Cincinnati Financial Annual Report 2000

Plain-text annual report

® 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 2 0 0 0 A N N U A L R E P O R T A Tradition O F S T R O N G Commitments C R E A T I N G Value I N 2 0 0 0 , O V E R T H E P A S T 50 Y E A R S A N D I N T O T H E Future F I N A N C I A L H I G H L I G H T S Cincinnati Financial Corporation and Subsidiaries Comparative results 2000-1999 (000s omitted except per share data and ratios) OPERATING PERFORMANCE Revenues Income before income taxes Net operating income Net capital losses (after tax) Net income FINANCIAL POSITION Total assets Shareholders’ equity PER SHARE DATA 2000 __________ 1999 __________ % Change _________ $ 2,330,994 108,664* 120,052* (1,687) 118,365* $ 2,128,223 321,573 255,089 (367) 254,722 $13,287,091 5,994,995 $11,807,679 5,421,284 Net operating income (diluted) Net capital losses (diluted) Net income (diluted) Cash dividends declared Book value $ .74* (.01) .73* .76 37.26 Average shares outstanding (diluted) 163,921 $ 1.52 .00 1.52 .68 33.46 168,615 PERFORMANCE RATIOS Statutory combined ratio Return on equity Return on equity including net unrealized gains and losses 112.5%* 2.1%* 13.0%* 100.4% 4.6% 1.9% 9.5 (66.2) (52.9) (359.7) (53.5) 12.5 10.6 (51.3) n/a (52.0) 11.8 11.4 (2.8) (12.1) (54.3) 584.2 *2000 results include a one-time net charge for asset impairment of $39.1 million, before tax; $25.4 million, net of tax; or 16 cents per share. The charge impacted the statutory combined ratio by 1.8 percentage points; return on equity by (0.4)%; and return on equity including net unrealized gains and losses by (0.5)%. CONTENTS Financial Highlights . . . . . . . . . . . .INFC Letter to Shareholders . . . . . . . . . . . 2-5 Report on Operations . . . . . . . . . . 6 - 7 Reports on Subsidiary Companies . . . . . . . . . . . . . . . . 8 - 1 7 Selected Financial Information . .18-19 Management Discussion . . . . . . . 20-28 Selected Quarterly Financial Data and Responsibility for Financial Statements . . . . . . . . . . . . . . . . . . . 29 Consolidated Financial Statements . . . . . . . . . . . . . . . . 30-33 Notes to Consolidated Financial Statements . . . . . . . . 34-42 Independent Auditors’ Report . . . . . 42 Subsidiary Ofﬁcers and Directors . . 43 Shareholder Information and Price Range of Common Stock . . . 44 Corporate Ofﬁcers and Directors . . . 45 This report contains forward-looking statements that involve potential risks and uncertainties. Please see the Management Discussion, Page 20, for factors that could cause results to differ materially from those discussed. A Tradition O F S T R O N G Commitments C R E A T I N G Value I N 2 0 0 0 , O V E R T H E P A S T 50 Y E A R S A N D I N T O T H E Future Fifty years ago, four independent insurance agents founded The Cincinnati Insurance Company. Their concept was radical; this would be a company sponsored and principally owned by local independent agents. Their commitment was total; the Company would grow and prosper by elevating personal relationships between Company and agent, agent and policyholder. It would respond to the agents’ needs, making it easier for them to do business and increasing their effectiveness in serving their friends and neighbors. Today, this commitment is a living tradition. Seven members of the Board of Directors are independent agents. The Company’s executives, local ﬁeld associates, underwriters and administrative staff develop and maintain personal relationships with the select group of 969 agencies appointed to represent Cincinnati Insurance in 31 states. While strategies change with the times, today’s mission is the same Revenues (in millions of dollars) 0 . 1 3 3 , 2 2 . 8 2 1 , 2 3 . 4 5 0 , 2 4 . 2 4 9 , 1 7 . 8 0 8 , 1 one inspired by those four founding agents. The Company is committed to growing proﬁtably and enhancing the ability of local independent insurance agents to deliver quality ﬁnancial protection to the people and 96 97 98 99 00 Revenues rose 9.5% on strong growth of insurance premiums and investment income. businesses they serve. Cincinnati Financial Corporation was formed in 1968 as the parent of The Cincinnati Insurance Company, the lead property and casualty insurance subsidiary. Today, ﬁve additional subsidiaries round out the group: • The Cincinnati Casualty Company • The Cincinnati Life Insurance Company • The Cincinnati Indemnity Company • CFC Investment Company • CinFin Capital Management Company Forty consecutive years of increased cash dividends paid to shareholders reﬂect our strong commitment to creating value now and into the future. The Company’s investment portfolio, its main source of proﬁts, is distinguished by a focus on carefully selected equity instruments that consistently pay dividends and appreciate in value. In 2000, this investment strategy led to a total return on the equity portfolio of 16.7%, greatly outperforming the Standard & Poor’s 500 Index. Book Value* Per Common Share (in dollars) 6 2 . 7 6 3 4 . 3 3 2 7 . 3 3 5 3 . 8 2 5 9 . 8 1 96 97 98 99 00 *Adjusted to reflect 5% stock dividends paid in April 1996 and a 3-for-1 stock split paid in May 1998. Book value rose 11.4% on appreciation of equity holdings in the Company’s investment portfolio, high- lighted by strong performance of ﬁnancial stocks. Net Income/ Dividends Paid* Per Common Share (in dollars) Net Income Dividends Paid 7 7 . 1 1 3 . 1 1 4 . 1 2 5 . 1 7 6 7 4 . 3 3 3 5 . 7 6 9 5 . 3 3 6 6 . † 9 8 . 0 0 4 7 . 96 97 98 99 00 *Adjusted to reflect 5% stock dividends paid in April 1996 and a 3-for-1 stock split paid in May 1998. †Excludes 16 cents per share one-time charge 2000 net income was reduced 44 cents per share by an addition to reserves as a result of two uninsured motorist court decisions affecting all insurers writing commercial auto policies in Ohio. Back to table of contents 1 (cid:2) T O O U R S H A R E H O L D E R S : The year 2000 came in gently. Y2K preparations environment and have emerged a stronger company succeeded and highly anticipated computer glitches in many respects. The approach was to forge ahead, had little or no effect on operations of your doing what it takes to put the problems behind us. Company, our agents and policyholders. By the end As we begin 2001, we are nimbler, more keenly of six months, net underwriting proﬁts of our interested in maximizing advantages inherent in our property casualty companies stood at $7.6 million. unique ﬁeld structure and underwriting expertise, Increased cash ﬂow from these proﬁts and from and more committed to the conservative path in double-digit premium accounting and reserves. growth contributed to excellent growth of investment income. Yet, before the year was over, sweeping changes would occur in the larger economic, legal and technological environments in which we operate. Events and Chairman, President and Chief Executive Ofﬁcer John J. Schiff, Jr., CPCU conditions outside of our direct control would test our mettle, calling for prompt, bold responses and aggressive management of factors within our control. We had a rough year. These challenges resulted in full-year 2000 net operating income, on a comparable basis excluding a one-time charge, of $145.5 million, or 90 cents per share, versus $255.1 million, or $1.52 per share, last year. Net income, excluding the charge, was $143.8 million, or 73 cents per share, versus $254.7 million, or $1.52 per share, in 1999. Results were brighter on the balance sheet side, where assets and shareholders’ equity reached all-time highs of $13.287 billion and $5.995 billion, respectively. Book value rose 11.4% to $37.26 compared with $33.46 at year-end 1999. While earnings were less than satisfactory, we believe we responded effectively to the changed C H A L L E N G E : C O U R T D E C I S I O N S In a 1999 ruling that affected all insurers writing commercial auto business in Ohio, that state’s Supreme Court granted coverage under an employer’s business auto policy to employees or their family members injured by an uninsured or underinsured motorist while on personal business and even while driving a personal car. While we took prompt action to amend policy language so employers would not be ﬁnancially responsible under their policies for such future losses, plaintiffs’ attorneys continue to ﬁle claims for past losses. Since late 1999, we have incurred $40 million in losses related to this decision. Then, in the last week of 2000, the same court ruled that forms policyholders signed to reject uninsured and underinsured motorist coverage on their auto and umbrella liability policies were insufﬁcient. This meant that uninsured motorist claims previously denied or not reported now Net Operating Income* Per Common Share (in dollars) 9 4 . 1 2 5 . 1 1 1 . 1 6 1 . 1 † 0 9 . 96 97 98 99 00 *Adjusted to reflect 5% stock dividends paid in April 1996 and a 3-for-1 stock split paid in May 1998. †Excludes 16 cents per share one-time charge Net operating earnings for 2000 include $60.2 million from parent company investment operations; $32.3 million from life operations; $24.8 million from property casualty operations; and $2.7 million from non-insurance subsidiaries. 2 (cid:2) Back to table of contents must be evaluated, even though the policyholder had not selected or purchased the coverage. Again, we took prompt action to rewrite our forms to meet Commitment to O U R S H A R E H O L D E R S extensive new requirements prescribed in the court’s Steadily increasing dividends decision. Going forward, these revised forms should relieve us of the obligation to cover new losses in In August 1950, investors had a chance to be part of a new venture, an Ohio ﬁre insurance company sponsored by and for local independent agents. The prospectus for The Cincinnati Insurance Company declared our commitment: “The Company cases where the policyholder speciﬁcally rejected the shall operate in an extremely conservative coverage. However, as Ohio’s largest commercial auto manner…every intelligent and sound method of insurer with an 8.4 % market share, we expect substantial claims due to past losses. These claims will include losses not yet reported, as well as transacting business shall be employed…expenses shall be kept at a minimum…agents will be offered the opportunity to purchase stock…this will enable the Company to have a better selection of business.” Seven approximately $32 million previously reported, but of the eight original directors were agents, including not paid, because the policyholder had rejected in founders John J. Schiff, Harry M. Turner, Chester T. writing the option to purchase coverage. Field and Robert C. Schiff. R E S P O N S E : P O L I C Y H O L D E R S E R V I C E A N D S A F E T Y Our ﬁrst course of action was to protect policyholders from court-mandated responsibility for losses they never intended to fund. With remarkable Directors and ofﬁcers other than the general manager served without pay for three years, putting the Company on a ﬁrm ﬁnancial footing. By 1959, policyholder surplus exceeded $1 million and, for each of the next 40 consecutive years, the Company paid out increasing cash dividends. speed, we placed revised forms in the hands of our short-term pain, it fulﬁlls our obligations to agents, providing guidance and support for delivery policyholders, protects our reserve integrity, and to policyholders. While a few insurers have responded reduces uncertainty by allowing for a true picture of by abandoning the Ohio commercial auto market, proﬁtability in future periods. our commitment is to maintain a market for our agents and their quality accounts even during difﬁcult times. With revised forms, frontline underwriting and increased monitoring of account quality over the policy term and at renewal, we can be more ﬂexible. Second, in the fourth quarter we added $110 million pre-tax (44 cents per share after tax) to reserves. This is our best estimate of past losses to be reported or paid in or after 2001 as a result of the two state Supreme Court decisions. Managing this liability through an addition to reserves reduced current income instead of letting the losses ﬂow into future quarters. While our approach involves C H A L L E N G E : T E C H N O L O G Y D E L A Y Faced with delays of key deliverables of a large, next-generation software initiative to streamline policy rating and issuance, management reviewed the project and requested an independent assessment. We determined that the majority of the investment over the past several years would not be of value as the project continued. In the meantime, commercial software vendors now were introducing alternatives, including package solutions compatible with our corporate technical architecture and further along in their development. Back to table of contents 3 (cid:2) R E S P O N S E : A L T E R N A T I V E S O L U T I O N S First, we recognized the impairment of the software development asset by taking a one-time, third-quarter net charge of $25.4 million, or 16 cents per share. Starting over with a clean slate, we appointed a new project management team to carry out this strategic priority. Second, we renewed our commitment to developing software to help our agents serve policyholders with new efﬁciency and speed. The project team evaluated development options and, in December, began plans to customize the selected vendor software for our personal lines business in three Portfolio managers monitor performance and maintain relationships with management of the top 10 equity holdings. Left to right: Steven A. Soloria, CFA, Secretary – Investments; George A. Schaefer, Jr., President & CEO of Fifth Third Bancorp; Michael R. Abrams, Secretary-Investments. pilot states. By year-end 2001, the customized software will be tested in the ﬁrst state. The system features direct-bill and agency bill capabilities that will complement its online rating and issue functions. C H A L L E N G E : L O S S S E V E R I T Y Over the year, insurers reported ﬁrmer pricing of commercial lines. This is good news, but not good enough to offset many years of inadequate pricing accompanied by rising loss costs. Higher building costs, vehicle repair costs, medical costs and court- directed verdicts now prevail. During the third quarter, the Company’s property casualty losses moved above or to the high end of our normal ranges. Improved performance during the fourth quarter was not sufﬁcient to return to our historic level of proﬁtability, as measured by our average combined loss and expense ratio of 101.3% over the previous ﬁve years. While we’re dissatisﬁed to fall short of that mark, we note that our 2000 ratio was in line with A. M. Best’s estimate of 110.3% for the industry. Even including 6.0 points for the uninsured motorist reserve addition, our 2000 ratio came in at 110.7%, excluding the one-time charge. We analyzed second-half losses, discovering no geographic or policy age concentration, aside from Ohio uninsured motorist claims. Losses occurred across a broad range of business lines, with a concentration in commercial auto and homeowners. R E S P O N S E : U N L O C K I N H E R E N T A D V A N T A G E S First, improved commercial pricing provided part of the answer. Our pricing of good renewal and new business accounts is up 10-15%, with commercial auto increases at the high end of that range. Median umbrella liability prices are up 18%, and we can compete for good workers’ compensation business while decreasing credits and moving accounts to non-dividend paying plans. We have instituted more conservative underwriting for workers’ compensation, commer- cial auto and other classes of risk. Investment Income Less Expenses (in millions of dollars) 3 . 5 1 4 8 . 6 8 3 0 . 8 6 3 6 . 8 4 3 3 . 7 2 3 96 97 98 99 00 Pre-tax investment income for 2000 rose 7.4% to an all-time high. Investment income is the primary source of the Company’s proﬁts. Dividends from equity holdings contributed $186.2 million and interest from ﬁxed-rate holdings contributed $222.0 million, pre-tax. 4 (cid:2) Back to table of contents Second, we have intensiﬁed efforts to carefully underwrite each account and to tap the wealth of local knowledge created by our uniquely strong local Commitment to A G E N T S O U R ﬁeld presence. Our no-branch-ofﬁce structure gives Choosing carefully, committing fully agencies a local team of marketing, claims, engineering and loss control representatives who work out of When 60 agents attended the ﬁrst Florida Sales Conference in 1960, they had produced more than $200,000 of premium in the ﬁrst full year of operation in the state. Sales meetings on the agents’ home turf already were a Cincinnati tradition, their homes, spending most of their time actually in an opportunity for top ofﬁcers to agencies and on their clients’ premises. They are cultivate personal relationships ideally positioned to take the lead in managing and loyalties with the factors we can control. The ﬁeld representative proﬁtability initiatives, from increased on-site inspections to team-centered renewal discussions, are outlined on Page 11. C O N T I N U I N G O U R T R A D I T I O N O F C O M M I T M E N T cream-of-the-crop agents selected to represent the Company. While other insurers appointed large numbers of agents, Cincinnati hand-picked a few good agencies and did what was necessary to earn a larger portion of their business, thereby reducing Company and agency expense. The 1962 Annual Report explained: “Your Company now has 373 agencies. We do not consider numbers alone to be of great importance…but rather the quality and The year behind us is a testament to the commitment desirable volume potential.” your Company has placed on value. It is a legacy built by people such as Director Emeritus David R. Huhn, who passed away in February 2000. The former 2000. As our Claims Department manager and a key president of The McAlpin Company and chief executive, Jim’s perspective will help our Board keep executive of Mercantile Stores, Inc., had served on the highest standards of customer service – to our the Cincinnati Financial Board from 1990 through agents, policyholders and claimants – in the 1996. It is a legacy built by people like Jackson H. foreground of every decision. Randolph, retired chairman of CINergy Your Company’s outlook is good as price Corporation, who retired from our Board on competition abates and agents have more November 17, 2000, after serving since 1986. opportunity to sell policies based on service and It is a legacy that will be guarded and preserved value. The commitments we make, and have made by people like Senior Vice Presidents Kenneth W. for 50 years, differentiate your Company, positioning Stecher and James E. Benoski. Ken was appointed it to continue building the strength that creates chief ﬁnancial ofﬁcer of Cincinnati Financial on shareholder value, even in an atypical year like 2000. February 3, 2001. His professionalism and management skills in leading our accounting and ﬁnancial reporting areas make him an integral part of the executive team. Jim, who is vice chairman and chief insurance ofﬁcer of The Cincinnati Insurance Companies, joined our Board on November 17, John J. Schiff, Jr., CPCU Chairman, President and Chief Executive Ofﬁcer February 6, 2001 Back to table of contents 5 (cid:2) A T R A D I T I O N O F V A L U E Cincinnati Financial Corporation stands among dividend to 84 cents per share. The vote to continue the nation’s strongest and most ﬁnancially stable the trend of increasing dividends reﬂects the insurer groups. This is reﬂected in our dividends, our Board’s conﬁdence in our ﬁnancial strength, business ratings and the way we manage operations. strategy, our associates and agents. D I V I D E N D S I N D E P E N D E N T R A T I N G S A G E N C I E S In 2000, we returned more than $186 million Following our announcement of the $110 million to shareholders, including cash dividends and reserve addition for uninsured motorist losses, repurchases of 2.1 million shares at an average price Standard & Poor’s lowered its rating of our of $30.90 