O U R C U S T O M E R I S T H E
L O C A L I N D E P E N D E N T A G E N T .
V A L U E F O R
S H A R E H O L D E R S A N D P O L I C Y H O L D E R S
I S T H E R E S U L T .
C I N C I N N A T I F I N A N C I A L
C O R P O R A T I O N
1 9 9 7 A N N U A L R E P O R T
O U R C O M P A N Y
Cincinnati Financial Corporation, formed in 1968, has five subsidiaries:
• The lead property and casualty insurance subsidiary, The Cincinnati
Insurance Company, was founded in 1950. It markets a broad range of
business and personal policies in 27 states, operating with a strong
customer focus on an elite corps of 973 local independent insurance
agencies.
The $2 billion target for direct
premium written during the year 2000
requires us to become a larger, more
aggressive company, building financial
strength that benefits agents,
policyholders, shareholders, associates
• The Cincinnati Casualty Company and The Cincinnati Indemnity
and community.
Company round out the A++ rated property and casualty
insurance group.
Programmer Joann Gillming
• The Cincinnati Life Insurance Company markets life, health and
submitted this special logo, designed
accident policies.
• CFC Investment Company complements the insurance subsidiaries
to inspire individuals and teams to
with leasing, financing and real estate services.
take ownership of this goal.
O U R M I S S I O N
To grow profitably and enhance the ability of local independent insurance
agents to deliver quality financial protection to the people and businesses
they serve by:
• Providing market stability through financial strength
• Producing competitive, up-to-date products and services
• Developing associates committed to superior service.
O U R R E C O R D
Over the past five years, the Company has experienced strong
compound growth:
• Net written property and casualty premium grew 7.7 percent annually.
• Investment income, the primary source of Company profits, rose
9.8 percent annually.
• Book value grew 22.2 percent annually, reaching a record $85.06.
• Earnings per share advanced 11.5 percent annually.
• Cash dividends paid increased 12.2 percent annually, reaching an
indicated annual total of $1.60 at December 31, 1997.
• Total return to shareholders, including share appreciation and dividends,
grew 22.8 percent annually compared to 19.2 percent for the Standard &
Poor’s property casualty insurance group and 20.0 percent for the
Standard & Poor’s 500 Index.
O U R O U T L O O K
We have resources and opportunities to grow profitably, increasing
effectiveness and shareholder value:
• Beginning to actively market in two new states in 1998 and evaluating
five more states for future years.
• Expanding our distribution network for life insurance, financing and
leasing products and services.
• Serving our agents better with a stronger local presence, work-saving
technology initiatives and competitive products, rates and compensation.
• CINF shares trading for the first time as part of the Standard & Poor’s
500 Index.
C O N T E N T S
Financial Highlights . . . . . . . . . . . . . . . 1
Letter To Our Shareholders . . . . . . . . 2-3
Reports On Subsidiary
Companies . . . . . . . . . . . . . . . . . 4-11
Selected Financial Information . . . 12-13
Management Discussion . . . . . . . . . 14-18
Responsibility For Financial
Statements . . . . . . . . . . . . . . . . . . . 19
Independent Auditors’ Report . . . . . . . 19
Consolidated Financial
Statements . . . . . . . . . . . . . . . . 20-23
Notes To Consolidated
Financial Statements. . . . . . . . . 24-30
Subsidiary Officers
And Directors . . . . . . . . . . . . . . . . . 31
Corporate Officers
And Directors . . . . . . . . . . . . . . . . . 32
Shareholder Information And
Price Range Of Common Stock. . . . 33
Selected Quarterly
Financial Data . . . . . . . . . . . . . . . . 33
F I N A N C I A L H I G H L I G H T S
Cincinnati Financial Corporation and Subsidiaries
Comparative results 1997-1996
(000’s omitted except per share data and ratios)
OPERATING PERFORMANCE
1997
1996
% Change
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Capital Gains (after tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,942,384
394,559
254,375
45,000
299,375
$ 1,808,749
282,421
192,595
31,165
223,760
FINANCIAL POSITION
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,493,425
4,716,965
7,045,514
3,162,889
PER SHARE DATA
Net Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Capital Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income (Diluted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends Declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average Shares Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PERFORMANCE RATIOS
Combined Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on Equity Including Net Unrealized
Gain and Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Adjusted to reflect 5 percent stock dividends paid in April, 1996 and 1995.
(2) Includes common stock equivalents for stock options and convertible debentures.
4.61
.82
5.43
5.31
1.64
85.06
55,179
97.7
7.6
42.6
7.4
39.7
32.1
44.4
33.8
34.7
49.1
33.6
46.4
35.4
35.5
12.3
49.6
(1.0)
(5.1)
(1.3)
3.45
.56
4.01
3.92
1.46
56.85
55,736
103.0
7.7
20.3
109.9
REVENUES
(In Millions of Dollars)
1,655.7
1,512.5
1,442.2
1,942.4
1,808.7
NET INCOME/DIVIDENDS PAID*
Per Common Share
(In Dollars)
SHAREHOLDERS’ EQUITY*
Book Value Per Common Share
(In Dollars)
Net Income
Dividends Paid
5.43
3.91
3.62
4.08
4.01
1.00
1.12
1.26
1.43
1.60
85.06
56.85
47.75
35.24
34.94
93
94
95
96
97
93
94
95
96
97
93
94
95
96
97
*Adjusted to reflect 5% stock dividends
paid in April, 1995 and 1996.
*Adjusted to reflect 5% stock dividends
paid in April, 1995 and 1996.
1
T O O U R S H A R E H O L D E R S :
PERFORMANCE OVERVIEW
underwriting with a $24.8 million net
independent life agent distribution
Cincinnati Financial Corporation’s
performance got stronger and
stronger over the course of 1997.
While revenues advanced 7.4 percent
to $1.942 billion, total net income
grew 33.8 percent to $299.4 million
and net operating income rose
32.1 percent to $254.4 million.
The weather and the stock market
cooperated, reducing catastrophic
storm losses and providing
opportunities for higher investment
income and capital gains. 1997
catastrophe losses were a more typical
$25.5 million versus last year’s
unusually high $64.7 million.
Just as important, our customer
focus on agents, consistent and
disciplined underwriting practices
and claims management proved their
value. While growing premiums at
twice the industry rate in 1997, we
experienced lower overall claims loss
trends. Profitability returned to
property and casualty insurance
NET OPERATING INCOME*
Per Common Share
(In Dollars)
4.61
3.30
3.40
3.72
3.45
93
94
95
96
97
*Adjusted to reflect 5% stock dividends
paid in April, 1995 and 1996.
Net operating earnings rose to all-time highs
for the year and for each of the last three
quarters of 1997.
2
gain versus last year’s $45.0 million
network, accelerate revenue growth,
net underwriting loss.
lower unit costs and achieve
This year’s lower claims payments
unparalleled service.
joined with higher realized capital
• We partnered with leading
gains to increase cash flow,
technology consultants to begin
contributing to 6.5 percent growth of
developing an Intranet-based system
investment income to $348.6 million.
that will be accessible from our
Net realized after-tax capital gains
headquarters and from our field
were $45.0 million, up from
representative and agent offices.
$31.2 million last year. Higher equity
This technology is planned to make
values presented many opportunities
us more efficient and more effective,
to sell convertible securities, which
with systems that enhance our
accounted for approximately
trademark flexibility and personal
70 percent of the net gains.
relationships.
Assets, shareholders’ equity and
Early in 1998, we firmed up plans
book value climbed to all-time highs.
for another infrastructure item,
As of December 31, 1997, assets were
construction of a second office tower
up 34.7 percent over year-end 1996
on the CFC Headquarters property.
at $9.493 billion. Shareholders’
We outgrew the current tower about
equity was up 49.1 percent to
a year ago and now have close to 300
$4.717 billion. Book value rose
associates in other buildings. With
to $85.06 from $56.85.
continued steady growth, the new
MOVING RESOURCES INTO PLACE
building will fill up very quickly
following the two-year construction
Our continued ability to grow is
timeframe.
limited only by our ability to develop
our staff and technology resources.
REWARDING SHAREHOLDERS
During 1997 we made major progress:
Standard & Poor’s added CINF
• We expanded the leadership ranks
to the S&P 500 Index at the close of
of corporate officers, promoting
trading on December 17, 1997. The
Theodore F. Elchynski to Chief
S&P 500 is a key barometer of stock
Financial Officer and appointing Vice
market activity and performance
Presidents Kenneth S. Miller, CLU,
benchmarks for professional money
ChFC and Kenneth W. Stecher.
managers. Selection to the index
• The Cincinnati Life Insurance
called attention to our strong market
Company appointed President and
position and operating results.
Chief Operating Officer David H.
Following the announcement, trading
Popplewell, FALU, LLIF and Senior
increased and our share price soared.
Vice President Glenn D. Nicholson,
Two months down the road, the price
LLIF, Senior Marketing Officer. They
seems stabilized at about one and a
are rapidly implementing product and
half times book value.
marketing initiatives to expand the
mission places agents at the center
of our identity. We follow through,
making sure every move enhances
our agents’ ability to add value to the
insurance transaction for people and
businesses in their communities.
Giving our agent customers what
they need to compete continuously
raises the bar, requiring us to set
and exceed ever higher standards
for products, profitability, service
and financial strength.
We are a specialty company.
Our specialty is not a product niche;
we prefer to offer a broad range of
products so agents can rely on us to
be their first-choice carrier for all of
their good business. Our specialty is
a distribution strategy—the local
independent agent strategy—and it
offers abundant rewards for those
who do it extremely well. We pledge
to support our strong, dynamic
independent agent customers as
they find and serve that large
percentage of the population that
wants more than commodity
insurance products and services.
That is what differentiates us from
other companies, creating superior
value for our agents, shareholders,
policyholders, associates and
community.
Robert B. Morgan
President and Chief Executive Officer
Left to right: John J. Schiff, Chairman of the Executive Committee; Robert B. Morgan,
President and Chief Executive Officer; John J. Schiff, Jr., CPCU, Chairman of the Board.
During each of the past 37 years,
split would improve liquidity of CINF
your Company has raised cash
shares, bringing convenience for
dividends paid to shareholders.
investors and supporting increased
Adjusted for stock dividends and
trading from mutual funds that invest
splits, dividends paid per share rose
to track the S&P 500 Index.
to $1.60 in 1997 from $0.43 in 1987,
For the year ended December 31,
a 14.0 percent ten-year compound
1997, CINF’s 121 percent total
growth rate. At their meeting in
return to shareholders, including
February of 1998, the Board of
share appreciation and dividends,
Directors declared a $0.05 per share
was the fifth highest among all
increase in the regular quarterly cash
S&P 500 Index companies.
dividend, raising the indicated annual
Cincinnati Financial’s convertible
dividend to $1.84 per share.
debenture was the top performing
The Board also announced plans
debenture in the country for 1997.
to declare a three-for-one split to be
The events of 1997 and the outlook
distributed in May, pending share-
for 1998 would appear to make this
holder approval on April 4 of an
a great time to own CFC shares.
authorized share increase to 200
We thank you for your confidence
million from 80 million. This would
be the 27th stock dividend or split
over the past 41 years. Shareholders
who purchased one share prior to
the first dividend in 1957, and who
held all shares accrued from stock
dividends and splits, would own
1,947 shares after the proposed
distribution in May. The planned
and for the opportunity to reward
you, our loyal shareholders.
OUR AGENT, OUR CUSTOMER,
OUR ADVANTAGE
John J. Schiff, Jr., CPCU
Chairman of the Board
While other companies may
distribute through local independent
agents and/or other channels,
John J. Schiff
Cincinnati is a company whose very
Chairman of the Executive Committee
3
S E E I N G T H R O U G H L O C A L
Where we have established top positions in agencies, a dedicated local
field staff makes it easier for agents to serve their communities. With more
than 620 local resident field claims representatives, we can often assign
one or more to work full-time with a single agency, its policyholders and
claimants. Paying claims is our business. Through these local adjusters,
the agent provides key accounts with consistency and personal service when
they need it most—when they have claims. Established agencies in
developed states have regular, personal contact with various field
marketing representatives for property and casualty or life insurance,
bonds or leasing. Additional field representatives work with agency clients,
providing premium audit, engineering and loss control services. By giving
all of our field staff full authority and placing them at the local level
alongside agents, we strengthen the agents’ ability to deliver added value.
David G. Winegarden, CPCU, President of Welt,
Ambrisco, Winegarden Insurance, Inc., in Iowa City,
Iowa, with Field Claims Manager Brent H. Burton, AIC.
T A R G E T I N G T H E Y E A R 2 0 0 0 A N D B E Y O N D :
E X P A N D I N G T H E P R O D U C T L I N E , E X T E N D I N G
O U R R E A C H
The Cincinnati Insurance Companies
to provide products people need; to
to write more accounts, more
are preparing to welcome the next
operate profitably; to deliver prompt
carefully, to compensate for the
millennium as a larger, more
and personal service; to listen and
lower premium pricing brought
aggressive competitor. Our target
learn continuously; and to build
about by intense price competition.
is to reach $2 billion in direct
financial strength that benefits
Total direct workers’ compensation
written premium during the year
agents, policyholders, shareholders,
premium fell 6 percent despite
2000. Along with this growth,
associates and community.
$30.1 million in new business.
we are renewing our commitments
GROSS WRITTEN PREMIUM
CFC Property Casualty Companies
(In Millions of Dollars)
1,566.7
1,476.0
1,377.4
1,287.3
1,216.8
93
94
95
96
97
In 1997 commercial insurance premiums
were 67.8% and personal insurance
premiums 32.2% of the total.
4
PROPERTY AND CASUALTY
INSURANCE
Net written property and casualty
premiums reached $1.472 billion,
up 6.4 percent. The combined
loss and expense ratio improved to
97.7 percent, our best annual ratio
since 1988. This profitability and
an all-time high of $202.6 million in
new business helped offset depressed
pricing of commercial accounts.
