Cincinnati Financial Annual Report 2000

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FY2000 Annual Report · Cincinnati Financial

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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

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.

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

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

*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
.

*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

(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
.

*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.

(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

(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

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.

(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

(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,

(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

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

(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

6
.
7
5
5
,
1
8
.
9
1
0
,
1

8
.
7
3
5

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

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

(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

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

(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.

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

*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

(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

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

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

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

(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

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.

(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

(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.

(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

(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.

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

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

(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.

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

(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

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.

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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

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(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.

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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

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(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

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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.

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(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

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.

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(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.

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122,005
173,533
357,615
$13,287,091

$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

107,784
120,695
– 0 –
$11,807,679

$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

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

3,530,104
5,735,578
(314,294)
5,421,284
$11,807,679

$000.,00000000$00,000

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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

$ 1,657,277
65,824
8,849
1,731,950
386,773
(564)
10,064
2,128,223

$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

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

$ 241,567

000,0000..0000$00,000

PER COMMON SHARE

Net income (basic) ........................................................

..............................................................................................................................................................

Net income (diluted)....................................................

..............................................................................................................................................................

Cash dividends (declared)............................................

..............................................................................................................................................................

$ .74

$000.,00000000$00,000

$ .73

$000.,00000000$00,000

$ .76

$000.,00000000$00,000

$000,00000000$00,000

000,0000..0000$00,000

1.45

1.55

1.52

.68

$000,00000000$00,000

000,0000..0000$00,000

$000,00000000$00,000

000,0000..0000$00,000

1.41
.611⁄3

Accompanying notes are an integral part of this statement.

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(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

000,000000000$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

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

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.,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

Accompanying notes are an integral part of this statement.

$000.,0000000$00,000

$000,0000000$000000

000,000000000$00,000

000,0000000000$00,000

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(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

40,214
33,396

$000000000$00,000

$
$

280,943
58,611
$ 339,554

$0000000000$00000

$ 31,612
$ 55,000

$0000000000$00000

(21,557)
80,168
58,611

000,0000000$00,000

36,419
91,241

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.

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(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

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(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.

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(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

$ 221,993
186,181
11,409
419,583
4,273
$ 415,310

$000000000$00,00

$ 218,688
165,137
8,316
392,141
5,368
$ 386,773

$000000000$00,00

$ 217,675
145,885
9,545
373,105
5,112
$ 367,993

$000000000$00,00

$ 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

$ (6,830)
969,638
$ 962,808

$000000000$00,00

57,605
(20,493)
$ (564)

$000000000$00,00

$ (204,314)
(23,248)
$ (227,562)

$000000000$00,00

104,079
(40,007)
65,309

$000000000$00,00

$ (50,098)
1,238,195
$1,188,097

$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:

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

186
40,605
$ 82,522

000000000$00000

– 0 –
151,411
$ 164,094

000000000$00000

7,216
1,580,122
$2,721,291

000000000$00000

$2,067,984

000000000$00000

$6,517,504

000000000$00000

$ 59,503

000000000$00000

$8,525,985

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

34
30,886
$ 51,232

000000000$00000

173
93,055
$ 125,974

000000000$00000

6,899
1,586,657
$2,617,412

000000000$00000

$2,022,555

000000000$00000

$5,580,114

000000000$00000

$ 91,751

000000000$00000

$7,510,918

000000000$00000

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(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

$ 115,575
734,204
740,758
1,130,754
$2,721,291

$00000000$00000

4.2
27.0
27.2
41.6
100.0

$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

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

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

0000000..0000000

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

000000000000000

0000000..0000000

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

000000000000

1999
$155,931
236,214
144,221
302,990
15,555
5,650
$860,561

000000000000

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0000000.00000

000000000000

(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

000000000000000

1999
$1,763,751
37,263
(94,105)
$1,706,909

000000000000000

1998
$1,636,859
38,119
(99,189)
$1,575,789

000000000000000

0000000000000000

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

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

$1,894,768
71,115
22,211
1,988,094

00000000000000

181,713
56,174
18,603
–0–
11,931
268,421
$1,719,673

00000000000000

000000000000000

00000000000000

The provision for federal income taxes is based upon a

consolidated income tax return for the Company and subsidiaries.

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(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

(15.11)
(30.39)
1.57
(8.93)

000000000

(5.13)
(9.19)
.11
20.79

(5.39)
(9.29)
1.02
21.34

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

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

000000000000

00000000000

00000000

$ .73

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

2,471
1,507
168,615

00000000000

166,821

$1.45

00000000

3,490
1,767
172,078

00000000000

000000000000

00000000000

$1.41

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

$ 76,314
5,319
5,147
11,088
(18,795)
(3,152)
$ 75,921

000000000000

Change in plan assets:

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

$151,879
(107)
(3,152)
$148,620

000000000000

Funded status:

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

$ 72,699
(80,552)
(2,962)
10,770
(45)

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

000000000000

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(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

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

(370)
(40)
(1,269)
$ (313)

0000000000

(370)
(40)
(1,049)
$ (286)

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,

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(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

00,0000000000$000000000000000000$00000000,000

$$00000,00$$00

5,460,140
1,294,600
(520,679)
(80,843)
6,153,218

$$00000,00$$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

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

Exercise Price
$17.88
38.00
15.27
25.48
25.11

$$00000,00$$00

$0$.0$00,0 0$$0

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$$

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

$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.

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(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

$ (225,342)*

1,362
379,088
(46,444)
$ 108,664*

00000000000000000

$ 6,487,819
1,619,169
5,180,103
$13,287,091

00000000000000000

Years Ended December 31,

000000000 0000000000000000000000000000

1999
$ 1,088,039
569,238
74,673
386,209
10,064
$ 2,128,223

00000000000000000

$ 3,241
(903)
355,643
(36,408)
$ 321,573

00000000000000000

$ 5,800,182
1,441,657
4,565,840
$11,807,679

00000000000000000

1998
$ 1,019,463
523,176
70,096
433,302
8,252
$ 2,054,289

00000000000000000

(59,438)
(1,776)
403,925
(35,604)
$ 307,107

00000000000000000

$ 5,879,064
1,203,908
4,399,458
$11,482,430

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

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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

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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

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

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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

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®

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