Cincinnati Financial Annual Report 2001

← All annual reports

FY2001 Annual Report · Cincinnati Financial

Loading PDF…

Cincinnati Financial Corporation

2001 Annual Report

t H o m eA

O n America’s

M a i n

S t r e e t s

A B O U T T H E C O M PA N Y

Cincinnati Financial Corporation is the nation’s 17th largest property casualty insurer, based on revenues. Its record of

outperforming the industry in growth and profitability reflects a strong competitive position, continued market penetration

in its operating territories and a business strategy that fully integrates the strengths of the independent agency system.

Foremost among these strengths, independent agents have the local knowledge and relationships valued by

policyholders and underwriters alike. To turn this strength into profitable business, Cincinnati supports agents with

responsive claims service; flexibility and a willingness to be a market for most types of risks the typical local agent handles;

a flat, no-branch structure; and a large field force with decision-making authority.

Cincinnati Financial, formed in 1968, operates through six subsidiaries. The Cincinnati Insurance Company, founded

in 1950, leads the property casualty group, which is rounded out by The Cincinnati Casualty Company and The

Cincinnati Indemnity Company. The group markets a broad range of business and personal policies through its elite

group of 959 local independent insurance agencies in 31 states. The Cincinnati Life Insurance Company markets life,

disability income and long term care insurance and annuities, while CFC Investment Company complements the

insurance subsidiaries with commercial leasing and financing services. CinFin Capital Management Company provides

asset management services to institutions, corporations and individuals.

The consistency, strength and stability that make Cincinnati the agents’ choice are the same hallmarks that bring value

to shareholders. Cash dividends have increased steadily for 41 consecutive years. The Company’s investment portfolio, its

primary source of profits, is distinguished by a focus on carefully selected equities that feature both a history of dividend

increases and a potential for appreciation.

A b o u t t h e c o v e r

A t H o m e O n America’s M a i n S t r e e t s :

F I E L D R E P R E S E N T A T I V E S

Through local field representatives, The Cincinnati Insurance Companies are

privileged to be thoroughly at home on America’s Main Streets. Almost a third of

Cincinnati’s 3,299 associates live and work in field territories close to the agents,

policyholders and claimants they serve. They are the claims, marketing, loss control

and legal professionals, the engineers and auditors who meet the public every day.

Most work out of their own homes or from agency offices, adding their personal

touch to each service provided. Cincinnati’s representatives don’t just visit agent

communities on business. They know the territory and respond effectively to its

insurance needs because these are their communities – where their everyday lives

contribute to making better homes for families and businesses.

C O N T E N T S

Financial Highlights . . . . . . . . . . . . . . .1
Overview of Insurance Operations . . 2
Letter to Shareholders . . . . . . . . . . . . 4
Overview of Investment Operations . .7
Main Street: Our Foundation

and Our Future . . . . . . . . . . . . . . . 1 0
Selected Financial Information . . . . .18
Management Discussion . . . . . . . . . 20
Selected Quarterly Financial Data . . .33
Responsibility for Financial

Statements . . . . . . . . . . . . . . . . . . 34
Independent Auditors’ Report . . . . . 34
Consolidated Financial

Statements . . . . . . . . . . . . . . . . . . 35

Notes to Consolidated

Financial Statements . . . . . . . . . . . 39
Subsidiary Officers and Directors . . 47
Shareholder Information and

Price Range of Common Stock . . .48
Corporate Officers and Directors . . . 49

F I N A N C I A L H I G H L I G H T S

Cincinnati Financial Corporation and Subsidiaries

(dollars in millions except per share data)

2001

2000
Pro Forma*

Change
00%00

I N C O M E S TAT E M E N T D ATA

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . .
Net operating income . . . . . . . . . . . . . . . . . . . . .
Net capital losses . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating income per common share (diluted)
Net income per common share (diluted) . . . . . . .
Net income per common share (diluted). . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . . .
Average shares outstanding (diluted) . . . . . . . . . .

$ 2,561
221
210
(17)
193
193
1.29
1.19
1.19
.84
162

$ 2,331
148*
146*
(2)
144*
118
.90*
.89*
.73
.76
164

B A L A N C E S H E E T D ATA

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . .
Book value per share . . . . . . . . . . . . . . . . . . . . .

$13,959
5,998
37.07

$13,287
5,995
37.26

9.9
49.8
44.1
(870.8)
34.4
63.3
43.3
33.7
63.0
10.5
(0.9)

5.1
—
(0.5)

R AT I O D ATA

Statutory combined ratio** . . . . . . . . . . . . . . . . .
Return on equity . . . . . . . . . . . . . . . . . . . . . . . .
Return on equity including net unrealized gains

and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103.6%
3.2%

109.9%*
2.5%*

5.7
28.0

2.5%

13.5%*

(81.5)

Revenues
(dollars in millions)

1
6
5
,
2

1
3
3
,
2

8
2
1
,
2

4
5
0
,
2

2
4
9
,
1

Revenues rose 9.9% in 2001 on strong
growth of insurance premiums and
investment income.

Net Operating
and Net Income/
Dividends Paid
Per Common Share
(dollars)

Net Operating Income
Net Income
Dividends Paid

7
7
.
1

9
4
.
1

2
5
.
1

1
4
.
6 1
1
.
1

9
2
.
1

9
1
.
1

0
9
.
0

9
8
.
0

0.53 0.60 0.66 0.74 0.82

00
Pro
Forma*

Net operating income for 2001 included
$66 million from parent company
investment operations; $30 million
from life operations; $111 million
from property casualty operations;
and $3 million from non-insurance
subsidiaries.

* In 2000, the Company incurred a one-time charge (GAAP) for asset impairment of $39 million, before tax; $25 million,

or 16 cents per share, net of tax. Pro forma results exclude the charge for comparison purposes only. Including the
2000 charge, income before income taxes was $109 million; net operating income was $120 million, or 74 cents per
share (diluted); the statutory combined ratio was 111.6 percent; and return on equity was 2.1 percent and 13.0 percent
including net unrealized gains and losses.

** As more fully discussed in the Management Discussion beginning on Page 20, 2001 statutory data for The Cincinnati

Insurance Companies’ property casualty subsidiary reflects the Company’s adoption of Codification of Statutory
Accounting Principles effective January 1, 2001. For comparison purposes, a $402 million one-time net written premium
adjustment required to conform with Codification was excluded, and 2000 property casualty subsidiary statutory data
was reclassified; as originally reported before reclassification, the 2000 combined ratio, excluding the one-time charge, was
110.7 percent for the full year.

Book Value
Per Common Share
(dollars)

6
2
7.
3

7
0
7.
3

2
7
.
3
3

6
4
.
3
3

5
3
.
8
2

Note: All per share data adjusted for stock split in 1998.

This report contains forward-looking statements that involve potential risks and uncertainties. Please
see the Management Discussion, beginning on Page 20, for factors that could cause results to differ
materially from those discussed.

Back to table of contents

Unrealized gains in the investment
portfolio contributed 68.6% of book
value in 2001.

(cid:2)
Property Casualty
Premiums
Statutory
(dollars in millions)

Net Written Premiums
Net Earned Premiums

8
8
1
,
8 2
2
8
,
1

6
3
9
,
1

7
6
0
,
2

1
8
6
,
1

7
5
6
,
1

8
5
5
,
1

3
4
5
,
1

2
7
4
,
1

4
5
4
,
1

00
Pro
Forma*

Growth in established states fueled a
$286 million increase in agency direct
premiums. Ohio, with 24.2% of total
direct volume, grew 10.4%. Other top
states: Illinois, up 17.4%; Indiana, up
16.7%; Michigan, up 16.7%.

Property Casualty Net
Written Premium
Growth Rate
Statutory
(percent)

Cincinnati Insurance Companies
Estimated Industry (A.M. Best)

1
.
3
1

8.5

9
.
1
1

4.4

00
Pro
Forma*

4
.
6

2.9

8
.
5

1.8
98

9
7.

1.9
99

O V E RV I E W O F

I N S U R A N C E O P E R AT I O N S

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 AT I O N S : G R O W T H

Property casualty statutory net written

premiums grew 13.1 percent for the year,

accounting for 96 percent of the Company’s

to help inspect

and review risks.

This ongoing

effort enables

Cincinnati to

total in 2001. Commercial statutory net written

identify accounts

premiums rose 16.6 percent to $1.551 billion in

that previously

2001, while statutory net written premiums for

were underpriced

personal lines of insurance rose 5.3 percent to

and accept good

$637 million.

business that

The primary source of premium growth in

wholesale

Premium Mix
Percent of 2001
Consolidated Statutory
Net Written Premiums

Life 4%

Personal
Lines
28%

Commercial
Lines
68%

2001 was firmer pricing on new and renewal

approaches simply leave behind.

commercial business. While the Company’s

philosophy does not support large, across-the-

board price increases, it has been introducing

new estimating tools and tapping local

knowledge of the field force to identify and

insure new or previously underestimated risk

exposures. This allows Cincinnati to provide the

full amount of coverage needed and collect an

Growth of Cincinnati’s net written
premiums consistently outpaces industry
growth. Commercial premiums, 71% of
property casualty volume, grew 16.6%
in 2001. Personal premiums, 29% of
the total, grew 5.3%.

adequate premium. In 2001, new business

written directly by Cincinnati agents reached

$272 million, just short of the all-time high of

Combined Loss and
Expense Ratio
Statutory, Post-Dividend
(percent)

Cincinnati Insurance Companies
Estimated Industry (A.M. Best)

$275 million recorded in 2000. 2001 results

were particularly satisfying given the year’s

priority on re-underwriting activities.

The Company continues to enlist the

101.6 105.6 107.8 110.1

0
.
8
9

2
.
4
0
1

4
.
0
0
1

117.0

support of its agents to strengthen frontline

underwriting, providing them with a field team

6
.
3
0
1

9
.
9
0
1

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 AT I O N S : P R O F I TA B I L I T Y

For 2001, the Company recorded a

103.6 percent statutory combined ratio,

reflecting the impact of Midwest hailstorms

and continued claims severity. This measure

of profitability was, as expected, several points

above the 101.3 percent the Company averaged

in the second half of the 1990s. Cincinnati’s

September 11 catastrophe losses were a

relatively minor $9 million, with total

catastrophe losses for the year at $64 million,

net of reinsurance.

For 2001, commercial lines generated a

statutory loss and loss adjustment expense (LAE)

ratio of 74.4 percent, including 1.9 points for

catastrophes. Personal lines had a statutory loss

00
Pro
Forma*
Cincinnati’s 2001 ratio included
3.1 points for catastrophes versus
2.7 points in 2000. It compared
favorably with the industry’s 2001 ratio
of 117%, including 6 points for World
Trade Center losses and 2.8 points for
other catastrophes.

The Cincinnati Insurance Companies (statutory, property casualty subsidiary)

The Cincinnati Insurance Companies (statutory, including effects of Codification, property casualty subsidiary)

Note: As more fully discussed in the Management Discussion beginning on Page 20, 2001 statutory data for The Cincinnati
Insurance Companies’ property casualty subsidiary reflects the Company’s adoption of Codification effective January 1,
2001. For comparison purposes, a $402 million one-time net written premium adjustment required to conform with
Codification was excluded, and 2000 statutory data was reclassified; as originally reported before reclassification, the 2000
combined ratio, excluding the one-time charge, was 110.7 percent for the full year.

In 2000, the Company incurred a one-time charge for asset impairment. Pro forma results exclude the charge for
comparison purposes only. Including the 2000 charge, the statutory combined ratio for 2000 was 111.6 percent.

Back to table of contents

(cid:2)
Net Premium Income
The Cincinnati Life
Insurance Company
(dollars in millions)

and LAE ratio of 82.9 percent, with 5.8 points

deposits written by Cincinnati Life to settle

for catastrophes. Among the Company’s major

Cincinnati’s property casualty claims increased

3
6

9
7

1
8

5
7

0
7

lines of insurance, workers’ compensation,

to $27 million in 2001, compared with

commercial auto and homeowners continued as

$21 million in 2000. Instead of making a

the most unprofitable. Cincinnati is responding

lump-sum claim payment, structuring the

with appropriate rate increases, tightened

settlement as an annuity allows the Company

underwriting guidelines, product refinements

to earn investment income while paying the

and new insurance-to-value initiatives.

claim over time and providing steady income

At the same time, the Company is continuing

for claimants or beneficiaries.

to leverage local knowledge and personal

Life company expenses in 2001 increased

contact to control losses. For example, claims

23.1 percent due to charges for automation,

representatives are reporting to agencies,

incentives and policy audits on certain lines of

marketing representatives and underwriters

business. As of December 31, 2001, assets reached

any changes in risks that they observe while

$1.761 billion, up 8.6 percent. Policyholder

meeting with claimants and visiting properties

surplus rose 5.2 percent to $552 million.

to respond to claims. Field marketing

With Cincinnati Life’s term insurance

representatives are gathering with engineering,

products, Cincinnati property casualty agents

loss control and claims staff to pool knowledge

are expanding their life insurance marketing

and to support agents as they review renewal

and sales opportunities while diversifying and

Cincinnati Life’s 2001 net premium
income exceeded the 2000 total, which
benefited from late processing of term
applications submitted before the
January 1, 2000 effective date of
Triple X regulations.

Life Policy Face
Amounts in Force
Excluding annuities,
accident and health
business
(dollars in millions)

4
3
5
7,
2

5
2
5
,
3
2

0
0
9
7,
1

0
6
0
,
3
1

8
5
8
,
0
1

accounts. And loss control associates now are

increasing their revenue stream. Term insurance

performing risk inspections at the request of

in force rose 23 percent in 2001, contributing

commercial underwriters. Cincinnati also

to excellent cash flow for Cincinnati Life’s

continues to maintain exceptional expense

investment operations. To further the cross-

control, even while paying appropriate

selling opportunities with property casualty

commissions for the agents who provide

agencies, Cincinnati Life will introduce a new

superior service to policyholders with one of

and enhanced term product series in the first

the lowest non-commission expense ratios in

quarter of 2002.

Face amounts of life insurance policies
in force increased 17% from 2000 to
2001. Cincinnati Life’s policy count
rose to 319,281 from 313,649.

the industry. In 2001, Cincinnati’s ratio was

10.2 percent.

*
Cincinnati remains committed to the

agency-centered business model and philosophies

L I F E I N S U R A N C E O P E R AT I O N S

upon which the Company was founded. Local

The Cincinnati Life Insurance Company’s net

knowledge, local authority and local support

written premiums in 2001 were $102 million.

are at the core, ensuring that Cincinnati is at

Annuity net written premiums increased to

home on America’s Main Streets and helping

$10 million in 2001, compared with $7 million

the Company achieve the consistent growth

in 2000. Structured settlement annuity

and profitability that are its hallmark.

Back to table of contents

(cid:2)
TO O U R

S H A R E H O L D E R S :

2 0 0 1 : H A R D Q U E S T I O N S F O R
H A R D T I M E S

• Do corporate accounting policies and

standards adequately protect investors?

When business historians talk about 2001,

All of these are tough questions with

they will highlight fallout from two dramatic

far-reaching, long-range implications for our

collapses, that of the twin towers in New

York City on September 11 and that of giant

energy trader Enron. These events raised

serious questions about the physical and

financial security of American citizens.

• Can our government protect us from

harm?

nation and for our insurance industry. They

deserve the urgent attention of political and

business leaders. As citizens and as insurance

professionals, we support a proactive

approach to homeland security and serious

consideration of proposals for a federally

backed insurance facility to absorb the

• Are adequate resources available to effect

financial shock of an act of terror.

recovery from huge disasters?

At H o m e O n M a i n S t r e e t:

C I N C I N N A T I A S S O C I A T E S

When Chairman and CEO Jack Schiff, Jr. addressed a gathering of Company associates outside CFC Headquarters on a

bright November afternoon, everyone’s thoughts were on another day and with others whose workplaces and homes would

never be the same after September 11.

Associates responded to the great sadness that swept over not just New York, Pennsylvania and Washington, D.C., but all

of America’s Main Streets. They felt the same urge to act that they would feel if a next-door neighbor suffered a grievous loss.

So while management worked to determine and fulfill insurance obligations arising out of September 11 events, associates

contributed personally and raised funds to support heroic rescuers and their lifesaving companions. On November 21, Jack

thanked associates for establishing a $55,000 fund to aid in the training of search

and rescue dogs and their handlers.

“The Company benefits from having staff and agents who value personal

involvement and relationships,” Jack said. “In the Main Street markets we serve,

people are more comfortable doing business with someone they know, someone

who cares. That means someone who takes the extra time to customize their insurance

program; someone who makes the extra effort to keep policies and coverages up to

date; someone who knows that when they have a claim, their loss may be more

than financial. From our file rooms and administrative areas to our underwriting and

field departments, associates keep Cincinnati’s performance personal.”

Back to table of contents

(cid:2)
More immediately, the year’s high-profile

share, on a comparable basis excluding that

collapses were less dramatic in their direct

year’s one-time charge of $25 million, or

effects on the performance of Cincinnati

16 cents per share, for impaired technology

Financial Corporation. As an insurer with a

assets. Net operating income rose 44.1 percent

Main Street focus and regional distribution

to $210 million, or $1.29 per share, in

outside of the largest population centers,

2001 versus $146 million, or 90 cents per

your Company was not as exposed to such

share, on the comparable basis in 2000.

losses as some insurers. At $9 million –

Revenues advanced 9.9 percent to a record

mostly for assumed reinsurance – the

$2.561 billion in 2001.

Company’s losses from September 11 events

This year’s higher earnings were driven

were small compared with an April hailstorm

by investment income, which continued to

that caused $47 million of insured losses

benefit from steadily increasing dividends

for our policyholders, with an impact of

on common stocks in the portfolio, and

$19 million after reinsurance and taxes.

by improved insurance underwriting,

As for the second collapse, your Company

which benefited from firmer pricing in the

wrote no insurance or surety bonds for

commercial insurance marketplace.

Enron, once the nation’s seventh-largest

From your Company’s perspective as a

firm. Our investment portfolio held

regional insurer with a Main Street focus,

securities issued by Enron and Kmart,

the changing price environment is the big

another firm going through a high-profile

story of 2001 and 2002. After 13 years of

bankruptcy. Combined, these issues were

soft prices in a buyer’s market, industry

just $18 million – less than two-tenths of

underwriting losses have been mounting and

1 percent – of the portfolio. After sales

industry surplus declining. This pressure has

and write downs, these holdings retained

forced insurers, your Company included,

$1 million of book value.

to become more selective about the business

The $11.571 billion investment portfolio

written and more diligent in pricing it in

comprises 82.9 percent of your Company’s

line with the risk accepted. The turn to a

assets, which reached an all-time high of

seller’s marketplace was already in motion

$13.959 billion at year-end 2001. Book

prior to September 11, and some observers

value, which also reflects the strength of

think that turn could come faster and last

our investment portfolio, was $37.07 at

longer after the financial shocks associated

year-end 2001, slightly below the year-ago

with last year’s collapses.

level of $37.26.

Now here are some more tough questions,

Net income rose 34.4 percent in 2001 to

ones that we have to answer ourselves.

$193 million, or $1.19 per share, after net

• Can The Cincinnati Insurance Companies

capital losses of $17 million. In 2000, net

control loss severity and still maintain a stable

income was $144 million, or 89 cents per

market for the local independent agents we serve?

