material
financial impact.
The Company has budgeted $9.5 million pretax to resolve the Year 2000 issues.
This would encompass the costs of modifications, the salaries of the associates
primarily assigned to this effort and the fees of outside consultants. As of
December 31, 1998, the Company had incurred approximately $7.9 million of these
costs, with the expenses incurred during 1998 at approximately $4.2 million.
Although the Company expects its systems to be Year 2000 compliant on or
before December 31, 1999, it cannot predict the outcome or the success of its
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.
<TABLE>
<CAPTION>
CASH FLOW AND LIQUIDITY
- -------------------------------------------------------------------------
(000,000 omitted) 1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash provided by
operating activities $ 273.6 $ 427.0 $ 308.3
Net cash used in investing activities (320.7) (282.5) (224.8)
Net cash provided (used) in
financing activities 25.5 (124.2) (43.7)
Net (decrease) increase in cash (21.6) 20.2 39.9
Cash at beginning of year 80.2 59.9 20.0
Cash at end of year 58.6 80.2 59.9
Supplemental
Interest paid 36.4 21.8 20.9
Income taxes paid 91.2 95.5 65.0
- -------------------------------------------------------------------------
</TABLE>
CASH FLOW
In 1998, operating cash flows were 36% lower than 1997 because of the frequency
and severity of catastrophe losses. Over the three-year period, however,
operating cash flows were sufficient to meet operating needs and provide for
financing needs and increased investment. Management expects operating cash flow
will continue to be CFC's primary source of funds because no substantial changes
are anticipated in the Company's mix of business 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 the continuing
trend over the three years of fixed maturity investments being called by the
issuer, offset in 1998 by increased purchases of equity securities and 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 $107.8 million and $153.2 million in 1998, $122.6 million and $134.1
million in 1997, and $98.0 million and $95.4 million in 1996.
In 1998, net cash was provided in financing activities
because of the issuance of a senior debenture in the amount
of $419.6 million. Those funds were used to repay short-term notes, to pay cash
dividends and to purchase treasury shares. For the years 1997 and 1996, 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 $41.1 million in 1996 to $18.5 million in 1997. Management
used short-term debt for cash management and other purposes. In 1998, the
Company issued $420 million of 30-year senior debentures. The proceeds
20
<PAGE> 18
MANAGEMENT DISCUSSION
(continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
were used to repay all of the short-term notes payable. The balance will be used
in the construction of an additional Cincinnati headquarters building and for
other purposes.
DIVIDENDS
CFC has increased cash dividends to shareholders for 38
consecutive years and, periodically, the Board of Directors authorizes stock
dividends or splits. In February 1997, the CFC 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 of Directors authorized a 12.2%
increase, raising the regular quarterly dividend by five cents to an indicated
annual rate of $1.84. At the same time, the Board of Directors announced its
intention to declare a three-for-one split to be distributed on May 15, 1998, to
shareholders of record as of April 24, 1998, which was authorized on April 4,
1998, based on shareholder approval of a proposal to increase authorized shares
to 200 million from 80 million. On February 6, 1999, the Board of Directors
authorized a 10.9% cash dividend increase, raising the quarterly dividend by one
and two-thirds cents to an indicated annual rate of $0.68.
Since 1987, the Company's Board has authorized three additional stock splits
or stock dividends: a 5% stock dividend in 1996; a 5% stock dividend in 1995 and
a three-for-one stock split in 1992. After the stock split in 1998, a
shareholder who purchased one Cincinnati Insurance share before 1957 would own
1,946 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 $10.326 billion make up 93.1% of the Company's
$11.087 billion assets; this compares with 93.0% in 1997 and 90.3% in 1996. The
Company has only minor investments in real estate and mortgages, which are
typically illiquid. At December 31, 1998, the Company's portfolio of fixed
maturity securities had an average yield-to-cost of 8.2% and an average maturity
of ten 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 year-end 1998 and 1997, investments totaling approximately $873 million
and $836 million ($883 million and $797 million at cost) of the Company's
$10.325 billion and $8.797 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 CFC.
Because of alternative minimum tax matters, the Company uses a blend of
tax-exempt and taxable fixed maturity securities. Tax-exempt bonds comprise 9%
of invested assets as of December 31, 1998, compared with 10% at year-end 1997
and 14% at year-end 1996. 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.
MARKET RISK
The Company could incur losses due to adverse changes in market
rates and prices. The Company's primary market risk exposures are 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 this 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.
LIABILITIES AND SHAREHOLDERS' EQUITY
At December 31, 1998, long- and short-term debt were 4%, insurance reserves were
23% and total shareholders' equity was 51% 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
1998 and 1997. At December 31, 1998 and 1997, long-term debt consisted of $471.5
million and $58.4 million, respectively, of convertible and senior debentures.
Short-term debt is used to provide working capital as discussed above. In the
second quarter of 1998, the Company issued $419.6 million of 30-year,
non-callable senior debentures. Proceeds were used to pay off $280.6 million of
short-term debt as it matured and for future general corporate purposes,
including expansion of the Company's headquarters.
