Cincinnati Financial Corporation
®
1998 Annual Report
voices of
“Field personnel operate out of their
homes and come around often to build
personal relationships. They will tackle just
about anything and it makes life easier.”
strategy
“Many companies tell us how much
they value their relationships with
agents…but it is an honor to represent a
company that ‘walks the talk.’”
voices of
“Your storm team worked for three
weeks and closed over 80% of the hail
claims. The ‘advertising’ we received from
this service cannot be purchased.”
experience
“Our insured would not change
companies for the lower premium.
The service has been excellent and
that was the final deciding factor.”
Cincinnati Financial Corporation
Our mission is 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; by producing
competitive, up-to-date products and services; and by developing associates
committed to superior service.
Cincinnati Financial Corporation, formed in 1968, has six subsidiaries:
• The Cincinnati Insurance Company, the lead property and casualty insurance
subsidiary, was founded in 1950. It now markets a broad range of business and
personal policies in 29 states, operating with a strong customer focus on an elite
corps of 978 local independent agencies.
• The Cincinnati Casualty Company and The Cincinnati Indemnity Company
round out the A++ rated property and casualty group.
• The Cincinnati Life Insurance Company markets life, health and accident policies.
• CFC Investment Company complements the insurance subsidiaries with leasing,
financing and real estate services.
• CinFin Capital Management Company, which began operating in 1999, offers
investment management services to corporations, institutions and high net
worth individuals.
The Company’s investment portfolio, the primary source of profits, employs a total
return strategy with an equity focus. The portfolio produces current earnings and
long-term appreciation, leading in 1998 to record book value and the 38th
consecutive year of increased cash dividends to shareholders.
Contents
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . 1
Letter to Our Shareholders . . . . . . . . . . . . . . . 2-5
Reports on Subsidiary Companies . . . . . . . . 6-13
Selected Financial Information . . . . . . . . . . 14-15
Management Discussion . . . . . . . . . . . . . . . 16-22
Selected Quarterly Financial Data . . . . . . . . . . 22
Responsibility for Financial Statements . . . . . 23
Independent Auditors’ Report . . . . . . . . . . . . . 23
Consolidated Financial Statements . . . . . . 24-27
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . 28-35
Subsidiary Officers and Directors . . . . . . . . 36-37
Corporate Officers and Directors . . . . . . . . . . . 38
Shareholder Information and
Price Range of Common Stock . . . . . . . . . . 39
Revenues
(in millions of dollars)
2,054.3
1,942.4
1,808.7
1,655.7
1,512.5
95
94
96
Revenues advanced 5.8% in 1998
to an all-time high.
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98
Book Value*
Per Common Share
(in dollars)
33.72
28.35
18.95
15.92
11.65
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*Adjusted to reflect 5% stock
dividends paid in April 1995
and 1996 and a 3-for-1 stock
split paid in May 1998.
1998 book value rose 18.9%. Return on
equity, including net unrealized gains,
was 19.6%.
Financial Highlights
Cincinnati Financial Corporation and Subsidiaries
Comparative results 1998-1997
(000’s omitted except per share data and ratios)
1998
1997
% Change
OPERATING PERFORMANCE
Revenues ........................................ $ 2,054,289
307,107
Income Before Income Taxes ..........
199,116
Net Operating Income ..................
42,451
Net Capital Gains (After Tax) ........
241,567
Net Income ..............................
$ 1,942,384
394,559
254,375
45,000
299,375
5.8
(22.2)
(21.7)
(5.7)
(19.3)
FINANCIAL POSITION
Total Assets ....................................
Shareholders’ Equity ......................
11,086,503
5,620,936
9,493,425
4,716,965
16.8
19.2
PER SHARE DATA
Net Operating Income ..................
Net Capital Gains ..........................
Net Income ..............................
Net Income (Diluted) ..............
Dividends Declared ........................
Book Value ....................................
Average Shares Outstanding ..........
1.19
.26
1.45
1.41
.61 1⁄3
33.72
166,821
1.54
.27
1.81
1.77
.54 2⁄3
28.35
165,538
PERFORMANCE RATIOS
Combined Ratio ............................
Return on Equity ..........................
Return on Equity Including Net
Unrealized Gain and Loss ........
103.6
4.7
19.6
97.7
7.6
42.6
(22.7)
(3.7)
(19.9)
(20.3)
12.2
18.9
.8
6.0
(38.2)
(54.0)
Per share amounts reflect the effects of a three-for-one stock split effective to shareholders of record on
April 24, 1998.
This report contains forward-looking statements that involve potential risks and
uncertainties. Please see the Management Discussion, page 16, for factors that could
cause results to differ materially from those discussed.
To Our Shareholders
VOICES OF STRATEGY
A strong customer focus on the local independent agent drives the strategies that
differentiate Cincinnati Financial Corporation and The Cincinnati Insurance Companies:
• A flat operating structure—a single headquarters and no branch offices—saves money and
speeds response time to our customers.
• A strong local field presence gives us a field underwriting advantage and service
superiority in claims and other areas.
• Exclusivity of our agency contract creates a valued franchise, fueling growth through
increased penetration of agencies and easier entry into new territories.
• Agent access to executive management boosts our knowledge of markets and positions us
to respond quickly to changes.
• Underwriting for a profit gives us a cushion to ride out market disruptions, preserving
agent and customer relationships.
• A total return investment strategy enhances shareholder value by stabilizing earnings and
increasing net worth.
• Exceptional financial strength means we can change and grow while maintaining the high
ratings that help agents sell our products to preferred risks.
These strategies share two subtexts. First, their effective implementation depends on
talented, can-do people willing to work above and beyond the call. It requires the executive
to travel, the underwriter to stay on the phone and find a solution, the claims representative
to provide around-the-clock service with genuine concern and care, the marketing
representative to call on each agent regularly and ask for business, the investment manager to
meet and monitor management of the companies selected for our portfolio.
Secondly, these strategies require those people to be exceptional listeners, ready to respond
flexibly to individual agents and individual accounts. While other insurers make wholesale
moves in and out of entire markets, territories and lines, Cincinnati people do the detail
work that lets us stay the course. They listen and learn, then tailor decisions and programs in
each case.
This report brings you the voices of a few of the people responsible for weaving these
strategies into a synergistic system and translating them into action. These are Cincinnati’s
voices of strategy, voices that take their power from the experience of working hard and
listening closely.
What is your assessment of
Cincinnati Financial Corporation’s
1998 results?
President and CEO Bob Morgan:
“After an outstanding 1997 and first quarter
1998, we had disappointing results for the
remaining quarters and for the year. The
variable in our results over the past 30 years has
been the amount of major storm activity in the
areas where we write insurance. 1998 was
unusual. Seventeen catastrophe-level storms hit
every state where we operate except North
Dakota and Montana.
“Net income was $241.6 million, a tough
comparison to almost $300 million for
1997. Net operating income for 1998 was
$199.1 million, higher than any year except
“Our expense ratio continues to trend
down after a lot of technological
investment, and we continue to grow at
more than double the industry average.”
1997 and not so bad considering our
$93.5 million bill for this year’s catastrophes.
There are positive signs. Our expense ratio
continues to trend down after a lot of
technological investment, and we continue to
grow at more than double the industry average.”
Chairman and Chief Operating Officer
Jack Schiff, Jr.:
“I agree with Bob. Our expenses are modest.
We’re in pretty good shape with investment
income higher than ever, $368 million before
taxes, and a healthy balance sheet. CFC’s
investment focus on equities made for a good
year from the standpoint of overall appreciation
and our book value rose about 19 percent to
$33.72. Numbers don’t tell the whole story—
our agents are optimistic, our field claims staff
is stronger and our geographic scope is wider.”
How has the management transition
announced last April worked?
Bob Morgan:
“CFC is at a turning point, ready for the
next generation of leaders. 1998 marked the
retirement of senior officers Bill Camp,
President of CFC Investment Company, and
Frank Love, Senior Vice President of
Administrative Services. And in November, we
appointed a new director, E. Anthony Woods,
President and Chief Executive Officer of
Deaconess Associations, Inc., a health care
organization. He fills the seat formerly held by
Jack Schiff, Sr., who died this past October. In
1991, I took over from Jack as Chief Executive
Officer. Now I’m preparing to retire this April
myself and turn over CEO responsibilities to
Jack Schiff, Jr.
“He’s had 30 years of the best possible
training—running an independent agency plus
serving as Chairman of CFC’s board. Because
he has traveled and seen agents and participated
in sales meetings for 15 years, it’s been a
smooth transition. He has eased into control
over all operational areas. People are secure
with the change. Agents would tell you it’s been
business as usual—and the agent is our
customer.”
Jack Schiff, Jr.:
“The biggest challenge is to adjust to a faster
pace than I ever imagined. I am blessed because
Net Income/
Dividends Paid*
Per Common Share
(in dollars)
Net Income
Dividends Paid
1.81
1.45
1.36
1.34
1.21
.59 ⁄2 3
.53 ⁄1 3
.47 ⁄2 3
.37 ⁄1 3
.42
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*Adjusted to reflect 5% stock
dividends paid in April 1995
and 1996 and a 3-for-1 stock
split paid in May 1998.
Dividends paid rose for the 38th
consecutive year.
Net Operating
Income*
Per Common Share
(in Dollars)
1.54
1.24
1.13
1.15
1.19
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95
96
97
98
*Adjusted to reflect 5% stock
dividends paid in April 1995
and 1996 and a 3-for-1 stock
split paid in May 1998.
1998 earnings included 36 cents
for catastrophe losses.
3
subsidiary, CinFin Capital Management, gives
us the potential to generate fee-based income
by making our internal investment expertise
available externally.”
Jack Schiff, Jr.:
“Our best opportunity for revenue and
earnings growth is going to be these same local
agents. As they merge and become larger, we
will increase our volume and penetration. Plus,
we’ll appoint a high caliber of agencies in new
and existing states and territories to offset
merged agencies, keeping our agency
appointments under 1,000, which is an
optimal number for maintaining personal
relationships. We’ll look at expanding into
states contiguous to existing territories, states
with favorable regulatory environments. We’re
working on Utah and Idaho for 1999.”
What is CFC doing to increase
shareholder value?
Jack Schiff, Jr.:
“Our fundamentals are sound and our
performance over the long run should reward
investors who stay with us through difficult
periods like 1998. We are committed to
consistent growth of shareholder value. 1998
was our 38th consecutive year of increased cash
dividends. Dividends paid per share rose to
592⁄3 cents in 1998 from 17 cents in 1988,
adjusted for stock dividends and splits,
“We’ll look at expanding into states
contiguous to existing territories, states with
favorable regulatory environments. We’re
working on Utah and Idaho for 1999.”
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Chairman and Chief Operating Officer
John J. Schiff, Jr., CPCU and
President and Chief Executive Officer
Robert B. Morgan, in front of the
Company’s expanding headquarters site
in Fairfield, Ohio.
4
over all operational areas. People are
“Jack Schiff, Jr., has eased into control
secure with the change.”
Bob has put into place experienced managers
with good judgment, dedication and job
knowledge. They carry the day.”
What will be the most significant
sources of growth in the future?
Bob Morgan:
“We’ll grow by identifying the specialty
policies and products agents want most. We
write as much of an agent’s book of business as
we can so they can meet the needs of their
clients without the expense of working with
additional specialty carriers. We’ll develop
broad coverages without a lot of exclusions
because that’s what our customers want.
We’ll offer one-stop service by increasing the
profile of our life insurance and leasing arms
over the coming years. And our newest
“Our fundamentals are sound and our
performance over the long run should
reward investors who stay with us through
difficult periods like 1998.”
including a three-for-one in May. That’s a
13.4 percent compound growth rate for the ten
years through 1998. We’ve declared a
10.9 percent increase in the cash dividend for
1999’s first quarter, raising the indicated
annual dividend to 68 cents per share.”
Bob Morgan:
“We believe the Company’s common stock
represents an attractive investment, with its
price currently below year-end book value.
Recently, the Board authorized repurchase of
up to 17 million shares by year-end 2000. We
plan to buy back about 10 percent of our
outstanding shares, and we’ve increased our
quarterly dividend 10.9 percent, to affirm our
confidence in our people, our business strategy
and outlook for the future.”
Robert B. Morgan
President and Chief Executive Officer
John J. Schiff, Jr., CPCU
Chairman and Chief Operating Officer
Remembering
JOHN J. SCHIFF, 1916-1998
Independent Insurance Agent
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Of all of the ways to
describe Jack Schiff, the
phrase that brought him the
most honor was
“independent insurance
agent.” Jack became an
independent agent in 1938,
founding the John J. Schiff
Agency. After serving in the
U.S. Navy during World
War II, he proposed an
idea to three other Ohio
agents—Harry M. Turner,
Chester T. Field and
Robert C. Schiff. Jack
conceived of “a company sponsored by excellent agents and one that would
build the relationship of partnership with agents.”
Jack Schiff and The Ohio State University Marching Band
In 1950, they organized The Cincinnati Insurance Company. Success
broadened the scope of the enterprise, creating Cincinnati Financial
Corporation, now a Fortune 1000 corporation with six subsidiaries. Yet
Jack never stopped being an agent, first and foremost. He remained a
licensed and active agent for several years after retiring as Chief Executive
Officer of Cincinnati Financial Corporation in 1991.
Jack worked with boundless energy to show that local independent
agents are the best way to deliver the industry’s benefits to the public.
While many insurers see independent agents as a distribution channel,
Jack’s company saw them as founders, directors on the Board and
executive officers. Today, seven agent directors have voices on the
Cincinnati Financial Board; and senior officers, including Jack Schiff, Jr.,
Larry Plum, J.F. Scherer and Tom Joseph, speak from years of agency
experience. Jack’s voice lives on in traditions born of the agency
experience and nurtured in our Company:
“Take care of your pennies and the dollars will take care of themselves.”
Well-managed agencies control postage and paper costs and get better
results by doing business in person. Today, Cincinnati has low company
expenses and a reputation for person-to-person relationships.
“Where the arts flourish, business also prospers.” Local agents forge strong
connections to their communities, taking the lead in creating and
protecting quality of life. Today, the Company supports the arts, schools
and charities with volunteers and dollars.
“Insurance is the business of trust.” Agents build a network of clients by
earning and rewarding loyal friends. Today, the Company Jack built
merges a strong work ethic with the Golden Rule, offering policies and
claim service that treat people the way we would want to be treated.
That’s his legacy, the legacy of an “excellent agent”…and our pledge.
5
Operations Review
VOICES OF EXPERIENCE
The agent/customer-driven strategies described in the preceding pages form the
foundation for CFC’s action plans and achievements. In the next pages, you’ll hear from
executives with hands-on experience working out the details of our processes, products
and services.
Many of CFC’s managers and executives are homegrown and most have cross-trained
for years in several operational areas, developing an integrated understanding of the
agents’ needs. All of them have learned to tune in the agent’s voice and let it guide CFC
to continuous improvements.
In this operations review, these “voices of experience” join Bob Morgan and Jack
Schiff, Jr., to respond to issues of 1998 and beyond:
Theodore F. Elchynski is CFC’s Chief Financial Officer, head of the Accounting and
Shareholder Services Departments and President of CFC Investment Company. Ted has
served CFC for 38 years.
Thomas A. Joseph, CPCU, leads the Commercial Lines Department. Tom’s 21-year
association with CFC includes agency, marketing, information systems and claims
experience.
James G. Miller, CFC’s Chief Investment Officer and President of the newly formed
CinFin Capital Management Company, joined the Company in 1966.
Larry R. Plum, CPCU, was a local independent agent in Circleville, Ohio, for 15
years before joining CFC 11 years ago. He heads the Personal Lines Department and is
President of The Cincinnati Casualty Company.
David H. Popplewell, FALU, LLIF, joined the Company in 1997, bringing 30 years
of life insurance experience to his position as President and Chief Operating Officer of
The Cincinnati Life Insurance Company.
J.F Scherer’s 25 years of experience include ten in his family’s Ironton, Ohio agency.
As head of the Sales & Marketing Department, he directs field marketing
representatives and agency relationships.