Commercial Insurance
Net written premiums for
commercial insurance grew only
3.6 percent to $987.3 million with a
53.2 percent pure loss ratio. We had
While we expect low pricing to
prevail into 1998, strong unit
growth and underwriting quality
of our accounts position us favorably
for longer-term growth.
Sales of our new Commercial
Output Policy (COP) began in
October. Our agents wrote 26 COP
policies for a total of $1.7 million
by year-end. This product offers
flexible pricing and coverage for
larger property risks. As agencies
consolidate and eliminate carriers,
they need to represent a company
that can handle complex, marquee
accounts. We expect the COP and
the Special Accounts Marketing
E Y E S
Iowa—Active marketing began in 1982.
Program (SAMP) for larger accounts
Worldwide Commercial General
growth came from these increases,
to become an important source of
Liability endorsement.
much of it comes from new business
growth. In the first month of 1998,
Cincinnati earned the highest
as our agents look for stable markets
total SAMP premiums were already
overall score on surveys of 30,000
and achieve economies by reducing
$3.0 million versus $7.8 million
agents across 16 commercial product
the number of carriers they represent.
in all of 1997.
lines, according to Property/Casualty
Some insurers have reduced
Working with professional trade
Rates & Ratings newsletter (August,
writings in order to remedy high
associations, we continued to gain
1997). Cincinnati was named
concentration of risk in certain
endorsements of our products and
Company of the Year by the Young
regions. Others have reduced
access to their members for our local
Agents Committee of the Independent
coverages or experimented with
agents. In several states, associations
Insurance Agents of North Carolina,
distribution methods. Agents are
of dentists, funeral service providers
where we market primarily
weighing other carriers’ lack of
or water quality dealers recommend
commercial insurance. And
focus against our commitment and
Cincinnati coverage and service.
Cincinnati earned the top spot
are giving us their prime personal
Other popular commercial
on an agent survey conducted
insurance accounts.
products attained production
by the Professional Independent
1998 product innovations will
milestones this year. The Cincinnati
Insurance Agents of Illinois, our
include a new Master Group Personal
Commercial Umbrella crossed the
second largest state by premium
Umbrella Liability Policy. Electronic
$100 million mark and Employment
volume.
funds transfer and other flexible
Practices Liability Insurance, on the
Personal Insurance
billing options may boost worksite
market for less than two years,
On the personal insurance side, net
marketing. We will capitalize on
reached $4 million. We will heighten
written premiums grew 12.4 percent
renewed agent interest in stable,
our product advantages during 1998
to $484.3 million with a 68.9 percent
personal lines business by “blitzing”
with introduction of an improved
pure loss ratio. Profitability is
50 agencies with our interdepart-
Property Optional Coverage
improving due to homeowner and
mental teams empowered to remove
endorsement, an improved
automobile rate increases approved
all barriers to production, from
Businessowners Policy and a new
in many states. While some premium
systems issues to producer education.
5
P U T T I N G R E S O U R C E S W H
Upstate New York—Active marketing begins in 1998.
Expansion Activities
This will not change as we diversify
Plans for 1998 call for opening
The Cincinnati Insurance
geographically by reaching into new
Montana and two upstate New York
Companies are represented by fewer
states, and as we increase market
territories, as well as adding
than 1,000 agencies while some other
penetration by forming new territories
territories in Louisville and Greater
insurers appoint many thousands.
in established ones. Our count should
Atlanta. Additionally, some
We are from the “do more with less”
remain fairly stable, with new
territories where we market
school of thought. By being very
agencies taking the place of
commercial insurance will be opened
selective in our representation, we can
consolidated agencies or agencies
for personal insurance. We are
invest in better relationships, earn
discontinued for not living up to our
evaluating possible entry over future
more loyalty and expect a higher
expectations. During 1997, we made
years into five new states—Delaware,
percentage of agency premium.
34 new agency appointments. During
Idaho, Oregon, Utah and Washington.
NET PREMIUM INCOME
The Cincinnati Life Insurance Company
(In Millions of Dollars)
1998, we expect to appoint 84.
We are appointing financially
strong, sales-oriented agencies that
62.9
invest in technology and people to
56.4
grow with us in the future. These
48.7
49.1
50.9
93
94
95
96
97
Total life, health, accident and annuity
premiums earned rose 11.5 percent in 1997.
6
elite agencies have put out the
welcome mat for us as we began
marketing in new states and
expanded established territories.
During 1997, we opened North
Dakota and split off new marketing
territories in several profitable areas
where we wanted to increase service
and do more business. We staffed
new territories in Wisconsin, Missouri,
Tennessee, Illinois and Michigan.
LIFE INSURANCE
The Cincinnati Life Insurance
Company contributed $29.2 million
to net income, up 10.2 percent over
last year. Net operating income rose
23.3 percent to $24.8 million.
Total net written premiums grew
7.6 percent to $92.4 million.
Direct term life insurance
premiums rose 16.8 percent to
$14.8 million. Near the end of 1997,
we rolled out a new term policy to
launch the Life Horizons product
series. We will introduce additional
new and improved Life Horizons
products at the rate of about one per
E R E T H E Y C O U N T
Where we are considering entry into a market, research includes visits
with state regulators, independent agents and leaders of insurance and agent
groups. We decide to actively market in a new state when we determine that
agents and their customers will benefit from Cincinnati products and
services. The process includes a thorough review of the competitive climate,
geographical risks, laws and regulations. First, we identify states compatible
with risk-based underwriting, healthy competition and profit potential; then
we prioritize and gear up by filing products for state insurance department
approval and programming our systems. Next, we prospect for agencies,
selecting those that share our commitments to customers—to carefully
underwrite risks and tailor coverages, to deliver superior claims service, to
use technology to enhance effectiveness and to operate financially strong,
sales and growth-oriented organizations.
Vice Presidents Jody L. Wainscott and Thomas A.
Joseph, CPCU, researched market conditions in upstate
New York, now selected for activation of two territories.
quarter during 1998, including low-
As we form these complementary,
businesses. 1997 net after-tax
cost universal life, guaranteed whole
nonconflicting independent life
earnings rose to $2.2 million versus
life and worksite universal life policies.
agent relationships, our property
$1.2 million in 1996. Gross
Cincinnati Life has an established
and casualty agencies will benefit
receivables have doubled over
expertise in the worksite marketing
from product development, field
the past three years, reaching
area, which brings convenient payroll
representative training, streamlining
$62.8 million at year-end 1997.
deduction policies and professional
of processes and our higher profile.
The leasing customer base is
agent service to underserved
Cincinnati’s property and casualty
50 percent independent property
consumers. Direct premiums from
Claims Department is now funding
casualty agents and a large portion
worksite marketing rose 8.9 percent
claims settlements with Cincinnati
of our business comes from agent
to $13.3 million in 1997. Worksite
Life annuity purchases. A total of
referrals of their commercial
marketing is increasing in popularity
45 of these structured settlements
insurance clients. Many agencies
among employers in search of
brought in $8.3 million of annuity
lease or finance agency management
valuable low-cost benefits. We
premium in 1997. During the first
systems that Cincinnati Insurance
plan to market worksite products
month of 1998, four cases were
funds under incentive agreements
aggressively during 1998.
settled with $2 million in annuity
requiring specified levels of premium
We continue to develop the life
premium. This inter-company
growth and profitability.
insurance production network made
cooperation provides secure income
We have begun to deploy a leasing
up of Cincinnati’s property and
and convenience for claimants, while
field sales force, improving support
casualty agents, which was the source
keeping funds in our investment
for agencies and their clients while
of approximately 93 percent of new
stream.
life premiums in 1997. Additionally,
we have begun appointing
independent life agencies to sell our
products in states such as California
and Texas, where Cincinnati has
no property and casualty agents.
FINANCIAL SERVICES
CFC Investment Company leases
and finances equipment and vehicles
for independent agencies, their
commercial clients and other
providing direct availability of our
financial services to businesses.
During the first part of 1998, our
fourth field sales territory should
open and our representative will
begin calling on lease/finance
prospects in Illinois and Wisconsin.
7
P E R S O N A L C O M M I T M E N T ,
Where we have appointed new agents to represent us, the relationship
officially begins with a Cincinnati tradition, the agent’s visit to our
Cincinnati headquarters. The agent meets personally with executives, sales
and accounting officers, underwriting and supply associates. The purpose
is to work out logistics and learn about policies and procedures—but more
importantly, it is to launch friendships and open doors so agents know they
have personal access to all of us, all of the time. This pledge of
unprecedented personal access is reaffirmed by regular executive travel
to agencies, annual sales meetings in 27 field locations, territory visits
by underwriters, invitations to sales classes and agent roundtables at
CFC Headquarters and many more opportunities to listen to our agent
customers, the most effective voices for the businesses and families we
insure.
Assistant Vice President Duane I. Swanson, CIC, with
Thomas C. Dawson, CPCU, CIC, who is CEO of
Dawson Insurance Agency in Fargo, North Dakota.
The agency was appointed in May 1997.
T A R G E T I N G T H E Y E A R 2 0 0 0 A N D B E Y O N D
S U P E R I O R S E R V I C E A N D P E O P L E — B R I D G E S
T O P R O F I T A B I L I T Y
Under today’s competitive
Process Improvement—Every
per month; now fewer than 4,000
conditions, running our business
department is examining internal
files were pending for 54 of the past
profitably requires a commitment
and interdepartmental processes. By
56 weeks.
to invest, on the customer’s behalf,
discovering and recognizing internal
Technology—New systems are
in state-of-the-art technical and
customers, we have been able to
presenting us with opportunities
human resources. During 1997, we
restructure workflows and stream-
to eliminate duplicate effort,
sharpened our service advantages:
line processes, gaining speed and
speed service and communicate
COMBINED LOSS AND
EXPENSE RATIO* ON
PROPERTY CASUALTY
BUSINESS
Estimated Industry Average
CFC
107.2
105.7
105.1
104.7
103.0
100.1
100.6
99.4
accuracy. Cross-functional teams
more effectively. This year, the
formed in many areas to find the
Information Systems Department
best way to deliver timely, personal
introduced systems and training for
service. Whether processing a
accounting, leasing and investment
policy change, examining a claim,
functions. They continued system
calculating a premium or com-
and network upgrades to address
mission, introducing a new product
Year 2000 issues; the few systems not
or evaluating proposed territory
yet compliant will be by mid-year
expansions, we found room to
1999. In Commercial Lines, the
improve and made positive changes.
DocuSolve typing system proved
100.4
97.7
In the Commercial Lines
to be a powerful tool to improve
Department, service requests rose
processing time. DocuSolve cut
18 percent over 1996 to 565,000,
training time by 50 percent and
93
94
95
96
97
*Before policyholder dividends
yet service complaints declined
cut errors affecting accounting and
16 percent versus last year. Four
premium audit functions. Our goal
1997 ratios represent the highest profitability
since 1979 for the industry and the highest
since 1988 for Cincinnati.
8
years ago, work-in-progress files held
is that raters and typists will have
in the department averaged 12,000
access to online procedures and
P E R S O N A L A C C E S S
CFC Headquarters, Cincinnati, OH—Our first North Dakota agents made pre-appointment visits during 1997.
underwriting guidelines. New
in 1997, up 24 percent over 1996
informed, strong competitors.
software will allow us to bypass
recoveries. Similar success came
Public Responsibility—We serve
paper files and bring key policy
from fraud investigation efforts
our agents and our industry by being
pages online.
and managed care techniques
active participants in the legislative
Information Systems rolled out
applied to workers’ compensation
and regulatory processes impacting
software and completed training to
claims. A glass program and an
your Company. We study proposals
upgrade and standardize software,
auto estimate service will soon bring
and take positions in support of tort
including a new e-mail system, on all
consumers new options for quick,
reform and against activist state
company personal computers. They
easy repairs at a cost savings.
Supreme Court candidates. We
installed a super data server for an
Education—We continue extensive
support private enterprise solutions
Intranet-based policy processing and
programs to train professional
versus unfunded federal assumption
administration system now under
associates, encouraging them to
of liability for catastrophic claims.
development. A single, integrated
acquire industry credentials and
1997 activities included work to
system will replace the current
certifications, develop customer
preserve the deduction for dividends
manual work processes between our
service awareness and acquire
received so taxation of the same
field and headquarters operations.
computer skills. New programs in
income at multiple levels would not
We will connect headquarters to our
1997 included a school to develop
occur. We supported the Commerce
Intranet as early as this year, then
new Cincinnati Life field marketing
Committee version of banking reform
connect field staff and agents in 1999.
representatives with a level of
legislation, which affirms state
Claims Management—The timely,
technical expertise, company
authority over insurance, whether
personal, fair claims service we
knowledge and authority parallel
transactions are made by an
provide cements our agents’ bond
to that of our property and casualty
insurance company or by a bank.
with clients. Claims management
field marketing representatives.
We believe strong state regulation
programs are introducing new
New programs for agents included
serves the public and our industry
conveniences and economies for
alternative risk transfer seminars,
better than any proposals for dual
consumers. Our Subrogation and
designed to increase awareness of
federal/state regulation of insurance.
Salvage unit recovered $30.9 million
market trends and make them
9
B U I L D I N G M O M E N T U M
Maryland—Active marketing began in December 1994.