21
<PAGE> 19
MANAGEMENT DISCUSSION
(continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
EQUITY
Shareholders' equity has continued to grow as a percentage of total assets,
reaching 51% for 1998 from 50% for 1997 and 45% for 1996, due to retained
earnings and accumulated comprehensive income. Statutory risk-based capital
requirements became effective for life insurance companies in 1993 and for
property casualty companies in 1994. The Company's capital has been well above
required amounts in each year since those effective dates.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(000,000 omitted) 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholders' equity excluding
retained earnings and
accumulated comprehensive
income $ 462.0 $ 469.5 $ 502.3
Retained earnings 1,480.9 1,341.7 1,132.9
Accumulated comprehensive
income 3,678.0 2,905.8 1,527.7
Total shareholders' equity $5,620.9 $4,717.0 $3,162.9
- --------------------------------------------------------------------------
</TABLE>
As a long-term investor, the Company has followed a buy-and-hold strategy for
more than 39 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 $5.512
billion as of December 31, 1998 and constituted 54% of the total investment
portfolio; 74% of the equities investment portfolio; and, after deferred income
taxes, 64% of total shareholders' equity. Such unrealized appreciation, before
deferred income taxes, amounted to $4.273 billion and $2.203 billion at year-end
1997 and 1996, respectively.
On November 22, 1996, the Board of Directors authorized the repurchase of up
to three million of the Company's outstanding shares as management deemed
appropriate over an unspecified period of time. On August 21, 1998, the Board of
Directors authorized repurchase of an additional six million shares, to reflect
the three-for-one split, which resulted in a total of nine million shares
authorized to be repurchased. As of December 31, 1998, the Company had
repurchased 3.5 million shares at an accumulated cost of $93.1 million.
On February 6, 1999, the CFC Board authorized management to repurchase up to
17 million shares of the Company's 166.7 million shares outstanding. They
specified their intention to complete the repurchase by December 31, 2000. This
authorization superceded the previous authorization of nine million shares, 3.9
million of which were purchased by February 5, 1999.
SELECTED QUARTERLY FINANCIAL DATA
(000's omitted except per share data)
Financial data for each quarter in the two years ended December 31,
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------
Quarter 1st 2nd 3rd 4th Full Year
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ 512,554 $ 518,578 $ 514,766 $ 508,392 $2,054,289
Income before income taxes ................ 116,333 72,913 64,019 53,841 307,107
Net income ................................ 84,178 58,850 52,915 45,623 241,567
Net income per common share ............... .51 .35 .31 .27 1.45
Net income per common share (diluted) . ... .49 .35 .30 .27 1.41
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------
Quarter 1st 2nd 3rd 4th Full Year
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ 483,737 $ 484,203 $ 492,038 $ 482,406 $1,942,384
Income before income taxes ................ 98,278 100,341 101,964 93,975 394,559
Net income ................................ 74,047 75,830 77,000 72,498 299,375
Net income per common share ............... .44 .46 .47 .44 1.81
Net income per common share (diluted) . ... .43 .44 .46 .43 1.77
</TABLE>
Per share amounts reflect the effects of a three-for-one stock split effective
to shareholders of record on April 24, 1998. Note: The sum of the quarterly
reported amounts may not equal the full year as each is computed independently.
22
<PAGE> 20
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Cincinnati Financial Corporation and Subsidiaries
- ------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT AND FINANCIAL STATEMENT FROM PAGES 23 THROUGH 35
(INCORPORATED INTO ITEMS 8 AND 14).
INDEPENDENT AUDITORS' REPORT
[LOGO-DELOITTE & TOUCHE LLP]
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, 1998 and 1997 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
February 4, 1999
23
<PAGE> 21
CONSOLIDATED BALANCE SHEETS
(000's omitted)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, at fair value (cost: 1998-$2,682,659;
1997-$2,571,549) $ 2,812,231 $ 2,751,219
Equity securities, at fair value (cost: 1998-$1,943,206;
1997-$1,725,855) 7,454,817 5,999,271
Other invested assets ..................................... 57,902 46,560
Cash ........................................................... 58,611 80,168
Investment income receivable ................................... 76,773 74,520
Finance receivables ............................................ 32,107 31,715
Premiums receivable ............................................ 164,412 158,539
Reinsurance receivable ......................................... 135,991 109,110
Prepaid reinsurance premiums ................................... 26,435 23,612
Deferred acquisition costs pertaining to unearned
premiums and to life policies in force .................... 142,896 135,313
Land, buildings and equipment for Company use (at cost, less
accumulated depreciation: 1998-$108,449; 1997-$97,248 ..... 53,639 52,559
Other assets ................................................... 70,689 30,839
------------ ------------
Total assets .......................................... $ 11,086,503 $ 9,493,425
============ ============
LIABILITIES
Insurance reserves
Losses and loss expenses .................................. $ 2,054,725 $ 1,936,534
Life policy reserves ...................................... 533,730 482,447
Unearned premiums .............................................. 459,695 443,054
Other liabilities .............................................. 136,894 168,959
Deferred income taxes .......................................... 1,809,003 1,406,478
Notes payable .................................................. - 0 - 280,558
6.9% senior debentures due 2028 ................................ 419,601 - 0 -
5.5% convertible senior debentures due 2002 .................... 51,919 58,430
------------ ------------
Total liabilities ..................................... 5,465,567 4,776,460
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, par value-$2 per share; authorized 200,000 shares;
issued: 1998-170,435; 1997-169,391 ........................ 340,871 338,782
Paid-in capital ................................................ 218,328 203,282
Retained earnings .............................................. 1,480,914 1,341,730
Accumulated comprehensive income ............................... 3,678,019 2,905,756
------------ ------------
5,718,132 4,789,550
Less treasury shares at cost (1998-3,754 shares;
1997-3,035 shares) ........................................ (97,196) (72,585)
------------ ------------
Total shareholders' equity ................................ 5,620,936 4,716,965
------------ ------------
Total liabilities and shareholders' equity ................ $ 11,086,503 $ 9,493,425
============ ============
</TABLE>
Common stock, paid-in capital and share figures reflect the effects of a
three-for-one stock split effective to shareholders of record on April 24, 1998.