Timothy L. Timmel is Senior Vice President of Operations, with responsibility for
staff departments including Claims, Field Claims, Legal, Government Relations,
Personnel, Education and Publications. He has 28 years of CFC experience.
Net Written
Premium
CFC Property Casualty
Companies
(in millions of dollars)
1,557.6
1,471.6
1,383.5
1,295.9
1,190.8
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New business more than offset soft
pricing in 1998.
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Premium Growth
Rate
Estimated Industry Average
CFC
8.8
6.8
6.4
6.0
3.8
3.6
3.4
2.8
5.8
1.7
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CFC premiums grew three times
faster than the industry in 1998.
6
Is CFC’s geographical expansion
driving higher catastrophe losses?
Are you changing the way you work
with agents?
Bob Morgan:
J.F. Scherer:
“No. Broader geographical scope is a
positive. Roughly 75 percent of 1998
catastrophe losses occurred in core states—the
dozen highest volume states where we’ve
marketed for 15 years or longer. We had about
$100 million in business from states entered
since 1994—Maryland, Arkansas, Minnesota,
North Dakota, Montana and New York. We’re
on a good pace but don’t have the volume that
creates catastrophe exposure.”
J.F. Scherer:
“Generally, we launch new territories with
commercial business, appointing agencies for
personal lines as the relationship becomes
established and they understand our field
underwriting philosophy. While we’re moving
more quickly now to introduce personal lines,
those newer states just don’t have the
concentration of personal policies often
associated with catastrophe claims.”
“Field personnel operate out of their
homes and come around often to build
personal relationships. They will
tackle just about anything and it makes
life easier.”
John H. Root, The A.C. Root Agency, Inc., Clinton, IA
“Many companies tell us how much
they value their relationships with
agents…but it is an honor to represent a
company that ‘walks the talk.’”
Terry L. Williams, CIC, Langford Insurance Agency,
Vienna, VA
“We don’t take a cookie-cutter approach to
who represents us and how we treat them. Our
agencies come in all sizes and have different
appetites. Our job is to be quick and flexible
enough to stay attuned to larger, as well as
smaller, agencies. Marketing
representatives in the field have
an enormous amount of
authority and decision-making
flexibility to work with each
agency differently, as justified by
the particular circumstance.
“We’ll ask agents to
consolidate the carriers in their
offices and give us a larger portion of their
business. Average agency volume is about
$8.8 million and our part of that is about
$1.6 million per agency, just shy of 20 percent
penetration. There is opportunity.”
Jack Schiff, Jr.:
“We continue to help them build their own
success in their communities. Agencies can
differentiate themselves by having an exclusive
Cincinnati contract and getting the benefits of
our claim service for their policyholders. We
give them a valuable franchise.”
How will you increase agency
penetration?
Tim Timmel:
Tom Joseph:
“Hail in Kentucky and Hurricane Georges
“More and better insurance products extend
across several southern states led this year’s
storm claims activity. Only two of our 29 states
escaped this year’s severe weather, and those
were North Dakota and Montana, two newer
states.”
our capabilities to meet changing needs. For
example, this year we introduced Worldwide
Commercial General Liability, Actual Loss
Sustained Business Income and Contractors’
Limited Pollution Liability. We updated our
7
Building and Personal Property coverage form
and package policies for artisan contractors and
religious institutions.”
“It was my first experience working
with the special risks unit. Thanks
Larry Plum:
“We’ll make doing business with Cincinnati
easier. We’ll offer agencies incentive loans,
agency perpetuation planning, advice from
management consultants and peer roundtables.
In 1998, we started sending people into agents’
offices to process the transfer of blocks of
business from other carriers to Cincinnati. In
1999, we’ll help agents develop best practices
for personal lines marketing. In 2000, agents
will have a new direct bill option.”
“Cincinnati is by far the best in the
commercial market. Their umbrella is as
broad as I’ve seen and their rates are
competitive.”Dick Lash, Hubbard-Insurance Agency, Farmville, VA
for your ‘We can make this happen!’
approach.”Michael S. Steiner, CPCU, CIC, Steiner Insurance
Agency, Inc., Wooster, OH
J.F. Scherer:
“Carriers are standing in line to write
policies at any price. Our greatest strength is
informed and experienced underwriters sitting
in the agent’s office or the policyholder’s
business and discerning if we should accept the
risk, if it needs an innovative form, what price
should be charged. That’s why agents gave
Cincinnati $218 million of new business in
1998, enough to offset soft pricing and increase
property and casualty net written premiums
5.8 percent. Commercial premiums grew
3.3 percent with a 61 percent loss ratio. We
balance growth and profitability.”
Bob Morgan:
Tom Joseph:
“We’ll ask for business. Marketing
representatives, executives, underwriters…we’ll
all increase our presence in agencies.”
100.3
What is CFC doing to overcome
commercial marketplace challenges?
Jack Schiff, Jr.:
“We have the underwriting expertise and
discipline to leave business on the table when
there is no reasonable profit expectation. Years
of industry price competition have created thin
margins, so we look closely at risks with
unsatisfactory loss records and sustain the
relationship by correcting the rate. We
nurture the agency relationship and encourage
renewal business.”
“We compete on value more than price.
That means rapid quoting ability, claim service
superiority, loss control services for workers’
compensation accounts, broad coverages
backed by financial strength. We are
positioning ourselves to handle larger, more
sophisticated accounts. We have filings in all
50 states so we can handle multi-state risks.
“Our claims representative met me at
an insured’s on a holiday to assess a loss
and made instant contacts with VIP
clients at our request.”Steven L. Squires, CPCU, CIC
Norman E. Johnson, Inc., Madison, WI
Combined Loss and
Expense Ratio* on
Property Casualty
Business
Estimated Industry Average
CFC
107.2
105.1
104.7
103.0
103.6
103.5
100.6
99.4
99.9
97.7
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*Before policyholder dividends
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CFC’s highest ever ratio matched the
industry performance in 1998.
Excluding
Catastrophe Losses
Combined Loss and
Expense Ratio* on
Property Casualty Business
Estimated Industry Average
CFC
101.8 101.9
100.8
98.8
98.9
98.3
97.3
97.5
95.9
95
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*Before policyholder dividends
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CFC’s 1998 catastrophe losses
masked consistently superior
underwriting results.
8
Our special accounts unit
helped remove barriers to
writing 82 new jumbo
accounts with premiums
averaging over $100,000 each.”
What is CFC doing to
drive profitable growth
in personal lines?
Bob Morgan:
“Profitable is the operative
word. While personal
insurance premiums grew
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11 percent in 1998, the loss ratio was
73.8 percent. We’re addressing this with
homeowners rate increases in the three to five
percent range in selected territories and with a
1999 re-underwriting program for about
200 agencies.”
Larry Plum:
“Cincinnati maintains quality features other
insurers have restricted, such as our guaranteed
replacement cost, a three-year guarantee that
rates won’t increase, water damage coverage and
an economic way to cover home businesses. In
1999, we’ll have electronic transfer technology
in our property casualty worksite marketing
program. It will give us billing flexibility to be a
player as the payroll deduction market takes off.”
While firefighters still battled hot spots, the
policyholder received a check to pay for
restoration of a damaged building and
demolition of two destroyed buildings in
Winston-Salem, NC. This was CFC’s
largest fire loss ever. Left to right: W. David
Shannon, President of Wolf Pond
Development Corp, the policyholder;
Agent Buddy L. McSwain, CPCU, CIC,
President of The Phoenix Company;
James F. Callahan, CPCU, AIC,
Cincinnati’s Field Claims Manager.
J.F. Scherer:
“More agents are recognizing the stability a
solid personal lines book brings and how
welcome that is. We allow the agent both the
responsibility and privilege of deciding which
policyholders get written. Cross-functional
teams of marketing, underwriting, claims and
information systems people continue to show
agents the why and how of rolling over
profitable business, moving it to Cincinnati
from other carriers less
committed to this marketplace
and to agency distribution.”
“Thank you. Cincinnati has once again
proven why our agency’s trust in placing
Are changes initiated by
Cincinnati Life’s new
leaders having an
impact?
Ted Elchynski:
two-thirds of our volume with you is not
misplaced.”
Chuck Mason, Mason Insurance Agency, Inc., Orange, VA
“Cincinnati Life’s net income decreased to
$21.5 million this year from $29.2 million last
9
year. The difference came from a $6.5 million
swing in net realized capital gains and higher
expenses to revamp the product line and
expand distribution.”
Dave Popplewell:
“Activity is already picking up with
introduction of our first wave of LifeHorizons
brand products. In the second half of 1998, we
introduced a new non-smoker worksite
marketing product agents like, plus
competitive term insurance products and a
Roth IRA. Net written premiums rose
production goal. We couldn’t have done it
“Our agency exceeded our 1998 life
without your brilliant underwriting.”
Bob Redel, CLU, ChFC, LUTCF, AEP,
Naught-Naught Agency, Jefferson City, MO
Net Premium
Income
The Cincinnati Life
Insurance Company
(in millions of dollars)
70.1
62.9
56.4
50.9
49.1
94
95
96
97
98
Total life, health, accident and
annuity premiums earned rose
11.5% in 1998.
10
20 percent. We project that premiums could
grow at a 15-20 percent compound rate over
the next five years.
“1999 roll-outs will include more products
where we have a core competency, like Long-
Term Guarantee Universal Life and Last
Survivor Universal Life. We’re working on
giving agents a complete line, supplying non-
core products through private label agreements
with a third party—long-term care, disability
income and equity products, including variable
life. Cincinnati Life should be ready to meet
the needs of 80-85 percent of an agent’s clients.
Agents will have a full range of choices to fund
retirements and estate plans, preserve assets,
provide pure life protection for some folks and
appeal to others who want interest-sensitive
products.”
What steps are planned to increase the
contribution from this business area?
Dave Popplewell:
“We’ll increase penetration in property
casualty agencies with this new generation of
policies, and we’ll develop an increased role for
regional directors in finding business life
solutions for commercial lines customers. To
lower unit costs and accelerate revenues, we’ve
started to appoint independent life agents and
worksite marketers in Texas, California and
other locations where Cincinnati has chosen
not to have a property casualty presence. We
can leverage our worksite marketing expertise
and that’s a booming market.”
Bob Morgan:
“Our professionalism and knowledge of the
market surpasses our competitors. We have a
better persistency ratio than our competitors.
Our goal, over the next five years, is to more
than double this year’s $110 million of written
premium. People are going to be excited about
the results.”
How does your leasing company
complement the insurance operations?
Ted Elchynski:
“CFC Investment Company increased
revenues 16.7 percent and net income
“It is phenomenal how quickly your
department responds when it really
counts—at the time the promise of the
policy is completed.”Dannie R. Fouts, CLU, Hummel & Plum
Life Insurance Agency, Circleville, OH
36.5 percent in 1998, to just over $3 million.
That’s mainly from vehicle and equipment
leasing and financing services we make
available to agents and their business insurance
customers. This year we initiated a real estate
mortgage program for owner-occupied
buildings and wrote a lot of incentive leases for
agents who agreed to meet premium
production goals. We wrote a $1 million lease
this year for a Maryland agent and see some
golden opportunities to write more of these
larger leases. Our growing field staff is calling
on agents and their business policyholders in
more areas.”
What progress is CFC making toward
your $2 billion premium goal?
J.F. Scherer:
“Two years ago, our planning committee
looked ahead at all of the milestones we’ll
reach in the year 2000. It will be our
50th anniversary and our new $65 million
headquarters building will be completed. Our
new CEO will be in place and major
technology initiatives will cause dramatic
changes as agents, field associates and
headquarters share policy information via an
intranet. We suggested an ambitious goal for
total property casualty and life premiums,
$2 billion in direct written premium for the
year 2000, to get our associates and agents on
board for these changes and geared up to make
the most of the opportunities they bring.”
“Our insured would not change
companies for the lower premium. The
service has been excellent and that was the
final deciding factor.”
John D. Smith, CIC, Clark/Colton Insurance
Agency, Inc., Hinsdale, NH
growth with profitability. But
the goal was never about just
reaching some magical
premium level. It’s about
improving our processes,
taking our service and
technology to the next level,
inviting associates at all levels
to step forward with ideas and take ownership
of the Company’s success in the next
millennium. That’s where we see clear
progress.”
Tim Timmel:
“Operationally, we’re continuing to be
innovative and productive. By educating
associates, adopting the team approach and
targeting process improvement, the commercial
lines area handled 14 percent more files with
no additional work hours and 27 percent fewer
processing errors in 1998 versus 1997. They are
now sending out cross-sell information about
leasing services with their
policies, dissolving department
boundaries to meet corporate
goals. The Claims Department
reduced glass replacement costs
while preserving customer
choice, potentially saving about
$2 million per year. And
they’ve offered claimants the
settlement option of Cincinnati Life annuities,
doubling the structured settlement annuities
written in 1998 to $16.7 million.”
“Cincinnati’s loss control
recommendations are based on sound risk
management principles and are well
received by our clients.”Ken Kratovil, ARM, AAI
Wagner Agency, Inc., Pittsburgh, PA
11
Jack Schiff, Jr.:
Ted Elchynski:
“This year’s total direct written premiums
exceeded $1.7 billion. The year 2000 goal may
yet be attainable with great effort and help
from the marketplace, in the form of firmer
prices for some commercial lines. We’ll balance
“Associates have increased their knowledge
and skills to prepare for challenges of the next
few years. Technology training for systems like
the one implemented this year for accounting is
extensive. Over the years leading up to 2000,
we’re investing $9.5 million to upgrade or
replace systems. Ninety percent of that work is
done now. Costs are now leveling off, but we’ll
continue to see benefits of increased efficiency in
areas from claims to underwriting and from
personnel to life insurance.”
“I was impressed with the corporate
culture and accessibility of the executives.
Your people and their collective
experience is your greatest asset.”
John Daloisio, CPCU, CLU, Echnoz, Scalzott &
Schutzman Insurance Group, Kittanning, PA
How did CFC’s investment portfolio
perform in 1998?
Jim Miller:
“Our 5.6 percent growth rate for investment
income was very good by industry standards.
Income of $368 million was a record, yet short
of the double-digit growth we target internally
for two reasons. One, we had less cash to invest
due to catastrophe claims payments. Two, low
interest rates led to a high rate of bond calls
and proceeds couldn’t be reinvested at
comparable yields. That’s why we invested in
shorter-term bonds, keeping those funds
liquid, and in tax-exempt municipal bonds,
where higher after-tax yields flow to net
income. Plus, we repurchased 736,240 shares
of CFC stock during 1998, paying $33.86 per
share on average. ”
Jack Schiff, Jr.:
“On the bright side, dividends from our
equity portfolio rose. We’re concentrated in
57 stocks and 43 of them announced dividend
increases in 1998, adding $16.4 million to
annualized dividend income. We have an
equity focus and a total return philosophy, so
we look to equities for both income and
appreciation. At the end of 1998, equity values
rose, increasing net worth. The balance sheet
shows shareholders’ equity up 19.2 percent to
$5.621 billion and assets up 16.8 percent to
$11.087 billion. Those are all-time highs.”
Bob Morgan
“Our investment team really has an expertise
in high-yield bonds, municipal bonds,
convertibles and common stock. We formed
CinFin Capital Management this year and will
begin during 1999 to offer asset management
services externally, to other companies and
insurance agencies. We’ll start slowly in Ohio
then expand to other states where we market
insurance, over the coming years.”
Are Cincinnati Financial’s strengths
documented by objective, external
evaluation?
Jim Miller:
“This was Cincinnati Financial’s first full
year in the S&P 500 Index, and we think that’s
a comment on our consistency and strength.
Standard & Poor’s evaluated our financial
strength as AA- and Moody’s gave us an A2 for
our 30-year senior debenture offering in May.
They assigned an Aa3 insurance rating to the
property casualty group, looking at our strong
franchise as a regional agency underwriter,
sound balance sheet with modest leverage and
above-average underwriting profitability.”