T A R G E T I N G T H E Y E A R 2 0 0 0 A N D B E Y O N D
B U I L D I N G F I N A N C I A L S T R E N G T H
INDEPENDENT RATINGS
AND RANKINGS
Companies’ property and casualty
Poor’s expects margins to be sustained
group and to each subsidiary. This
with anticipated premium growth of
A.M. Best Company A++ (Superior)
is their highest rating, awarded to
seven to nine percent over the next
The A.M. Best Company, the
only 7 percent of companies and
three to five years.”
leading provider of insurer ratings,
3 percent of rating units in 1997. Best
Forbes (April 21, 1997): The
annually conducts an extensive
quantitative and qualitative
evaluation. Best assigns the A++
rating to The Cincinnati Insurance
asserts, “Despite the highly competitive
Cincinnati Insurance Companies’
market conditions…Cincinnati is well
profits per employee surpass those
positioned to continue its superior
earned by our peers. Per capita
operating performance, with its
productivity of $93,300 more than
TOTAL SHAREHOLDER
RETURN
(1997 Share Appreciation Plus Dividends)
CINF
121.2
S&P
Multi-line
Insurers
56.5
S&P
Property
Casualty
Group
42.6
S&P
500
33.4
increasing market presence, disciplined
doubles the industry median of $44,600.
underwriting approach and highly
Fortune (April 28, 1997): Ranked
successful distribution strategy.”
Standard & Poor’s AA+ (Excellent)
Standard & Poor’s bases the
by revenues, Cincinnati Financial
Corporation is the 21st largest U. S.
publicly traded property and casualty
property casualty group’s AA+ claims-
insurer or reinsurer. Within the
paying ability rating on superior
Fortune 1000 across all industries,
capitalization and financial flexibility,
we are number 652.
as well as an excellent operating
National Underwriter (July 21, 1997):
performance characterized by above-
Based on 1996 net written premiums,
average premium growth and very
strong margins. “Standard & Poor’s
believes that a low-cost infrastructure
and agency focus will continue to be
an unmatched competitive advantage
Cincinnati moved up two spots to
place 30th among stock, mutual,
reciprocal and Lloyds insurance
companies and 21st among stock
insurers.
The CINF share price, already trending up over
the course of 1997, rose sharply in December.
for The Cincinnati Insurance
Business Insurance (August 25, 1997):
Companies. Therefore, Standard &
Ward Financial Group analyzes
10
Where new agencies are building their Cincinnati business, the field
marketing representative heads up an intensive effort to move Cincinnati
into one of the top two positions among the agency’s carriers within five
years. The field marketing representative teaches agents to be front-line
Cincinnati underwriters, to know our appetite for business and to
customize our flexible policies appropriately for their clients. This involves
doing whatever the agent needs, from visiting accounts with agents to
removing production barriers by marshaling resources from Cincinnati’s
claims, information systems, underwriting and other areas. Cincinnati’s
unique, no-branch-office structure and assignment of full decision-making
authority set these field marketing representatives apart as one of the
agency’s most valuable assets.
William P. Griffin, Jr., President of Bartlett, Vermilye
& Griffin, Inc., in Easton, Maryland and Regional
Director Sean M. Connolly, CIC, AIM.
five-year statutory data to find
combined from 1985-1996. They
income and assets by accepting
the best insurers for their top
analyzed 158 insurance carriers,
reasonable risks associated with
50 benchmark group. Ward’s
concluding that a clear focus paired
concentrated equity investments and
50 insurers set themselves apart by
with effective execution leads to
with our preference for bonds that
meeting two sets of high standards—
success for companies of all sizes and
hold potential for upgrades. This
return for shareholders balanced by
distribution models.
philosophy led to unusual profitability
solvency for policyholders. Cincinnati
is one of just nine insurer groups
named to both Ward’s lists in 1997,
our seventh consecutive year qualifying
for the property/casualty list and fifth
year on the life/health list.
Forbes (January 12, 1998): Cincinnati
Financial Corporation’s 15.1 percent
profit margin (12-month net income
divided by sales) is the highest among
Forbes’ top 28 publicly traded U. S.
property and casualty insurers.
Best’s Review (January 1998): Best’s
ranks Cincinnati Financial in the first
tier of “market leaders—those that
maintain a competitive distribution
advantage…and carry A.M. Best’s
highest ratings.”
Conning Commentary (February 1998):
Conning named Cincinnati to their
Steller Performer category based on
operating ratios for all insurance lines
USING STRENGTH TO
INVEST STRATEGICALLY
Exceptional financial strength
is what allows Cincinnati Financial
to balance safety and return while
pursuing an aggressive, equity-
centered investment strategy. Our
surplus, more than ample for our
insurance operations, supports a
and a surge in book value during
1997. The market recognized the
growing net worth of your Company
when CINF became an S&P 500
Index stock on December 17.
INVESTMENT INCOME
Less Expenses
(In Millions of Dollars)
348.6
327.3
highly effective total return strategy
300.0
that is atypical for our industry.
Historically, we have achieved
steadily increasing income and
appreciation by managing companies
in the portfolio the same way we
manage insurance agency
relationships—select a few very good
ones poised to continue profitable
growth, take a large stake and pay
close personal attention. With strong
surplus, we can continue to increase
262.6
239.4
93
94
95
96
97
34 of the 62 stocks in the equity portfolio
announced dividend increases in 1997, boosting
future annualized income by $8.1 million.
11
S E L E C T E D F I N A N C I A L I N F O R M A T I O N
(000’s omitted except per share data and ratios)
Cincinnati Financial Corporation and Subsidiaries
1997
Years Ended December 31,
1995
1996
1994
TOTAL ASSETS.................................................
LONG-TERM OBLIGATIONS ............................
$9,493,425
58,430
$
$ 7,045,514
79,847
$
$6,109,298
80,000
$
$4,734,279
80,000
$
REVENUES
Premium Income..................................................
Investment Income (Less Expense).......................
Realized Gains on Investments .............................
Other Income .......................................................
NET INCOME BEFORE REALIZED GAINS
ON INVESTMENTS
In Total................................................................
Per Common Share ..............................................
NET INCOME
In Total................................................................
Per Common Share ..............................................
Per Common Share (Diluted) ...............................
$1,516,378
348,597
69,230
8,179
$ 1,422,897
327,307
47,946
10,599
$ 254,375
4.61
$ 192,595
3.45
$ 299,375
5.43
5.31
$ 223,760
4.01
3.92
CASH DIVIDENDS DECLARED
Per Common Share ..............................................
CASH DIVIDENDS PAID
Per Common Share ..............................................
$
$
1.64
1.60
$
$
1.46
1.43
$1,314,126
300,015
30,781
10,729
$ 207,342
3.72
$ 227,350
4.08
3.99
$
$
1.28
1.26
$1,219,033
262,649
19,557
11,267
$ 188,538
3.40
$ 201,230
3.62
3.54
$
$
1.16
1.12
PROPERTY AND CASUALTY OPERATIONS
Gross Premiums Written ......................................
Net Premiums Written .........................................
Premiums Earned ................................................
$1,566,688
1,471,603
1,453,526
$ 1,476,011
1,383,525
1,366,544
$1,377,426
1,295,852
1,263,257
$1,287,280
1,190,824
1,169,940
Loss Ratio ............................................................
Loss Expense Ratio ..............................................
Underwriting Expense Ratio.................................
Combined Ratio ...................................................
58.3%
10.1%
29.3%
97.7%
61.6%
13.8%
27.6%
103.0%
57.6%
14.7%
27.1%
99.4%
63.3%
9.8%
27.5%
100.6%
Investment Income Before Taxes ..........................
$ 199,427
$ 190,318
$ 180,074
$ 162,260
Property and Casualty Reserves
Unearned Premiums.............................................
Losses ..................................................................
Loss Adjustment Expense.....................................
$ 418,465
1,373,950
402,698
$ 401,562
1,319,286
383,135
$ 385,418
1,274,180
306,570
$ 353,697
1,213,383
218,642
Statutory Policyholders’ Surplus ..........................
$2,468,944
$ 1,608,084
$1,268,597
$ 998,595
*1993 earnings include a credit for $13,845,000 ($.25 per share) cumulative effect of a change in the method of accounting for income taxes to
conform with FASB Statement No. 109 and a net charge of $8,641,000 ($.16 per share) related to the effect of the 1993 increase in income tax
rates on deferred taxes recorded for various prior year items.
12
Cincinnati Financial Corporation and Subsidiaries
1993
1992
1991
1990
1989
1988
1987
$4,602,288
80,000
$
$4,098,713
80,000
$
$3,513,749
182
$
$2,626,156
202
$
$2,602,990
753
$
$ 2,163,341
890
$
$1,828,032
3,898
$
$1,140,791
239,436
51,529
10,396
$1,038,772
218,942
35,885
10,552
$ 182,530*
3.30*
$ 147,669
2.69
$ 216,024*
3.91*
3.81*
$ 171,325
3.12
3.08
$
$
1.02
1.00
$
$
.93
.90
$ 947,576
193,220
7,641
12,698
$ 141,273
2.59
$ 146,280
2.69
2.67
$
$
.83
.81
$ 871,196
167,425
1,488
8,822
$ 128,052
2.37
$ 128,962
2.38
2.37
$
$
.73
.71
$ 813,313
149,285
4,678
7,134
$ 754,335
130,885
6,423
10,281
$ 747,266
108,915
3,845
7,686
$ 111,477
2.08
$ 124,618
2.34
$ 114,490
2.14
2.11
$ 128,748
2.42
2.40
$
$
.66
.63
$
$
.52
.51
$
$
$
$
90,714
1.74
93,154
1.79
1.76
.45
.43
$1,216,766
1,123,780
1,092,135
$1,089,901
1,014,971
992,335
$ 996,807
930,296
903,465
$ 896,204
838,554
828,046
$ 845,346
790,971
771,205
$ 782,143
718,853
712,771
$ 763,925
702,785
687,429
63.5%
8.7%
27.9%
100.1%
63.8%
9.0%
29.0%
101.8%
61.6%
9.2%
28.9%
99.7%
61.6%
9.0%
29.0%
99.6%
61.6%
9.0%
29.1%
99.7%
55.1%
10.1%
30.7%
95.9%
61.8%
10.4%
27.5%
99.7%
$ 153,190
$ 141,958
$ 126,332
$ 110,827
$
97,661
$
84,379
$
67,871
$ 333,550
1,100,051
193,305
$ 302,473
960,571
177,262
$ 280,404
825,952
160,260
$ 254,000
692,081
140,501
$ 244,011
616,730
124,993
$ 224,545
522,162
109,323
$ 218,840
449,159
84,359
$1,011,609
$ 933,529
$ 735,557
$ 477,355
$ 494,460
$ 422,521
$ 346,623
Per share data adjusted for three-for-one stock split in 1992 and stock dividends of 5 percent in 1996, 1995 and 1987.
13
M A N A G E M E N T D I S C U S S I O N
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) has five
subsidiaries. The lead property and casualty insurance
subsidiary, The Cincinnati Insurance Company, markets
a broad range of business and personal policies in 27 states
through an elite corps of 973 independent insurance
agencies. Also engaged in the property and casualty business
are 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.
The following discussion, related consolidated financial
statements and accompanying notes contain certain forward-
looking statements that involve potential risks and uncertain-
ties. 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 legis-
lation that place the Company at a disadvantage in the market-
place; recession or other economic conditions resulting in lower
demand for insurance products; sustained decline in overall
stock market values negatively impacting the Company’s
equity portfolio and the ability to generate investment
income; and, the potential inability of the Company and/or
the independent agents with which it works to complete the
necessary information system changes required to handle 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 8.3%, reaching
$1.942 billion in 1997, with property/casualty net written
premiums growing at a 7.7% rate to $1.472 billion over
the past five years. In the same five-year period, total
net income, including realized capital gains, grew at an
11.8% rate to $299.4 million, or $5.43 per share, from
$216.0 million, or $3.91, while net operating income
increased at an 11.5% rate to $254.4 million, or $4.61 per
share, from $182.5 million, or $3.30, in 1993. Book value
grew at a 22.2% compound rate over the same period to
$85.06 per share from $31.26.
A number of factors, including the Company’s strong
reputation among independent insurance agencies and
management’s belief that the Company can achieve
additional market penetration in states in which it currently
operates, have led management to target $2 billion in
direct written premiums during the year 2000, up from
$1.621 billion in 1997. At the same time, the Company
seeks to generate an underwriting profit and maximize
annual growth in investment income.
The following discusses and analyzes results for the three-
year period ending December 31, 1997 and provides insight
into management’s strategic direction for the Company.
(000,000 omitted except
per share data and ratios)
Revenues
Net Operating Income
Net Capital Gains (after tax)
Net Income
Net Operating Income Per Share
Net Capital Gains Per Share
Net Income Per Share
Catastrophe Losses
Catastrophe Losses Per Share
(after tax)
1997
$1,942.4
254.4
45.0
299.4
4.61
.82
5.43
25.5
.30
$
$
$
Change
$
$133.7
61.8
13.8
75.6
1.16
.26
$
1.42
$ (39.2 )
(.45)
$
Change
%
7)
32)
44)
34)
34)
46)
35)
(60)
(60)
1996
$1,808.7
192.6
31.2
223.8
3.45
.56
4.01
64.7
.75
$
$
$
Change
$
$153.0
(14.7 )
11.2
(3.5 )
(.30)
.20
(.10)
$
$ 37.6
.44
$
Change
%
9
(7 )
56
(2 )
(7 )
54
(2 )
138
142
1995
$ 1,655.7
207.3
20.0
227.3
3.72
.36
4.08
27.1
.31
$
$
$
Change
$
$143.2
18.8
7.3
26.2
.32
.14
$
.46
$ 6.4
.07
$
Change
%
9
10
58
13
9
68
13
31
28
The Company’s financial results for the three years ending
December 31, 1997 reflect steady growth in new insurance
business and high retention of renewal business quoted on
behalf of the Company’s independent insurance agents, offset
by competitive property and casualty pricing. In addition,
1997 marked a return to a more normal level of catastrophe
losses from the unusually high 1996 level. Results for 1997
also reflect the Company’s consistent underwriting
philosophy and strategy-maintaining high underwriting
standards by carefully evaluating individual risks, reviewing
agency performance and controlling overall expenses.