Accompanying notes are an integral part of this statement.
24
<PAGE> 22
CONSOLIDATED STATEMENTS OF INCOME
(000's omitted except per share data)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE
Premium income
Property and casualty .......................... $ 1,542,639 $ 1,453,526 $ 1,366,544
Life ........................................... 61,704 54,742 48,694
Accident and health ............................ 8,392 8,110 7,659
----------- ----------- -----------
Net premiums earned ............................ 1,612,735 1,516,378 1,422,897
Investment income .................................. 367,993 348,597 327,307
Realized gains on investments ...................... 65,309 69,230 47,946
Other income ....................................... 8,252 8,179 10,599
----------- ----------- -----------
Total revenues ................................. 2,054,289 1,942,384 1,808,749
----------- ----------- -----------
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits ......... 1,221,118 1,054,924 1,087,105
Commissions ........................................ 290,832 282,690 259,291
Other operating expenses ........................... 144,849 139,030 117,034
Taxes, licenses and fees ........................... 60,798 48,573 43,392
Increase in deferred acquisition costs pertaining to
unearned premiums and to life policies in force (7,583) (7,725) (7,999)
Interest expense ................................... 28,012 20,821 20,102
Other expenses ..................................... 9,156 9,512 7,403
----------- ----------- -----------
Total benefits and expenses .................... 1,747,182 1,547,825 1,526,328
----------- ----------- -----------
INCOME BEFORE INCOME TAXES .............................. 307,107 394,559 282,421
----------- ----------- -----------
PROVISION FOR INCOME TAXES
Current ............................................ 78,847 107,046 67,827
Deferred ........................................... (13,307) (11,862) (9,166)
----------- ----------- -----------
Total provision for income taxes ............... 65,540 95,184 58,661
----------- ----------- -----------
NET INCOME .............................................. $ 241,567 $ 299,375 $ 223,760
=========== =========== ===========
PER COMMON SHARE
Net Income ......................................... $ 1.45 $ 1.81 $ 1.34
=========== =========== ===========
Net Income (diluted) ............................... $ $1.41 $ 1.77 $ 1.31
=========== =========== ===========
Cash dividends (declared) .......................... $ .61 1/3$ .54 2/3$ .48 2/3
=========== =========== ===========
</TABLE>
Per share amounts reflect the effects of a three-for-one stock split effective
to shareholders of record on April 24, 1998. Accompanying notes are an integral
part of this statement.
25
<PAGE> 23
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(000's omitted)
<TABLE>
<CAPTION>
Cincinnati Financial Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Common Treasury Paid-In Retained Comprehensive Shareholders'
Stock Stock Capital Earnings Income Equity
--------- ------------ -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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 ................. 592,079
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
Net income ........................... 241,567 241,567
Change in unrealized gains on
investments ..................... 1,188,097 1,188,097
Income taxes on unrealized gains ..... (415,834) (415,834)
------------
Comprehensive income ................. 1,013,830
Dividends declared ................... (102,383) (102,383)
Purchase/issuance of
treasury shares ................. (24,611) 310 (24,301)
Stock options exercised .............. 1,214 9,100 10,314
Conversion of debentures ............. 875 5,636 6,511
..................................... --------- ------------ -------- ------------ ------------ ------------
Balance, December 31, 1998 ........... $ 340,871 $ (97,196) $218,328 $ 1,480,914 $ 3,678,019 $ 5,620,936
========= ============ ======== ============ ============ ============
</TABLE>
*Includes $252 for fractional shares paid in April 1996.
Common stock and paid-in capital figures reflect the effects of a three-for-one
stock split effective to shareholders of record on April 24, 1998.
Accompanying notes are an integral part of this statement.
