Cincinnati Financial
Annual Report 1999

Plain-text annual report

Cincinnati Financial Corporation consistentgrowth consistentprofitability innovation consistent Annual Report 1999 Revenues (in millions of dollars) 2,128.2 2,054.3 1,942.4 1,808.7 1,655.7 95 96 97 98 99 Net Operating Income* Per Common Share (in dollars) 1.55 1.54 1.24 1.15 1.19 96 97 95 *Adjusted to reflect 5% stock dividends paid in April 1995 and 1996 and a 3-for-1 stock split paid in May 1998. 98 99 Net Income/Dividends Paid* Per Common Share (in dollars) Net Income Dividends Paid 1.81 1.55 1.45 1.36 1.34 .4200 .4767 .5333 .5967 .6633 96 97 95 *Adjusted to reflect 5% stock dividends paid in April 1995 and 1996 and a 3-for-1 stock split paid in May 1998. 98 99 ABOUT THE COVER: Today’s insurance landscape is marked by peaks and valleys, change and consolidation. The rough topography and changing climate contrast with the stability of Cincinnati Financial Corporation. Artist Frank Satogata captured that theme for our cover. Looking through the mountains of industry uncertainty, the viewer sees the steady plain that is Cincinnati Financial. COMPANY PROFILE: Consistent growth, consistent profitability and consistent innovation are our hallmarks. Guided by a strong customer focus on an elite corps of 977 agencies, the Company stays steady on its path by embracing its mission—to grow profitably and enhance the ability of local independent insurance agents to deliver quality financial protection to the people and businesses they serve. To fulfill this mission, the Company strategically provides market stability through financial strength; produces competitive, up-to-date products and services; and develops associates committed to superior service. Cincinnati Financial was formed in 1968 as the parent of The Cincinnati Insurance Company, the lead property and casualty insurance subsidiary founded in 1950. Today, five additional subsidiaries round out the group: The Cincinnati Casualty Company The Cincinnati Indemnity Company The Cincinnati Life Insurance Company CFC Investment Company CinFin Capital Management Company Cincinnati Financial’s investment portfolio, the primary source of profits, employs a total return philosophy with an equity focus. By selecting investments with potential for both current income and long-term appreciation, the Company has achieved the same record of consistent results that marks its insurance operations. In 1999, this led to record- high consolidated assets and the 39th consecutive year of increased cash dividends paid to shareholders. Contents Financial Highlights . . . . . . . . . . . . . . . . . . . . . . 1 Letter to Shareholders . . . . . . . . . . . . . . . . . . . 2-5 Reports on Subsidiary Companies . . . . . . . . . 6-14 Responsibility for Financial Statements and Selected Quarterly Financial Data . . . . . . . . 15 Selected Financial Information . . . . . . . . . . 16-17 Management Discussion . . . . . . . . . . . . . . . 18-23 Consolidated Financial Statements . . . . . . . 24-27 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 28-36 Independent Auditors’ Report. . . . . . . . . . . . . . 36 Subsidiary Officers and Directors . . . . . . . . . . . 37 Shareholder Information and Price Range of Common Stock . . . . . . . . . . 38 Corporate Officers and Directors . . . . . . . . . . . 39 Financial Highlights Cincinnati Financial Corporation and Subsidiaries Comparative results 1999-1998 (000’s omitted except per share data and ratios) 1999 __________ 1998 __________ % Change _________ Operating Performance Revenues ...................................................................... Income Before Income Taxes........................................ Net Operating Income ................................................ Net Capital (Losses) Gains (After Tax) ........................ Net Income ............................................................ $ 2,128,223 321,573 255,089 (367) 254,722 $ 2,054,289 307,107 199,116 42,451 241,567 Financial Position Total Assets .................................................................... Shareholders’ Equity.................................................... $11,380,214 5,421,284 $11,086,503 5,620,936 Per Share Data Net Operating Income ................................................ Net Capital Gains ........................................................ Net Income ............................................................ Net Income (Diluted) ............................................ Cash Dividends Declared ............................................ Book Value.................................................................. Average Shares Outstanding ........................................ $ 1.55 .00 1.55 1.52 .68 33.46 164,637 $ 1.19 .26 1.45 1.41 .611⁄3 33.72 166,821 3.6 4.7 28.1 (100.9) 5.4 2.6 (3.6) 30.3 (100.0) 6.9 7.8 10.9 (0.8) (1.3) Performance Ratios Combined Ratio (Statutory Basis) ................................ Return on Equity ........................................................ Return on Equity Including Net Unrealized Gains and Losses .................................. 100.0% 4.6 1.9 103.6% (3.5) 4.7 (2.1) 19.6 (90.3) This report contains forward-looking statements that involve potential risks and uncertainties. Please see the Management Discussion, page 18, for factors that could cause results to differ materially from those discussed. 1 To Our Shareholders: Cincinnati Financial Corporation reported Innovation: Claims Philosophy record-high assets, net operating income, total From the Company’s agent origins to its revenues and pre-tax investment income in local field authority, agent-centered Cincinnati 1999. Highlights included improved has always stood apart. This was as true in profitability of property and casualty insurance 1999 as in 1950. While foresight and underwriting, with a 100.0% statutory preparation made the century transition combined ratio; a 19.0% increase in net uneventful so far for most insurers, income from The Cincinnati Life Insurance Cincinnati’s innovative stance showed our Company; and achievement of record commitment to select courses of action consolidated revenue and net operating income consistent with our agents’ needs for stable with no boost from taxable net capital gains. markets and superior claims service. Like other These financial results reflected the insurers, we repaired or replaced our own Company’s strong fundamentals and steady non-compliant systems, and we went further performance, achieved by targeting profitable, by helping agencies assess their readiness. incremental and sustainable growth. The We helped them alert insured businesses of Cincinnati formula for consistent growth and the need to prepare and staffed a hotline for profits is a strong customer focus on the agent Y2K-related insurance questions. Unlike and a willingness to align our entire business many insurers, Cincinnati did not attach a system with that focus, innovating to support Y2K-related exclusion to every policy in our the market stability, service advantages and commercial book of business. Instead, we financial strength those agents need. chose to preserve traditional coverages for our In 1999, this meant walking away from policyholders, maintaining our practice of commercial insurance accounts when industry deciding coverage only after looking in each peers priced business with no regard for the case at the specific loss and policy language. amount of risk assumed. It meant repairing Cincinnati’s golden rule claims philosophy autos with manufacturers’ factory parts and gives agents a competitive advantage. Nearly giving claimants the freedom to select their 700 field claims professionals work out of their own body shop or mechanic. It meant offering homes in agents’ communities, available to guaranteed products and rates when other provide emergency service 24 hours a day and insurers were changing direction and hedging seven days a week. Most policyholders learn to bets. It meant investing for total return, appreciate the value of insurance when they selecting equities that pay increasing dividends have a claim, so our claims representatives and bonds with potential for ratings upgrades. confirm that value by treating them as we would want to be treated. 2 Some of our most able executives began that met the policyholder’s needs; and to show their careers as staff adjusters, discovering that a history of service and strength. superior claims service is the most important Those are formidable selling points to have way Cincinnati differentiates our brand. on our side as we again target $2 billion in Senior Vice President James E. Benoski, direct written premiums by year-end 2000. appointed vice chairman and chief insurance Although the large life policy discussed earlier officer of the property and casualty subsidiaries helped us exceed that goal in 1999, it was fully late in 1999, started as a claims representative paid in 1999 and won’t contribute to written in Alabama. Retired Cincinnati Casualty premiums in 2000. Excluding it, direct Company President Hayden D. Davis, who premiums were $1.855 billion in 1999. passed away in January of this year, was the Company’s first claims representative. Innovation: Products and Pricing Director Emeritus Harry M.Turner, one of the four founding agents, also died in January. He wrote the first Cincinnati Insurance policy in 1951, served as its first president and chairman and Cincinnati Financial’s first chairman. He believed an agent-sponsored company that excelled at service and personal relationships would prosper. It did, and in 1999, we wrote the largest policy in our history. In the last days of December, a $302.9 million single-pay life policy on one Chairman, President and Chief Executive Officer John J. Schiff, Jr., CPCU bank’s officers put us over the top of our If positive trends in the final months of 1999 $2 billion goal for direct written premiums for continue, we’ll get more adequate pricing for property casualty and life insurance. commercial accounts and attract new business That transaction succeeded because our with our multi-year rate guarantees, our claims associates tackled it with ingenuity, diligence service and our strong brand in agents’ eyes. and willingness to work across department The good economy should benefit businesses, borders. Selling points included our ability to which will need more and better policies to manage a relationship-based approach; to cover their increased insurable exposures. And design flexible, innovative coverage and terms more property and casualty agents will discover 3 that Cincinnati Life has new products that can Reaching the $2 billion level should make life insurance a profit center for them. position us to increase revenues faster than Sixty agencies, up from 20 in 1998, earned expenses, achieving new economies of scale. more than $40,000 in life commissions in Industry studies by A.M. Best and the 1999. In Tribute to Robert B. Morgan Retired April 3, 1999 Independent Insurance Agents Association showed that Cincinnati’s total operating expenses are no more than those of some large direct marketers that advertise their products to the public. The difference is that we keep Bob Morgan joined Cincinnati as an office and advertising expenses much lower assistant casualty manager in 1966. He and give consumers the extra value of quickly rose through the ranks to become professional advice and service from president of Cincinnati Insurance and of Cincinnati Financial, then chief executive officer. He guided the Company’s progress with skills fine-tuned by his underwriting experience—discipline, decisiveness and the talent to accurately distill complex questions down to simple solutions. He led the Company from $46.6 million in premium and operations in 10 states in 1972 to $1.6 billion and 29 states in 1998. While other companies strayed from core competencies, Bob consistently chose the path commissioned agents. A 1999 major consumer survey by the Insurance Information Institute confirmed that about 80% of the public is most comfortable purchasing insurance from an independent agent. Our business model must continue to demonstrate that these consumers can have quality products and the service of an independent agent without paying substantially more. that differentiates us today, judging all proposals against two brilliant truths: Innovation: Shareholder Value “The agent is our customer.” We made decisions at the local level, empowering and supporting—but not controlling—the field marketing and claims people closest to agents and their customers. “We’re in the business of accepting risk.” To Bob, this meant looking for ways to flexibly underwrite the business agents brought to us. Instead of specializing, we developed a full range of products responding to most of their clients’ needs. It meant looking through policies for reasons to pay claims and treating catastrophe losses not as earnings spoilers, but as opportunities to earn more business from satisfied policyholders. In a three-room Kentucky schoolhouse, Bob learned to cut through complexity, zeroing in on what’s really important. He remains active in retirement, applying his talents to the Company’s government relations. His example lights the way as we choose future paths. Just as agents and policyholders count on Cincinnati’s consistency and stability, you can count on consistently receiving shareholder value. In 1999, we returned more than $327 million to shareholders in cash dividends and stock repurchases. This was the 39th consecutive year of increased cash dividends. Dividends paid per share rose to $0.661⁄3 in 1999 from $0.21 in 1989, adjusted for stock dividends and splits. That’s a 12.2% compound growth rate for the past ten years. 4 Further, the Board declared an 11.8% increase • Standard & Poor’s AA- senior debt rating • Moody’s Investors Service A2 senior debt rating • Standard & Poor’s 500 Index Listed in property casualty insurance group • InformationWeek 500 #353 among top innovative corporate technology users • Nasdaq 1000 #50 among Nasdaq companies by market value It is a privilege to report on the state of Cincinnati Financial Corporation in 2000, my first year of service as chief executive officer. From our current very strong financial position, your Company will follow our agent-centered business plan, continuing to produce consistent growth and profits over the long term. John J. Schiff, Jr., CPCU Chairman, President and Chief Executive Officer February 5, 2000 in the dividend for the first quarter of 2000, raising the indicated annual dividend to $0.76 per share. With financial stocks out of favor and the price of Cincinnati Financial common stock below book value, the Board sees it as an attractive investment. During 1999, we acquired 6.1 million shares at a cost of $217.1 million. After purchase of 589,000 more shares in January, 10.3 million shares remain authorized for repurchase. Rising interest rates in 2000 may contribute to higher investment income, as well as reduced realized and unrealized capital gains in the investment portfolio. We’ll stick to our disciplined buy-and-hold equity strategy, confident in the long-term appreciation potential of the well-managed companies we select. This consistency is a prime reason for Cincinnati Financial’s financial strength reflected in recent positive rankings and ratings (published in 1999 and generally based on 1998 performance): • Forbes 500 #319 Super Rank #237 assets #299 market value #329 profits • Fortune 1000 #640 by revenues #18 among property and casualty stock insurers, based on consolidated revenues • Moody’s Dividend Achievers #92 for 10-year compound growth of cash dividends #25 for longest record of consecutive annual cash dividend increases 33.46 33.72 Book Value* Per Common Share (in dollars) 28.35 18.95 15.90 97 96 95 *Adjusted to reflect 5% stock dividends paid in April 1995 and 1996 and a 3-for-1 stock split paid in May 1998. 