Back to table of contents

(cid:2)
Investment Income
Less Expenses
(dollars in millions)

0
1
4

1
2
4

7
8
3

8
6
3

9
4
3

• Can those agents continue to rely on

ratio is 1.0, indicating a good margin for

Cincinnati to be a market for 60 percent to

growth. The industry’s written premiums are

70 percent of the risks encountered by a

1.2 times surplus, weakened from 0.9 times

typical agency in our operating territory?

surplus in 2000. Strong growth of earned

• If our actions in this marketplace lead

premiums softened 2001 loss severity, and

to top-line growth of premium revenues,

our capacity to write more good business

can we turn this growth into bottom-line

will be a factor in offsetting continued

earnings?

2 0 0 1 : H A R D W O R K E R S M E E T
A H A R D E N I N G M A R K E T

97
00
*Excludes BOLI interest

Investment income has grown steadily,
even as the Company repurchased its
shares and reinvested called or
redeemed bonds at lower prevailing
interest rates.

Assets
(dollars in millions)

9
5
9
,
3
1

7
8
2
,
3
1

2
8
4
,
1
1

8
0
8
,
1
1

7
6
8
,
9

Over the years, Cincinnati has been

tagged as a company that thrives in a strong

market for insurance – a hard market in the

industry’s vernacular. We think that’s true,

and we’ll be all right. Many positives are on

our side. First and foremost, we do know

how to underwrite, and for us that’s an

activity that happens both in the field and at

headquarters. Over the past two years, we

became more aggressive about cleaning up

the book of business and in 2001 improved

results for some lines, notably commercial

and personal auto. Agents, field representatives

Total assets rose 5.1% to an all-time
high at year-end 2001. Over the past
five years, assets grew at a 8.0%
compound rate.

and underwriters are teaming up to gather

facts and closely evaluate new and renewal

risks. They aren’t afraid of the work that

leads to sound risk selection, appropriate

policy terms and conditions and accurate

pricing for the risk exposure. They recognize

that local knowledge and local decision-

making are advantages we can leverage to

stay a market for good accounts in most

classes of business.

Second, your Company has the financial

strength to pick up the pace as opportunities

arise. Our written premiums-to-surplus

severity due to inflated costs and judgments.

Your Company’s cash flow historically has

been sufficient to fund claim payments

and fuel investments – the key to bottom-

line profits.

We make accounting policies and reserving

decisions with the intention of giving a

conservative, true picture of your Company’s

position. We feel strongly that our financial

reporting should reflect not just the letter,

but the spirit, of accounting policies and

standards. When material bad news is on

the horizon – such as the problems with the

uninsured motorist line in 2000 – our strategy

has been to deal with it openly and then

move on. Faced with rising severity of losses,

we opted to provide our constituents with

more information, not less, shedding light

on the issues and the solutions we pursued.

Third, your Company has longstanding

relationships with highly-rated reinsurers.

Our capacity and willingness to retain more

risk in 2002 will help mitigate the very large

premium increases these reinsurers need to

protect their own financial health. Both our

catastrophe reinsurance program and the

reinsurance working treaties we use to

structure layers of coverage for large risks

include terrorism coverage, with limitations.

Back to table of contents

(cid:2)
O V E R V I E W O F I N V E S T M E N T O P E R AT I O N S

The momentum of premium coming into

Cincinnati’s insurance companies drove the

pace in the Investment Department. Cash flow

available for investment during 2001 was

superb – one of the best years ever without a

debt offering. Portfolio managers invested

$359 million of net new cash, allocating

77.5 percent of new money to fixed income

investments and 22.5 percent to equities.

Historically, on a cost basis, fixed income has

been 65 percent and common stock 35 percent

of the portfolio. As market values change over

time, this allocation reverses, resulting in a

portfolio that has approximately 75 percent of

market value in equities.

The Company’s total-return equity orientation

is reflected in high unrealized gains as stocks are

held to appreciate over the long term while

they pay steadily increasing dividends. At

December 31, 2001, the equity portfolio

contained $6.321 billion of unrealized gains,

95.9 percent of this in the 10 largest of the

Company’s 44 stock holdings. Annualized

Investment Assets
Market Value as of December 31
(dollars in millions)

11,571
66
388
8,107

11,316
69
377
8,149

Others
Preferred Stock
Common Stocks
Taxable Bonds
Tax-Exempt Bonds

10,325 10,194

58
442
7,013

66
404
7,107

8,797
47
530

5,469

Composition of Equity
Investments
As of December 31, 2001
(dollars in millions)

8,107
5,532

Banks, Trusts
and Insurance

Industrial,
Miscellaneous

Public Utilities

1,594

1,801
868

1,863 1,895

1,730 1,738

1,968

720

981

373
32
261

80
Preferred
Stock
Portfolio
by Cost

388
36
271

81
Preferred
Stock
Portfolio
by Market
Value

213
Common
Stock
Portfolio
by Cost

Common
Stock
Portfolio
by Market
Value

While the Company’s high percentage of common
stock investments reduces the portfolio’s effective
yield relative to other insurers, it also contributes
to the long-term growth of surplus.

888

917

887

983

1,042

Approximately $71.00 in investments supported
each Cincinnati Financial common share at year-
end 2001. Portfolio managers favor stocks with
above-average market yields and convertible
and investment-grade bonds with compelling risk-
reward profiles.

dividend income from these stocks is approximately $172 million, up $18 million from 2001 increases, as 26 of the 44

stocks in the portfolio raised their dividends. Our largest holding – Fifth Third Bancorp – raised its dividend twice during

the year for a total annualized addition to income of $15 million.

While the Company’s concentrated investment in a small group of high-quality, dividend-paying financial and value

stocks is unconventional for an insurer, the strategy has proven successful. In a declining interest-rate environment,

financial stocks have tended to maintain their value better than others. In 2001, the equity portfolio outperformed the

S&P 500 Index for the fourth time in six years, with a 2001 rate of return of 0.7 percent versus the S&P 500’s

11.9 percent decline.

C I N F I N C A P I TA L M A N A G E M E N T C O M PA N Y

CinFin’s strategy mirrors that of the parent company – equity-based portfolios centering on best-in-class companies.

In its third full year of operations, the Company’s asset management services subsidiary ended the year with $663 million

under management, up 23.6 percent from the year-ago total.

Back to table of contents

(cid:2)
I N D E P E N D E N T R AT I N G S

A.M. Best Company affirmed the A++ Superior rating of Cincinnati’s

property casualty companies based on superior capitalization, strong

regional franchise, modest financial leverage and excellent cash flow.

Fewer than 3 percent of insurer groups qualify at this level. Best affirmed

Cincinnati Life’s A+ Superior rating and awarded a new aa Very Strong

debt rating to Cincinnati Financial’s senior debentures.

Standard & Poor’s currently rates the corporate debentures A+ Strong

and our insurance companies at AA- Very Strong, citing a strong market

position afforded by an extremely loyal and productive agency force, a

low-cost infrastructure, extremely strong capitalization and strong financial

flexibility. While S&P lowered its ratings in January 2001 after our

announcement of a $110 million reserve addition in the fourth quarter of

2000, Cincinnati retains top-tier S&P Security Circle ratings.

Moody’s Investors Service maintained the A2 rating on the corporate

debentures and the Aa3 rating of the property casualty companies,

noting a strong regional agency franchise, large capital base and historic

operating profitability.

R A N K I N G S
(published in 2001 and generally based on 2000 performance)

For new risks with more than $50 million

of total insured values, the Company is

purchasing facultative reinsurance in excess

of our retention. Our reinsurers are

“grandfathering” in terrorism coverage until

the policy’s anniversary or renewal. Risks

with lower insured values have terrorism

coverage under the working treaty.

Named the leading commercial package

insurer in survey results published by

Crittenden’s Property Casualty Rates & Ratings
newsletter (July 2001), Cincinnati writes

approximately 80 percent to 85 percent of

our commercial policies at annual premiums

below $10,000. With reinsurance and

terrorism coverage in place, we will have the

flexibility to safely write the Main Street

risks that are our primary appetite and to

selectively write larger risks when our agents

Fortune (April 16, 2001): Among the Fortune 1,000 U.S. industrial

and their clients have special needs.

and service corporations, Cincinnati Financial was the 17th largest

Finally, we have built the infrastructure

U.S. stock property casualty insurer based on revenues, placing sixth in

to accept and service more good business.

that industry category for 10-year total return to investors.

Our talented associates and loyal agents are

Forbes (April 16, 2001): Among the top 500, Cincinnati Financial

primed to do what has to be done and to

ranked 237th for assets and 352nd for market value. Compared with all

do it better than ever. Staffing has increased

companies appearing on any of the Forbes 500 lists for market value,

13 percent since the beginning of 2000, and

sales, profits or assets, Cincinnati Financial scored 391st.

training programs have greatly expanded for

Best’s Review (July 2001): Cincinnati ranked 32nd among property

both Company and agency staff. The

casualty groups based on net premiums written. Among the top 200

Company is developing and introducing

life health insurers, Cincinnati Life ranked 164th.

technology to streamline back-office

Business Insurance (August 20, 2001): Cincinnati was one of only

functions. The year 2001 brought the debut

eight companies named to both the property casualty and life health

of CinciLink, an agency extranet that is the

Ward’s 50 Benchmark Groups. Qualifying insurers have outstanding

delivery platform for new and updated

five-year scores for financial safety, consistency and performance.

software including CinciPrint, which gives

Cincinnati Insurance stood among just 10 companies named to the

agents the convenience of retrieving and

Ward’s 50 for 11 consecutive years.

completing forms online.

Back to table of contents

(cid:2)
Imaging technology currently in use for

compares favorably with a yield of 1.4 percent

selected business will be applied in additional

for the S&P 500 Index. The vote to continue

areas during 2002, and agents in a pilot state

the trend of increasing dividends reflects the

will begin using an online personal policy

Board’s confidence in our financial strength,

processing system with functionality

business strategy, associates and agents.

supporting a direct-bill option.

2 0 0 2 : H O L D I N G H A R D
T O T H E C O U R S E

All of these considerations give us optimism

for 2002. Barring unusual catastrophes, our

target is to return by year-end to a statutory

combined ratio of 101.3 percent, which was

our average ratio from 1995 to 1999. Our

will to underwrite and the improved pricing

environment should help us build on the

positive trends of 2001, when the ratio

improved to 103.6 percent compared with

109.9 percent in 2000. Ultimately, we won’t

be satisfied until we achieve breakeven

underwriting that makes it possible for all

investment income to flow to earnings.

Cincinnati Financial returned more than

$182 million to shareholders in 2001,

including cash dividends and common stock

repurchases of more than 1 million shares at

an average price of $37.67. Over the past

10 years, cash dividends paid per share rose

to 82 cents from 27 cents, adjusted for stock

dividends and splits. That’s a 10.2 percent

compound growth rate for the 10-year

period. Further, the Board declared a

The 2001 Mergent’s (formerly Moody’s)
Handbook of Dividend Achievers ranked
Cincinnati Financial 15th for the longest
record of dividend growth, with 40 consecutive

years (now 41) of annual cash dividend

increases. And on December 31, 2001,

Cincinnati Financial was an entrée on
BusinessWeek’s “Menu of Investment
Opportunities” as a stock with a high

S&P Equity Ranking and low price-to-book

value. While there are many schools of

thought about investment valuation, steadily

increasing dividends and stable book value

are two historically attractive features of

your Company.

As we work to preserve and expand

shareholder value, our plan is to build on

strengths instead of shift directions. Our

Main Street focus, hard-working people,

selective and conservative approach and

commitment to personal service and

relationships are proven strategies through

all kinds of business and economic cycles.

6 percent increase in the dividend during the

John J. Schiff, Jr., CPCU

first quarter of 2002, raising the indicated

Chairman, President and Chief Executive Officer

annual dividend to 89 cents per share. At

February 6, 2002

2.3 percent, the current dividend yield

Back to table of contents

(cid:2)
M A I N S T R E E T:

O U R F O U N D AT I O N A N D O U R F U T U R E

In an insurance climate marked by change

T H E M A R K E T P L A C E

and uncertainty, The Cincinnati Insurance

In 2001, insured property casualty losses

Companies’ strong presence on America’s

were estimated at nearly $285 billion,

Main Streets is a competitive advantage.

including an estimated $30 billion to

For Cincinnati, Main Street is not so

$45 billion in the aftermath of September 11.

much a place as it is an approach, a commit-

Even before the terrorist attacks, property

ment to know and support the people we

casualty insurers faced rising claims severity,

serve. It is a personal way of doing business.

adverse court decisions and mounting losses

It is an emphasis on the local market. It

due to more than a decade of insufficient

relies on relationships, and it pays dividends.

rates and overcapacity. Industry-wide,

Main Street is both our foundation and

excluding the 6-point impact of the World

our future. We maintain our business the

Trade Center losses, the combined ratio for

way we built it, on America’s Main Streets,

2001 was estimated at 111.0 percent, up

through an elite corps of agents. Independent

from 110.1 percent in 2000.

agencies representing Cincinnati, 959 in all,

Such losses have created a market in

place an average of almost 20 percent of

which underwriting and pricing can and

their business with the Company. These top

must be re-evaluated. While some carriers

producers are committed to a long-term

are exiting product lines or enforcing large,

relationship with Cincinnati.

across-the-board price increases, Cincinnati

During 2001, the Company took steps

continues to do business the way we always

to leverage our Main Street advantages

through our large and experienced field

staff. This has meant more attention to

have: on the local level, focusing on each

relationship separately. We work with agents

case by case to recognize and accurately

front-line underwriting, more involvement

measure exposures, then price each risk

in renewal discussions, more specialized

adequately and appropriately for the local

expertise in claims adjusting and more

inspections. It has meant subdividing

marketplace. Commercial lines pricing

remains flexible to respond to each risk in

territories to increase points of contact. It

partnership with local agents who know

has meant creating a deeper and more

personal understanding of our business

their markets and their business. For personal

lines, we are seeking and obtaining regulatory

from the ground up. And in doing all of

approval for increases where warranted. This

this, we remain confident that we can restore

customized approach means less immediate

consistently healthy profitability over the

results but longer-term success. By making

long term, despite the challenges our

decisions that are risk-specific, we give our

industry faces.

Company the opportunity to retain not just

business, but high-quality business.

Back to table of contents

(cid:2)
U N D E R W R I T I N G

Cincinnati measures results for every

Although Cincinnati outperformed the

program in every line of business, reviewing

industry during 2001, reporting a statutory

trends and taking action where justified.

combined ratio of 103.6 percent, we believe

That process brought to the forefront the

we can and we will do better. The path to

need to seek regulatory approval for

improved profitability begins with strong

appropriate rate increases for the homeowner

fundamentals, and it begins at home on

line, which continues to experience increased

America’s Main Streets.

loss severity. It highlighted the need to more

At H o m e O n M a i n S t r e e t:

C L A I M S R E P R E S E N T A T I V E S

Wendy Alberts takes The Cincinnati Insurance Companies’ credo – “we’re here to pay claims” – seriously. A claims

representative in northeastern Ohio, Wendy calls upon policyholders during times of loss. She works to settle their claims

quickly, compassionately and personally.

“I meet people during a difficult time in their lives,” says Wendy, who also volunteers to care for hospice patients and

participates in memorial services with their families. “My response to their claim may be the only time they interact with

an insurance company. I want to meet them at a human level.”

That means going the extra mile – not only in terms of personal interaction, but also in coordinating repairs that truly

meet the needs of the claimant.

An independent insurance agent who

represented Cincinnati before becoming a

claims representative, Wendy also considers it

her responsibility to make certain that the

claims process is equitable for the Company.

“Part of my job is to make sure that the repair

people and contractors who respond to our

claims are charging fair prices for good quality

work,” she says.

“Cincinnati operates under the Golden Rule.

We are to treat people the way we treat

family. It’s a very personal, very honorable

philosophy. It’s the reason agents respect us

and policyholders trust us.”

Back to table of contents

(cid:2)
carefully manage blanket and replacement

2000, two additional field representatives

property coverages and to limit the use of

were assigned to established marketing

credits and dividend-paying plans in

territories, raising the total number of

establishing workers’ compensation policy

property casualty marketing territories to 76.

pricing. It demonstrated the need to

In 2002, the Company plans to split and

continue to aggressively re-underwrite

staff another six or more new territories.

commercial auto policies to ensure that

Policyholders, too, deserve intense, local,

driver records are current.

personal attention, and they get it from

Personal lines account reviews determined

agents, engineers, marketing representatives,

that nearly 19 percent of our homeowner

claims representatives and loss control

property claims from 1996-2000 were

specialists. On-site inspections, photographs,

related to water damage. Going forward,

building cost estimates, loss trend and risk

rather than include that coverage as

analyses increasingly are part of the process

standard, we’ll give policyholders more

used to insure to value, providing business

choice of the coverage amount they need

owners and homeowners with the coverage

and the price they’ll pay for it. Water

they need to repair or replace their property.

damage exclusions and endorsements

This attention to detail is part of the

developed in 2001 will begin to take effect

process in new business discussions and in

over the next year in most states.

renewals. Once a policy is on the books, an

Disciplined underwriting means knowing

entire team of people works to help the

your book of business. Again, being at

agent monitor the risk, regardless of

home on America’s Main Streets is a

whether loss activity occurs. Agents, field

Cincinnati advantage.

claims representatives and field marketing

Agencies generally sell Cincinnati

representatives review many account

products to their neighbors and to

renewals together. Where losses are reported,

organizations they know and understand.

we take an even closer look. The number of

To ensure business remains agent-focused,

in-depth risk reports increased more than

Cincinnati’s property casualty field marketing

200 percent in 2001. These reports from

representatives are assigned to specific

claims representatives include on-site

agencies, and their territories are divided

inspections and detailed analyses to help

according to activity levels. The number of

underwriters at renewal time. Where

agency relationships each field representative

exposures have changed, all of this detail

manages is kept to a minimum – 13 on

allows for more accurate coverage amounts,

average – allowing Cincinnati to provide the

terms and conditions, as well as premiums.

personal service each agency deserves. During

Back to table of contents

(cid:2)
C L A I M S

dedicated storm teams aid them in handling

Cincinnati is in the business of paying

claims fairly and accurately.

claims promptly, fairly and personally.

During 2001:

Our policy is to contact a claimant within

• Nearly 500 claims representatives and trainees

24 hours of receiving notice from the

participated in schools to enhance claims

agent that a loss has occurred. Local claims

handling techniques for workers’ compensation,

representatives move quickly to assess losses

physical damage, fire loss investigation,

and estimate costs. Specialized training and

settlement negotiation and other claims skills.

At H o m e O n M a i n S t r e e t:

P R O P E R T Y C A S U A L T Y M A R K E T I N G R E P R E S E N T A T I V E S

People energize Mark Massaro. The agencies he visits, the policyholders he meets, the businesses he inspects, all generate

enthusiasm and excitement. Not to mention the parents and kids he encounters through scouting.

Mark, a Cincinnati sales and marketing representative in Minnesota, understands that to the agents and commercial

policyholders in his territory, he is The Cincinnati Insurance Companies.

“It’s a huge responsibility,” he says, “and a very rewarding job. The more I get to know the people in my community and

their businesses, the better I can advise agents.”

He doesn’t do it alone. Now more than ever, Mark and other marketing representatives count on gathering specific

knowledge about each risk from the field team

including claims, loss control, life, audit, sales

and machinery and equipment representatives.