26
<PAGE> 24
Consolidated Statements of Cash Flows
(000's omitted)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income .............................................. $ 241,567 $ 299,375 $ 223,760
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation and amortization ....................... 11,793 11,327 7,100
Increase in investment income receivable ............ (2,253) (4,074) (5,401)
(Increase) decrease in premiums receivable .......... (5,873) 3,506 (928)
(Increase) decrease in reinsurance receivable ....... (26,881) 6,796 (12,223)
Increase in prepaid reinsurance premiums ............ (2,823) (688) (1,089)
Increase in deferred acquisition costs .............. (7,583) (7,725) (7,999)
Increase in accounts receivable ..................... (7,369) (7,230) (2,080)
Decrease (increase) in other assets ................. 649 42,084 (31,538)
Increase in loss and loss expense reserves .......... 118,191 55,367 137,633
Increase in life policy reserves .................... 51,283 42,166 37,017
Increase in unearned premiums ....................... 16,641 17,304 17,126
(Decrease) increase in other liabilities ............ (34,925) 49,672 6,984
Decrease in deferred income taxes ................... (13,307) (11,862) (9,272)
Realized gains on investments ....................... (65,309) (69,230) (47,946)
Other ............................................... (224) 169 (2,805)
--------- --------- ---------
Net cash provided by operating activities ...... 273,577 426,957 308,339
--------- --------- ---------
Cash flows from investing activities:
Sale of fixed maturities investments .................... 47,486 138,741 219,131
Call or maturity of fixed maturities investments ........ 320,510 376,496 247,205
Sale of equity securities investments ................... 321,003 266,296 257,981
Collection of finance receivables ....................... 14,738 8,588 10,449
Purchase of fixed maturities investments ................ (475,751) (637,858) (564,317)
Purchase of equity securities investments ............... (474,176) (400,405) (353,340)
Investment in land, buildings and equipment ............. (47,750) (16,485) (17,798)
Investment in finance receivables ....................... (15,131) (13,439) (17,032)
Increase in other invested assets ....................... (11,589) (4,471) (7,030)
--------- --------- ---------
Net cash used in investing activities .......... (320,660) (282,537) (224,751)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issue of 6.9% senior debentures ........... 419,593 - 0 - - 0 -
Proceeds from stock options exercised ................... 10,314 6,474 3,399
Purchase/issuance of treasury shares .................... (24,301) (60,714) (8,963)
Payoff/increase in notes payable ........................ (280,558) 18,460 41,093
Payment of cash dividends to shareholders ............... (99,522) (88,405) (79,203)
--------- --------- ---------
Net cash provided (used) in financing activities 25,526 (124,185) (43,674)
--------- --------- ---------
Net (decrease) increase in cash .............................. (21,557) 20,235 39,914
Cash at beginning of year .................................... 80,168 59,933 20,019
--------- --------- ---------
Cash at end of year .......................................... $ 58,611 $ 80,168 $ 59,933
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid ........................................... $ 36,419 $ 21,823 $ 20,922
========= ========= =========
Income taxes paid ....................................... $ 91,241 $ 95,488 $ 65,000
========= ========= =========
</TABLE>
Accompanying notes are an integral part of this statement.
27
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Cincinnati Financial Corporation (the "Company") sells
insurance primarily in the Midwest and Southeast through a network of local
independent agents. Insurance products sold include fire, automobile, casualty,
bonds and all related forms of property and casualty insurance, as well as life
insurance and accident and health insurance.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of the Company and its subsidiaries, each of which is wholly owned, and
are presented in conformity with generally accepted accounting principles.
Generally accepted accounting principles differ in certain respects from
statutory insurance accounting practices prescribed or permitted for insurance
companies by regulatory authorities. All significant inter-company balances and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions. The
accompanying consolidated financial statements include estimates for such items
as insurance reserves and income taxes. Actual results could differ from those
estimates.
PROPERTY AND CASUALTY INSURANCE - Expenses incurred in the issuance of
policies are deferred and amortized over the terms of the policies. Anticipated
investment income is not considered in determining if a premium deficiency
related to insurance contracts exists. Policy premiums are included in income on
a pro rata basis over the terms of the policies. Losses and loss expense
reserves are based on claims reported prior to the end of the year and estimates
of unreported claims.
LIFE INSURANCE - Policy acquisition costs are deferred and amortized over the
premium paying period of the policies. Life policy reserves are based on
anticipated rates of mortality derived primarily from industry experience data,
anticipated withdrawal rates based principally on Company experience and
estimated future interest earnings using initial interest rates ranging from 3%
to 101/2%. Interest rates on approximately $356,000,000 and $324,000,000 of such
reserves at December 31, 1998 and 1997, respectively, are periodically adjusted
based upon market conditions.
Payments received for investment, limited pay and universal life-type
contracts are recognized as income only to the extent of the current cost of
insurance and policy administration, with the remainder recognized as
liabilities and included in life policies reserves.
ACCIDENT AND HEALTH INSURANCE - Expenses incurred in the issuance of policies
are deferred and amortized over a five-year period. Policy premium income,
unearned premiums and reserves for unpaid losses are accounted for in
substantially the same manner as property and casualty insurance discussed
above.
REINSURANCE - In the normal course of business, the Company seeks to reduce
losses that may arise from catastrophes or other events that cause unfavorable
underwriting results by reinsuring certain levels of risk in various areas of
exposure with other insurance companies, reinsurers and involuntary state pools.
Reinsurance contracts do not relieve the Company from any obligation to
policyholders. Although the Company historically has not experienced
uncollectible reinsurance, failure of reinsurers to honor their obligations
could result in losses to the Company. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy.
The Company also assumes some reinsurance from other insurance companies,
reinsurers and involuntary state pools. Such assumed reinsurance activity is
recorded principally on the basis of reports received from the ceding companies.