98 99 Assets (in millions of dollars) 11,380 11,087 9,493 7,046 6,109 95 96 97 98 99 5 consistent innovation Property and Casualty Insurance Operations Property and casualty insurance underwriting achieved a combined loss and expense ratio of 100.0% for 1999, on a statutory basis. Several factors converged to improve performance over 1998, when the Geographical Scope—Commercial Insurance Independent agencies in 30 states market property/ casualty commercial lines ratio was 103.6%. Primary among those factors were increased underwriting discipline, reduced catastrophe losses, selective abatement of competitive pressure on commercial pricing and some rate improvements on personal lines. Net written premiums advanced to $1.681 billion, up 7.9% versus estimated industry growth of 2.3%. New business reached $210.3 million in direct premiums, compared with 1998’s $218.4 million. The decrease reflected heightened efforts to balance growth and profitability. Notably, fourth- quarter highlights included new business growth of 11.0% and a $19.0 million gross underwriting profit, the second quarterly underwriting gain in 1999. 6 Innovation: Partnering With Agents Our strong desire to remain a stable market for most of our agents’ best accounts influences the strategies we employ to underwrite profitably. Where some other insurers tighten up by eliminating whole classes of business or drastically raising prices, we’re more likely to search for flexible solutions that allow us to write each account. Sometimes the overall risk can be made more attractive by selling additional, more highly profitable coverages in the package, increasing the total premium while giving the policyholder extra value. Or we may offer to write the same policy at a higher price for a multi-year term. This gives policyholders a guarantee that the rates on most coverages won’t increase, reduces their incentive to shop their business every year and lowers processing expenses for agents and for us. Innovative strategies do much more than control our profitability; they give agents new advantages to sell. To provide individualized solutions for agencies and accounts, we must give them each more personal attention. That’s why we choose to keep our agency partnerships under 1,000 instead of taking the approach of appointing every agency that asks to represent us. We commit to having a strong local presence by placing almost a third of our staff in the field, assigning well-trained underwriters and granting easy access to our executives and headquarters staff. While we’ve succeeded at keeping the number of partnerships fairly constant, the average size of those agencies is increasing due to mergers and consolidations. Many agencies time to develop our style of relationship and now have multiple locations, giving them a build premium volume. Those seven new larger marketing radius and larger volume. We states accounted for $58.9 million of direct wrote an average of $1.7 million of premiums premiums in 1999, 3.4% of our total volume. consistent growth Cincinnati’s net written premiums grow consistently at more than twice the industry rate. Commercial net written premiums, which make up 65% of total volume, grew 7.9% in per agency in 1999, out of more than For additional growth, we supplement the 1999. Personal net written $9 billion total volume reported for all 977 new states with expansion of the number of agencies. There is clearly room to grow by marketing territories in established states. further penetrating these prosperous, top-tier Over the past five years, this strategy led to agencies. Innovation: Creating Opportunities the creation of 12 additional, smaller territories where we could provide increased support in return for more business. For Cincinnati also has room to grow 2000, we are looking at staffing new geographically. We’ve expanded to seven new territories in established states of Michigan, states over the past five years and expect to South Carolina, Tennessee, Pennsylvania appoint our first Utah agency soon. It takes and Illinois. We also grow by expanding the product lines our agents can sell. In 1999, Michigan The first Idaho agency appointed, Higgins & Rutledge Insurance (Boise) reflects the larger size typical of new appointments. Left to right: Claims Examiner Lynn M. Hovekamp; Chief Underwriting Specialist Michael J. Meese; Rodney A. Higgins, President of the agency; and Michael E. Francois, Secretary— Sales & Marketing. premiums, accounting for 35% of the total, grew 8.0%. Property Casualty Premium Growth Rate (percent) Cincinnati Insurance Companies Estimated Industry 8.8 6.8 6.4 3.6 3.4 2.8 7.9 2.3 5.8 1.8 95 96 97 98 99 consistent profitability Cincinnati’s statutory combined ratio consistently outperforms the estimated industry ratio. Catastrophe losses contributed 2.2 points to Cincinnati’s 1999 loss ratio versus 6.1 points in 1998. The 1999 expense ratio of 28.4% improved from 28.9% in 1998. Property Casualty Combined Loss and Expense Ratio Statutory basis Before policyholder dividends (percent) Cincinnati Insurance Companies Estimated Industry 104.7 103.0 105.0 99.4 99.9 97.7 103.9 103.6 106.4 100.0 95 96 97 98 99 7 consistent innovation moved into fourth place among our largest relationships that help our agencies grow first. states, following addition of auto insurance to This is a prime reason for our property and the products available there. Personal lines casualty insurance group’s high rankings and filings were approved during 1999 for ratings (published in 1999 and generally based Montana, a young state with $3 million in on 1998 performance): 1999 direct premiums; and selected personal • A.M. Best Company lines are available in Idaho, the newest state, activated late in 1999. Geographical Scope—Personal Insurance Independent agencies in 22 states market all property/ casualty personal lines Selected personal insurance products available Cincinnati’s product portfolio undergoes continuous review and enhancement to make sure agents have up-to-date products with differentiated features. Major 1999 updates A++ (Superior), awarded to just 3% of insurer groups • Standard & Poor’s AA+ (Very Strong) Security Circle • Ward Financial Group Ward’s 50 Benchmark Company, ninth consecutive year, for balancing policyholder safety and shareholder return • Arkansas Independent Agents Association Regional Company of the Year • Best’s Review (July 1999) #33 nationally, net written premiums • Best’s Review (September 1999) #31 nationally, assets • National Underwriter (August 1999) #40 nationally, direct written auto premiums • Business Week Global 1000 (July 12, 1999) #327 in United States, based on financial measures #661 globally Innovation: Providing the Resources included the Homeowner Plus value package A 1999 study by Conning & Co. named of extra coverages, the Residential Business Cincinnati as one of the four most prominent Program and the Businessowners Package middle market insurers. The report singled out Policy. New coverages that are giving agents effective use of technology and outstanding marketing opportunities include Equipment service as the two most important strategies for Breakdown Coverage, Builders’ Risk Soft future success in this market. Both the Costs, Actual Loss Sustained Business Income commercial and personal lines areas of the and the Businessowners Package for Company are dedicating resources to bring the Cosmetologists and Barbers. benefits of technology and service to agents. While many insurers pursue their own Multi-year projects now underway are growth, the innovative Cincinnati approach beginning to change business workflow. focuses on the flexible underwriting and deeper At this time, the headquarters staff and 8 Large, multi-state accounts, like the School Sisters of Notre Dame, receive special attention and innovative, customized claims service and reports. Left to right: Jay P. Weir, Vice President, James R. Weir Insurance Agency, Inc. (Mankato, MN); Sister Katherine DuVal, Provincial Leader; Sister Janet Senderak, Provincial Treasurer; and James E. Benoski, Chief Insurance Officer and Senior Vice President—Claims, The Cincinnati Insurance Companies. consistent growth Steady growth in established states fueled a $123.2 million premium increase. Ohio, the largest state with 26.8% of total direct volume, grew $21.6 million or 4.9%. Other top states by total volume: Illinois up $10.5 million or 6.8%; Indiana, up $5.3 million or 3.6%; Michigan, up $7.0 million or 8.1%. Property Casualty Net Written Premium (in millions of dollars) Commercial Lines Personal Lines Total Property Casualty 1,680.8 1,383.5 1,295.9 1,557.6 1,471.6 1,099.8 902.0 952.7 987.3 1,019.8 581.0 393.9 430.8 484.3 537.8 95 96 97 98 99 consistent profitability The loss and LAE ratio for 1999 improved 3.1 points on the strength of personal lines field representatives across the country limits, providing the right level of protection at profitability. Lower catastrophe have been connected to a corporate intranet. the right price. Sales and Commercial Lines CFCNet provides a direct communication link teamed up to attract $12.7 million of jumbo between headquarters, field staff and agencies. account new business, averaging over This spring, when we begin connecting $140,000 per package. The large account unit’s agencies, they will have online access from underwriters are skilled in quoting and their offices to property and casualty policy underwriting multi-state accounts supported forms and manuals in our Electronic by appropriate resources—loss control, claims Document Repository. This repository is the service agreements and loss reports customized infrastructure for automation of paper-based to the policyholder’s needs. When fully processes. implemented, new large loss reporting software Ongoing software and systems projects will let policyholders view their reports online contribute to progress in every area. Personal via a secure Internet link. lines agents received software to calculate By partnering with good agents and property values and establish correct policy innovating to meet their needs, Cincinnati has losses and an agency re-underwriting program improved the personal lines ratio to 69.1% versus 81.7% in 1998. The commercial lines ratio was 72.9% versus 71.1% in 1998. Property Casualty Loss and LAE Ratio (percent) Total Property Casualty 72.3 75.4 68.4 71.6 74.7 95 96 97 98 99 9 consistent innovation achieved outstanding commercial and personal • National Underwriter (August 16, 1999) insurance rankings and ratings: • Crittenden’s Property/Casualty Ratings #1 commercial insurer nationwide for 1999—agent survey covering six service categories (January 4, 2000); fourth year as the agents’ top choice #1 insurer for commercial umbrellas, Geographical Scope—Life Insurance Property/ casualty and independent life agencies market Cincinnati Life products Independent life agencies market Cincinnati Life products employment practices liability, multi-peril, commercial inland marine, commercial general liability—product-specific agent surveys #2 insurer for commercial auto and business owner policies—product-specific agent surveys • Best’s Review (July 1999) #1 insurer in Ohio for commercial auto direct premiums, with an 8% market share #14 of Top 250 insurers for commercial multi-peril net written premiums • Standard & Poor’s (Business Insurance, October 25, 1999) One of the “Top Global Business Insurers Operating in the United States,” based on suggestions from market participants and share of commercial risks written in the local market #68 insurer for private passenger auto direct written premiums • Independent Consumer Survey Highest-rated independent agent insurer for auto claims satisfaction Life Insurance Operations Innovation: Aligning Product and Distribution Cincinnati Life contributed $28.1 million of net operating income in 1999, up from $23.6 million in 1998. Gross written premiums were $420.7 million, including the $302.9 million dollar, single-premium Bank Owned Life Insurance policy discussed in the Shareholders’ Letter (page 3). The Company’s life insurance operations are in the third year of new leadership. Management’s charge is to align product and distribution to achieve corporate objectives, by rounding accounts and improving persistency of business for Cincinnati’s property and casualty agencies. Innovations include a new generation of life products, updated agent compensation programs, a larger agency force and expanded geographical presence. On the product side, a third-party agreement made it possible to add LifeHorizons Long Term Care to the portfolio and hold training seminars for over 1,000 agents who are selling the coverage. Term insurance sales were very strong as consumers locked in long-term rate guarantees before Triple X regulations became effective on • Best’s Review (September 1999) January 1, 2000. Term life first-year premiums #27 for homeowner direct written premiums rose 70% and ordinary life applications, 10 including individual term, whole life and our first agents in Massachusetts, Connecticut, universal products, rose 64%. Montana and Nevada. As Cincinnati Life enters Because term insurance is easily cross-sold states or areas where we have no property to property and casualty policyholders, it opens casualty agents selling life insurance, we are doors to increased life production from those recruiting independent life agencies. This agencies. We will introduce an updated series strategy increases our return on product of LifeHorizons Term in 2000, as well as development because these agencies require less survival universal life, disability products, a support at a lower fixed cost. single premium deferred annuity and a flexible Cincinnati Life will pilot imaging and premium deferred annuity. automated workflow for the Corporation The broader product portfolio gives agents during 2000. Over 325,000 active files will be the full range they must have to meet most life converted to digital format for online access, insurance needs of their property and casualty with major implications for enhanced service clientele. It also makes recruiting agencies in to agencies. new states easier. During 1999, we appointed Information Systems teams with user departments to develop technology solutions such as the new Field Audit Management System (FAMS). FAMS improves our ability to track and report policy audits. Left to right: Senior Programmer Kara J. Maguire; Premium Audit Field Supervisor Timothy D. Morris, CPCU, APA; and Associate Project Manager Diane L. Fluegeman. consistent growth Face amounts of life insurance policies in force increased 37.2% from 1998 to 1999. Cincinnati Life’s total policy count rose to 327,610 versus 318,598 in 1998, including life, annuities, and accident/health policies. Life Policy Face Amounts in Force Excluding annuities, accident and health business (in millions of dollars) 17,899.9 13,059.9 10,858.4 9,791.9 8,348.8 95 96 97 98 99 consistent profitability Cincinnati Life’s 1999 net premium income rose $4.6 million, up 6.5%. Earned premiums for life insurance, the main marketing thrust, rose $3.7 million to $65.1 million, up 6.1%. Net Premium Income The Cincinnati Life Insurance Company (in millions of dollars) 74.7 70.1 62.9 56.4 50.9 95 96 97 98 99 11 consistent innovation Composition of Equity Investments As of December 31, 1999 (in millions of dollars) Banks, Trusts and Insurance Industrial, Miscellaneous Public Utilities 7,107.0 4,526.4 Cincinnati Life’s solid financial strength 1999 was the first full year of operations for qualifies it for the high rankings and ratings the asset management services subsidiary, that increase the comfort level of property and CinFin Capital Management Company. casualty agencies considering life insurance Although start-up costs exceeded income, the sales: Company ended the year with 14 accounts and • Best’s Review (July 1999) more than $450 