“Being active in the community allows me

to associate with a variety of dedicated people,”

Mark says. “From them, I learn about local

business interests as well as social, educational,

economic and political issues. During 2001,

this knowledge made me a more valuable sales

and underwriting resource as I worked with

agencies, the field team and headquarters

underwriters to review new and renewal

business opportunities.”

Back to table of contents

(cid:2)
• Midway through the year, we designated

handle non-catastrophe claims in a timely

staff in larger metropolitan areas as specialists

and personal manner.

who work to contain costs for large property

Additionally, new resources are helping

losses.

verify, control and recoup costs. Re-pricing

• More than 150 people specifically assigned

of auto physical damage estimates helped

to storm duty responded immediately to

save an average of $80 each on repairs during

areas affected by severe weather. Storm duty

a 2001 pilot project in just a few territories.

teams help free local claims representatives to

At H o m e O n M a i n S t r e e t:

L O S S C O N T R O L R E P R E S E N T A T I V E S

As a former city safety director who now is a Cincinnati loss control consultant in Indiana, Scott Hendrix helps

policyholders identify potential risks in their businesses. He provides training and education about policies and procedures

that prevent losses.

“I’m a safety resource to policyholders and a marketing tool for agents,” Scott says.

During 2001, Cincinnati’s Commercial Lines Department turned to Scott for risk evaluations on southwestern Indiana

accounts. “Proactive risk evaluations effectively open doors,” Scott says. “Besides providing underwriters with good

information about the account, these evaluations place me on-site to lend a helping hand and keep businesses and their

people accident and injury free. That adds even more depth to the policyholder relationship.”

Scott’s work with United Way as a member

of an allocation committee is another way he

makes sure people in his community get a

helping hand when they need it.

“Cincinnati has a legacy of being

hands-on,” he says. “By living and working

in the communities we serve, we are better

able to analyze local situations, control losses

and make a difference.”

Back to table of contents

(cid:2)
And a special Recovery and Subrogation

as we bring software applications online.

Group in 2001 regained $40 million, nearly

Other technology initiatives in development,

an 11 percent increase over 2000, through

test or pilot stages include imaging projects,

sale of assets recovered or salvaged from

online production and loss reports and

losses and recapture of payments that were

policy quoting and processing systems.

the responsibility of a third party.

L I F E I N S U R A N C E

P R O D U C T S A N D S E R V I C E S

The Cincinnati Life Insurance Company

To better serve the independent agents for

enhances local independent agents’ ability

whom and by whom Cincinnati was founded,

to deliver financial protection to their

we committed resources to new tools and

communities. At the same time, policyholders

new products to protect their policyholders.

benefit from the personal, local service

New products included a Credit Union

that is unique to the Cincinnati family of

Blanket Bond and the Executive CEO

insurance companies.

policy. The latter meets the needs of

Distributed primarily through agents

individuals with higher-valued homes. Each

representing Cincinnati’s property casualty

policy comes with a building survey, giving

group, Cincinnati Life helps those agents

the homeowner the security of knowing

increase their revenue streams with a full line

replacement value is covered and giving

of whole, term and universal life products,

Cincinnati an accurate premium for

fixed annuities, disability income and long

that value.

term care products. For the Company,

Property valuation software introduced in

Cincinnati Life offers the benefits of

October 2001 and available on Cincinnati’s

strengthening the relationship with agents

agency extranet further helps determine

and providing a steady cash flow to fuel

replacement value of commercial buildings.

investments and return. Life operations

This software provides information on

contributed $30 million to Cincinnati

geographic values, construction costs and

Financial Corporation’s $210 million in net

other variables, working as a supplement to

operating income for the year.

on-site inspections to ensure that the

policyholder buys adequate protection.

Cincinnati continues to invest in and roll

out tools to speed processing and cut costs at

the local level and at headquarters. More

than 500 agency representatives visit our

agency extranet weekly to download software,

print forms and check Company news or

ratings. This number will grow significantly

O U R C O M M U N I T I E S ,
O U R R E S P O N S I B I L I T I E S

The Cincinnati Insurance Companies –

like the people who work for the Company

and represent our products – are committed

to our communities. We demonstrate that

commitment with the same local emphasis

on all of our business practices.

Back to table of contents

(cid:2)
In the agent community, we support our

commercial and personal lines schools.

partners with outstanding service. Senior

These sessions aid in everything from agency

management travels to annual sales meetings

accounting to selling skills. And many of

in 28 cities to meet, greet and listen to

these programs are held in cities around

agents. We support the education and training

the country, making it possible for agency

of agents by offering producer schools,

associates to stay close to home while earning

agency management and executive liability

necessary education credits.

roundtables, life product seminars and

At H o m e O n M a i n S t r e e t:

L I F E M A R K E T I N G R E P R E S E N T A T I V E S

“Team builder” best describes Norm Alms, whether he is recruiting fellow bicyclists for a charity tour or organizing agents

to market a new insurance product. Norm calls on agencies throughout Wisconsin and the Upper Peninsula of Michigan to

promote Cincinnati’s life insurance products, educate their staff and meet with policyholders.

Serving this territory for 14 years, he’s created exceptional team spirit, trust and loyalty by making service to others his

top priority. When Norm’s team traveled this summer to a cycling event to raise funds for diabetes research, he stayed in the

hospital with an ill rider from his community until family could arrive. When agents needed support to sell Cincinnati’s Long

Term Care Insurance, they also knew they could count on Norm to be there for them. He intensely studied that market and

developed a seminar that he began leading this year for agencies and their clients.

“Cincinnati’s life marketing representatives

are out in the community every day,” Norm

says, “and we often field questions on

everything from financial goals and life

insurance to property casualty insurance and

claims. Agents and policyholders know that if

I can’t answer a question, I’ll find a colleague

who can. That creates respect, and in many

cases, it creates new business.”

Back to table of contents

(cid:2)
Beyond the frequent direct contact we

In the insurance community, Cincinnati

have with our agents, we support their

Financial is a responsible citizen, working to

businesses through subsidiaries such as

protect the integrity of our industry. Our

CFC Investment Company and CinFin

philosophy on legislative and regulatory

Capital Management.

issues is consistent with our philosophy on

CFC Investment Company helps local

business practices: Keep decision-making

independent agents, their clients and the

as close as possible to the local level.

general public develop their businesses

That brings us to our namesake

through equipment and vehicle loans and

community – the Greater Cincinnati region.

leases, as well as real estate loans. This

Cincinnati-based associates have a tradition

support helps agencies expand to better serve

of supporting the arts, education and

customers in their communities.

other community-related activities in our

CinFin Capital Management, the

hometown. As a Company and personally,

Company’s asset management services

we commit to living and working every day

subsidiary, is another service to our agencies.

as part of a proud community. Headquarters

CinFin invites agencies and their clients to

associates give generously to organized fund

benefit from an investment strategy that

drives such as the Fine Arts Fund and

mirrors that of the Company. Clients with

United Way, volunteering for service activities

assets under CinFin management – typically

ranging from tutoring and mentoring

agencies, pension plans, corporations,

students to special events like blood and

endowment funds and high net-worth

food donations.

individuals – receive the personal,

Our mission is to grow profitably and

customized attention for which The

enhance the ability of local independent

Cincinnati Insurance Companies are known.

insurance agents to deliver quality financial

We also serve agents and policyholders by

protection to the people and businesses

continuing education for Company associates.

they serve. Whether field representatives or

In 2001, more than 1,000 field and

headquarters associates, we fulfill this

headquarters associates participated in online

mission agency by agency, community by

courses to improve both technical and

community. Cincinnati is at home on

interpersonal skills. Additionally, 38 claims

America’s Main Streets.

representative trainees graduated in 2001.

For the second year in a row, five classes of

trainees graduated from our professional

underwriting school.

Back to table of contents

(cid:2)
Years Ended December 31,
2000

1999

____________________

S E L E C T E D F I N A N C I A L I N F O R M AT I O N

Cincinnati Financial Corporation and Subsidiaries

(dollars in millions except per share data)

I N C O M E S TAT E M E N T D ATA ( G A A P )
Net earned premiums......................................
Net investment income..................................
Revenues..........................................................
Net operating income........................................
Net capital (losses) gains ..................................
Net income......................................................
Net operating income per common share:

Basic................................................................
Diluted..........................................................

Net income per common share:

Basic................................................................
Diluted..........................................................

Cash dividends per common share:

Declared......................................................
Paid............................................................

B A L A N C E S H E E T D ATA ( G A A P )
Total assets......................................................
Long term debt..............................................
Shareholders’ equity..........................................
Book value per share......................................

R AT I O D ATA ( G A A P )
Loss ratio............................................................
LAE ratio........................................................
Expense ratio......................................................
Combined ratio ..............................................

2001

____________________

$ 2,152
421
2,561
210
(17)
193

1.31
1.29

1.20
1.19

.84
.82

$ 1,907
415
2,331

120**
(2)
118**

.75**
.74**

.74**
.73**

.76
.74

$13,959
426
5,998
37.07

$13,287
449
5,995
37.26

66.6%
10.1
28.2
104.9%

71.1%
11.3
30.4**
112.8%**

P R O P E R T Y C A S U A L T Y S U B S I D I A R Y S TAT U T O R Y D ATA *
Net written premiums ....................................
$ 2,188*
Net earned premiums......................................
2,067
Net investment income..................................
223
Unearned premiums........................................
1,033
Loss reserves......................................................
1,886
Loss adjustment expense reserves....................
466
Policyholders’ surplus....................................
2,533

$ 1,936
1,828
223
507
1,730
452
3,172

$ 1,732
387
2,128
255
–
255

1.55
1.52

.68
.661⁄3

$11,808
456
5,421
33.46

61.6%
10.0
28.6
100.2%

$ 1,681
1,658
208
455
1,513
419
2,852

Loss ratio............................................................
LAE ratio........................................................
Expense ratio ..................................................
Combined ratio................................................

66.8%
10.1
26.7*
103.6%*

71.1%
11.3
29.2**
111.6%**

61.6%
10.0
28.8
100.4%

Note: The selected financial information above allows for a more complete analysis of results of operations and should not be considered a substitute for
any GAAP measure of performance. The statutory basis data presented above for the year ended December 31, 2001 reflects the adoption of the
Codification of Statutory Accounting Principles (Codification) on January 1, 2001, as required by the State of Ohio, as more fully discussed in the
Management Discussion beginning on Page 20. Property casualty subsidiary statutory data for the year ended December 31, 2000 has been
reclassified for comparative purposes; information was not readily available to reclassify earlier years’ statutory data presented above.

Back to table of contents

1998

____________________

$ 1,613
368
2,054
199
43
242

1.19
1.16

1.45
1.41

.611⁄3
.592⁄3

$11,482
472
5,621
33.72

65.4%
9.3
29.6
104.3%

$ 1,558
1,543
204
432
1,432
408
3,020

65.4%
9.3
29.5
104.2%

(cid:2)
Cincinnati Financial Corporation and Subsidiaries

1997

____________________

1996

____________________

1995

____________________

1994

____________________

1993

____________________

1992

____________________

1991

____________________

$ 1,516
349
1,942
254
45
299

1.54
1.49

1.81
1.77

.542⁄3
.531⁄3

$ 9,867
58
4,717
28.35

58.3%
10.1%
30.0%
98.4%

$ 1,472
1,454
199
418
1,374
403
2,473

58.3%
10.1%
29.6%
98.0%

$ 1,423
327
1,809
193
31
224

1.15
1.11

1.34
1.31

.482⁄3
.472⁄3

$ 7,397
80
3,163
18.95

61.6%
13.8%
28.2%
103.6%

$ 1,384
1,367
190
402
1,319
383
1,608

61.6%
13.8%
27.6%
103.0%

$ 1,314
300
1,656
207
20
227

1.24
1.20

1.36
1.33

.422⁄3
.422⁄3

$ 6,439
80
2,658
15.80

57.6%
14.7%
27.8%
100.1%

$ 1,296
1,263
180
385
1,274
307
1,269

57.6%
14.7%
26.9%
99.2%

$ 1,219
263
1,513
189
12
201

1.13
1.09

1.21
1.18

.382⁄3
.371⁄3

$ 5,037
80
1,940
11.63

63.3%
9.8%
27.8%
100.9%

$ 1,191
1,170
162
354
1,213
219
999

63.3%
9.8%
26.9%
100.0%

$ 1,141
239
1,442

183***
33
216***

1.10***
1.06***

1.30***
1.27***

.341⁄3
.331⁄3

$ 4,888
80
1,947
11.70

63.5%
8.7%
28.5%
100.7%

$ 1,124
1,092
153
334
1,100
193
1,012

63.5%
8.7%
27.4%
99.6%

$ 1,039
219
1,304
148
23
171

.90
.87

1.04
1.03

.31
.30

$ 4,357
80
1,714
10.37

63.8%
9.0%
29.9%
102.7%

$ 1,015
992
142
302
961
177
934

63.8%
9.0%
29.0%
101.8%

$ 948
193
1,161
141
5
146

.86
.86

.90
.89

.272⁄3
.272⁄3

$ 3,750
–
1,441
8.79

61.6%
9.2%
30.2%
101.0%

$ 930
903
126
280
826
160
736

61.6%
9.2%
28.9%
99.7%

***2001 property casualty subsidiary statutory data excludes the effects of a $402 million one-time adjustment to recognize net written premiums
on the basis of the policy contract term rather than the policy billing period as of January 1, 2001, as required to conform with Codification
of Statutory Accounting Principles.

***2000 results include a one-time net charge for asset impairment of $39 million, before tax; $25 million, or 16 cents per share, net of tax.

The charge affected the statutory expense ratio and combined ratio by 1.7 percentage points and the GAAP expense ratio and combined ratio
by 2.1 percentage points.

***1993 earnings include a net credit for $14 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 $9 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)
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 R O D U C T I O N

The following discussion highlights significant factors influencing

the consolidated results of operations and financial position of
Cincinnati Financial Corporation (CFC). It should be read in
conjunction with the consolidated financial statements and related
notes beginning on Page 35 and the 11-year summary of selected
financial information on Pages 18 and 19.

CFC had six subsidiaries at year-end 2001. The lead property
casualty insurance subsidiary, The Cincinnati Insurance Company,
markets a broad range of business and personal policies in 31 states
through an elite corps of 959 independent insurance agencies.
Other members of the property casualty group are The Cincinnati
Casualty Company and The Cincinnati Indemnity Company,
which provide the Company with flexibility in underwriting,
pricing and billing. The Cincinnati Life Insurance Company
markets life, long term care and disability income 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, provides asset management services to
institutions, corporations and individuals with $500,000 minimum
accounts. The Company’s segments are defined based upon the
components of the Company for which financial information is
used internally to evaluate segment performance and determine the
allocation of resources.

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.
SAFE HARBOR STATEMENT

The following discussion contains 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 causes; the
frequency and severity of claims; environmental events or changes;
changes in insurance regulations, legislation or court decisions that
place the Company at a disadvantage in the marketplace; adverse
outcomes from litigation or administrative proceedings; 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 development,
implementation and benefits of technology enhancements; and
decreased ability to generate growth in investment income.

Further, the Company’s insurance businesses are subject to the
effects of changing social, economic and regulatory environments.
Public and regulatory initiatives have included efforts to adversely
influence and restrict premium rates, restrict the ability to cancel
policies, impose underwriting standards and expand overall
regulation. The ultimate changes and eventual effects, if any, of
these initiatives are uncertain.

Readers are cautioned that the Company undertakes no
obligation to review or update the forward-looking statements
included in this material.
INSURANCE REGULATORY OVERSIGHT

The Company’s insurance subsidiaries, in common with
other insurers based in the United States, are subject to extensive
governmental regulation and supervision in the various states
and jurisdictions in which they transact business. The laws and
regulations of Ohio, the state of domicile of the Company’s
insurance subsidiaries, have the most significant impact on their
operations.

For public reporting, insurance companies prepare financial
statements in accordance with accounting principles generally
accepted in the United States (GAAP). However, certain data also
must be calculated according to statutory accounting rules, based
on Statutory Accounting Principles, and must be reported to state
insurance departments per the National Association of Insurance
Commissioners (NAIC), the oversight organization for state
insurance regulations.

While not a substitute for any GAAP measure of performance,

statutory data frequently is used by industry analysts and other
recognized reporting sources to facilitate comparisons of the
performance of insurance companies. When appropriate, the
following discussion makes use of statutory data to analyze trends
or to make comparisons to industry performance. Estimated
industry data included below is taken from materials published by
A.M. Best Company, a leading insurance industry analytical and
rating agency, and presented on a statutory basis. Statutory data for
the Company is labeled as such and all other data is prepared based
on accounting principles generally accepted in the United States.
NAIC adopted the Codification of Statutory Accounting
Principles (Codification) in March 1998. Codification, which is
intended to standardize regulatory accounting and reporting to
state insurance departments, became effective January 1, 2001.
However, statutory accounting principles will continue to be
established by individual state laws and permitted practices. Ohio
required adoption of Codification, with certain modifications, for
the preparation of statutory-basis financial statements effective
January 1, 2001. Codification is now incorporated into the NAIC

Back to table of contents

(cid:2)
Cincinnati Financial Corporation and Subsidiaries

Accounting Practices and Procedures Manual. The effects of
the Company’s adoption of Codification are discussed below.
The NAIC uses risk-based capital (RBC) formulas for both
property casualty and life insurers, which serve as an early warning
tool for the NAIC and the state regulators to identify companies
that are undercapitalized and merit further regulatory action. The
Company’s property casualty and life companies have more than
sufficient capital to meet the RBC requirements.
Effects of Codification of Statutory Accounting Practices
The effect of adopting Codification is reported as a cumulative-

effect type change in accounting principle for the Company’s
insurance subsidiaries’ statutory financial statements as of
January 1, 2001. This means that the January 1, 2001 balances
of the Company’s insurance subsidiaries’ statements of admitted
assets, liabilities and capital and surplus have been adjusted to the
amounts that would have been reported had Codification been in
effect since the subsidiaries began operations. Accordingly, the
significant changes to statutory surplus were as follows: For the
property casualty companies – deferred tax assets of $314 million,
consisting primarily of taxes on the timing of loss reserves and
unearned premiums; deferred tax liabilities of $701 million,
comprised mainly of taxes on net unrealized gains; guaranty fund
assessments and premium tax liabilities of $11 million; and earned-
but-unbilled premium receivables of $6 million, with a resulting
decrease in surplus of $392 million. For the life company –
deferred tax liabilities of $62 million, comprised mainly of taxes on
net unrealized gains, and a corresponding decrease in surplus.

Additionally, prior to 2001, the Company’s property casualty
insurance subsidiaries recognized written premiums as they were
billed throughout the policy period, which was a previously
acceptable method. Beginning on January 1, 2001, these
companies began recognizing written premiums on an annualized
basis at the effective date of the policy as required by Codification.
This method of recognizing written premiums had no effect on
statutory income or surplus because earned premiums were
unaffected. To account for unbooked premium related to policies
with effective dates prior to January 1, 2001, the Company
recorded a written premium adjustment on January 1, 2001 of
$402 million that will appear in 2001 statutory financial reports
submitted to insurance regulatory authorities. Since this
adjustment affected written premiums only and was one-time
in nature, it has been excluded from comparisons of written
premiums between 2001 and 2000 in this report. Written
premiums presented throughout this report for 2000 have been
reclassified to conform with the 2001 presentation based on
contractual period; information was not readily available to
reclassify earlier years’ statutory data.