Net operating income for 1997 rose substantially over the
prior year. The Company generated 6.5% growth in pre-tax
investment income and an underwriting profit versus an
14
Cincinnati Financial Corporation and Subsidiaries
underwriting loss in 1996, primarily due to lower
catastrophe losses. In 1996, net operating income
declined 7% because of the catastrophe losses, while
pre-tax investment income rose 9.1%. The contribution
from net realized capital gains after-tax rose in both years
primarily due to the sale of equity securities.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
(000,000 omitted except
per share data and ratios)
Gross Written Premiums
Net Written Premiums
Net Earned Premiums
Loss and LAE Ratio
Expense Ratio
Combined Ratio
1997
$1,566.7
1,471.6
1,453.5
68.4%
29.3%
97.7%
Change
$
$ 90.7
88.1
87.0
n/a
n/a
n/a
Change
%
6.1)
6.4)
6.4)
(9.3)
6.2)
(5.1)
1996
$1,476.0
1,383.5
1,366.5
75.4%
27.6%
103.0%
Change
$
$ 98.6
87.6
103.2
n/a
n/a
n/a
Change
%
7.2
6.8
8.2
4.3
1.8
3.6
1995
$1,377.4
1,295.9
1,263.3
72.3%
27.1%
99.4%
Change
$
$ 90.1
105.1
93.4
n/a
n/a
n/a
Change
%
7.0)
8.8)
8.0)
(1.1)
(1.5)
(1.2)
Premiums—While premium growth rates have declined
in 1997 and 1996, the Company’s property and casualty
group continued to increase net written premiums at rates
well above estimated industry growth rates. In 1997 and
1996, the primary source of growth was personal lines
insurance, for which net written premiums advanced 12.4%
in 1997 (9.4% in 1996), while commercial lines insurance
growth was 3.6% (5.6% in 1996).
During 1997 and 1996, the commercial insurance
market experienced intense price competition, most notably
in workers’ compensation where market-share competition
and mandated rate reductions in some states led to renewal
account discounts of as much as a third from the previous
year’s premium. The Company is committed to prudent
underwriting standards and emphasizing account profitability.
The emphasis on profitability contributed to the 53.2% pure
loss ratio for the commercial lines area, in line with the 54.8%
reported in 1996.
As a result of the market factors, direct written workers’
compensation premiums in 1997 declined 6% and growth in
other commercial insurance lines was limited. Management
believes these competitive forces will continue for at least the
next six to twelve months. To help offset these pressures, the
Company is emphasizing personal lines insurance, entering
new states to expand market opportunities, pursuing a
marketing strategy that permits field representatives to
spend more time assisting the independent insurance
agents and expanding its life insurance operations.
The Company sees heightened interest from independent
insurance agents in writing personal lines insurance as a
means of buffering the price competition in the commercial
sector and stabilizing their revenue. CFC is taking
advantage of this trend by encouraging independent agents
to move to the Company their proven, profitable business.
Agents who are streamlining operations by reducing the
number of carriers they represent have been rolling-over
entire books of business to the Company.
Management believes CFC can achieve additional market
penetration by leveraging its strong relationships with
independent agencies and entering new states. The Company
also can take advantage of key competitive advantages of
CFC’s insurance products, for example three- and five-year
policies for many types of insurance coverage.
At year-end 1997, approximately 98% of the Company’s
property and casualty premium volume was in states in
which the Company has had a presence since 1994 or earlier.
Over the past three years, the Company has added nine
marketing representatives in several established states,
restructuring territories so that each representative has
fewer agencies to serve. This has allowed field representatives
to appoint additional agencies and, more importantly, spend
more time with each agent. During 1998, management
anticipates adding two marketing territories in existing
regions.
Entry into new states also has been a source of premium
growth. At year-end 1997, the states the Company entered
between 1994 and 1997 contributed more than $28 million
of property and casualty premium volume. An example of
these successful new market entries is Minnesota, where
premium volume reached $11.7 million in 1997, up from
$800,000 in 1994. During 1996 and 1997, the Company
began marketing commercial lines in North Dakota and
added personal lines in Arkansas, Maryland, Minnesota,
North Dakota, Pennsylvania and Vermont. During 1998,
management anticipates beginning to market insurance
products in Montana and in two planned upstate New York
territories. Five western states currently are being researched
with the intention of selecting one or two additional states in
which to seek approval during 1998 to market the Company’s
products in 1999. The Company’s criteria for entry into new
states include a favorable regulatory climate.
Expenses—The Company recorded a $24.8 million under-
writing profit in 1997 compared with an $45.0 million
underwriting loss in 1996 and a $1.4 million underwriting
profit in 1995. The 1997 underwriting profit, reflecting a
combined ratio of 97.7%, was primarily the result of a more
normal level of catastrophe losses contributing to a seven
point reduction in the loss and loss adjustment expense ratio
compared with 1996. The return to a more normal level of
catastrophe losses also helped offset a one and seven-tenths
point increase in the expense ratio. The underwriting loss in
1996, reflecting a combined ratio of 103.0%, was the result
of the higher catastrophe losses, as well as a half percentage
point increase in the expense ratio over 1995.
15
M A N A G E M E N T D I S C U S S I O N ( C O N T I N U E D )
Cincinnati Financial Corporation and Subsidiaries
The expense ratio increased in both years as the Company
raised spending on staff and costs associated with upgrading
technology and facilities to accommodate anticipated growth
in premium volume while making computer systems Year
2000 compliant. Because the Company issues three- and
five- year policies, management believes that Year 2000
compliance issues have been initiated for most of the
computer systems. Many systems are already Year 2000
compliant; most other programs will be compliant by year-
end 1998, with the balance completed during 1999.
Management believes this goal will be attained. CFC’s
largest risk lies with Year 2000 compliance by its
independent agencies, which handle most of the customer
billing and collections. In response to this concern, CFC
is proactively contacting agents regarding this issue and
will be monitoring each agency’s actions closely. Adding
to expenses in 1997 were higher profit-sharing commissions
to many of the Company’s independent insurance agents,
due to the overall profitability of the business they wrote.
In 1997, catastrophe losses accounted for 1.8% of the
combined ratio, more closely in line with the Company’s
historic results and in contrast to the unusually high 4.7%
from ten large storms in 1996. In 1995, catastrophe losses
accounted for 2.1% of the combined ratio. Due to the nature
of catastrophic events, management is unable to predict
accurately the frequency or potential cost of such
occurrences in the future; however, the Company has
continued not to market property and casualty insurance in
California, not to write flood insurance, to review exposure to
huge disasters and reduce coverage in certain coastal regions
in an effort to control such catastrophe losses. For property
catastrophes, the Company retains the first $25 million of
losses and is reinsured to cover 95% of the losses from
$25 million up to $200 million.
As discussed in the Notes to the Consolidated Financial
Statements, the Company’s insurance reserve liabilities are
estimated by management based upon Company experience
data. The Company consistently has established property
and casualty insurance reserves, including adjustments of
estimates, using information from internal analysis and
review by external actuaries. Though uncertainty always
exists as to the adequacy of established reserves,
management believes this uncertainty is less than it
otherwise would be, due to the stability of the Company’s
book of business. Such reserves are related to various lines
of business and will be paid out over future periods.
Reserves for environmental claims have been reviewed
and the Company believes that the reserves are adequate.
Environmental exposures are minimal as a result of the types
of risks the Company has insured in the past. Historically,
most commercial accounts written post-date the coverages,
which afford clean-up costs and Superfund responses.
16
Life and Accident and Health—CFC’s life insurance
subsidiary had total net premium income for 1997 of
$62.9 million, up from $56.4 million in 1996 and
$50.9 million in 1995. Life insurance premiums were
$54.7 million, $48.7 million and $43.6 million, respectively.
The life insurance subsidiary contributed 10% of CFC’s
operating income in 1997, 1996 and 1995.
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 states in which the Company does not have
property and casualty agency representation. The initiatives,
which were undertaken in the second half of 1997, had
little impact on results for the year. Management believes,
however, that opportunities exist to increase the life
insurance subsidiary’s contribution to total operating
income through expanded life insurance sales.
Investment Income and Investments—Investment income
rose 6.5% to $348.6 million in 1997 and increased 9.1% to
$327.3 million in 1996. The slower growth rate in 1997
reflected the amount of fixed maturities investments called
early and the generally lower interest rate environment. The
increases were primarily the result of investing the cash flows
from operating activities and dividend increases from equity
securities in the investment portfolio. In 1997, 34 of the
62 common stocks in the Company’s investment portfolio
increased dividends during the year, adding more than
$8.1 million to future annualized investment earnings.
The Company’s primary investment strategy is to maintain
liquidity to meet both immediate and long-range insurance
obligations through the purchase and maintenance of medium-
risk, fixed maturity and equity securities, while earning
optimal returns on the equity portfolio through higher
dividends and capital appreciation. The Company’s
investment decisions on an individual insurance company
basis are influenced by insurance statutory requirements
designed to protect policyholders from investment risk. Cash
generated from insurance operations is invested almost entirely
in corporate, municipal, public utility and other fixed maturity
securities or equity securities. Such securities are evaluated
prior to purchase based on yield and risk.
Investments in common stocks have emphasized securities
with an annual dividend yield of at least 2%-3% and annual
dividend increases. The Company’s portfolio of equity
investments had an average dividend yield to cost of 7.8%
at December 31, 1997. Management’s strategy in equity
investments includes identifying approximately ten to twelve
companies, for the core of the investment portfolio, in which
the Company can accumulate 10%-20% of their common
stock.
Cincinnati Financial Corporation and Subsidiaries
INVESTMENT ASSETS
As of December 31
(Market Value In Millions of Dollars)
Others
Preferred Stock
Common Stocks
Taxable Bonds
Tax Exempt Bonds
4,241.3
40.8
565.3
1,753.5
4,216.9
43.6
554.3
1,675.9
1,073.9
1,173.6
6,344.4
42.4
465.6
3,274.6
5,535.7
46.9
577.3
2,464.5
1,583.3
1,686.4
1,863.0
807.8
93
769.5
94
863.7
95
875.4
96
888.2
97
COMPOSITION OF EQUITY INVESTMENTS
As of December 31, 1997
(In Millions of Dollars)
Public Utilities
Industrial,
Miscellaneous
Banks, Trusts
and Insurance
Common
Stock
Portfolio
by Cost
1,302.2
176.9
493.4
631.9
Common
Stock Portfolio
by Market
Value
5,468.9
692.1
1,114.5
3,662.3
Preferred
Stock
Portfolio
by Cost
423.7
22.7
278.4
122.6
Preferred
Stock
Portfolio
by Market
Value
530.4
28.2
336.8
165.4
Interest and Income Taxes—The Company’s income tax
expense was $95.2 million, $58.7 million and $67.8 million
for 1997, 1996 and 1995, respectively, while the effective
tax rate was 24.12%, 20.77% and 22.98%, for the same
periods. The higher tax rate in 1997 primarily was due to
the strong underwriting profit recorded for the year and
higher capital gains. The lower rate in 1996 was partially the
result of a higher percentage of net income earned from tax-
exempt interest on state, municipal and political subdivision
fixed maturities and dividends received on equity
investments. The Company incurred no additional
alternative minimum tax expenses for the three years.
CASH FLOW AND LIQUIDITY
8,797.1
46.6
530.4
5,468.9
(000,000 omitted)
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used) provided in financing
1997
$ 427.0
(282.5)
(124.2)
1996
$ 308.3
(224.8)
(43.7)
1995
$ 389.5
(443.9)
26.2
activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Supplemental
Interest paid
Income taxes paid
20.2
59.9
80.2
21.8
95.5
39.9
20.0
59.9
20.9
65.0
(28.2)
48.3
20.0
16.0
67.0
Cash Flow—Over the past three years, operating cash flows
have been sufficient to meet operating needs and provide for
financing needs and increased investment. Management
expects operating cash flow will continue to be 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 a steady increase over the three years in calls
of fixed maturity investments, offset in 1997 by increased
purchases of fixed maturities and equity securities. Cash
flows used in net purchases of fixed maturity and equity
securities, respectively, amounted to $122.6 million and
$134.1 million in 1997, $98.0 million and $95.4 million
in 1996, and $309.7 million and $114.9 million in 1995.
Over the three-year period, the primary increases in net
cash used for financing activities were for the payment of
cash dividends and the purchase of treasury shares.
Notes Payable — Increases in notes payable, primarily
short-term debt used to enhance liquidity, were reduced
from $91.9 million in 1995 to $41.1 million in 1996 to
$18.5 million in 1997. Management used short-term debt
for cash management and other purposes.
Dividends — CFC has increased cash dividends to
shareholders for 37 consecutive years and, periodically,
the Board of Directors authorizes stock dividends or splits.
In February 1997, the 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 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 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, contingent upon shareholder approval of a proposal
to increase authorized shares to 200 million from 80 million.
Since 1987, the Company’s Board of Directors has
authorized four additional stock splits or stock dividends:
17
M A N A G E M E N T D I S C U S S I O N ( C O N T I N U E D )
Cincinnati Financial Corporation and Subsidiaries
a 5% stock dividend in 1996; a 5% stock dividend in 1995;
a three-for-one stock split in 1992; and, a 5% stock dividend
in 1987. After the stock dividend in 1996, a shareholder
who purchased one Cincinnati Insurance share before 1957
would own 649 CFC 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 $8.831 billion
make up 93.0% of the Company’s $9.493 billion assets; this
compares with 90.3% in 1996 and 90.2% in 1995. The
Company has only minor investments in real estate and
mortgages, which are typically illiquid. At December 31,
1997, the Company’s portfolio of fixed maturity securities
had an average yield-to-cost of 8.4% and an average
maturity of 12 years. For the insurance companies’ purposes,
strong emphasis has been placed on purchasing current
income-producing securities and maintaining such securities
as long as they continue to meet the Company’s yield
and risk criteria. Historically, municipal bonds have
been attractive due to their tax-exempt feature. Essential
service (e.g., schools, sewer, water, etc.) bonds issued by
municipalities are prevalent in this area. Many of these
bonds are not rated due to the small size of their offerings.