per share. In November, the Board corporate senior debentures to A+ (Strong) and its extended indeﬁnitely the repurchase period for the ratings of our insurance companies to AA- (Very 9.1 million remaining shares left on the authorization. Strong). These are Security Circle ratings reserved for Dividends paid per share rose to 74 cents in 2000 the top tier of companies. S&P’s decision reﬂects its from 232/3 cents in 1990, adjusted for stock negative outlook for the overall insurance industry, dividends and splits. That’s a 12% compound and within that context, your Company’s relative growth rate for the past 10 years. Further, the Board operational and investment risk. declared a 10.5% increase in the dividend during the Other leading rating ﬁrms maintained their high ﬁrst quarter of 2001, raising the indicated annual ratings. A. M. Best, the oldest and most authoritative Commitment to F I N A N C I A L S T R E N G T H Making our strength your future With growth, the Company became eligible for ratings from independent ﬁrms. Dunne’s was ﬁrst, awarding an A rating in 1954. A. M. Best assigned an A-Excellent rating to Cincinnati Insurance in 1955, and its highest A+ rating the very next year. The Company watched our pennies and the dollars took care of themselves. In the early 50s, an insured truck overturned and lost its cargo of sugar cookies. The staff pitched in to sell the cookies and recouped almost the entire $2,000 loss. Thrift was the glue that held together the Cincinnati formula then and now: “…maintain a sound and reasonable underwriting policy, not one of extreme ﬂuctuations directly related to changing market conditions…it is necessary that our product be offered to the public at a reasonable price, and the remuneration to insurance rating ﬁrm, awards our property casualty companies its A++ (Superior) rating, for which fewer than 3% of insurer groups qualify. Best awards Cincinnati Life the A+ (Superior) rating. Moody’s Investors Service has maintained the A2 rating on our corporate debentures and the Aa3 rating of the property casualty companies. The Cincinnati Insurance Companies remain strong, with year-end statutory surplus of the property casualty companies at $2.761 billion, up 10.5% from $2.499 billion at the end of 1999. Cincinnati Life’s statutory surplus is $411.1 million, up 16.4% from $353.2 million. These increases were achieved during a year when property casualty industry surplus declined 4.3%, as estimated by A. M. Best. Cash ﬂow always has been more than adequate to our agents be commensurate with the services rendered.” (Harry Turner, 1963) pay claims, and we have never sold off investments for that purpose. We buy and hold equities, 6 (cid:2) Back to table of contents return. We ranked 653rd among the Fortune 1000 U.S. industrial and service corporations, based on revenues. • Best’s Review (July 2000): The Cincinnati Insurance Companies ranked 34th among property casualty insurers based on net written premiums. In the commercial multi-peril line, our rank was 15th with a 2% market share. On the life side, Cincinnati Life was the top net premium gainer in the country by percent change, due to the sale of a large bank-owned life insurance policy. • Best’s Viewpoint (August 7, 2000): Cincinnati ranked 22nd among leading property casualty During 2000, new claims-trending reports improved information available for management analysis and ﬁnancial reporting. Left to right: Kenneth W. Stecher, Chief Financial Ofﬁcer; Kenneth P. Grimme, CPCU, AIM, Secretary – Claims; David T. Groff, FCAS, Secretary – Staff Underwriting. conﬁdent in the long-term appreciation potential of insurers based on surplus and 29th based on the well-managed companies we select and monitor. net income. Accumulated unrealized gains in our $11.247 billion • Business Insurance (August 21, 2000): consolidated investment portfolio reached We were one of only 10 companies named $4.156 billion, after tax, at year-end 2000, boosted to both the property casualty and life/health by our ﬁnancial equity holdings, which tend to Ward’s 50 Benchmark Groups of insurers outperform the market in a declining interest rate with outstanding ﬁnancial safety, consistency environment. and performance over ﬁve years. Cincinnati Assets (in millions of dollars) 1 . 7 8 2 , 3 1 4 . 2 8 4 , 1 1 7 . 7 0 8 , 1 1 4 . 7 6 8 , 9 1 . 7 9 3 , 7 R A N K I N G S (published in 2000 and generally based on 1999 performance) Insurance was one of only 13 companies 96 97 98 99 00 named to Ward’s 50 for 10 consecutive Assets rose 12.5% to an all-time high. The success of the Cincinnati formula for building years. value is reﬂected in high national rankings: • 2000 Mergent’s (formerly Moody’s) Handbook • Forbes (April 17, 2000): Cincinnati Financial of Dividend Achievers: Cincinnati Financial ranked 349th among the top 500 for proﬁts and ranked 20th for the longest record of dividend 250th for assets, with a Super Rank of 397. achievement, with 39 consecutive years (now 40) The Super Rank compares all 895 companies of annual dividend increases. appearing on any of the top 500 lists for market • Business Week (December 25, 2000): value, sales, proﬁts or assets. Cincinnati Financial scored high as an investment • Fortune (April 17, 2000): Cincinnati Financial opportunity, due to its S&P Equity Ranking of A was the 17th largest U.S. stock property casualty and its relatively low price-to-book ratio. insurer, ranking seventh within that group for total return to investors and ﬁfth for two-year Back to table of contents 7 (cid:2) rate increases in the homeowner and auto insurance marketplace and progress on Company automation initiatives. During 2000, we opened a territory in Utah, our 31st state of operations, appointing three large agencies and writing more than $1 million of net premium. States launched over the past four years – Utah, Idaho, upstate New York, Montana and North Dakota—accounted for $16.8 million of premium; states launched over the past nine years reached $89.4 million, or approximately 5% of total volume. Over the same nine years, we also increased service to our agents and premium per agency by stafﬁng 20 new marketing territories in established states, including Eastern Pennsylvania, Southeastern Michigan and Minneapolis in 2000. A new Chicago territory was staffed in January 2001, and planning Field marketing representatives from all territories met with Headquarters underwriters in January 2001, leading discussions of local market conditions and strategies for proﬁtable underwriting. Left to right: Tonia T. Hamilton, Steven C. Dunn, Wes Brunn, Barbara A. Heil, Michael P. Williams, Richard D. Bernius, AIC, and Lisa A. Hall, CIC. P R O P E R T Y C A S U A L T Y I N S U R A N C E O P E R A T I O N S G R O W T H At 11.9% for the year, overall growth of net has begun to open additional Maryland, Kentucky written premiums continued at more than double and Charlotte, North Carolina territories this year. the 5% industry growth estimated by A. M. Best. When entering new states and appointing new Commercial premiums rose 16.0% to $1.275 billion, while premiums for personal lines of insurance rose 4.3% to $605.7 million. While we beneﬁted substantially from price increases averaging 10-15% for commercial accounts, the primary driver of growth was the new business our agents put on the books. Annualized new business written by agents rose 31% to $275.4 million, for our best new business year ever. Commercial new business rose 42.0% to $229.6 million, with increased production across a broad range of territories and lines. Personal lines new business was $45.8 million in 2000 compared with $48.6 million in 1999. Growth in personal lines will remain at or below industry levels pending Property Casualty Net Written Premium Statutory Basis (in millions of dollars) Commercial Lines Personal Lines 5 . 3 8 3 , 1 7 . 2 5 9 8 . 0 3 4 96 6 . 1 7 4 , 1 3 . 7 8 9 3 . 4 8 4 97 6 . 7 5 5 , 1 8 . 9 1 0 , 1 8 . 7 3 5 98 1 . 1 8 8 , 1 4 . 5 7 2 , 1 7 . 5 0 6 8 . 0 8 6 , 1 8 . 9 9 0 , 1 0 . 1 8 5 agencies, we generally target cautious growth, concentrating on forming relationships, developing an underwriting partnership and communicating our appetite for speciﬁc 99 00 types of business. By Steady growth in established states fueled a $200.3 million premium increase. Ohio, the largest state with 25.6% of total direct volume, grew $33.0 million or 7.1%. Other top states by total volume: Illinois, up $23.0 million or 13.9%; Indiana, up $11.0 million or 7.2%; Michigan, up $12.4 million or 13.3%. expanding at a steady, deliberate pace, we are gradually becoming less geographically concentrated. Ohio accounted for 31.7% of 8 (cid:2) Back to table of contents premium in 1992, declining to 25.6% in 2000. A customer relationship management approach Our top four states accounted for less than half of encourages integrated, customized insurance total premium volume in 2000, down from 61.0% programs and personal service. in 1992. • As agencies streamline their operations by Like the elite corps of Cincinnati agencies they consolidating carriers, we expect continued join, the 23 new agencies appointed during 2000 are success attracting rollover books formerly placed Property Casualty Premium Growth Rate Statutory Basis (percent) Cincinnati Insurance Companies Estimated Industry (A.M. Best) 9 . 1 1 9 . 7 0 . 5 8 . 6 4 . 6 8 5 . 4 . 3 9 . 2 8 . 1 9 . 1 97 98 00 99 96 Cincinnati’s net written premiums grow consistently at more than twice the industry rate. Commercial net written premiums, which make up 68% of total volume, grew 16.0% in 2000. Personal net written premiums, accounting for 32% of the total, grew 4.3%. the premier agencies in with other personal lines carriers. During 2000, their communities. agents gave us 38 rollovers with annual premiums Signiﬁcantly, we also of $11.2 million. Because our agents controlled appointed 24 branches these accounts and knew their loss history, we had of established agencies, assurance that these rollovers were quality business. bringing total agency • On the commercial side, agents moved more than relationships after 700 new dentist accounts to Cincinnati closings to 969 and during 2000. total agency locations to 1,233. Many of today’s Cincinnati agencies are larger, stronger survivors of agency consolidation and acquirers of other agencies. Thirty-three Commitment to L O C A L M A R K E T S Leveraging local knowledge with local authority When agents and guests gathered in 1957 for the Ohio Sales Meeting and opening of a new home ofﬁce, President Harry Turner’s important guests included the Company’s ﬁrst three state agents – Charlie Bent, Bob McDonald and Lou Erckert. A Cincinnati executive commented in 1978: “We very deliberately use the title, ‘state percent of Cincinnati’s independent agencies agent,’ as opposed to the more common designation of ‘ﬁeld man,’ because we truly have total annual premium volume in excess of view and utilize our production force as managers of their respective territories… $10 million. According to the recent Future One Agency Universe Study, only 13% of agencies nationwide produce at this level. they are endowed with the authority to make under- writing decisions and multi-peril quotations on In 2000, our agents gave Cincinnati almost 20% the spot.” of their total premium, writing nearly $2 million per agency relationship. While this penetration is outstanding, we are taking steps to grow with each agency. • Our Cross-Serving initiative provides educational and technical assistance for agencies to prospect According to a 1964 newsletter to agents, “Because of his close proximity to the risk, the agent in the ﬁeld can do a better job underwriting his business than the underwriter at a desk.” Then and now, the Company’s ﬁeld representatives are empowered decision-makers, using their local knowledge of the additional sales to their current clients, increasing community to support the agent’s frontline underwriting efforts. customer loyalty and decreasing agency expenses. Back to table of contents 9 (cid:2) Already the ofﬁcially endorsed carrier of the P R O F I T A B I L I T Y prestigious Chicago Dental Society, we secured a As reported in the Letter to Shareholders on new endorsement from the Vermont State Pages 2-5, proﬁtability of our property casualty Dental Society. The dentist’s program broke the insurance companies was reduced by court decisions $20 million mark in 2000, and affecting all insurers that write Ohio auto policies, by coverage enhancements slated for 2001 will rapidly changing technology and by rising cost make the product even more saleable. • We continuously improve products to inﬂation in the general economy. incorporate differentiating features that let Our combined loss agents compete on value and service instead of and expense ratio was price. During 2000, we updated products for 110.7%, including cosmetologists and barbers, introduced 6.0 points for the superior business income coverage for large uninsured motorist manufacturing clients and made new and reserve addition and improved products available for contractors excluding 1.8 points whose policies often must provide coverage for for the one-time other project partners. Commitment to P E R S O N A L S E R V I C E Treating people as we would want to be treated technology charge. This result compares with 100.4% in 1999 and A.M. Best’s industry estimate of 110.3% for 2000. 1999 Agency Volume Property Casualty Premiums (percentage of agencies) Over $25 million $10 million - $24.9 million $5 million - $9.9 million $2 million - $4.9 million Up to $1.9 million Agency Universe* 4% 9% 13% 48% 26% Agencies representing Cincinnati 10% 23% 27% 30% 10% $5.5 million Total Average Agency Volume *Future One 2000 Agency Universe Study $10.7 million In 1953, the largest ﬁre loss to that point in the Company’s history caused $15,000 of damage and was settled within 48 hours. Cincinnati claim professionals understood that policyholders and claimants deserved prompt, personal service after The pure loss ratio for commercial lines was 71.2% in 2000 versus 61.4% in 1999. For personal a loss. To speed up processing of small claims, in lines, it was 71.1% in 2000 and 62.0% last year. 1952 Cincinnati pioneered granting draft authority to While we continue to underwrite ﬂexibly based ﬁrst agents to write claim checks, eliminating the requirement to ﬁrst send a proof of loss. The Company adopted a plan to “place qualiﬁed staff on agency relationships and overall account quality, we are addressing loss severity in commercial auto, adjusters in all areas where the premium volume with a 108.0% pure loss ratio and in the homeowner warrants such action.” By 1961, the claim count had risen to about 2,000 per month and eight claims representatives provided local service. The claims philosophy has passed the test of time; the monthly claim line, with an 83.9% loss ratio. Targeting a return to the historic proﬁtability indicated by our 101.3% average combined ratio over the previous ﬁve years, count was more than 25,000 and our ﬁeld claims network of adjusters was more than we are working from our historic strengths to 650 strong in 2000. 10 manage factors within our control. (cid:2) Back to table of contents First, from the underwriting standpoint, we have instituted more conservative standards by class of risk, particularly for commercial auto and workers’ compensation. In addition to loss history, underwriters are giving more weight at renewal to loss-predictive information such as 2000 Cincinnati Volume Per Agency (percentage of agencies) $5 million and above $3 million - $4.9 million $2 million - $2.9 million $1.0 million - $1.9 million Under $1.0 million 6% 11% 17% 34% 32% $1.9 million Average Cincinnati Premium Per Agency estimating property construction claims. Third, we are following through on our commitment to stay customer-centered and agent-focused: • During 2000 we provided tools to help agents verify that their homeowner clients are fully protected by selling insurance to value, the level of coverage that will allow them to repair or replace their home. • We are preparing to test an innovative use of credit scores as a criteria for participation in payment plans, rather than as underwriting criteria to restrict availability of coverage. • And during 2000, our Best Practices program helped agencies work toward their full potential as frontline underwriters and producers of personal lines. This program updated motor vehicle reports and driver experience supports agents with ﬁeld seminars and records on commercial auto risks. one-on-one consultation for workﬂow and Second, we are leveraging our large, empowered marketing plan review, as well as producer ﬁeld staff and their extensive local knowledge. recruitment and training. Property Casualty Combined Loss and Expense Ratio Statutory Basis (percent) Cincinnati Insurance Companies Estimated Industry (A.M. Best) 8 . 5 0 1 0 . 3 0 1 6 . 1 0 1 0 . 8 9 6 . 5 0 1 2 . 4 0 1 . 8 7 0 1 4 . 0 0 1 3 . 0 1 1 * 7 . 0 1 1 96 97 98 99 00 *Excludes 1.8 percentage points for one-time charge Marketing representatives are reafﬁrming agreements on the extent of frontline underwriting to be performed by agents. They are engaging the entire team of local claims, engineering and loss control Remembering H A R R Y M . T U R N E R , 1 9 0 3 - 2 0 0 0 Independent insurance agent representatives who get a bird’s-eye view of the risk Harry M. Turner applied common sense to all decisions, yet he dared to dream in the course of providing services to the policyholder. big and plan carefully for the Company’s brilliant future. At renewal discussions with the agent, this team conﬁrms that risks measure up to the same high He knew that insurance is about people, not numbers. That philosophy continues to guide us today. A founding agent of The Cincinnati Insurance quality as when the policies were ﬁrst written. Companies, Harry purchased the Company’s ﬁrst share Marketing representatives have stepped up risk of stock in 1950, wrote the ﬁrst policy in 1951, served as inspections on new and renewal business, and claims representatives are conducting on-site inspections the ﬁrst president from 1950 through 1962 and the ﬁrst chairman from 1963 through 1986. He was Cincinnati Financial Corporation’s ﬁrst chairman from 1968 and preparing full risk reports for every account through 1972, continuing to serve on boards of the reporting a loss above $100,000. Field claims representatives now have access to specialists in parent and subsidiaries through 1995. With his death in 2000, the Company, our industry and the community have lost a true friend and leader. Back to table of contents 11 (cid:2) L I F E I N S U R A N C E O P E R A T I O N S Cincinnati Life is a valued strategic member of the Cincinnati family of insurance companies. During 2000, Cincinnati Life contributed $32.3 million of net operating income, up from $28.1 million in 1999. Gross written premiums were $157.3 million. This growth was achieved proﬁtably, with expenses offset by rising investment income and rising premiums (excluding large, single-premium, bank-owned life insurance “BOLI” policies) and good mortality experience. Strong new product Life Policy Face Amounts in Force Excluding annuities, accident and health business (in millions of dollars) 6 . 4 2 5 , 3 9 2 . 9 9 8 , 7 1 9 . 9 5 0 , 3 1 9 . 1 9 7 , 9 4 . 8 5 8 , 0 1 96 97 98 99 00 Face amounts of life insurance policies in force increased 31.4% from 1999 to 2000. Cincinnati Life’s policy count rose to 313,649 versus 302,030. products on the horizon, Cincinnati Life delivers outstanding value to our dedicated agency force. In addition to providing independent life agencies with the strength and reliability of the Cincinnati name, the Company provides property casualty agents Net Premium Income The Cincinnati Life Insurance Company (in millions of dollars) 3 . 9 7 7 . 4 7 1 . 0 9 7 . 2 4 6 . 