R E S U LT S O F O P E R AT I O N S
THREE-YEAR HIGHLIGHTS

2001 Change 2000 Change

1999 Change

Pro
Forma*
$2,331

(dollars in millions

except per share data)
Revenue
Net operating

income

Net capital losses
Net income
Net income

$2,561

9.9

$ 210

44.1
(17)(870.8)
34.4
63.3

$ 193
$ 193

Per Share Data (diluted):
Net operating

income

Net capital losses
Net income
Net income

$ 1.29

43.3
(.10)(900.0)
33.7
63.0

$ 1.19
$ 1.19

9.5

$2,128

3.6

(2) (359.8)

$ 146* (43.0) $ 255
–
$ 144* (43.5) $ 255
(53.5) $ 255
$ 118

(.01)

$ .90* (40.8) $ 1.52
–
nm
$ .89* (41.4) $ 1.52
(52.0) $ 1.52
$ .73

28.1
nm
5.4
5.4

31.0
nm
7.8
7.8

Note: 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.

*In 2000, the Company incurred a one-time net charge for asset
impairment of $39 million, before tax; $25 million, or 16 cents per
share, net of tax. Pro forma amounts exclude the one-time charge for
comparison purposes.

Revenue growth in each of the past three years primarily reflected
higher contributions from property casualty earned premiums and
investment income. In 2001, the growth rate for property casualty
earned premiums rose for the fourth consecutive year because of
strong growth in the Company’s commercial insurance lines.

Revenue from investment income rose 2.8 percent in 2001 on a

comparable basis, below the 6.0 percent growth rate in 2000 and
5.1 percent growth in 1999, due to the lower interest rate
environment. Growth rates are calculated excluding $5 million in
interest earned in 2000 from a $303 million single-premium bank-
owned life insurance (BOLI) policy booked at the end of 1999.

Excluding a one-time charge for asset impairment in 2000, net
operating income in 2001 rose 44.1 percent over 2000, primarily
because of a decline in the underwriting loss in 2001. In 2000,
higher losses and $72 million (after-tax) in additional reserves
related to uninsured motorists coverage resulted in a 43.0 percent
decline in net operating income compared with the prior year’s
record level. In 1999, net operating earnings increased 28.1 percent
principally due to lower catastrophe losses.

The one-time charge of $25 million (after-tax) recorded in 2000
expensed impaired assets related to development of next-generation
software to process property casualty policies. For comparison
purposes all data discussed below excludes the charge, unless
otherwise indicated.

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

The Company reported a net capital loss of $17 million in 2001

as detailed in Investment Operations. The net capital loss was
$2 million in 2000 and less than $1 million in 1999. Book value
was $37.07 at year-end 2001, below the record $37.26 at year-end
2000, but up from $33.46 at year-end 1999. The decrease in
2001 was primarily due to an increase in outstanding shares as
convertible debenture conversions offset a modest $3 million
increase in total shareholders’ equity.
PROPERTY CASUALTY INSURANCE OPERATIONS
Property Casualty Insurance Premiums

Cincinnati leverages its strong relationships with independent
insurance agents in 31 states to market property casualty insurance.
In 2001, approximately 98 percent of the Company’s agency direct
written premium volume was in the 26 states in which the
Company has had a presence for more than five years. In 2001,
the Company’s 959 independent insurance agencies generated an
average of approximately $2.3 million each in agency direct written
premiums; no single agency accounted for more than 1.3 percent
of the Company’s total agency direct written premiums. Further,
agencies in Ohio contributed 25 percent and Georgia, Illinois,
Indiana, Michigan and Pennsylvania each contributed between
5 percent and 10 percent of premium volume in 2001. 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 24/7 availability and local decision-making
authority. The field marketing staff is responsible for the
selection of new independent agents as well as underwriting
and pricing of new commercial business.

• Widely recognized, high-quality claims service via locally
based field claims 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 and assigns claims representatives to agencies. In
total, the Company pays an average of $5 million per business
day in claims.

• 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 2001, both new and updated policies
were introduced to further meet the needs of agents and their
customers, including the new Credit Union Blanket Bond and
improved broadening endorsements for commercial general
liability and business auto as well as updated dentist, printer
and homeowner-auto packages.

• 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. During 2001, two additional field
representatives were assigned to established marketing
territories. Since the beginning of 1997, the Company has
subdivided 10 territories in established states. During 2002,
the Company plans to split and staff another six or more
territories. Smaller territories allow marketing representatives to
increase the level of service as well as expand the opportunities
to ask for and earn new business.

• Programs to support agency growth, including education

programs for agents and staff, and financing for buildings and
equipment. In 2001, the insurance subsidiaries augmented
ongoing training programs with a number of special events,
including seminars held around the country to encourage
cross-selling 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, the Company has expanded
property casualty total net written premiums more rapidly than
the estimated industry growth rate in each of the past three years.

The Company’s total net earned premiums grew 13.3 percent in

2001, 10.3 percent in 2000 and 7.4 percent in 1999. For 2001
only, GAAP net earned premiums were $6 million higher than
statutory net earned premiums due to certain adjustments required
by statutory Codification.
Property Casualty Insurance Subsidiary Premiums (GAAP)
(dollars in millions)

2000 Change

2001 Change

1999 Change

Commercial lines
net earned
premiums
Personal lines
net earned
premiums

Total net

$1,453 17.9

$1,232

13.3

$1,088

6.7

620

4.0

596

4.6

570

8.9

earned premiums $2,073 13.3

$1,828

10.3

$1,658

7.4

The primary source of growth in 2001 was firmer pricing on
new and renewal commercial business. Premium growth in states in
which the Company has had a presence for more than five years
was a healthy 13.9 percent in 2001, reflecting the continued
opportunities available to Cincinnati. Expansion states, where the
Company has operated for fewer than five years, also were a factor
in overall growth, with agency direct premiums of $33 million in
2001 compared with $16 million in 2000. 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 states that were

Back to table of contents

(cid:2)
Cincinnati Financial Corporation and Subsidiaries

previously commercial-only territories: Maryland, Michigan,
Minnesota, Montana, North Dakota and Pennsylvania.
Commercial Lines

Commercial lines premiums rose to 70.0 percent of total net

earned premiums in 2001 from 67.4 percent in 2000 and
65.6 percent in 1999, reflecting the higher rate of growth in that
segment as the market continued the strengthening that began in
the second half of 1999 after years of intense price competition.
Industry-wide growth in net written commercial insurance premiums
was 10.0 percent in 2001 compared with 7.2 percent in 2000.
The Company’s standard approach is to write three-year

policies, an advantage in the commercial lines market. Exceptions
often include business new to the agency or, in certain local
competitive marketplaces, when a policy is aggressively priced.
Within those multi-year packages, automobile, workers’
compensation, professional liability and most umbrella liability
coverages remain subject to annual adjustment. Management
estimates that approximately 70 percent of the commercial written
premiums is subject to annual adjustment or re-pricing. Multi-year
packages are offered at rates that may be slightly higher than single-
year or annually-adjusted rates. By reducing annual administrative
efforts, multi-year policies reduce the Company’s and agency’s
expenses and the incentive for the policyholder to shop for a new
policy every year.

In 2001, new commercial lines business written directly by
Cincinnati agents reached $220 million, just short of the all-time
high of $230 million recorded in 2000. 2001 growth was excellent
given the priority placed on underwriting activities during this period.
Personal Lines

During 2001, the personal insurance market grew less

rapidly than the commercial insurance market due to
continuing competition. Industry-wide growth in net written
personal lines premiums was estimated at 7.0 percent, up from
3.7 percent in 2000.

Cincinnati’s personal lines net earned premium growth rate
was 4.0 percent in 2001 compared with 4.6 percent in 2000 and
8.9 percent in 1999. Growth in 2001 reflected a 14 percent
increase in personal lines new business to $52 million. The Company
introduced a new homeowner policy for higher valued homes and
an updated personal auto program. Emphasis on writing homeowner
coverage limits at full replacement value also began to contribute
to total personal lines premium growth. These factors should
contribute to premium growth in 2002 and beyond, as well.

The Company has received regulatory approvals for homeowner

rate increases averaging approximately 10 percent. In the fourth
quarter of 2001, increases took effect in several states, including
Ohio and Illinois. Further, rate increases will take effect in four
major states in the first quarter of 2002 and in several additional
states in the second quarter. As a result, management estimates an
increase in homeowner premium of 7 percent to 8 percent in 2002
as new business is written and existing one- and three-year policies
begin to renew.

The personal lines automation project, launched at the end
of 2000, now is testing key components and preparing for release
to agencies in a pilot state in mid-2002. Sequential roll-out to other
states will follow, extending over several years. The objectives are to
create next-generation software for personal lines products; to build
a single-entry data processing system to streamline policy issue; to
speed up processing time to improve cash flow; and to offer direct
billing, a feature frequently requested by agents. The automation
program is expected to contribute to personal lines growth in
future years. The total amount invested in development of this
new software through December 31, 2001 was $8 million.
Property Casualty Insurance Profitability

The discussion of profitability is based on GAAP data, except

for the following statutory analysis of results versus industry
performance and the accident year analysis of loss data.

The Company recorded a statutory net underwriting loss of

$108 million in 2001, compared with underwriting losses of
$210 million in 2000 and $13 million in 1999.

In 2001, the Company’s statutory combined ratio was
103.6 percent. This measure of profitability was above the
101.3 percent (statutory basis) the Company averaged in the
second half of the 1990s and which the Company has stated is
its target for future performance. However, the 2001 ratio was
considerably better than the industry’s estimated 117 percent
combined ratio, which included approximately 6 points for World
Trade Center losses. Cincinnati’s September 11 losses were a
relatively minor $9 million, adding only 0.4 percentage points
to the Company’s statutory combined ratio.

The 2000 statutory combined ratio for Cincinnati was
109.9 percent, including 6 points for a $110 million reserve
addition and excluding a one-time charge for asset impairment.
The $110 million pre-tax addition to reserves, net of reinsurance,
was an estimate of past uninsured and underinsured motorist
(UM/UIM) losses incurred but not yet reported (IBNR) resulting
from two Ohio Supreme Court decisions. Even including the
reserve addition, the Company’s statutory combined ratio was
below the estimated industry ratio of 110.1 percent.

In 1999, Cincinnati’s statutory combined ratio was

100.4 percent comparing favorably with the estimated industry
average of 107.8 percent.

On a GAAP basis, the Company’s combined ratio was
104.9 percent in 2001, 112.8 percent in 2000 (110.7 percent
excluding the asset impairment charge or 104.7 excluding both the
asset impairment charge and the reserve addition) and 100.2 percent
in 1999, a trend similar to that seen in the statutory data.

The following contributed to the Company’s underwriting results:

Loss and LAE Trends

Excluding catastrophe losses, the total loss and loss adjustment

expense (LAE) ratio in 2001 was 6.1 percentage points less than
the level recorded in 2000 (essentially unchanged from 2000 when
the reserve addition is excluded) and 4.2 percentage points higher
than 1999. The total loss and LAE ratio for both 2001 and 2000

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

was primarily affected by the increase in severity of losses of all sizes
when compared with 1999, the first year the Company collected
data on losses and reserve adjustments by size categories.
Property Casualty Subsidiary Losses Incurred Analysis (GAAP)
Over the three-year period, the following changes occurred in

the loss patterns:

(dollars in millions)
Losses $1 million or more
Losses $250 thousand to $1 million
Development and reserve

increases of $250 thousand or more

Other losses
Total losses incurred excluding

catastrophe losses

Catastrophe losses
Total losses
As a Percent of Net Earned Premiums:
Losses $1 million or more
Losses $250 thousand to $1 million
Development and reserve

increases of $250 thousand or more

Other losses
Loss ratio excluding catastrophe losses
Catastrophe loss ratio
Total loss ratio

2001
$ 71
143

122
981

$1,317
64
$1,381

2000
$ 58
118

1999
$ 36
89

114
961

90
770

$1,251
50
$1,301

$ 985
37
$1,022

3.4%
6.9

5.9
47.3
63.5%
3.1
66.6%

3.2%
6.5

6.2
52.5
68.4%
2.7
71.1%

2.2%
5.4

5.4
46.4
59.4%
2.2
61.6%

• Losses $1 million or more – The average size of new losses of
$1 million or more, net of reinsurance, declined over the
three-year period. Rising overall severity and frequency was
the primary factor in the increased contribution of losses of
this size over the past three years. While total large losses rose
$13 million, or 22.1 percent in 2001 compared with 2000,
claim count rose by 30.0 percent. Between 2000 and 1999,
total large losses increased by $22 million, or 62.7 percent,
while claim count rose by 66.7 percent. With the number of
in-force policies increasing over the three-year period, the
Company would have expected some increase in the number
of large losses. However, the rate at which total large losses
increased over the period was greater than the growth in the
overall business, which management believes was due to
escalating legal costs, medical costs and jury verdicts along
with inflated perceived values caused by announcements of
sensational “celebrity” pay contracts.

• Losses $250,000 to $1 million – New losses in this range over
the past three years were driven by factors similar to those
affecting losses of $1 million or more. These losses, in total,
increased by 21.5 percent in 2001, while claim count rose by

19.4 percent. In 2000, these losses in total rose 32.0 percent
with a 33.3 percent rise in frequency.

• Development and reserve increases of $250,000 or more – In
2001, as the Company adapted to the changing environment
and began establishing larger initial reserves to more accurately
reflect severity trends, the number of claims requiring case
reserve adjustments declined. For losses requiring reserve
adjustments, however, the average increase in 2001
was 17.5 percent, a rate exceeding that of the growth in the
overall business and reflecting the rising overall severity.
• Other losses – This category includes adverse development

and reserve increases less than $250,000 and IBNR. Following
its initial rise of 24.7 percent in 2000, due to rising severity,
the total of all other losses and case reserve adjustments rose
2.1 percent in 2001, stabilizing at 47.3 percent of net earned
premiums.
As these trends developed, management concluded that the
most effective means of returning the Company’s loss ratio to its
historic levels will be through pricing and rate increases, which the
Company has been implementing. In addition, in 2001, the
Company continued efforts to leverage its strong local presence in
field territories. Insurance-to-value initiatives are designed to ensure
the policyholders pay for coverage amounts appropriate for
exposures. Field marketing representatives have been meeting with
every agency to reaffirm agreements on the extent of frontline
renewal underwriting to be performed by local agents. Claims
representatives have been conducting on-site inspections and
preparing full risk reports on every account reporting a loss above
$100,000 and on accounts of concern.

These and other actions are expected to contribute to further

improvement in loss results and lead to improved profitability.
Loss Trends by Business Line

The loss and LAE ratio for commercial lines was 74.1 percent
in 2001, compared with 84.0 percent in 2000 (75.7 percent when
the reserve addition is excluded) and 72.9 percent in 1999.
Catastrophe losses contributed 1.9 percent, 1.5 percent and
2.3 percent to the commercial loss and LAE ratio in 2001, 2000
and 1999, respectively.

The loss and LAE ratio for personal lines was 82.9 percent in
2001, compared with 79.2 percent for 2000 (77.9 percent when
the reserve addition is excluded) and 69.1 percent in 1999.
Catastrophe losses contributed 5.8 percent, 5.3 percent and
2.1 percent to the personal lines’ loss and LAE ratio in 2001, 2000
and 1999, respectively.

Back to table of contents

(cid:2)
Cincinnati Financial Corporation and Subsidiaries

Property Casualty Subsidiary Accident Year Loss Analysis
Results by accident year, excluding catastrophe losses, for
selected business lines are as follows as of December 31, 2001:
2001

1999

2000

1998

154
185
166

$1,658 $1,543
142
182
150

$1,828
179
208
180

$2,067
221
252
191

Statutory Net Earned Premiums (dollars in millions)
All lines
Commercial auto
Workers’ compensation
Homeowner
Statutory Accident Year Losses and LAE (dollars in millions)
All lines
$1,580
175
Commercial auto
184
161
Workers’ compensation
208
Homeowner
120
160
Statutory Accident Year Loss and LAE Ratios (percent)
All lines
Commercial auto
Workers’ compensation
Homeowner

$1,494
185
195
153

113.4
87.1
72.3

103.1
93.9
85.2

76.4% 81.7% 75.9% 78.1%
83.3
82.6
83.7

106.9
74.1
86.8

$1,259 $1,206
152
135
131

Within commercial lines, the commercial auto and workers’
compensation lines were the most significant contributors to the
higher losses in accident years 2001 and 2000 when compared with
1999. Based on the Company’s historic trends for reserve accuracy
and its intent to reflect higher severity in its initial reserve activity,
management believes that the improvement in 2001 accident year
loss ratios, basically resulting from higher premiums, indicates that
the Company’s strategies are reducing the impact of greater losses
in these business lines.

The most significant cause of the higher loss and LAE ratio

between 2001 and 1999 in personal lines was weakening
profitability in the homeowner line, an industry-wide trend. In
2000, the Company began a personal auto re-underwriting
program that reviewed and strengthened underwriting standards,
requiring motor vehicle reports for many insured drivers and
commitments that some agencies will provide the Company with
specific premium volume increases. That program helped mitigate
the higher losses in 2001 and 2000.

In 2001, the Company expanded the re-underwriting program

to include homeowner coverages, emphasizing homeowner
coverage limits at full replacement value. In addition, account
reviews determined that water damage was a significant cause of
homeowner property claims. Going forward, rather than including
that coverage as standard, policyholders will be given the
opportunity to select water damage coverage as a policy addition,
in coverage amounts needed. New water damage exclusions and
endorsements will begin to take effect over the next year in several
states. Homeowner rate increases averaging 10 percent are
scheduled to go into effect in the coming year for new and renewal
policies. Insurance to value, rate increases, specific charges for water
coverages and agency-by-agency reviews should help improve
results in the homeowner line over the next several years.

Catastrophe Losses

The contribution to the loss ratio of catastrophe losses at

3.1 percentage points in 2001, 2.7 points in 2000, and 2.2 points
in 1999 approximated the Company’s historic range.

2001 catastrophe losses totaled $64 million, net of reinsurance
and before taxes, including $9 million for losses related to events of
September 11, 2001. Reported direct losses accounted for only
$300,000 of that total, with the remainder arising from the
Company’s participation in an aircraft insurance pool and other
reinsurance agreements.