million under management. #100 for ordinary life insurance premiums #330 for net premiums written • Ward Financial Group Ward’s 50 Benchmark Company, seventh consecutive year, for policyholder safety and financial strength This amount includes $302.9 million from the large Cincinnati Life policy discussed in the Shareholders’ Letter (page 3). As Cincinnati Life pursues additional sales of this type, CinFin’s asset management services should be a • A.M. Best Company A+ (Superior) • Standard & Poor’s AA+ (Very Strong), Security Circle Financial Services Cincinnati’s financial services subsidiaries enhance relationships by increasing service to sales advantage. Prospective clientele for CinFin services include corporations, insurance agencies and companies, institutions, pension plans and high net-worth individuals. As Cincinnati executives travel to 28 cities for insurance sales meetings this spring, they will introduce agents to CinFin’s disciplined, buy-and-hold approach our agent customers while providing direct to investing. availability to other organizations and individuals. Innovation: Cross-Selling CFC Investment Company, the Investment Operations Innovation: Focusing on the Long Term commercial lease and finance subsidiary, Cincinnati’s investment style is reported $3.2 million of net income in 1999. differentiated by our focus on common stocks Gross receivables rose 19.9% to $92.6 million of well-managed, high-quality companies with as of December 31, 1999. In addition to proven success and regular dividend increases. paying finders’ fees to agents for referrals, During 1999, 35 of the 45 stocks held in the CFC Investment provides agencies with portfolio announced dividend increases, 1,393.5 equipment and vehicles through incentive adding $16.1 million, on an annualized basis, 1,187.1 420.6 403.9 94.8 292.3 33.5 Preferred Stock Portfolio by Cost 98.2 264.4 41.3 Preferred Stock Portfolio by Market Value Common Stock Portfolio by Market Value leases. The Sales Department negotiates to our investment income. Revenues from generous repayment agreements in exchange investment income advanced $18.8 million, for higher insurance premium production. a 5.1% increase. During 1999, two new marketing territories We achieved this growth with an unusually were staffed in Georgia and in Kentucky/ low level of new investment dollars, due to Tennessee. cash outlays for priority projects of major 1,602.0 851.3 577.0 173.7 Common Stock Portfolio by Cost 12 importance to the Company’s future. We spent that inflated gains in 1999 for the S&P 500. $35.2 million in 1999 to double the size of our At year-end 1999, unrealized equity gains offices, bringing headquarters associates back in our common stock portfolio were under one roof for increased efficiency; $5.485 billion versus $5.455 billion at year- approximately $23 million for ongoing end 1998. For the three-year period 1997-99, software development; and $217.1 million to annual total return on our portfolio was repurchase 6.1 million shares of CFC common 28.7% versus 27.5 % for the S&P 500. stock at an average price of $35.66 per share. Higher interest rates impacted the bond After a purchase of 589,000 shares in January market, reducing its asset value by of 2000, a balance of 10.3 million shares $194.8 million as of December 31, 1999. remained authorized for repurchase under the Looking forward to 2000, those high interest 17 million share program announced in rates should bring many opportunities to select February 1999. The average price of all fixed-income investments with higher current consistent growth Investment Assets As of December 31, 1999 (market value in millions of dollars) Others Preferred Stock Common Stocks Taxable Bonds Tax-Exempt Bonds 10,325.0 57.9 10,194.2 65.9 442.2 7,012.6 403.9 7,107.0 8,797.1 46.6 530.4 5,468.9 6,344.4 42.4 465.6 3,274.6 5,535.7 46.9 577.3 2,464.5 repurchases since November of 1996 is $32.13. income and the potential for ratings upgrade. 1,583.3 1,686.4 1,863.0 1,895.1 1,730.8 We recorded a slight realized capital loss in Reflecting the lower unrealized gains in the 1999, less than $0.4 million, compared with portfolio, the book value of Cincinnati net realized capital gains of $42.5 million in Financial stock was $33.46 at year-end 1999 1998. Our policy, over the years, has been to versus $33.72 at year-end 1998. Book value offset capital gains during the fourth quarter over the past three years grew at a 20.9% and minimize taxes. compound growth rate. The Company’s exceptionally strong surplus allows us to capture long-term gains by investing more in common stocks than is typical for many insurers. We continued in 1999 to invest over 40% of new money in equities. The cost basis of the common stock portfolio was $1.602 billion or 34.0% of the total portfolio’s cost at December 31, 1999. Because of our buy-and-hold philosophy, equities accounted for $7.107 billion or 70.2% of total portfolio value on a market basis, as of December 31, 1999. Half of our top 10 equity holdings are financial stocks, a sector temporarily out of favor at year-end 1999. We own financial stocks because of their strong fundamentals, including consistent earnings and dividend histories, in contrast to technology stocks 863.7 875.4 888.2 917.2 886.6 95 96 97 98 99 consistent profitability Pre-tax investment income for 1999 rose 5.1% to an all-time high. Investment income is the primary source of the Corporation’s profits. Dividends from equity holdings contributed $165.1 million and interest from fixed-rate holdings contributed $218.7 million, pre-tax. Investment Income Less Expenses (in millions of dollars) 386.8 368.0 348.6 Public Responsibility Innovation: Speaking Out, Stepping Up Published rankings peg Cincinnati as the 18th largest insurer in the country for revenues and the 33rd largest for net written premiums—but size alone doesn’t determine an insurer’s spot as a good corporate citizen and industry leader. We back our commitment to local independent agents and their customers with a tradition of civic involvement and social responsibility. In 1999, this tradition 327.3 300.0 took us to classrooms and to nonprofit boardrooms, to statehouses and to Congress. The legislative news of the year was the Gramm-Leach-Bliley Act. The law paves the way for insurers, securities firms and banks to 95 96 97 98 99 13 consistant innovation From 1,200 square feet in 1950, Cincinnati’s offices grew to more than 800,000 square feet when the expanded CFC Headquarters was completed in early 2000. It signifies our growth, stability and commitment to serving agents through a strong local field staff reporting to a single headquarters. Approximately two-thirds of the Company’s 2,920 associates work from our Fairfield, Ohio headquarters. 14 enter each other’s businesses. Your Company coalition of insurance, business and consumer actively presented our industry perspective as organizations. The Company’s representative legislators crafted provisions. Our goal was to testified before a Congressional committee to make sure that, in this new landscape, urge consideration of this private-sector consumers will benefit from consistent solution—and to oppose passage of other regulatory oversight, regardless of the type of disaster insurance legislation (H.R. 21) that financial company providing their insurance. unnecessarily involves the federal government. We believe the law, as enacted, sufficiently To learn more about this issue, visit preserves state regulation of insurance and www.pdpc.com. protects consumer privacy. Doing what’s right for the people we serve is During 1999, your Company helped recruit the principle that drives Cincinnati Financial more than 50 Congressional sponsors for and The Cincinnati Insurance Companies to the Policyholder Disaster Protection Act innovate. Consistent innovation has given us (H.R. 2749, S.1914), a proposal to protect strong agency partnerships, highly-rated claims insurer solvency and provide mega-disaster service, satisfied policyholders…and loyal recovery funds through restricted, tax-deferred shareholders who see the opportunity to grow insurer reserves. We continue to help build and profit with us over the years. Thank you support for the proposal through a broad for your support. 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, 1999 were prepared by management in conformity with accounting principles generally accepted in the United States of America. 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, 1999 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. Selected Quarterly Financial Data (Unaudited) (000’s omitted except per share data) Financial data for each quarter in the two years ended December 31, Quarter Revenues .......................................................... Income before income taxes ............................ Net income ...................................................... Net income per common share........................ Net income per common share (diluted) ........ 00,0000000$00,000 1st $ 536,659 82,061 64,477 .39 .38 Quarter Revenues .......................................................... Income before income taxes ............................ Net income ...................................................... Net income per common share........................ Net income per common share (diluted) ........ 00,0000000$00,000 1st $ 512,554 116,333 84,178 .51 .49 $000,00000$00,000 2nd $ 541,321 116,341 86,254 .53 .52 2nd 00,0000000$00,000 $ 518,578 72,913 58,850 .35 .35 $000,00000$00,000 1999 3rd $ 538,301 69,042 57,046 .35 .34 1998 3rd 00,0000000$00,000 $ 514,766 64,019 52,915 .31 .30 $000,00000$00,000 4th $ 511,942 54,129 46,945 .29 .28 00,0000000$00,000 4th $ 508,392 53,841 45,623 .27 .27 0,000000000$00000 Full Year $2,128,223 321,573 254,722 1.55 1.52 0,000000000$00000 Full Year $2,054,289 307,107 241,567 1.45 1.41 Note: The sum of the quarterly reported amounts may not equal the full year as each is computed independently. 15 Selected Financial Information (000’s omitted except per share data and ratios) Cincinnati Financial Corporation and Subsidiaries Total Assets ............................................ Long-Term Obligations........................ Shareholders’ Equity ............................ Book Value Per Share.......................... 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 ........................................ Per Common Share (Diluted) ........................ Net Income In Total ............................................................ Per Common Share ........................................ Per Common Share (Diluted)........................ 00000000000$0000,000 1999 $11,380,214 $ 456,373 $ 5,421,284 $ 33.46 00000000000$0000,000 Years Ended December 31, 1998 $11,086,503 $ 471,520 $ 5,620,936 $ 33.72 1997 $9,493,425 $ 58,430 $4,716,965 $ 28.35 00000000000$00,000 $ 1,731,950 386,773 (564) 10,064 $ 1,612,735 367,993 65,309 8,252 $ 255,089 1.55 1.51 $ 254,722 1.55 1.52 $ 199,116 1.19 1.16 241,567 1.45 1.41 $ $ $1,516,378 348,597 69,230 8,179 $ 254,375 1.54 1.49 $ 299,375 1.81 1.77 00000000000$00,000 1996 $7,045,514 $ 79,847 $3,162,889 $ 18.95 $1,422,897 327,307 47,946 10,599 $ 192,595 1.15 1.11 $ 223,760 1.34 1.31 Cash Dividends Per Common Share Declared ........................................................ Paid .............................................................. $ .681⁄3 .661⁄3 .611⁄3 .592⁄3 $ .542⁄3 .531⁄3 $ .482⁄3 .472⁄3 Property and Casualty Operations Gross Premiums Written ................................ Net Premiums Written .................................. Net Premiums Earned .................................... Loss and Expense Ratio (Statutory Basis): Loss Ratio...................................................... Loss Expense Ratio ........................................ Underwriting Expense Ratio.......................... Combined Ratio............................................ Investment Income Before Taxes.................... Property and Casualty Reserves Unearned Premiums ...................................... Losses ............................................................ Loss Adjustment Expense .............................. $ 1,774,633 1,680,812 1,657,277 $ 1,656,476 1,557,581 1,542,639 $1,566,688 1,471,603 1,453,526 $1,476,011 1,383,525 1,366,544 61.6% 10.0% 28.4% 100.0% 00000000000$0000,000 $ $ 207,640 454,844 1,513,134 418,634 65.4% 9.3% 28.9% 103.6% 00000000000$0000,000 58.3% 10.1% 29.3% 97.7% 00000000000$00,000 61.6% 13.8% 27.6% 103.0% 00000000000$00,000 $ $ 203,919 $ 199,427 $ 190,318 432,436 1,432,212 408,113 $ 418,465 1,373,950 402,698 $ 401,562 1,319,286 383,135 Statutory Policyholders’ Surplus .................... $ 2,851,774 $ 3,019,828 $2,472,532 $1,608,084 *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. 16 Cincinnati Financial Corporation and Subsidiaries 00000000000$00,000 1995 $6,109,298 $ 80,000 $2,657,971 $ 15.90 $1,314,126 300,015 30,781 10,729 $ 207,342 1.24 1.20 $ 227,350 1.36 1.33 00000000000$00,000 1994 $4,734,279 $ 80,000 $1,940,047 $ 11.63 $1,219,033 262,649 19,557 11,267 $ 188,538 1.13 1.09 $ 201,230 1.21 1.18 00000000000$00,000 1993 $4,602,288 $ 80,000 $1,947,338 $ 11.70 $1,140,791 239,436 51,529 10,396 $ 182,530* 1.10* 1.06* $ 216,024* 1.30* 1.27* 00000000000$00,000 1992 $4,098,713 $ 80,000 $1,713,776 $ 10.37 $1,038,772 218,942 35,885 10,552 $ 147,669 .90 .87 $ 171,325 1.04 1.03 00000000000$00,000 Years Ended December 31, 1990 $2,626,156 $ 202 $1,006,868 $ 6.18 1991 $3,513,749 $ 182 $1,441,401 $ 8.79 00000000000$00,000 00000000000$00,000 1989 $2,602,990 $ 753 $1,020,253 $ 6.31 $ 947,576 193,220 7,641 12,698 $ 141,273 .86 .86 $ 146,280 .90 .89 $ 871,196 167,425 1,488 8,822 $ 813,313 149,285 4,678 7,134 $ 128,052 .79 .78 $ 128,962 .79 .79 $ 111,477 .69 .69 $ 114,490 .71 .70 $ .422⁄3 .422⁄3 $ .382⁄3 .371⁄3 $ .341⁄3 .331⁄3 $ .31 .30 $ .272⁄3 .272⁄3 $ .241⁄3 .232⁄3 $ .22 .21 $1,377,426 1,295,852 1,263,257 $1,287,280 1,190,824 1,169,940 $1,216,766 1,123,780 1,092,135 $1,089,901 1,014,971 992,335 $ 996,807 930,296 903,465 $ 896,204 838,554 828,046 $ 845,346 790,971 771,205 57.6% 14.7% 27.1% 99.4% 00000000000$00,000 63.3% 9.8% 27.5% 100.6% 00000000000$00,000 63.5% 8.7% 27.9% 100.1% 00000000000$00,000 63.8% 9.0% 29.0% 101.8% 00000000000$00,000 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 $ 180,074 $ 162,260 $ 153,190 $ 141,958 $ 126,332 $ 110,827 $ 97,661 $ 385,418 1,274,180 306,570 $ 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 $1,268,597 $ 998,595 $1,011,609 $ 933,529 $ 735,557 $ 477,355 $ 494,460 Per share data adjusted for three-for-one stock splits in 1998 and 1992 and stock dividends of 5 percent in 1996 and 1995. 17 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 1999. The lead property and casualty insurance subsidiary, The Cincinnati Insurance Company, markets a broad range of business and personal policies in 30 states through an elite corps of 977 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 nonparticipatory workers’ compensation and nonstandard policies for preferred risk accounts. The Cincinnati Life Insurance Company markets life, long term care, health and accident policies and annuities through property and casualty agencies and independent life agencies. CFC Investment Company complements the insurance subsidiaries with commercial leasing, financing and real estate services. The Company’s sixth subsidiary, CinFin Capital Management Company, was established in 1998 to provide asset management services to institutions, corporations and individuals with $500,000 minimum accounts. CinFin’s assets under management more than tripled to $462 million in 14 accounts by January 2000 from $150 million in two accounts in January 1999. Investment operations are CFC’s primary source of profits. A total return strategy emphasizes investment in fixed-maturity securities as well as equity securities that contribute to current earnings through dividend increases and add to net worth through long-term price appreciation. 