6 5 96 97 98 99 00 Cincinnati Life’s 2000 net premium income rose $4.6 million, up 6.2%. Earned premiums for life insurance, the main marketing thrust, rose $9.1 million to $74.2 million, up 14.0%. offerings — including enhanced term, with a competitive edge. A complete portfolio universal life and annuity portfolios – designed to meet the life and property casualty contributed to 11.7% growth in net written insurance needs of customers simpliﬁes transactions premiums, excluding BOLI. New term both for agents and policyholders. And the fact that insurance regulations, which went into effect all of these needs can be met by an agent and a January 1, 2000, pushed ﬁrst-year term company the consumer knows and trusts makes premiums up 41%. Ordinary life applications doing business with Cincinnati easy. rose 9% and structured settlement premiums At the same time, we are expanding our network reached a record $23 million – up 90% from of independent life agencies. We appointed 56 new 1999. agencies last year: 50 independent life agencies BOLI, which played so large a role in where the Company already had property casualty top-line growth during 1999 highlighted by representation and six agencies in areas outside of the sale of a $302.9 million single-premium property casualty states. Cincinnati Life also entered policy, continues to be a source of opportunity. Maine during 2000. During the coming year, we Cincinnati Life is aggressively marketing this product, expect to further develop markets in the West and which generally involves a six- to twelve-month sales the Northeast. process. During 2000, Cincinnati Life reported All of these appointments, all of these expansions, $20.0 million in premium from BOLI. The occur with the careful selection and agency nurturing Company now protects more than 1,000 lives that has become a hallmark of The Cincinnati through BOLI and has more than $1 billion in force. Insurance Companies. A genuine commitment to With an already strong product portfolio, and servicing our customers – independent insurance with individual disability products and a series of agents – demonstrates that Cincinnati supports our next-generation whole life, term and universal agents. Dozens of seminars held around the country 12 Back to table of contents (cid:2) during 2000 introduced independent agents to Cincinnati Life products and services, to advanced marketing strategies, to worksite marketing, to long-term care products and to Cincinnati’s Cross-Serving initiative – the Company’s own brand of customer relationship management. Nearly Commitment to O U R P O L I C Y H O L D E R S Differentiating for marketplace advantages The Underwriting Committee, shown here in 1959, developed policy contracts, rates, rules and competitive sales advantages. In 1955, members created the ﬁrst homeowner package policy approved in Ohio, giving Cincinnati agents a 3,000 agents beneﬁted from these workshops, and four- to ﬁve-year Cincinnati Life will remain committed to this type of service and training in the years ahead. Cincinnati service also was evident in technological initiatives launched in 2000. The life operations piloted imaging technology for the Corporation and introduced an enhanced application tracking system. Another new development, tele-underwriting, headstart with “the one-policy approach to simpliﬁcation and improved coverage for the insurance buyer.” They continued to innovate with commercial packages and account selling. The 1966 Annual Report mentions “the unique position of being able to package the enables agents to phone in basic information and let commercial and personal catastrophe coverage under one policy,” an advantage Cincinnati complete the application process. These Cincinnati still holds today. technologies speed service to agents and allow for a concentration on client relationships rather than on Their secret was to create a superior product that others could not match. This approach made Cincinnati an early provider of replacement cost coverage. It gave agents a huge marketing edge with one of the ﬁrst homeowner-auto packages, paperwork. Similar initiatives and movements including features like a 15% auto discount. Cincinnati dared to be different, offering toward automated workﬂow and information management are planned for the year ahead. As Cincinnati Life looks toward our future, we remain committed to the values that shaped our past: an absolute commitment to service, strength and proﬁtable growth over the long term. policies with a multi-year term, providing built-in earthquake coverage and placing no general aggregate limit on umbrella liability coverage. Every product made it easier for the agent to deliver extra value to policyholders. loans to agents. These are services that help agencies operate and expand their businesses – both physically F I N A N C I A L S E R V I C E S and as a means of becoming more comprehensive Service is a key differentiating factor for ﬁnancial service providers themselves. Agents The Cincinnati Insurance Companies, and referring clients to CFC Investment Company CFC Investment Company is a tangible example receive ﬁnders’ fees, making the relationship with of Cincinnati’s commitment to service. CFC Investment Company rewarding for them as CFC Investment Company writes equipment and well as their clients. vehicle leases and loans for independent insurance During 2000, net after-tax earnings for agents, their commercial customers and other CFC Investment Company were $2.2 million. businesses. We also provide commercial real estate Back to table of contents 13 (cid:2) Investment Assets As of December 31 (market value in millions of dollars) Others Preferred Stock Common Stocks Taxable Bonds Tax-Exempt Bonds 10,325.0 57.9 442.2 7,012.6 10,194.2 65.9 403.9 7,107.0 8,797.1 46.6 530.4 5,468.9 6,344.4 42.4 465.6 3,274.6 Gross receivables reached $93.4 million. During I N V E S T M E N T S 2001, CFC Investment Company plans to subdivide Cincinnati Financial Corporation’s investment territories in Ohio, committing more resources to strategy – heavily weighted toward a small group of our home state agency base. high-quality equity investments – is atypical for CinFin Capital Management, the insurance industry. At its core are the same Cincinnati Financial Corporation’s philosophies that guide insurance operations at the asset management services subsidiary, Company – deep relationships, deep understanding grew during 2000, ﬁnishing the year and deep commitment for the long term. 11,315.8 68.5 377.4 8,148.6 with $536.3 million under Cincinnati carefully selects a small group of management and nearly doubling the equities, gains an understanding of their industry, client base it had during 1999, our develops relationships with the management of each ﬁrst full year of operation. ﬁrm, and holds them for the long-term. Overall, the Twenty-seven clients – up from 14 in Company’s equity portfolio produced a compounded 1999 – trust Cincinnati to protect annual return of 25.5% over the past ﬁve years, their ﬁnancial futures. compared with 18.3% for the Standard & Poor’s 500 CinFin’s investment strategy Index. Notably, in 2000, the Company’s equity mirrors the strategy of our parent portfolio returned 16.7% compared with the 9.1% company – equity-based portfolios decline of the same index. Thirty of the 45 common that center on best-in-class companies. stocks in our portfolio raised their dividends, adding 1,686.4 1,863.0 1,895.1 1,730.8 1,738.1 875.4 888.2 917.2 886.6 983.2 96 97 98 99 00 Each client’s portfolio is custom-made according to the unique needs and risk appetite of the individual or institution. Regular contact, both formal and informal, ensures that clients know and understand $12.8 million to gross investment earnings on an annualized basis. This type of their investments, and that they are comfortable with performance year the results. Current and prospective clients include corporations, after year afﬁrms the value of Cincinnati’s insurance agencies, pension plans, endowment funds investment strategy – and high net-worth individuals. In 2001, CinFin is a source of the evaluating plans for a new, separate account with a Company’s ﬁnancial lower minimum than the $500,000 required for strength. individually managed accounts. Such a product would broaden the appeal of the ﬁnancial services Bonds, too, are an important component company and help leverage the Cincinnati name. of our portfolio. 14 (cid:2) Back to table of contents Composition of Equity Investments As of December 31, 2000 (in millions of dollars) 8,148.6 5,463.0 Banks, Trusts and Insurance Industrial, Miscellaneous Public Utilities 1,688.5 1,691.5 835.0 650.6 997.1 205.9 Common Stock Portfolio by Cost Common Stock Portfolio by Market Value 376.5 57.0 285.2 34.3 Preferred Stock Portfolio by Cost 377.4 67.5 270.7 39.2 Preferred Stock Portfolio by Market Value Fixed-income investments in corporate, municipal, remaining on the repurchase authorization and will public utility and other bonds help the Company continue to buy back shares when such action meet insurance obligations and provide a steady beneﬁts earnings per share and book value. During stream of cash ﬂow. Cincinnati continues to focus 2000, book value for Cincinnati Financial on medium-risk bonds, reducing its appetite for Corporation rose 11.4% to $37.26, with shareholders’ high-yield, non-investment grade bonds. equity at $5.995 billion. Non-investment grade bonds comprised just 5.3% This ﬁnancial strength demonstrates the of the Company’s portfolio at year-end 2000, Company’s commitment to value and our focus on compared with 7.5% in 1999. While the Company the long term. These core competencies have experienced some realized losses in the bond beneﬁted shareholders for 50 years and will portfolio, partly due to higher interest rates and continue to reward you in the future. deteriorating economic conditions, most were offset by gains in the stock portfolio. Overall, higher interest rates in 2000 improved the growth rate for investment income, with pre-tax Commitment to E D U C A T I O N revenue climbing 6.0% to a record $410.0 million, Nurturing skilled, knowledgeable teams and leaders excluding income recorded in the ﬁrst quarter from a single-premium, bank-owned life insurance policy In the early years, the highlights of Cincinnati’s sales meetings across the operating territories were panel discussions by successful agents. By 1974, the Company operated an Education & Training Department with a curriculum of sold in the fourth quarter of 1999. The total value of schools and courses for agents and associates. The Young Agents School, ﬁrst held the portfolio – $11.247 billion at year-end – rose that year, introduced novice 11.0% over 1999. While higher interest rates allow us to grow producers to insurance principles and to Cincinnati’s personal, life investment income at an increased rate, declining and business insurance interest rates also beneﬁt the Company, both in the products. The ﬁrst bond and equity portfolios. An inverse relationship between interest rates and bond value will beneﬁt the Advanced Agents School followed shortly. Just as important as the course ﬁxed-income portfolio. Financial securities – the content, the schools were another opportunity for Cincinnati underwriters and core of Cincinnati’s portfolio – also tend to react ofﬁcers to renew friendships with agents and listen to their needs. At the same time, associates at all levels were “encouraged through special incentives to engage in additional schooling and insurance education classes, and thus become more qualiﬁed for promotions.” favorably to lower interest rates. With continued conﬁdence in the Company and its value, Cincinnati Financial Corporation repurchased 2.1 million shares of CFC common stock during 2000 at an average purchase price of $30.90. The Company has 9.1 million shares Back to table of contents 15 (cid:2) P R O F E S S I O N A L D E V E L O P M E N T In March, we completed the expansion of our Headquarters. The new building measures more than 800,000 square feet and features a state-of-the-art education facility. This new facility expanded from ﬁve rooms to 17, making it feasible to offer a full menu of classes and training for associates and agents. New agent programs included an Executive Liability Roundtable focusing on this growing line of business and introducing our new Blue Chip Policy, as well as a Cross-Serving Seminar demonstrating techniques to bring customers the beneﬁts of comprehensive, integrated insurance programs. The Cincinnati Life Insurance Company took our CFC’s tradition of support for the Greater Cincinnati’s Fine Arts Fund dates back to 1983. Launching the 2001 campaign are (left to right): Thomas R. Schiff, CFC Director and Agent; D. Kae Parrott, AIM, Assistant Vice President – Information Systems and 2001 Chairperson for the CFC campaign; and Timothy F. Rub, Director of the Cincinnati Art Museum. training on the road and visited agents in 23 cities to about recent developments in underwriting and new present Update 2000 ﬁeld seminars. Agents learned and improved Cincinnati Life products. Commitment to O U R C O M M U N I T I E S Being a responsible corporate citizen When the Newcomen Society honored Cincinnati Financial in 1978, President and founder John J. Schiff commented, “Integrity, fairness and devotion to the principles of community and national service will always serve to bolster the Our tradition of investing in our associates starts with providing extensive training programs, especially for entry-level underwriters, claims representatives and programmers. A commitment to help each associate pursue continuous learning, insurance knowledge and skill development is just one of the reasons Cincinnati Financial is a great place to work. foundation of business, as they have for our own.” ComputerWorld (June 5, 2000) recognized your In 1967 and over the next few years, all 75 home ofﬁce associates donated a half-day’s overtime pay, matched by the Company, to purchase holiday gifts for military personnel stationed in Vietnam. As the Company’s practices and ranked us among the “100 Best Places to Work in IT.” Selection was based on beneﬁts, training and development, salary and Company prospered, community service and promotions, turnover rates and women/minority leadership became a way to pay back the community management opportunities, as well as hot projects and the nation of people who had supported Cincinnati as shareholders, policyholders and and mentoring programs. agents. Patriotic traditions continued as the Company adopted the crew of the Navy submarine USS Cincinnati, hosting events whenever they visited the city whose name we shared. 16 (cid:2) Back to table of contents P U B L I C R E S P O N S I B I L I T Y A number of public policy issues equally Your Company’s tradition of support for the arts, important to your Company also will dominate the education and other community-related activities year, including our continuing effort to advance the continued in 2000. Cincinnati Financial sponsored a Policyholder Disaster Protection Act, a proposal that pig for the Big Pig Gig—Cincinnati’s 2000 Artworks would permit insurers to accumulate tax-deferred celebration. After the event, the pig was auctioned, reserves to meet policyholder needs after a with proceeds donated to Artworks and to Insuring mega-catastrophe and to protect insurer solvency. the Children of Southern Ohio and Northern We will continue to act on behalf of shareholders Kentucky, a nonproﬁt group organized by insurance and policyholders as advocates of judicial restraint professionals to fund child abuse prevention and and a level playing ﬁeld for all litigants in our state treatment. Other corporate community investments supreme courts. In Ohio, we will be hard at work included our traditional bi-annual blood drives, building relationships with the large class of new Partnership in Education activities and participation legislators serving in the general assembly with the in campaigns for the Salvation Army, Fine Arts Fund onset of term limits. and United Way. Implementation of the landmark ﬁnancial services Your Company works to educate, inform and modernization law, the Gramm-Leach-Bliley Act, develop consensus on legislative and regulatory issues will continue. To comply with the Act’s privacy affecting our agents, policyholders and the insurance provisions, we have conducted a full audit to industry. The future of the state insurance regulatory determine what information is collected, how it is system will be a dominant issue in 2001. We will stored, who has access and when it is disclosed. continue to work with the National Association of In addition, we are working with trade organizations Insurance Commissioners as they reﬁne their to support our agents as they also implement the initiatives to modernize and improve the efﬁciency of privacy regulations. Information may be disclosed in state insurance regulation. We also will urge order to service policyholders or account holders, to Congress to proceed with caution as it considers comply with governmental regulations or demands proposals to create a federal regulatory system for the or to prevent fraud. We do not share personal insurance industry. We oppose any modiﬁcations to information with any unafﬁliated party for the current system of state regulation that are not marketing purposes. in the best interests of policyholders, agents and the industry. Back to table of contents 17 (cid:2) S E L E C T E D F I N A N C I A L I N F O R M A T I O N (000s 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 (losses) gains on investments............ Other income ................................................ NET INCOME BEFORE REALIZED GAINS ON INVESTMENTS In Total ............................................................ Per common share (basic) .............................. Per common share (diluted) .......................... NET INCOME In Total ............................................................ Per common share (basic) .............................. Per common share (diluted) .......................... CASH DIVIDENDS PER COMMON SHARE Declared ........................................................ Paid .............................................................. 00000000000$0000,000 2000 $13,287,091 $ 449,234 $ 5,994,995 $ 37.26 00000000000$00,000 00000000000$0000,000 Years Ended December 31, 1999 $11,807,679 $ 456,373 $ 5,421,284 $ 33.46 1998 $11,482,430 $ 471,520 $ 5,620,936 $ 33.72 $ 1,906,922 415,310 (2,595) 11,357 $ 1,731,950 386,773 (564) 10,064 $ 1,612,735 367,993 65,309 8,252 $ 120,052* .75* .74* $ 255,089 1.55 1.52 $ 199,116 1.19 1.16 $ $ 118,365* .74* .73* .76 .74 $ $ 254,722 1.55 1.52 .681⁄3 .661⁄3 $ $ 241,567 1.45 1.41 00000000000$00,000 1997 $9,867,404 $ 58,430 $4,716,965 $ 28.35 $1,516,378 348,597 69,230 8,179 $ 254,375 1.54 1.49 $ 299,375 1.81 1.77 .611⁄3 .592⁄3 $ .542⁄3 .531⁄3 PROPERTY CASUALTY OPERATIONS (STATUTORY BASIS) Gross premiums written ................................ Net premiums written .................................. Net premiums earned .................................... $ 1,979,741 1,881,112 1,827,576 Loss and expense ratio: Loss ratio ...................................................... Loss expense ratio .......................................... Underwriting expense ratio............................ Combined ratio ............................................ Investment Income Before Taxes.................... Property and Casualty Reserves: Unearned premiums ...................................... Losses ............................................................ Loss adjustment expense................................ 