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.
Property Casualty Subsidiary Profitability Ratios (GAAP)

Commercial loss and LAE ratio
including catastrophe losses

Personal loss and LAE ratio

including catastrophe losses
Loss ratio excluding catastrophe

losses
LAE ratio
Loss and LAE ratio excluding

catastrophe losses

Catastrophe loss and LAE ratio
Loss and LAE ratio
Expense ratio excluding

policyholder dividends
Policyholder dividend ratio
Combined ratio
Combined ratio

2001

2000
Pro Forma*

1999

74.1%

84.0%

72.9%

82.9%

79.2%

69.1%

63.5%
10.1

73.6%
3.1
76.7%

27.4
.8
104.9%
104.9%

68.4%
11.3

79.7%
2.7
82.4%

27.3*
1.0
110.7%*
112.8%

59.4%
10.0

69.4%
2.2
71.6%

28.2
.4
100.2%
100.2%

*In 2000, the Company incurred a one-time net charge for asset
impairment of $39 million. Including the charge, the expense ratio
was 29.4% and the combined ratio was 112.8%. Pro forma results
exclude the charge for comparison purposes.
Expense Ratio

The expense ratio, excluding the one-time charge to expense
software development assets in 2000, remained relatively stable
over the past three years, 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

declined by 0.2 percentage points in 2001 after increasing

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

0.6 percentage points in 2000 over 1999 due to growth in workers’
compensation premiums, particularly in Wisconsin, where these
policies are structured to include policyholder dividends. The
improvement in 2001 reflected the Company’s decision to move
many workers’ compensation policies to The Cincinnati Casualty
Company, a subsidiary company that writes non-participating
workers’ compensation policies. As a result of this decision, the
policyholder dividend ratio should further decline in 2002.
LIFE AND ACCIDENT HEALTH OPERATIONS (GAAP)
1999 Change
(dollars in millions)

2001 Change 2000 Change

Gross written
premiums*
Net written
premiums*

Earned premiums
Other income
Investment income
Total revenues
Total expenses
Net operating

income

Net capital losses
Net income
Total assets
Shareholder’s equity
*Statutory basis

$ 122 (10.7) $ 137 (66.5) $ 409 317.1

102 (14.2)
1.7
81
33.6
3
1.3
80
–
158
6.6
120

119 (70.1)
80
6.2
2 (32.1)
12.5
79
9.9
158
5.3
112

398 331.1
6.6
75
na
3
7.7
70
8.8
144
4.8
107

30
(8.1)
(4) (136.0)
26 (15.4)
8.6
5.2

1,761
552

32
14.9
(2) 40.0
20.3
31
12.0
1,621
13.3
525

28
19.1
(3) (19.0)
19.1
26
19.6
1,447
463 (11.8)

The Company’s life insurance subsidiary had statutory net
written premiums of $102 million in 2001. In 2000, net written
premiums were $119 million, including a single $20 million BOLI
policy and a separate account. In 1999, net written premiums were
$398 million, including a $303 million BOLI premium. Excluding
BOLI premiums, net written premiums rose 3.0 percent in 2001,
compared with increases of 3.8 percent in 2000 and 3.6 percent
in 1999. Written premiums have been restated to exclude annuity
deposits not involving life contingencies, which are not recognized
as written premium under statutory rules.

In 2001, net operating income was down 8.1 percent from the

prior year primarily due to higher expenses related to charges for
automation and policy audits and incentives. In 2000 and 1999,
net operating income rose 14.9 percent and 19.1 percent,
respectively, due to growth in investment income, favorable
mortality experience, expense control and continued growth.
The life insurance subsidiary contributed 14 percent of CFC’s
operating income in 2001 compared with 27 percent in 2000 and
11 percent in 1999.

An important part of Cincinnati Life’s strategic mission is to
round out accounts while improving persistency for the Company.
Term and worksite insurance products are well suited to cross-
serving by the Company’s property casualty agency force, 90 percent

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. To further the cross-selling opportunities with property
casualty agencies, new and enhanced term products will be
introduced in early 2002.
FEDERAL INCOME TAXES

Investment operations are the Company’s primary source of

profits. The Company pursues a strategy of investing in tax-
advantaged fixed maturities and equity securities to minimize its
overall tax liability and maximize after-tax earnings.

Reflecting that strategy, the Company’s income tax expense
(benefit) was $28 million, $(9) million and $67 million for 2001,
2000 and 1999, respectively, while the effective tax rate was
12.7 percent, (8.9) percent, and 20.8 percent for the same periods.
The statutory net underwriting losses in each of the past three

years served to further reduce the Company’s tax expense. The
differences in income tax expense and the effective tax rate during
the period were primarily the Company’s tax-exempt interest and
dividends received exclusion. The 1999 tax rate was consistent with
historical experience, and management anticipates that the effective
tax rate will approximate that level if the Company achieves its
performance objectives.

I N V E S T M E N T O P E R AT I O N S

The market value of the Company’s investments was
$11.571 billion and $11.316 billion at year-end 2001 and
2000, respectively. These investments made up 82.9 percent of the
Company’s $13.959 billion assets at year-end 2001 compared
with 85.2 percent at year-end 2000.

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 bonds and equity securities. The Company’s
investment decisions on an individual insurance company basis are
influenced by insurance regulatory and 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 or
equity securities. Such securities are evaluated prior to purchase
based on yield and risk. Investments are primarily publicly-traded
securities, classified as available-for-sale in the accompanying
financial statements. Changes in the fair value of these securities are
reported in other comprehensive income, net of tax.

The Company invests in convertible bonds and convertible
preferred stocks. The Company believes the conversion features
enhance the overall value of the security when purchased.
Management does not believe that investments in convertible
securities (market value of $442 million at December 31, 2001)
pose any significant risk to the Company or its portfolio due to the

Back to table of contents

(cid:2)
Cincinnati Financial Corporation and Subsidiaries

relatively high quality of the securities. Consequently, management
intends to continue to invest in convertible securities in the future.
Information regarding the composition of investments, together
with maturity data regarding investments in fixed maturity obligations,
is included in the Notes to Consolidated Financial Statements.
INVESTMENT INCOME

Pre-tax investment income reached a new record of $421 million

in 2001; however, reflecting the lower interest rate environment,
the growth rate for investment income slowed to 2.8 percent,
compared with 6.0 percent in 2000, excluding interest income
recorded from the BOLI policy, and 5.1 percent 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. In 2001, 26 of the 44 common stocks in
the Company’s investment portfolio increased dividends during the
year, adding more than $18 million to gross investment earnings
on an annualized basis.

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 stock and the reinvestment
of called or redeemed bonds at lower interest rates.
NET CAPITAL LOSSES

The Company reported a net capital loss of $17 million in 2001

following net capital losses of $2 million in 2000 and less than
$1 million in 1999.

Included in the 2001 loss were asset impairments of $47 million

related to non-investment grade corporate bonds, recognized
because management viewed the declines as “other than
temporary.” (See Asset Impairment discussion in Significant
Accounting Policies on Page 32 for factors considered by
management.) During 2001 the corporate bond market
experienced the highest default rates since 1990-1991. The
Company is taking an aggressive approach, selling or writing
down issues for management believes it may not be able to
recoup lost value.

In addition, the Company adopted SFAS No. 133 “Accounting

for Derivative Financial Instruments and Hedging Activities” on
January 1, 2001. Convertible securities (both fixed maturities and
preferred stocks) have been divided between the host contract and
the derivative financial instrument according to SFAS No. 133 for
valuation purposes. The host contract continues to be accounted
for as an available-for-sale security and the conversion feature has
been marked to market and the related change in value recorded as
net capital gains (losses). Prior to the adoption of SFAS No. 133,
these changes in value affected only the Company’s balance sheet.
The impact in 2001 was a $9 million net capital gain, before tax.
Net capital gains (losses) in prior years were not affected by
SFAS No. 133.
MARKET RISK

Market risk is the risk that the Company’s portfolio may incur
losses due to changes in price for equity securities and changes in

interest rates and credit ratings for fixed-maturity securities.
Actively managing market risk is integral to the Company’s
operations. The Company may change the character of future
investments purchased or sold or alter the existing asset portfolios
to manage exposure to market risk within defined tolerance ranges.
The Company administers and oversees the investment risk
management process primarily through the Investment Committee
of the Board of Directors, which provides executive oversight of
investment activities. The Company has specific guidelines and
policies that define the overall framework for managing market and
other investment risks, including the accountabilities and controls
over these activities. These guidelines are applied daily by
investment portfolio managers.
Exposure to Changes in Price for Equity Securities
Equity price risk is the risk that the Company will incur
economic losses due to adverse changes in a particular equity
investment or group of equity investments. At year-end 2001 and
2000, investments totaling approximately $8.495 billion and
$8.526 billion ($2.174 billion and $2.068 billion at cost) of the
Company’s $11.571 billion and $11.316 billion investment
portfolio related to equity securities.

The equity emphasis is on common stocks with an annual
dividend yield of approximately 1.5 percent to 3 percent and with
annual dividend increases. The Company’s portfolio of equity
investments had an average dividend yield-to-cost of 9.4 percent at
December 31, 2001. Management’s strategy in equity investments
includes identifying, for the core of the investment portfolio,
approximately 10 to 15 companies, in which the Company can
accumulate 5 percent to 10 percent of their common stock.

While the Company’s financial position would be impacted by
changes in the market valuation of these investments, in 2001, the
Company’s equity portfolio outperformed the Standard & Poor’s
(S&P) 500 Index, a common measure of market performance,
gaining 0.7 percent vs. a decline of 11.9 percent for the Index.
Over the past five years, the portfolio performed similarly, with
an average annual return of 20.2 percent compared with a
10.7 percent rate for the S&P 500 Index. While past performance
cannot guarantee future returns, management believes the Company’s
investment style – focused on companies that pay and increase
dividends to shareholders – offers some protection in down markets.
A prolonged downturn in the stocks of financial institutions would
make future comparisons with the S&P 500 Index more difficult.

At December 31, 2001, the Company held six individual equity

investments that accounted for approximately 90 percent of the
after-tax net unrealized appreciation of the entire investment
portfolio. The Company’s largest equity holding is Fifth Third
Bancorp (Nasdaq:FITB) common stock, of which the
Company held 72.8 million shares at a cost of $283 million at
December 31, 2001. The market value of the Company’s Fifth
Third Bancorp position was $4.464 billion at year-end 2001, or
53 percent of its total equity portfolio. The after-tax unrealized gain
represented by the Company’s Fifth Third Bancorp position was

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

$2.717 billion, or 66 percent of the Company’s total after-tax
unrealized gains at year-end 2001. The Fifth Third Bancorp
position represented $16.80 of the Company’s total book value of
$37.07 per share at year-end 2001. If Fifth Third Bancorp’s
common stock were to decline by 20 percent from its closing price
of $61.33 at year-end 2001, the impact on CFC would be an
$893 million reduction in assets and a $580 million reduction in
after-tax unrealized gains. This would reduce shareholders’ equity
by 10 percent and book value by $3.59 per share.
Exposure to Changes in Interest Rates and Credit Ratings
for Fixed-Maturity Securities

Interest rate risk is the risk that the Company will incur
economic losses due to adverse changes in interest rates. This
risk arises from the Company’s exposure to interest rates through
investing activities. The Company invests substantial funds in
interest-sensitive assets and also has certain interest-sensitive
liabilities. Credit rating risk is the risk that the Company will
incur economic losses due to credit downgrades by Moody’s
Investors Service and/or Standard & Poor’s. At year-end 2001 and
2000, investments totaling approximately $3.010 billion and
$2.721 billion ($3.012 billion and $2.803 billion at amortized
cost) of the Company’s $11.571 billion and $11.316 billion
investment portfolio related to fixed-maturity securities.

Interest rate risk is lessened through the maturity structure of
the fixed-income portfolio. At December 31, 2001, the Company’s
portfolio of fixed-maturity securities had a weighted average yield-
to-cost of 7.8 percent, a weighted average maturity of 9.8 years and
a weighted average modified duration of 6.1 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.

By maintaining a well diversified, fixed-income portfolio, the
Company attempts to mitigate overall credit risk. No individual
fixed-income issuer’s securities account for more than 1.7 percent
of the fixed-income portfolio.

Historically, municipal bonds have been attractive due to their
tax-exempt status. Essential service (e.g., schools, sewer, water, etc.)
bonds issued by municipalities are prevalent in this area. The
Company maintains a diversified portfolio of municipal bonds.
While no single municipal issuer accounts for more than 1 percent
of the tax-exempt bond portfolio, concentrations within individual
states can be high. Holdings in the top five states account for
63 percent of the municipal portfolio.

Because of alternative minimum tax matters, the Company
uses a blend of tax-exempt and taxable fixed-maturity securities.
Tax-exempt bonds comprised 9 percent of invested assets as of
December 31, 2001, unchanged from year-end 2000.

At year-end 2001 and 2000, approximately $1.240 billion and

$1.079 billion ($1.208 billion and $1.067 billion at amortized
cost) of the investment portfolio was related to corporate bonds
rated as investment grade. Bonds with a Moody’s rating at or above
Baa are considered investment grade. A majority of the bonds not
rated by Moody’s are investment grade for statutory purposes and
are related to small, tax-exempt bond issues.

The breakdown of the Company’s fixed-income portfolio based

on Moody’s ratings is as follows:

Moody’s Rating

Aaa, Aa, A
Baa
Ba
B
Caa
Ca, C
Not rated
Total

Market Value
(dollars in millions)
$ 966
788
399
308
67
7
475
$3,010

______________

Percent of Total

32.1%
26.2
13.3
10.2
2.2
0.2
15.8
100.0%

_________________

At year-end 2001 and 2000, approximately $652 million and
$585 million ($718 million and $706 million at amortized cost)
of the investment portfolio were corporate bonds rated as non-
investment grade. Such investments tend to have higher yields and
are inherently more risky and illiquid since the risk of default by
the issuer, as exhibited by rating, is higher. Historically, they have
benefited the Company’s results of operations and in general are
less sensitive to interest rate fluctuations. Many have been upgraded
to investment grade while owned. In 2001, however, the Company
recorded losses in its non-investment grade bond portfolio due to
deteriorating economic conditions and tightening credit standards.
The Company continues to closely monitor this class of investments.
While interest rates for U.S. treasuries traded at or close to their
lowest level of the past 20 years, the corporate bond market saw a
greater deviation in 2001. Companies with pristine balance sheets
and no perceived risk of accounting irregularities followed the
treasury market with the lowering of yields. Any company with
known or perceived credit or liquidity concerns saw its borrowing
cost (interest rate) increase dramatically.

The Company currently is developing financial planning
models to further incorporate other analytical tools in assessing
market risks. Management believes the new models will improve
the Company’s ability to measure the impact on bond values of
changes in interest rates. Understanding the impact of interest rate
changes should allow for a better matching of the Company’s assets
and liabilities.

Back to table of contents

(cid:2)
Cincinnati Financial Corporation and Subsidiaries

O U T L O O K

Management is targeting continued growth in excess of the

industry average. In 2002, industry analysts are projecting
10.4 percent net written premium growth for the property casualty
insurance market. The Company’s further objectives are to return
to historic profitability levels in its insurance segments and to
maintain above industry-average investment income growth.
PROPERTY CASUALTY INSURANCE OPERATIONS

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 its
reputation among independent insurance agencies and
management’s belief that the Company can achieve additional
market penetration in states in which it currently operates.

Management has concluded, however, that the higher-than-

historic levels of severity, an industry-wide phenomenon, is a
permanent shift; and that underwriting and pricing must be
adjusted appropriately. The re-underwriting efforts begun in
2000 and 2001 have begun to address that issue. In this context,
over the course of 2002, management anticipates improvement
in the statutory combined ratio from the 103.6 percent reported
for 2001.

Management has targeted a return to its five-year (1995-99)
average statutory and GAAP combined ratio of 101.3 percent,
including policyholder dividends. Assuming a normal level of
catastrophes, management believes it could reach that level by the
end of 2002. Industry analysts are projecting a 107.5 percent
statutory combined ratio for the property casualty insurance
industry in 2002.

To obtain reinsurance coverage in 2002, the Company is paying

rates substantially higher than in 2001. Management anticipates
the impact of the higher reinsurance rates on 2002 earnings per
share will be approximately 12 cents, after tax.
INVESTMENT OPERATIONS

Management believes that with the resumption of a favorable
pricing environment and continued growth in new business, strong
cash flow from insurance operations should contribute to
continued above industry-average investment income growth.
With market sentiment indicating an economic recovery in 2002,
the Company’s value-driven focus on income-generating securities
of growing businesses should help it reach its goal.

Continued weakness in the economy, however, could keep many

non-investment grade securities under pressure. Similar to many
financial institutions, the Company has and will continue to
tighten its standards to adjust for credit risk. Currently, CFC sees
convertible securities and investment-grade fixed maturities
offering the best risk-adjusted returns. CFC will continue to invest
in common stocks of companies with good management teams
that have growth in earnings, revenues and dividends.

LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
(dollars in millions)
Net cash provided by
operating activities
Net cash used in investing

$ 540

$ 697

$ 370

2001

1999

2000

activities

Net cash used in financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Supplemental:
Interest paid
Income taxes paid

(359)
(148)
$ 33
60
$ 93

$ 41
9

(513)
(136)
$(279)
339
$ 60

$ 40
33

(205)
(211)
$ 281
58
$ 339

$ 32
55

Cash flow from operations was sufficient to meet operating

needs in 2001, 2000 and 1999, with short-term borrowings
utilized for financing activities. 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.

In 2001, cash flow from operations rose $170 million over
2000, primarily because of growth in insurance operations and the
improved operating results. The higher level of premiums in 2001
resulted in a $140 million increase in unearned premiums.

While reinsurance receivables rose in 2001 by $300 million
primarily due to a $286 million receivable from the Company’s
participation in a United States Aircraft Insurance Group (USAIG)
insurance pool, this was mostly offset by a $315 million increase in
the related loss and loss expense reserves.

The primary reason for the decline in cash flow from operations

between 2000 and 1999 was the 1999 year-end sale of the BOLI
policy, which added $303 million to 1999 results, combined with
larger underwriting losses in 2000.

Management is aware that future liquidity could be impacted by

disasters that are in excess of catastrophe treaties, which provide
coverage for gross losses up to $200 million. The Company has no
significant exposure to assumed reinsurance, which accounted for
no more than 2.3 percent of net premiums in each of the last three
years and is expected to remain at this level. In 2002, however, the
change in the Company’s ceded reinsurance agreements will result
in higher ceded premiums and higher retention by the Company,
which will increase incurred losses.

The higher level of available cash in 2001 was used primarily for
investing activities. Net cash used in investing activities declined by
$154 million in 2001, after rising by $308 million in 2000 as the
$303 million from the sale of the BOLI policy in 1999 was
invested primarily in fixed-maturity securities. During 2000 and
1999, a large number of the Company’s fixed-maturity investments

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

were called by the issuers. The overall decline in interest rates in
2001 substantially reduced the number of bond calls.

The net effect of this transaction was to fix the interest cost on the
short-term loan.

Net cash used in financing activities rose $12 million in 2001

The Company has no off-balance sheet arrangements.

after declining by $75 million in 2000. The modest increase in
2001 primarily reflected the higher level of dividends paid during
the year and a $39 million decrease in short-term borrowing due to
a lower level of stock repurchase. The decline in 2000 was primarily
due to the $150 million reduction in cash used to purchase
treasury shares from the unusually high level in 1999. Over the
three-year period, the increase in notes payable declined steadily
due to the reduced level of borrowing for treasury share purchases.
LIABILITIES

At December 31, 2001, total long- and short-term debt was
4.4 percent and insurance reserves were 25.8 percent of total assets,
with remaining liabilities consisting of unearned premiums, deferred
income taxes, declared but unpaid dividends and other liabilities.
Debt

At December 31, 2001, and December 31, 2000, long-term
debt consisted of $426 million and $449 million, respectively, of
convertible and senior debentures, neither of which is encumbered
by rating triggers.

Notes payable, primarily short-term debt through two bank

lines of credit, used to enhance liquidity and provide working
capital, increased to $183 million in 2001 from $170 million in
2000 and $118 million in 1999. Management has used short-
term debt for purchase of treasury shares and other purposes. At
December 31, 2001, the Company had $92 million of available
borrowing capacity on its $175 million and $100 million lines of
credit.