INVESTMENTS - 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
28
<PAGE> 26
such securities not actively traded, fair values are estimated by discounting
expected future cash flows using a current market rate applicable to the yield,
credit quality and maturity of the investments. Fair values for equity
securities are based on quoted market prices.
The fair values for liabilities under investment-type insurance contracts
(annuities) are estimated using discounted cash flow calculations, based on
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued. Fair values for
short-term notes payable are estimated using interest rates currently available
to the Company. Fair values for long-term debentures are based on the quoted
market prices for such debentures.
STOCK SPLIT - On April 4, 1998, the Company's authorized capital was
increased to 200,000,000 shares of common stock and a three-for-one stock split
was declared that was 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.
ACCOUNTING CHANGES - In 1998, the Company adopted several Statements of
Financial Accounting Standards (SFAS). SFAS No. 130, "Reporting Comprehensive
Income," 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. SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," requires certain information to be
reported about operating segments on a basis consistent with the Company's
internal organizational structure. SFAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits," revises the disclosures for
pensions and other postretirement benefits and standardizes them into a combined
format. The Company has made all required disclosures and prior years'
information has been reclassified for the impact of SFAS Nos. 130, 131 and 132.
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" was
issued in 1998 and establishes accounting and reporting standards for derivative
instruments. The effects of the statement to the Company are not yet known.
2. INVESTMENTS
(000's omitted)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Investment income summarized by investment category:
Interest on fixed maturities ................................ $ 217,675 $ 218,065 $ 208,907
Dividends on equity securities .............................. 145,885 128,403 118,932
Other investment income ..................................... 9,545 6,865 5,744
----------- ----------- -----------
Total ................................................... 373,105 353,333 333,583
Less investment expenses .................................... 5,112 4,736 6,276
----------- ----------- -----------
Net investment income ................................... $ 367,993 $ 348,597 $ 327,307
=========== =========== ===========
Realized gains on investments summarized by investment category:
Fixed maturities:
Gross realized gains .................................... $ 11,591 $ 22,075 $ 20,823
Gross realized losses ................................... (10,354) (6,732) (10,207)
Equity securities:
Gross realized gains .................................... 104,079 62,337 47,310
Gross realized losses ................................... (40,007) (8,450) (9,980)
----------- ----------- -----------
Realized gains on investments ........................... $ 65,309 $ 69,230 $ 47,946
=========== =========== ===========
Change in unrealized gains on investments summarized by investment
category:
Fixed maturities ............................................ $ (50,098) $ 49,650 $ (18,257)
Equity securities ........................................... 1,238,195 2,070,425 584,901
----------- ----------- -----------
Change in unrealized gains on investments ............... $ 1,188,097 $ 2,120,075 $ 566,644
=========== =========== ===========
</TABLE>
29
<PAGE> 27
Notes to Consolidated Financial Statements
(continued)
Cincinnati Financial Corporation and Subsidiaries
- ------------------------------------------------------------------------------
Analysis of cost, gross unrealized gains, gross unrealized losses and fair
value as of December 31, 1998 and 1997 (000's omitted):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
1998 Cost Gains Losses Value
---------- ---------- ---------- ----------
Fixed maturities:
<S> <C> <C> <C> <C>
States, municipalities and political subdivisions $ 865,600 $ 51,944 $ 341 $ 917,203
Convertibles and bonds with warrants attached ... 100,360 6,208 4,914 101,654
Public utilities ................................ 55,709 4,713 0 60,422
United States government and government
agencies and authorities .................... 9,043 480 0 9,523
All other corporate bonds ....................... 1,651,947 104,849 33,367 1,723,429
---------- ---------- ---------- ----------
Total ....................................... $2,682,659 $ 168,194 $ 38,622 $2,812,231
========== ========== ========== ==========
Equity securities .................................... $1,943,206 $5,553,489 $ 41,878 $7,454,817
========== ========== ========== ==========
1997
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
========== ========== ========== ==========
</TABLE>
Contractual maturity dates for investments in fixed maturity securities as of
December 31, 1998 (000's omitted):
<TABLE>
<CAPTION>
Fair % of
Cost Value Fair Value
---------- ---------- ------------
Maturity dates occurring:
<S> <C> <C> <C>
One year or less ........................ $ 134,300 $ 135,906 4.8
After one year through five years ....... 614,545 640,865 22.8
After five years through ten years ...... 938,364 957,728 34.1
After ten years ......................... 995,450 1,077,732 38.3
---------- ---------- -----
Total ............................... $2,682,659 $2,812,231 100.0
========== ========== =====
</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.
30
<PAGE> 28
At December 31, 1998, investments with a cost of $49,425,000 and fair value
of $53,029,000 were on deposit with various states in compliance with certain
regulatory requirements.
Investments in companies that exceed 10% of the Company's shareholders'
equity include the following as of December 31 (000's omitted):
<TABLE>
<CAPTION>
1998 1997
------------------------ -------------------------
Fair Fair
Cost Value Cost Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Fifth Third Bancorp common stock . $ 276,799 $3,445,118 $ 255,089 $2,612,607
Alltel Corporation common stock. . $ 100,467 $ 767,105 $ 95,810 $ 522,527
</TABLE>
3. DEFERRED ACQUISITION COSTS
Acquisition costs incurred and capitalized during 1998, 1997 and 1996
amounted to $384,231,000, $322,117,000 and $303,111,000, respectively.