J.F. Scherer:
“Having the highest Best’s rating, A++ Superior,
shows the financial strength of our insurance
companies. Independent surveys confirm our
Investment
Income
Less Expenses
(in millions of dollars)
368.0
348.6
327.3
300.0
262.6
94
95
96
97
98
Increased dividends from the
common stock portfolio were the
primary source of 1998 growth.
12
product and service strengths, too.
Crittenden’sTM Property/Casualty Ratings
newsletter surveys thousands of agents across
the country. They selected Cincinnati as the
leading writer of commercial lines, with the
best Business-
owners Policy
in the Mid-
west and the
best umbrella
liability,
inland marine
and commercial
auto coverages
nationwide. A
consumer magazine ranked Cincinnati among
the top personal auto insurers. These ratings
really help our agents at the point of sale.”
r
e
t
n
e
C
d
o
o
l
B
h
t
r
o
w
x
o
H
y
s
e
t
r
u
o
C
f
o
y
h
p
a
r
g
o
t
o
h
P
e
e
L
-
k
c
i
r
n
e
K
c
M
What does CFC do to benefit the
general public, as well as agents,
policyholders and shareholders?
Bob Morgan chaired the 1997-98
Hoxworth Blood Center’s Business
Campaign. CFC associates turned out
for the largest single-day blood drive in
the center’s history. Right: Kerri A.
Vanlandingham, Personnel Department;
below, Bob Morgan.
Dave Popplewell:
Bob Morgan:
“Cincinnati’s new AA+ rating from Standard
& Poor’s will help attract independent life
agencies we plan to appoint in areas where
Cincinnati isn’t already a known name.
Cincinnati Life, as well as the Cincinnati
property casualty group, qualified again for
Ward Financial Group’s Benchmark 50. That’s
a list of insurers that give the best value to
shareholders and policyholders, as measured by
five years of quantitative data.”
“Your storm team worked for three
weeks and closed over 80 percent of the
hail claims. The ‘advertising’ we received
from this service cannot be purchased.”
John D. Van Groll, Insurance Management, Inc.,
Little Chute, WI
“Cincinnati Financial is an active corporate
citizen. We work with the community, especially
in the arts and education areas. Key executives
lend their leadership, associates volunteer their
service, and we support well-managed nonprofits
with modest financial contributions. It’s also our
duty to proactively study
regulatory and legislative issues
that could impact the
Company’s ability to do our
best for shareholders and
policyholders. In 1999, we’ll
work to support a proposal
allowing insurers to set up
policyholder safety reserves for
future catastrophe losses. We’ll monitor the
financial services modernization debate and urge
Congress to pass legislation that preserves state
regulation of insurance.”
“I commend your support and thank
you for your interest and dedication to
our young people. It is refreshing to have
the support of the community behind us.”
Karen Norton, Business Education,
Midview High School, Grafton, OH
13
Selected Financial Information
(000’s omitted except per share data and ratios)
Cincinnati Financial Corporation and Subsidiaries
TOTAL ASSETS ..........................................
LONG-TERM OBLIGATIONS..................
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)........................
CASH DIVIDENDS DECLARED
Per Common Share ........................................
CASH DIVIDENDS PAID
Per Common Share ........................................
00000000000$0000,000
1998
$11,086,503
$ 471,520
$ 1,612,735
367,993
65,309
8,252
$ 199,116
1.19
$
$
$
241,567
1.45
1.41
.611⁄3
.592⁄3
PROPERTY AND CASUALTY OPERATIONS
Gross Premiums Written ................................
Net Premiums Written ..................................
Premiums Earned ..........................................
$ 1,656,476
1,557,581
1,542,639
Loss Ratio......................................................
Loss Expense Ratio ........................................
Underwriting Expense Ratio..........................
Combined Ratio............................................
65.4%
9.3%
28.9%
103.6%
00000000000$0000,000
00000000000$00,000
Years Ended December 31,
1997
$9,493,425
58,430
$
1996
$7,045,514
79,847
$
00000000000$00,000
$1,516,378
348,597
69,230
8,179
$ 254,375
1.54
$ 299,375
1.81
1.77
$
$
.542⁄3
.531⁄3
$1,566,688
1,471,603
1,453,526
58.3%
10.1%
29.3%
97.7%
00000000000$00,000
$1,422,897
327,307
47,946
10,599
$ 192,595
1.15
$ 223,760
1.34
1.31
$
$
.482⁄3
.472⁄3
$1,476,011
1,383,525
1,366,544
61.6%
13.8%
27.6%
103.0%
00000000000$00,000
00000000000$00,000
1995
$6,109,298
$ 80,000
$1,314,126
300,015
30,781
10,729
$ 207,342
1.24
$ 227,350
1.36
1.33
$
$
.422⁄3
.42
$1,377,426
1,295,852
1,263,257
57.6%
14.7%
27.1%
99.4%
00000000000$00,000
Investment Income Before Taxes....................
Property and Casualty Reserves
Unearned Premiums ......................................
Losses ............................................................
Loss Adjustment Expense ..............................
$
$
203,919
$ 199,427
$ 190,318
$ 180,074
432,436
1,432,212
408,113
$ 418,465
1,373,950
402,698
$ 401,562
1,319,286
383,135
$ 385,418
1,274,180
306,570
Statutory Policyholders’ Surplus ....................
$ 3,019,828
$2,472,532
$1,608,084
$1,268,597
*1993 earnings include a credit for $13,845 ($.08 per share) cumulative effect of a change in the method of accounting for income taxes to
conform with SFAS No. 109 and a net charge of $8,641 ($.05 per share) related to the effect of the 1993 increase in income tax rates on
deferred taxes recorded for various prior year items.
14
Cincinnati Financial Corporation and Subsidiaries
00000000000$00,000
1994
$4,734,279
80,000
$
00000000000$00,000
1993
$4,602,288
80,000
$
00000000000$00,000
1992
$4,098,713
80,000
$
00000000000$00,000
1991
$3,513,749
182
$
00000000000$00,000
Years Ended December 31,
1989
$2,602,990
753
$
1990
$2,626,156
202
$
00000000000$00,000
00000000000$00,000
1988
$2,163,341
890
$
$1,219,033
262,649
19,557
11,267
$ 188,538
1.13
$ 201,230
1.21
1.18
$
$
.382⁄3
.371⁄3
$1,287,280
1,190,824
1,169,940
63.3%
9.8%
27.5%
100.6%
00000000000$00,000
$1,140,791
239,436
51,529
10,396
$1,038,772
218,942
35,885
10,552
$ 182,530*
1.10*
$ 147,669
.90
$ 216,024*
1.30*
1.27*
$ 171,325
1.04
1.03
$ 947,576
193,220
7,641
12,698
$ 141,273
.86
$ 146,280
.90
.89
$ 871,196
167,425
1,488
8,822
$ 128,052
.79
$ 128,962
.79
.79
$ 813,313
149,285
4,678
7,134
$ 754,335
130,885
6,423
10,281
$ 111,477
.69
$ 124,618
.78
$ 114,490
.71
.70
$ 128,748
.81
.80
$
$
.34
.331⁄3
$
$
.31
.30
$
$
.272⁄3
.27
$
$
.241⁄3
.232⁄3
$
$
.22
.21
$
$
.171⁄3
.17
$1,216,766
1,123,780
1,092,135
63.5%
8.7%
27.9%
100.1%
00000000000$00,000
$1,089,901
1,014,971
992,335
63.8%
9.0%
29.0%
101.8%
00000000000$00,000
$ 996,807
930,296
903,465
$ 896,204
838,554
828,046
$ 845,346
790,971
771,205
$ 782,143
718,853
712,771
61.6%
9.2%
28.9%
99.7%
00000000000$00,000
61.6%
9.0%
29.0%
99.6%
00000000000$00,000
61.6%
9.0%
29.1%
99.7%
00000000000$00,000
55.1%
10.1%
30.7%
95.9%
00000000000$00,000
$ 162,260
$ 153,190
$ 141,958
$ 126,332
$ 110,827
$
97,661
$
84,379
$ 353,697
1,213,383
218,642
$ 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
$ 998,595
$1,011,609
$ 933,529
$ 735,557
$ 477,355
$ 494,460
$ 422,521
Per share data adjusted for three-for-one stock splits in 1998 and 1992 and stock dividends of 5 percent in 1996 and 1995.
15
Management Discussion
Cincinnati Financial Corporation and Subsidiaries
INTRODUCTION
This Management Discussion is intended to supplement the
data contained in the financial statements and related notes of
Cincinnati Financial Corporation and subsidiaries.
Cincinnati Financial Corporation (CFC) had six subsidiaries
at year-end 1998. The lead property and casualty insurance
subsidiary, The Cincinnati Insurance Company, markets a
broad range of business and personal policies in 29 states
through an elite corps of 978 independent insurance agencies.
Also engaged in the property and casualty business are
The Cincinnati Casualty Company, which works on a direct
billing basis, and The Cincinnati Indemnity Company, which
markets nonstandard policies for preferred risk accounts.
The Cincinnati Life Insurance Company markets life, health
and accident policies through property and casualty agencies
and independent life agencies. CFC Investment Company
complements the insurance subsidiaries with leasing, financing
and real estate services. Investment operations are CFC’s
primary source of profits, with a total return strategy
emphasizing investment in fixed maturities securities as well as
equity securities that contribute to current earnings through
dividend increases and add to net worth through long-term
appreciation. During 1998, the Company incorporated a sixth
subsidiary, CinFin Capital Management Company. The new
subsidiary was established to provide investment management
services to institutions, corporations and individuals with
$500,000 minimum accounts. In January 1999, CinFin started
to conduct business with approximately $150 million in assets
under management.
The following discussion, related consolidated financial
statements and accompanying notes contain certain forward-
looking statements that involve potential risks and uncertainties.
The Company’s future results could differ materially from
those discussed. Factors that could cause or contribute to such
differences include, but are not limited to: unusually high levels
of catastrophe losses due to changes in weather patterns or
other natural causes; changes in insurance regulations or
legislation that place the Company at a disadvantage in the
marketplace; recession or other economic conditions resulting
in lower demand for insurance products; sustained decline in
overall stock market values negatively impacting the Company’s
equity portfolio and the ability to generate investment income;
and the potential inability of the Company and/or the
independent agencies with which it works to complete the
necessary information system changes required to handle the
Year 2000 issue. Readers are cautioned that the Company
undertakes no obligation to review or update the forward-
looking statements included in this material.
RESULTS OF OPERATION
Overview of Results
Primarily as a result of continued market penetration and entry into
new states, CFC revenues have increased at a compound annual
rate of 7.3%, reaching $2.054 billion in 1998, with
property/casualty net written premiums growing at a 6.7% rate
to $1.558 billion over the past five years. In the same five-year
period, total net income, including realized capital gains, grew
at a 2.3% rate to $241.6 million, or $1.45 per share, from
$201.2 million, or $1.21. Net operating income increased at
a 1.8% rate to $199.1 million, or $1.19 per share, from
$188.5 million, or $1.13, in 1994. Excluding catastrophe
losses and an adjustment for SFAS No. 109 in 1993, total net
income over the five-year period grew at a compound rate of
6.9%, while net operating income increased at a 7.2% rate.
Book value grew at a 23.5% compound rate over the same
period to $33.72 per share from $11.65.
A number of factors, including the Company’s strong
reputation among independent insurance agencies and
management’s belief that the Company can achieve additional
market penetration in states in which it currently operates,
have led management to target an ambitious $2 billion in
total direct written premiums for the year 2000, up from
$1.732 billion in 1998. At the same time, the Company
seeks to generate an underwriting profit and maximize
annual growth in investment income.
The following table and discussion analyze results for the
three-year period ending December 31, 1998 and provide
insight into management’s strategic direction.
(000,000 omitted except
per share data and ratios)
1998
$2,054.3
199.1
42.5
241.6
Revenue
Net Operating Income
Net Capital Gains (after tax)
Net Income
Net Operating Income Per Share $ 1.19
.26
Net Capital Gains Per Share
$ 1.45
Net Income Per Share
Catastrophe Losses (before tax)
$ 93.5
Catastrophe Losses Per Share
Change
$
$111.9
(55.3)
(2.5)
(57.8)
$
(.35)
(.01)
(.36)
$
$ 68.0
Change
%
1997
6
(22)
(6)
(19)
(23)
(4)
(20)
267
$1,942.4
254.4
45.0
299.4
$ 1.54
.27
$ 1.81
$ 25.5
Change
$
$133.7
61.8
13.8
75.6
$ .39
.08
$ .47
$ (39.2)
Change
%
7
32
44
34
34
42
35
(60)
1996
$1,808.7
192.6
31.2
223.8
$ 1.15
.19
$ 1.34
$ 64.7
Change
$
$153.0
(14.7)
11.2
(3.5)
(.09)
.07
(.02)
$
$ 37.6
$
Change
%
9
(7)
56
(2)
(7)
58
(2)
138
(after tax)
16
.36
.26
260
.10
(.15)
(60)
.25
.15
150
Cincinnati Financial Corporation and Subsidiaries
The Company’s financial results for the three years ending
December 31, 1998 reflect growth in new insurance business
and retention of renewal customers through the Company’s
independent insurance agents, offset by highly competitive
property and casualty pricing. However, frequent and severe
storms pushed catastrophe losses to an all-time high in 1998
of $93.5 million. The previous high had been $64.7 million
in 1996. Results for 1998 do reflect the Company’s consistent
underwriting philosophy and strategy of maintaining high
underwriting standards by carefully evaluating individual risks,
reviewing agency performance and controlling overall expenses.
While the Company generated 5.6% growth in pre-tax
investment income, net operating income for 1998 declined
from the prior-year level due to catastrophe losses and large
property losses. In 1997, net operating income rose 32% and
pre-tax investment income rose 6.5%. The contribution from net
realized capital gains declined slightly in 1998 but rose in 1997,
primarily due to the sale of equity securities.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
1998
(000,000 omitted except
1997
per share data and ratios)
Gross Written Premiums
Net Written Premiums
Net Earned Premiums
Loss and LAE Ratio
Expense Ratio
Combined Ratio
$1,656.5
1,557.6
1,542.6
74.7%
28.9%
103.6%
Change
$
$ 89.8
86.0
90.1
n/a
n/a
n/a
Change
%
5.7
5.8
6.2
9.2
(1.4)
6.0
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
$1,566.7
1,471.6
1,453.5
68.4%
29.3%
97.7%
Premiums
While premium growth rates declined in 1998 and 1997, the
Company’s property and casualty group continued to increase
net written premiums at rates well above the industry average.
In 1998 and 1997, the primary source of growth was personal
lines insurance, for which net written premiums advanced
11.0% in 1998 (12.4% in 1997), while commercial lines
insurance growth was 3.3% (3.6% in 1997).
During 1998, the commercial insurance market continued
to experience the intense price competition that began prior
to 1996. The impact was seen in workers’ compensation where
market-share competition and mandated rate reductions in
some states led to renewal account discounts of as much as a
third from the previous year’s premium. Although the Company
is committed to prudent underwriting standards and emphasizing
account profitability, the lower pricing combined with large
property losses to produce a 61.1% pure loss ratio for the
commercial lines area, higher than the 53.2% reported in 1997.
As a result of the market factors, direct written premiums
from account renewals for the commercial insurance lines
declined in 1998. New business premiums offset this decline
and generated modest overall premium growth. Total new
business in direct written premiums in the property and
casualty area rose 7.6%, reaching an all-time high of
$218 million on a new business policy count of more than
148,500. Management cannot predict when the pricing
pressures in the commercial insurance area will be alleviated.
To help offset these pressures, the Company is working harder
to underwrite accounts even more closely by:
• systematically re-underwriting the personal lines book
of business,
• entering new states to expand market opportunities,
• pursuing a marketing strategy that permits field
representatives to spend more time assisting the
independent insurance agents and
• expanding its life insurance operations.
The Company sees heightened interest from independent
insurance agents in writing personal lines insurance as a means
of buffering the price competition in the commercial sector
and stabilizing their revenue. CFC is taking advantage of this
trend by encouraging independent agents to move their
proven, profitable business to the Company. Agents who are
streamlining operations by reducing the number of carriers
they represent have been rolling over entire books of business
to the Company.