71.1% 11.3% 30.1%* 112.5%* 00000000000$0000,000 $ $ 223,001 506,966 1,729,918 452,088 $ 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 61.6% 10.0% 28.8% 100.4% 00000000000$0000,000 $ $ 207,640 454,844 1,513,134 418,634 65.4% 9.3% 29.5% 104.2% 00000000000$00,000 58.3% 10.1% 29.6% 98.0% 00000000000$00,000 203,919 $ 199,427 432,436 1,432,212 408,113 $ 418,465 1,373,950 402,698 $ $ Policyholders’ surplus.................................... $ 3,171,730 $ 2,851,774 $ 3,019,828 $2,472,532 *2000 results include a one-time net charge for asset impairment of $39.1 million, before tax; $25.4 million, net of tax; or 16 cents per share. The charge impacted the underwriting expense ratio and statutory combined ratio by 1.8 percentage points. **1993 earnings include a net credit for $13.8 million, or 8 cents 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 $8.6 million, or 5 cents per share, related to the effect of the 1993 increase in income tax rates on deferred taxes recorded for various prior year items. 18 Back to table of contents (cid:2) Cincinnati Financial Corporation and Subsidiaries 00000000000$00,000 1996 $7,397,109 $ 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 00000000000$00,000 1995 $6,438,613 $ 80,000 $2,657,971 $ 15.80 $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 $5,036,903 $ 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 $4,887,875 $ 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 00000000000$00,000 Years Ended December 31, 1991 $3,750,166 $ 182 $1,441,401 $ 8.79 1992 $4,356,648 $ 80,000 $1,713,776 $ 10.37 00000000000$00,000 1990 $2,839,258 $ 202 $1,006,868 $ 6.18 $1,038,772 218,942 35,885 10,552 $ 147,669 .90 .87 $ 171,325 1.04 1.03 $ 947,576 193,220 7,641 12,698 $ 871,196 167,425 1,488 8,822 $ 141,273 .86 .86 $ 146,280 .90 .89 $ 128,052 .79 .78 $ 128,962 .79 .79 $ .482⁄3 .472⁄3 $ .422⁄3 .422⁄3 $ .382⁄3 .371⁄3 $ .341⁄3 .331⁄3 $ .31 .30 $ .272⁄3 .272⁄3 $ .241⁄3 .232⁄3 $1,476,011 1,383,525 1,366,544 $1,377,426 1,295,852 1,263,257 $1,287,280 1,190,824 1,169,940 $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 61.6% 13.8% 27.6% 103.0% 00000000000$00,000 57.6% 14.7% 26.9% 99.2% 00000000000$00,000 63.3% 9.8% 26.9% 100.0% 00000000000$00,000 63.5% 8.7% 27.4% 99.6% 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 $ 190,318 $ 180,074 $ 162,260 $ 153,190 $ 141,958 $ 126,332 $ 110,827 $ 401,562 1,319,286 383,135 $ 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 $1,608,084 $1,268,597 $ 998,595 $1,011,609 $ 933,529 $ 735,557 $ 477,355 The selected financial information presented above allows for a more complete analysis of results of operations and should not be considered as a substitute for any GAAP measures of performance. Per share data adjusted for three-for-one stock splits in 1998 and 1992 and stock dividends of 5% in 1996 and 1995. Back to table of contents 19 (cid:2) M A N A G E M E N T D I S C U S S I O N Cincinnati Financial Corporation and Subsidiaries I N T RO D U C T I O N This Management Discussion supplements the financial statements and related notes of Cincinnati Financial Corporation and subsidiaries. Cincinnati Financial Corporation (CFC) had six subsidiaries at year-end 2000. The lead property and casualty insurance subsidiary, The Cincinnati Insurance Company, markets a broad range of business and personal policies in 31 states through an elite corps of 969 independent insurance agencies. Also engaged in the property and casualty business are The Cincinnati Casualty Company, which offers direct billing and agency-billed non-particpatory workers’ compensation policies; and The Cincinnati Indemnity Company, which markets nonstandard policies for preferred risk accounts. The Cincinnati Life Insurance Company markets life, long term care, disability policies and annuities through property 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 rose to $541 million in 28 accounts by January 2001, from $150 million R E S U LTS O F O PE R AT I O N S 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, legislation or court decisions 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. 2000 $2,331.0 Change $ $202.8 Change % 9.5 1999 $2,128.2 Change $ $ 73.9 Change % 3.6 1998 $2,054.3 Change $ $111.9 Change % 5.8 145.5 (1.7) 143.8 (25.4) 118.4 (109.6) (1.3) (110.9) (43.0) (325.0) (43.5) (25.4) (136.3) n/a (53.5) 255.1 (.4) 254.7 0.0 254.7 56.0 (42.9) 13.1 28.1 (100.9) 5.4 0.0 13.1 n/a 5.4 199.1 42.5 241.6 0.0 241.6 (55.3) (2.5) (57.8) (21.7) (5.6) (19.3) 0.0 (57.8) n/a (19.3) Three-year Highlights (000,000s omitted except per share data and ratios) Revenue Net Operating Income Excluding Charge Net Capital (Losses) Gains (after tax) Net Income Excluding Charge One-Time Charge for Asset Impairment Net Income Per Share Data (diluted) Net Operating Income Excluding Charge Net Capital (Losses) Gains (after tax) Net Income Excluding Charge One-Time Charge for Asset $ .90 (.01) $ .89 $ (.62) (.01) $ (.63) (40.8) n/a (41.4) $ 1.52 0.0 $ 1.52 $ $ $ .36 (.25) .11 0.0 .11 31.0 n/a 7.8 n/a 7.8 $ 1.16 .25 $ 1.41 0.0 $ 1.41 $ $ $ (.33) (.03) (.36) (22.1) (10.7) (20.3) 0.0 (.36) n/a (20.3) Impairment Net Income (.16) $ .73 (.16) $ (.79) n/a (52.0) 0.0 $ 1.52 The selected financial information presented above allows for a more complete analysis of results of operations and should not be considered as a substitute for any GAAP measures of performance. 20 Back to table of contents (cid:2) Cincinnati Financial Corporation and Subsidiaries Revenue growth in each of the past three years primarily reflected higher contributions from property casualty earned premiums and investment income. In 2000, the growth rate for property casualty earned premiums rose for the third consecutive year because of strong growth in the Company’s commercial insurance lines. Revenue from investment income rose 7.4% to $415.3 million in 2000, including $5.3 million in interest earned in first quarter 2000 from a $302.9 million single-premium bank-owned life insurance (BOLI) policy booked at the end of 1999. Excluding that interest income, investment income rose 6.0% in 2000, up from the 5.1% increase in 1999 and the 5.6% increase in 1998. In the third quarter of 2000, the Company recorded a one- time, pre-tax charge of $39.1 million to expense assets related to development of next-generation software to process property casualty policies based on management’s decision that the assets were impaired. The charge reduced net income by $25.4 million or 16 cents per share, after tax. Excluding the charge, net operating income in 2000 was 43.0% below the prior year’s record level, primarily because of the additional reserves related to uninsured motorist coverage as well as the increased level of property casualty claims in the second half of 2000. In 1999, net operating earnings were 28.1% ahead of the prior year’s level, reflecting a lower level of catastrophe losses and stronger overall profitability, while in 1998, net operating earnings declined 21.7% due to the unusually high level of catastrophe losses. The Company reported a net capital loss after tax of $1.7 million in 2000 versus a $0.4 million net capital loss in 1999 and a $42.5 million net capital gain in 1998. Book value grew to $37.26 at year-end 2000 from $33.46 at year-end 1999 and $33.72 at year-end 1998. The growth in 2000 was primarily due to unrealized gains in the investment portfolio. Property Casualty Insurance Premiums (000,000s omitted except ratios) *Statutory basis Total Gross Written Premiums* $1,979.7 Commercial Lines Net Written 2000 Change $ $205.1 Change % 11.6 1999 $1,774.6 Change $ $118.1 Change % 7.1 1998 $1,656.5 Change $ $ 89.8 Change % 5.7 Premiums* 1,275.4 175.6 16.0 1,099.8 80.0 Personal Lines Net Written Premiums* Total Net Written Premiums* Total Net Earned Premiums 605.7 1,881.1 1,827.6 24.7 200.3 170.3 4.3 11.9 10.3 581.0 1,680.8 1,657.3 43.2 123.2 114.7 7.8 8.0 7.9 7.4 1,019.8 32.4 3.3 537.8 1,557.6 1,542.6 53.6 86.0 89.1 11.1 5.8 6.1 Cincinnati leverages its strong relationships with independent insurance agents to market property casualty insurance in 31 states, up from 30 states in 1999 and 29 in 1998. In 2000, approximately 98% of the Company’s premium volume was in the 26 states in which the Company has had a presence for more than five years. Further, Ohio contributed 26% and Georgia, Illinois, Indiana, Michigan and Pennsylvania each contributed between 5% and 10% of premium volume in 2000. Key factors that distinguish the Company in the insurance marketplace include: • Single-channel distribution strategy that emphasizes the value of independent agents and their knowledge of the local markets. • Local field staff that enhances service and accountability by providing 24-hour-a-day, seven-day-a-week availability and local decision-making authority. Local field staff is responsible for the selection of new independent agents as well as underwriting and pricing of new business. • Innovative products and services that meet the needs of the Company’s independent agents and their customers, including the availability of three-year policy terms for many types of insurance coverage. In 2000, both new and updated policies were introduced, including an endorsement that allows living trusts to be named as insureds on homeowner policies, to further meet the needs of agents and their customers. Looking ahead, plans call for the introduction of an endorsement to cover identity theft under a homeowner policy. • Widely recognized quality claims service via locally based claims field staff in conjunction with independent agents. To help ensure prompt claims service, the Company provides most agents with authority to pay claims immediately up to $2,500. In total, the Company pays in the range of $3-7 million per business day in claims. • Emphasis on improving customer service through the creation of smaller marketing territories, permitting local field marketing representatives to devote more time to each independent agent. Since the beginning of 1997, the Company has subdivided eight territories in established states, increasing the field marketing staff by 23% to 75 over the four-year period. Three new territories are expected to open in Kentucky, Maryland and North Carolina in the coming months, in addition to one new territory that opened in Illinois early in 2001. Back to table of contents 21 (cid:2) M A N A G E M E N T D I S C U S S I O N (continued) Cincinnati Financial Corporation and Subsidiaries • Programs to support agency growth, including education programs for agents and staff, and building and equipment financing. In 2000, the insurance subsidiaries augmented ongoing training programs with a number of special events, including seminars held around the country to encourage cross-serving by expanding awareness of the Company’s products among producing agents. CFC Investment Company offers convenient, competitive equipment and vehicle leases and loans for independent insurance agents, their commercial customers and other businesses and also provides commercial real estate loans to agents to help them operate and expand their businesses. By leveraging these characteristics and taking advantage of the improved pricing environment in the commercial insurance market, the Company’s property casualty total net written premiums have expanded more than twice as rapidly as the estimated industry growth rate in each of the past three years, rising 11.9% in 2000 to $1.881 billion. Premium growth in states in which the Company has had a presence for more than five years was a healthy 11.4% in 2000, reflecting the continued opportunities available to Cincinnati. Newer states also were a factor in overall growth, with premiums of $17 million for the year; these states provide an opportunity for expansion. Over the past five years, the Company began marketing commercial lines insurance in North Dakota, Montana, upstate New York, Idaho and Utah, and began writing or expanding personal lines in Maryland, Michigan, Minnesota, Montana, North Dakota and Pennsylvania. The Company’s criteria for entry into new states include a favorable regulatory climate and a limited residual market. Commercial Lines Commercial lines premiums rose to 67.8% of total statutory basis net written premiums in 2000, reflecting the higher rate of growth in that segment as the market continued the strengthening that began in the second half of 1999 after more than three years of intense price competition. Industry-wide growth in the commercial insurance area was 3.6% in 2000, after declining 0.9% in 1999 and rising 0.1% in 1998. Cincinnati’s commercial lines’ premium growth rate exceeded that of the industry in each of the past three years due to: • Strong competitive position and relationships with leading independent insurance agents. • Careful underwriting and pricing of both new and renewal accounts. • Healthy gains in new business, reflecting the Company’s approach of evaluating each new risk individually. In 2000, the Company’s new business from commercial lines reached $230 million, up 42% from the prior year. New commercial business was $162 million in 1999 and $164 million in 1998. One of the Company’s advantages in the commercial lines market is the availability of multi-year policy terms. Except for new business to an agent or when a policy is aggressively priced, the Company’s standard approach is to write three-year policies. Within those multi-year packages, automobile coverages, workers’ compensation, professional liability and most umbrella policies remain subject to annual adjustment. At year-end 2000, management estimated that approximately 70% of the $1.275 billion in net commercial premiums is subject to annual adjustment or re-pricing. The remainder have rates that may be slightly higher than single-year policy rates, in some cases, and that are guaranteed not to increase over a multi-year term. Personal Lines During 2000, the personal insurance market grew less rapidly than the commercial insurance market due to increased competition and lower rate increases. Industry-wide growth in personal lines was estimated at 5.0% in 2000, up from 3.6% in 1999 and 1998. Cincinnati’s personal lines premium growth rate declined in 2000 and 1999 because of: • An agency re-underwriting program designed to help improve profitability. In 2000, the program reviewed and strengthened underwriting standards for more than 100 of the Company’s independent agents, obtaining motor vehicle reports for insured drivers and commitments that some agencies will provide the Company with a specific volume of personal lines business. • Delayed introduction of automation initiatives that will increase convenience and decrease agency work necessary to write the Company’s personal lines policies. Property Casualty Profitability (statutory basis) (000,000s omitted except ratios and per share data) Commercial Lines Pure Loss Ratio Personal Lines Pure Loss Ratio Loss and LAE Ratio Excluding 2000 71.2% 71.1 1999 61.4% 62.0 1998 61.1% 73.8 Catastrophes Catastrophes Loss Ratio Loss and LAE Ratio Expense Ratio Excluding Charge Policyholder Dividend Ratio Statutory Combined Ratio Excluding Charge One-Time Charge for Asset Impairment Combined Ratio Catastrophe Loss Data Catastrophe Losses (before tax) Catastrophe Losses Per Share 79.7 2.7 82.4 27.3 1.0 69.4 2.2 71.6 28.4 .4 68.6 6.1 74.7 28.9 .6 110.7 100.4 104.2 1.8 112.5 0.0 100.4 0.0 104.2 $50.1 $36.8 $93.5 (after tax)(diluted) $.20 $.14 $.35 22 Back to table of contents (cid:2) Cincinnati Financial Corporation and Subsidiaries The Company recorded a statutory underwriting loss of $210.3 million in 2000, excluding the one-time charge to expense assets, compared with underwriting losses of $12.5 million in 1999 and $68.5 million in 1998. The Company’s combined ratio (statutory basis), excluding the one-time charge to expense assets, continued to compare favorably with industry results of 110.3%, 107.8% and 105.6% in 2000, 1999 and 1998, respectively. Management, however, expects to return profitability to the Company’s five-year (1995-99) average statutory combined ratio of 101.3%, including policyholder dividends, by the end of 2001. The following contributed to the Company’s underwriting results. Loss and LAE Ratio Excluding catastrophe losses, the total loss and LAE ratio in 2000 was 10.3 percentage points higher than the level recorded in 1999 and 11.1 percentage points higher than 1998 due to additional reserves related to uninsured motorist losses and the unusually high level of claims in the second half of the year. Reserves — As discussed in the Notes to the Consolidated Financial Statements, management establishes the Company’s liabilities for insurance reserves, including adjustments of estimates, based upon Company experience and information from internal analysis. Though uncertainty always exists as to the adequacy of established reserves, management believes this uncertainty is mitigated by the historic 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 these reserves are adequate at this time. Environmental exposures are minimal as a result of the types of risks the Company has insured in the past. Historically, most of the Company’s commercial accounts were written with post-date coverages that afford clean-up costs and Superfund responses. In the fourth-quarter of 2000, the Company added $110 million (44 cents per diluted share) to reserves for losses incurred but not yet reported (IBNR), net of reinsurance, for uninsured motorist claims. The additional IBNR reserves represented management’s best estimate of past losses to be reported or paid in 2001 and beyond as a result of two Ohio Supreme Court decisions. In the first of the two decisions, first addressed by the Company in October 1999, the court ruled that Ohio business automobile policies covered employees and their family members for injuries caused by uninsured or underinsured motorists, even when the injured persons were not in company vehicles or on company business. Since that decision and through year-end 2000, Cincinnati Financial’s property casualty insurance subsidiaries had incurred $40 million in related claims. On December 27, 2000, the court further ruled that the forms used by insurance companies to allow Ohio personal and commercial policyholders to decline uninsured motorist coverage or to purchase reduced limits were not sufficient. Based on this decision, uninsured or underinsured motorist coverage must be provided at a limit equal to the bodily injury liability limit, even if the policyholder had declined or reduced the coverage by signing one of these forms. At year-end 2000, the Company was aware of approximately $32 million in claims related to this decision that were reported but had not previously been reserved due to the documented decision by the insurance customer to decline or reduce such coverage. The Company’s loss and LAE ratio in 2000 and 1999 included 7.5 percentage points and 0.8 percentage points, respectively, related to these uninsured motorist claims and reserves. Excluding those amounts, the loss and LAE ratio would have been 74.9% in 2000 and 70.8% in 1999 compared with 74.7% in 1998. Claims in 2000 — During July and August of 2000, losses moved above or to the high end of the Company’s normal monthly ranges. This reflected a combination of higher than usual losses above $1 million and higher than usual adverse developments above $250,000 on reserved claims, along with an upswing in the frequency and severity of smaller losses. During the fourth quarter, losses above $1 million and the frequency of smaller losses decreased. Also improved from the third quarter level were adverse developments greater than $250,000 and the severity of smaller losses, although these claims categories did not return to historic levels. During the fourth quarter, however, the frequency and severity of losses between $250,000 and $1 million moved higher than historic levels. Further, the accelerating rate of commercial insurance premium growth experienced by the Company led to higher IBNR reserves (in addition to the IBNR reserves related to uninsured motorist coverage noted above). The total loss and LAE ratio for the fourth quarter of 2000, however, improved 6.7 percentage points from the third quarter level, although it remained 4.5 percentage points above the five-year average. To address the higher losses, beginning in the fourth quarter of 2000, management put together