At year-end 1997 and 1996, investments totaling
approximately $836 million and $729 million ($797 million
and $706 million at cost) of the Company’s $8.797 billion
and $6.344 billion investment portfolio related to securities
rated non-investment grade or not rated by Moody’s
Investors Service or Standard & Poor’s. Such investments,
which tend to have higher yields, historically have benefited
the Company’s results of operations. Further, many have
been upgraded to investment grade while owned by CFC.
Because of alternative minimum tax matters, the
Company uses a blend of tax-exempt and taxable fixed
maturity securities. Tax exempt bonds comprise 10% of
invested assets as of December 31, 1997, compared with
14% at year-end 1996 and 16% at year-end 1995.
Additional information regarding the composition of
investments, together with maturity data regarding
investments in fixed maturities, is included in the Notes
to Consolidated Financial Statements.
Market Risk—The Company could incur losses due to
adverse changes in market rates and prices. The Company’s
primary market risk exposures are to changes in price for
equity securities and changes in interest rates and credit
ratings for fixed maturity securities. The Company could
alter the existing investment portfolios or change the
character of future investments to manage exposure
to market risk. CFC, with the Board of Directors,
administers and oversees investment risk through
18
the Investment Committee, which provides executive
oversight of investment activities. The Company has
specific investment guidelines and policies that define
the overall framework used daily by investment portfolio
managers to limit the Company’s exposure to market risk.
Liabilities and Shareholders’ Equity—At December 31,
1997, long- and short-term debt were 4%, insurance reserves
were 25% and total shareholders’ equity was 50% of total
assets, with remaining liabilities consisting of unearned
premiums, deferred income taxes and other liabilities.
Debt—Total long- and short-term debt was less than 5%
of total assets at year-end 1997 and 1996. At December 31,
1997 and 1996, long-term debt consisted of $58.4 million
and $79.8 million, respectively, of convertible debentures.
Short-term debt is used to provide working capital as
discussed above.
Equity—Shareholders’ equity has continued to grow as a
percentage of total assets, reaching 50% for 1997 from 45%
for 1996 and 44% for 1995, due to retained earnings and
unrealized appreciation of investments. Statutory risk-based
capital requirements became effective for life insurance
companies in 1993 and for property casualty companies in
1994. The Company’s capital has been well above required
amounts in each year since those effective dates.
1997
(000,000 omitted)
Shareholders’ equity excluding retained $ 469.5
1996
1995
$ 502.3 $ 342.0
earnings and unrealized gains on
investments
Retained earnings
Unrealized gains on investments
Total shareholders’ equity
1,341.7
2,905.8
$ 4,717.0
1,156.6
1,132.9
1,527.7
1,159.4
$3,162.9 $ 2,658.0
As a long-term investor, the Company has followed a
buy-and-hold strategy for more than 38 years. A significant
amount of unrealized appreciation on equity investments
has been generated as a result of this policy. Unrealized
appreciation on equity investments, before deferred income
taxes, was $4.273 billion as of December 31, 1997 and
constituted 49% of the total investment portfolio; 71%
of the equities investment portfolio; and, after deferred
income taxes, 59% of total shareholders’ equity. Such
unrealized appreciation, before deferred income taxes,
amounted to $2.203 billion and $1.618 billion, at year-
end 1996 and 1995, respectively.
On November 22, 1996, the Board of Directors authorized
the repurchase of up to three million of the Company’s
outstanding shares as management deemed appropriate
over an unspecified period of time. As of December 31,
1997, the Company had repurchased 934,041 shares,
at an accumulated cost of $68.1 million.
R E S P O N S I B I L I T Y F O R F I N A N C I A L S T A T E M E N T S
Cincinnati Financial Corporation and Subsidiaries
The accompanying financial statements of Cincinnati
Financial Corporation and subsidiaries for the year ended
December 31, 1997 were prepared by management in
conformity with generally accepted accounting principles.
The management of the Company is responsible for the
integrity and objectivity of the financial statements, which
are presented on an accrual basis of accounting and include
amounts based upon management’s best estimates and
judgment. Other financial information in the Annual Report
is consistent with that in the financial statements. The
accounting plan and related system of internal controls are
designed to assure that the books and records reflect the
transactions of the Company in accordance with established
policies and procedures as implemented by qualified
personnel.
The Board of Directors has established an Audit Committee
composed of outside Directors who are believed to be free
from any relationships that could interfere with the exercise
of independent judgment as Audit Committee members.
The Audit Committee meets periodically with management,
the independent auditors and the internal auditor to make
inquiries as to the manner in which the responsibilities of
each are being discharged and reports thereon to the Board
of Directors. In addition, the Audit Committee recommends
to the Board of Directors the annual appointment of the
independent auditors with whom the Audit Committee
reviews the scope of the audit assignment, adequacy of
internal controls and internal audit procedures.
Deloitte & Touche LLP, independent auditors, have
audited the financial statements of Cincinnati Financial
Corporation and subsidiaries for the year ended
December 31, 1997 and their report is included herein.
The auditors meet with members of the Audit Committee
of the Board of Directors to discuss the results of their
examination and are afforded the opportunity to present
their opinions in the absence of management personnel with
respect to the adequacy of internal controls and the quality
of financial reporting of the Company.
I N D E P E N D E N T A U D I T O R S ’ R E P O R T
To the Shareholders and Board of Directors of Cincinnati
Financial Corporation:
We have audited the consolidated balance sheets of
Cincinnati Financial Corporation and subsidiaries as of
December 31, 1997 and 1996 and the related consolidated
statements of income, shareholders’ equity and cash flows
for each of the three years in the period ended
December 31, 1997. These financial statements are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made
by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position
of Cincinnati Financial Corporation and subsidiaries at
December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Cincinnati, Ohio
February 4, 1998
19
C O N S O L I D A T E D B A L A N C E S H E E T S
(000’s omitted)
Cincinnati Financial Corporation and Subsidiaries
December 31,
1997
1996
ASSETS
Investments
Fixed maturities, at fair value (cost: 1997—$2,571,549;
1996—$2,431,785) ..................................................................................
$ 2,751,219
$ 2,561,805
Equity securities, at fair value (cost: 1997—$1,725,855;
1996—$1,537,189) ..................................................................................
Other invested assets .....................................................................................
Cash .................................................................................................................
Investment income receivable ............................................................................
Finance receivables............................................................................................
Premiums receivable..........................................................................................
Reinsurance receivable.......................................................................................
Prepaid reinsurance premiums...........................................................................
Deferred acquisition costs pertaining to unearned
5,999,271
46,560
80,168
74,520
31,715
158,539
109,110
23,612
premiums and to life policies in force ............................................................
135,313
Land, buildings and equipment for Company use (at cost, less
accumulated depreciation: 1997—$97,248; 1996—$85,541) .......................
Other assets .......................................................................................................
52,559
30,839
3,740,180
42,419
59,933
70,446
26,864
162,045
115,906
22,924
127,588
50,071
65,333
Total assets ...............................................................................................
$ 9,493,425
$ 7,045,514
LIABILITIES
Insurance reserves
Losses and loss expenses................................................................................
Life policy reserves ........................................................................................
Unearned premiums ..........................................................................................
Other liabilities ..................................................................................................
Deferred income taxes........................................................................................
Notes payable ....................................................................................................
5.5% convertible senior debentures due 2002 ....................................................
Total liabilities ..........................................................................................
$ 1,936,534
482,447
443,054
168,959
1,406,478
280,558
58,430
4,776,460
$ 1,881,167
440,281
425,750
116,589
676,893
262,098
79,847
3,882,625
SHAREHOLDERS’ EQUITY
Common stock, par value—$2 per share; authorized 80,000 shares; issued,
1997—56,464; 1996—55,829 ......................................................................
Paid-in capital ...................................................................................................
Retained earnings ..............................................................................................
Unrealized gains on investments ........................................................................
.................................................................................................................
Less treasury shares at cost (1997—1,012 shares; 1996—192 shares)...............
Total shareholders’ equity .........................................................................
112,927
429,137
1,341,730
2,905,756
4,789,550
(72,585)
4,716,965
111,657
401,862
1,132,880
1,527,707
3,174,106
(11,217)
3,162,889
Total liabilities and shareholders’ equity ...................................................
$ 9,493,425
$ 7,045,514
Accompanying notes are an integral part of this statement.
20
C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E
(000’s omitted except per share data)
Cincinnati Financial Corporation and Subsidiaries
Years Ended December 31,
1997
1996
1995
REVENUE
Premium income
Property and casualty . . . . . . . . . . . . . . . . . . . .
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accident and health . . . . . . . . . . . . . . . . . . . . . .
Net premiums earned . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains on investments . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,453,526
54,742
8,110
1,516,378
348,597
69,230
8,179
1,942,384
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits . . . . . . .
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . .
Taxes, licenses and fees . . . . . . . . . . . . . . . . . . . . .
Increase in deferred acquisition costs pertaining to
unearned premiums and to life policies in force . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,054,924
282,690
139,030
48,573
(7,725)
20,821
9,512
$ 1,366,544
48,694
7,659
1,422,897
327,307
47,946
10,599
1,808,749
1,087,105
259,291
117,034
43,392
(7,999)
20,102
7,403
$ 1,263,257
43,551
7,318
1,314,126
300,015
30,781
10,729
1,655,651
964,216
244,862
97,909
38,887
(10,086)
17,231
7,444
Total benefits and expenses . . . . . . . . . . . . . . . .
1,547,825
1,526,328
1,360,463
INCOME BEFORE INCOME TAXES . . . . . . . . . . . .
394,559
282,421
295,188
PROVISION FOR INCOME TAXES
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision for income taxes . . . . . . . . . . . .
107,046
(11,862)
95,184
67,827
(9,166)
58,661
76,012
(8,174)
67,838
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
299,375
$
223,760
$
227,350
PER COMMON SHARE
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income (diluted) . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends (declared) . . . . . . . . . . . . . . . . . . .
$
$
$
5.43
5.31
1.64
$
$
$
4.01
3.92
1.46
$
$
$
4.08
3.99
1.28
Accompanying notes are an integral part of this statement.
21
C O N S O L I D AT E D S T AT E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y
(000’s omitted)
Cincinnati Financial Corporation and Subsidiaries
Balance, December 31, 1994 .................
$
100,872
$
(914)
$
105,792
$ 1,133,105
$
601,192
Common
Stock
Treasury
Stock
Paid-In
Capital
Retained
Earnings
Unrealized
Gains on
Investments
Net income ............................................
Change in unrealized gains on
investments.......................................
Income taxes on unrealized gains...........
Dividends declared ................................
5% stock dividend at market.................
Purchase/issuance of treasury shares ......
Stock options exercised..........................
5,043
253
(470)
Balance, December 31, 1995 .................
106,168
(1,384)
Net income ............................................
Change in unrealized gains on
investments.......................................
Income taxes on unrealized gains...........
Dividends declared ................................
5% stock dividend at market.................
Purchase/issuance of treasury shares ......
Stock options exercised..........................
Conversion of debentures ......................
5,304
178
7
(9,833)
Balance, December 31, 1996 .................
111,657
(11,217)
127,338
182
3,860
237,172
160,453
870
3,221
146
401,862
Net income ............................................
Change in unrealized gains on
investments.......................................
Income taxes on unrealized gains...........
Dividends declared ................................
Purchase/issuance of treasury shares ......
Stock options exercised..........................
Conversion of debentures ......................
310
960
(61,368)
654
6,164
20,457
227,350
(71,262)
(132,566)*
858,763
(300,567)
1,156,627
1,159,388
223,760
(81,498)
(166,009)*
566,644
(198,325)
1,132,880
1,527,707
299,375
(90,525)
2,120,075
(742,026)
Balance, December 31, 1997 .................
$
112,927
$
(72,585)
$
429,137
$ 1,341,730
$ 2,905,756
*Includes $183,718 and $251,851 for fractional shares paid in April 1995 and 1996, respectively.
Accompanying notes are an integral part of this statement.
22
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
(000’s omitted)
Cincinnati Financial Corporation and Subsidiaries
Years Ended December 31,
1997
1996
1995
$ 299,375
$ 223,760
$ 227,350
Cash flows from operating activities:
Net income.................................................................................
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation and amortization...............................................
Increase in investment income receivable ...............................
Decrease (increase) in premiums receivable ...........................
Decrease (increase) in reinsurance receivable.........................
(Increase) decrease in prepaid reinsurance premiums ..............
Increase in deferred acquisition costs .....................................
Increase in accounts receivable ..............................................
Decrease (increase) in other assets .........................................
Increase in loss and loss expense reserves ...............................
Increase in life policy reserves ................................................
Increase in unearned premiums .............................................
Increase in other liabilities .....................................................
Decrease in deferred income taxes..........................................
Realized gains on investments................................................
Other .....................................................................................
11,327
(4,074)
3,506
6,796
(688)
(7,725)
(7,230)
42,084
55,367
42,166
17,304
49,672
(11,862)
(69,230)
169
Net cash provided by operating activities...........................
426,957
Cash flows from investing activities:
Sale of fixed maturities investments ...........................................
Call or maturity of fixed maturities investments .........................
Sale of equity securities investments...........................................
Collection of finance receivables.................................................
Purchase of fixed maturities investments....................................
Purchase of equity securities investments ...................................
Investment in land, buildings and equipment.............................
Investment in finance receivables ...............................................
Increase in other invested assets .................................................
Net cash used in investing activities...................................