Management believes CFC can achieve additional
market penetration by leveraging its strong relationships
with independent agencies and entering new states. The
Company also can distinguish itself through key competitive
advantages of the insurance products, for example three- and
five-year policies for many types of insurance coverage.
For the year 1998, approximately 97% of the Company’s
property and casualty premium volume was in states in which
the Company has had a presence since 1994 or earlier. Over
17
Management Discussion
(continued)
Cincinnati Financial Corporation and Subsidiaries
the past five years, the Company added seven marketing
representatives in established states, restructuring territories
so that each representative has fewer agencies to serve. This
has allowed field representatives to appoint additional
agencies and, more importantly, spend more time with each
agent. This program was essentially completed in 1998, with
only one marketing territory division anticipated in 1999.
Entry into new states also has been a source of premium
growth. The states the Company entered between 1994 and
1998 contributed more than $102.4 million of property and
casualty premium volume over the five-year period. A very
successful example of a new market entry is Minnesota, where
premium volume reached $18.2 million in 1998, up from
$800,000 in 1994. From 1996 through 1998, the Company
began marketing commercial lines in North Dakota, Montana
and upstate New York and added personal lines in Arkansas,
Maryland, Minnesota, North Dakota, Pennsylvania and
Vermont. Idaho and Utah have been selected to seek approval
to market the Company’s products in 1999. Three additional
states currently are being researched. The Company’s criteria
for entry into new states include a favorable regulatory climate
and no residual market.
Expenses
The Company recorded a $64.5 million statutory underwriting
loss in 1998 compared with a $24.8 million underwriting
profit in 1997 and a $45.0 million underwriting loss in 1996.
The 1998 underwriting loss, reflecting a combined ratio of
103.6%, was primarily the result of catastrophe losses, which
added 6.1 points to the loss and loss adjustment expense ratio,
as well as large fire losses. That compared with a 1.8 point
impact of catastrophe losses on a combined ratio of 97.7% in
1997. The underwriting loss in 1996, reflecting a combined
ratio of 103.0%, was the result of higher catastrophe losses, as
well as a half of one percentage point increase in the expense
ratio over 1995. Due to the nature of catastrophic events,
management is unable to predict accurately the frequency or
potential cost of such occurrences in the future; however, the
Company has continued not to market property and casualty
insurance in California, not to write flood insurance, to review
exposure to huge disasters and reduce coverage in certain
coastal regions in an effort to control such catastrophe losses.
For property catastrophes, the Company retains the first
$25 million of losses and is reinsured for 95% of losses from
$25 million up to $200 million.
After rising in 1997 and 1996, the expense ratio in 1998
declined slightly because the Company reached a sustainable
level of investment in staff and costs associated with upgrading
technology and facilities. These investments will help the
Company accommodate anticipated growth in premium
volume while making computer systems Year 2000 compliant.
(See Year 2000 discussion on page 19.)
18
As discussed in the Notes to the Consolidated Financial
Statements, the Company’s liabilities for insurance reserves are
estimated by management based upon Company experience.
The Company consistently has established property and casualty
insurance reserves, including adjustments of estimates, using
information from internal analysis and review by external
actuaries. Though uncertainty always exists as to the adequacy
of established reserves, management believes this uncertainty is
less than it otherwise would be, due to the stability of the
Company’s book of business. Such reserves are related to various
lines of business and will be paid out over future periods.
Reserves for environmental claims have been reviewed;
and the Company believes, at this time, these reserves are
adequate. Environmental exposures are minimal as a result of
the types of risks the Company has insured in the past.
Historically, most commercial accounts written post-date
coverages that afford clean-up costs and Superfund responses.
Life and Accident and Health
CFC’s life insurance subsidiary had total net premium income
for 1998 of $70.1 million, up from $62.9 million in 1997
and $56.4 million in 1996. Life insurance premiums were
$61.7 million, $54.7 million and $48.7 million, respectively.
The life insurance subsidiary contributed 12% of CFC’s
operating income in 1998 and 10% of CFC operating income
in 1997 and 1996.
During 1997, the Company hired a new president for the
life insurance subsidiary. Under his direction, the life insurance
subsidiary is expanding worksite marketing activities, intro-
ducing a competitive new life insurance product series and
researching opportunities to sell life insurance in areas where
the Company does not have property and casualty agency
representation. The initiatives, which began in the second half
of 1997, appeared to have a measurable impact on 1998
results. Management believes that opportunities exist to further
increase the life insurance subsidiary’s contribution to total
operating income through expanded life insurance sales.
Investment Income and Investments
Investment income rose 5.6% to $368.0 million in 1998 and
increased 6.5% to $348.6 million in 1997 primarily as a result
of investing the cash flows from operating activities and
collection of dividend increases from equity securities in the
investment portfolio. The slower growth rate in 1998 again
reflected the volume of fixed maturities investments being
called early and the generally lower interest rate environment.
In 1998, 43 of the 57 common stocks in the Company’s
investment portfolio increased dividends during the year,
adding more than $16.0 million to future annualized
investment earnings.
The Company’s primary investment strategy is to maintain
liquidity to meet both immediate and long-range insurance
57.9
442.2
10,325.0
46.6
530.4
8,797.1
Cincinnati Financial Corporation and Subsidiaries
Investment Assets
As of December 31
(market value in millions of dollars)
Tax-Exempt Bonds
Taxable Bonds
Common Stocks
Preferred Stock
Others
98
97
96
95
94
917.2
1,895.1
7,012.6
888.2
1,863.0
5,468.9
42.4
6,344.4
875.4
1,686.4
3,274.6
465.6
46.9
5,535.7
863.7
1,583.3
2,464.5
577.3
43.6
4,216.9
769.5 1,173.6
1,675.9 554.3
Composition of Equity Investments
As of December 31, 1998
(In millions of dollars)
Public Utilities
Industrial, Miscellaneous
Banks, Trusts and Insurance
Common Stock Portfolio by Cost
561.3
181.6
794.4
1,537.3
property
Common Stock Portfolio by Market Value
943.3
1,407.8
4,661.5
7,012.6
Preferred Stock Portfolio by Cost
252.1
405.9
115.7
38.1
Preferred Stock Portfolio by Market Value
248.8
442.2
137.2
56.2
obligations through the purchase and maintenance of medium-
risk, fixed maturity and equity securities, while earning optimal
returns on the equity portfolio through higher dividends and
capital appreciation. The Company’s investment decisions
on an individual insurance company basis are influenced by
insurance regulatory statutory requirements designed to protect
policyholders from investment risk. Cash generated from
insurance operations is invested almost entirely in corporate,
municipal, public utility and other fixed maturity securities or
equity securities. Such securities are evaluated prior to purchase
based on yield and risk.
Investments in common stocks have emphasized
securities with an annual dividend yield of at least 2-3% and
annual dividend increases. The Company’s portfolio of equity
investments had an average dividend yield to cost of 8.0%
at December 31, 1998. Management’s strategy in equity
investments includes identifying approximately ten to twelve
companies, for the core of the investment portfolio, in which
the Company can accumulate 10-20% of their common stock.
Interest and Income Taxes
The Company’s income tax expense was $65.5 million,
$95.2 million and $58.7 million for 1998, 1997 and 1996,
respectively, while the effective tax rate was 21.34%, 24.12%
and 20.77% for the same periods. The lower rates in 1998 and
1996 were partially the result of a higher percentage of net
income earned from tax-exempt interest on state, municipal and
political subdivision fixed maturities and from dividends
received on equity investments. The higher tax rate in 1997
primarily was due to the strong underwriting profit recorded for
the year and higher capital gains. The Company incurred no
additional alternative minimum tax expenses for the three years.
YEAR 2000 COMPLIANCE
Because the Company issues three- and five- year policies,
it has been working on the Year 2000 project for several years
to address potential problems within the Company’s operations
that could result from the century change. The Information
Systems Department is primarily responsible for this endeavor
and has a designated team of Company associates assigned to
this effort. This team has access to key associates in all areas of
the Company’s operations as well as to outside consultants and
resources on an as-needed basis.
The Information Systems Department provides a
comprehensive report on a quarterly basis for management
and the Audit Committee of the Board of Directors. This
report identifies progress against the plan as well as
projections on specific issues.
Percent of Hardware/Software Applications Year 2000 Compliant
Actual as of
December 31, December 31,
Planned as of Planned as of
Mission critical systems
All other systems
1998
90%
90%
1998
90%
90%
June 30,
1999
100%
100%
The Company has identified computer systems (both
hardware and software), including equipment with embedded
computer chips, that were not Year 2000 compliant; determined
what revisions or replacements would be needed to achieve
compliance; prioritized and proceeded to implement those
19
Management Discussion
(continued)
Cincinnati Financial Corporation and Subsidiaries
revisions or replacements; instituted testing procedures to ensure
that the revisions and fixes are operational; and moved the
compliant systems into production. As of December 31, 1998,
approximately 90% of the applications had either been
modified to be compliant or had been replaced by purchased
compliant systems. Additional in-depth testing, both internal
and third-party related, is planned into 1999. Management
believes that all critical systems will be Year 2000 compliant by
June 30, 1999.
As part of the overall review of Year 2000, the Company is
verifying with certain key outside vendors, and with others
where a significant business relationship exists, to determine
their Year 2000 compliance status and plans. Because the
Company markets products through independent agencies,
it is of paramount importance that those approximately
1,000 agencies (1,300 offices) successfully migrate to a Year 2000
compliant processing system. The Company is actively working
with those agencies. As of December 1998, nearly all of the
agencies’ processing systems had either been made compliant
or the agencies had plans to be compliant by June 30, 1999.
Phone and personal interviews are being used to verify the
progress of the agencies.
Contingency planning for the Year 2000 includes standard
backup and recovery procedures to be followed in the event of
a critical system failure. While management does not expect
any unusual failures as a result of specific Year 2000-related
changes, by June 30, 1999, the Company plans to develop
specific backup procedures for the Year 2000 to minimize
the effect of any potential problems.
Should the Company or a third party with whom the
Company transacts business have a system failure due to
the century change, it is believed it will not result in more
than a delay in processing or reporting, with no material
financial impact.
The Company has budgeted $9.5 million pretax to
resolve the Year 2000 issues. This would encompass the
costs of modifications, the salaries of the associates primarily
assigned to this effort and the fees of outside consultants.
As of December 31, 1998, the Company had incurred
approximately $7.9 million of these costs, with the expenses
incurred during 1998 at approximately $4.2 million.
Although the Company expects its systems to be
Year 2000 compliant on or before December 31, 1999,
it cannot predict the outcome or the success of its
Year 2000 project; or that third-party systems are or
will be Year 2000 compliant; or that the costs required
to address the Year 2000 issue or the impact of a failure
to achieve substantial Year 2000 compliance will not have
a material adverse effect on the Company’s business,
financial condition or results of operations.
20
CASH FLOW AND LIQUIDITY
(000,000 omitted)
Net cash provided by
operating activities
1998
Net cash used in investing activities
Net cash provided (used) in
financing activities
Net (decrease) increase in cash
Cash at beginning of year
Cash at end of year
Supplemental
Interest paid
Income taxes paid
1997
1996
$ 427.0
(282.5)
$ 308.3
(224.8)
$ 273.6
(320.7)
25.5
(21.6)
80.2
58.6
36.4
91.2
(124.2)
20.2
59.9
80.2
21.8
95.5
(43.7)
39.9
20.0
59.9
20.9
65.0
Cash Flow
In 1998, operating cash flows were 36% lower than 1997
because of the frequency and severity of catastrophe losses.
Over the three-year period, however, operating cash flows were
sufficient to meet operating needs and provide for financing
needs and increased investment. Management expects
operating cash flow will continue to be CFC’s primary source
of funds because no substantial changes are anticipated in the
Company’s mix of business nor are there plans to reduce
protection by ceded reinsurance agreements with financially
stable reinsurance companies. Further, the Company has no
significant exposure to assumed reinsurance. Assumed
reinsurance comprised no more than 3% of gross premiums
in each of the last three years.
The change in net cash used in investing activities reflected
the continuing trend over the three years of fixed maturity
investments being called by the issuer, offset in 1998 by
increased purchases of equity securities and in 1997 by
increased purchases of fixed maturities and equity securities.
Cash flows used in net purchases of fixed maturity and equity
securities, respectively, amounted to $107.8 million and
$153.2 million in 1998, $122.6 million and $134.1 million
in 1997, and $98.0 million and $95.4 million in 1996.
In 1998, net cash was provided in financing activities
because of the issuance of a senior debenture in the amount
of $419.6 million. Those funds were used to repay short-term
notes, to pay cash dividends and to purchase treasury shares.
For the years 1997 and 1996, the primary increases in net
cash used for financing activities were for the payment of
cash dividends and the purchase of treasury shares.
Notes Payable
Increases in notes payable, primarily short-term debt used to
enhance liquidity, were reduced from $41.1 million in 1996 to
$18.5 million in 1997. Management used short-term debt for
cash management and other purposes. In 1998, the Company
issued $420 million of 30-year senior debentures. The proceeds
were used to repay all of the short-term notes payable. The
balance will be used in the construction of an additional
Cincinnati headquarters building and for other purposes.
Dividends
CFC has increased cash dividends to shareholders for 38 consecutive
years and, periodically, the Board of Directors authorizes stock
dividends or splits. In February 1997, the CFC Board voted to
increase the regular quarterly dividend by four cents to an
indicated annual rate of $1.64 per share. On February 7, 1998,
the Board of Directors authorized a 12.2% increase, raising the
regular quarterly dividend by five cents to an indicated annual
rate of $1.84. At the same time, the Board of Directors
announced its intention to declare a three-for-one split to be
distributed on May 15, 1998, to shareholders of record as of
April 24, 1998, which was authorized on April 4, 1998, based
on shareholder approval of a proposal to increase authorized
shares to 200 million from 80 million. On February 6, 1999,
the Board of Directors authorized a 10.9% cash dividend
increase, raising the quarterly dividend by one and two-thirds
cents to an indicated annual rate of $0.68.
Since 1987, the Company’s Board has authorized three
additional stock splits or stock dividends: a 5% stock dividend
in 1996; a 5% stock dividend in 1995 and a three-for-one
stock split in 1992. After the stock split in 1998, a shareholder
who purchased one Cincinnati Insurance share before 1957
would own 1,946 Cincinnati Financial shares, if all shares from
accrued stock dividends and splits were held. The Company’s
policy for the past ten years has been to reinvest approximately
70% of net income in future growth and to distribute remain-
ing income as dividends. The ability of the Company to con-
tinue paying cash dividends is subject to such factors as the
Board of Directors may deem relevant.
FINANCIAL CONDITION
Assets
Cash and marketable securities of $10.326 billion make up
93.1% of the Company’s $11.087 billion assets; this compares
with 93.0% in 1997 and 90.3% in 1996. The Company has only
minor investments in real estate and mortgages, which are
typically illiquid. At December 31, 1998, the Company’s
portfolio of fixed maturity securities had an average yield-to-
cost of 8.2% and an average maturity of ten years. For the
insurance companies’ purposes, strong emphasis has been placed
on purchasing current income-producing securities and
maintaining such securities as long as they continue to meet the
Company’s yield and risk criteria. Historically, municipal
bonds have been attractive due to their tax-exempt feature.
Essential service (e.g., schools, sewer, water, etc.) bonds issued
by municipalities are prevalent in this area. Many of these
bonds are not rated due to the small size of their offerings.
At year-end 1998 and 1997, investments totaling
approximately $873 million and $836 million ($883 million
and $797 million at cost) of the Company’s $10.325 billion
and $8.797 billion investment portfolio related to securities
rated non-investment grade or not rated by Moody’s Investors
Service or Standard & Poor’s. Such investments, which tend to
have higher yields, historically have benefited the Company’s
results of operations. Further, many have been upgraded to
investment grade while owned by CFC.