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 affecting the Company’s equity portfolio; delays in the planned schedule of development and implementation of technology enhancements; and, decreased ability to generate growth in investment income. Readers are cautioned that the Company undertakes no obligation to review or update the forward-looking statements included in this material. Further, income per share discussions herein relate to basic income per share. 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 7.1%, reaching $2.128 billion in 1999, with property and casualty net written premiums also growing at a 7.1% rate to $1.681 billion over the past five years. In the same five-year period, total net income, including realized capital gains, grew at a compound rate of 4.8% to $254.7 million, or $1.55 per share, from $201.2 million, or $1.21. Net operating income, which excludes capital gains or losses, increased at a 6.2% rate to $255.1 million, or $1.55 per share, from $188.5 million, or $1.13, in 1994. Book value grew at a 23.5% compound rate over the same period to $33.46 per share in 1999 from $11.63. 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, led management to target an ambitious $2.0 billion in total direct written premiums by the year 2000. This goal was met in 1999, when the Company wrote $2.158 billion in direct written premiums, largely as the result of a single Bank Owned Life Insurance (BOLI) premium of $302.9 million written by The Cincinnati Life Insurance Company. Management believes the Company could again reach $2.0 billion in total direct written premiums in 2000, without additional BOLI sales. Management balances this goal with the objectives of generating an underwriting profit and maximizing annual growth in investment income. The following table and discussion analyzes results for the three-year period ending December 31, 1999 and provides insight into management’s strategic direction. (000,000’s omitted except per share data and ratios) Revenue Net Operating Income Net Capital (Losses) Gains (after tax) Net Income Net Operating Income Per Share Net Capital Gains Per Share Net Income Per Share Catastrophe Losses (before tax) Catastrophe Losses Per Share 1999 $2,128.2 255.1 (.4) 254.7 $ 1.55 .00 $ 1.55 $ 36.8 Change $ $ 73.9 56.0 (42.9) 13.1 .36 (.26) $ .10 $(56.7) $ Change % 4 28 (101) 5 30 (100) 7 (61) 1998 $2,054.3 199.1 42.5 241.6 $ 1.19 .26 $ 1.45 $ 93.5 Change $ $111.9 (55.3) (2.5) (57.8) (.35) (.01) (.36) $ $ 68.0 $ Change % 6 (22) (6) (19) (23) (4) (20) 267 1997 $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) (after tax) 18 .15 (.21) (58) .36 .26 260 .10 (.15) (60) Cincinnati Financial Corporation and Subsidiaries The Company’s financial results for the three years ending December 31, 1999 reflected growth in new insurance business and retention of renewal customers, offset by highly competitive property and casualty pricing in 1997 through the first half of 1999. Net operating earnings in 1999 were the best for any year in Company history, modestly surpassing the record results of 1997. Relatively low catastrophe losses contributed to the Company’s 28% improvement in net operating income in 1999. In 1998, net operating income declined due to catastrophe losses and large property losses. The Company reported a modest net capital loss after tax of $0.4 million in 1999. Capital gains on sales of equity securities were offset by sales of fixed maturity securities with market value lower than book value, attributable to higher interest rates and sales of a few non-performing investments. In 2000, the Company expects to be able to invest available cash and proceeds from the sales of securities at higher yields. Revenue from investment income rose 5.1% to an all-time high of $386.8 million in 1999. Record investment income was achieved despite reduced cash flow available for investment in 1999, when more cash was spent on the Company’s stock repurchase, the construction of a new office tower and ongoing technology initiatives. Year 2000 The Company’s Year 2000 project was successfully completed, with total expenses of $9.7 million over a six-year period ending in 1999. The investment included upgrading and replacement of systems that will generate long-term value for the Company. No material effect on operations or financial results occurred because of the calendar year change. Small isolated technical problems early in January 2000 were resolved quickly. Any future problems are anticipated to be minimal and further reporting of Year 2000 issues will not be made, unless the occurrence is material to the Company. Property and Casualty Insurance Operations (000,000’s omitted except ratios) 1999 Gross Written Premiums Net Written Premiums Net Earned Premiums Loss and LAE Ratio Expense Ratio (Statutory Basis) Combined Ratio (Statutory Basis) $1,774.6 1,680.8 1,657.3 71.6% 28.4% 100.0% Change $ $118.1 123.2 114.7 n/a n/a n/a Change % 7.1 7.9 7.4 (4.1) (1.7) (3.5) 1998 $1,656.5 1,557.6 1,542.6 74.7% 28.9% 103.6% Change $ $ 89.8 86.0 89.1 n/a n/a n/a Change % 5.7 5.8 6.1 9.2 (1.4) 6.0 1997 $1,566.7 1,471.6 1,453.5 68.4% 29.3% 97.7% Change $ $ 90.7 88.1 87.0 n/a n/a n/a Change % 6.1 6.4 6.4 (9.3) 6.2 (5.1) Premiums — The Company’s property and casualty total net written premiums, which advanced 7.9% in 1999, continued to outpace the estimated industry growth rate. The Company’s commercial lines growth rate reversed a downward trend to increase 7.9% to $1,099.8 billion in 1999 versus 3.3% in 1998 and 3.6% in 1997. Personal lines net written premiums increased 8.0% to $581.0 million in 1999 compared with 11.0% in 1998 and 12.4% in 1997. During 1999, the commercial insurance market continued to experience the price competition that began prior to 1996, although some of the Company’s field marketing representatives and independent agents reported firmer pricing for selected lines in some market areas. Accelerated growth of new business later in the year brought the 1999 total to $210.3 million versus $218.4 million in 1998. The Company continues to selectively underwrite both new and renewal accounts, carefully assessing profitability. In addition, the Company completed an agency re-underwriting program that helped restore profitability to its personal lines insurance business. The improved profitability was balanced against slower premium growth, and the Company anticipates that the pace of personal lines growth will continue to reflect heightened underwriting discipline and the need for upcoming technology upgrades. While improved pricing of some commercial lines of business should contribute to future growth, the Company will be challenged to continue achieving strong personal lines growth. To continue its growth and maximize profitability, the Company is working harder to develop new and retain profitable business by: • pursuing a marketing strategy that permits field representatives to spend more time assisting the independent insurance agents and • providing innovative product and service solutions that meet the needs of the Company’s independent agents. Management believes additional market penetration can be achieved by leveraging strong relationships with independent agencies. The Company also can distinguish itself through competitive features of its insurance products such as the availability of three- and five-year policy terms for many types of insurance coverage. In 1999, approximately 97% of the Company’s premium volume was in states in which the Company has had a presence for more than five years. During the past five years, the Company added 12 territories in established states, restructuring so that each field representative has fewer agencies to serve. The Company expects to subdivide as many as five territories in 2000 and 2001 to further strengthen agency relationships. 19 Management Discussion (continued) Cincinnati Financial Corporation and Subsidiaries Entry into new states also has been a source of premium growth. The Company appointed its first agent in Idaho late in 1999 and expects to be active in Utah in 2000. A very successful example of a new market entry is Minnesota, where premium volume reached $23.1 million in 1999, up from $2.9 million in 1995. From 1997 through 1999, the Company began marketing commercial lines in North Dakota, Montana, Idaho and upstate New York and added full personal lines in Minnesota, North Dakota, Montana and Pennsylvania. The Company’s criteria for entry into new states include a favorable regulatory climate and no residual market. The Company’s Special Accounts unit enjoyed strong growth in 1999. Formed to underwrite and support large, multi-state accounts, the unit generated $12.7 million in new business in 1999 — up from $8.3 million in 1998. The accounts in this unit are among the largest businesses served by the Company’s agents. Expenses — The Company recorded a $6.2 million statutory gross underwriting loss in 1999, compared with a $59.6 million statutory gross underwriting loss in 1998 and a $28.6 million gross underwriting profit in 1997. The 1999 underwriting loss, reflecting a combined ratio (statutory basis) of 100.0%, was primarily the result of strong premium growth and more favorable loss results, with catastrophe losses accounting for only 2.2 percentage points of the loss and loss adjustment expense ratio. The 1998 underwriting loss, reflecting a combined ratio of 103.6%, was primarily the result of catastrophe losses, which added 6.1 percentage points to the loss and loss adjustment expense ratio, as well as an unusual number of losses greater than $1 million, including several large fire losses. In 1997, catastrophe losses had a 1.8 percentage point impact on a combined ratio of 97.7%. 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, in an effort to control such catastrophe losses, 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. 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. The pure loss ratio for commercial lines increased to 61.4% in 1999 from 61.1% in 1998 and 53.3% in 1997. The 1999 pure loss ratio for commercial lines was increased by 1.3 percentage points due to Ohio uninsured motorist claims that the Company incurred, which resulted in losses of $13.7 million. In 1999, the Ohio Supreme Court ruled that Ohio business automobile policies cover employees or their family members for injuries caused by uninsured and underinsured 20 motorists, even when the injured persons are not in company vehicles or on company business. Effective October 1, 1999, the Company began using new language in Ohio business auto policies to relieve business policyholders of the need to fund this coverage for losses that they did not intend to assume responsibility for. The Company is being very proactive about changing the policy language on renewals, at or before the policy anniversaries, and amending language on policies outside of Ohio to protect business owner policyholders from this type of risk. The pure loss ratio for personal lines improved to 62.0% for 1999, down from 73.8% in 1998 and 68.9% in 1997. Lower catastrophe losses accounted for 6.3 percentage points of the improvement between 1999 and 1998. The Company’s 1998-1999 agency re-underwriting program, designed to help restore profitability, accounted for the remainder. The expense ratio (statutory basis) continued to decline slightly in 1999, dropping to 28.4% from 28.9% in 1998 and 29.3% in 1997, as the Company maintained a sustainable level of investment in staff and costs associated with upgrading technology and facilities. For the next several years, the Company anticipates the expense ratio will be affected by plans to invest in upgraded or new direct personal lines billing software for the Company’s property and casualty subsidiaries, with the phased roll-outs planned for 2000 through 2001. In January 1999, the Company adopted Statement of Position (SOP) 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use.” This SOP provides guidance on the capitalization of costs related to internal use software and does not require restatement of prior period amounts. The Company capitalized costs of $6.0 million in 1999, which would have been expensed under the Company’s prior policy. 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 are written with post-date coverages that afford clean-up costs and Superfund responses. Cincinnati Financial Corporation and Subsidiaries Life and Accident and Health (000,000’s omitted except ratios) 1999 Gross Written Premiums Net Written Premiums Net Earned Premiums Total Assets Equity Net Operating Income $ 420.7 410.4 74.7 1,447.1 463.2 28.1 Change $ $306.0 301.2 4.6 236.9 (61.8) 4.5 Change % 266.8 275.8 6.6 19.6 (11.8) 19.1 1998 $ 114.7 109.2 70.1 1,210.2 525.0 23.6 Change $ $ 17.1 16.8 7.2 110.2 48.4 (1.2) Change % 17.5 18.2 11.4 10.0 10.2 (4.8) 1997 $ 97.6 92.4 62.9 1,100.0 476.6 24.8 Change $ $ 7.8 7.2 6.5 192.7 101.0 4.7 Change % 8.7 8.5 11.5 21.2 26.9 23.4 CFC’s life insurance subsidiary had total net earned premium income for 1999 of $74.7 million, up from $70.1 million in 1998 and $62.9 million in 1997. Life insurance premiums were $65.1 million in 1999, $61.7 million in 1998 and $54.7 million in 1997. The life insurance subsidiary contributed 11% of CFC’s operating income in 1999, down from 12% in 1998 but above the 10% in 1997. The growth in life insurance premium came primarily from the sale of term insurance. The LifeHorizons products offered competitive rates and commissions along with guaranteed level premiums for periods up to 30 years. Term insurance sales were strong throughout the industry as policyholders wanted to lock in those level premiums before “Triple X” regulations took effect on January 1, 2000. Term life first-year premiums rose 70% and ordinary life applications, including individual term, whole life and universal products, rose 64%. Worksite marketing applications increased 17% in 1999. An important part of Cincinnati Life’s strategic mission is to round out accounts while improving persistency for the Company. Term and worksite insurance products are well suited to cross selling by the Company’s property and casualty agency force. Agents find that offering worksite marketing to employees of their small commercial accounts provides a benefit to the employees at low cost to the employer. With the success of the term and worksite efforts, the Company intends to enhance and develop new life insurance products that will meet the needs of the property and casualty agent and their customers as well as attract independent life agents to help support overall product volume. Investment Income and Investments Though the growth rate for investment income declined slightly to 5.1% in 1999 from 5.6% in 1998, income reached a record level of $386.8 million primarily as a result of investing the cash flows from operating activities and the collection of dividend increases from equity securities in the investment portfolio. The primary reason for the slower growth in 1999 was the use of $217.1 million of cash flow to fund the repurchase of the Company’s common stock, which decreased cash available for the investment portfolio compared with 1998, a year affected by high catastrophe losses, and 1997. The asset value of the equities rose by about $56 million in 1999, offset by the bond portfolio, which declined by about $195 million, in line with the market. In 1999, 35 out of the 45 common stocks in the Company’s investment portfolio increased dividends during the year, adding more than $16.1 million to future annualized investment earnings. The Company’s primary investment strategy is to maintain liquidity to meet both immediate and long-range insurance obligations through the purchase and maintenance of medium- risk, fixed maturity and equity securities, while earning optimal returns on the equity portfolio through higher dividends and capital appreciation. The Company’s investment decisions on an individual insurance company basis are influenced by insurance 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% to 3% and with annual dividend increases. The Company’s portfolio of equity investments had an average dividend yield-to-cost of 8.9% at December 31, 1999. Management’s strategy in equity investments includes identifying approximately 10 to 12 companies, for the core of the investment portfolio, in which the Company can accumulate 10% to 20% of their common stock. Interest and Income Taxes The Company’s income tax expense was $66.9 million, $65.5 million and $95.2 million for 1999, 1998 and 1997, respectively, while the effective tax rate was 20.79%, 21.34% and 24.12%, for the same periods. The higher tax rate in 1997 primarily was due to the strong underwriting profit recorded for the year and higher capital gains. The effective rate remained constant from 1998 to 1999. The Company incurred no additional alternative minimum tax expenses for the three years. 