There are two financial covenants for the Company’s $175 million
line of credit. First, consolidated net worth on the last day of each
fiscal quarter shall not be less than $5.0 billion or $4.5 billion
if such reduction in consolidated net worth is due solely to unrealized
losses in the Company’s portfolio of debt and equity investments;
at year-end 2001, the Company’s consolidated net worth was
$6.0 billion. Second, the Company’s consolidated ratio of
indebtedness for borrowed money to net worth, at any time
during each fiscal quarter, shall not exceed the ratio of 0.25-to-
1.00; as of year-end 2001, the ratio of indebtedness to net worth
was 0.10-to-1.00. The Company’s $100 million line of credit has
no financial covenants.

During the second quarter of 2001, CFC Investment Company
entered into an interest rate swap as a cash hedge of variable interest
payments for certain variable-rate debt obligations ($31 million
notional amount). Under this interest rate swap contract, the
Company agreed to pay a fixed rate of interest for a seven-year
period. The contract is considered to be a hedge against changes in
the amount of future cash flows associated with the related interest
payments. Accordingly, the related unrealized gain or loss on this
contract is a component of comprehensive income. The interest
swap contract is reflected at fair value in the Company’s balance
sheet. The unrealized loss at December 31, 2001 was insignificant.

Ratings

Insurers are rated on their financial strength and claims-paying
ability to provide consumers with comparative information in the
insurance industry. Among other factors, the ratings focus on items
such as results of operations, capital resources and minimum
policyholders’ surplus requirements as well as qualitative analysis.

In 2001, Standard & Poor’s changed their rating of the

Company’s senior debentures to A+ Strong from AA- Very Strong
and their ratings of the Company’s insurance subsidiaries to AA-
Very Strong from AA+ Very Strong. Their decision reflected their
outlook for the overall insurance industry, and, within that context,
the Company.

Other leading rating firms have maintained their ratings of the
Company; A. M. Best, the leading insurance company rating firm,
awards CFC’s property casualty companies the A++ Superior
rating, assigned to less than 3 percent of insurer groups. A.M. Best
awards Cincinnati Life the A+ Superior rating. Moody’s has
maintained an A2 rating on the corporate debentures and an Aa3
ratings of the property casualty companies.

The Company believes its financial position is strong; however,

the rating agencies could decide to lower its ratings in the future.
The following table summarizes the Company’s current debt and
financial strength ratings:

A.M Best

S&P Moody’s

Cincinnati Financial Corporation
Convertible Senior Debentures
Senior Debentures

The Cincinnati Insurance Companies

Property Casualty Group
(and each subsidiary)

Cincinnati Life

aa
aa

A++
A+

A+
A+

A2
A2

AA-
AA-

Aa3
—

DIVIDENDS

CFC has increased cash dividends to shareholders for
41 consecutive years and, periodically, the Board of Directors
authorizes stock dividends or splits. In February 2002, the Board of
Directors authorized a 6 percent increase in the regular quarterly
dividend to an indicated annual rate of 89 cents. In February 2001,
the Board authorized a 10.5 percent increase; and in February
2000, an 11.8 percent increase. Over the past 10 years, the Company
has paid an average of 35 percent to 40 percent of net income as
dividends, with the remaining 60 percent to 65 percent 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 percent stock dividend in 1996; a 5 percent stock dividend in

Back to table of contents

(cid:2)
Cincinnati Financial Corporation and Subsidiaries

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 CFC shares if all shares from
accrued stock dividends and splits were held and cash dividends
not reinvested.
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, 2001, 7.9 million shares remained authorized

for repurchase at any time in the future. The Company has
purchased 1.2 million shares at a cost of $46 million, 2.1 million
shares at a cost of $66 million and 6.1 million shares at a cost of
$217 million during the years ended December 31, 2001, 2000
and 1999, respectively. Shares repurchased total 13.0 million at a
total cost to the Company of $423 million, since the inception of
the share repurchase program in 1996.
SHAREHOLDERS’ EQUITY

At year-end 2001, total shareholders’ equity was 43.0 percent of

total assets.

(dollars in millions)
Common stock, paid-in capital

less treasury stock

Retained earnings
Accumulated other

comprehensive income
Total shareholders’ equity

2001

2000

1999

$ 207
1,678

4,113
$5,998

$ 219
1,620

4,156
$5,995

$ 267
1,624

3,530
$5,421

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 $6.321 billion
and $6.458 billion at year-end 2001 and 2000, respectively.
It constituted 54.6 percent of the total investment portfolio;
74.4 percent of the equity investment portfolio; and, after deferred
income taxes, 68.5 percent of total shareholders’ equity at year-end
2001. The unrealized appreciation is primarily due to the Company’s
holdings in Fifth Third Bancorp and Alltel Corporation (NYSE:AT)
common stock.

O T H E R I T E M S
REINSURANCE

The Company has finalized new property casualty catastrophe
reinsurance treaty and new property and casualty working reinsurance
treaties with reinsurers that have written the Company’s treaties
for more than 10 years. Under the new programs, 2002 ceded
premiums are estimated to be $86 million, compared with
$68 million in 2001 and $47 million in 2000. The Company

received no ceding commissions in 1999 or 2000, nor will it
receive any in 2002. The Company received $9 million in ceding
commissions in 2001.

Under the new property catastrophe reinsurance treaty, the
Company will retain the first $25 million of losses, 40 percent of
losses from $25 million to $45 million and 5 percent of losses from
$45 million to $200 million. The Company has the financial
ability to absorb catastrophe losses at that level, and the revised
reinsurance agreement is a means of balancing reinsurance costs
and risks. Previously, the Company retained the first $25 million
of property catastrophe losses and 5 percent of losses from
$25 million up to $200 million.

Under the new 2002 property working treaty, the Company
retains 100 percent of the first $2 million in losses and 20 percent
of the next $3 million up to $5 million. Losses in excess of $5 million
are covered at 100 percent up to $25 million. In 2001 and 2000,
the Company retained 100 percent of the first $2 million in losses,
and losses in excess of $2 million were covered at 100 percent up to
$25 million. Under the new 2002 casualty working treaty, the
Company retains 100 percent of the first $2 million in losses and
40 percent of the next $2 million, up to $4 million. Losses in
excess of $4 million are covered at 100 percent up to $25 million.
In 2001 and 2000, the Company retained 100 percent of the first
$2 million in losses and 20 percent of the next $2 million up to
$4 million. Losses in excess of $4 million were covered at
100 percent up to $25 million.

The Company’s reinsurance programs will include terrorism

coverages with certain limitations. On commercial risks over
$50 million in exposures, however, the Company will need to
purchase separate coverage or assume the risk of the loss. Risks
already insured by the Company are grandfathered in with
terrorism coverage.
USAIG POOL PARTICIPATION

CFC, through The Cincinnati Insurance Company, participates
in USAIG, a joint underwriting association of individual insurance
companies that collectively function as a worldwide insurance
market for all types of aviation and aerospace accounts. Member
participation is renewed annually and each member’s share of
premiums, losses, expenses and profits is in proportion to their
contracted participation level. Each member company of USAIG
must adhere to financial rating, statutory surplus and security
agreement requirements. The member companies are required to
fund a trust account at a depository bank to meet 100 percent of
their respective net liabilities.

USAIG has a reinsurance program for its members. Companies
participating in the USAIG reinsurance program are all rated A or
higher by A.M. Best. Reinsurance recoverables on behalf of
unauthorized reinsurers participating in the pool are backed by
Letters of Credit and trust funds from these reinsurers.

The pool has two governing committees to which each member

company may appoint a representative. The General Policy
Committee meets periodically to review, among other things,
reinsurance credit exposure, trends in the reinsurance marketplace

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

and to evaluate exceptions to the approved reinsurer list that may
arise. The Advisory Council, which includes all member companies,
meets annually.

The managers of USAIG issue policies in the name of one or

more of the member companies. All business written in
The Cincinnati Insurance Company name is treated in the
Company’s accounts as direct premium and losses and is then
ceded to USAIG. For the years ended December 31, 2001, 2000
and 1999, direct business earned and then ceded was $57 million,
$39 million and $27 million, while direct losses and LAE incurred
and then ceded were $314 million, $7 million and $14 million,
respectively. The Company then assumed its contracted share of
the pool’s operating results. CFC’s participation share for policy
years 2001, 2000 and 1999 was 10 percent, resulting in USAIG-
related underwriting losses of $3 million, $2 million and $2
million for the years ending December 31, 2001, 2000 and 1999,
respectively. The 2001 underwriting loss included $4 million
related to the events of September 11, 2001, and the American
Airlines flight 587 accident in Queens, New York in November 2001.
Since The Cincinnati Insurance Company was named as the
designated insurer for American Airlines policy year 2000 business,
the gross losses and recoverables resulting from all American
Airlines accidents were recorded on its 2001 financial statements.
Management expects to recover 100 percent of the reinsurance
recoverables associated with these accidents.
SIGNIFICANT ACCOUNTING POLICIES
Property Casualty Insurance Loss 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.

The Company monitors trends in the industry, relevant court

cases, current legislative activity and other current events in an
effort to ascertain new or additional exposures to loss. For example,
the $110 million IBNR reserve, net of reinsurance, established in
2000 for past uninsured and underinsured motorist losses incurred
but not yet reported, was the result of two Ohio Supreme Court
decisions. The court rulings affected all auto insurers in the state,
and Cincinnati acted conservatively to clear the way for long-term
performance improvements benefiting shareholders and

policyholders. Prior to the establishment of the reserve, the Company
incurred losses in 2000 and 1999 of $28 million and $12 million,
respectively, related to these uninsured motorist claims. In 2001,
the Company identified $54 million of case reserves for these
exposures, leaving $56 million of IBNR. Management believes
that the remaining reserves are adequate for losses incurred, but
not yet reported.

Insurance loss reserves are affected directly by management’s
reserving philosophy. The Company’s claims management team has
an average of 23 years of experience in the industry and 20 years of
experience with the Company. The Company’s outside actuary
provides management with an opinion regarding the acceptable
range for adequate reserves based on generally accepted actuarial
guidelines. Historically, the Company has established adequate
reserves, falling in the upper half of the actuary’s recommended
range. However, if the Company were slow to recognize and
respond to unusual claim and loss patterns, such as those caused by
the risk factors cited in the Company’s safe harbor statement, it
could lead to a rise in IBNR due to the expectation of higher losses.
Higher IBNR would lead to a higher loss and LAE ratio; each
percentage point increase in the loss and LAE ratio would reduce
operating income by $21 million, pre-tax (based on 2001 net
earned premiums). Adjustments to prior years could be material.
Life Insurance Policy Reserves

Policy reserves for traditional life insurance policies 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.
Management uses standard mortality rates for its policies and
conservative withdrawal rates. Estimates of future earnings are based
on long-term interest rates that range from 3 percent to 7 percent.
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. Interest rates on approximately $471 million of such
reserves are periodically adjusted based upon market conditions.
Assuming a 1 percent increase or decrease in each of the assumed
rates, the effect on these policy reserves would range from an
increase of $5 million to a decrease of $5 million, respectively.
Asset Impairment

The Company’s Asset Impairment Committee continually
monitors investments and other assets that have fair values that are
less than carrying amounts for signs of other-than-temporary
impairment. Factors such as the amount and timing of declines in
fair values, the significance of the declines, the length of time (six to
nine months) of the declines, duration of fixed-maturity securities,
and interest payment defaults, among others, are considered when
determining investment impairment. Invested assets and property
and equipment are monitored for signs of impairment such as

Back to table of contents

(cid:2)
Cincinnati Financial Corporation and Subsidiaries

significant decreases in market value of assets, changes in legal
factors or in the business climate, an accumulation of costs in
excess of the amount originally expected to acquire or construct an
asset, or other such factors indicating that the carrying amount may
not be recoverable.

Fixed maturities (bonds and notes) and equity securities
(common and preferred stocks) are classified as available-for-sale
and recorded at fair value in the financial statements.

Unrealized gains and losses on investments held as available for

sale, net of taxes, are included in shareholders’ equity as
accumulated other comprehensive income. Other-than-temporary
declines in the fair value of investments are recognized in earnings
when facts and circumstances indicate such write-downs are
warranted.

During the years ended December 31, 2001, 2000 and 1999,

the Company had realized losses amounting to $105 million,
$118 million and $70 million, which compared with realized
gains of $80 million, $116 million and $69 million, respectively.
At December 31, 2001, there were unrealized losses in the

investment portfolio amounting to approximately $83 million
and unrealized gains of $4.190 billion, net of tax. Given current
market conditions, the Company could record additional other-
than-temporary impairments during 2002.
RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 of the Notes to the Consolidated Financial Statements

for a description of recently issued accounting pronouncements.
The impact of adopting new accounting pronouncements will not
materially affect the Company’s financial condition or results of
operations.
RELATED-PARTY TRANSACTIONS

Related-party transactions are covered in detail in the

Company’s Proxy Statement dated March 8, 2002. The related-
party transactions consist primarily of commissions paid to agents
of the Company who also are directors of the Company or its
subsidiaries. In total, these commissions represented less than
4 percent of the commissions paid by the Company’s insurance
subsidiaries in 2001.

S E L E C T E D QUA RT E R LY F I N A N C I A L D ATA (Unaudited)

Cincinnati Financial Corporation and Subsidiaries

(dollars in millions 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) ..........

Quarter
Revenues............................................................
Income before income taxes ..............................
Net income........................................................
Net income per common share (basic) ..............
Net income per common share (diluted) ..........

___________________

1st
$ 618
97
72
.45
.44

___________________

1st
$ 571
104
79
.49
.48

___________________

2nd
$ 645
51
49
.30
.30

___________________

2nd
$ 579
97
75
.46
.45

___________________

2001
3rd
$ 644
34
36
.22
.22

2000
3rd
$ 600

___________________

(9)*
6*
.03*
.03*

___________________

4th
$ $ 654
39
36
.23
.22

___________________

4th
$ 581
(83)
(41)
(.26)
(.26)

Note: The sum of the quarterly reported amounts may not equal the full year as each is computed independently.

*Third-quarter and full-year 2000 results include a one-time net charge for asset impairment of $39 million, before tax; $25 million,
or 16 cents per share, net of tax.

____________________

Full Year
$2,561
221
193
1.20
1.19

____________________

Full Year
$2,331
109*
118*
.74*
.73*

Back to table of contents

(cid:2)
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 TAT 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, 2001 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, 2001, and their
report is included herein. The auditors meet with members of
the Audit Committee of the Board of Directors to discuss the
results of their examination and are afforded the opportunity to
present their opinions in the absence of management personnel
with respect to the adequacy of internal controls and the quality
of financial reporting of the Company.

I N D E P E N D E N T AU D I TO R S ’ R E P O RT

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, 2001 and 2000 and the related consolidated
statements of income, shareholders’ equity and cash flows for
each of the three years in the period ended December 31, 2001.
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, 2001 and 2000 and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.

Cincinnati, Ohio
February 6, 2002

Back to table of contents

(cid:2)
C O N S O L I D AT E D B A L A N C E S H E E T S

Cincinnati Financial Corporation and Subsidiaries

(dollars in millions except per share data)

A S S E T S
Investments

Fixed maturities, at fair value (amortized cost: 2001–$3,012;

2000–$2,803)............................................................................

Equity securities, at fair value (cost: 2001–$2,174;

2000–$2,068)............................................................................
Other invested assets ......................................................................
Cash..................................................................................................
Investment income receivable............................................................
Finance receivable ..............................................................................
Premiums receivable ..........................................................................
Reinsurance receivable ........................................................................
Prepaid reinsurance premium..............................................................
Deferred policy acquisition costs..........................................................
Property and equipment, net, for Company use

(accumulated depreciation: 2001-$135; 2000-$124)....................
Other assets ..........................................................................................
Separate accounts................................................................................
Total assets..............................................................................

L I A B I L I T I E S
Insurance reserves

Losses and loss expenses................................................................
Life policy reserves........................................................................
Unearned premium............................................................................
Other liabilities ..........................................................................
Deferred income tax..........................................................................
Notes payable....................................................................................
6.9% senior debenture due 2028............................................................
5.5% convertible senior debenture due 2002........................................
Separate accounts................................................................................
Total liabilities..........................................................................

S H A R E H O L D E R S ’ E Q U I T Y
Common stock, par value–$2 per share; authorized 200 million shares;
issued: 2001–175 million shares; 2000–173 million shares ..........
Paid-in capital....................................................................................
Retained earnings ..............................................................................
Accumulated other comprehensive income–unrealized gains

on investments and derivatives........................................................

Less treasury stock at cost (2001–13 million shares;

2000–12 million shares)..................................................................
Total shareholders’ equity..........................................................
Total liabilities and shareholders’ equity..................................

Accompanying notes are an integral part of this statement.

Back to table of contents

December 31,

2001
_____________

2000
_____________

$ 3,010

$ 2,721

8,495
66
93
93
27
732
515
28
286

125
99
390
_____________
$13,959
_____________
_____________

$ 2,932
674
1,062
293
2,001
183
420
6
390
_____________
7,961
_____________

350
284
1,678

4,113
_____________
6,425

(427)
_____________
5,998
_____________
$13,959
_____________
_____________

8,526
69
60
86
31
652
215
15
259

122
173
358
_____________
$13,287
_____________
_____________

$ 2,473
605
922
257
2,058
170
420
29
358
_____________
7,292
_____________

346
254
1,620

4,156
_____________
6,376

(381)
_____________
5,995
_____________
$13,287
_____________
_____________

(cid:2)
C O N S O L I D AT E D S TAT E M E N T S O F I N C O M E

Cincinnati Financial Corporation and Subsidiaries

(dollars in millions except per share data)

R E V E N U E S

Net earned premiums

Property casualty........................................................
Life..............................................................................
Accident health........................................................
Net earned premiums............................................
Net investment income......................................................
Realized losses on investments......................................
Other income..............................................................
Total revenues..........................................................

B E N E F I T S A N D E X P E N S E S

Insurance losses and policyholder benefits ....................
Commissions................................................................
Other operating expenses....................................................
Taxes, licenses and fees......................................................
Increase in deferred policy acquisition costs..................
Interest expense..................................................................
Other expenses ............................................................
Asset impairment–software written off..........................
Total benefits and expenses....................................

I N C O M E B E F O R E I N C O M E TA X E S ..............................

P R O V I S I O N ( B E N E F I T ) F O R I N C O M E TA X E S

Current............................................................................
Deferred......................................................................
Total provision (benefit) for income taxes..............

N E T I N C O M E ......................................................................

P E R C O M M O N S H A R E

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

2001
___________

$2,071
77
4
___________
2,152
421
(25)
13
___________
2,561
___________

1,663
392
184
72
(27)
39
17
–
___________
2,340
___________

221
___________

62
(34)
___________
28
___________

$ 193
___________
___________

$ 1.20
___________
___________
$ 1.19
___________
___________

Years Ended December 31,
2000
___________

1999
___________

$1,827
77
3
___________
1,907
415
(2)
11
___________
2,331
___________

1,581
351
172
56
(33)
37
19
39
___________
2,222
___________

109
___________

(11)
2
___________
(9)
___________

$ 118
___________
___________

$ .74
___________
___________
$ .73
___________
___________

$1,657
66
9
___________
1,732
387
(1)
10
___________
2,128
___________

1,254
316
152
60
(17)
33
8
–
___________
1,806
___________

322
___________

77
(10)
___________
67
___________

$ 255
___________
___________

$ 1.55
___________
___________
$ 1.52
___________
___________

Accompanying notes are an integral part of this statement.
36

Back to table of contents

(cid:2)
C O N S O L I D AT E D S TAT E M E N T S O F S H A R E H O L D E R S ’ E QU I T Y

Cincinnati Financial Corporation and Subsidiaries

(dollars in millions)

Balance, December 31, 1998 ....