teams of claims representatives and other Company specialists, under the direction of the field marketing representatives. These locally based Company representatives will intensify efforts on many fronts: • Reaffirm agreements on the extent of frontline renewal underwriting to be performed by local agents. • Improve pricing and institute more conservative underwriting by class of risk. • Increase the frequency of property inspections for new and renewal commercial business. Back to table of contents 23 (cid:2) M A N A G E M E N T D I S C U S S I O N (continued) Cincinnati Financial Corporation and Subsidiaries • Evaluate commercial auto risks for new and renewal business, based on driver motor vehicle reports and length of experience of individual drivers, in addition to policyholder loss history. • Re-emphasize agency reviews and profitability analysis, and follow up aggressively. • Obtain overall risk reviews from claims representatives at account renewal or in conjunction with loss reviews as well as conduct on-site inspections and prepare full risk reports for every account reporting a loss over $100,000. • Include claims representatives, loss control staff and engineering representatives in policy renewal discussions with field marketing representatives and agents. In addition, the Company established property construction claims specialists to augment the locally based field claims force and instituted additional steps for claims and adverse development reviews. These actions are expected to contribute to further improvement in loss results and lead to a return to the Company’s five-year average statutory combined ratio of 101.3% by the end of 2001, absent an unusual level of catastrophe losses. Loss Ratio by Business Line The pure loss ratio for commercial lines was 71.2% in 2000, compared with 61.4% in 1999 and 61.1% in 1998. Catastrophe losses contributed 1.5%, 2.3% and 4.6% to the commercial lines’ pure loss ratio in 2000, 1999 and 1998, respectively. The increase in the pure loss ratio excluding catastrophes in 2000 was due primarily to factors affecting the loss ratio, described above. In 2000, uninsured motorist claims and reserves added 10.6 percentage points to the commercial lines’ pure loss ratio — 2.3 percentage points due to recorded claims and 8.3 percentage points due to additional IBNR reserves related to potential future claims. In 1999, recorded uninsured motorist claims added 1.2 percentage points to the commercial lines’ pure loss ratio. To reduce the future impact of the court’s decisions regarding uninsured motorist coverage, effective October 1, 1999, the Company began using new language in Ohio business auto policies to relieve business policyholders of the need to fund coverage for losses for which they did not intend to assume responsibility. The Company was proactive about changing policy language and amending language on policies outside of Ohio to protect business policyholders from this type of risk. Early in 2001, the Company began working with independent agents to verify Ohio policyholders’ decisions regarding uninsured motorist coverage and document those decisions on a form that meets the court’s criteria. The pure loss ratio for personal lines was 71.1% in 2000, after having improved to 62.0% for 1999 from 73.8% in 1998. Catastrophe losses contributed 5.3%, 2.1% and 8.9% to the personal lines’ pure loss ratio in 2000, 1999 and 1998, respectively. The increase in the pure loss ratio in 2000 was due to the factors affecting the loss ratio, described above, as well as weakening profitability in the personal lines segment, an industry-wide trend. The Company’s agency re-underwriting program, designed to help restore personal lines profitability, was a factor in the improvement in the ratio between 1998 and 1999 and helped mitigate the higher losses in 2000. In 2001, the Company anticipates continuing the re-underwriting program with an additional 100 agencies. In addition, the Company is assessing profitability and seeking appropriate rate increases for personal lines products. Catastrophe Losses The contribution to the loss ratio due to catastrophe losses of 2.7% in 2000 and 2.2% in 1999 was within the Company’s historic range and significantly below the 6.1% recorded in 1998, an unusually high level. 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 does not market property casualty insurance in California, does not write flood insurance, reviews exposure to huge disasters and continues to 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. Expense Ratio The expense ratio (statutory basis), excluding the one-time charge to expense software development assets, remained relatively stable over the three-year period, as the Company maintained its level of investment in staff and costs associated with upgrading technology and facilities. Policyholder Dividend Ratio Policyholder dividends as a percent of net earned premiums increased nearly three-fold in 2000 over 1999 due to growth in workers’ compensation premiums, particularly in Wisconsin, where these policies are structured to include policyholder dividends. As a result of the expansion of this business area, in 2000 the Company began reporting its statutory combined ratio after policyholder dividends, in line with industry practices. One-time Charge The one-time, pre-tax charge of $39.1 million recorded in the third quarter of 2000 was to expense assets related to 24 Back to table of contents (cid:2) Cincinnati Financial Corporation and Subsidiaries development of next-generation software to process property casualty policies. The development of next-generation software remains a strategic priority. The charge reflected the determination that previous work to establish business requirements retained asset value, and costs associated with that portion of the project were excluded from the charge. Life and Accident and Health (000,000s omitted except ratios) *Statutory basis Gross Written Premiums* Net Written Premiums* Earned Premiums Other Income Investment Income Total Revenues Total Expenses Net Operating Income Net Realized Capital Losses Net Income Total Assets Equity 2000 $ 157.3 140.1 79.3 1.9 79.1 158.0 112.1 32.3 (1.5) 30.8 1,620.9 524.7 Change $ $(263.4) (270.3) 4.6 (0.9) 8.8 14.2 5.6 4.2 1.0 5.2 173.8 61.5 Change % (62.6) (65.9) 6.2 (32.1) 12.5 9.9 5.3 14.9 40.0 20.3 12.0 13.3 1999 $ 420.7 410.4 74.7 2.8 70.3 143.8 106.5 28.1 (2.5) 25.6 1,447.1 463.2 Change $ $ 306.0 301.2 4.6 2.8 5.0 11.6 4.9 4.5 (0.4) 4.1 236.9 (61.8) Change % 266.8 275.8 6.6 n/a 7.7 8.8 4.8 19.1 (19.0) 19.1 19.6 (11.8) 1998 $ 114.7 109.2 70.1 0.0 65.3 132.2 101.6 23.6 (2.1) 21.5 1,210.2 525.0 Change $ $ 17.1 16.8 7.2 0.0 4.4 1.7 14.2 (1.2) (6.5) (7.7) 110.2 48.4 Change % 17.5 18.2 11.4 n/a 7.2 1.3 16.2 (4.8) (147.7) (26.4) 10.0 10.2 The Company’s life insurance subsidiary had net written premiums of $140.1 million in 2000 including $20.0 million of BOLI premiums. In 1999, net written premiums were $410.4 million, including a $302.9 million BOLI premium. Excluding BOLI premiums, net written premiums grew 11.7% in 2000, compared with a decline of 1.5% in 1999 and an increase of 18.2% in 1998. Total net earned premium income for 2000 was up for the third consecutive year, with life insurance premiums rising to $74.2 million in 2000 from $65.1 million in 1999 and $61.7 million in 1998. Growth in 2000 reflected continued penetration of the Company’s property casualty agencies, appointment of independent life agencies and introduction of new products. In addition, through the first half of 2000, the Company processed ordinary life applications for policyholders who purchased term life insurance before the “Triple X” regulations took effect, contributing to the year’s increase. In 2000, favorable mortality experience, expense control and continued growth from new products led to strong operating earnings, up 14.9% from the prior year. In 1999, net operating income rose 19.1% due to favorable mortality experience. The life insurance subsidiary contributed 27% of CFC’s operating income in 2000 compared with 11% in 1999 and 12% in 1998. 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-serving by the Company’s property casualty agency force, 90% of which now do business with Cincinnati Life. 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 casualty agents and their customers as well as attract independent life agents to help support overall product volume. To provide increased support to agents and accommodate growth, the Company subdivided existing life marketing territories in Michigan and in Georgia/Alabama during 2000, adding two new life field marketing representatives to bring the total to 25 across the country. Investment Income and Investments Reflecting the interest rate environment, the growth rate for investment income improved in 2000 to 6.0%, excluding interest income recorded in the first quarter from the BOLI, after having declined slightly in 1999 to 5.1% from 5.6% in 1998. As a result, pre-tax investment income, excluding BOLI, reached a new record of $410.0 million compared with the previous record of $386.8 million in 1999. The growth was primarily the result of investing the cash flows from operating activities and dividend increases from equity securities in the investment portfolio. Investment income was affected over the past three years by decreased cash available for the investment portfolio due to the repurchase of the Company’s common stocks. In addition, the higher paid losses in the second half of 2000 reduced the available funds. Back to table of contents 25 (cid:2) M A N A G E M E N T D I S C U S S I O N (continued) Cincinnati Financial Corporation and Subsidiaries The asset value of the Company’s equity portfolio rose approximately $1.015 billion in 2000, while the bond portfolio value rose approximately $103.9 million. In 2000, 30 of the 45 common stocks in the Company’s investment portfolio increased dividends during the year, adding more than $12.8 million to gross investment earnings on an annualized basis. 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. The equity emphasis is on common stocks 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 9.0% at December 31, 2000. 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. Income Taxes The Company’s income tax expense was $(9.7) million, $66.9 million and $65.5 million for 2000, 1999 and 1998, respectively, while the effective tax rate was (8.9)%, 20.8% and 21.3% for the same periods. The negative effective tax rate for 2000 was primarily attributable to lower income before income taxes, combined with the Company’s tax-exempt interest and dividend exclusions, as compared with 1999 and 1998. The effective rate was constant from 1998 and 1999. The Company expects to pay $9.8 million in alternative minimum tax for 2000. The $9.8 million in alternative minimum tax can offset taxes owed in future years, thus creating a deferred tax benefit. Recording this deferred tax benefit in the current year serves to offset the current alternative minimum tax such that total tax expense is unaffected. Outlook Having achieved the goal to reach $2.0 billion in total direct written premiums by the year 2000 in both 2000 and 1999, management is targeting continued growth at two or more times the industry averages. In 2001, industry analysts are projecting 5.8% growth for the property casualty insurance market. The Company’s further objectives are to return to historic profitability levels and maximize annual growth in investment income. Management believes that its statutory combined ratio, a key measure of profitability, should return to its five-year (1995-99) average of 101.3%, including policyholder dividends. The Company’s $2.0 billion premium (statutory basis) target was met in 1999, when $2.158 billion in direct written premiums were written, including a single BOLI premium of $302.9 million written by The Cincinnati Life Insurance Company. In 2000, the target was reached with $1.944 billion in direct written property casualty premiums and $157.3 million in direct written life insurance premiums. Factors that contribute to the positive outlook for total premium growth include the growing strength of the commercial insurance marketplace, the Company’s strong competitive position and reputation among independent insurance agencies and management’s belief that the Company can achieve additional market penetration in states in which it currently operates. However, management believes that the growth rate of personal lines premiums will be relatively unchanged from the 4.3% recorded in 2000 until the Company completes its rollout of next-generation software that will include direct billing capabilities. C A S H F LOW A N D L I QU I D I T Y Cash Flow (000,000s omitted) Net Cash Provided by Operating Activities Net Cash Used in Investing Activities Net Cash (Used in) Provided by Financing Activities Net (Decrease) Increase in Cash Cash at Beginning of Year Cash at End of Year Supplemental Interest Paid Income Taxes Paid 2000 1999 1998 $ 356.6 $ 687.8 $ 273.6 (513.2) (205.3) (320.7) (122.7) (279.3) 339.5 60.2 (201.6) 280.9 58.6 339.5 40.2 33.4 31.6 55.0 25.5 (21.6) 80.2 58.6 36.4 91.2 Cash flow was sufficient to meet operating needs, with short-term borrowings utilized for financing and investing activities for the years 2000 and 1999. Excluding the 1999 year-end sale of the BOLI policy, amounting to approximately $302.9 million, cash flows from operations have been relatively 26 Back to table of contents (cid:2) Cincinnati Financial Corporation and Subsidiaries consistent from year to year. The Company had $55 million of unused letters of credit at December 31, 2000. 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 entering or modifying ceded reinsurance agreements. Further, the Company has no significant exposure to assumed reinsurance because this comprised no more than 2.3% of gross premiums in each of the last three years. The change in net cash used in investing activities for 2000 and 1999 reflected a continued decline in the amount of fixed maturity investments being called by the issuers, compared with higher amounts called in 1998. For the years 2000 and 1999, 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 senior debentures, 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 $170.0 million in 2000 and $118.0 million in 1999 from zero in 1998. Management used short-term debt for purchase of treasury shares, the construction of an additional Cincinnati Headquarters building and other purposes. Dividends CFC has increased cash dividends to shareholders for 40 consecutive years and, periodically, the Board of Directors authorizes stock dividends or splits. In February 2001, the Board of Directors authorized a 10.5% increase in the regular quarterly dividend to an indicated annual rate of 84 cents. In February 2000, the Board authorized an 11.8% increase; in February 1999, a 10.9% increase; and, in February 1998, a 12.2% increase. In the past 10 years, the Company has paid an average of 30-35% of net income as dividends, with the remaining 65-70% reinvested for future growth. The ability of the Company to continue paying cash dividends is subject to factors as the Board of Directors may deem relevant. Since 1992, the Company’s Board also has authorized four stock splits or stock dividends: a three-for-one stock split in 1998; 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 1,947 Cincinnati Financial shares, if all shares from accrued stock dividends and splits were held and cash dividends not reinvested. F I N A N C I A L CO N D I T I O N Assets At year-end 2000, total assets were $13.287 billion compared with $11.808 billion at year-end 1999. Cash and Investments Cash and marketable securities of $11.376 billion make up 85.6% of the Company’s $13.287 billion assets; compared with 89.2% in 1999. The Company has minor investments in real estate and mortgages, which are typically illiquid. At December 31, 2000, the Company’s portfolio of fixed-maturity securities had an average yield-to-cost of 7.7% and an average maturity of 11.2 years. For the insurance companies’ purposes, strong emphasis has been placed on purchasing current income- producing securities and maintaining such securities as long as they continue to meet the Company’s yield and risk criteria. Historically, municipal bonds have been attractive due to their tax-exempt feature. Essential service (e.g., schools, sewer, water, etc.) bonds issued by municipalities are prevalent in this area. Many of these bonds are not rated due to the small size of their offerings. At year-end 2000 and 1999, investments totaling approximately $730 million and $888 million ($806 million and $970 million at cost) of the Company’s $11.376 billion and $10.194 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 and many have been upgraded to investment grade while owned. However, in 2000, the Company recorded losses in its non-investment grade bond portfolio due to the interest rate environment and deteriorating economic conditions. The losses were offset by gains in the equity portfolio. The Company continues to closely monitor these investments. Because of alternative minimum tax matters, the Company uses a blend of tax-exempt and taxable fixed-maturity securities. Tax-exempt bonds comprised 9% of invested assets as of December 31, 2000, unchanged from year-end 1999 and 1998. 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. Remaining Assets Land, building and equipment for the Company at year-end 2000 included $61 million relating to the addition of a second Back to table of contents 27 (cid:2) M A N A G E M E N T D I S C U S S I O N (continued) Cincinnati Financial Corporation and Subsidiaries office tower completed in the first half of 2000, which approximately doubled the Headquarters space. In the second quarter of 2000, the Company began accounting for the assets related to the $302.9 million single- premium BOLI policy written on December 30, 1999, as a separate item on the balance sheet, “Separate Accounts.” At year-end 1999, the premium amount was included in cash. 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, 2000, total long- and short-term debt was 4.7%, insurance reserves were 23.2% and total shareholders’ equity was 45.1% of total assets, with remaining liabilities consisting of unearned premiums, deferred income taxes, declared but unpaid dividends and other liabilities. At December 31, 2000, and December 31, 1999, long-term debt consisted of $449.2 million and $456.4 million, respectively, of convertible and senior debentures. Short-term debt is used to provide working capital as discussed above. Equity Statutory risk-based capital requirements became effective for life insurance companies in 1993 and for property casualty companies in 1994. The Company’s risk-based capital has been well above required amounts in each year since those effective dates. Shareholders’ Equity (000,000s omitted) Common Stock, Paid in Capital less Treasury Stock Retained Earnings Accumulated Other Comprehensive Income Total Shareholders’ Equity 2000 1999 1998 $ 219.1 1,620.0 $ 267.3 1,623.9 $ 462.0 1,480.9 4,155.9 $5,995.0 3,530.1 $5,421.3 3,678.0 $5,620.9 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 $6.438 billion as of December 31, 2000, and constituted 57.2% of the total investment portfolio; 75.5% of the equity investment portfolio; and, after deferred income taxes, 69.8% of total shareholders’ equity. Such unrealized appreciation, before deferred income taxes, amounted to $5.488 billion and $5.512 billion, at year-end 1999 and 1998, respectively. Common Stock Repurchase The CFC Board of Directors believes that stock repurchases can help fulfill the Company’s commitment to enhancing shareholder value. Consequently, the Company’s Board of Directors has authorized the repurchase of outstanding shares. At December 31, 2000, 9.1 million shares remained authorized for repurchase at any time in the future. The Company has purchased 2.1 million shares at a cost of $66.4 million and 6.1 million shares at a cost of $217.1 million during the years ended December 31, 2000 and 1999, respectively, with 11.8 million total shares repurchased at a total cost to the Company of $376.6 million since the inception of the share repurchase program in 1996. 