21 Management Discussion (continued) Cincinnati Financial Corporation and Subsidiaries Cash Flow and Liquidity (000,000’s omitted) Net Cash Provided by Operating Activities Net Cash Used in Investing Activities Net Cash (Used in) Provided by Financing Activities Net Increase (Decrease) in Cash Cash at Beginning of Year Cash at End of Year Supplemental Interest Paid Income Taxes Paid 1999 1998 1997 $ 687.8 (205.3) $ 273.6 (320.7) $ 427.0 (282.5) (201.6) 280.9 58.6 339.5 31.6 55.0 25.5 (21.6) 80.2 58.6 36.4 91.2 (124.2) 20.3 59.9 80.2 21.8 95.5 Cash Flow In 1999, operating cash flow was 151% higher than in 1998, primarily because of the sale of a $302.9 BOLI policy. Excluding this event, operating cash flow was 41% higher than in 1998 primarily because of lower catastrophe losses. For the years 1999 and 1998, cash flow was sufficient to meet operating needs, but short-term borrowings were utilized for financing and investing activities. In 1997, operating cash flow was 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 for 1999 reflected a decline in the amount of fixed maturity investments being called by the issuers, compared with the higher amounts called in 1998 and 1997. This also resulted in lower levels of fixed maturities purchased in 1999, compared with 1998 and 1997. Cash flows used in net purchases of fixed maturity and equity securities, respectively, amounted to $45.1 million and $49.0 million in 1999, $107.8 million and $153.2 million in 1998, and $122.6 million and $134.1 million in 1997. For the years 1999 and 1997, the primary reasons for increases in net cash used for financing activities were for the payment of cash dividends and the purchase of treasury shares. In 1998, net cash was provided in financing activities due to the issuance of a senior debenture, offset by treasury share purchases, cash dividend payments and reduction of short-term debt. Notes Payable — Notes payable, primarily short-term debt used to enhance liquidity, increased to $118.0 million in 1999 from zero in 1998. Management used short-term debt for 22 purchase of treasury shares, the construction of an additional Cincinnati headquarters building and for other purposes. Dividends — CFC has increased cash dividends to shareholders for 39 consecutive years and, periodically, the Board of Directors authorizes stock dividends or splits. In February 1998, the CFC Board increased the indicated annual dividend 12.2%, raising the annual dividend five cents to an indicated annual rate of $1.84 (pre split basis). 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. On February 5, 2000, the Board of Directors authorized an 11.8% increase in the regular quarterly dividend to an indicated annual rate of $0.76 per share. 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 and cash dividends not reinvested. In the past 10 years, the Company has paid an average of 30-35% of net income as dividends, with the other 65-70% reinvested for future growth. The ability of the Company to continue paying cash dividends is subject to such factors as the Board of Directors may deem relevant. Financial Condition Assets Cash and marketable securities of $10.468 billion make up 92.0% of the Company’s $11.380 billion assets; this compares with 93.1% in 1998 and 93.0% in 1997. The Company has only minor investments in real estate and mortgages, which are typically illiquid. At December 31, 1999, the Company’s portfolio of fixed maturity securities had an average yield-to-cost of 8.3% and an average maturity of 10 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. Cincinnati Financial Corporation and Subsidiaries At year-end 1999 and 1998, investments totaling approximately $888 million and $873 million ($970 million and $883 million at cost) of the Company’s $10.194 billion and $10.325 billion investment portfolio related to securities rated as 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, 1999, compared with 9% at year-end 1998 and 10% at year-end 1997. 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. The $54.1 million increase in land, building and equipment for Company use includes $35.2 million relating to the addition of a second office tower, which approximately doubled the headquarters space. The new construction and related renovations will be completed in the first half of 2000. The total cost is estimated at $60 million. 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, 1999, long- and short-term debt were 5%, insurance reserves were 26% and total shareholders’ equity was 48%, of total assets, with remaining liabilities consisting of unearned premiums, deferred income taxes, declared but unpaid dividends and other liabilities. Debt — Total long- and short-term debt was less than 6% of total assets at year-end 1999 and 1998. At December 31, 1999 and 1998, long-term debt consisted of $456.4 million and $471.5 million, respectively, of convertible and senior debentures. Short-term debt is used to provide working capital as discussed above. Equity — Shareholders’ equity, as a percentage of total assets, declined in 1999 to 48% compared with 51% for 1998 and 50% for 1997 due to a decrease in accumulated other comprehensive income as a result of a decline in unrealized capital gains, primarily due to the lower market value of the Company’s bond portfolio. 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’s omitted) Shareholders’ Equity Excluding Retained Earnings and Accumulated Other Comprehensive Income Retained Earnings Accumulated Other Comprehensive Income Total Shareholders’ Equity 1999 1998 1997 $ 267.3 1,623.9 $ 462.0 1,480.9 $ 469.5 1,341.7 3,530.1 $5,421.3 3,678.0 $5,620.9 2,905.8 $4,717.0 As a long-term investor, the Company has followed a buy-and-hold strategy for more than 40 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 $5.488 billion as of December 31, 1999 and constituted 54% of the total investment portfolio; 73% of the equity investment portfolio; and after deferred income taxes, 66% of total shareholders’ equity. Such unrealized appreciation, before deferred income taxes, amounted to $5.512 billion and $4.273 billion, at year-end 1998 and 1997, respectively. On November 22, 1996, the Board of Directors authorized the repurchase of up to 3 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 adjusted the authorization to reflect the three-for-one split, which resulted in a total of 9 million shares authorized to be repurchased. 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 at December 31, 1998. They specified their intention to complete the repurchase by December 31, 2000. This authorization superceded the previous authorization of 9 million shares. As of December 31, 1999, the Company, working under Board repurchase authorizations, had bought back more than 9.6 million shares of its common stock at a cost of $310.2 million. Under the new authority, repurchases in 1999 and the first month of 2000 totaled 6.7 million shares at a cost of $235.1 million. As of February 1, 2000, 10.3 million shares remained authorized for repurchase by the Board of Directors. 23 Consolidated Balance Sheets (000’s omitted) Cincinnati Financial Corporation and Subsidiaries ...................................................................................................................................................................... Assets Investments Fixed maturities, at fair value (cost: 1999–$2,692,154; 1998–$2,682,659) ................................................................ Equity securities, at fair value (cost: 1999–$2,022,555; 1998–$1,943,206) ................................................................ 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, 1999 $000.,00000000$00,000 1998 $000.,00000000$00,000 $ 2,617,412 $ 2,812,231 7,510,918 65,909 339,554 80,128 32,931 166,585 159,229 24,684 154,385 7,454,817 57,902 58,611 76,773 32,107 164,412 135,991 26,435 142,896 accumulated depreciation: 1999–$123,427; 1998–$108,449) .... Other assets .......................................................................................... Total assets ............................................................................ ...................................................................................................................................................................... ...................................................................................................................................................................... 107,784 120,695 $11,380,214 $000.,00000000$00,000 $000.,00000000$00,000 53,639 70,689 $11,086,503 $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: 1999–171,862; 1998–170,435 ........................................ Paid-in capital .................................................................................. Retained earnings .............................................................................. Accumulated other comprehensive income........................................ ...................................................................................................................................................................... Less treasury shares at cost (1999–9,841 shares; 1998–3,754 shares) Total shareholders’ equity ............................................................ Total liabilities and shareholders’ equity ...................................... ...................................................................................................................................................................... ...................................................................................................................................................................... ...................................................................................................................................................................... $ 2,154,149 860,561 480,453 169,721 1,719,673 118,000 419,614 36,759 5,958,930 $000.,00000000$00,000 $000.,00000000$00,000 $000.,00000000$00,000 343,725 237,859 1,623,890 3,530,104 5,735,578 (314,294) 5,421,284 $11,380,214 $000.,00000000$00,000 $000.,00000000$00,000 $000.,00000000$00,000 $ 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 ...................................................................................................................................................................... $000.,00000000$00,000 $000.,00000000$00,000 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 .............................................................................................................................................................. 1999 $000.,00000000$00,000 Years Ended December 31, 1998 $000,00000000$00,000 1997 000,0000..0000$00,000 Revenue Premium income .............................................................................................................................................................. Property and casualty .............................................. Life........................................................................ Accident and health .............................................. Net premiums earned............................................ Investment income...................................................... Realized (losses) gains on investments.......................... Other income.............................................................. Total revenues ........................................................ .............................................................................................................................................................. .............................................................................................................................................................. $000.,00000000$00,000 $ 1,657,277 65,824 8,849 1,731,950 386,773 (564) 10,064 2,128,223 $000.,00000000$00,000 $000.,00000000$00,000 $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$00,000 000,0000..0000$00,000 $ 1,453,526 54,742 8,110 1,516,378 348,597 69,230 8,179 1,942,384 000,0000..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 1,254,363 311,979 151,170 59,796 1,221,118 290,832 144,849 60,798 1,054,924 282,690 139,030 48,573 unearned premiums and to life policies in force .... Interest expense ............................................................ Other expenses ............................................................ Total benefits and expenses.................................... .............................................................................................................................................................. .............................................................................................................................................................. (11,489) 33,043 7,788 1,806,650 (7,583) 28,012 9,156 1,747,182 (7,725) 20,821 9,512 1,547,825 $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 .................................... 321,573 307,107 394,559 .............................................................................................................................................................. $000.,00000000$00,000 $000,00000000$00,000 000,0000..0000$00,000 Provision For Income Taxes Current .......................................................................... Deferred...................................................................... Total provision for income taxes ............................ .............................................................................................................................................................. .............................................................................................................................................................. 76,534 (9,683) 66,851 78,847 (13,307) 65,540 107,046 (11,862) 95,184 $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 .................................................................. .............................................................................................................................................................. $ 254,722 $000.,00000000$00,000 .............................................................................................................................................................. $000.,00000000$00,000 $ 241,567 $000,00000000$00,000 $000,00000000$00,000 $ 299,375 000,0000..0000$00,000 000,0000..0000$00,000 Per Common Share Net income .................................................................... .............................................................................................................................................................. $ 1.55 $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 Net income (diluted).................................................... .............................................................................................................................................................. $ 1.52 $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)............................................ .............................................................................................................................................................. $ .68 $000.,00000000$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$00,000 000,0000..0000$00,000 $ $ $ 1.45 1.41 .611⁄3 $ $ $ 1.81 1.77 .542⁄3 Consolidated Statements of Shareholders’ Equity (000’s omitted) Cincinnati Financial Corporation and Subsidiaries Accumulated Other Total Balance, December 31, 1996 .... $ Common Stock 334,972 $ (11,217) $ 178,547 $ 1,132,880 $ 1,527,707 $ 3,162,889 Comprehensive Shareholders’ Retained Earnings Treasury Stock Paid-In Capital Income Equity 000,0000000000$00,000 000,0000 0000$00,000 000,0000000000 0,000 000,0000 000$00,000 $000,0000000$000000 $000.,0000000$00,000 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 treasury shares .................... Stock options exercised.............. Conversion of debentures.......... Balance, December 31, 1998 .... Net income .............................. Change in unrealized losses on investments ........................ Income taxes on unrealized losses.. Comprehensive income ............ Dividends declared .................... Purchase/issuance of 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) 1,214 875 340,871 $000.,0000000$00,000 (24,611) $000,0000000$000000 (97,196) 310 9,100 5,636 218,328 000,000000000$00,000 000,0000000000$00,000 000,0000000000$00,000 1,480,914 3,678,019 254,722 (111,746) (227,562) 79,647 299,375 000,0000000000$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) 10,314 6,511 5,620,936 000,0000000000$00,000 254,722 000,0000000000$00,000 (227,562) 79,647 106,807 (111,746) (217,084) treasury shares .................... 7,212 Stock options exercised.............. Conversion of debentures.......... 15,159 Balance, December 31, 1999 .... $ 343,725 $ (314,294) $ 237,859 $ 1,623,890 $ 3,530,104 $ 5,421,284 14 6,396 13,121 816 2,038 (217,098) 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 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. 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 provided by operating activities: Depreciation and amortization........................................ Increase in investment income receivable ........................ (Increase) decrease in premiums receivable ...................... (Increase) decrease in reinsurance receivable .................... Decrease (increase) in prepaid reinsurance premiums ...... Increase in deferred acquisition costs................................ Increase in accounts receivable........................................ (Increase) decrease in other assets.................................... Increase in loss and loss expense reserves .......................... Increase in life policy reserves .......................................... Increase in unearned premiums........................................ Increase (decrease) in other liabilities .............................. Increase (decrease) in current income taxes...................... Decrease in deferred income taxes .................................... Realized loss (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...................................... Increase in (payoff of ) notes payable ...................................... Payment of cash dividends to shareholders ............................ Net cash (used in) provided by financing activities .... Net increase (decrease) 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. 1999 $000000000$00,000 Years Ended December 31, 1998 $0000000000$00000 1997 000,0000000$00,000 $ 254,722 $ 241,567 $ 299,375 $000000000$00,000 $0000000000$00000 000,0000000$00,000 $000000000$00,000 $0000000000$00000 000,0000000$00,000 16,016 (3,355) (2,173) (23,238) 1,751 (11,489) (15,277) (376) 99,424 326,831 20,758 10,030 20,752 (9,683) 564 2,546 687,803 61,909 316,495 197,141 16,133 (423,505) (246,129) (102,141) (16,957) (8,232) (205,286) – 0 – 7,212 (217,084) 118,000 (109,702) (201,574) 11,793 (2,253) (5,873) (26,881) (2,823) (7,583) (7,369) 649 118,191 51,283 16,641 (20,330) (14,595) (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 38,746 10,926 (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) 20,235 59,933 80,168 21,823 95,488 $ $ $ $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$00,000 280,943 58,611 $ 339,554 $000000000$00,000 $000000000$00,000 $000000000$00,000 $000000000$00,000 $ 31,612 $ 55,000 $000000000$00,000 $ $ $ $0000000000$00000 000,0000000$00,000 $000000000$00,000 $0000000000$00000 000,0000000$00,000 $0000000000$00000 000,0000000$00,000 $0000000000$00000 $0000000000$00000 000,0000000$00,000 000,0000000$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’’), through its subsidiaries, sells insurance primarily in the Midwest and Southeast regions of the United States of America 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 accounting principles generally accepted in the United States of America. Accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 $380,000,000 and $356,000,000 of such reserves at December 31, 1999 and 1998, 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 28 of the current cost of insurance and policy administration, with the remainder recognized as liabilities and included in life policies reserves. Accident and Health Insurance – Expenses incurred in the issuance of policies are deferred and amortized over a five-year period. Policy premium income, unearned premiums and reserves for unpaid losses are accounted for in substantially the same manner as property and casualty insurance discussed above. Reinsurance – In the normal course of business, the Company seeks to reduce losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance companies, reinsurers and involuntary state pools. Reinsurance contracts do not relieve the Company from any obligation to policyholders. Although the Company historically has not experienced uncollectible reinsurance, failure of reinsurers to honor their obligations could result in losses to the Company. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. The Company also assumes some reinsurance from other insurance companies, reinsurers and involuntary state pools. Such assumed reinsurance activity is recorded principally on the basis of reports received from the ceding companies. Investments – Fixed maturities (bonds and notes) and equity securities (common and preferred stocks) are classified as available for sale and are stated at fair values. Unrealized gains and losses on investments, net of income taxes associated therewith, are included in shareholders’ equity in accumulated other comprehensive income. 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. Cincinnati Financial Corporation and Subsidiaries Earnings Per Share – Net income per common share is based on the weighted average number of common shares outstanding during each of the respective years. The calculation of net income per common share (diluted) assumes the conversion of convertible senior debentures and the exercise of stock options. Fair Value Disclosures – Fair values for investments in fixed maturity securities (including redeemable preferred stock) are based on quoted market prices, where available. For such securities not actively traded, fair values are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. Fair values for equity securities are based on quoted market prices. The fair values for liabilities under investment-type insurance contracts (annuities) are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. Fair values for short-term notes payable are estimated using interest rates currently available to the Company. Fair values for long-term 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 – Effective January 1, 1999, the Company adopted Statement of Position (SOP) 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use.” This SOP does not require restatement of prior period amounts. The adoption of this SOP was not material to the Company’s financial statements. Statements of Financial Accounting Standards (SFAS) No. 133 “Accounting for Derivative Instruments and Hedging Activities’’ is effective for the Company in 2001 and establishes accounting and reporting standards for derivative instruments. The effects of SFAS No. 133 to the Company are not yet known. Reclassifications – Certain prior year amounts have been reclassified to conform with 1999 classifications. 2. Investments (000’s omitted) Investment income summarized by investment category: Interest on fixed maturities ...................................................................................... Dividends on equity securities ...................................................................................... Other investment income ........................................................................................ Total .............................................................................................................. Less investment expenses .............................................................................................. Net investment income .................................................................................... Realized (losses) gains on investments summarized by investment category: Fixed maturities: 1999 $000000000$00,00 Years Ended December 31, 1998 $000000000$00,00 1997 $000000000$00,00 $000000000$00,00 $ 218,688 165,137 8,316 392,141 5,368 $ 386,773 $000000000$00,00 $000000000$00,00 $000000000$00,00 $ 217,675 145,885 9,545 373,105 5,112 $ 367,993 $000000000$00,00 $000000000$00,00 $000000000$00,00 $ 218,065 128,403 6,865 353,333 4,736 $ 348,597 $000000000$00,00 $000000000$00,00 $000000000$00,00 $000000000$00,00 $000000000$00,00 Gross realized gains .......................................................................................... Gross realized losses .......................................................................................... $ 10,842 (48,518) $ 11,591 (10,354) $ 22,075 (6,732) Equity securities: Gross realized gains .......................................................................................... Gross realized losses .......................................................................................... Realized (losses) gains on investments .............................................................. Change in unrealized (losses) gains on investments summarized by investment category: Fixed maturities ...................................................................................................... Equity securities ...................................................................................................... Change in unrealized (losses) gains on investments .......................................... 57,605 (20,493) $ (564) $000000000$00,00 $000000000$00,00 104,079 (40,007) 65,309 $ 62,337 (8,450) 69,230 $ $000000000$00,00 $000000000$00,00 $000000000$00,00 $000000000$00,00 $000000000$00,00 $000000000$00,00 $000000000$00,00 $ (204,314) (23,248) $ (227,562) $000000000$00,00 $000000000$00,00 $ (50,098) 1,238,195 $1,188,097 $000000000$00,00 $000000000$00,00 49,650 $ 2,070,425 $2,120,075 $000000000$00,00 $000000000$00,00 $000000000$00,00 $000000000$00,00 $000000000$00,00 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, 1999 and 1998 (000’s omitted): 1999 Fixed maturities: States, municipalities and political subdivisions ...................... Convertibles and bonds with warrants attached ...................... Public utilities ........................................................................ United States government and government agencies and authorities .................................................. All other corporate bonds.......................................................... Total ................................................................................ Cost 000000000$00000 $ 891,319 83,993 60,978 Gross Unrealized Gains 000000000$00000 $ 16,971 2,221 1,120 Gross Unrealized Losses 000000000$00000 $ 21,637 10,419 690 Fair Value 000000000$00000 $ 886,653 75,795 61,408 7,038 1,648,826 $2,692,154 000000000$00000 000000000$00000 34 30,886 $ 51,232 000000000$00000 000000000$00000 173 93,055 $ 125,974 000000000$00000 000000000$00000 6,899 1,586,657 $2,617,412 000000000$00000 000000000$00000 Equity securities ............................................................................ 000000000$00000 000000000$00000 000000000$00000 000000000$00000 $2,022,555 000000000$00000 000000000$00000 $5,580,114 000000000$00000 000000000$00000 $ 91,751 000000000$00000 000000000$00000 $7,510,918 000000000$00000 000000000$00000 1998 Fixed maturities: States, municipalities and political subdivisions ...................... Convertibles and bonds with warrants attached ...................... Public utilities ........................................................................ United States government and government agencies and authorities .................................................. All other corporate bonds.......................................................... Total ................................................................................ $ 865,600 100,360 55,709 $ 51,944 6,208 4,713 $ 341 4,914 – 0 – $ 917,203 101,654 60,422 9,043 1,651,947 $ 2,682,659 000000000$00000 000000000$00000 480 104,849 $ 168,194 000000000$00000 000000000$00000 – 0 – 33,367 $ 38,622 000000000$00000 000000000$00000 9,523 1,723,429 $ 2,812,231 000000000$00000 000000000$00000 Equity securities ............................................................................ 000000000$00000 000000000$00000 000000000$00000 000000000$00000 $ 1,943,206 000000000$00000 000000000$00000 $ 5,553,489 000000000$00000 000000000$00000 $ 41,878 000000000$00000 000000000$00000 $ 7,454,817 000000000$00000 000000000$00000 Contractual maturity dates for investments in fixed maturity securities as of December 31, 1999 (000’s omitted): Cost $00000000$00000 Fair Value $00000000$00000 % of Fair Value $00000000$00000 Maturity dates occurring: One year or less ...................................................................... After one year through five years ............................................ After five years through ten years ............................................ After ten years ........................................................................ Total ................................................................................ $ 110,483 709,912 827,996 1,043,763 $2,692,154 $00000000$00000 $00000000$00000 $ 111,754 703,431 778,814 1,023,413 $2,617,412 $00000000$00000 $00000000$00000 4.3 26.9 29.7 39.1 100.0 $00000000$00000 $00000000$00000 Actual maturities may differ from contractual maturities when there exists a right to call or prepay obligations with or without call or prepayment penalties. At December 31, 1999, investments with a cost of $58,850,000 and fair value of $58,082,000 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): $00000000$00000 $00000000$00000 $00000000$00000 Fifth Third Bancorp common stock................................ Alltel Corporation common stock .................................. 0000000000000000000000000000000000000000 1999 0000000000000000000000000000000000000000 1998 $00000000$00000 Cost $ 276,799 $ 100,467 $00000000$00000 Fair Value $3,544,757 $1,060,481 $00000000$0000 Cost $ 276,799 $ 100,467 $000000000$0000 Fair Value $3,445,118 $ 767,105 30 Cincinnati Financial Corporation and Subsidiaries 3. Deferred Acquisition Costs 5. Life Policy Reserves Acquisition costs incurred and capitalized during 1999, 1998 and 1997 amounted to $376,154,000, $343,881,000 and $322,117,000, respectively. Amortization of deferred acquisition costs was $364,665,000, $336,298,000 and $314,392,000 for 1999, 1998 and 1997, respectively. 