Amortization of deferred acquisition costs was $376,648,000, $314,392,000 and
$295,112,000 for 1998, 1997 and 1996, 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,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1........... $1,888,883 $1,824,296 $1,690,461
Less reinsurance receivable. 112,235 121,881 109,719
---------- ---------- ----------
Net balance at January 1....... 1,776,648 1,702,415 1,580,742
---------- ---------- ----------
Incurred related to:
Current year................ 1,306,194 1,115,140 1,183,251
Prior years................. (153,311) (119,654) (151,996)
---------- ---------- ----------
Total incurred................. 1,152,883 995,486 1,031,255
---------- ---------- ----------
Paid related to:
Current year................ 590,366 467,843 514,186
Prior years................. 498,842 453,410 395,396
---------- ---------- ----------
Total paid..................... 1,089,208 921,253 909,582
---------- ---------- ----------
Net balance at December 31..... 1,840,323 1,776,648 1,702,415
Plus reinsurance receivable. 138,138 112,235 121,881
---------- ---------- ----------
Balance at December 31...... $1,978,461 $1,888,883 $1,824,296
========== ========== ==========
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss expenses decreased by $153,311,000, $119,654,000
and $151,996,000 in 1998, 1997 and 1996. 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 $76,264,000 and $47,651,000 at December 31, 1998 and 1997,
respectively, for certain life/health losses and loss checks payable.
5. LIFE POLICY RESERVES.
Life policy reserves have been calculated using the account value basis for
universal life and annuity policies and primarily the Basic Table (select)
mortality basis for ordinary/traditional, industrial and other policies.
Following is a summary of such reserves (000's omitted):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Ordinary/traditional life..................... $156,887 $137,734
Universal life................................ 221,197 202,696
Annuities..................................... 135,176 121,284
Industrial.................................... 15,986 16,470
Other......................................... 4,484 4,263
-------- --------
Total..................................... $533,730 $482,447
======== ========
</TABLE>
At December 31, 1998 and 1997, the fair value associated with the annuities
shown above approximated $144,000,000 and $123,000,000, respectively.
6. NOTES PAYABLE
The Company and subsidiaries had no compensating balance requirement on debt
for either 1998 or 1997. Notes payable in the accompanying balance sheets are
short term, and interest rates charged on such borrowings ranged from 5.03% to
8.50% during 1998, which resulted in an average interest rate of 6.07%. At
December 31, 1997, the fair value of the notes payable approximated the carrying
value and the weighted average interest rate approximated 6.44%.
7. SENIOR DEBENTURES
The Company issued $420,000,000 of senior debentures due in 2028 in 1998. The
convertible senior debentures due in 2002 are convertible by the debenture
holders into shares of common stock at a conversion price of $14.88 (67.23
shares for each $1,000 principal). At December 31, 1998 and 1997, the fair value
of the debentures approximated $533,000,000 and $175,000,000, respectively.
31
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY AND RESTRICTION
The insurance subsidiaries paid cash dividends to the Company of
approximately $105,000,000, $95,500,000 and $77,027,000 in 1998, 1997 and 1996,
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 1999, the total dividends that can
be paid to the Company without regulatory approval are approximately
$299,805,000.
4,318,000 shares of common stock were available for future stock option
grants, as of December 31, 1998.
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. On August 21,
1998, the Board authorized the repurchase of an additional six million shares,
to reflect the three-for-one split, which results in a total of nine million
shares authorized to be repurchased. As of December 31, 1998, the Company had
repurchased 3,538,000 shares.
9. REINSURANCE
Property and casualty premium income in the accompanying statements of income
includes approximately $38,790,000, $41,694,000 and $41,139,0000 of earned
premiums on assumed business and is net of approximately $96,073,000,
$94,397,000 and $91,396,000 of earned premiums on ceded business for 1998, 1997
and 1996, respectively.
Written premiums for 1998, 1997 and 1996 consist of the following (000's
omitted):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Direct business .......... $ 1,618,357 $ 1,523,915 $ 1,433,340
Assumed business ......... 38,119 42,773 42,671
Ceded business ........... (98,895) (95,085) (92,486)
----------- ----------- -----------
Net ................... $ 1,557,581 $ 1,471,603 $ 1,383,525
=========== =========== ===========
</TABLE>
Insurance losses and policyholder benefits in the accompanying statements of
income are net of approximately $59,741,000, $34,744,000 and $44,770,000 of
reinsurance recoveries for 1998, 1997 and 1996, respectively.
10. FEDERAL INCOME TAXES
Significant components of the Company's net deferred tax liability as of
December 31, 1998 and 1997 are as follows (000's omitted):
<TABLE>
<CAPTION>
1998 1997
---------- ---------
Deferred tax liabilities:
<S> <C> <C>
Unrealized gains on investments ........... $1,974,414 $1,558,580
Deferred acquisition costs ................ 45,205 42,936
Other ..................................... 8,046 10,514
---------- ----------
Total ..................................... 2,027,665 1,612,030
---------- ----------
Deferred tax assets:
Losses and loss expense reserves .......... 132,298 127,994
Unearned premiums ......................... 30,270 29,293
Life policy reserves ...................... 18,637 19,460
Other ..................................... 37,457 28,805
---------- ----------
Total ..................................... 218,662 205,552
---------- ----------
Net deferred tax liability ................... $1,809,003 $1,406,478
========== ==========
</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>
1998 1997 1996
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............... (5.39) (4.44) (6.41)
Dividend exclusion....................... (9.29) (6.54) (8.50)
Other.................................... 1.02 .10 .68
----- ----- -----
Effective rate 21.34 24.12 20.77
===== ===== =====
</TABLE>
No provision has been made (at December 31, 1998, 1997 and 1996) 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.