28 Back to table of contents (cid:2) S E L E C T E D Q U A R T E R L Y F I N A N C I A L D A T A (Unaudited) Cincinnati Financial Corporation and Subsidiaries (000s 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 (basic) ............ Net income per common share (diluted) ........ 00,0000000$00,000 1st $ 571,270 103,528 79,363 .49 .48 Quarter Revenues .......................................................... Income before income taxes ............................ Net income ...................................................... Net income per common share (basic) ............ Net income per common share (diluted) ........ 00,0000000$00,000 1st $ 536,659 82,061 64,477 .39 .38 $000,00000$00,000 2nd $ 578,806 96,640 74,694 .46 .45 00,0000000$00,000 2nd $ 541,321 116,341 86,254 .53 .52 2000 3rd $ 599,790 $000,00000$00,000 (8,731)* 5,577* .03* .03* 00,0000000$00,000 1999 3rd $ 538,301 69,042 57,046 .35 .34 $000,00000$00,000 4th $ 581,127 (82,773) (41,269) (.26) (.26) 0,000000000$00000 Full Year $2,330,994 108,664* 118,365* .74* .73* 00,0000000$00,000 4th $ 511,942 54,129 46,945 .29 .28 0,000000000$00000 Full Year $2,128,223 321,573 254,722 1.55 1.52 *Fourth-quarter and full-year 2000 results include a one-time net charge for asset impairment of $39.1 million, before tax; $25.4 million, net of tax; or 16 cents per share. Note: The sum of the quarterly reported amounts may not equal the full year as each is computed independently. R E S P O N S I B I L I T Y F O R F I N A N C I A L S T A T E M E N T S Cincinnati Financial Corporation and Subsidiaries The accompanying financial statements of Cincinnati Financial Corporation and subsidiaries for the year ended December 31, 2000 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, 2000 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. Back to table of contents 29 (cid:2) C O N S O L I D A T E D B A L A N C E S H E E T S (000s omitted) Cincinnati Financial Corporation and Subsidiaries ...................................................................................................................................................................... ASSETS Investments Fixed maturities, at fair value (amortized cost: 2000–$2,802,863; 1999–$2,692,154) ................................................................ Equity securities, at fair value (cost: 2000–$2,067,984; 1999–$2,022,555) ................................................................ Other invested assets ...................................................................... Cash.................................................................................................. Investment income receivables .......................................................... Finance receivables ............................................................................ Premiums receivable .......................................................................... Reinsurance receivables ...................................................................... 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, 2000 $000.,00000000$00,000 1999 $000.,00000000$00,000 $ 2,721,291 $ 2,617,412 8,525,985 68,560 60,254 86,234 30,718 652,340 214,576 15,246 258,734 7,510,918 65,909 339,554 80,128 32,931 522,539 159,229 24,684 225,896 accumulated depreciation: 2000–$123,840; 1999–$123,427) .... Other assets .......................................................................................... Separate accounts................................................................................ Total assets ............................................................................ ...................................................................................................................................................................... ...................................................................................................................................................................... ...................................................................................................................................................................... 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 .................................... Separate accounts................................................................................ Total liabilities ...................................................................... ...................................................................................................................................................................... ...................................................................................................................................................................... SHAREHOLDERS’ EQUITY Common stock, par value–$2 per share; authorized 200,000 shares; issued: 2000–172,883; 1999–171,862 ........................................ Paid-in capital .................................................................................. Retained earnings .............................................................................. Accumulated other comprehensive income–unrealized net capital gains .......................................................................... ...................................................................................................................................................................... Less treasury stock at cost (2000–11,992 shares; 1999–9,841 shares) Total shareholders’ equity ...................................................... Total liabilities and shareholders’ equity ................................ ...................................................................................................................................................................... ...................................................................................................................................................................... ...................................................................................................................................................................... ...................................................................................................................................................................... Accompanying notes are an integral part of this statement. 30 Back to table of contents 122,005 173,533 357,615 $13,287,091 $000.,00000000$00,000 $000.,00000000$00,000 $000.,00000000$00,000 $ 2,473,059 605,421 921,872 257,254 2,057,641 170,000 419,631 29,603 357,615 7,292,096 $000.,00000000$00,000 $000.,00000000$00,000 107,784 120,695 – 0 – $11,807,679 $000.,00000000$00,000 $000.,00000000$00,000 $000.,00000000$00,000 $ 2,154,149 860,561 836,407 241,232 1,719,673 118,000 419,614 36,759 – 0 – 6,386,395 $000.,00000000$00,000 $000.,00000000$00,000 345,766 254,156 1,619,954 343,725 237,859 1,623,890 $000.,00000000$00,000 4,155,929 6,375,805 (380,810) 5,994,995 $13,287,091 $000.,00000000$00,000 $000.,00000000$00,000 $000.,00000000$00,000 $000.,00000000$00,000 $000.,00000000$00,000 3,530,104 5,735,578 (314,294) 5,421,284 $11,807,679 $000.,00000000$00,000 $000.,00000000$00,000 $000.,00000000$00,000 $000.,00000000$00,000 (cid:2) C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E (000s omitted except per share data) Cincinnati Financial Corporation and Subsidiaries .............................................................................................................................................................. 2000 $000.,00000000$00,000 Years Ended December 31, 1999 $000,00000000$00,000 1998 000,0000..0000$00,000 REVENUES Premium income .............................................................................................................................................................. Property and casualty .............................................. Life........................................................................ Accident and health .............................................. Premiums earned .................................................. Net investment income .............................................. Realized (losses) gains on investments.......................... Other income.............................................................. Total revenues ........................................................ .............................................................................................................................................................. .............................................................................................................................................................. $000.,00000000$00,000 $ 1,827,576 76,716 2,630 1,906,922 415,310 (2,595) 11,357 2,330,994 $000.,00000000$00,000 $000.,00000000$00,000 $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$00,000 000,0000..0000$00,000 $ 1,542,639 61,704 8,392 1,612,735 367,993 65,309 8,252 2,054,289 000,0000..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 1,581,123 351,104 171,729 55,694 1,254,363 316,416 151,495 60,475 1,221,118 293,926 145,022 61,271 unearned premiums and to life policies in force .... Interest expense ............................................................ Other expenses ............................................................ Asset impairment–software written off ........................ Total benefits and expenses.................................... .............................................................................................................................................................. .............................................................................................................................................................. (32,838) 36,788 19,630 39,100 2,222,330 (16,930) 33,043 7,788 – 0 – 1,806,650 (11,323) 28,012 9,156 – 0 – 1,747,182 $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 .................................. .............................................................................................................................................................. 108,664 $000.,00000000$00,000 321,573 $000,00000000$00,000 307,107 000,0000..0000$00,000 PROVISION FOR INCOME TAXES Current .......................................................................... Deferred...................................................................... Total provision for income taxes ............................ .............................................................................................................................................................. .............................................................................................................................................................. (11,223) 1,522 (9,701) 76,534 (9,683) 66,851 78,847 (13,307) 65,540 $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 .................................................................. .............................................................................................................................................................. $ 118,365 $000.,00000000$00,000 .............................................................................................................................................................. $000.,00000000$00,000 $ 254,722 $000,00000000$00,000 $000,00000000$00,000 $ 241,567 000,0000..0000$00,000 000,0000..0000$00,000 PER COMMON SHARE Net income (basic) ........................................................ .............................................................................................................................................................. .............................................................................................................................................................. Net income (diluted).................................................... .............................................................................................................................................................. .............................................................................................................................................................. Cash dividends (declared)............................................ .............................................................................................................................................................. .............................................................................................................................................................. $ .74 $000.,00000000$00,000 $000.,00000000$00,000 $ .73 $000.,00000000$00,000 $000.,00000000$00,000 $ .76 $000.,00000000$00,000 $000.,00000000$00,000 $000,00000000$00,000 $000,00000000$00,000 000,0000..0000$00,000 000,0000..0000$00,000 1.45 $ $ $ 1.55 1.52 .68 $000,00000000$00,000 $000,00000000$00,000 000,0000..0000$00,000 000,0000..0000$00,000 $000,00000000$00,000 $000,00000000$00,000 000,0000..0000$00,000 000,0000..0000$00,000 $ $ $ 1.41 .611⁄3 Accompanying notes are an integral part of this statement. Back to table of contents 31 (cid:2) C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y (000s omitted) Cincinnati Financial Corporation and Subsidiaries Accumulated Other Total Balance, December 31, 1997 .... $ Common Stock 338,782 $ (72,585) $ 203,282 $ 1,341,730 $ 2,905,756 $ 4,716,965 Comprehensive Shareholders’ Retained Earnings Treasury Stock Paid-In Capital Income Equity 000,0000000000$00,000 000,0000000000$00,000 000,0000000000$00,000 000,000000000$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, 1998 .... 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, 1999 .... Net income .............................. Change in unrealized gains on investments ........................ Income taxes on unrealized gains .. Comprehensive income ............ Dividends declared .................... Purchase/issuance of 241,567 (102,383) 1,188,097 (415,834) $000.,0000000$00,000 1,214 875 340,871 (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 $000.,0000000$00,000 816 2,038 343,725 (217,098) $000,0000000$000000 (314,294) 14 6,396 13,121 237,859 000,000000000$00,000 000,0000000000$00,000 000,0000000000$00,000 1,623,890 3,530,104 118,365 (122,301) 962,808 (336,983) 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) 7,212 15,159 5,421,284 000,0000000000$00,000 118,365 000,0000000000$00,000 962,808 (336,983) 744,190 (122,301) (66,505) treasury shares .................... 11,171 Stock options exercised.............. Conversion of debentures.......... 7,156 Balance, December 31, 2000 .... $ 345,766 $ (380,810) $ 254,156 $ 1,619,954 $ 4,155,929 $ 5,994,995 11 10,091 6,195 1,080 961 (66,516) 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 Accompanying notes are an integral part of this statement. $000.,0000000$00,000 $000,0000000$000000 000,000000000$00,000 000,0000000000$00,000 000,0000000000$00,000 000,0000000000$00,000 32 Back to table of contents (cid:2) C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S (000s 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........................................ Asset impairment-software written off ............................ Increase in investment income receivable ........................ Increase in premiums receivable ...................................... Increase in reinsurance receivables .................................. Decrease (increase) in prepaid reinsurance premiums ...... Increase in deferred acquisition costs................................ Decrease (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 .............................. (Decrease) increase in current income taxes .................... Increase (decrease) in deferred income taxes .................... Realized loss (gains) on investments ................................ 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: Payment of cash dividends to shareholders ............................ Purchase/issuance of treasury shares...................................... Increase in (payoff of ) notes payable ...................................... Proceeds from stock options exercised .................................... Proceeds from issue of 6.9% senior debentures...................... Net cash (used in) provided by financing activities .... Net (decrease) increase in cash...................................................... Cash at beginning of year ............................................................ Cash at end of year...................................................................... Supplemental disclosures of cash flow information: Interest paid .......................................................................... Income taxes paid.................................................................. 2000 $000000000$00,000 Years Ended December 31, 1999 $0000000000$00000 1998 000,0000000$00,000 $ 118,365 $ 254,722 $ 241,567 $000000000$00,000 $0000000000$00000 000,0000000$00,000 $000000000$00,000 $0000000000$00000 000,0000000$00,000 18,269 39,100 (11,038) (129,801) (55,347) 9,438 (32,838) 22,502 (72,306) 318,910 52,621 85,465 53,078 (63,400) 985 2,595 356,598 3,518 302,145 293,474 15,434 (795,766) (272,172) (43,724) (13,220) (2,912) (513,223) (119,342) (66,504) 52,000 11,171 – 0 – (122,675) 16,016 – 0 – (3,355) (28,270) (23,238) 1,751 (16,930) (15,277) 2,170 99,424 326,831 46,855 15,471 20,752 (9,683) 564 687,803 61,909 316,495 197,141 16,133 (423,505) (246,129) (102,141) (16,957) (8,232) (205,286) (109,702) (217,084) 118,000 7,212 – 0 – (201,574) 11,793 – 0 – (2,253) (24,081) (26,881) (2,823) (11,323) (7,369) 425 118,191 51,283 34,849 (16,590) (14,595) (13,307) (65,309) 273,577 47,486 320,510 321,003 14,738 (475,751) (474,176) (47,750) (15,131) (11,589) (320,660) (99,522) (24,301) (280,558) 10,314 419,593 25,526 $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 (279,300) 339,554 60,254 $000000000$00,000 $000000000$00,000 $000000000$00,000 $000000000$00,000 $000000000$00,000 40,214 33,396 $000000000$00,000 $000000000$00,000 $ $ $ 280,943 58,611 $ 339,554 $0000000000$00000 $0000000000$00000 $0000000000$00000 $0000000000$00000 $0000000000$00000 $ 31,612 $ 55,000 $0000000000$00000 $0000000000$00000 (21,557) 80,168 58,611 000,0000000$00,000 000,0000000$00,000 000,0000000$00,000 000,0000000$00,000 000,0000000$00,000 36,419 91,241 000,0000000$00,000 000,0000000$00,000 $ $ $ Supplemental disclosure of noncash activity - During the current year, the Company established a separate account. This resulted in a noncash transfer to the separate account of the following: $300,818 from investments, $307,762 from life policy reserves, $11,394 from cash, $8,984 from accounts payable securities, $4,932 from investment income receivable, $540 from other liabilities, and $142 from accounts receivable securities. Accompanying notes are an integral part of this statement. Back to table of contents 33 (cid:2) N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Cincinnati Financial Corporation and Subsidiaries 1. S U M M A RY O F S I G N I F I C A N T ACCO U N T I N G P O L I C I E S Nature of Operations – Cincinnati Financial Corporation (Company), through four insurance subsidiaries, sells insurance in 31 states, 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 casualty insurance as well as life insurance, long term care, disability policies and annuities. Basis of Presentation – The consolidated financial statements include the accounts of the Company and subsidiaries, each of which is wholly owned, and are presented in conformity with accounting principles generally accepted in the United States of America. 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 that affect amounts reported in the financial statements and accompanying notes. 