Cash flows from financing activities:
Proceeds from stock options exercised........................................
Purchase/issuance of treasury shares..........................................
Increase in notes payable ...........................................................
Payment of cash dividends to shareholders ................................
138,741
376,496
266,296
8,588
(637,858)
(400,405)
(16,485)
(13,439)
(4,471)
(282,537)
6,474
(60,714)
18,460
(88,405)
Net cash (used) provided in financing activities .................
(124,185)
Net increase (decrease) in cash .......................................................
Cash at beginning of year ...............................................................
20,235
59,933
7,100
(5,401)
(928)
(12,223)
(1,089)
(7,999)
(2,080)
(31,538)
137,633
37,017
17,126
6,984
(9,272)
(47,946)
(2,805)
308,339
219,131
247,205
257,981
10,449
(564,317)
(353,340)
(17,798)
(17,032)
(7,030)
(224,751)
3,399
(8,963)
41,093
(79,203)
(43,674)
39,914
20,019
9,641
(8,976)
(19,145)
(36,558)
2,231
(10,086)
(3,900)
(6,773)
191,237
33,169
26,505
9,522
(8,174)
(30,781)
14,245
389,507
118,986
187,320
255,542
8,222
(616,001)
(370,445)
(10,538)
(12,335)
(4,666)
(443,915)
4,113
(287)
91,889
(69,542)
26,173
(28,235)
48,254
Cash at end of year.........................................................................
Supplemental disclosures of cash flow information:
Interest paid...............................................................................
Income taxes paid ......................................................................
$ 80,168
$ 59,933
$ 20,019
$ 21,823
$ 95,488
$ 20,922
$ 65,000
$ 16,001
$ 67,000
Accompanying notes are an integral part of this statement.
23
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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 $324,000,000 and $296,000,000 of
such reserves at December 31, 1997 and 1996, respectively,
are periodically adjusted based upon market conditions.
Payments received for investment, limited pay and
universal life-type contracts are recognized as income only
to the extent of the current cost of insurance and policy
administration, with the remainder recognized as liabilities
and included in life policies reserves.
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 policy-
holders. 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.
ACCIDENT AND HEALTH INSURANCE—Expenses
incurred in the issuance of policies are deferred and
amortized over a five-year period. Policy premium income,
FAIR VALUE DISCLOSURES—Fair values for investments
in fixed maturity securities (including redeemable preferred
stock) are based on quoted market prices, where available.
24
Cincinnati Financial Corporation and Subsidiaries
For such securities not actively traded, fair values are
estimated by discounting expected future cash flows using
a current market rate applicable to the yield, credit quality
and maturity of the investments. Fair values for equity
securities are based on quoted market prices.
The fair values for liabilities under investment-type
insurance contracts (annuities) are estimated using
discounted cash flow calculations, based on interest rates
currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being
valued. Fair values for short-term notes payable are
estimated using interest rates currently available to the
Company. Fair values for long-term convertible debentures
are based on the quoted market prices for such debentures.
OTHER—Statement of Financial Accounting Standards
(SFAS) No. 128 “Earnings Per Share” was adopted in
1997, and all prior period earnings per share data has
been restated.
SFAS No. 130 “Reporting Comprehensive Income”
will be effective for the Company in 1998. This statement
requires financial statement reporting of comprehensive
income, which includes net income and other items, such
as the change in unrealized gains on investments, net of
income taxes.
SFAS No. 131 “Disclosures About Segments of an
Enterprise and Related Information” will be effective for
the Company in 1998 and will require additional disclosures
for the Company’s operating segments.
RECLASSIFICATIONS—Certain prior year amounts have
been reclassified to conform with 1997 classifications.
2. INVESTMENTS
(000’s omitted)
Investment income summarized by investment category:
Interest on fixed maturities .......................................................................
Dividends on equity securities...................................................................
Other investment income ..........................................................................
$
Total ....................................................................................................
Less investment expenses..........................................................................
Years Ended December 31,
1997
1996
1995
218,065
128,403
6,865
353,333
4,736
$ 208,907
118,932
5,744
333,583
6,276
$ 186,071
111,458
6,480
304,009
3,994
Net investment income .........................................................................
$
348,597
$ 327,307
$ 300,015
Realized gains on investments summarized by investment category:
Fixed maturities:
Gross realized gains..............................................................................
Gross realized losses .............................................................................
$
22,075
(6,732)
$ 20,823
(10,207)
$ 14,466
(7,263)
Equity securities:
Gross realized gains..............................................................................
Gross realized losses .............................................................................
62,337
(8,450)
47,310
(9,980)
38,705
(15,127)
Realized gains on investments ..............................................................
$
69,230
$ 47,946
$ 30,781
Change in unrealized gains on investments summarized by investment
category:
Fixed maturities .......................................................................................
Equity securities .......................................................................................
$
49,650
2,070,425
$ (18,257)
584,901
Change in unrealized gains on investments...........................................
$ 2,120,075
$ 566,644
$ 181,475
677,288
$ 858,763
25
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
( C O N T I N U E D )
Cincinnati Financial Corporation and Subsidiaries
Analysis of cost, gross unrealized gains, gross unrealized losses and fair value as of December 31, 1997 and 1996 (000’s omitted):
1997
Fixed maturities:
States, municipalities and political subdivisions .....
Convertibles and bonds with warrants attached .....
Public utilities........................................................
United States government and government
agencies and authorities ....................................
All other corporate bonds.......................................
Cost
$ 843,064
103,124
74,871
9,278
1,541,212
Total .................................................................
$ 2,571,549
Equity securities.........................................................
$ 1,725,855
1996
Fixed maturities:
States, municipalities and political subdivisions .....
Convertibles and bonds with warrants attached .....
Public utilities........................................................
United States government and government
agencies and authorities ....................................
All other corporate bonds.......................................
$ 838,008
125,629
85,573
8,790
1,373,785
Total .................................................................
$ 2,431,785
Equity securities.........................................................
$ 1,537,189
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
47,811
7,973
4,982
258
125,174
$ 186,198
$ 4,277,294
$
38,457
7,626
3,697
156
88,713
$ 138,649
$ 2,207,805
$
$
$
$
$
$
2,645
1,705
18
22
2,138
6,528
3,878
1,092
1,630
349
143
5,415
8,629
4,814
Fair
Value
$ 888,230
109,392
79,835
9,514
1,664,248
$2,751,219
$5,999,271
$ 875,373
131,625
88,921
8,803
1,457,083
$2,561,805
$3,740,180
Contractual maturity dates for investments in fixed maturity securities as of December 31, 1997 (000’s omitted):
Maturity dates occurring:
One year or less ..................................................
After one year through five years ........................
After five years through ten years........................
After ten years ....................................................
Total ..............................................................
Cost
$
58,119
337,683
905,388
1,270,359
$ 2,571,549
Fair
Value
% of
Fair Value
$
58,306
360,838
958,526
1,373,549
$ 2,751,219
2.1
13.1
34.9
49.9
100.0
Actual maturities may differ from contractual maturities when there exists a right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1997, investments with a cost of $51,585,000 were on deposit with various states in compliance with
certain regulatory requirements.
Investments in companies that exceed 10% of the Company’s shareholders’ equity include the following as of December 31
(000’s omitted):
1997
Fair
Value
Cost
1996
Fair
Value
Cost
Fifth Third Bancorp common stock.........................
Alltel Corporation common stock ............................
$ 255,089
95,810
$
$ 2,612,607
$ 522,527
$ 238,087
95,720
$
$ 1,331,625
$ 399,252
3. DEFERRED ACQUISITION COSTS
Acquisition costs incurred and capitalized during 1997, 1996 and 1995 amounted to $322,117,000, $303,111,000 and
$282,399,000, respectively. Amortization of deferred acquisition costs was $314,392,000, $295,112,000 and $272,313,000
for 1997, 1996 and 1995, respectively.
26
Cincinnati Financial Corporation and Subsidiaries
4. LOSSES AND LOSS EXPENSES
Activity in the reserve for losses and loss expenses is
summarized as follows (000’s omitted):
Years Ended December 31,
1996
1995
1997
Balance at January 1 .............. $1,824,296
121,881
1,702,415
Less reinsurance receivable ..
Net balance at January 1 ........
Incurred related to:
$1,690,461 $1,510,150
78,125
1,432,025
109,719
1,580,742
Current year.........................
Prior years............................
Total incurred.........................
Paid related to:
1,115,140
(119,654)
995,486
1,183,251
(151,996 )
1,031,255
1,040,541
(126,509)
914,032
Current year.........................
Prior years............................
Total paid...............................
Net balance at December 31...
Plus reinsurance receivable ..
467,843
453,410
921,253
1,776,648
112,235
Balance at December 31 ......... $1,888,883
514,186
395,396
909,582
1,702,415
121,881
396,856
368,459
765,315
1,580,742
109,719
$ 1,824,296 $1,690,461
As a result of changes in estimates of insured events
in prior years, the provision for losses and loss expenses
decreased by $119,654,000, $151,996,000 and
$126,509,000 in 1997, 1996 and 1995. These decreases
are due in part to the effects of settling reported (case)
and unreported (IBNR) reserves established in prior years
for less than expected.
The reserve for losses and loss expenses in the accom-
panying balance sheets also includes $47,651,000 and
$56,871,000 at December 31, 1997 and 1996, respectively,
for certain life/health losses and loss checks payable.
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):
Ordinary/traditional life..................
Universal life...................................
Annuities.........................................
Industrial ........................................
Other ..............................................
Total ............................................
1997
$137,734
202,696
121,284
16,470
4,263
$482,447
1996
$123,473
183,967
112,496
16,881
3,464
$440,281
At December 31, 1997 and 1996, the fair value
associated with the annuities shown above approximated
$123,000,000 and $114,000,000, respectively.
6. NOTES PAYABLE
The Company and subsidiaries had no compensating
balance requirement on debt for either 1997 or 1996. Notes
payable in the accompanying balance sheets are short term,
and interest rates charged on such borrowings ranged from
5.14% to 8.50% during 1997 which resulted in an average
interest rate of 6.14%. At December 31, 1997 and 1996,
the fair value of the notes payable approximated the carrying
value and the weighted average interest rate approximated
6.44% and 6.12%, respectively.
7. CONVERTIBLE SENIOR DEBENTURES
The convertible senior debentures are convertible by
the debenture holders into shares of common stock at a
conversion price of $44.63 (22.41 shares for each $1,000
principal). At December 31, 1997 and 1996, the fair value
of the debentures approximated $175,000,000 and
$115,000,000, respectively.
8. REINSURANCE
Property and casualty premium income in the
accompanying statements of income includes approximately
$41,694,000, $41,139,000 and $36,956,000 of earned
premiums on assumed business and is net of approximately
$94,397,000, $91,396,000 and $83,805,000 of earned
premiums on ceded business for 1997, 1996 and 1995,
respectively.
Written premiums for 1997, 1996 and 1995 consist of
the following (000’s omitted):
Direct business...........
Assumed business ......
Ceded business...........
Net ..........................
1997
$1,523,915
42,773
(95,085)
$1,471,603
1996
$1,433,340
42,671
(92,486)
$1,383,525
1995
$1,338,205
39,221
(81,574)
$1,295,852
Insurance losses and policyholder benefits in the
accompanying statements of income are net of approximately
$34,744,000, $44,770,000 and $40,316,000 of reinsurance
recoveries for 1997, 1996 and 1995, respectively.
9. FEDERAL INCOME TAXES
Significant components of the Company’s net deferred tax
liability as of December 31, 1997 and 1996 are as follows
(000’s omitted):
1997
1996
Deferred tax liabilities:
Unrealized gains on investments ................ $1,558,580
42,936
Deferred acquisition costs ..........................
10,514
Other..........................................................
1,612,030
Total ..........................................................
Deferred tax assets:
Losses and loss expense reserves ................
Unearned premiums...................................
Life policy reserves.....................................
Other..........................................................
Total ..........................................................
127,994
29,293
19,460
28,805
205,552
Net deferred tax liability............................... $1,406,478
$816,554
38,966
8,447
863,967
133,692
28,109
15,962
9,311
187,074
$676,893
The provision for federal income taxes is based upon
a consolidated income tax return for the Company and
subsidiaries.
27
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
( C O N T I N U E D )
Cincinnati Financial Corporation and Subsidiaries
The differences between the statutory federal rates
and the Company’s effective federal income tax rates are
as follows:
Tax at statutory rate...........................
Increase (decrease) resulting from:
Tax-exempt municipal bonds ...........
Dividend exclusion...........................
Other ...............................................
Effective rate......................................
1997
Percent
35.00
1996
Percent
35.00
1995
Percent
35.00
(4.44)
(6.54)
.10
24.12
(6.41)
(8.50)
.68
20.77
(6.10)
(8.04)
2.12
22.98
No provision has been made (at December 31, 1997,
1996 and 1995) for federal income taxes on approximately
$14,000,000 of the life insurance subsidiary’s retained
earnings, since such taxes will become payable only to
the extent that such retained earnings are distributed as
dividends or exceed limitations prescribed by tax laws.
The Company does not contemplate any such dividend.
11. PENSION PLAN
The Company and subsidiaries have a defined benefit
pension plan covering substantially all employees. Benefits
are based on years of credited service and compensation level.
Contributions to the plan are based on the frozen entry age
actuarial cost method. Pension expense is composed of several
components that are determined using the projected unit
credit actuarial cost method and based on certain actuarial
assumptions. The following table sets forth the plan’s funded
status and the amounts recognized in the Company’s balance
sheets as of December 31, 1997 and 1996 (000’s omitted):
Actuarial present value of
accumulated benefit obligation
(vested benefits: 1997—$34,094;
1996—$29,704) ........................................
Plan assets at fair value ................................
Actuarial present value of projected
1997
1996
$ 35,202
$ 30,740
$133,470
$ 92,740
10. NET INCOME PER COMMON SHARE
benefit obligation .......................................