Common
Stock
$ 341

_________________

Treasury
Stock
$ (97)

_________________

Paid-In
Capital
$ 218

_________________

Retained
Earnings
$1,481

_________________

Accumulated
Other
Comprehensive
Income
$3,678

_________________

Total
Shareholders’
Equity
$5,621

_________________

Net income................................
Change in accumulated other

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

comprehensive income, net..
Comprehensive income..............
Dividends declared ....................
Purchase/issuance of

treasury shares......................
Stock options exercised..............
Conversion of debentures..........
Balance, December 31, 1999......

Net income ..............................
Change in accumulated other

comprehensive income, net..
Comprehensive income..............
Dividends declared ....................
Purchase/issuance of

treasury shares ....................
Stock options exercised..............
Conversion of debentures..........
Balance, December 31, 2000......

Net income ..............................
Change in accumulated other

comprehensive income, net..
Comprehensive income ............
Dividends declared ....................
Purchase/issuance of

treasury shares ....................
Stock options exercised..............
Conversion of debentures..........
Balance, December 31, 2001......

1
2
344

_________________

(217)

_________________

(314)

6
13
237

_________________

1
1
346

_________________

(67)

_________________

(381)

10
7
254

_________________

1
3
$ 350

_________________

_________________
_________________

(46)

_________________

$ (427)

_________________
_________________

10
20
$ 284

_________________

_________________
_________________

255

(112)

(148)

_________________

1,624

3,530

118

(122)

626

_________________

1,620

4,156

193

(135)

(43)

_________________

$1,678

_________________
_________________

_________________

$4,113

_________________
_________________

255

_________________

(148)
107
(112)

(217)
7
15
5,421

_________________

118

_________________

626
744
(122)

(67)
11
8
5,995

_________________

193

_________________

(43)
150
(135)

(46)
11
23
$5,998

_________________

_________________
_________________

Accompanying notes are an integral part of this statement.

Back to table of contents

(cid:2)
C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L OW S

Cincinnati Financial Corporation and Subsidiaries

(dollars in millions)

Cash flows from operating activities:

Net income ................................................................................
Adjustments to reconcile net income to net
cash provided by operating activities:

Depreciation and amortization........................................
Realized loss on investments..............................................
Asset impairment-software written off..............................
Interest credited to contract holders..................................
Changes in:

Investment income receivable....................................
Premiums and reinsurance receivable..........................
Deferred policy acquisition costs................................
Other assets ....................................................................
Loss and loss expense reserves ......................................
Life policy reserves......................................................
Unearned premiums....................................................
Other liabilities............................................................
Current income tax ....................................................
Deferred income tax ....................................................
Net cash provided by operating activities....................

(7)
(399)
(27)
37
459
44
140
22
43
(34)
540

2001

______________

$ 193

25
25
–
19

Years Ended December 31,
2000

______________

$ 118

18
2
39
24

1999

______________

$ 255

16
1
–
20

______________

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 property and equipment....................................
Investment in finance receivables............................................
Investment in other invested assets..........................................
Net cash used in investing activities..........................

35
218
223
16
(531)
(295)
(15)
(12)
2
(359)

______________

Cash flows from financing activities:

Payment of cash dividends to shareholders ..............................
Purchase/issuance of treasury shares......................................
Increase in notes payable..........................................................
Proceeds from stock options exercised ....................................
Contract holder funds deposited ............................................
Contract holder funds withdrawn ..........................................
Net cash used in provided by financing activities........
Net increase (decrease) in cash......................................................
Cash at beginning of year................................................................
Cash at end of year......................................................................
Supplemental disclosures of cash flow information:

Interest paid............................................................................
Income taxes paid..................................................................
Conversion of 5.5% senior debentures to common stock ......
Conversion of fixed maturity to equity security investments..

(132)
(44)
13
9
24
(18)
(148)
33
60
$ 93

______________

______________
______________

(119)
(67)
52
11
19
(32)
(136)
(279)
339
$ 60

______________

______________
______________

(110)
(217)
118
7
19
(28)
(211)
281
58
$ 339

______________

______________
______________

$ 41
9
24
51

$ 40
33
7
12

$ 32
55
15
83

Supplemental disclosure of noncash activity - During 2000, the Company established a separate account. This resulted in a noncash transfer to
the separate account of the following: $301 from investments, $308 from life policy reserves, $11 from cash, $8 from accounts receivable/payable
securities, $5 from investment income receivable and $1 from other liabilities.

Accompanying notes are an integral part of this statement.
38

Back to table of contents

(11)
(153)
(33)
(72)
319
42
85
53
(63)
2
370

4
302
294
15
(796)
(272)
(44)
(13)
(3)
(513)

(3)
(65)
(17)
2
99
316
47
15
21
(10)
697

62
316
197
16
(423)
(246)
(102)
(17)
(8)
(205)

(cid:2)
N OT E S TO C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

Cincinnati Financial Corporation and Subsidiaries

All dollar amounts in millions, except share data, unless
otherwise stated.

1 . S U M M A R Y O F S I G N I F I C A N T A C C O 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,
primarily in the Midwest and Southeast regions of the United
States of America through a network of local independent agents.
Insurance products include fire, automobile, casualty, bonds
and all related forms of property casualty insurance as well as
life insurance, long term care, disability income 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 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. The portion of
written premiums applicable to the unexpired terms of the
policies is recorded as unearned premiums. 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 – Premiums for traditional life insurance and
certain life contingent annuities are recognized as secure when
due. 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 percent to
7 percent.

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. Interest rates on approximately $471 and $414
of such reserves at December 31, 2001 and 2000, respectively,
are periodically adjusted based upon market conditions.

Accident 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), including embedded
derivatives, are classified as available for sale and are stated at fair
values. The Company now accounts for the fair value of embedded
derivatives separately in its consolidated balance sheets.

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.

Derivative Financial Instruments and Hedging Activities –

The Company invests in certain financial instruments that
contain embedded options, such as convertible debt and
convertible preferred stock. The Company also entered into an
interest rate swap agreement as a cash flow hedge during 2001 in
order to fix an interest rate related to certain of its variable rate
debt obligations ($31 notional amount). Upon adoption of
Statement of Financial Accounting Standards (SFAS) No. 133
“Accounting for Derivative Financial Instruments and Hedging
Activities,” as amended, on January 1, 2001, changes in the fair
value of the Company’s derivative financial instruments and its
interest rate swap agreement began to be either recognized
periodically in income or shareholders’ equity (as a component
of accumulated other comprehensive income). Neither the
adoption of SFAS No. 133 nor any subsequent changes in fair
values of these instruments have had a significant impact on the
accompanying consolidated financial statements.

Back to table of contents

(cid:2)
N OT E S TO C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S (continued)

Cincinnati Financial Corporation and Subsidiaries

Property and Equipment – Property and equipment is at cost
less accumulated depreciation. The Company provides depreciation
based on estimated useful lives using straight-line and accelerated
methods. Depreciation expense recorded in 2001, 2000 and
1999 was $25, $20 and $18, respectively. The Company reviews
property and equipment for impairment whenever events or
changes in circumstances, such as significant decreases in market
values of assets, changes in legal factors or in the business climate,
an accumulation of costs significantly in excess of the amount
originally expected to acquire or construct an asset, or other such
factors indicate that the carrying amount may not be recoverable.
The Company capitalizes costs related to computer software
developed for internal use during the application development
stage of software development projects. These costs generally
consist of certain external, payroll and payroll-related costs.
During 2000, the Company wrote off $39 of previously
capitalized costs related to the development of next-generation
software to process property casualty policies.

Federal Income Taxes – Deferred income 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
income taxes associated with unrealized appreciation (except
the amounts related to the effect of income tax rate changes)
are charged to shareholders’ equity in accumulated other
comprehensive income, 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’ claims 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 the
Company’s 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.

New Accounting Pronouncements – On June 29, 2001,
SFAS No. 141 “Business Combinations” was approved by the
Financial Accounting Standards Board (FASB). The Company’s
adoption of SFAS No. 141 on July 1, 2001 had no effect on its
consolidated financial statements.

On June 29, 2001, SFAS No. 142 “Goodwill and Other
Intangible Assets” was approved by the FASB. SFAS No. 142
changes the accounting for goodwill from an amortization method
to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations,
will cease upon adoption of this statement. The Company is
required to implement SFAS No. 142 on January 1, 2002.
The Company does not expect that SFAS No. 142 will have
a material effect on its consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144 “Accounting

for the Impairment or Disposal of Long-Lived Assets.”
SFAS No. 144 addresses financial accounting and reporting for
the impairment of long-lived assets and for long-lived assets to
be disposed of. It supersedes SFAS No. 121 “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of,” while retaining the fundamental provisions of
Statement No. 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and
(b) measurement of long-lived assets to be disposed of by sale.
It also supersedes the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30 “Reporting the
Results of Operations - Reporting the Effects of Disposal of a
Segment of Business, and Extraordinary, Unsual and
Infrequently Occurring Events and Transactions.”

Back to table of contents

(cid:2)
Cincinnati Financial Corporation and Subsidiaries

The Company does not expect these standards will have a
material effect on its consolidated financial statements.

Reclassifications – Certain prior year amounts have been

reclassified to conform with current-year classifications.

2 . I N V E S T M E N T S

Investment income summarized

by investment category:

Interest on fixed maturities......
Dividends on equity securities
Other investment income........
Total ....................................
Less investment expenses..........
Net investment income..........

Years Ended December 31,
2000

___________

1999

___________

2001

___________

$ 226
193
7
426
5
$ 421

___________

___________
___________

___________

$ 222
186
11
419
4
$ 415

___________

___________
___________

___________

$ 219
165
8
392
5
$ 387

___________

___________
___________

Realized (losses) gains on investments
summarized by investment category:

Fixed maturities:

Gross realized gains................
Gross realized losses..............

Equity securities:

Gross realized gains................
Gross realized losses..............
Embedded derivatives ..........
Realized losses on

investments........................

Change in unrealized (losses) gains
on investments summarized by
investment category:

Fixed maturities ......................
Equity securities......................
Change in unrealized (losses)
gains on investments..........

$ 6
(73)

65
(32)
9

___________

$ 8
(76)

108
(42)
–

___________

$ 11
(49)

58
(21)
–

___________

$ (25)

___________
___________

$ (2)

___________
___________

$ (1)

___________
___________

$ 79
(145)

___________

$ (66)

___________
___________

$ (7)
969

___________

$ 962

___________
___________

$(204)
(23)

___________

$(227)

___________
___________

Contractual maturity dates for investments in fixed maturity

securities as of December 31, 2001:

Amortized
Cost

___________________

Fair
Value

___________________

% of
Fair Value

___________________

Maturity dates occurring:

One year or less.......................... $ 168
After one year through five years
720
After five years through ten years
975
After ten years ............................
1,149
Total........................................ $3,012

____________

______________
______________

$ 169
721
958
1,162
$3,010

____________

______________
______________

5.6
24.0
31.8
38.6
100.0

__________

___________
___________

Actual maturities may differ from contractual maturities
when there exists a right to call or prepay obligations with
or without call or prepayment penalties.

At December 31, 2001, investments with a cost of $63 and

fair value of $64 were on deposit with various states in
compliance with certain regulatory requirements.

Analysis of cost or amortized cost, gross unrealized gains,

gross unrealized losses and fair value as of December 31:

2001
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 ........

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

Cost or

Gross
Amortized Unrealized Unrealized
Gains

Losses

Gross

Cost

______________

Fair
Value

______________

$1,013

$ 37

$ 8

$1,042

69
115

1,811

______________

$3,012

______________
______________

$2,174

______________
______________

6
3

4
3

–

71
115

1,777

______________

$ 104

______________
______________

$6,342

______________
______________

______________

$ 106

______________
______________

$ 21

______________
______________

$3,010

______________
______________

$8,495

______________
______________

$ 947

$ 38

$ 2

$ 983

77
81

1
3

–

10
1

68
83

–

______________

1,691
$2,803

______________
______________

______________

40
$ 82

______________
______________

______________

151
$ 164

______________
______________

______________

1,580
$2,721

______________
______________

Equity securities ........

$2,068

______________
______________

$6,518

______________
______________

$ 60

______________
______________

$8,526

______________
______________

The fair value of the conversion features embedded in convertible

securities amounted to $9 at December 31, 2001.

Investments in companies that exceed 10 percent of the Company’s

shareholders’ equity include the following as of December 31:

Fifth Third Bancorp
common stock......
Alltel Corporation
common stock......

_________________________________________

2001

_________________________________________

2000

Cost

___________________

Fair Value

___________________

Cost

___________________

Fair Value

___________________

$ 283

$4,464

$ 269

$4,330

$ 119

$ 813

$ 119

$ 823

Back to table of contents

(cid:2)
N OT E S TO C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S (continued)

Cincinnati Financial Corporation and Subsidiaries

3 . D E F E R R E D A C Q U I S I T I O N C O S T S

Acquisition costs incurred and capitalized during 2001, 2000

and 1999 amounted to $481, $438 and $382, respectively.
Amortization of deferred acquisition costs was $454, $405 and
$365 for 2001, 2000 and 1999, respectively.

4 . PROPERTY CASUALTY LOSSES AND LOSS EXPENSES
Activity in the reserve for losses and loss expenses is summarized

as follows:

Balance at January 1..................
Less reinsurance receivable....
Net balance at January 1 ..........
Incurred related to:

Current year..........................
Prior years ............................
Total incurred ..........................
Paid related to:

Current year..........................
Prior years ............................
Total paid..................................
Net balance at December 31......
Plus reinsurance receivable......
Balance at December 31........

_____________

Years Ended December 31,
1999
2000
$1,978
$2,093
138
161
1,840
1,932

2001
$2,401
219
2,182

_____________

1,653
(62)
1,591

_____________

1,528
(20)
1,508

_____________

1,304
(116)
1,188

_____________

724
697
1,421
2,352
513
$2,865

_____________

_____________
_____________

_____________

667
591
1,258
2,182
219
$2,401

_____________

_____________
_____________

_____________

574
522
1,096
1,932
161
$2,093

_____________

_____________
_____________

As a result of changes in estimates of insured events in prior

years, the provision for losses and loss expenses decreased by
$62, $20 and $116 in 2001, 2000 and 1999. 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 $67 and $72 at December 31, 2001
and 2000, 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 R V 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 as of December 31:

Ordinary/traditional life ........................................
Universal life ..........................................................
Annuities ..............................................................
Industrial ..............................................................
Other....................................................................
Total ....................................................................

__________

2001
$184
272
199
15
4
$674

__________

__________
__________

__________

2000
$171
251
163
15
5
$605

__________

__________
__________

At December 31, 2001 and 2000, the fair value associated with
the annuities shown above approximated $213 and $179, respectively.

6 . N O T E S PAYA B L E

The Company and subsidiaries had no compensating balance

requirement on debt for either 2001 or 2000. The Company
had two lines of credit with commercial banks amounting to $275
in 2001 (expiring in 2002) and $225 in 2000, of which $183
and $170 were in use at December 31, 2001 and 2000. Interest
rates charged on such borrowings ranged from 2.32 percent to
7.40 percent during 2001, which resulted in an average interest
rate of 5.27 percent. At December 31, 2001, the fair value of the
notes payable approximated the carrying value and the weighted
average interest rate approximated 4.34 percent.

The Company entered an interest rate swap agreement during

2001, which expires in 7 years, to hedge future cash flows
(thereby obtaining a fixed interest rate) related to certain variable
rate debt obligations ($31 notional amount). This swap is
reflected at fair value in the accompanying balance sheet and the
unrealized loss at December 31, 2001, which is insignificant, is a
component of comprehensive income. The Company does not
expect any significant amounts to be reclassified into earnings as
a result of interest rate changes in the next 12 months.

7 . S E N I O R D E B E N T U R E S

The Company issued $420 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 per share (67.23 shares for each one
thousand dollars principal). At December 31, 2001 and 2000, the fair
value of the debentures approximated $415 and $450, respectively.

8 . S H A R E H O L D E R S ’ E Q U I T Y A N D D I V I D E N D

R E S T R I C T I O N S
The insurance subsidiaries paid cash dividends to the Company
of approximately $100, $100 and $175 in 2001, 2000 and 1999,
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 percent of statutory surplus or 100 percent
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 2002, the total dividends that may be paid
to the Company without regulatory approval are approximately $257.
One million shares of common stock were available for future

stock option grants, as of December 31, 2001.

The Company’s Board of Directors has authorized the repurchase
of outstanding shares. At December 31, 2001, 7.9 million shares
remain authorized for repurchase at any time in the future.
The Company has purchased 13.0 million shares at a cost of
$423 million between the inception of the share repurchase
program in 1996 and December 31, 2001.

Back to table of contents

(cid:2)
Cincinnati Financial Corporation and Subsidiaries

Declared cash dividends per share were $.84, $.76 and $.68 as

The provision for federal income taxes is based upon a

of December 31, 2001, 2000 and 1999, respectively.

Accumulated other comprehensive income – The change

consolidated income tax return for the Company and subsidiaries.
The differences between the statutory federal rates and the

in unrealized gains on investments and derivatives included:

Company’s effective federal income tax rates are as follows:

Unrealized holding (losses) gains on
securities and derivatives arising
during the period..................................

Reclassification adjustment:

Net realized loss on investments ..........
Income taxes on above ..............................
Change in unrealized (losses) gains

2001

___________

2000

___________

1999

___________

$(100)

$ 960

$(228)

34
23

___________

2
(336)

___________

1
79

___________

Tax at statutory rate............................
Increase (decrease) resulting from:

Tax-exempt municipal bonds ........
Dividend exclusion........................
Other ............................................
Effective rate......................................

_____________

2001
35.0%

_____________

2000
35.0%

_____________

1999
35.0%

(7.9)
(16.0)
1.6
12.7%

_____________

_____________
_____________

(15.1)
(30.4)
1.6
(8.9)% 20.8%

(5.1)
(9.2)
.1

_____________

_____________
_____________

$ 626
on securities and derivatives, net..........
Income taxes relate to each component above ratably.

$ (43)

___________
___________

$(148)

___________
___________

9 . R E I N S U R A N C E

Property casualty premium income in the accompanying
statements of income includes approximately $38, $34 and
$37 of earned premiums on assumed business and is net of
approximately $155, $108 and $96 of earned premiums on
ceded business for 2001, 2000 and 1999, respectively.

Written premiums consist of the following:

Direct........................................
Assumed ..................................
Ceded ......................................
Net ........................................

_____________

Years Ended December 31,
1999
2000
$1,764
$1,987
37
36
(94)
(99)
$1,707
$1,924

2001
$2,315
41
(168)
$2,188

_____________

_____________
_____________

Insurance losses and policyholder benefits in the

accompanying statements of income are net of approximately
$422, $109 and $63 of reinsurance recoveries for 2001, 2000
and 1999, respectively.

1 0 . F E D E R A L I N C O M E TA X E S

Significant components of the Company’s net deferred tax

liability are as follows as of December 31:

2001

______________

2000

______________

Deferred tax liabilities:

Unrealized gains on investments and
derivatives ..................................................
Deferred acquisition costs ............................
Other..............................................................
Total..............................................................