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, 1997 1998 1999 0000000..0000000 000000000000000 000000000000000 Balance at January 1 ................ $1,978,461 $1,888,883 $1,824,296 121,881 1,702,415 138,138 1,840,323 112,235 1,776,648 Less reinsurance receivable .. Net balance at January 1 .......... Incurred related to: 0000000..0000000 0000000..0000000 000000000000000 000000000000000 000000000000000 000000000000000 Current year ........................ Prior years ............................ Total incurred .......................... Paid related to: 1,303,561 (116,061) 1,187,590 1,306,194 (153,311) 1,152,883 1,115,140 (119,654) 995,486 0000000..0000000 000000000000000 000000000000000 0000000..0000000 000000000000000 000000000000000 467,843 Current year ........................ 453,410 Prior years ............................ 921,253 Total paid ................................ 1,776,648 Net balance at December 31.... 112,235 Plus reinsurance receivable .... Balance at December 31 ...... $2,092,576 $1,978,461 $1,888,883 574,038 522,108 1,096,146 1,931,767 160,809 590,366 498,842 1,089,208 1,840,323 138,138 0000000..0000000 0000000..0000000 0000000..0000000 000000000000000 000000000000000 000000000000000 000000000000000 000000000000000 000000000000000 0000000..0000000 000000000000000 000000000000000 0000000..0000000 000000000000000 000000000000000 As a result of changes in estimates of insured events in prior years, the provision for losses and loss expenses decreased by $116,061,000, $153,311,000 and $119,654,000 in 1999, 1998 and 1997. 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 $61,573,000 and $76,264,000 at December 31, 1999 and 1998, respectively, for certain life/health losses and loss checks payable. 1999 0000000.00000 Ordinary/traditional life .................................. $155,931 236,214 Universal life.................................................... 144,221 Annuities ........................................................ 302,990 Group life ........................................................ 15,555 Industrial ........................................................ 5,650 Other.............................................................. Total ............................................................ $860,561 0000000.00000 0000000.00000 000000000000 1998 $156,887 221,197 135,176 80 15,986 4,404 $533,730 000000000000 000000000000 0000000.00000 000000000000 At December 31, 1999 and 1998, the fair value associated with the annuities shown above approximated $158,000,000 and $144,000,000, respectively. 6. Notes Payable The Company and subsidiaries had no compensating balance requirement on debt for either 1999 or 1998. Notes payable in the accompanying balance sheets are short term, and interest rates charged on such borrowings ranged from 5.22% to 6.69% during 1999, which resulted in an average interest rate of 5.49%. At December 31, 1999, the fair value of the notes payable approximated the carrying value and the weighted average interest rate approximated 6.67%. 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, 1999 and 1998, the fair value of the debentures approximated $445,000,000 and $533,000,000, respectively. 31 Notes to Consolidated Financial Statements (continued) Cincinnati Financial Corporation and Subsidiaries 10. Federal Income Taxes Significant components of the Company’s net deferred tax liability as of December 31, 1999 and 1998 are as follows (000’s omitted): 1999 000000000000000 1998 00000000000000 Deferred tax liabilities: Unrealized gains on investments .......... $1,894,768 46,780 Deferred acquisition costs .................... 22,211 Other.................................................... 1,963,759 Total .................................................... 000000000000000 000000000000000 Deferred tax assets: Losses and loss expense reserves............ Unearned premiums ............................ Life policy reserves .............................. Other.................................................... Total .................................................... 181,713 31,839 18,603 11,931 244,086 Net deferred tax liability .......................... $1,719,673 000000000000000 000000000000000 000000000000000 $1,974,414 45,205 8,046 2,027,665 00000000000000 00000000000000 162,311 30,270 18,637 7,444 218,662 $1,809,003 00000000000000 00000000000000 00000000000000 000000000000000 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 .................................. Increase (decrease) resulting from: Tax-exempt municipal bonds................ Dividend exclusion .............................. Other .................................................. Effective rate............................................ 1999 1997 1998 Percent Percent Percent 35.00 35.00 35.00 000000000 000000000 000000000 (5.13) (9.19) .11 20.79 (5.39) (9.29) 1.02 21.34 (4.44) (6.54) .10 24.12 000000000 000000000 000000000 000000000 000000000 000000000 000000000 000000000 000000000 No provision has been made (at December 31, 1999, 1998 and 1997) 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. 8. Shareholders’ Equity and Restriction The insurance subsidiaries paid cash dividends to the Company of approximately $195,000,000, $105,000,000 and $95,500,000 in 1999, 1998 and 1997, 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 2000, the total dividends that can be paid to the Company without regulatory approval are approximately $285,177,000. 3,401,000 shares of common stock were available for future stock option grants, as of December 31, 1999. On February 6, 1999, the Board of Directors of the Company authorized the repurchase of up to 17 million of the Company’s outstanding shares, with the intent to complete the repurchase by December 31, 2000. This authorization supercedes the previous authorization of nine million shares. 9. Reinsurance Property and casualty premium income in the accompanying statements of income includes approximately $37,113,000, $38,790,000 and $41,694,000 of earned premiums on assumed business and is net of approximately $95,572,000, $96,073,000 and $94,397,000 of earned premiums on ceded business for 1999, 1998 and 1997, respectively. Written premiums for 1999, 1998 and 1997 consist of the following (000’s omitted): 1999 0000000000000000 Direct business .................. $1,737,370 Assumed business .............. 37,263 (93,821) Ceded business .................. Net.................................. $1,680,812 0000000000000000 0000000000000000 000000000000000 1998 $1,618,357 38,119 (98,895) $1,557,581 000000000000000 000000000000000 000000000000000 1997 $1,523,915 42,773 (95,085) $1,471,603 000000000000000 000000000000000 0000000000000000 000000000000000 000000000000000 Insurance losses and policyholder benefits in the accompanying statements of income are net of approximately $63,206,000, $59,741,000 and $34,744,000 of reinsurance recoveries for 1999, 1998 and 1997, respectively. 32 Cincinnati Financial Corporation and Subsidiaries 11. Net Income Per Common Share 12. Pension Plan (000’s omitted except per share data) The Company and subsidiaries have a defined benefit pension 1999 Income Per Share (Numerator) (Denominator) Amount Shares 000000000000000 000000000000000000 00000000000 Net income per common share $254,722 164,637 $1.55 00000000 Effect of dilutive securities: 5.5% convertible senior debentures ........................ Stock options ...................... 1,539 000000000000 2,471 1,507 00000000000 Net income per common share (diluted) ................................ $256,261 000000000000 168,615 00000000000 000000000000 00000000000 $1.52 00000000 00000000 1998 Net income per common share $241,567 Effect of dilutive securities: 5.5% convertible senior 166,821 $1.45 00000000 debentures ........................ Stock options ...................... 1,918 000000000000 3,490 1,767 00000000000 Net income per common share (diluted) ................................ $243,485 000000000000 172,078 00000000000 000000000000 00000000000 $1.41 00000000 00000000 1997 Net income per common share $299,375 Effect of dilutive securities: 5.5% convertible senior 165,538 $1.81 00000000 debentures ........................ Stock options ...................... 2,712 000000000000 3,928 1,329 00000000000 Net income per common share (diluted) ................................ $302,087 000000000000 170,795 00000000000 000000000000 00000000000 $1.77 00000000 00000000 Options to purchase 918,000, 667,000 and 76,000 shares of common stock were outstanding during 1999, 1998 and 1997, 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. 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): 000 0000000 0000000000000000000000000 Years Ended December 31, 1998 1999 000000000000 000000000000 Change in benefit obligation: Benefit obligation at beginning of year ...... $ 76,314 5,319 Service cost ................................................ Interest cost .............................................. 5,147 11,088 Plan amendments ...................................... (18,795) Actuarial gain ............................................ Benefits paid .............................................. (3,152) Benefit obligation at end of year ................ $ 75,921 000000000000 000000000000 $ 62,934 4,150 4,474 – 0 – 7,383 (2,627) $ 76,314 000000000000 000000000000 Change in plan assets: 000000000000 000000000000 Fair value of plan assets at beginning of year........................................................ $151,879 Actual return on plan assets........................ (107) (3,152) Benefits paid .............................................. Fair value of plan assets at end of year ........ $148,620 000000000000 000000000000 $133,470 21,036 (2,627) $151,879 000000000000 000000000000 Funded status: 000000000000 000000000000 Funded status at end of year ...................... $ 72,699 (80,552) Unrecognized net actuarial gain.................. (2,962) Unrecognized net transitional asset ............ 10,770 Unrecognized prior service cost.................. (45) Prepaid (accrued) pension cost .................. $ 000000000000 000000000000 $ 75,565 (72,235) (3,331) (357) (358) 000000000000 $ 000000000000 000000000000 000000000000 A 1999 plan amendment increased benefit obligations and unrecognized prior service costs. This plan amendment primarily changed the retirement benefit formula resulting in increased benefit payments to plan participants. 33 Notes to Consolidated Financial Statements (continued) Cincinnati Financial Corporation and Subsidiaries The fair value of the Company’s stock comprised $18,164,130 and $21,331,023 of the plan’s assets at December 31, 1999 and 1998, respectively. The following summarizes the assumptions for the plan: 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): Discount rate............................................ Expected return on plan assets .................. Rate of compensation increase .................. Years Ended December 31, 000000000000 00000000000000000000000 000000000000 1999 Percent 7.50 8.00 5 to 7 000000000000 1998 Percent 6.25 8.00 5 to 7 The components of the net periodic benefit cost for 1999, 1998 and 1997 include the following (000’s omitted): 0000000000 0000000 0 0000000 000000000000000000000 Years Ended December 31, 1997 1998 1999 $ 3,449 $ 4,150 $ 5,319 3,938 4,474 5,147 (6,250) (7,451) (9,100) 0000000000 0000000000 (370) (40) (1,269) $ (313) 0000000000 0000000000 (370) (40) (1,049) $ (286) 0000000000 0000000000 (370) (40) (790) $ (63) 0000000000 0000000000 0000000000 0000000000 0000000000 Service cost........................................ Interest cost........................................ Expected return on plan assets .......... Amortization of: Transition obligation (asset)............ Prior service cost............................ Actuarial (gain) loss........................ Net pension expense.......................... 15. Stock Options Years Ended December 31, 0000000 000 0000000 0000000000000000000000000000 1999 0000000000000 1998 00000000000000 1997 000000000000000 Net income: Property/casualty insurance subsidiaries .......................... $209,915 $148,235 $200,830 Life/health insurance subsidiary ............................ $ 21,381 $ 7,248 $ 6,261 Shareholders’ equity: December 31, 000000000000000000000000000000000 1999 000000000000000 1998 000000000 0000 Property/casualty insurance subsidiaries .. $2,498,609 $2,650,503 Life/health insurance subsidiary................ $ 353,165 $ 369,325 14. Transactions With Affiliated Parties The Company paid certain officers and directors, or insurance agencies of which they are shareholders, commissions of approximately $12,989,000, $11,654,000 and $11,780,000 on premium volume of approximately $82,707,000, $82,839,000 and $78,727,000 for 1999, 1998 and 1997, respectively. The Company has primarily qualified stock option plans under which options are granted to employees of the Company at prices which are not less than market price at the date of grant and which are exercisable over ten-year periods. The Company applies APB Opinion 25 and related Interpretations in accounting for these plans. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below (000’s omitted except per share data): 1998 $00000$00,000 1997 $00000$00,000 $ $241,567 235,420 1.45 1.41 1.41 1.38 $ $ $299,375 296,078 1.81 1.79 1.77 1.75 $ 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 1999 0000000.0,000 $254,722 246,007 1.55 $ 1.49 1.52 1.47 $ 34 Cincinnati Financial Corporation and Subsidiaries 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 1999, 1998 and 1997, respectively: dividend yield of 2.36%, 1.79% and 1.22%; expected volatility of 22.89%, 21.79% and 19.67%; risk-free interest rates of 6.81%, 5.02% and 5.89%; 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, 1999, 1998 and 1997 follows (000’s omitted except per share data): 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 00,0000000000$000000000000000000$00000000,000 1999 0000000000000$000000000$00 0000$00,000 1998 00,00000000000$000000000$00 0000$00,000 1997 Shares $$00000,00$$00 4,940,591 1,011,800 (414,703) (77,548) $$00000,00$$00 5,460,140 $$00000,00$$00 $$00000,00$$00 3,224,461 Weighted-Average Exercise Price $$000000000000,00,00$$00,0 Shares Weighted-Average Shares Weighted-Average $0$.0$00,0 0$$0 $$0000000,00$00,000$$0 Exercise Price $0$.0$00,0 0$$0 $$0000000,00$00,000$$0 Exercise Price $25.11 35.46 16.55 32.89 27.57 62.91 $14.40 3,932,271 1,664,200 (615,884) (39,996) $0$.0$00,0 0$$0 4,940,591 $0$.0$00,0 0$$0 $0$.0$00,0 0$$0 2,243,982 $17.88 38.00 15.27 25.48 25.11 $13.39 3,774,492 655,437 (465,429) (32,229) $0$.0$00,0 0$$0 3,932,271 $0$.0$00,0 0$$0 $15.98 20.97 11.31 17.96 i 17.88 i $0$.0$00,0 0$$0 i 2,108,790 $ 7.66 Options outstanding and exercisable at December 31, 1999 consisted of the following: $0$$0$00000000000000000000000$000000000000000000000000000000000000000000000000000000000000000000000000000000000000000$$0 00000000000000000000000000000000000000000000000 Options Outstanding Options Exercisable Range of Exercise Prices Weighted-Average Remaining Contractual Life Number Weighted-Average Exercise Price Number Weighted-Average Exercise Price $$0$$0$000000000$0$$0 $$0$$0$$0$$0$$ $0$$000000000000$$0$$0$$0 $$0$$0$$0$$0$$0$$0$$0$$0 $00,00$00,00$$0 $$0$$0$$0$$0$$0$$0$$0$$0 $ 7.46 to 15.79 $15.95 to 20.47 $20.50 to 22.46 $23.00 to 33.75 $33.88 to 34.50 $36.63 to 42.00 $42.87 to 45.37 681,606 776,500 1,085,661 984,423 916,250 414,200 601,500 $$0$$0$$0$$0$$ 5,460,140 $$0$$0$$0$$0$$ $$0$$0$$0$$0$$ 2.96 yrs 5.30 yrs 6.51 yrs 8.55 yrs 8.76 yrs 9.25 yrs 8.07 yrs 7.02 yrs $13.13 18.57 20.96 31.08 33.93 39.43 43.87 27.57 681,606 776,500 998,961 217,329 282,040 47,104 220,921 $00,00$00,00$$0 3,224,461 $00,00$00,00$$0 $00,00$00,00$$0 $13.13 18.57 20.83 25.69 33.88 38.07 43.76 21.95 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. 