32
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
11. NET INCOME PER COMMON SHARE
(000's omitted except per share data)
<TABLE>
<CAPTION>
Income Shares Per Share
1998 (Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net income per common share.. $241,567 166,821 $1.45
======
Effect of dilutive securities:
5.5% convertible senior
debentures.............. 1,918 3,490
Stock options............. 1,767
Net income per common share
(diluted).................. $243,485 172,078 $1.41
======== ======= =====
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
========= ======= ======
</TABLE>
Options to purchase 667,000, 76,000 and 1,458,000 shares of common stock were
outstanding during 1998, 1997 and 1996, 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.
12. 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 summarized information on the Company's
defined benefit pension plan (000's omitted):
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
--------- ---------
Change in benefit obligation:
<S> <C> <C>
Benefit obligation at beginning of year .......... $ 62,934 $ 53,849
Service cost ..................................... 4,150 3,449
Interest cost .................................... 4,474 3,938
Actuarial gain ................................... 7,383 4,719
Benefits paid .................................... (2,627) (3,021)
--------- ---------
Benefit obligation at end of year ................ $ 76,314 $ 62,934
========= =========
Change in plan assets:
Fair value of plan assets at beginning
of year ........................................ $ 133,470 $ 92,740
Actual return on plan assets ..................... 21,036 43,751
Benefits paid .................................... (2,627) (3,021)
--------- ---------
Fair value of plan assets at end of year ......... $ 151,879 $ 133,470
========= =========
Funded status:
Funded status at end of year ..................... $ 75,565 $ 70,536
Unrecognized net actuarial gain .................. (72,235) (67,081)
Unrecognized net transitional asset .............. (3,331) (3,702)
Unrecognized prior service cost .................. (357) (397)
--------- ---------
Prepaid accrued pension cost ..................... $ (358) $ (644)
========= =========
</TABLE>
The fair value of the Company's stock comprised $21,331,023 and $27,325,064
of the plan's assets at December 31, 1998 and 1997, respectively.
The following summarizes the assumptions for the plan:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
Percent Percent
------- -------
<S> <C> <C>
Discount rate .................................... 6.25 6.75
Expected return on plan assets ................... 8.00 8.00
Rate of compensation increase .................... 5 to 7 5 to 7
</TABLE>
The components of the net periodic benefit cost for 1998, 1997 and 1996
include the following (000's omitted):
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost ............................ $ 4,150 $ 3,449 $ 3,306
Interest cost ........................... 4,474 3,938 3,572
Expected return on plan assets .......... (7,451) (6,250) (5,557)
Amortization of:
Transition obligation (asset) ........ (370) (370) (370)
Prior service cost ................... (40) (40) (40)
Actuarial (gain) loss ................ (1,049) (790) (475)
------- ------- -------
Net pension expense ..................... $ (286) $ (63) $ 436
======= ======= =======
</TABLE>
33
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
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,
-------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income:
Property/casualty insurance
subsidiaries .................. $ 148,235 $ 200,830 $ 136,041
Life/health insurance
subsidiary .................... $ 7,248 $ 6,261 $ (1,812)
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Shareholders' equity:
Property/casualty insurance subsidiaries ......... $2,650,503 $2,152,334
Life/health insurance subsidiary ................. $ 369,325 $ 320,198
</TABLE>
14. TRANSACTION WITH AFFILIATED PARTIES
The Company paid certain officers and directors, or insurance agencies of
which they are shareholders, commissions of approximately $11,654,000,
$11,780,000 and $10,874,000 on premium volume of approximately $82,839,000,
$78,727,000 and $70,418,000 for 1998, 1997 and 1996, 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 (000's omitted except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income As reported $241,567 $299,375 $223,760
Pro forma 235,420 296,078 221,665
Net income per common share As reported $ 1.45 $ 1.81 $ 1.34
Pro forma 1.41 1.79 1.33
Net income per common share As reported $ 1.41 $ 1.77 $ 1.31
(diluted) Pro forma 1.38 1.75 1.30
</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 1998, 1997 and 1996,
respectively: dividend yield of 1.79%, 1.22% and 2.26%; expected volatility of
21.79%, 19.67% and 20.50%; risk-free interest rates of 5.02%, 5.89% and 6.56%;
and expected lives of ten years for all years. Compensation expense in the pro
forma disclosures is not indicative of future amounts as options vest over
several years and additional grants are generally made each year.