Deferred tax assets:

Losses and loss expense reserves....................
Unearned premiums....................................
Life policy reserves........................................
Tax credit carryforward ................................
Other..............................................................
Total..............................................................
Net deferred tax liability....................................

$2,208
100
26
2,334

______________

187
83
20
9
34
333
$2,001

______________

______________
______________

$2,232
82
28
2,342

______________

178
64
19
10
13
284
$2,058

______________

______________
______________

No provision has been made (at December 31, 2001, 2000
and 1999) for federal income taxes on approximately $14 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.

1 1 . N E T I N C O M E P E R C O M M O N S H A R E

Basic earnings per share is computed based on the weighted

average number of shares outstanding. Diluted earnings per
share is computed based on the weighted average number of
common and dilutive potential common shares outstanding.
For the Company, dilutive potential common shares consist
of outstanding stock options and shares issuable under its
5.5 percent convertible senior debentures (debentures). The
computations of basic and diluted earnings per share are as follows:

Years Ended December 31,
2000

1999

___________

2001

___________

Numerator:

Net income (basic) ..................
Effect of debentures..................
Net income (diluted) ................

Denominator (in millions):

Weighted average common

$ 193
1
$ 194

___________

___________
___________

$ 118
1
$ 119

___________

___________
___________

$ 255
1
$ 256

___________

___________
___________

shares outstanding................

161

Effect of:

Debentures ..........................
Stock options ........................

Adjusted weighted average

shares ....................................

Earnings per share:

Basic........................................

Diluted....................................

1
–

___________

162

___________
___________

$1.20

___________
___________

$1.19

___________
___________

161

2
1

___________

164

___________
___________

$ .74

___________
___________

$ .73

___________
___________

165

2
2

___________

169

___________
___________

$1.55

___________
___________

$1.52

___________
___________

Options to purchase 1 million shares of common stock were
outstanding during 2001, 2000 and 1999, 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.

Back to table of contents

(cid:2)
N OT E S TO C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S (continued)

Cincinnati Financial Corporation and Subsidiaries

1 2 . P E N S I O N P L A N

The Company and subsidiaries sponsor a defined

contribution plan (401(k) savings plan) and a defined benefit
pension plan covering substantially all employees. Benefits for
the defined benefit plan 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:

Years Ended December 31,
2000

2001

___________

Change in benefit obligation:

Benefit obligation at beginning of year........
Service cost ................................................
Interest cost....................................................
Actuarial loss (gain)....................................
Benefits paid ..............................................
Benefit obligation at end of year..................

Change in plan assets:

Fair value of plan assets at beginning
of year........................................................
Actual return on plan assets........................
Benefits paid ..............................................
Fair value of plan assets at end of year ........

Funded status:

Funded status at end of year........................
Unrecognized net actuarial gain..................
Unrecognized net transitional asset..............
Unrecognized prior service cost..................
Prepaid (accrued) pension cost ..................

$ 88
6
7
8
(3)
$106

__________

__________
__________

$ 76
5
6
6
(5)
$ 88

__________

__________
__________

$160
(10)
(3)
$147

__________
__________

00-0

$148
17
(5)
$160

__________
__________

00-0

$ 41
(43)
(2)
9
$ 5

__________

__________
__________

$ 72
(76)
(2)
9
$ 3

__________

__________
__________

The fair value of the Company’s stock comprised $22 and $23
of the plan’s assets at December 31, 2001 and 2000, respectively.

The following summarizes the assumptions for the plan:

Discount rate............................................
Expected return on plan assets ..................
Rate of compensation increase ..................

______________

Years Ended December 31,
2000
7.25%
8.00
5–7

2001
7.00%
8.00
5-7

______________

The components of the net periodic benefit cost are as follows:

___________

Years Ended December 31,
2000
$ 5
6
(11)
(3)
$ (3)

1999
$ 5
5
(9)
(1)
–

2001
$ 6
7
(12)
(3)
$ (2)

_________

_________
_________

Service cost ..................................
Interest cost..................................
Expected return on plan assets ....
Amortization of actuarial gain......
Net pension expense ....................

1 3 . S TAT U T O R Y A C C O 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.

The National Association of Insurance 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, became 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, required adoption of the
Codification with certain modifications for the preparation of
statutory financial statements effective January 1, 2001. The
following table reconciles consolidated net income for the years
ended December 31, and shareholders’ equity at December 31,
as reported herein in conformity with GAAP, with total statutory
net income and capital and surplus of the Company’s insurance
subsidiaries prepared in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory
authorities:

Balance per GAAP ....................................
Deferred policy acquisition costs................
Deferred income taxes ................................
Income from derivatives............................
Parent company and undistributed net

income of certain subsidiaries ................
Other........................................................
Balance per statutory accounting practices

Balances by major business type:
Property casualty insurance........................
Life insurance ..............................................

Balance per GAAP..........................................
Deferred policy acquisition costs....................
Deferred income taxes ..................................
Parent company and undistributed net

income of certain subsidiaries......................
Reserves and non-admitted assets ................
Other ..............................................................
Balance per statutory accounting practices....

Balances by major business type:
Property casualty insurance............................
Life insurance................................................

__________

Net Income
2000
$118
(33)
5
–

__________

2001
$193
(27)
(30)
(5)

__________

1999
$255
(17)

–

(49)
22
$104

__________

__________
__________

$ 89
15
$104

__________

__________
__________

(39)
14
$ 65

__________

__________
__________

$ 35
30
$ 65

__________

__________
__________

(53)
46
$231

__________

__________
__________

$210
21
$231

__________

__________
__________

______________

Shareholders’ Equity
2000
2001
$5,995
$5,998
(259)
(286)
687
140

______________

(3,127)
(141)
(51)
$2,533

______________

______________
______________

(3,078)
(110)
(63)
$3,172

______________

______________
______________

$2,153
380
$2,533

______________

______________
______________

$2,761
411
$3,172

______________

______________
______________

Back to table of contents

(cid:2)
Cincinnati Financial Corporation and Subsidiaries

Adopting the Codification reduced statutory capital and
surplus as of January 1, 2001 by $392 for the property casualty
insurance subsidiaries and $62 for the life insurance subsidiary.

1 4 . T R A N S A C T I O N S W I T H A F F I L I AT E D PA R T I E S

The Company paid certain officers and directors, or insurance
agencies of which they are shareholders, commissions of approximately
$14, $14 and $13 on premium volume of approximately $95,
$87 and $83 for 2001, 2000 and 1999, respectively.

1 5 . C O N T I N G E N C I E S

Various litigation and claims against the Company and its
subsidiaries are in process and pending and principally result
from normal insurance activities. Based upon a review of open
matters with legal counsel, management believes that the outcomes
of such matters will not have a material effect upon the Company’s
consolidated financial position or results of operations.

1 6 . S T O 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 ten-year periods. The
Company applies APB Opinion 25 and related Interpretations
in accounting for these plans. Accordingly, no compensation
cost has been recognized for the stock option plans. Had
compensation cost for the Company’s stock option plans been
determined based on the fair value at the grant dates for awards
under those plans consistent with the method of SFAS No. 123,
the Company’s net income and earnings per share would have
been reduced to the pro forma amounts indicated below:

Net income

Net income per
common share

(basic)
Net income per
common share
(diluted)

As reported
Pro forma

___________

Years Ended December 31,
1999
2000
$ 255
$ 118
246
108

2001
$ 193
182

___________

$1.20
1.14

$1.19
1.13

$ .74
.67

$ .73
.66

$1.55
1.49

$1.52
1.47

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 2001, 2000 and 1999, respectively:
dividend yield of 2.20 percent, 2.11 percent and 2.36 percent;
expected volatility of 25.54 percent, 24.92 percent and
22.89 percent; risk-free interest rates of 5.54 percent, 5.30 percent
and 6.81 percent; 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 follows:

Years Ended December 31,

2001
Outstanding at beginning of year
Granted
Exercised
Forfeited/revoked
Outstanding at end of year

_____________________

Shares
6,153,218
1,132,200
(558,039)
(123,550)
6,603,829

____________________

____________________
____________________

Options exercisable at end of year
Weighted-average fair value of

options granted during the year

4,327,005

2000
Outstanding at beginning of year
Granted
Exercised
Forfeited/revoked
Outstanding at end of year

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

____________________

____________________
____________________

Options exercisable at end of year
Weighted-average fair value of

options granted during the year

3,694,725

1999
Outstanding at beginning of year
Granted
Exercised
Forfeited/revoked
Outstanding at end of year

4,940,591
1,011,800
(414,703)
(77,548)
5,460,140

____________________

____________________
____________________

Options exercisable at end of year
Weighted-average fair value of

options granted during the year

3,224,461

___________________________________

Weighted-Average
Exercise Price
$29.05
36.41
16.30
33.82
31.30

$13.31

$27.57
31.08
18.48
29.57
29.05

$10.56

$25.11
35.46
16.55
32.89
27.57

$14.40

Back to table of contents

(cid:2)
N OT E S TO C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S (continued)

Cincinnati Financial Corporation and Subsidiaries

Options outstanding and exercisable consisted of the following at December 31, 2001:

$0$$0$0000000000000000000000000000000__000000000000000000000

00000000000000000_000_000

Options Outstanding

Options Exercisable

Number

_________________________

Weighted-Average
Remaining
Contractual Life

______________________________________

Weighted-Average
Exercise Price

____________________________________

Number

__________________________

Weighted-Average
Exercise Price

____________________________________

195,295
433,509
1,064,123
1,052,939
741,736
2,223,367
892,860
6,603,829

1.07 yrs
3.57 yrs
4.62 yrs
8.85 yrs
7.05 yrs
8.09 yrs
6.59 yrs
6.83 yrs

$13.43
18.93
21.26
29.60
33.62
35.50
42.78
$31.30

195,295
433,509
1,064,123
372,268
501,916
972,811
787,083
4,327,005

$13.43
18.93
21.26
29.41
33.63
34.44
43.07
$29.74

_________________________

______________________

_________________________

______________________

_________________________
_________________________

______________________
______________________

_________________________
_________________________

______________________
______________________

Range of
Exercise
Prices

_______________________________

$12.14 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

1 7 . 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.
Corporate and other identifiable assets are principally cash and marketable securities. Segment information, which Company
management regularly reviews to make decisions about allocating resources to the segments and assessing 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 of property casualty insurance.

________________

Years Ended December 31,
2000
$ 1,231
596
80
413
11
$ 2,331

________________

________________
________________

$ (225)*

1
379
(46)
109*

________________

________________
________________

________________

1999
$ 1,088
569
75
386
10
$ 2,128

________________

________________
________________

$ 3
(1)
356
(36)
$ 322

________________

________________
________________

$ 6,488
1,619
5,180
$13,287

________________

________________
________________

$ 5,800
1,442
4,566
$11,808

________________

________________
________________

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

________________

2001
$ 1,451
620
81
396
13
$ 2,561

________________

________________
________________

$ (92)
(1)
358
(44)
$ 221

________________

________________
________________

$ 6,954
1,752
5,253
$13,959

________________

________________
________________

*2000 results include a one-time net charge for asset impairment of $39 million, before tax.

Back to table of contents

(cid:2)
S U B S I D I A RY O F F I C E R S A N D D I R E C TO R S

As of December 31, 2001, Listed Alphabetically

CFC Investment Company (CFC-I)
The Cincinnati Casualty Company (CCC)
The Cincinnati Insurance Company (CIC)
The Cincinnati Indemnity Company (CID) 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 and Chief Insurance
Officer 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, CFC-I Senior Vice President-
Strategic Planning
CCC, CFC-I, CCM Director

Larry R. Plum, CPCU
CCC President
CIC, CID Senior Vice President-Personal Lines
CIC, CID, CCC, CLIC Director
David H. Popplewell, FALU, LLIF

J. Michael Dempsey, CLU

CLIC Vice President-Marketing

Todd H. Pendery, FLMI

CLIC Vice President-Corporate Accounting

Mark R. DesJardins, CPCU, AIM, AIC, ARP

Thomas J. Scheid

CIC, CID, CCC Vice President-Education & Training

CIC, CID, CCC, CLIC Vice President-Staff Underwriting

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 Technology

Harold L. Eggers, CLU, FLMI, FALU, HIA

CLIC Vice President-Life Policy Issue

Frederick A. Ferris

CIC, CID, CCC Vice President-Commercial Lines

John E. Field, CPCU
CIC, CID Director

Bruce S. Fisher, CPCU, AIC

CIC, CID, CCC Vice President-Claims

Craig W. Forrester, CLU

CIC, CID, CCC, CLIC Vice President-
Information Technology

Stephen C. Frechtling, FSA, MAAA, CLU, FLMI

CLIC Vice President-Actuarial

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

Don E. Schricker

CIC, CID, CCC Vice President-Personal Lines

Frank J. Schultheis
CIC, CID Director

Norman R. Settle

CIC, CID, CCC Senior Vice President-Administrative
Services/Machinery & Equipment Specialties/
Loss Control

Joan O. Shevchik, CLU, CPCU
CCC, CIC, CID Vice President-
Corporate Communications
J. B. Shockey, CPCU, CIC, CLU

CIC, CID, CCC Vice President-Sales & Marketing

Cheryl L. Frey

David W. Sloan

CLIC President and Chief Operating Officer; Director

CIC, CID, CCC Vice President-Meetings & Travel

CFC-I Vice President-Leasing

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 and Chief Financial Officer;
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 T O R S

Michael R. Abrams

CCM Vice President
Donald R. Adick, FLMI

CLIC Senior Vice President-Life Marketing Administration

Dawn M. Alcorn

CIC, CID, CCC Vice President-Administrative Services

Brad E. Behringer

CLIC Vice President-Life Underwriting
Richard W. Cumming, FSA, ChFC, CLU
CIC, CID, CCC, CLIC Senior Vice President-
Chief Actuary
CLIC Director

Michael J. Gagnon

CIC, CID, CCC Vice President-Claims

Kevin E. Guilfoyle

Steven A. Soloria, CFA

CCM Secretary
Henry W. Stein, Jr.

CFC-I Senior Vice President-Leasing

CIC, CID, CCC Vice President-Commercial Lines

David L. Helmers, CPCU, API, ARe, AIM
CIC, CID, CCC Vice President-Personal Lines

Duane I. Swanson, CIC

CIC, CID, CCC Vice President-Sales & Marketing

Martin F. Hollenbeck, CFA

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, ARM, ARP

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

Richard P. Matson

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, CFC-I, CLIC Vice President-Purchasing

CIC, CID, CCC, CLIC Counsel

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

C I C D I R E C T O R S E M E R I T I

Vincent H. Beckman
Robert J. Driehaus
Richard L. Hildbold, CPCU
William H. Zimmer

Back to table of contents

(cid:2)
S H A R E H O L D E R I N F O R M AT I O N

Cincinnati Financial Corporation had approximately 11,325 direct shareholders of record as of December 31, 2001. Many
of our independent agent representatives and most of the 3,299 associates of our subsidiaries own stock in their Company.
Registered owners hold 31 percent of Cincinnati Financial Corporation’s outstanding shares.

A N N U A L M E E T I N G

The Annual Meeting of Shareholders of Cincinnati Financial Corporation will take place at 9:30 a.m. on Saturday, April 6, 2002,
at the Cincinnati Art Museum in Eden Park, Cincinnati, Ohio.

I N T E R I M C O M M U N I C AT I O N S

During 2002, Cincinnati Financial Corporation Management is tentatively scheduled to report interim results as follows:

First Quarter Ending March 31 – April 25
Second Quarter Ending June 30 – July 25
Third Quarter Ending September 30 – October 24

Information regarding final interim release dates and the conference call Webcast is available approximately two weeks
following the end of each quarter on our Web site, www.cinfin.com, or by calling (513) 870-2639 or by e-mail to
investor_inquiries@cinfin.com.

S H A R E H O L D E R S E R V I C E

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.

F O R M 1 0 - K

Shareholders may request a copy of Form 10-K for 2001. 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 the Investors/Financial Reports section of 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 TO C K

Shares are traded on the Nasdaq National Market and 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 intra-day high and low prices.

00000000000000000000000$000,000

2001

00000000000000000000000$000,000

2000

Quarter
High ............................................ $41.25
Low ..............................................
34.75
.19
Dividends paid..............................

1st

00,0_00

2nd
$42.92
34.00
.21

00,0_00

3rd
$42.20
34.36
.21

00,0_00

4th
$42.93
36.33
.21

00,0_00

1st
$37.98
26.19
.17

00,0_00

2nd
$43.31
31.00
.19

00,0_00

3rd
$40.63
31.44
.19

00,0_00

4th
$40.38
32.56
.19

Back to table of contents

(cid:2)
C I N C I N N AT I F I N A N C I A L C O R P O R AT I O N O F F I C E R S A N D D I R E C TO R S

William F. Bahl, CFA

James E. Benoski

Michael Brown

John E. Field, CPCU

Kenneth C. Lichtendahl

W. Rodney McMullen

James G. Miller

John J. Schiff, Jr., CPCU

Robert C. Schiff

Thomas R. Schiff

Frank J. Schultheis

John M. Shepherd

DIRECTORS EMERITI:

Vincent H. Beckman
Robert J. Driehaus
Jackson H. Randolph
Lawrence H. Rogers II
John Sawyer

David B. Sharrock
Thomas J. Smart
Charles I. Westheimer
William H. Zimmer

Larry R. Webb, CPCU

Alan R. Weiler, CPCU

E. Anthony Woods

OFFICERS AS OF DECEMBER 31, 2001

John J. Schiff, Jr., CPCU
Chairman, President and Chief Executive Officer

James G. Miller
Senior Vice President and Chief Investment
Officer, Assistant Secretary, Assistant Treasurer

Kenneth W. Stecher
Senior Vice President and Chief Financial
Officer, 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, 2001

William F. Bahl, CFA (1)(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

John E. Field, CPCU (3)
Chairman
Wallace & Turner, Inc.
(insurance agency)
Director since 1995

Kenneth C. Lichtendahl (1)(2)
President and Chief Executive Officer
Tradewinds Beverage Company
Director since 1988

W. Rodney McMullen (4)
Executive Vice President
The Kroger Co.
Director since 2001

James G. Miller (4)
Senior Vice President and Chief Investment
Officer
Cincinnati Financial Corporation
Director since 1996

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

Thomas R. Schiff (4)
Chairman and Chief Executive Officer
John J. & Thomas R. Schiff & Co., Inc.
(insurance agency)
Director since 1975

Frank J. Schultheis (3)
President
Schultheis Insurance Agency, Inc.
Director since 1995

John M. Shepherd (1)
Chairman and Chief Executive Officer
The Shepherd Chemical Company
Director since 2001

Larry R. Webb, CPCU
President
Webb Insurance Agency, Inc.
Director since 1979

Alan R. Weiler, CPCU (3)(5)
Chairman
Archer-Meek-Weiler Agency, Inc.
(insurance agency)
Director since 1992

E. Anthony Woods (1)
President and Chief Executive Officer
Deaconess Associations, Inc.
(health care)
Director since 1998

(1) Audit Committee
(2) Compensation Committee;

also Lawrence H. Rogers II, advisor

(3) Executive Committee
(4) Investment Committee;

also Richard M. Burridge, CFA, advisor

(5) Nominating Committee

Back to table of contents

(cid:2)
Cincinnati Financial Corporation
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Life Insurance Company
CFC Investment Company
CinFin Capital Management Company

P. O. Box 145496
Cincinnati, Ohio 45250-5496
(513) 870-2000
www.cinfin.com