35 Notes to Consolidated Financial Statements (continued) Cincinnati Financial Corporation and Subsidiaries 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 .................................................................... 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, 1999 and 1998 and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States of America. 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 36 1999 $ 1,088,039 569,238 74,673 386,209 10,064 $ 2,128,223 00000000000000000 00000000000000000 000000000 0000000000000000000000000000 Years Ended December 31, 1998 $ 1,019,463 523,176 70,096 433,302 8,252 $ 2,054,289 00000000000000000 00000000000000000 1997 $ 983,605 469,921 62,852 417,827 8,179 $1,942,384 000000000000000 000000000000000 00000000000000000 00000000000000000 000000000000000 $ 3,241 (903) 355,643 (36,408) $ 321,573 00000000000000000 00000000000000000 $ (59,438) (1,776) 403,925) (35,604) $ 307,107 00000000000000000 00000000000000000 $ 28,955 2,763) 390,850) (28,009) $ 394,559 000000000000000 000000000000000 00000000000000000 00000000000000000 000000000000000 $ 5,372,717 1,441,657 4,565,840 $11,380,214 00000000000000000 00000000000000000 $ 5,483,137 1,203,908 4,399,458 $11,086,503 00000000000000000 00000000000000000 $4,953,259 1,094,445 3,445,721 $9,493,425 000000000000000 000000000000000 00000000000000000 00000000000000000 000000000000000 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, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. Cincinnati, Ohio February 3, 2000 Subsidiary Officers and Directors As of December 31, 1999, Listed Alphabetically The Cincinnati Insurance Company (CIC) The Cincinnati Casualty Company (CCC) The Cincinnati Indemnity Company (CID) CFC Investment Company (CFC-I) The Cincinnati Life Insurance Company (CLIC) CinFin Capital Management (CCM) Executive Officers James E. Benoski CIC, CID, CCC Vice Chairman and Chief Insurance Officer CIC, CID, CCC, CLIC Senior Vice President-Claims CIC, CID, CCC Director James G. Miller CIC, CID, CCC, CLIC, CFC-I Senior Vice President and Chief Investment Officer CCM President CFC-I Treasurer CIC, CID, CFC-I, CCM Director Urban G. Neville CIC, CID, CCC, CLIC Senior Vice President- Information Systems CCC, CCM 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 CIC, CID, CCC, CLIC, CCM Director John J. Schiff, Jr., CPCU CIC, CID, CCC Chairman and Chief Executive Officer CIC,CID President CLIC Chief Executive Officer CCM Chairman CIC, CID, CCC, CLIC, CFC-I, CCM Director Kenneth W. Stecher CIC, CID, CCC, CLIC, CFC-I Senior Vice President- Accounting; Secretary CLIC, CCM Treasurer; Director Timothy L. Timmel CIC, CID, CCC, CLIC, CFC-I Senior Vice President- Operations CIC, CID, CCC, CLIC, CFC-I, CCM Director Senior Officers and Directors Michael R. Abrams CCM Vice President Donald R. Adick, FLMI CLIC Senior Vice President-Administration Brad E. Behringer CLIC Vice President-Life Underwriting Richard W. Cumming, FSA, ChFC CIC, CID, CCC, CLIC Senior Vice President- Chief Actuary CLIC Director James H. Deal, CPCU, CLU CIC, CID, CCC, CLIC Vice President- Education & Training J. Michael Dempsey, CLU CLIC Vice President-Marketing Dean W. Dicke CIC, CID, CCC Senior Vice President-Field Claims CCC Director Harold L. Eggers, CLU, FLMI, FALU CLIC Vice President-Life Policy Issue Don E. Schricker CIC, CID, CCC Vice President-Personal Lines Frank J. Schultheis CIC, CID Director Norman R. Settle CIC, CID, CCC Senior Vice President- Administrative Services/Boiler & Engineering/ Loss Control J. B. Shockey, CPCU, CLU CIC, CID, CCC Vice President-Sales & Marketing David W. Sloan CFC-I Vice President-Leasing Henry W. Stein, Jr. CIC, CID, CCC Vice President-Commercial Lines Duane I. Swanson, CIC CIC, CID, CCC Vice President-Sales & Marketing Jody L. Wainscott CIC, CID, CCC Vice President-Staff Underwriting Larry R. Webb, CPCU CIC, CID, CCM Director Alan R. Weiler, CPCU CIC, CID, CCM Director Gregory J. Ziegler CIC, CID, CCC, CLIC, CFC-I Vice President- Personnel Mark J. Huller CIC, CID, CCC, CLIC Senior Counsel Eugene M. Gelfand CIC, CID, CCC, CLIC Counsel G. Gregory Lewis CIC, CID, CCC, CLIC Counsel CIC Directors Emeriti Vincent H. Beckman Robert J. Driehaus Richard L. Hildbold, CPCU William H. Zimmer 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 Cheryl L. Frey CIC, CID, CCC Vice President-Administrative Services Michael J. Gagnon CIC, CID, CCC Vice President-Claims Kevin E. Guilfoyle CFC-I Senior Vice President-Leasing David L. Helmers, CPCU CIC, CID, CCC Vice President-Personal Lines Martin F. Hollenbeck CCM Vice President Thomas A. Joseph, CPCU CIC, CID, CCC Senior 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 Vice President-Commercial Lines Bob R. Kerns CIC, CID, CCC, CLIC Senior Vice President- Staff Underwriting CCC Director Eric N. Mathews, AIAF CIC, CID, CCC Senior Vice President- Accounting; Treasurer Daniel T. McCurdy CIC, CID, CCC Senior Vice President-Bond CCC Director Kenneth S. Miller, CLU, ChFC CIC, CID, CCC, CLIC Vice President-Investments CCM Executive Vice President; Director Glenn D. Nicholson, LLIF CLIC Senior Vice President, Senior Marketing Officer Robert J. Nieberding, CLU CIC, CID, CCC, CLIC Vice President- Information Systems Marc A. O’Dowd, CPA, CPCU CIC, CID, CCC, CLIC Internal Audit Officer 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 37 Shareholder Information Cincinnati Financial Corporation had approximately 11,485 direct shareholders of record as of December 31, 1999. Most of our 2,920 associates and many of our independent agent representatives own stock in their Company. Forty-four 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 1, 2000, 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 Kenneth W. Stecher, Senior Vice President, Secretary & Treasurer, 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 1999. 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. 00000000000000000000000000000000000000000000000000000$000,000 1999 00000000000000000000000000000000000000000000000000000$000,000 1998 Quarter 1st High ............................................ $391⁄4 307⁄8 Low .............................................. .151⁄3 Dividend paid .............................. 0000$000,000 0000$000,000 2nd $4115⁄32 36 5⁄16 .17 0000$000,000 3rd $421⁄4 36 3⁄4 .17 0000$000,000 4th $371⁄16 301⁄8 .17 0000$000,000 1st $453⁄8 4121⁄64 .132⁄3 0000$000,000 2nd $4521⁄64 36 5⁄8 .151⁄3 0000$000,000 3rd $391⁄8 303⁄4 .151⁄3 0000$000,000 4th $40 315⁄8 .151⁄3 38 Cincinnati Financial Corporation Insure Where You Invest Investors can gain first-hand knowledge of the way The Cincinnati Insurance Companies do business while contributing to your Company’s success. Consider insuring your home, auto, life or business with Cincinnati through your local independent agent. Let An Agent Know How To Contact You Please provide contact information and check off the product that interests you on the reverse. e r e h d r a c h c a t e d Complete, fold, seal and mail the top half of this page and an agent will contact you. If you prefer, you may call 1-800-769-0548 for an agent referral or visit our Agent Locator at www.cinfin.com/insurance and link directly to an agency site. Cincinnati is a regional insurer. Maps in this report show where you may find Cincinnati agents and products to meet your business (page 6), personal (page 8) and life insurance (page 10) needs. e n i l s i h t n o d l o f Some insurers give you a price quote. Our agents are ready to give you professional advice, guiding your informed insurance decisions. They can tell you about Cincinnati’s three-year rate guarantees on most coverages, highly-rated claims service, built-in coverage advantages, optional coverage choices and the rewards you’ll receive when you package your policies. Name Mailing Address City State Phone E-mail Preferred Contact By: Phone (time of day) E-mail (address) Zip Current Cincinnati Policyholder? Yes No Current Agency detach card here detach card here Cincinnati Financial Corporation Cincinnati Financial Corporation Automatic Dividend Reinvestment And Stock Purchase Plan As registered shareholders,* you may have your dividends automatically reinvested in Cincinnati Financial Corporation stock with a minimal service or brokerage fee. In addition, you may elect to supplement your dividends with cash for additional purchases. Participation is completely voluntary and you may withdraw at any time. To request more information about our Dividend Reinvestment Plan and Stock Purchase Plan, please fill out, detach and mail this postage-paid reply card. * Registered shareholders are those to whom we have issued stock certificates in your name. “Street name” shareholders may participate and continue to have your broker hold your certificates after instructing the broker to register certificates in your name. Dividend Direct Deposit Plan As registered shareholders,* you may have your dividend payments from Cincinnati Financial Corporation delivered directly to your account at the financial institution of your choice. This plan saves you the time required to deposit the payments, provides immediate access to your funds and minimizes the risk of payments being lost or stolen. e r e h d r a c h c a t e d How it works to benefit you! On payment day, your dividend will be deposited automatically into your personal checking or savings account. In lieu of a check, Cincinnati Financial Corporation will send you a notice of the amount deposited. In addition, the deposit will appear on the regular statement from your financial institution. Participation is voluntary and you may withdraw at any time. e r e h d r a c h c a t e d Name Address City State Zip Telephone Thank You! Sign up today To participate in the Dividend Direct Deposit Plan, please complete the authorization form on the reverse of this card, place it in a sealed, stamped envelope and return it (with your pre-encoded deposit ticket or blank, voided check) to Shareholder Services, Cincinnati Financial Corporation, P. O. Box 145496, Cincinnati, OH 45250-5496. For additional information, please call (513) 870-2639. * Registered shareholders are those to whom we have issued stock certificates in your name. “Street name” shareholders may participate and continue to have your broker hold your certificates after instructing the broker to register certificates in your name. Sample Products Available In Many Areas Please check products and services that interest you. ❏ Executive Homeowner Policy ❏ Homeowner Auto Package ❏ Personal Umbrella Liability ❏ Home-based Business Insurance ❏ Condominium Coverage ❏ Special Valuables Coverage ❏ Watercraft Insurance ❏ Cosmetologists & Barbers Package ❏ Businessowner Policy ❏ Specialty Commercial Packages (for religious or financial institutions, dentists, funeral providers, printers, garage operators, metalworkers, artisan contractors and more) ❏ Professional Liability and Errors & Omissions (for teachers, social services, ministers, veterinarians, EMT/paramedics, optometrists, opticians, pharmacists, nurses, printers and real estate or travel agents) ❏ Contractor’s Errors & Omissions ❏ Boiler & Machinery Policy ❏ Equipment Breakdown Coverage ❏ Surety or Fidelity Bonds ❏ Kidnap, Ransom & Extortion Coverage ❏ Service Industry Bonds ❏ Executive Liability Package ❏ Directors & Officers Liability ❏ Employment Practices Liability Insurance ❏ Commercial Umbrella Liability ❏ Worldwide General Liability ❏ Business Income/Extra Expense Coverage ❏ Term Life Insurance Policy ❏ Whole Life Insurance Policy ❏ Annuities ❏ Disability Policy ❏ Long Term Care Insurance ❏ Universal Life Policy ❏ Survivor Life Policy ❏ Employer Payroll Deduction Programs ❏ Business Vehicle/Equipment Leases or Financing –call 1-800-242-9680 ❏ Asset Management Services –call 1-800-327-3950 ($500,000 minimum account) Dividend Direct Deposit Authorization Form Please complete a separate form for each shareholder account. This form may be photocopied. Please indicate the account number and the financial institution to which you would like your dividends deposited. Account number: Account type: ❑ Checking ❑ Savings ❑ Other Financial institution: Please enclose a pre-encoded deposit ticket or blank, voided check to help us identify the account. Please print name(s) as shown on shareholder records: First Middle initial Last First Last Address City Telephone number Home ( ) Work ( ) Signature(s)*: Middle initial State Zip Shareholder account number: (This number appears on the dividend check stub.) * All persons shown on shareholder records are required to sign for Dividend Direct Deposit. To enroll in this plan, place this form with your deposit ticket or voided check in a secure stamped envelope before mailing. Do not fold and mail without an envelope. I I C N C N N A T I , O H 4 5 2 5 0 - 9 9 2 2 I I C N C N N A T I , O H 4 5 2 5 0 - 9 9 2 2 P O S T A G E W I L L B E P A D B Y A D D R E S S E E I P O S T A G E W I L L B E P A D B Y A D D R E S S E E I P O B O X 1 4 5 4 9 6 A T T N : I S A L E S & M A R K E T N G D E P A R T M E N T T H E C I N C I N N A T I I N S U R A N C E C O M P A N I E S P O B O X 1 4 5 4 9 6 A T T N : S H A R E H O L D E R S E R V C E S I C I N C I N N A T I F I N A N C I A L C O R P O R A T I O N I F R S T C L A S S M A I L I P E R M T N O 8 8 2 0 I I C N C N N A T I O H I F R S T C L A S S M A I L I P E R M T N O 8 8 2 0 I I C N C N N A T I O H B U S I N E S S R E P L Y M A I L B U S I N E S S R E P L Y M A I L U N I T E D S T A T E S I N T H E I F M A I L E D N E C E S S A R Y N O P O S T A G E U N I T E D S T A T E S I N T H E I F M A I L E D N E C E S S A R Y N O P O S T A G E Cincinnati Financial Corporation Officers and Directors William F. Bahl Michael Brown John E. Field William R. Johnson Kenneth C. Lichtendahl James G. Miller 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, 1999 John J. Schiff, Jr., CPCU Chairman, President and Chief Executive Officer James G. Miller Senior Vice President and Chief Investment Officer, Assistant Secretary, Assistant Treasurer Kenneth W. Stecher Senior Vice President, Secretary, Treasurer Kenneth S. Miller, CLU, ChFC Vice President, Assistant Secretary, Assistant Treasurer Eric N. Mathews, AIAF Assistant Secretary, Assistant Treasurer Directors as of December 31, 1999 William F. Bahl, CFA(2)(4) President—Bahl & Gaynor, Inc. (investment advisors) Director since 1995 Michael Brown(2)(3)(5) President and General Manager— Cincinnati Bengals, Inc. Director since 1980 Directors Emeriti Vincent H. Beckman Robert J. Driehaus David R. Huhn Lawrence H. Rogers, II John Sawyer David B. Sharrock Thomas J. Smart Charles I. Westheimer William H. Zimmer John E. Field, CPCU(3) 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— Tradewinds Beverage Company Director since 1988 James G. Miller Senior Vice President and Chief Investment Officer—Cincinnati Financial Corporation Director since 1996 Jackson H. Randolph(1)(4)(5) Chairman—CINergy Corporation Director since 1986 John J. Schiff, Jr., CPCU(3)(4)(5) Chairman, President and Chief Executive Officer Cincinnati Financial Corporation Director since 1968 Robert C. Schiff Chairman and Chief Executive Officer— Schiff, Kreidler-Shell, Inc. (insurance agency) Director since 1968 Thomas R. Schiff(4) Chairman and Chief Executive Officer— John J. & Thomas R. Schiff & Co., Inc. (insurance agency) Director since 1975 Frank J. Schultheis(3) President—Schultheis Insurance Agency, Inc. Director since 1995 Larry R. Webb, CPCU President—Webb Insurance Agency, Inc. Director since 1979 Alan R. Weiler, CPCU(3) President and Chief Executive Officer— Archer-Meek-Weiler Agency, Inc. (insurance agency) Director since 1992 E. Anthony Woods(1) President and Chief Executive Officer— Deaconess Associations, Inc. (health care) Director since 1998 (1) Audit Committee (2) Compensation Committee also Lawrence H. Rogers, II, advisor (3) Executive Committee (4) Investment Committee; also Richard M. Burridge, CFA, advisor (5) Nominating Committee 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 

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