Because of alternative minimum tax matters, the Company
uses a blend of tax-exempt and taxable fixed maturity securities.
Tax-exempt bonds comprise 9% of invested assets as of
December 31, 1998, compared with 10% at year-end 1997
and 14% at year-end 1996. Additional information regarding
the composition of investments, together with maturity data
regarding investments in fixed maturities, is included in the
Notes to Consolidated Financial Statements.
Market Risk
The Company could incur losses due to adverse changes in
market rates and prices. The Company’s primary market risk
exposures are changes in price for equity securities and changes
in interest rates and credit ratings for fixed maturity securities.
The Company could alter the existing investment portfolios
or change the character of future investments to manage this
exposure to market risk. CFC, with the Board of Directors,
administers and oversees investment risk through the
Investment Committee, which provides executive oversight of
investment activities. The Company has specific investment
guidelines and policies that define the overall framework used
daily by investment portfolio managers to limit the Company’s
exposure to market risk.
Liabilities and Shareholders’ Equity
At December 31, 1998, long- and short-term debt were 4%,
insurance reserves were 23% and total shareholders’ equity was
51% of total assets, with remaining liabilities consisting of
unearned premiums, deferred income taxes and other liabilities.
Debt
Total long- and short-term debt was less than 5% of total
assets at year-end 1998 and 1997. At December 31, 1998
and 1997, long-term debt consisted of $471.5 million
and $58.4 million, respectively, of convertible and senior
debentures. Short-term debt is used to provide working
capital as discussed above. In the second quarter of 1998,
the Company issued $419.6 million of 30-year, non-
callable senior debentures. Proceeds were used to pay off
$280.6 million of short-term debt as it matured and for
future general corporate purposes, including expansion
of the Company’s headquarters.
21
Management Discussion
(continued)
Cincinnati Financial Corporation and Subsidiaries
Equity
Shareholders’ equity has continued to grow as a percentage of
total assets, reaching 51% for 1998 from 50% for 1997 and
45% for 1996, due to retained earnings and accumulated
comprehensive income. Statutory risk-based capital
requirements became effective for life insurance companies
in 1993 and for property casualty companies in 1994.
The Company’s capital has been well above required amounts
in each year since those effective dates.
(000,000 omitted)
Shareholders’ equity excluding
retained earnings and
accumulated comprehensive
income
Retained earnings
Accumulated comprehensive
income
Total shareholders’ equity
1998
1997
1996
$ 462.0
1,480.9
$ 469.5
1,341.7
$ 502.3
1,132.9
3,678.0
$5,620.9
2,905.8
$4,717.0
1,527.7
$3,162.9
As a long-term investor, the Company has followed a
buy-and-hold strategy for more than 39 years. A significant
amount of unrealized appreciation on equity investments
has been generated as a result of this policy. Unrealized
appreciation on equity investments, before deferred income
taxes, was $5.512 billion as of December 31, 1998 and
constituted 54% of the total investment portfolio; 74% of
the equities investment portfolio; and, after deferred income
taxes, 64% of total shareholders’ equity. Such unrealized
appreciation, before deferred income taxes, amounted to
$4.273 billion and $2.203 billion at year-end 1997 and
1996, respectively.
On November 22, 1996, the Board of Directors authorized
the repurchase of up to three million of the Company’s
outstanding shares as management deemed appropriate over
an unspecified period of time. On August 21, 1998, the Board
of Directors authorized repurchase of an additional six million
shares, to reflect the three-for-one split, which resulted in a
total of nine million shares authorized to be repurchased. As
of December 31, 1998, the Company had repurchased
3.5 million shares at an accumulated cost of $93.1 million.
On February 6, 1999, the CFC Board authorized
management to repurchase up to 17 million shares
of the Company’s 166.7 million shares outstanding. They
specified their intention to complete the repurchase by
December 31, 2000. This authorization superceded the
previous authorization of nine million shares, 3.9 million
of which were purchased by February 5, 1999.
Selected Quarterly Financial Data
(000’s omitted except per share data)
Financial data for each quarter in the two years ended December 31,
Quarter
Revenues .................................................. $ 512,554
116,333
Income before income taxes ....................
84,178
Net income ..............................................
.51
Net income per common share ................
.49
Net income per common share (diluted)..
1st
$000,0000000$00,000
Quarter
Revenues .................................................. $ 483,737
98,278
Income before income taxes ....................
74,047
Net income ..............................................
.44
Net income per common share ................
.43
Net income per common share (diluted)..
1st
$000,0000000$00,000
$000,0000000$00,000
2nd
$ 518,578
72,913
58,850
.35
.35
$000,0000000$00,000
2nd
$ 484,203
100,341
75,830
.46
.44
$000,0000000$00,000
1998
3rd
$ 514,766
64,019
52,915
.31
.30
$000,0000000$00,000
1997
3rd
$ 492,038
101,964
77,000
.47
.46
$000,0000000$00,000
4th
$ 508,392
53,841
45,623
.27
.27
000,000000000$00000
Full Year
$2,054,289
307,107
241,567
1.45
1.41
$000,0000000$00,000
4th
$ 482,406
93,975
72,498
.44
.43
000,000000000$00000
Full Year
$1,942,384
394,559
299,375
1.81
1.77
Per share amounts reflect the effects of a three-for-one stock split effective to shareholders of record on April 24, 1998.
Note: The sum of the quarterly reported amounts may not equal the full year as each is computed independently.
22
Responsibility for Financial Statements
Cincinnati Financial Corporation and Subsidiaries
The accompanying financial statements of Cincinnati
Financial Corporation and subsidiaries for the year ended
December 31, 1998 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, 1998 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.
Independent Auditors’ Report
To the Shareholders and Board of Directors of Cincinnati
Financial Corporation:
We have audited the consolidated balance sheets of
Cincinnati Financial Corporation and subsidiaries as of
December 31, 1998 and 1997 and the related consolidated
statements of income, shareholders’ equity and cash flows for
each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Cincinnati
Financial Corporation and subsidiaries at December 31, 1998
and 1997 and the results of their operations and their cash flows
for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting
principles.
Cincinnati, Ohio
February 4, 1999
23
Consolidated Balance Sheets
(000’s omitted)
Cincinnati Financial Corporation and Subsidiaries
......................................................................................................................................................................
ASSETS
Investments
Fixed maturities, at fair value (cost: 1998–$2,682,659;
1997–$2,571,549) ................................................................
Equity securities, at fair value (cost: 1998–$1,943,206;
1997–$1,725,855) ................................................................
Other invested assets ..................................................................
Cash..................................................................................................
Investment income receivable............................................................
Finance receivables ............................................................................
Premiums receivable ........................................................................
Reinsurance receivable ......................................................................
Prepaid reinsurance premiums ..........................................................
Deferred acquisition costs pertaining to unearned
premiums and to life policies in force ..........................................
Land, buildings and equipment for Company use (at cost, less
December 31,
1998
$000.,00000000$00,000
1997
$000,00000000$00,000
$ 2,812,231
$ 2,751,219
7,454,817
57,902
58,611
76,773
32,107
164,412
135,991
26,435
142,896
5,999,271
46,560
80,168
74,520
31,715
158,539
109,110
23,612
135,313
accumulated depreciation: 1998–$108,449; 1997–$97,248 ........
Other assets ......................................................................................
Total assets ............................................................................
......................................................................................................................................................................
......................................................................................................................................................................
53,639
70,689
$11,086,503
$000.,00000000$00,000
$000.,00000000$00,000
52,559
30,839
$ 9,493,425
$000,00000000$00,000
$000,00000000$00,000
......................................................................................................................................................................
$000.,00000000$00,000
$000,00000000$00,000
LIABILITIES
Insurance reserves
Losses and loss expenses ..............................................................
Life policy reserves ......................................................................
Unearned premiums..........................................................................
Other liabilities ................................................................................
Deferred income taxes ......................................................................
Notes payable ..................................................................................
6.9% senior debentures due 2028 ....................................................
5.5% convertible senior debentures due 2002 ..................................
Total liabilities ......................................................................
......................................................................................................................................................................
......................................................................................................................................................................
SHAREHOLDERS’ EQUITY
Common stock, par value–$2 per share; authorized 200,000 shares;
issued: 1998–170,435; 1997–169,391 ........................................
Paid-in capital ..................................................................................
Retained earnings ..............................................................................
Accumulated comprehensive income ................................................
......................................................................................................................................................................
Less treasury shares at cost (1998–3,754 shares; 1997–3,035 shares)
Total shareholders’ equity ............................................................
Total liabilities and shareholders’ equity ......................................
......................................................................................................................................................................
......................................................................................................................................................................
......................................................................................................................................................................
$ 2,054,725
533,730
459,695
136,894
1,809,003
– 0 –
419,601
51,919
5,465,567
$000.,00000000$00,000
$000.,00000000$00,000
$000.,00000000$00,000
340,871
218,328
1,480,914
3,678,019
5,718,132
(97,196)
5,620,936
$11,086,503
$000.,00000000$00,000
$000.,00000000$00,000
$000.,00000000$00,000
$ 1,936,534
482,447
443,054
168,959
1,406,478
280,558
– 0 –
58,430
4,776,460
$000,00000000$00,000
$000,00000000$00,000
$000,00000000$00,000
338,782
203,282
1,341,730
2,905,756
4,789,550
(72,585)
4,716,965
$ 9,493,425
$000,00000000$00,000
$000,00000000$00,000
$000,00000000$00,000
......................................................................................................................................................................
$000.,00000000$00,000
$000,00000000$00,000
Common stock, paid-in capital and share figures reflect the effects of a three-for-one stock split effective to shareholders of record on April 24, 1998.
Accompanying notes are an integral part of this statement.
24
Consolidated Statements of Income
(000’s omitted except per share data)
Cincinnati Financial Corporation and Subsidiaries
..............................................................................................................................................................
1998
$000.,00000000$00,000
Years Ended December 31,
1997
$000,00000000$00,000
1996
000,0000..0000$00,000
REVENUE
Premium income
..............................................................................................................................................................
Property and casualty ............................................
Life........................................................................
Accident and health ..............................................
Net premiums earned............................................
Investment income......................................................
Realized gains on investments......................................
Other income..............................................................
Total revenues ......................................................
..............................................................................................................................................................
..............................................................................................................................................................
$000.,00000000$00,000
$ 1,542,639
61,704
8,392
1,612,735
367,993
65,309
8,252
2,054,289
$000.,00000000$00,000
$000.,00000000$00,000
$000,00000000$00,000
$ 1,453,526
54,742
8,110
1,516,378
348,597
69,230
8,179
1,942,384
$000,00000000$00,000
$000,00000000$00,000
000,0000..0000$00,000
$ 1,366,544
48,694
7,659
1,422,897
327,307
47,946
10,599
1,808,749
000,0000..0000$00,000
000,0000..0000$00,000
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits ..................
Commissions ..............................................................
Other operating expenses ............................................
Taxes, licenses and fees ................................................
Increase in deferred acquisition costs pertaining to
1,221,118
290,832
144,849
60,798
1,054,924
282,690
139,030
48,573
1,087,105
259,291
117,034
43,392
unearned premiums and to life policies in force ....
Interest expense ..........................................................
Other expenses ............................................................
Total benefits and expenses....................................
..............................................................................................................................................................
..............................................................................................................................................................
(7,583)
28,012
9,156
1,747,182
(7,725)
20,821
9,512
1,547,825
(7,999)
20,102
7,403
1,526,328
$000.,00000000$00,000
$000,00000000$00,000
000,0000..0000$00,000
$000.,00000000$00,000
$000,00000000$00,000
000,0000..0000$00,000
INCOME BEFORE INCOME TAXES ..........................
307,107
394,559
282,421
..............................................................................................................................................................
$000.,00000000$00,000
$000,00000000$00,000
000,0000..0000$00,000
PROVISION FOR INCOME TAXES
Current ......................................................................
Deferred......................................................................
Total provision for income taxes ............................
..............................................................................................................................................................
..............................................................................................................................................................
78,847
(13,307)
65,540
107,046
(11,862)
95,184
67,827
(9,166)
58,661
$000.,00000000$00,000
$000,00000000$00,000
000,0000..0000$00,000
$000.,00000000$00,000
$000,00000000$00,000
000,0000..0000$00,000
NET INCOME ................................................................
..............................................................................................................................................................
$ 241,567
$000.,00000000$00,000
..............................................................................................................................................................
$000.,00000000$00,000
$
299,375
$000,00000000$00,000
$000,00000000$00,000
$
223,760
000,0000..0000$00,000
000,0000..0000$00,000
PER COMMON SHARE
..............................................................................................................................................................
Net Income ................................................................
Net Income (diluted) ..................................................
..............................................................................................................................................................
..............................................................................................................................................................
$000.,00000000$00,000
$000.,00000000$00,000
$ 1.45
$ 1.41
$000.,00000000$00,000
..............................................................................................................................................................
$000.,00000000$00,000
$000,00000000$00,000
000,0000..0000$00,000
$000,00000000$00,000
000,0000..0000$00,000
Cash dividends (declared)............................................
..............................................................................................................................................................
$
.611⁄3
$000.,00000000$00,000
$000,00000000$00,000
000,0000..0000$00,000
..............................................................................................................................................................
$000.,00000000$00,000
$000,00000000$00,000
000,0000..0000$00,000
Per share amounts reflect the effects of a three-for-one stock split effective to shareholders of record on April 24, 1998.
Accompanying notes are an integral part of this statement.
25
$000,00000000$00,000
$000,00000000$00,000
000,0000..0000$00,000
000,0000..0000$00,000
$
$
$
1.81
1.77
.542⁄3
$
$
$
1.34
1.31
.482⁄3
Consolidated Statements of Shareholders’ Equity
(000’s omitted)
Cincinnati Financial Corporation and Subsidiaries
Balance, December 31, 1995 .... $
(1,384) $
24,836 $ 1,156,627 $ 1,159,388 $ 2,657,971
Common
Stock
318,504 $
Treasury
Stock
$000.,0000000$00,000
$000,0000000$000000
Paid-In
Capital
000,000000000$00,000
Retained
Earnings
000,0000000000$00,000
Accumulated
Comprehensive Shareholders’
Total
Income
000,0000000000$00,000
Equity
000,0000000000$00,000
Net income ..............................
Change in unrealized gains on
investments ........................
Income taxes on unrealized gains
Comprehensive income ............
Dividends declared ..................
5% stock dividend at market ....
Purchase/issuance of
treasury shares ....................
Stock options exercised ............
Conversion of debentures ........
Balance, December 31, 1996 ....
Net income ..............................
Change in unrealized gains on
investments ........................
Income taxes on unrealized gains
Comprehensive income ............
Dividends declared ..................
Purchase/issuance of
treasury shares ....................
Stock options exercised ............
Conversion of debentures ........
Balance, December 31, 1997 ....
Net income ..............................
Change in unrealized gains on
investments ........................
Income taxes on unrealized gains
Comprehensive income ............
Dividends declared ..................
Purchase/issuance of
15,913
534
21
334,972
$000.,0000000$00,000
(9,833)
$000,0000000$000000
(11,217)
149,844
870
2,865
132
178,547
000,000000000$00,000
223,760
(81,498)
(166,009)*
566,644
(198,325)
000,0000000000$00,000
000,0000000000$00,000
1,132,880
1,527,707
299,375
(90,525)
2,120,075
(742,026)
931
2,879
338,782
$000.,0000000$00,000
(61,368)
$000,0000000$000000
(72,585)
654
5,543
18,538
203,282
000,000000000$00,000
000,0000000000$00,000
000,0000000000$00,000
1,341,730
2,905,756
241,567
(102,383)
1,188,097
(415,834)
223,760
000,0000000000$00,000
566,644
(198,325)
592,079
(81,498)
(252)
(8,963)
3,399
153
3,162,889
000,0000000000$00,000
299,375
000,0000000000$00,000
2,120,075
(742,026)
1,677,424
(90,525)
(60,714)
6,474
21,417
4,716,965
000,0000000000$00,000
241,567
000,0000000000$00,000
1,188,097
(415,834)
1,013,830
(102,383)
(24,301)
treasury shares ....................