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 deferred and earned 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, based upon facts in each claim and the Company’s experience with similar claims. The establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain process. Reserve estimates are regularly reviewed and updated, using the most current information available. Any resulting adjustments are reflected in current operations. 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 7%. Interest rates on approximately $415,000,000 and $380,000,000 of such reserves at December 31, 2000 and 1999, respectively, are periodically adjusted based upon market conditions. Payments received for investment, limited pay and universal life-type contracts are recognized as income only to the extent of the current cost of insurance and policy administration, with the remainder recognized as liabilities and included in life policies reserves. Accident and Health Insurance – Expenses incurred in the issuance of policies are deferred and amortized over a five-year period. Policy premium income, unearned premiums and reserves for unpaid losses are accounted for in substantially the same manner as property 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 and reinsurers. 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. Investment income consists primarily of interest and dividends. Interest is recognized on an accrual basis and dividends are recorded at the ex-dividend date. Land, Building and Equipment – Property and equipment are classified as land, buildings and equipment for Company use or as other invested assets and are carried at cost less accumulated depreciation. The Company provides depreciation based on estimated useful lives using straight-line and accelerated methods. The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. During 2000, the Company wrote off $39.1 million of previously capitalized costs related to the development of next-generation software to process property casualty policies. Management conducted a review of the project, including an assessment by an independent firm, and determined, after several deliverable dates were missed, that the project design would not 34 Back to table of contents (cid:2) perform as originally intended. The decision required the application software under development be abandoned and a new application purchased. 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. Separate Accounts – The Company issues variable life contracts with guaranteed minimum returns, the assets and liabilities of which are legally segregated and recorded as assets and liabilities of the separate accounts. Minimum investment returns and account values are guaranteed by the Company and also include death benefits to beneficiaries of the contract holders. The assets of the separate accounts are carried at fair value. Separate account liabilities primarily represent the contract holders’ claim to the related assets and are carried at the fair value of the assets. In the event that the asset value of contract holders’ accounts is projected below the value guaranteed by the Company, a liability is established through a charge to earnings. Investment income and realized capital gains and losses of the separate accounts generally accrue directly to the contract holders and, therefore, are not included in the Company’s Consolidated Statements of Income. Revenues and expenses for the Company related to the separate accounts consist of contractual fees, percentages of net realized capital gains and losses, and mortality, surrender and expense risk charges. 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 and assets held in separate accounts) 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. Derivative Instruments and Hedging Activities – In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133 “Accounting for Derivative Instruments and Hedging Activities” (amended by SFAS Nos. 137 and 138). The Company plans to adopt SFAS No. 133, as amended, on January 1, 2001. Management has determined that the adoption of SFAS No. 133 will not have a significant impact on the consolidated results of operations, financial position or cash flows of the Company because the Company does not have significant derivative activity. Transfers of Financial Assets and Extinguishments of Liabilities – In September 2000, the FASB issued SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 140 replaces SFAS No. 125 and addresses certain issues not previously addressed in SFAS No. 125. SFAS No. 140 is effective for transfers and servicing occurring after March 31, 2001. Additionally, SFAS No. 140 is effective for disclosures about securitizations and collateral for fiscal years ending after December 15, 2000. The Company does not expect that SFAS No. 140 will have a material effect on its financial statements. Reclassifications – Certain prior year amounts have been reclassified to conform with current year classifications, including certain premium receivables and deferred acquisition costs, which prior to 2000 were netted against unearned premiums and underwriting expense accruals in the balance sheets. Back to table of contents 35 (cid:2) N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued) Cincinnati Financial Corporation and Subsidiaries 2. I N V E S T M E N TS (000s 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: 2000 $000000000$00,00 Years Ended December 31, 1999 $000000000$00,00 1998 $000000000$00,00 $000000000$00,00 $ 221,993 186,181 11,409 419,583 4,273 $ 415,310 $000000000$00,00 $000000000$00,00 $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 $000000000$00,00 $ 217,675 145,885 9,545 373,105 5,112 $ 367,993 $000000000$00,00 $000000000$00,00 $000000000$00,00 Gross realized gains .......................................................................................... Gross realized losses .......................................................................................... $ 7,216 (76,540) $ 10,842 (48,518) $ 11,591 (10,354) Equity securities: Gross realized gains .......................................................................................... Gross realized losses .......................................................................................... Realized (losses) gains on investments .............................................................. Change in unrealized gains on investments summarized by investment category: Fixed maturities ...................................................................................................... Equity securities ...................................................................................................... Change in unrealized gains on investments ...................................................... 108,299 (41,570) $ (2,595) $000000000$00,00 $000000000$00,00 $000000000$00,00 $ (6,830) 969,638 $ 962,808 $000000000$00,00 $000000000$00,00 $000000000$00,00 57,605 (20,493) $ (564) $000000000$00,00 $000000000$00,00 $000000000$00,00 $ (204,314) (23,248) $ (227,562) $000000000$00,00 $000000000$00,00 $000000000$00,00 104,079 (40,007) 65,309 $ $000000000$00,00 $000000000$00,00 $000000000$00,00 $ (50,098) 1,238,195 $1,188,097 $000000000$00,00 $000000000$00,00 $000000000$00,00 Analysis of cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value as of December 31, 2000 and 1999 (000s omitted): 2000 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 ................................................................................ Equity securities ............................................................................ 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 ................................................................................ Equity securities ............................................................................ Cost or Amortized Cost 000000000$00000 $ 947,470 76,506 80,929 Gross Unrealized Gains 000000000$00000 $ 37,822 1,387 2,522 Gross Unrealized Losses 000000000$00000 $ 2,062 9,703 918 Fair Value 000000000$00000 $ 983,230 68,190 82,533 7,030 1,690,928 $2,802,863 000000000$00000 000000000$00000 000000000$00000 186 40,605 $ 82,522 000000000$00000 000000000$00000 000000000$00000 – 0 – 151,411 $ 164,094 000000000$00000 000000000$00000 000000000$00000 7,216 1,580,122 $2,721,291 000000000$00000 000000000$00000 000000000$00000 $2,067,984 000000000$00000 000000000$00000 $6,517,504 000000000$00000 000000000$00000 $ 59,503 000000000$00000 000000000$00000 $8,525,985 000000000$00000 000000000$00000 $ 891,319 83,993 60,978 $ 16,971 2,221 1,120 $ 21,637 10,419 690 $ 886,653 75,795 61,408 7,038 1,648,826 $2,692,154 000000000$00000 000000000$00000 000000000$00000 34 30,886 $ 51,232 000000000$00000 000000000$00000 000000000$00000 173 93,055 $ 125,974 000000000$00000 000000000$00000 000000000$00000 6,899 1,586,657 $2,617,412 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 36 Back to table of contents (cid:2) Cincinnati Financial Corporation and Subsidiaries Contractual maturity dates for investments in fixed maturity securities as of December 31, 2000 (000s omitted): Amortized Cost $00000000$00000 Fair Value $00000000$00000 % of Fair Value $00000000$00000 Maturity dates occurring: One year or less ................................................................................................ $ 113,765 763,746 After one year through five years........................................................................ 806,477 After five years through ten years ...................................................................... 1,118,875 After ten years.................................................................................................... Total .......................................................................................................... $2,802,863 $00000000$00000 $00000000$00000 $00000000$00000 $ 115,575 734,204 740,758 1,130,754 $2,721,291 $00000000$00000 $00000000$00000 $00000000$00000 4.2 27.0 27.2 41.6 100.0 $00000000$00000 $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, 2000, investments with a cost of $64,020,000 and fair value of $63,878,000 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 (000s omitted): Fifth Third Bancorp common stock .......................................................... $ 276,799 Alltel Corporation common stock ............................................................ $ 118,931 Cost $00000000$00000 $00000000$00000 Fair Value $4,329,797 $ 822,624 $00000000$0000 Cost $ 276,799 $ 100,467 $000000000$0000 Fair Value $3,544,757 $1,060,481 0000000000000000000000000000000000000000 2000 0000000000000000000000000000000000000000 1999 3. D E F E R R E D ACQU I S I T I O N CO S TS Acquisition costs incurred and capitalized during 2000, 1999 and 1998 amounted to $437,504,000, $381,635,000 and $347,704,000, respectively. Amortization of deferred acquisition costs was $404,666,000, $364,705,000 and $336,381,000 for 2000, 1999 and 1998, respectively. 4. LO S S E S A N D LO S S E X PE N S E S Activity in the reserve for losses and loss expenses is summarized as follows (000s omitted): Years Ended December 31, 1998 1999 000000000000000 2000 0000000..0000000 000000000000000 Balance at January 1 ................ $2,092,576 $1,978,461 $1,888,883 112,235 1,776,648 160,809 1,931,767 138,138 1,840,323 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: 1,527,669 (19,726) 1,507,943 1,303,651 (116,061) 1,187,590 1,306,194 (153,311) 1,152,883 0000000..0000000 000000000000000 000000000000000 0000000..0000000 000000000000000 000000000000000 590,366 Current year ........................ 498,842 Prior years ............................ 1,089,208 Total paid ................................ 1,840,323 Net balance at December 31.... Plus reinsurance receivable .... 138,138 Balance at December 31 ...... $2,401,482 $2,092,576 $1,978,461 666,796 590,909 1,257,705 2,182,005 219,477 574,038 522,108 1,096,146 1,931,767 160,809 0000000..0000000 0000000..0000000 0000000..0000000 0000000..0000000 000000000000000 000000000000000 000000000000000 000000000000000 000000000000000 000000000000000 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 $19,726,000, $116,061,000 and $153,311,000 in 2000, 1999 and 1998. 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 $71,577,000 and $61,573,000 at December 31, 2000 and 1999, respectively, for certain life/health losses and loss checks payable. 5. L I F E P O L I C Y R E S E RV E S 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 (000s omitted): 2000 0000000.00000 Ordinary/traditional life .................................. $170,816 251,722 Universal life.................................................... 162,848 Annuities ........................................................ 106 Group life ........................................................ 15,120 Industrial ........................................................ 4,809 Other.............................................................. $605,421 Total ............................................................ 0000000.00000 0000000.00000 000000000000 1999 $155,931 236,214 144,221 302,990 15,555 5,650 $860,561 000000000000 000000000000 Back to table of contents 0000000.00000 000000000000 37 (cid:2) N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued) Cincinnati Financial Corporation and Subsidiaries At December 31, 2000 and 1999, the fair value associated with the annuities shown above approximated $179,000,000 and $158,000,000 respectively. 6. N OT E S PAYA B L E The Company and subsidiaries had no compensating balance requirement on debt for either 2000 or 1999. The Company had lines of credit with commercial banks amounting to $225,000,000, of which $170,000,000 and $118,000,000 were in use at December 31, 2000 and 1999. Interest rates charged on such borrowings ranged from 6.38% to 7.40% during 2000, which resulted in an average interest rate of 7.12%. At December 31, 2000, the fair value of the notes payable approximated the carrying value and the weighted average interest rate approximated 6.68%. 7. S E N I O R D E B E N T U R E S 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, 2000 and 1999, the fair value of the debentures approximated $450,000,000 and $445,000,000, respectively. 8. S H A R E H O L D E R S’ E QU I T Y A N D R E S T R I C T I O N The insurance subsidiaries paid cash dividends to the Company of approximately $100,000,000, $195,000,000 and $105,000,000 in 2000, 1999 and 1998, 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 may be paid only with approval of the insurance department of the subsidiaries’ domiciliary state. During 2001, the total dividends that may be paid to the Company without regulatory approval are approximately $317,173,000. 2,151,000 shares of common stock were available for future stock option grants, as of December 31, 2000. The Company’s Board of Directors has authorized the repurchase of outstanding shares. At December 31, 2000, 9.1 million shares remain authorized for repurchase at any time in the future. The Company has purchased 11.8 million shares at a cost of $376.6 million between the inception of the share repurchase program in 1996 and December 31, 2000. 9. R E I N S U R A N C E Property casualty premium income in the accompanying statements of income includes approximately $33,773,000, $37,113,000 and $38,790,000 of earned premiums on assumed business and is net of approximately $108,067,000, $95,572,000 and $96,073,000 of earned premiums on ceded business for 2000, 1999 and 1998, respectively. Written premiums for 2000, 1999 and 1998 consist of the following (000s omitted): 2000 0000000000000000 Direct business .................. $1,987,019 35,597 Assumed business .............. (99,085) Ceded business .................. Net.................................. $1,923,531 0000000000000000 0000000000000000 000000000000000 1999 $1,763,751 37,263 (94,105) $1,706,909 000000000000000 000000000000000 000000000000000 1998 $1,636,859 38,119 (99,189) $1,575,789 000000000000000 000000000000000 0000000000000000 000000000000000 000000000000000 Insurance losses and policyholder benefits in the accompanying statements of income are net of approximately $109,478,000, $63,206,000 and $59,741,000 of reinsurance recoveries for 2000, 1999 and 1998, respectively. 10. F E D E R A L I N CO M E TA X E S Significant components of the Company’s net deferred tax liability as of December 31, 2000 and 1999 are as follows (000s omitted): 2000 000000000000000 1999 00000000000000 Deferred tax liabilities: Unrealized gains on investments .......... $2,231,751 82,163 Deferred acquisition costs .................... 28,331 Other.................................................... 2,342,245 Total .................................................... 000000000000000 000000000000000 Deferred tax assets: Losses and loss expense reserves............ Unearned premiums ............................ Life policy reserves .............................. Tax credit carryforward ........................ Other.................................................... Total .................................................... 178,211 64,405 18,620 9,848 13,520 284,604 Net deferred tax liability .......................... $2,057,641 000000000000000 000000000000000 000000000000000 $1,894,768 71,115 22,211 1,988,094 00000000000000 00000000000000 181,713 56,174 18,603 –0– 11,931 268,421 $1,719,673 00000000000000 00000000000000 00000000000000 000000000000000 00000000000000 The provision for federal income taxes is based upon a consolidated income tax return for the Company and subsidiaries. 38 Back to table of contents (cid:2) Cincinnati Financial Corporation and Subsidiaries The differences between the statutory federal rates and the Options to purchase 1,112,000, 918,000 and 667,000 shares 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............................................ 2000 1998 1999 Percent Percent Percent 35.00 35.00 35.00 000000000 000000000 000000000 (15.11) (30.39) 1.57 (8.93) 000000000 000000000 (5.13) (9.19) .11 20.79 (5.39) (9.29) 1.02 21.34 000000000 000000000 000000000 000000000 000000000 000000000 000000000 No provision has been made (at December 31, 2000, 1999 and 1998) for federal income taxes on approximately $14,000,000 of the life insurance subsidiary’s retained earnings, since such taxes will become payable only to the extent that such retained earnings are distributed as dividends or exceed limitations prescribed by tax laws. The Company does not contemplate any such dividend. 11. N E T I N CO M E PE R CO M M O N S H A R E The computation of earnings per share for the years ended December 31, 2000, 1999 and 1998 is as follows (000s omitted except per share data): 2000 Basic ........................................ $118,365 Shares Net Income Per Share (Numerator) (Denominator) Amount $ .74 160,611 000000000000000000 000000000000000 00000000000 00000000 Effect of dilutive securities: 5.5% convertible senior debentures ........................ Stock options ...................... 1,206 000000000000 Diluted .................................... $119,571 000000000000 1,990 1,320 163,921 00000000000 00000000000 000000000000 00000000000 00000000 $ .73 00000000 00000000 1999 Basic ........................................ $254,722 Effect of dilutive securities: 5.5% convertible senior debentures ........................ Stock options ...................... 1,539 000000000000 Diluted .................................... $256,261 000000000000 1998 Basic ........................................ $241,567 Effect of dilutive securities: 5.5% convertible senior debentures ........................ Stock options ...................... 1,918 000000000000 Diluted .................................... $243,485 000000000000 164,637 $1.55 00000000 00000000 2,471 1,507 168,615 00000000000 00000000000 166,821 $1.45 00000000 00000000 3,490 1,767 172,078 00000000000 00000000000 000000000000 00000000000 $1.41 00000000 00000000 of common stock were outstanding during 2000, 1999 and 1998, respectively, but were not included in the computation of net income per common share (diluted) because the options’ exercise prices were greater than the average market price of the common shares. 