Cincinnati Financial
Annual Report 2002

Plain-text annual report

ByDesign Structured for Strength and Stability CINCINNATI FINANCIAL CORPORATION 2002 ANNUAL REPORT About the Company Cincinnati Financial Corporation is the nation’s 17th largest publicly traded property casualty insurer, based on consolidated revenues. By design, Cincinnati Financial Corporation is structured for strength and stability, built on a foundation of personal relationships with local independent insurance agents. These agents have an informed, frontline perspective that benefits policyholders as well as the company, helping to create profitability and value for shareholders. The company provides agents with flexible underwriting solutions, prompt claims service and a large, strong field presence. Cincinnati streamlines its field structure by eliminating branch office bureaucracy. Instead, local-resident field representatives are assigned directly to agencies, where they are ideally situated to provide prompt and personal service, gain firsthand knowledge and be effective decision-makers for the company. Cincinnati Financial Corporation’s long-term record of outperforming the industry in growth, profitability and return to shareholders reflects the strength of its business approach. The company’s strong surplus and asset positions provide security for policyholders while allowing for a successful, equity- centered investment strategy. Cincinnati Financial was formed in 1968 and operates through six subsidiaries. The Cincinnati Insurance Company, founded in 1950, leads the property casualty group. The group operates in 31 states, marketing a broad range of business and personal policies and retaining its strong customer focus on a select group of fewer than 1,000 independent insurance agencies. The Cincinnati Casualty Company and The Cincinnati Indemnity Company round out the property casualty insurance group, rated A++ (Superior) by A.M. Best. The Cincinnati Life Insurance Company – rated A+ (Superior) — 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. Contents Financial Highlights . . . . . . . . . . . . . . . . . 1 Letter to Shareholders . . . . . . . . . . . . . . . 2 Overview of Investment Operations . . . . 4 Selected Financial Information . . . . . . . . 6 Overview of Insurance Operations . . . . . 8 By Design: Structured for Strength and Stability . . . . . . . . . . . . . 10 Corporate Officers and Directors . . . . . 18 Subsidiary Officers and Directors . . . . . 19 Shareholder Information and Price Range of Common Stock . . . . . . . . . . 20 For financial statements and management’s discussion and analysis, please see Cincinnati Financial Corporation’s Annual Report on Form 10-K for 2002. This report contains forward-looking statements that involve potential risks and uncertainties. Please see the company’s Annual Report on Form 10-K for factors that could cause results to differ materially from those discussed. FINANCIAL HIGHLIGHTS Cincinnati Financial Corporation and Subsidiaries (Dollars in millions except share data) 2002 2001 Change 00%00 Income Statement Data Net realized investment gains and losses . . . . . . . . $ Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . (62) 238 Per Share Data (Diluted) Net realized investment gains and losses . . . . . . . . $ Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividend declared . . . . . . . . . . . . . . . . . . . . Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.38) 1.46 .89 34.65 $ $ (17) 193 (277.9) 23.3 (.10) 1.19 .84 37.07 (280.0) 22.7 6.0 (6.5) Balance Sheet Data $13,914 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,059 Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . 5,998 5,598 Average shares outstanding . . . . . . . . . . . . . . . 163,193,184 162,398,777 1.1 (6.7) Ratio Data Statutory combined ratio* . . . . . . . . . . . . . . . . . . Annualized return on equity . . . . . . . . . . . . . . . . Annualized return on equity including 98.4% 4.1% 103.6% 3.2% 28.4 based on comprehensive income** . . . . . . . . . . . (4.0%) 2.5% (259.2) * 2001 property casualty operations data excludes the effects of a $402 million one-time adjustment to recognize net written premiums on an annualized basis rather than the billing period, as of January 1, 2001, as required to conform with Codification of Statutory Accounting Principles. ** Comprehensive net income recognizes the company’s equity focus and the resulting appreciation/depreciation not reflected in traditional return calculations that consider income statement-based earnings only. Back to table of contents Revenues (dollars in millions) 3 4 8 , 2 1 6 5 , 2 1 3 3 , 2 8 2 1 , 2 4 5 0 , 2 98 99 00 01 02 Revenues rose 11% in 2002 on strong growth of insurance premiums and investment income. Net Income/ Dividends Paid Per Common Share (dollars) Net Income before Net Realized Investment Gains and Losses Net Income Dividends Paid 4 8 . 