61,457
54,208
(000’s omitted except per share data)
1997
Net income per common share..... $299,375
Shares
Income
Per Share
(Numerator) (Denominator) Amount
$5.43
55,179
Effect of dilutive securities:
5.5% convertible senior
debentures .............................
Stock options .........................
Net income per common share
2,712
1,309
443
Plan assets in excess of projected
benefit obligation .......................................
72,013
38,532
Unrecognized net transition asset at
January 1, 1987 ($7,774 amortized
over 21 years) ............................................
Unrecognized prior service costs ...................
Unrecognized net gain ..................................
(3,702)
(397)
(68,558)
(4,072)
(437)
(34,730)
(diluted)...................................
$ 302,087
56,931
$5.31
Accrued pension cost ....................................
$
(644)
$
(707)
1996
Net income per common share..... $ 223,760
55,736
$4.01
the following components (000’s omitted):
Net pension expense for 1997, 1996 and 1995 includes
Service cost for current year .........
Interest cost ..................................
Actual return on plan assets..........
Net amortization and deferral.......
Net pension expense .....................
1997
$ 3,449
3,938
(43,752)
36,302
(63)
$
1996
$ 3,306
3,572
(15,057)
8,615
436
$
1995
$ 2,555
3,014
(20,717)
14,720
(428)
$
The weighted average discount rate used in determining
the actuarial present value of the projected benefit obligation as
of December 31 was 6.75%, 7% and 6.75% in 1997, 1996 and
1995, respectively. The rates of increase in future compensation
levels were 5% to 7% for each year. The expected long-term
rate of return on retirement plan assets, consisting principally
of equity securities (including those of the Company), was 8%
as of December 31, 1997, 1996 and 1995.
Effect of dilutive securities:
5.5% convertible senior
debentures .............................
Stock options .........................
Net income per common share
2,859
1,789
256
(diluted)................................... $ 226,619
57,781
$3.92
1995
Net income per common share..... $227,350
55,668
$4.08
Effect of dilutive securities:
5.5% convertible senior
debentures .............................
Stock options .........................
Net income per common share
2,860
1,793
221
(diluted)................................... $ 230,210
57,682
$3.99
Options to purchase 25,000, 486,000 and 124,000 shares
of common stock were outstanding during 1997, 1996 and 1995,
respectively, but were not included in the computation of net
income per common share (diluted) because the options’ exercise
prices were greater than the average market price of the common
shares.
28
Cincinnati Financial Corporation and Subsidiaries
12. SHAREHOLDERS’ EQUITY AND RESTRICTION
13. STATUTORY ACCOUNTING INFORMATION
The insurance subsidiaries paid cash dividends to the
Company of approximately $95,500,000, $77,027,000
and $143,773,000 in 1997, 1996 and 1995, respectively.
Dividends paid to the Company by insurance subsidiaries
are restricted by regulatory requirements of the insurance
subsidiaries’ domiciliary state. Generally, the maximum
dividend that may be paid without prior regulatory approval
is limited to the greater of 10% of statutory surplus or 100%
of statutory net income for the prior calendar year, up to the
amount of statutory unassigned surplus as of the end of the
prior calendar year. Dividends exceeding these limitations
can be paid only with approval of the insurance department
of the subsidiaries’ domiciliary state. During 1998, the total
dividends that can be paid to the Company without
regulatory approval are approximately $246,941,000.
314,178 shares of common stock were available for
future stock option grants, as of December 31, 1997.
On November 22, 1996, the Board of Directors of the
Company authorized the repurchase of up to three million
of the Company’s outstanding shares as management
deemed appropriate, over an unspecified period of time.
As of December 31, 1997, the Company had repurchased
934,041 shares.
15. STOCK OPTIONS
Net income and shareholders’ equity, as determined in ac-
cordance with statutory accounting practices for the Company’s
insurance subsidiaries, are as follows (000’s omitted):
Years Ended December 31,
1996
1997
1995
Net income:
Property/casualty insurance
subsidiaries ..........................
$ 212,808 $ 136,041
$ 152,003
Life/health insurance
subsidiary ............................
$
6,261 $ (1,812)
$
7,096
December 31,
1997
1996
Shareholders’ equity:
Property/casualty insurance subsidiaries
Life/health insurance subsidiary...........
$ 2,148,746
$ 320,198
$ 1,393,954
$ 214,130
14. TRANSACTION WITH AFFILIATED PARTIES
The Company paid certain officers and directors, or
insurance agencies of which they are shareholders,
commissions of approximately $11,780,000, $10,874,000
and $10,034,000 on premium volume of approximately
$78,727,000, $70,418,000 and $60,720,000 for 1997, 1996
and 1995, respectively.
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:
Net income
Net income per common share
Net income per common share
(diluted)
As reported
Pro forma
As reported
Pro forma
As reported
Pro forma
1997
$ 299,375
296,078
5.43
5.41
5.31
5.25
$
$
1996
$ 223,760
221,665
4.01
3.98
3.92
3.89
$
$
$
1995
$ 227,350
227,106
4.08
4.08
3.99
3.99
$
In determining the pro forma amounts above, the fair value of each option was estimated on the date of grant using the
Binomial option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995,
respectively: dividend yield of 1.22%, 2.26% and 2.26%; expected volatility of 19.67%, 20.5% and 21.3%; risk-free interest
rates of 5.89%, 6.56% and 5.73%; and expected lives of ten years for all years. Compensation cost comprehended in the
above pro forma disclosures is not indicative of future amounts (when the SFAS No. 123 methodology will be applied to
additional outstanding nonvested awards).
29
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
( C O N T I N U E D )
Cincinnati Financial Corporation and Subsidiaries
(000’s omitted except per share data)
A summary of options information for the years ended December 31, 1997, 1996 and 1995 follows:
Shares
Outstanding at beginning of year 1,258,164
218,479
Granted
(155,143)
Exercised
(10,743)
Forfeited/revoked
1,310,757
Outstanding at end of year
702,930
Options exercisable at end of year
Weighted-average fair value of
1997
Weighted-Average
Exercise Price
$ 47.93
62.91
33.93
53.89
53.64
1996
Shares Weighted-Average
Shares
Exercise Price
$ 40.24
60.76
37.38
58.68
47.93
895,249
512,603
(90,926)
(58,762)
1,258,164
652,010
892,131
155,713
(136,291 )
(16,304 )
895,249
641,655
1995
Weighted-Average
Exercise Price
$ 36.19
53.17
29.18
39.91
40.24
options granted during the year
$ 22.97
$ 20.55
$ 15.80
Options outstanding at December 31, 1997 consisted of the following:
Options Outstanding
Options Exercisable
Range of
Exercise
Prices
$12 to 15
22 to 31
33 to 44
46 to 57
59 to 64
67 to 69
79 to 100
Number
34,056
48,993
237,763
297,270
482,175
166,500
44,000
1,310,757
Weighted-Average
Remaining
Contractual Life
.25 yrs
2.50 yrs
4.15 yrs
6.57 yrs
8.31 yrs
9.28 yrs
9.75 yrs
6.91 yrs
Weighted-Average
Exercise Price
$ 13.77
25.22
37.04
50.45
61.13
68.06
90.79
53.64
Number
34,056
48,993
237,763
229,571
152,547
0
0
702,930
Weighted-Average
Exercise Price
$ 13.77
25.22
37.04
50.24
61.05
n/a
n/a
44.61
16. SEGMENT INFORMATION
(000’s omitted)
The Company operates principally in two industries—property and casualty insurance and life insurance. Information
concerning the Company’s operations in different industries is presented below. Revenue is primarily from unaffiliated
customers. Identifiable assets by industry are those assets that are used in the Company’s operations in each industry.
Corporate assets are principally cash and marketable securities.
Property/casualty insurance ......................................................
Life/health insurance ................................................................
Investment income (less required interest on life reserves) .........
Realized gains on investments ...................................................
Other.........................................................................................
General corporate expenses .......................................................
Total .....................................................................................
Property/casualty insurance ......................................................
Life/health insurance ................................................................
Other.........................................................................................
Corporate assets ........................................................................
Total .....................................................................................
30
30
1997
$
28,955
2,763
321,620
69,230
865
(28,874)
$ 394,559
Income Before Income Taxes
1996
$ (44,449)
(2,906)
305,211
47,946
3,337
(26,718)
$ 282,421
1997
$ 4,953,259
1,094,445
66,227
3,379,494
$ 9,493,425
Identifiable Assets
1996
$ 3,986,658
902,354
53,351
2,103,151
$ 7,045,514
1995
$
2,894
(2,512)
279,346
30,781
4,979
(20,300)
$ 295,188
1995
$ 3,526,900
809,418
44,487
1,728,493
$ 6,109,298
S U B S I D I A R Y O F F I C E R S A N D D I R E C T O R S
AS OF DECEMBER 31, 1997, LISTED ALPHABETICALLY
The Cincinnati Insurance Company (CIC)
The Cincinnati Casualty Company (CCC)
EXECUTIVE OFFICERS
William T. Camp
The Cincinnati Indemnity Company (CID)
The Cincinnati Life Insurance Company (CLIC)
Cheryl L. Frey
CIC, CID, CCC Vice President—Administrative Services
CFC-I President and Director
Theodore F. Elchynski
CIC, CID, CCC, CLIC, CFC-I Senior Vice President—
Accounting, Secretary and Director
CIC, CID, CCC Treasurer
James G. Miller
CIC, CID, CCC, CLIC, CFC-I Senior Vice President —
Investments
CFC-I Treasurer and Director
CIC, CID Director
Robert B. Morgan
CIC, CID, CCC, CLIC Chief Executive Officer and Director
CIC, CID President
CFC-I Director
Larry R. Plum, CPCU
CCC President and Director
CIC, CID Senior Vice President—Personal Lines and Director
CLIC Director
David H. Popplewell, FALU, LLIF
CLIC President, Chief Operating Officer and Director
J. F. Scherer
CIC, CID, CCC, CLIC Senior Vice President—Sales &
Marketing and Director
John J. Schiff
CIC, CID, CCC Chairman of the Executive Committee
and Director
CLIC, CFC-I Director
John J. Schiff, Jr., CPCU
CIC, CID, CCC Chairman of the Board and Director
CLIC, CFC-I Director
Timothy L. Timmel
CIC, CID, CCC, CLIC, CFC-I Senior Vice President—
Operations and Director
OFFICERS AND DIRECTORS
Michael R. Abrams
CIC, CID, CCC, CLIC Assistant Treasurer—Investments
Donald R. Adick, FLMI
CLIC Senior Vice President—Administration
Dawn M. Alcorn
CIC, CID, CCC Secretary—Administrative Services
R. Larry Arlen, CPCU, CLU, ARP, AIAF, AIM
CLIC Assistant Secretary—Life Claims
Charles M. Armentrout, AIC
CIC, CID, CCC Secretary—Claims
William R. Backs
CFC-I Vice President—Sales
Ricky G. Baker
CIC, CID, CCC, CLIC Assistant Secretary—Information
Systems
Patricia L. Barnhart
CIC, CID, CCC Assistant Treasurer—Accounting
Brad E. Behringer
CLIC Assistant Vice President—Life Underwriting
James E. Benoski
CIC, CID, CCC, CLIC Senior Vice President—Claims
CCC Director
Douglas A. Bogenreif, CLU
CLIC Assistant Secretary—Life Development
David L. Burbrink
CLIC Assistant Vice President—Advanced Planning
Thomas D. Candella
CIC, CID, CCC Assistant Secretary—Personal Lines
Daniel C. Cappel
CIC, CID, CCC Assistant Vice President—Accounting
Richard W. Cumming, FSA, ChFC
CIC, CID, CCC, CLIC Senior Vice President—Chief Actuary
CLIC Director
Joel W. Davenport, AAI, CPCU
CIC, CID, CCC Assistant Secretary—Commercial Lines
James H. Deal, CPCU, CLU
CIC, CID, CCC, CLIC Vice President—Education & Training
J. Michael Dempsey, CLU
CLIC Vice President—Education & Training
Mark R. DesJardins, CPCU, AIC, AIM
CIC, CID, CCC Secretary—Education & Training
Dean W. Dicke
CIC, CID, CCC Senior Vice President—Field Claims
CCC Director
Donald J. Doyle, Jr., AIM