A summary of options information for the years ended December 31, 1998, 1997
and 1996 follows (000's omitted except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------------ ----------------------------
Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average
Exercise Price Exercise Price Exercise Price
--------- -------------- ---------- ---------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,932,271 $17.88 3,774,492 $15.98 2,685,747 $13.41
Granted 1,664,200 38.00 655,437 20.97 1,537,809 20.25
Exercised (615,884) 15.27 (465,429) 11.31 (272,778) 12.46
Forfeited/revoked (39,996) 25.48 (32,229) 17.96 (176,286) 19.56
---------- --------- ---------
Outstanding at end of year 4,940,591 25.11 3,932,271 17.88 3,774,492 15.98
========== ========= =========
Options exercisable at end of year 2,243,982 2,108,790 1,956,030
Weighted-average fair value of
options granted during the year $13.39 $ 7.66 $6.85
</TABLE>
34
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Cincinnati Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1998 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>
$ 7.34 to 12.34 590,335 2.77 yrs $11.50 490,335 $11.33
$13.45 to 17.00 531,153 5.52 yrs 15.81 531,153 15.81
$17.38 to 20.00 500,409 6.36 yrs 19.28 378,550 19.18
$20.47 to 21.33 1,060,865 7.37 yrs 20.51 646,215 20.50
$22.46 to 26.62 533,556 8.30 yrs 23.08 174,356 23.07
$33.00 to 33.88 953,373 9.60 yrs 33.81 23,373 33.00
$36.63 to 45.37 770,900 9.20 yrs 42.70 0 n/a
--------- ---------
4,940,591 7.34 yrs 25.11 2,243,982 17.49
========= =========
</TABLE>
35
<PAGE> 33
MANAGEMENT DISCUSSION
(continued)
Cincinnati Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
"SELECTED QUARTERLY FINANCIAL DATA" FROM PAGE 22 (INCORPORATED INTO ITEM 8).
SELECTED QUARTERLY FINANCIAL DATA
(000's omitted except per share data)
Financial data for each quarter in the two years ended December 31,
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------
Quarter 1st 2nd 3rd 4th Full Year
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 512,554 $ 518,578 $ 514,766 $ 508,392 $2,054,289
Income before income taxes................ 116,333 72,913 64,019 53,841 307,107
Net income................................ 84,178 58,850 52,915 45,623 241,567
Net income per common share............... .51 .35 .31 .27 1.45
Net income per common share (diluted) .... .49 .35 .30 .27 1.41
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------
Quarter 1st 2nd 3rd 4th Full Year
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 483,737 $ 484,203 $ 492,038 $ 482,406 $1,942,384
Income before income taxes................ 98,278 100,341 101,964 93,975 394,559
Net income................................ 74,047 75,830 77,000 72,498 299,375
Net income per common share............... .44 .46 .47 .44 1.81
Net income per common share (diluted) .... .43 .44 .46 .43 1.77
</TABLE>
Per share amounts reflect the effects of a three-for-one stock split effective
to shareholders of record on April 24, 1998. Note: The sum of the quarterly
reported amounts may not equal the full year as each is computed independently.
22
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
2-71575 (on Form S-8), No. 33-34127 (on Form S-8), No. 333-24185 )on Form S-8),
No. 333-24817 (on Form S-8), No. 333-49981 (on Form S-8), No. 333-51677 (on Form
S-3), and No. 33-48970 (on Form S-4) of Cincinnati Financial Corporation of our
reports dated February 4, 1999, appearing in and incorporated by reference in
the Annual Report on Form 10-K of Cincinnati Financial Corporation for the year
ended December 31, 1998.
DELOITTE & TOUCHE LLP
/S/ Deloitte & Touche LLP
Cincinnati, Ohio
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 2,812,231
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 7,454,817
<MORTGAGE> 14,553
<REAL-ESTATE> 4,472
<TOTAL-INVEST> 10,324,950<F1>
<CASH> 58,611
<RECOVER-REINSURE> 6,555
<DEFERRED-ACQUISITION> 142,896
<TOTAL-ASSETS> 11,086,503
<POLICY-LOSSES> 2,518,745<F2>
<UNEARNED-PREMIUMS> 459,695
<POLICY-OTHER> 65,901<F2>
<POLICY-HOLDER-FUNDS> 18,028
<NOTES-PAYABLE> 471,520<F3>
340,871<F4>
0
<COMMON> 0
<OTHER-SE> 5,280,065<F4>
<TOTAL-LIABILITY-AND-EQUITY> 11,086,503
1,612,735
<INVESTMENT-INCOME> 367,993
<INVESTMENT-GAINS> 65,309
<OTHER-INCOME> 8,252
<BENEFITS> 1,221,118
<UNDERWRITING-AMORTIZATION> 376,648<F5>
<UNDERWRITING-OTHER> 149,416<F5>
<INCOME-PRETAX> 307,107
<INCOME-TAX> 65,540
<INCOME-CONTINUING> 241,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 241,567
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.41
<RESERVE-OPEN> 1,776,648<F6>
<PROVISION-CURRENT> 1,306,194
<PROVISION-PRIOR> (153,311)
<PAYMENTS-CURRENT> 590,366
<PAYMENTS-PRIOR> 498,842
<RESERVE-CLOSE> 1,840,323<F7>
<CUMULATIVE-DEFICIENCY> (153,311)
<FN>
<F1>
<F2>
<F3>
<F4>
<F5>
<F6>
<F7>
</FN>
</TABLE>