10,314
Stock options exercised ............
Conversion of debentures ........
6,511
Balance, December 31, 1998 .... $ 340,871 $ (97,196) $ 218,328 $ 1,480,914 $ 3,678,019 $ 5,620,936
310
9,100
5,636
1,214
875
(24,611)
000,0000000000$00,000
000,0000000000$00,000
000,0000000000$00,000
$000.,0000000$00,000
000,000000000$00,000
$000,0000000$000000
000,0000000000$00,000
000,0000000000$00,000
000,0000000000$00,000
$000.,0000000$00,000
000,000000000$00,000
$000,0000000$000000
$000.,0000000$00,000
$000,0000000$000000
000,000000000$00,000
000,0000000000$00,000
000,0000000000$00,000
000,0000000000$00,000
*Includes $252 for fractional shares paid in April 1996.
Common stock and paid-in capital figures reflect the effects of a three-for-one stock split effective to shareholders of record on April 24, 1998.
Accompanying notes are an integral part of this statement.
26
Consolidated Statements of Cash Flows
(000’s omitted)
Cincinnati Financial Corporation and Subsidiaries
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 ........................
(Increase) decrease in premiums receivable ......................
(Increase) decrease in reinsurance receivable ....................
Increase 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 ......................................
(Decrease) increase in other liabilities ..............................
Decrease in deferred income taxes ..................................
Realized gains on investments..........................................
Other ..............................................................................
Net cash provided by operating activities ..................
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 issue of 6.9% senior debentures......................
Proceeds from stock options exercised ..................................
Purchase/issuance of treasury shares ......................................
Payoff/increase in notes payable ............................................
Payment of cash dividends to shareholders ............................
Net cash provided (used) in financing activities ........
Net (decrease) increase in cash ....................................................
Cash at beginning of year ............................................................
Cash at end of year......................................................................
Supplemental disclosures of cash flow information:
Interest paid ..........................................................................
Income taxes paid..................................................................
Accompanying notes are an integral part of this statement.
1998
$000000000$00,000
Years Ended December 31,
1997
$0000000000$00000
1996
000,0000000$00,000
$ 241,567
$ 299,375
$ 223,760
$000000000$00,000
$0000000000$00000
000,0000000$00,000
$000000000$00,000
$0000000000$00000
000,0000000$00,000
11,793
(2,253)
(5,873)
(26,881)
(2,823)
(7,583)
(7,369)
649
118,191
51,283
16,641
(34,925)
(13,307)
(65,309)
(224)
273,577
47,486
320,510
321,003
14,738
(475,751)
(474,176)
(47,750)
(15,131)
(11,589)
(320,660)
419,593
10,314
(24,301)
(280,558)
(99,522)
25,526
(21,557)
80,168
58,611
36,419
91,241
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
426,957
138,741
376,496
266,296
8,588
(637,858)
(400,405)
(16,485)
(13,439)
(4,471)
(282,537)
– 0 –
6,474
(60,714)
18,460
(88,405)
(124,185)
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)
– 0 –
3,399
(8,963)
41,093
(79,203)
(43,674)
$000000000$00,000
$0000000000$00000
000,0000000$00,000
$000000000$00,000
$0000000000$00000
000,0000000$00,000
$000000000$00,000
$0000000000$00000
000,0000000$00,000
$000000000$00,000
$0000000000$00000
000,0000000$00,000
$
$
$
$000000000$00,000
$0000000000$00000
000,0000000$00,000
$000000000$00,000
$0000000000$00000
000,0000000$00,000
$000000000$00,000
$0000000000$00000
000,0000000$00,000
20,235
59,933
80,168
21,823
95,488
$
$
$
39,914
20,019
59,933
20,922
65,000
$
$
$
$000000000$00,000
$000000000$00,000
$0000000000$00000
$0000000000$00000
000,0000000$00,000
000,0000000$00,000
$000000000$00,000
$0000000000$00000
000,0000000$00,000
$000000000$00,000
$0000000000$00000
000,0000000$00,000
27
Notes to Consolidated Financial Statements
Cincinnati Financial Corporation and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF OPERATIONS – Cincinnati Financial
Corporation (the “Company’’) sells insurance primarily in the
Midwest and Southeast through a network of local independent
agents. Insurance products sold include fire, automobile,
casualty, bonds and all related forms of property and casualty
insurance, as well as life insurance and accident and health
insurance.
BASIS OF PRESENTATION – The consolidated financial
statements include the accounts of the Company and its
subsidiaries, each of which is wholly owned, and are presented
in conformity with generally accepted accounting principles.
Generally accepted accounting principles differ in certain
respects from statutory insurance accounting practices
prescribed or permitted for insurance companies by regulatory
authorities. All significant inter-company balances and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions. The accompanying
consolidated financial statements include estimates for such
items as insurance reserves and income taxes. Actual results
could differ from those estimates.
PROPERTY AND CASUALTY INSURANCE – Expenses
incurred in the issuance of policies are deferred and amortized
over the terms of the policies. Anticipated investment income is
not considered in determining if a premium deficiency related
to insurance contracts exists. Policy premiums are included in
income on a pro rata basis over the terms of the policies. Losses
and loss expense reserves are based on claims reported prior to
the end of the year and estimates of unreported claims.
LIFE INSURANCE – Policy acquisition costs are deferred
and amortized over the premium paying period of the policies.
Life policy reserves are based on anticipated rates of mortality
derived primarily from industry experience data, anticipated
withdrawal rates based principally on Company experience and
estimated future interest earnings using initial interest rates
ranging from 3% to 101/2%. Interest rates on approximately
$356,000,000 and $324,000,000 of such reserves at
December 31, 1998 and 1997, respectively, are periodically
adjusted based upon market conditions.
Payments received for investment, limited pay and universal
life-type contracts are recognized as income only to the extent
of the current cost of insurance and policy administration, with
the remainder recognized as liabilities and included in life
policies reserves.
over a five-year period. Policy premium income, unearned
premiums and reserves for unpaid losses are accounted for in
substantially the same manner as property and casualty insurance
discussed above.
REINSURANCE – In the normal course of business, the
Company seeks to reduce losses that may arise from catastrophes
or other events that cause unfavorable underwriting results by
reinsuring certain levels of risk in various areas of exposure with
other insurance companies, reinsurers and involuntary state
pools. Reinsurance contracts do not relieve the Company from
any obligation to policyholders. Although the Company
historically has not experienced uncollectible reinsurance, failure
of reinsurers to honor their obligations could result in losses to
the Company. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability
associated with the reinsured policy.
The Company also assumes some reinsurance from other
insurance companies, reinsurers and involuntary state pools.
Such assumed reinsurance activity is recorded principally on the
basis of reports received from the ceding companies.
INVESTMENTS – Fixed maturities (bonds and notes) and
equity securities (common and preferred stocks) are classified as
available for sale and are stated at fair values.
Unrealized gains and losses on investments, net of income
taxes associated therewith, are included in shareholders’ equity.
Realized gains and losses on sales of investments are recognized
in net income on a specific identification basis.
INCOME TAXES – Deferred tax liabilities and assets are
computed using the tax rates in effect for the time when
temporary differences in book and taxable income are estimated
to reverse. Deferred income taxes are recognized for numerous
temporary differences between the Company’s taxable income
and book-basis income and other changes in shareholders’
equity. Such temporary differences relate primarily to unrealized
gains on investments and differences in the recognition of
deferred acquisition costs and insurance reserves. Deferred taxes
associated with unrealized appreciation (except the amounts
related to the effect of income tax rate changes) are charged to
shareholders’ equity, and deferred taxes associated with other
differences are charged to income.
EARNINGS PER SHARE – Net income per common share
is based on the weighted average number of common shares
outstanding during each of the respective years. The calculation
of net income per common share (diluted) assumes the
conversion of convertible senior debentures and the exercise of
stock options.
FAIR VALUE DISCLOSURES – Fair values for investments
ACCIDENT AND HEALTH INSURANCE – Expenses
incurred in the issuance of policies are deferred and amortized
in fixed maturity securities (including redeemable preferred
stock) are based on quoted market prices, where available. For
28
Cincinnati Financial Corporation and Subsidiaries
such securities not actively traded, fair values are estimated by
discounting expected future cash flows using a current market
rate applicable to the yield, credit quality and maturity of the
investments. Fair values for equity securities are based on quoted
market prices.
The fair values for liabilities under investment-type insurance
contracts (annuities) are estimated using discounted cash flow
calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those
remaining for the contracts being valued. Fair values for short-
term notes payable are estimated using interest rates currently
available to the Company. Fair values for long-term debentures
are based on the quoted market prices for such debentures.
STOCK SPLIT – On April 4, 1998, the Company’s
authorized capital was increased to 200,000,000 shares of
common stock and a three-for-one stock split was declared that
was effective for shareholders of record as of April 24, 1998. The
financial statements, notes and other references to share and per
share data have been retroactively restated to reflect the stock
split for all periods presented.
ACCOUNTING CHANGES – In 1998, the Company
adopted several Statements of Financial Accounting Standards
(SFAS). SFAS No. 130, “Reporting Comprehensive Income,’’
requires financial statement reporting of comprehensive
income, which includes net income and other items, such as
the change in unrealized gains on investments, net of income
taxes. SFAS No. 131, “Disclosures About Segments of an
Enterprise and Related Information,’’ requires certain
information to be reported about operating segments on a
basis consistent with the Company’s internal organizational
structure. SFAS No. 132, “Employers’ Disclosures about
Pensions and Other Postretirement Benefits,’’ revises the
disclosures for pensions and other postretirement benefits and
standardizes them into a combined format. The Company has
made all required disclosures and prior years’ information has
been reclassified for the impact of SFAS Nos. 130, 131 and
132. SFAS No. 133 “Accounting for Derivative Instruments
and Hedging Activities’’ was issued in 1998 and establishes
accounting and reporting standards for derivative instruments.
The effects of the statement to the Company are not yet known.
2. INVESTMENTS
(000’s omitted)
Investment income summarized by investment category:
Interest on fixed maturities ........................................................................
Dividends on equity securities ....................................................................
Other investment income ..........................................................................
Total ....................................................................................................
Less investment expenses ............................................................................
Net investment income ........................................................................
Realized gains on investments summarized by investment category:
Fixed maturities:
Years Ended December 31,
1997
$0000000000$00,00
1996
1998
$000000000$00,000
$000000000$00,000
$000000000$00,000
$ 217,675
145,885
9,545
373,105
5,112
$ 367,993
$000000000$00,000
$000000000$00,000
$0000000000$00,00
$ 218,065
128,403
6,865
353,333
4,736
$ 348,597
$0000000000$00,00
$0000000000$00,00
$000000000$00,000
$ 208,907
118,932
5,744
333,583
6,276
$ 327,307
$000000000$00,000
$000000000$00,000
$000000000$00,000
$0000000000$00,00
$000000000$00,000
Gross realized gains ..............................................................................
Gross realized losses..............................................................................
$ 11,591
(10,354)
$
22,075
(6,732)
$
20,823
(10,207)
Equity securities:
Gross realized gains ..............................................................................
Gross realized losses..............................................................................
Realized gains on investments ..............................................................
Change in unrealized gains on investments summarized by investment
category:
Fixed maturities ..........................................................................................
Equity securities..........................................................................................
Change in unrealized gains on investments ..........................................
$0000000000$00,00
$000000000$00,000
104,079
(40,007)
$ 65,309
$000000000$00,000
$000000000$00,000
62,337
(8,450)
69,230
$
47,310
(9,980)
47,946
$
$0000000000$00,00
$000000000$00,000
$000000000$00,000
$0000000000$00,00
$000000000$00,000
$ (50,098)
1,238,195
$1,188,097
$000000000$00,000
$000000000$00,000
$
49,650
2,070,425
$2,120,075
$0000000000$00,00
$0000000000$00,00
$ (18,257)
584,901
$ 566,644
$000000000$00,000
$000000000$00,000
$000000000$00,000
$0000000000$00,00
$000000000$00,000
29
Notes to Consolidated Financial Statements
(continued)
Cincinnati Financial Corporation and Subsidiaries
Analysis of cost, gross unrealized gains, gross unrealized losses and fair value as of December 31, 1998 and 1997
(000’s omitted):
1998
Fixed maturities:
....................................................................................................................................................
States, municipalities and political subdivisions ............
Convertibles and bonds with warrants attached ............
Public utilities ..............................................................
United States government and government
Cost
$000000000$00,000
$ 865,600
100,360
55,709
Gross
Unrealized
Gains
$00000 000.$00,000
$ 51,944
6,208
4,713
Gross
Unrealized
Losses
$0 0 000000$00,000
$ 341
4,914
0
Fair
Value
$00000..000$00,000
$ 917,203
101,654
60,422
agencies and authorities ..........................................
All other corporate bonds ..............................................
Total ......................................................................
....................................................................................................................................................
....................................................................................................................................................
9,043
1,651,947
$2,682,659
$000000000$00,000
$000000000$00,000
480
104,849
$ 168,194
$00000 000.$00,000
$00000 000.$00,000
0
33,367
$ 38,622
$0 0 000000$00,000
$0 0 000000$00,000
9,523
1,723,429
$2,812,231
$00000..000$00,000
$00000..000$00,000
....................................................................................................................................................
$000000000$00,000
$00000 000.$00,000
$0 0 000000$00,000
$00000..000$00,000
Equity securities ..................................................................
....................................................................................................................................................
$1,943,206
$000000000$00,000
$5,553,489
$00000 000.$00,000
$ 41,878
$0 0 000000$00,000
....................................................................................................................................................
$000000000$00,000
$00000 000.$00,000
$0 0 000000$00,000
$7,454,817
$00000..000$00,000
$00000..000$00,000
1997
Fixed maturities:
....................................................................................................................................................
States, municipalities and political subdivisions ............
Convertibles and bonds with warrants attached ............
Public utilities ..............................................................
United States government and government
$0000000.000$00,000
$0000000000.$00,000
$0000000000$00,000
$0000000..000$00,000
$ 843,064
103,124
74,871
$
47,811
7,973
4,982
$
2,645
1,705
18
$ 888,230
109,392
79,835
$0 0 000000$00,000
$0 0 000000$00,000
22
2,138
6,528
3,878
$
$
$0 0 000000$00,000
9,514
1,664,248
$ 2,751,219
$00000..000$00,000
$00000..000$00,000
$ 5,999,271
$00000..000$00,000
agencies and authorities ..........................................
All other corporate bonds ..............................................
Total ......................................................................
....................................................................................................................................................
....................................................................................................................................................
9,278
1,541,212
$ 2,571,549
$000000000$00,000
$000000000$00,000
258
125,174
$ 186,198
$00000 000.$00,000
$00000 000.$00,000
....................................................................................................................................................
$000000000$00,000
$00000 000.$00,000
$0 0 000000$00,000
$00000..000$00,000
Equity securities ..................................................................
....................................................................................................................................................
$ 1,725,855
$000000000$00,000
$ 4,277,294
$00000 000.$00,000
....................................................................................................................................................
$000000000$00,000
$00000 000.$00,000
$0 0 000000$00,000
$00000..000$00,000
Contractual maturity dates for investments in fixed maturity securities as of December 31, 1998
(000’s omitted):
....................................................................................................................................................
Maturity dates occurring:
Cost
$00000000$00,000
Fair
Value
$00000000$00,000
% of
Fair Value
$000000000$00,000
One year or less ............................................................
After one year through five years....................................
After five years through ten years ..................................
After ten years ..............................................................
Total ......................................................................
....................................................................................................................................................
....................................................................................................................................................
$ 134,300
614,545
938,364
995,450
$2,682,659
$00000000$00,000
$00000000$00,000
$ 135,906
640,865
957,728
1,077,732
$2,812,231
$00000000$00,000
$00000000$00,000
4.8
22.8
34.1
38.3
100.0
$000000000$00,000
$000000000$00,000
....................................................................................................................................................
$00000000$00,000
$00000000$00,000
$000000000$00,000
Actual maturities may differ from contractual maturities when there exists a right to call or prepay obligations with
or without call or prepayment penalties.