12. PE N S I O N P L A N The Company and subsidiaries have a defined benefit pension plan covering substantially all employees. Benefits are based on years of credited service and compensation level. Contributions to the plan are based on the frozen entry age actuarial cost method. Pension expense is composed of several components that are determined using the projected unit credit actuarial cost method and based on certain actuarial assumptions. The following table sets forth summarized information on the Company’s defined benefit pension plan (000s omitted): Years Ended December 31, 000 0000000 0000000000000000000000000 2000 000000000000 1999 000000000000 Change in benefit obligation: Benefit obligation at beginning of year ...... $ 75,921 4,855 Service cost ................................................ 6,031 Interest cost .............................................. – 0 – Plan amendments ...................................... 6,187 Actuarial loss (gain).................................... Benefits paid .............................................. (4,811) Benefit obligation at end of year ................ $ 88,183 000000000000 000000000000 $ 76,314 5,319 5,147 11,088 (18,795) (3,152) $ 75,921 000000000000 000000000000 Change in plan assets: 000000000000 000000000000 Fair value of plan assets at beginning of year........................................................ $148,620 16,632 Actual return on plan assets........................ (4,812) Benefits paid .............................................. Fair value of plan assets at end of year ........ $160,440 000000000000 000000000000 $151,879 (107) (3,152) $148,620 000000000000 000000000000 Funded status: 000000000000 000000000000 Funded status at end of year ...................... $ 72,257 (76,164) Unrecognized net actuarial gain.................. (2,591) Unrecognized net transitional asset ............ Unrecognized prior service cost.................. 9,080 Prepaid (accrued) pension cost .................. $ 2,582 000000000000 000000000000 $ 72,699 (80,552) (2,962) 10,770 (45) 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. The fair value of the Company’s stock comprised $23,042,000 and $18,164,000 of the plan’s assets at December 31, 2000 and 1999, respectively. 000000000000 00000000000 $1.52 00000000 00000000 000000000000 000000000000 Back to table of contents 39 (cid:2) N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued) Cincinnati Financial Corporation and Subsidiaries The following summarizes the assumptions for the plan: In March 1998, the National Association of Insurance Discount rate............................................ Expected return on plan assets .................. Rate of compensation increase .................. Years Ended December 31, 000000000000 00000000000000000000000 000000000000 2000 Percent 7.25 8.00 5 to 7 000000000000 1999 Percent 7.50 8.00 5 to 7 The components of the net periodic benefit cost for 2000, 1999 and 1998 include the following (000s omitted): Service cost........................................ Interest cost........................................ Expected return on plan assets .......... Amortization of: Transition obligation (asset)............ Prior service cost............................ Actuarial (gain) loss........................ Net pension expense.......................... 0000000000 0000000000 0000000 0 0000000 000000000000000000000 Years Ended December 31, 1998 2000 1999 $ 4,150 $ 5,319 $ 4,855 4,474 5,147 6,031 (7,451) (9,100) (10,688) 0000000000 (370) 543 (2,998) $(2,627) 0000000000 0000000000 (370) (40) (1,269) $ (313) 0000000000 0000000000 (370) (40) (1,049) $ (286) 0000000000 0000000000 0000000000 0000000000 0000000000 13. S TAT U TO RY ACCO U N T I N G I N F O R M AT I O N 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. Net income and shareholders’ equity, as determined in accordance with statutory accounting practices for the Company’s insurance subsidiaries, are as follows (000s omitted): 0000000 000 0000000 0000000000000000000000000000 Years Ended December 31, 1998 1999 00000000000000 2000 0000000000000 000000000000000 Net income: Property casualty insurance subsidiaries .......................... $ 35,035 $209,915 $148,235 Life health insurance subsidiary ............................ $ 30,071 $ 21,381 $ 7,248 December 31, 000000000000000000000000000000000 2000 000000000000000 1999 000000000 0000 Capital and surplus: Property casualty insurance subsidiaries .. $2,760,594 $2,498,609 Life health insurance subsidiary ................ $ 411,136 $ 353,165 Commissioners adopted the Codification of Statutory Accounting Principles (the Codification). The Codification, which is intended to standardize regulatory accounting and reporting to state insurance departments, is effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. Ohio, the domiciliary state of the Company’s insurance subsidiaries, will require adoption of the Codification with certain modifications for the preparation of statutory financial statements effective January 1, 2001. The Company estimates that the adoption of the Codification as modified by the Ohio Department of Insurance will reduce statutory capital and surplus as of January 1, 2001 by approximately $465,000,000 for the property casualty insurance subsidiaries and $62,000,000 for the life health insurance subsidiary. 14. T R A N S AC T I O N S W I T H A F F I L I AT E D PA RT I E S The Company paid certain officers and directors, or insurance agencies of which they are shareholders, commissions of approximately $13,934,000, $12,989,000 and $11,654,000 on premium volume of approximately $87,465,000, $82,707,000 and $82,839,000 for 2000, 1999 and 1998, respectively. 15. S TO C K O P T I O N S 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 10-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, 40 Back to table of contents (cid:2) Cincinnati Financial Corporation and Subsidiaries the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below (000s omitted except per share data): Net income Net income per common share (basic) Net income per common share (diluted) As reported Pro forma As reported Pro forma As reported Pro forma 0000000.0,000 2000 $118,365 107,597 .74 .67 .73 .66 $ $ $00000$00,000 1999 $254,722 246,007 1.55 1.49 1.52 1.47 $ $ $00000$00,000 1998 $241,567 235,420 1.45 1.41 1.41 1.38 $ $ 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 2000, 1999 and 1998, respectively: dividend yield of 2.11%, 2.36% and 1.79%; expected volatility of 24.92%, 22.89% and 21.79%; risk-free interest rates of 5.30%, 6.81% and 5.02%; and expected lives of 10 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, 2000, 1999 and 1998 follows (000s 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 $$000000000000,00,00$$00,0 $0$.0$00,0 0$$0 $$0000000,00$00,000$$0 $0$.0$00,0 0$$0 $$0000000,00$00,000$$0 00,0000000000$000000000000000000$00000000,000 Shares $$00000,00$$00 5,460,140 1,294,600 (520,679) (80,843) 6,153,218 $$00000,00$$00 $$00000,00$$00 2000 Weighted-Average Exercise Price $27.57 31.08 18.48 29.57 29.05 0000000000000$000000000$00 0000$00,000 1999 Shares Weighted-Average 00,00000000000$000000000$00 0000$00,000 1998 Shares Weighted-Average 4,940,591 1,011,800 (414,703) (77,548) 5,460,140 $0$.0$00,0 0$$0 $0$.0$00,0 0$$0 Exercise Price $25.11 35.46 16.55 32.89 27.57 3,932,271 1,664,200 (615,884) (39,996) 4,940,591 $0$.0$00,0 0$$0 $0$.0$00,0 0$$0 Exercise Price $17.88 38.00 15.27 25.48 25.11 i i $$00000,00$$00 $0$.0$00,0 0$$0 $0$.0$00,0 0$$0 i 3,694,725 3,224,461 2,243,982 $10.56 $14.40 $13.39 Options outstanding and exercisable at December 31, 2000 consisted of the following: $0$$0$00000000000000000000000$000000000000000000000000000000000000000000000000000000000000000000000000000000000000000$$0 00000000000000000000000000000000000000000000000 Options Outstanding Options Exercisable Range of Exercise Prices Number Weighted-Average Remaining Contractual Life 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$$0 $ 9.07 to 15.79 $15.95 to 20.47 $20.50 to 23.00 $26.41 to 29.72 $32.06 to 33.75 $33.88 to 39.88 $40.16 to 45.37 525,613 575,878 1,121,355 1,069,829 755,980 1,226,363 878,200 6,153,218 $$0$$0$$0$$0$$ $$0$$0$$0$$0$$ 1.86 yrs 4.30 yrs 5.62 yrs 9.83 yrs 8.04 yrs 8.15 yrs 7.48 yrs 6.97 yrs $13.08 18.60 21.25 29.59 33.62 34.79 42.80 29.05 525,613 575,878 1,121,355 40,629 285,494 628,034 517,722 3,694,725 $00,00$00,00$$0 $00,00$00,00$$0 $13.08 18.60 21.25 26.52 33.59 34.22 43.17 28.27 $$0$$0$$0$$0$$ $00,00$00,00$$0 16. S E G M E N T I N F O R M AT I O N The Company is organized and operates principally in two industries and has four reportable segments – commercial lines property casualty insurance, personal lines property 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. Back to table of contents 41 (cid:2) N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (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 in the following table. Information regarding income before income taxes and identifiable assets is not available for two reportable segments – commercial lines and personal lines – property casualty insurance. (000s omitted): Revenues Commercial lines insurance.................................................................. Personal lines insurance ........................................................................ Life insurance ...................................................................................... Investment operations .......................................................................... Corporate and other ............................................................................ Total revenues.................................................................................. Income before income taxes Property casualty insurance .................................................................. Life insurance ...................................................................................... Investment operations .......................................................................... Corporate and other ............................................................................ Total income before income taxes .................................................... Identifiable assets Property casualty insurance .................................................................. Life insurance ...................................................................................... Corporate and other ............................................................................ Total identifiable assets .................................................................... 2000 $ 1,231,306 596,270 79,346 412,715 11,357 $ 2,330,994 00000000000000000 00000000000000000 00000000000000000 $ (225,342)* 1,362 379,088 (46,444) $ 108,664* 00000000000000000 00000000000000000 00000000000000000 $ 6,487,819 1,619,169 5,180,103 $13,287,091 00000000000000000 00000000000000000 00000000000000000 Years Ended December 31, 000000000 0000000000000000000000000000 1999 $ 1,088,039 569,238 74,673 386,209 10,064 $ 2,128,223 00000000000000000 00000000000000000 00000000000000000 $ 3,241 (903) 355,643 (36,408) $ 321,573 00000000000000000 00000000000000000 00000000000000000 $ 5,800,182 1,441,657 4,565,840 $11,807,679 00000000000000000 00000000000000000 00000000000000000 1998 $ 1,019,463 523,176 70,096 433,302 8,252 $ 2,054,289 00000000000000000 00000000000000000 00000000000000000 $ (59,438) (1,776) 403,925 (35,604) $ 307,107 00000000000000000 00000000000000000 00000000000000000 $ 5,879,064 1,203,908 4,399,458 $11,482,430 00000000000000000 00000000000000000 00000000000000000 *2000 results include a one-time net charge for asset impairment of $39.1 million, before tax. I N D E P E N D E N T A U D I T O R S ’ R E P O R T To the Shareholders and Board of Directors of Cincinnati Financial Corporation: We have audited the consolidated balance sheets of Cincinnati Financial Corporation and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2000. 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 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, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Cincinnati, Ohio February 6, 2001 42 Back to table of contents (cid:2) S U B S I D I A R Y O F F I C E R S A N D D I R E C T O R S As of December 31, 2000, 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) E X E C U T I V E O F F I C E R S James E. Benoski CIC, CID, CCC Vice Chairman, Senior Vice President-Claims and Chief Insurance Officer CLIC Senior Vice President-Claims CIC, CID, CCC, CLIC, CFC-I Director James G. Miller CIC, CID, CCC, CLIC Senior Vice President-Investments and Chief Investment Officer CCM President CFC-I Senior Vice President; Treasurer CIC, CID, CLIC, CFC-I, CCM Director Kenneth S. Miller, CLU, ChFC CFC-I President and Chief Operating Officer; Director CIC, CID, CCC, CLIC Senior Vice President- Investments CCM Executive Vice President; Director Urban G. Neville CIC, CID, CCC, CLIC Senior Vice President- Information Systems CCC, CFC-I, CCM Director Larry R. Plum, CPCU CCC President CIC, CID Senior Vice President-Personal Lines CIC, CID, CCC, CLIC Director Mark R. DesJardins, CPCU, AIM, AIC CIC, CID, CCC Vice President-Education & Training Dean W. Dicke CIC, CID, CCC Senior Vice President-Field Claims CCC Director Donald J. Doyle, Jr., AIM CIC, CID, CCC, CLIC Vice President-Information Systems Harold L. Eggers, CLU, FLMI, FALU CLIC Vice President-Life Policy Issue 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, ARC CIC, CID, CCC, CLIC Vice President-Staff Underwriting Frederick A. Ferris Don E. Schricker CIC, CID, CCC Vice President-Commercial Lines CIC, CID, CCC Vice President-Personal Lines John E. Field, CPCU CIC, CID Director Bruce S. Fisher, CPCU, AIC CIC, CID, CCC Vice President-Claims Craig W. Forrester, CLU CIC, CID, CCC, CLIC Vice President-Information Systems Stephen C. Frechtling, FSA, MAAA, CLU, FLMI CLIC Vice President-Actuarial Cheryl L. Frey CIC, CID, CCC Vice President-Meetings & Travel Frank J. Schultheis CIC, CID Director Norman R. Settle CIC, CID, CCC Senior Vice President-Administrative Services/Machinery & Equipment Specialties/Loss Control J. B. Shockey, CPCU, CLU CIC, CID, CCC Vice President-Sales & Marketing David W. Sloan CFC-I Vice President-Leasing Steven A. Soloria, CFA CCM Secretary 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 Mark S. Wietmarschen CIC, CID, CCC Vice President-Commercial Lines 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 Lisa A. Love CIC, CID, CCC, CLIC Counsel CIC D I R E C TO R S E M E R I T I Vincent H. Beckman Robert J. Driehaus Richard L. Hildbold, CPCU William H. Zimmer David H. Popplewell, FALU, LLIF CLIC President and Chief Operating Officer; Director Michael J. Gagnon CIC, CID, CCC Vice President-Claims J. F. Scherer CIC, CID, CCC, CLIC Senior Vice President-Sales & Marketing; Director of all subsidiaries John J. Schiff, Jr., CPCU CIC, CID Chairman, President and Chief Executive Officer CCC Chairman and Chief Executive Officer CLIC Chief Executive Officer CCM Chairman Director of all subsidiaries Kenneth W. Stecher CIC, CID, CCC, CLIC, CFC-I Senior Vice President- Corporate Accounting; Secretary CLIC, CCM Treasurer Director of all subsidiaries Timothy L. Timmel CIC, CID, CCC, CLIC, CFC-I Senior Vice President- Operations Director of all subsidiaries S E N I O R O F F I C E R S A N D D I R E C TO R S Michael R. Abrams CCM Vice President Donald R. Adick, FLMI CLIC Senior Vice President- Life Marketing 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 J. Michael Dempsey, CLU CLIC Vice President-Marketing Kevin E. Guilfoyle CFC-I Senior Vice President-Leasing David L. Helmers, CPCU, AIM, ARe 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 & Executive Risk 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-Corporate Accounting; Treasurer Daniel T. McCurdy CIC, CID, CCC Senior Vice President-Bond & Executive Risk CCC Director Glenn D. Nicholson, LLIF CLIC Senior Vice President and Senior Marketing Officer Marc A. O’Dowd, CPA, CPCU CIC, CID, CCC, CLIC Internal Audit Officer Todd H. Pendery, FLMI CLIC Vice President-Accounting Back to table of contents 43 (cid:2) S H A R E H O L D E R I N F O R M A T I O N Cincinnati Financial Corporation had approximately 11,225 direct shareholders of record as of December 31, 2000. Most of our 3,106 associates and many of our independent agent representatives own stock in their Company. Thirty-nine 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 7, 2001, 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, Chief Financial Officer, Cincinnati Financial Corporation, P. O. Box 145496, Cincinnati, Ohio 45250-5496, (513) 870-2639 or e-mail to investor_inquiries@cinfin.com. FORM 10-K Shareholders may request a copy of Form 10-K for 2000. Cincinnati Financial Corporation files the Annual Report on Form 10-K with the Securities and Exchange Commission. You may access this document through a link to the SEC’s EDGAR database from our Web site, www.cinfin.com. P R I C E R A N G E O F C O M M O N S T O C K Shares are traded on the Nasdaq National Market. The 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 2000 00000000000000000000000000000000000000000000000000000$000,000 1999 Quarter 1st High ............................................ $37 5⁄8 2611⁄16 Low .............................................. .17 Dividend paid .............................. 0000$000,000 0000$000,000 2nd $427⁄8 31 7⁄16 .19 0000$000,000 3rd $403⁄16 32 1⁄16 .19 0000$000,000 4th $401⁄16 331⁄4 .19 0000$000,000 1st $391⁄4 307⁄8 .151⁄3 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 44 Back to table of contents (cid:2) C I N C I N N A T I F I N A N C I A L C O R P O R A T I O N O F F I C E R S A N D D I R E C T O R S William F. Bahl, CFA James E. Benoski Michael Brown John E. Field, CPCU William R. Johnson Kenneth C. Lichtendahl James G. Miller John J. Schiff, Jr., CPCU Robert C. Schiff Thomas R. Schiff Frank J. Schultheis Larry R. Webb, CPCU DIRECTORS EMERITI Vincent H. Beckman Robert J. Driehaus Lawrence H. Rogers, II John Sawyer David B. Sharrock Thomas J. Smart Charles I. Westheimer William H. Zimmer Alan R. Weiler, CPCU E. Anthony Woods OFFICERS AS OF DECEMBER 31, 2000 John J. Schiff, Jr., CPCU Chairman, President and Chief Executive Ofﬁcer John E. Field, CPCU(3) Chairman Wallace & Turner, Inc. (insurance agency) Director since 1995 Thomas R. Schiff(4) Chairman and Chief Executive Ofﬁcer John J. & Thomas R. Schiff & Co., Inc. (insurance agency) Director since 1975 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, 2000 William F. Bahl, CFA(2)(4) President Bahl & Gaynor, Inc. (investment advisors) Director since 1995 James E. Benoski Vice Chairman, Senior Vice President and Chief Insurance Ofﬁcer The Cincinnati Insurance Company Director since 2000 Michael Brown(2)(3)(5) President and General Manager Cincinnati Bengals, Inc. Director since 1980 William R. Johnson Chairman, President and Chief Executive Ofﬁcer H. J. Heinz Company Director since 1996 Frank J. Schultheis(3) President Schultheis Insurance Agency, Inc. Director since 1995 Kenneth C. Lichtendahl(1)(2) President and Chief Executive Ofﬁcer Tradewinds Beverage Company Director since 1988 Larry R. Webb, CPCU President Webb Insurance Agency, Inc. Director since 1979 James G. Miller(4) 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 Term ended November 17, 2000 John J. Schiff, Jr., CPCU(3)(4)(5) Chairman, President and Chief Executive Ofﬁcer Cincinnati Financial Corporation Director since 1968 Robert C. Schiff Chairman Schiff, Kreidler-Shell, Inc. (insurance agency) Director since 1968 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 Back to table of contents (cid:2) ® 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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