CIC, CID, CCC, CLIC Secretary—Information Systems
John C. DuBois
CIC, CID, CCC Assistant Secretary—Personal Lines
Frederick A. Ferris
CIC, CID, CCC Secretary—Commercial Lines
John E. Field, CPCU
CIC, CID Director
Bruce S. Fisher, CPCU, AIC
CIC, CID, CCC Assistant Vice President—Claims
Craig W. Forrester, CLU
CIC, CID, CCC, CLIC Vice President—Information Systems
Michael E. Francois
CIC, CID, CCC Assistant Secretary—Sales & Marketing
Michael J. Gagnon
CIC, CID, CCC Vice President—Claims
William J. Geier, CLU, ChFC, FLMI, CPCU
CIC, CID, CCC, CLIC Secretary—Information Systems
Scott A. Gilliam
CIC, CID, CCC Assistant Secretary—Government Relations
Gary B. Givler
CIC, CID, CCC Assistant Secretary—Claims
Kevin E. Guilfoyle
CFC-I Assistant Vice President—Real Estate
David L. Helmers, CPCU
CIC, CID, CCC Vice President—Personal Lines
Theresa A. Hoffer
CIC, CID, CCC Assistant Treasurer—Accounting
Martin F. Hollenbeck
CIC, CID, CCC, CLIC Assistant Treasurer—Investments
Timothy D. Huntington, AU, CPCU
CIC, CID, CCC Assistant Secretary—Commercial Lines
Thomas A. Joseph, CPCU
CIC, CID, CCC Vice President—Commercial Lines
CCC Director
Thomas H. Kelly
CIC, CID, CCC Vice President—Bond
Christopher O. Kendall, CPCU, AAM, AIM, ARE
CIC, CID, CCC Assistant Vice President—Commercial Lines
Bob R. Kerns
CIC, CID, CCC, CLIC Senior Vice President—Staff
Underwriting
CCC Director
Gary J. Kline, CPCU
CIC, CID, CCC Secretary—Commercial Lines
Robert L. Laymon
CIC, CID, CCC Secretary—Bond
Steven W. Leibel
CIC, CID, CCC Assistant Secretary—Personal Lines
Jerry L. Litton
CIC, CID, CCC Assistant Treasurer—Accounting
Frank D. Love, CPCU
CIC, CID, CCC, CFC-I Senior Vice President—Administrative
Services, Engineering and Sales
CLIC Director
Kenneth C. Mack, AIM
CIC, CID, CCC Secretary—Personal Lines
Michael J. Martini
CLIC Assistant Secretary—Life Policy Services
Eric N. Mathews, AIAF
CIC, CID, CCC Vice President—Accounting
Richard L. Mathews
CIC, CID, CCC Assistant Secretary—Information Systems
Richard P. Matson
CIC, CID, CCC, CLIC, CFC-I Assistant Vice President—
Purchasing
Daniel T. McCurdy
CIC, CID, CCC Senior Vice President—Bond
CCC Director
Janet K. McVay
CIC, CID, CCC Assistant Secretary—Personal Lines
Kenneth S. Miller, CLU, ChFC
CIC, CID, CCC, CLIC Vice President—Investments
Martin J. Mullen, CPCU
CIC, CID, CCC Assistant Secretary—Claims
Urban G. Neville
CIC, CID, CCC, CLIC Senior Vice President—Information
Systems
CCC Director
Gary A. Nichols
CIC, CID, CCC Assistant Secretary—Claims
Glenn D. Nicholson, LLIF
CLIC Senior Vice President and Senior Marketing Officer
Robert J. Nieberding, CLU
CIC, CID, CCC, CLIC Vice President—Information Systems
Marc A. O’Dowd, CPA, CPCU
CIC, CID, CCC, CLIC Internal Audit Officer
Carol A. Oler, AIM
CIC, CID, CCC, CLIC Assistant Secretary—Information
Systems
David H. Park, CLU
CIC, CID, CCC, CLIC Assistant Secretary—Information
Systems
D. Kae Parrott, AIM
CIC, CID, CCC, CLIC Secretary—Information Systems
Todd H. Pendery, FLMI
CLIC Secretary—Accounting
Marc C. Phillips, CPCU
CIC, CID, CCC Assistant Secretary—Commercial Lines
David A. Pierce
CIC, CID, CCC, CLIC Assistant Secretary—Information
Systems
John P. Ringstrom
CIC, CID, CCC Assistant Secretary—Claims
Charles E. Robinson, CPCU
CIC, CID, CCC Secretary—Field Claims
Ronald L. Robinson
CIC, CID, CCC Assistant Secretary—Field Claims
CFC Investment Company (CFC-I)
Christopher J. Roehm
CIC, CID, CCC Assistant Secretary—Personal Lines
Michael A. Rouse
CIC, CID, CCC Assistant Secretary—Commercial Lines
Thomas J. Scheid
CIC, CID, CCC, CLIC Assistant Vice President—Staff
Underwriting
Robert C. Schiff
CIC, CID, CCC, CLIC Director
Thomas R. Schiff
CIC, CID, CCC, CLIC Director
Gregory D. Schmidt, CPCU, ARP, CSF
CIC, CID, CCC, CLIC Assistant Vice President—Staff
Underwriting
William E. Scholz
CIC, CID, CCC Assistant Secretary—Sales & Marketing
Don E. Schricker
CIC, CID, CCC Vice President—Personal Lines
Frank J. Schultheis
CIC, CID Director
Norman R. Settle
CIC, CID, CCC Vice President—Engineering and Loss Control
Dennis D. Shamp
CIC, CID, CCC Assistant Vice President—Special Projects
Joan O. Shevchik, CPCU, CLU
CIC, CID, CCC Secretary—Publications
J. B. Shockey, CPCU, CLU
CIC, CID, CCC Vice President—Sales & Marketing
Scott K. Smith
CIC, CID, CCC Assistant Secretary—Commercial Lines
Kenneth W. Stecher
CIC, CID, CCC, CLIC Senior Vice President—Accounting
CLIC Treasurer and Director
Henry W. Stein, Jr.
CIC, CID, CCC Vice President—Commercial Lines
Charles P. Stoneburner, II, CPCU
CIC, CID, CCC Assistant Secretary—Claims
Duane I. Swanson, CIC
CIC, CID, CCC Assistant Secretary—Sales & Marketing
Eric N. Taylor, CLU, ChFC
CLIC Assistant Secretary—Sales & Marketing
Michael A. Terrell, CPCU, RPLU
CIC, CID, CCC Assistant Secretary—Sales & Marketing
Roger E. Thomas, AIC
CIC, CID, CCC Assistant Vice President—Claims
Scott L. Unger
CIC, CID, CCC Secretary—Bond
Philip J. Van Houten, CFE, FCLS
CIC, CID, CCC Secretary—Claims
Jody L. Wainscott
CIC, CID, CCC Vice President—Staff Underwriting
William H. Ware, Jr., CLU, ChFC
CLIC Vice President—Sales & Marketing
David A. Webb, CLU, ChFC, FLMI
CIC, CID, CCC, CLIC Secretary—Information Systems
Larry R. Webb, CPCU
CIC, CID Director
Alan R. Weiler, CPCU
CIC, CID Director
Paul W. Wells
CIC, CID, CCC Secretary—Bond
Mark A. Welsh
CIC, CID, CCC , CLIC Secretary—Staff Underwriting
Mark S. Wietmarschen
CIC, CID, CCC Secretary—Commercial Lines
Gregory J. Ziegler
CIC, CID, CCC, CLIC, CFC-I Vice President—Personnel
_____________________________
Edward P. Brueggeman
CIC, CID, CCC, CLIC Associate Counsel
John F. Gannon
CIC, CID, CCC, CLIC Associate Counsel
Eugene M. Gelfand
CIC, CID, CCC, CLIC Counsel
Mark J. Huller
CIC, CID, CCC, CLIC Senior Counsel
G. Gregory Lewis
CIC, CID, CCC, CLIC Counsel
Lisa A. Love
CIC, CID, CCC, CLIC Associate Counsel
Barry A. Meyer
CIC, CID, CCC, CLIC Associate Counsel
Stephen C. Roach
CIC, CID, CCC, CLIC Associate Counsel
CIC DIRECTORS EMERITI
Vincent H. Beckman
Hayden D. Davis
Robert J. Driehaus
Richard L. Hildbold, CPCU
Harry M. Turner, Chairman Emeritus
Robert B. Woods
William H. Zimmer
31
31
C I N C I N N A T I F I N A N C I A L C O R P O R A T I O N
O F F I C E R S A N D D I R E C T O R S
William F. Bahl
Michael Brown
Richard M. Burridge
John E. Field
William R. Johnson
Kenneth C. Lichtendahl
James G. Miller
Robert B. Morgan
Jackson H. Randolph
John J. Schiff
John J. Schiff, Jr.
Robert C. Schiff
Thomas R. Schiff
Frank J. Schultheis
Larry R. Webb
Alan R. Weiler
OFFICERS AS OF
DECEMBER 31, 1997
Robert B. Morgan
President and Chief Executive Officer
John J. Schiff, Jr., CPCU
Chairman of the Board
John J. Schiff
Chairman of the Executive Committee
Theodore F. Elchynski
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
James G. Miller
Senior Vice President, Chief Investment Officer,
Assistant Secretary and Assistant Treasurer
Kenneth S. Miller, CLU, ChFC
Vice President, Assistant Secretary and
Assistant Treasurer
Kenneth W. Stecher
Vice President, Assistant Secretary and
Assistant Treasurer
DIRECTORS AS OF
DECEMBER 31, 1997
William F. Bahl, CFA(2)(5)
President—Bahl & Gaynor, Inc.
(investment advisors)
Director since 1995
32
Michael Brown(2)(6)
President and General Manager—
Cincinnati Bengals, Inc.
Director since 1980
Richard M. Burridge, CFA(1)(5)
Chairman—The Burridge Group, Inc.
(investment advisors)
Director since 1987
John E. Field, CPCU(4)
Vice Chairman—Wallace & Turner, Inc.
(insurance agency)
Director since 1995
William R. Johnson
President and Chief Operating Officer—
H. J. Heinz Company
Director since 1996
Kenneth C. Lichtendahl(1)(2)
President and Chief Executive Officer—
Hudepohl-Schoenling Brewing Company
Director since 1988
James G. Miller
Senior Vice President and Chief Investment
Officer—Cincinnati Financial Corporation
Director since 1996
Robert B. Morgan(4)(5)
President and Chief Executive Officer—
Cincinnati Financial Corporation
Director since 1978
Jackson H. Randolph(1)(5)(6)
Chairman—CINergy Corporation
Director since 1986
DIRECTORS
EMERITI
Vincent H. Beckman
Robert J. Driehaus
David R. Huhn
Lawrence H. Rogers, II(3)
John Sawyer
David B. Sharrock
Thomas J. Smart
Harry M. Turner
Charles I. Westheimer
William H. Zimmer
John J. Schiff(4)(5)
Chairman of the Executive Committee—
Cincinnati Financial Corporation
Director since 1968
John J. Schiff, Jr., CPCU(4)(5)(6)
Chairman—Cincinnati Financial Corporation
Director since 1968
Robert C. Schiff
Chairman and Chief Executive Officer—
Schiff, Kreidler-Shell, Inc. (insurance agency)
Director since 1968
Thomas R. Schiff(5)
Chairman and Chief Executive Officer—
John J. & Thomas R. Schiff & Co., Inc.
(insurance agency)
Director since 1975
Frank J. Schultheis(4)
President—Schultheis Insurance Agency, Inc.
Director since 1995
Larry R. Webb, CPCU
President—Webb Insurance Agency, Inc.
Director since 1979
Alan R. Weiler, CPCU(4)
President and Chief Executive Officer—
Archer-Meek-Weiler Agency, Inc.
(insurance agency)
Director since 1992
(1) Audit Committee
(2) Compensation Committee
(3) Advisor to Compensation Committee
(4) Executive Committee
(5) Investment Committee
(6) Nominating Committee
S H A R E H O L D E R I N F O R M A T I O N
Cincinnati Financial Corporation had approximately 10,320 shareholders of record as of December 31, 1997.
Most of CFC’s 2,670 associates and many of our independent agent representatives own stock in their Company.
49 percent of CFC’s outstanding shares are held by registered owners.
ANNUAL MEETING
The Annual Meeting of Shareholders of Cincinnati Financial Corporation will take place at 9:30 a.m. on Saturday,
April 4, 1998, at the Cincinnati Art Museum in Eden Park, Cincinnati, Ohio.
SHAREHOLDER SERVICES
Please direct inquiries about stock transfer, dividend reinvestment, dividend direct deposit, lost certificates, change of
address and elimination of duplicate mailings to T. F. Elchynski, Chief Financial Officer, Cincinnati Financial Corporation,
P.O. Box 145496, Cincinnati, Ohio 45250-5496, (513)870-2639 or e-mail to investor_inquiries@cinfin.com.
FORM 10-K
Shareholders may request a copy of Form 10-K for 1997. Cincinnati Financial Corporation files the Annual Report on
Form 10-K with the Securities and Exchange Commission. You may access this document through a link to the SEC’s
EDGAR database from our Web site, www.cinfin.com.
P R I C E R A N G E O F C O M M O N S T O C K
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.
1997
1996
Quarter
High............................
Low ............................
Dividend Paid .............
1st
$ 73 1⁄4
62
.37
2nd
$ 82 1⁄2
67 3⁄8
.41
3rd
$ 83 3⁄4
78 1⁄2
.41
4th
$ 140 3⁄4
83 7⁄8
.41
1st
$ 64 1⁄4
57 5⁄8
.32
2nd
$ 63 1⁄2
57 3⁄8
.37
3rd
$ 58 13⁄16
54
.37
4th
$ 65 3⁄16
54 1⁄4
.37
S E L E C T E D Q U A R T E R L Y F I N A N C I A L D A T A
(000’s omitted except per share data)
Financial data for each quarter in the two years ended December 31,
Quarter
Revenues .....................................................
Income Before Income Taxes........................
Net Income ..................................................
Net Income Per Common Share ...................
Net Income Per Common Share (Diluted) ....
Quarter
Revenues .....................................................
Income Before Income Taxes........................
Net Income ..................................................
Net Income Per Common Share ...................
Net Income Per Common Share (Diluted) ....
1st
$ 483,737
98,278
74,047
1.33
1.30
1st
$ 451,798
76,449
59,448
1.07
1.04
2nd
$ 484,203
100,341
75,830
1.37
1.33
2nd
$ 442,042
67,022
54,396
.98
.95
1997
3rd
$ 492,038
101,964
77,000
1.42
1.37
1996
3rd
$ 455,681
58,658
46,949
.84
.82
4th
$ 482,406
93,975
72,498
1.32
1.28
4th
$ 459,227
80,291
62,966
1.13
1.10
Full Year
$1,942,384
394,559
299,375
5.43
5.31
Full Year
$1,808,749
282,421
223,760
4.01
3.92
Note: The sum of the quarterly reported amounts may not equal the full year as each is computed independently.
Printed on recycled paper
CINCINNATI FINANCIAL CORPORATION
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Life Insurance Company
CFC Investment Company
P.O. Box 145496
Cincinnati, Ohio 45250-5496
(513) 870-2000
www.cinfin.com