30
Cincinnati Financial Corporation and Subsidiaries
At December 31, 1998, investments with a cost of $49,425,000 and fair value of $53,029,000 were on deposit with
various states in compliance with certain regulatory requirements.
Investments in companies that exceed 10% of the Company’s shareholders’ equity include the following as of
December 31 (000’s omitted):
....................................................................................................................................................
Fifth Third Bancorp common stock ....................................
Alltel Corporation common stock........................................
000000000000000000 0000000000000
1998
000000000000000000 000000000000
1997
$0000000 ..0$00,000
Cost
$ 276,799
$ 100,467
$00000 .. 00$00,000
Fair
Value
$3,445,118
$ 767,105
$0000000000$0000
Cost
$ 255,089
95,810
$
000,0000000$00,000
Fair
Value
$2,612,607
$ 522,527
3. DEFERRED ACQUISITION COSTS
Acquisition costs incurred and capitalized during 1998, 1997
and 1996 amounted to $384,231,000, $322,117,000 and
$303,111,000, respectively. Amortization of deferred acquisition
costs was $376,648,000, $314,392,000 and $295,112,000 for
1998, 1997 and 1996, respectively.
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):
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
1997
1998
0000000 .0000000
00000000000000
00000000000000
Less reinsurance receivable ..
Balance at January 1 ................ $1,888,883 $1,824,296 $1,690,461
109,719
1,580,742
112,235
Net balance at January 1 .......... 1,776,648
Incurred related to:
121,881
1,702,415
0000000 .. 0000000
0000000 . 0000000
00000000000000
00000000000000
00000000000000
00000000000000
Current year.......................... 1,306,194
(153,311)
Prior years ............................
Total incurred .......................... 1,152,883
Paid related to:
0000000. 0000000
0000000 . 0000000
1,115,140
(119,654)
995,486
1,183,251
(151,996)
1,031,255
00000000000000
00000000000000
00000000000000
00000000000000
Current year..........................
Prior years ............................
590,366
498,842
Total paid ................................ 1,089,208
Net balance at December 31 .... 1,840,323
138,138
514,186
395,396
909,582
1,702,415
Plus reinsurance receivable ..
121,881
Balance at December 31 ...... $1,978,461 $1,888,883 $1,824,296
467,843
453,410
921,253
1,776,648
112,235
0000000 . 0000000
0000000 . 0000000
0000000 . 0000000
00000000000000
00000000000000
00000000000000
00000000000000
00000000000000
00000000000000
0000000 . 0000000
00000000000000
00000000000000
0000000 . 0000000
00000000000000
00000000000000
As a result of changes in estimates of insured events in prior
years, the provision for losses and loss expenses decreased by
$153,311,000, $119,654,000 and $151,996,000 in 1998, 1997
and 1996. These decreases are due in part to the effects of settling
reported (case) and unreported (IBNR) reserves established in
prior years for less than expected.
The reserve for losses and loss expenses in the accompanying
balance sheets also includes $76,264,000 and $47,651,000 at
December 31, 1998 and 1997, respectively, for certain life/health
losses and loss checks payable.
1998
00000000.00000
Ordinary/traditional life .................................. $156,887
221,197
Universal life ....................................................
135,176
Annuities..........................................................
15,986
Industrial ........................................................
4,484
Other ..............................................................
Total ............................................................ $533,730
00000000.00000
00000000.00000
000000000000
1997
$137,734
202,696
121,284
16,470
4,263
$482,447
000000000000
000000000000
00000000.00000
000000000000
At December 31, 1998 and 1997, the fair value associated
with the annuities shown above approximated $144,000,000
and $123,000,000, respectively.
6. NOTES PAYABLE
The Company and subsidiaries had no compensating balance
requirement on debt for either 1998 or 1997. Notes payable in
the accompanying balance sheets are short term, and interest
rates charged on such borrowings ranged from 5.03% to 8.50%
during 1998, which resulted in an average interest rate of 6.07%.
At December 31, 1997, the fair value of the notes payable
approximated the carrying value and the weighted average
interest rate approximated 6.44%.
7. SENIOR DEBENTURES
The Company issued $420,000,000 of senior debentures due
in 2028 in 1998. The convertible senior debentures due in 2002
are convertible by the debenture holders into shares of common
stock at a conversion price of $14.88 (67.23 shares for each
$1,000 principal). At December 31, 1998 and 1997, the fair
value of the debentures approximated $533,000,000 and
$175,000,000, respectively.
31
Notes to Consolidated Financial Statements
(continued)
Cincinnati Financial Corporation and Subsidiaries
8. SHAREHOLDERS’ EQUITY AND RESTRICTION
The insurance subsidiaries paid cash dividends to the
Company of approximately $105,000,000, $95,500,000 and
$77,027,000 in 1998, 1997 and 1996, respectively. Dividends
paid to the Company by insurance subsidiaries are restricted
by regulatory requirements of the insurance subsidiaries’
domiciliary state. Generally, the maximum dividend that may
be paid without prior regulatory approval is limited to the
greater of 10% of statutory surplus or 100% of statutory net
income for the prior calendar year, up to the amount of
statutory unassigned surplus as of the end of the prior calendar
year. Dividends exceeding these limitations can be paid only
with approval of the insurance department of the subsidiaries’
domiciliary state. During 1999, the total dividends that can
be paid to the Company without regulatory approval are
approximately $299,805,000.
4,318,000 shares of common stock were available for future
stock option grants, as of December 31, 1998.
On November 22, 1996, the Board of Directors of the
Company authorized the repurchase of up to three million
of the Company’s outstanding shares as management deemed
appropriate, over an unspecified period of time. On August 21, 1998,
the Board authorized the repurchase of an additional six million
shares, to reflect the three-for-one split, which results in a total
of nine million shares authorized to be repurchased. As of
December 31, 1998, the Company had repurchased
3,538,000 shares.
9. REINSURANCE
Property and casualty premium income in the accompanying
statements of income includes approximately $38,790,000,
$41,694,000 and $41,139,0000 of earned premiums on assumed
business and is net of approximately $96,073,000, $94,397,000
and $91,396,000 of earned premiums on ceded business for
1998, 1997 and 1996, respectively.
Written premiums for 1998, 1997 and 1996 consist of the
following (000’s omitted):
00000 ...000000000
1997
$1,523,915
42,773
(95,085)
$1,471,603
00000 ...000000000
00000 ...000000000
00000 ...000000000
00000000000000
1996
$1,433,340
42,671
(92,486)
$1,383,525
00000000000000
00000000000000
00000000000000
1998
00000000....000000
Direct business .............. $1,618,357
38,119
Assumed business ..........
(98,895)
Ceded business ..............
Net .............................. $1,557,581
00000000....000000
00000000....000000
00000000....000000
32
Insurance losses and policyholder benefits in the
accompanying statements of income are net of approximately
$59,741,000, $34,744,000 and $44,770,000 of reinsurance
recoveries for 1998, 1997 and 1996, respectively.
10. FEDERAL INCOME TAXES
Significant components of the Company’s net deferred tax
liability as of December 31, 1998 and 1997 are as follows
(000’s omitted):
1998
0000000000000000
1997
00000000000000
Deferred tax liabilities:
Unrealized gains on investments .......... $1,974,414
45,205
Deferred acquisition costs ....................
8,046
Other ....................................................
Total .................................................... 2,027,665
0000000000000000
0000000000000000
Deferred tax assets:
Losses and loss expense reserves..........
Unearned premiums ............................
Life policy reserves ..............................
Other ....................................................
Total ....................................................
132,298
30,270
18,637
37,457
218,662
Net deferred tax liability............................ $1,809,003
0000000000000000
0000000000000000
0000000000000000
$1,558,580
42,936
10,514
1,612,030
00000000000000
00000000000000
127,994
29,293
19,460
28,805
205,552
$1,406,478
00000000000000
00000000000000
00000000000000
0000000000000000
00000000000000
The provision for federal income taxes is based upon a
consolidated income tax return for the Company and subsidiaries.
The differences between the statutory federal rates and the
Company’s effective federal income tax rates are as follows:
Tax at statutory rate .................................. 35.00
Increase (decrease) resulting from:
1998
1997
Percent Percent
35.00
000000000
00000000000
1996
Percent
35.00
0000000000
00000000000
000000000
0000000000
Tax-exempt municipal bonds ................
Dividend exclusion ..............................
Other ....................................................
(5.39)
(9.29)
1.02
Effective rate ............................................ 21.34
(4.44)
(6.54)
.10
24.12
(6.41)
(8.50)
.68
20.77
00000000000
000000000
0000000000
00000000000
000000000
0000000000
No provision has been made (at December 31, 1998,
1997 and 1996) for federal income taxes on approximately
$14,000,000 of the life insurance subsidiary’s retained earnings,
since such taxes will become payable only to the extent that
such retained earnings are distributed as dividends or exceed
limitations prescribed by tax laws. The Company does not
contemplate any such dividend.
Cincinnati Financial Corporation and Subsidiaries
11. NET INCOME PER COMMON SHARE
(000’s omitted except per share data)
1998
Net income per common share $241,567
Shares
Income
Per Share
(Numerator) (Denominator) Amount
$1.45
166,821
00000000000000000
00000000000000
00000000000
Effect of dilutive securities:
5.5% convertible senior
debentures ........................
Stock options ......................
Net income per common share
00000000
1,918
3,490
1,767
(diluted)................................ $243,485
0000000000000
172,078
000000000000
0000000000000
000000000000
$1.41
00000000
00000000
1997
Net income per common share $ 299,375
165,538
$ 1.81
00000000
Effect of dilutive securities:
5.5% convertible senior
debentures ........................
Stock options ......................
Net income per common share
2,712
0000000000000
3,928
1,329
000000000000
(diluted)................................ $ 302,087
0000000000000
170,795
000000000000
0000000000000
000000000000
$ 1.77
00000000
00000000
1996
Net income per common share $ 223,760
167,209
$ 1.34
00000000
Effect of dilutive securities:
5.5% convertible senior
debentures ........................
Stock options ......................
Net income per common share
2,859
0000000000000
5,368
769
000000000000
(diluted)................................ $ 226,619
0000000000000
173,346
000000000000
0000000000000
000000000000
$ 1.31
00000000
00000000
Options to purchase 667,000, 76,000 and 1,458,000 shares
of common stock were outstanding during 1998, 1997 and
1996, respectively, but were not included in the computation
of net income per common share (diluted) because the options’
exercise prices were greater than the average market price of the
common shares.
12. PENSION PLAN
The Company and subsidiaries have a defined benefit pension
plan covering substantially all employees. Benefits are based on
years of credited service and compensation level. Contributions
to the plan are based on the frozen entry age actuarial cost
method. Pension expense is composed of several components
that are determined using the projected unit credit actuarial
cost method and based on certain actuarial assumptions.
The following table sets forth summarized information on
the Company’s defined benefit pension plan (000’s omitted):
Years Ended December 31,
1998
0000 000 00000
Change in benefit obligation:
Benefit obligation at beginning of year ...... $ 62,934
4,150
Service cost................................................
4,474
Interest cost ..............................................
Actuarial gain ............................................
7,383
Benefits paid..............................................
(2,627)
Benefit obligation at end of year ................ $ 76,314
Change in plan assets:
Fair value of plan assets at beginning
0000 000 00000
0000 000 00000
0000 000 00000
of year .................................................... $133,470
21,036
Actual return on plan assets ......................
Benefits paid..............................................
(2,627)
Fair value of plan assets at end of year ...... $151,879
Funded status:
Funded status at end of year ...................... $ 75,565
(72,235)
Unrecognized net actuarial gain ................
(3,331)
Unrecognized net transitional asset............
Unrecognized prior service cost ................
(357)
Prepaid accrued pension cost.................... $ (358)
0000 000 00000
0000 000 00000
0000 000 00000
0000 000 00000
0000 000 00000
1997
000 00000000
$ 53,849
3,449
3,938
4,719
(3,021)
$ 62,934
000 00000000
000 00000000
000 00000000
$ 92,740
43,751
(3,021)
$133,470
000 00000000
000 00000000
000 00000000
$ 70,536
(67,081)
(3,702)
(397)
(644)
000 00000000
$
000 00000000
0000 000 00000
000 00000000
The fair value of the Company’s stock comprised $21,331,023
and $27,325,064 of the plan’s assets at December 31, 1998 and
1997, respectively.
The following summarizes the assumptions for the plan:
Discount rate ............................................
Expected return on plan assets ..................
Rate of compensation increase ..................
Years Ended December 31,
0000000000000
1998
Percent
6.25
8.00
5 to 7
000000000000
1997
Percent
6.75
8.00
5 to 7
The components of the net periodic benefit cost for 1998,
1997 and 1996 include the following (000’s omitted):
Years Ended December 31,
1996
1997
1998
Service cost ........................................ $ 4,150 $ 3,449 $ 3,306
3,572
Interest cost ......................................
Expected return on plan assets ..........
(5,557)
Amortization of:
4,474
(7,451)
3,938
(6,250)
000000000000
00000 000000
00000000000
Transition obligation (asset) ..........
Prior service cost............................
Actuarial (gain) loss ......................
(370)
(40)
(1,049)
000000000000
Net pension expense .......................... $ (286) $
(370)
(40)
(790)
(63) $
(370)
(40)
(475)
436
00000000000
000 00000000
000000000000
00000000000
000 00000000
000000000000
00000000000
00000000 000
33
Notes to Consolidated Financial Statements
(continued)
Cincinnati Financial Corporation and Subsidiaries
13. STATUTORY ACCOUNTING INFORMATION
Net income and shareholders’ equity, as determined in
accordance with statutory accounting practices for the
Company’s insurance subsidiaries, are as follows (000’s omitted):
0000000 000 0000000 0000000000000000000000000000
Years Ended December 31,
1997
1998
1996
0000000 00000
000000 00000
000000000000
Net income:
Property/casualty insurance
subsidiaries..........................$148,235
$200,830
$136,041
Life/health insurance
subsidiary ............................$ 7,248
$
6,261
$ (1,812)
14. TRANSACTION WITH AFFILIATED PARTIES
The Company paid certain officers and directors, or
insurance agencies of which they are shareholders,
commissions of approximately $11,654,000, $11,780,000
and $10,874,000 on premium volume of approximately
$82,839,000, $78,727,000 and $70,418,000 for 1998, 1997
and 1996, respectively.
Shareholders’ equity:
December 31,
000000000000 000000000000000000000
1998
1997
0000 00000000000
000000000 0000
Property/casualty insurance subsidiaries .. $2,650,503 $2,152,334
Life/health insurance subsidiary ................ $ 369,325 $ 320,198
15. STOCK OPTIONS
The Company has primarily qualified stock option plans under which options are granted to employees of the Company at prices
which are not less than market price at the date of grant and which are exercisable over ten-year periods. The Company applies APB
Opinion 25 and related Interpretations in accounting for these plans. Accordingly, no compensation cost has been recognized for
the stock option plans. Had compensation cost for the Company’s stock option plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company’s net income and earnings per
share would have been reduced to the pro forma amounts indicated below (000’s omitted except per share data):
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
$000000000.0,000
1998
$241,567
235,420
1.45
1.41
1.41
1.38
$
$
$00000000$00,000
1997
$299,375
296,078
1.81
1.79
1.77
1.75
$
$
000,00000$00,000
1996
$223,760
221,665
1.34
1.33
1.31
1.30
$
$
In determining the pro forma amounts above, the fair value of each option was estimated on the date of grant using the Binomial
option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: dividend
yield of 1.79%, 1.22% and 2.26%; expected volatility of 21.79%, 19.67% and 20.50%; risk-free interest rates of 5.02%, 5.89% and
6.56%; and expected lives of ten years for all years. Compensation expense in the pro forma disclosures is not indicative of future
amounts as options vest over several years and additional grants are generally made each year.