1 6 4 . 1 2 5 . 1 2 5 . 1 1 4 . 1 6 1 . 1 9 2 . 1 9 1 . 1 0 9 . 0 9 8 . 0 0.60 0.66 0.74 0.82 0.88 98 99 00 Pro Forma* 01 02 2002 net income before net realized investment gains and losses included $78 million from parent company operations; $25 million from life operations; and $188 million from property casualty operations. Book Value Per Common Share (dollars) 6 2 7. 3 7 0 7. 3 5 6 . 4 3 2 7 . 3 3 6 4 . 3 3 98 99 00 01 02 Book value has grown at a compound average rate of 4.1% since the end of 1997. Unrealized gains in the investment portfolio contributed 65% of book value as of December 31, 2002. 1 (cid:2) ByDesign Structured for Strength and Stability To Our Shareholders: responsiveness to stakeholder needs. The year ended with a strong second half, and During 2002, The Cincinnati Insurance your company reported 2002 full-year net income Companies acted consistently with our mission of of $238 million, up 23.3 percent. Net income increasing stability for stakeholders, including our before net realized investment gains and losses independent agent representatives, policyholders, reached $300 million, making this our most claimants, shareholders, company associates and profitable year ever. Performance measures for communities. property casualty insurance were positive, with First and foremost, agents need stable markets. premiums up and losses and expenses down as a A better insurance pricing environment has created percent of premiums. In three of the four opportunities to improve our underwriting results quarters, the statutory combined ratio improved and operations. In 2002, we continued to raise to less than 100 percent – at or near the prices as appropriate, to gather more risk data, to breakeven point for underwriting profitability. tighten underwriting guidelines, to apply fewer For the full year, the combined ratio improved to 98.4 percent, the first sub-100 full-year ratio since 1997. These 2002 accomplishments are works in progress. We will have to keep pressing in 2003 with Net income before net realized investment gains and losses reached $300 million, making this our most profitable year ever. Performance measures for property casualty insurance were positive, with premiums up and losses and expenses down as a percent of premiums. discounts and credits, and to revise policy contracts to address new or increased exposures to risk. These underwriting actions and continued discipline enabled us to preserve markets while giving agents and all of the profitability initiatives that now have policyholders choice and control. Looking started to benefit your company’s performance. at each piece of business separately, we crafted These results represent the beginning, not the solutions by changing deductibles, limits or other end, of our response to company-specific challenges terms. We have deliberately been followers rather of the past three years, as well as to broader than market leaders when it comes to restricting marketplace issues. The world in which our coverages, choosing to do so only where it is stakeholders live today seems more uncertain, a necessary to restore profitability or avoid becoming little more likely to bring unwanted surprises than the default market for unacceptable risks. An in the past. While we cannot fix political and approach we apply where reasonable is to limit economic instability, we have made coverage provided by the basic policy and provide deliberate choices to establish and maintain higher limit options at a separate charge, giving financial strength and an operating structure that agents and policyholders more control over supports and increases your company’s coverage and price. 2 Back to table of contents (cid:2) Our agents would be $136 million for your company in support these 2003. Our rating plan for new and renewal policies measures. They in most areas will add a charge of just 1 or 2 percent are the ones presenting double-digit to policy premium. This choice provides important peace of mind and encourages policyholders to purchase the coverage, achieving the goal of price increases spreading the risk. While our reinsurance and the to policyholders, government plan are steps in the right direction, and they are the we believe more must be done to protect ones working policyholders and insurers from devastating harder than ever terror losses. John J. Schiff, Jr., CPCU, addressed top-producing agents at the President’s Club event in June. before to find the limits, Investors need restored confidence in the stability of corporate America. Over the course of coverages and 2002, high-profile meltdowns of large companies terms their clients need. They do this willingly continued to shake the investment