A summary of options information for the years ended December 31, 1998, 1997 and 1996 follows
(000’s omitted except per share data):
000,0000000000$000000000000000000$00000000,000
1998
Shares Weighted-Average
000,00000000000$000000000$00 0000$00,000
1997
Shares Weighted-Average
000,00000000000$000000000$00 0000$00,000
1996
Shares Weighted-Average
Outstanding at beginning of year
Granted
Exercised
Forfeited/revoked
Outstanding at end of year
Options exercisable at end of year
Weighted-average fair value of
options granted during the year
34
$$0$.0$00,0 0$$0 $$0000000,00$00,000$$0
$$0$.0$00,0 0$$0 $$0000000,00$00,000$$0
$$000,00,00$$,00
3,932,271
1,664,200
(615,884)
(39,996)
4,940,591
$$000,00,00$$,00
$$000,00,00$$,00
$$000000000000,00,00$$00,00
Exercise Price
$17.88
38.00
15.27
25.48
25.11
3,774,492
655,437
(465,429)
(32,229)
3,932,271
$$0$.0$00,0 0$$0
$$0$.0$00,0 0$$0
Exercise Price
$15.98
20.97
11.31
17.96
17.88
2,685,747
1,537,809
(272,778)
(176,286)
3,774,492
$$0$.0$00,0 0$$0
$$0$.0$00,0 0$$0
Exercise Price
$13.41
20.25
12.46
19.56
15.98
i
i
$$000,00,00$$,00
2,243,982
62.91
2,108,790
1,956,030
$$0$.0$00,0 0$$0
$$0$.0$00,0 0$$0
i
$13.39
$ 7.66
$ 6.85
Cincinnati Financial Corporation and Subsidiaries
Options outstanding at December 31, 1998 consisted of the following:
$$0,00$$0$$0$$0$$0$0$00,00$$0$$0,00$$0$$0$$0$$0$0$00,00$$0$$0,00$$0$$0$$0$$0$0$0$$0$0$0$$0$0$00,00$$0 $$0,00$$$$0$$$0$00,00$$0
Options Outstanding
$$$$0$0$00,00$$0$$0$$0$$0$0,00$$0$$0$$0$$0$0$00,00$$0
Options Exercisable
Range of
Exercise
Prices
Number
Weighted-Average
Remaining
Contractual Life
Weighted-Average
Exercise Price
Number
Weighted-Average
Exercise Price
$$0$$0$ $0$$0$$0
$$0$$0$$0$$0$$0
$$0$$000000000000$$0$$0$$0
$$0$$0$$0$$0$$0$$0$$0$$0$$0$$0
$$00,00$00,00$$0
$$0$$0$$0$$0$$0$$0$$0$$0$$0$$0
$ 7.34 to 12.34
$13.45 to 17.00
$17.38 to 20.00
$20.47 to 21.33
$22.46 to 26.62
$33.00 to 33.88
$36.63 to 45.37
590,335
531,153
500,409
1,060,865
533,556
953,373
770,900
4,940,591
$$0$$0$$0$$0$$0
$$0$$0$$0$$0$$0
2.77 yrs
5.52 yrs
6.36 yrs
7.37 yrs
8.30 yrs
9.60 yrs
9.20 yrs
7.34 yrs
$11.50
15.81
19.28
20.51
23.08
33.81
42.70
25.11
490,335
531,153
378,550
646,215
174,356
23,373
0
2,243,982
$$00,00$00,00$$0
$$00,00$00,00$$0
$11.33
15.81
19.18
20.50
23.07
33.00
n/a
17.49
$$0$$0$$0$$0$$0
$$00,00$00,00$$0
16. SEGMENT INFORMATION
The Company is organized and operates principally in two industries and has four reportable segments – commercial
lines property and casualty insurance, personal lines property and casualty insurance, life insurance and investment operations. The
accounting policies of the segments are the same as those described in the basis of presentation. Revenue is primarily from unaffiliated
customers. Identifiable assets by segment are those assets, including investment securities, used in the Company’s operations in each
industry. Corporate and other identifiable assets are principally cash and marketable securities. Segment information, for which results
are regularly reviewed by Company management in making decisions about resources to be allocated to the segments and assess their
performance, is summarized as follows (000’s omitted):
Revenues
Commercial lines insurance ......................................................
Personal lines insurance ............................................................
Life insurance ............................................................................
Investment operations ..............................................................
Corporate and other
Total revenues ......................................................................
Income before income taxes
Property and casualty insurance ................................................
Life insurance ............................................................................
Investment operations ..............................................................
Corporate and other ..................................................................
Total income before income taxes..........................................
Identifiable assets
Property and casualty insurance ................................................
Life insurance ............................................................................
Corporate and other ..................................................................
Total identifiable assets..........................................................
1998
$ 1,019,463
523,176
70,096
433,302
8,252
$ 2,054,289
0000000000000000000
0000000000000000000
Years Ended December 31,
1997
$ 983,605
469,921
62,852
417,827
8,179
$1,942,384
00000000000000000
00000000000000000
1996
$ 946,923
419,621
56,353
375,253
10,599
$1,808,749
00000000000000000
00000000000000000
0000000000000000000
00000000000000000
00000000000000000
$ (59,438)
(1,776)
403,925)
(35,604)
$ 307,107
0000000000000000000
0000000000000000000
$
28,955
2,763)
390,850)
(28,009)
$ 394,559
00000000000000000
00000000000000000
$ (44,449)
(2,906)
353,157)
(23,381)
$ 282,421
00000000000000000
00000000000000000
0000000000000000000
00000000000000000
00000000000000000
$ 5,483,137
1,203,908
4,399,458
$11,086,503
0000000000000000000
0000000000000000000
$4,953,259
1,094,445
3,445,721
$9,493,425
00000000000000000
00000000000000000
$3,986,658
902,354
2,156,502
$7,045,514
00000000000000000
00000000000000000
0000000000000000000
00000000000000000
00000000000000000
35
Subsidiary Officers and Directors
AS OF DECEMBER 31, 1998, LISTED ALPHABETICALLY
The Cincinnati Insurance Company (CIC)
The Cincinnati Casualty Company (CCC)
The Cincinnati Indemnity Company (CID)
The Cincinnati Life Insurance Company (CLIC)
CFC Investment Company (CFC-I)
EXECUTIVE OFFICERS
Theodore F. Elchynski
CIC, CID, CCC, CLIC, Senior Vice President–
Accounting; Secretary; Director
CIC, CID, CCC Treasurer
CFC-I President; Secretary; Director
James G. Miller
CIC, CID, CCC, CLIC, CFC-I Senior Vice President–
Investments
CFC-I Treasurer
CIC, CID, CFC-I Director
Robert B. Morgan
CIC, CID, CCC, CLIC Chief Executive Officer
CIC, CID President
CIC, CID, CCC, CLIC, CFC-I Director
Larry R. Plum, CPCU
CCC President
CIC, CID Senior Vice President–Personal Lines
CIC, CID, CCC, CLIC Director
David H. Popplewell, FALU, LLIF
CLIC President and Chief Operating Officer; Director
J.F. Scherer
CIC, CID, CCC, CLIC Senior Vice President–
Sales & Marketing; Director
John J. Schiff, Jr., CPCU
CIC, CID, CCC Chairman of the Board
CIC, CID, CCC, CLIC, CFC-I Director
Timothy L. Timmel
CIC, CID, CCC, CLIC, CFC-I Senior Vice President–
Operations; 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 Assistant Vice President–
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, AIM
CIC, CID, CCC Assistant Treasurer–Accounting
Brad E. Behringer
CLIC 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
Daniel C. Cappel
Timothy D. Huntington, AU, CPCU
CIC, CID, CCC Assistant Vice President–Accounting
CIC, CID, CCC Secretary–Commercial Lines
Richard W. Cumming, FSA, ChFC
Thomas A. Joseph, CPCU
CIC, CID, CCC, CLIC Senior Vice President–
Chief Actuary
CLIC Director
Joel W. Davenport, AAI, CPCU
CIC, CID, CCC Secretary–Commercial Lines
James H. Deal, CPCU, CLU
CIC, CID, CCC, CLIC Vice President–
Education & Training
J. Michael Dempsey, CLU
CLIC Vice President–Marketing
Mark R. DesJardins, CPCU, AIC, AIM
CIC, CID, CCC Assistant Vice President–
Education & Training
Dean W. Dicke
CIC, CID, CCC Senior Vice President–Field Claims
CCC Director
W. Dane Donham
CIC, CID, CCC Assistant Secretary–Commercial Lines
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 Assistant Vice President–
Commercial Lines
John E. Field, CPCU
CIC, CID Director
Bruce S. Fisher, CPCU, AIC
CIC, CID, CCC Vice President–Claims
Craig W. Forrester, CLU
CIC, CID, CCC, CLIC Vice President–
Information Systems
Michael E. Francois
CIC, CID, CCC Secretary–Sales & Marketing
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
Allen J. Matheny, CFE, FCLS, CIFI
CIC, CID, CCC Assistant Secretary–Claims
Eric N. Mathews, AIAF
CIC, CID, CCC Vice President–Accounting
Richard L. Mathews, CPCU
CIC, CID, CCC, CLIC Assistant Secretary–
Information Systems
Rodney M. French, AIM
Richard P. Matson
CIC, CID, CCC Assistant Secretary–Staff Underwriting
Cheryl L. Frey
CIC, CID, CCC Vice President–Administrative Services
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 Secretary–Claims
David T. Groff, ACAS
CIC, CID, CCC Assistant Secretary–Staff Underwriting
Kevin E. Guilfoyle
CFC-I Assistant Vice President–Real Estate
David L. Helmers, CPCU, AIM, ARE
CIC, CID, CCC Vice President–Personal Lines
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 Secretary–Claims
Urban G. Neville
CIC, CID, CCC, CLIC Senior Vice President–
Information Systems
CCC Director
Gary A. Nichols
CIC, CID, CCC Secretary–Claims
Glenn D. Nicholson, LLIF
CLIC Senior Vice President, Senior Marketing Officer
Robert J. Nieberding, CLU
CIC, CID, CCC, CLIC Vice President–
Information Systems
CLIC Assistant Vice President–Life Field Services
Theresa A. Hoffer
Thomas D. Candella
CIC, CID, CCC Secretary–Accounting
CIC, CID, CCC Assistant Secretary–Personal Lines
Martin F. Hollenbeck
CIC, CID, CCC, CLIC Assistant Treasurer–Investments
36
CIC DIRECTORS EMERITI
Vincent H. Beckman
Harry M. Turner, Chairman Emeritus
Hayden D. Davis
William H. Zimmer
Robert J. Driehaus
Richard L. Hildbold, CPCU
CINCINNATI FINANCIAL CORPORATION SUBSIDIARIES
Marc A. O’Dowd, CPA, CPCU
Henry W. Stein, Jr.
CIC, CID, CCC, CLIC Internal Audit Officer
CIC, CID, CCC Vice President–Commercial Lines
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 Assistant Vice President–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
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 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 Vice President–
Staff Underwriting
William E. Scholz
CIC, CID, CCC 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–
Administrative Services and Engineering
Dennis D. Shamp
CIC, CID, CCC Assistant Vice President–
Staff Underwriting
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
Steven A. Soloria
CIC, CID, CCC, CLIC Assistant Treasurer–Investments
Kenneth W. Stecher
CIC, CID, CCC, CLIC Senior Vice President–Accounting
CLIC Treasurer; Director
Dennis G. Stetz
CIC, CID, CCC Assistant Secretary–Claims
Charles P. Stoneburner II, CPCU
CIC, CID, CCC Assistant Secretary–Claims
Gary B. Stuart
CIC, CID, CCC Secretary–Sales & Marketing
Duane I. Swanson, CIC
CIC, CID, CCC Assistant Vice President–
Sales & Marketing
Eric N. Taylor, CLU, ChFC, LLIF
CLIC Assistant Vice President–Sales & Marketing
Michael A. Terrell, CPCU, RPLU
CIC, CID, CCC Secretary–Sales & Marketing
Scott L. Unger
CIC, CID, CCC Secretary–Bond
Philip J. Van Houten, CFE, FCLS
CIC, CID, CCC Secretary–Claims
Stephen A. Ventre
CIC, CID, CCC Assistant Secretary–Commercial Lines
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 Assistant Vice President–
Staff Underwriting
Mark S. Wietmarschen
CIC, CID, CCC Assistant Vice President–
Commercial Lines
Gregory J. Ziegler
CIC, CID, CCC, CLIC, CFC-I Vice President–
Personnel
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
Brian E. McNair
CIC, CID, CCC, CLIC Associate Counsel
Barry A. Meyer
CIC, CID, CCC, CLIC Associate Counsel
Stephen C. Roach
CIC, CID, CCC, CLIC Associate Counsel
Daniel G. Taylor
CIC, CID, CCC, CLIC Associate Counsel
37
Cincinnati Financial Corporation
Officers and Directors
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, Jr.
Robert C. Schiff
Thomas R. Schiff
Frank J. Schultheis
Larry R. Webb
Alan R. Weiler
E. Anthony Woods
OFFICERS AS OF
DECEMBER 31, 1998
Robert B. Morgan
President and Chief Executive Officer
John J. Schiff, Jr., CPCU
Chairman and Chief Operating Officer
Theodore F. Elchynski
Senior Vice President and Chief Financial Officer,
Secretary, Treasurer
James G. Miller
Senior Vice President and Chief Investment Officer,
Assistant Secretary, Assistant Treasurer
Kenneth S. Miller, CLU, ChFC
Vice President, Assistant Secretary, Assistant
Treasurer
Kenneth W. Stecher
Vice President, Assistant Secretary, Assistant
Treasurer
DIRECTORS AS OF
DECEMBER 31, 1998
William F. Bahl, CFA(2)(5)
President—Bahl & Gaynor, Inc.
(investment advisors)
Director since 1995
Michael Brown(2)(4)(6)
President and General Manager—
Cincinnati Bengals, Inc.
Director since 1980
38
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 Executive 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
John J. Schiff, Jr., CPCU(4)(5)(6)
Chairman and Chief Operating Officer—
Cincinnati Financial Corporation
Director since 1968
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
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
E. Anthony Woods
President and Chief Executive Officer—
Deaconess Associations, Inc. (health care)
Director since 1998
(1) Audit Committee
(2) Compensation Committee
(3) Advisor to Compensation Committee
(4) Executive Committee
(5) Investment Committee
(6) Nominating Committee
Shareholder Information
Cincinnati Financial Corporation had approximately 11,395 shareholders of record as of December 31, 1998.
Most of our 2,770 associates and many of our independent agent representatives own stock in their Company.
Forty-seven 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 3, 1999, at the Cincinnati Art Museum in Eden Park, Cincinnati, Ohio.
Shareholder Service
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 1998. 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.
Price Range of Common Stock
Shares are traded nationally over the counter. Closing sale price is quoted under the symbol CINF on the National
Market List of Nasdaq (National Association of Securities Dealers Automated Quotation System). Tables below
show the price range reported for each quarter based on daily last sale prices.
1998
1997
Quarter
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
1st
2nd
3rd
4th
1st
2nd
3rd
4th
–––––––––––
–––––––––––
–––––––––––
–––––––––––
–––––––––––
–––––––––––
–––––––––––
–––––––––––
High . . . . . . . . . . . .
Low. . . . . . . . . . . . .
Dividend paid . . . . .
$ 45 3⁄8
4121⁄64
.13 2⁄3
$ 4521⁄64
365⁄8
.151⁄3
$ 39 1⁄8
30 3⁄4
.15 1⁄3
$ 40
315⁄8
.15 1⁄3
$ 2427⁄64
2021⁄32
.121⁄3
$ 271⁄2
22 29⁄64
.13 2⁄3
$ 2729⁄32
26 11⁄64
.13 2⁄3
$ 46 29⁄32
2731⁄32
.132⁄3
Price ranges reflect the effects of a three-for-one stock split effective to shareholders of record on April 24, 1998.
®
Cincinnati Financial Corporation
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Life Insurance Company
CFC Investment Company
CinFin Capital Management Company
P. O. Box 145496
Cincinnati, Ohio 45250-5496
(513) 870-2000
www.cinfin.com