world, and a because they know that having access to insurers weak economy helped reduce portfolio values. that are financially secure, highly rated and Most executives are honest and most balance profitable enhances their own stability and that of sheets remain strong. However, all corporate their policyholders. leaders must do more to demonstrate integrity by Policyholders need stable protection. As prices adding checks and balances to our governance and in the insurance marketplace firmed, so did the disclosure practices. reinsurance prices that primary insurers pay to cap Your company has a hard-working board that their losses from larger risks and catastrophes. brings candor and expertise – agency, financial Reinsurance agreements spread losses, making it and operational – to the table. Directors attend possible to write business that insurers could not educational programs as well as company and otherwise accept. We negotiated 2003 reinsurance agent events so they can make informed decisions. agreements that protect the company and our During 2002, an independent director became policyholders. Pricing rose modestly as we retained chair of the nominating committee, and a new more risk, a cost-effective choice afforded by your independent director joined your company’s board: company’s superior capital and surplus condition. Gretchen W. Price is vice president – finance and With our focus on relatively low-risk Main accounting, Global Market Development Street business, we had chosen not to exclude Organization, Procter & Gamble. Early in 2003, terrorism losses for most commercial policies. Our CFC Director and Chief Investment Officer 2003 reinsurance agreements do protect us for the James G. Miller retired. Jim formed our investment terrorism exposure, with certain limitations. department in 1972 and CinFin Capital Additionally, the federal government acted to Management Company in 1998. provide a backstop for the industry’s annual We are working to update and publish aggregate commercial losses exceeding $10 billion board committee charters and a code of ethics, due to international terrorism events. Insurers preparing to comply fully with all new would pay losses within their retentions, which regulations when or before they take effect. Back to table of contents 3 (cid:2) Overview of Investment Operations A Steady Performance in Unsteady Times Pre-tax investment income from our portfolio rose to an all-time high of $445 million, up 5.6 percent for the year. Because we select equity holdings with annual dividend yields in the range of 1.5 percent to 3.0 percent, a steady flow of dividends added stability to our investment income. At year-end 2002, gross annualized dividend income from common stocks stood at $185 million, including $12 million from dividend increases announced during 2002 by 28 of our 46 equity holdings. During 2002, historically low interest rates and a third consecutive year of stock market declines both affected your company’s ability to invest strong cash flows. Net realized losses were $94 million, including impairments of $98 million, or less than 1 percent of our $11.189 billion portfolio, for securities that had been in an unrealized loss position for several quarters. Net realized gains from Portfolio of Fixed-Income and Equity Assets as of December 31, 2002 Book Value: $5.6 billion Common Stocks $1,959 million Investment-Grade Bonds $1,374 million High-Yield Bonds $717 million Municipal Bonds $1,055 million Convertible Securities $491 million (preferred stocks and debentures) 9% 19% 35% 13% 24% Market Value: $11.2 billion Common Stocks $7,464 million Investment-Grade Bonds $1,470 million High-Yield Bonds $651 million Municipal Bonds $1,111 million Convertible Securities $492 million (preferred stocks and debentures) 4% 10% 6% 13% sales of investment assets were positive at $8 million versus $11 million in 2001. At December 31, 2002, net unrealized portfolio gains, noted on our balance sheets in accumulated other comprehensive income, totaled $3.643 billion versus $4.113 billion at year-end 2001. 2002 year-end book value was $34.65, down from $37.07 a year ago but up from $34.14 at the end of the third quarter. In response to current economic conditions, we are favoring shorter bond maturities, higher credit quality and municipals with tax-exempt income for the fixed-income portfolio. On the equity side, your company’s total return investment strategy is based on the compounding of cash flows over time. We like income; we like growth; and we are patient. We consistently select and hold securities with a proven record of steadily increasing sales, earnings and dividends and a favorable outlook, managing equity investments the same way your company manages insurance operations – leveraging personal knowledge and relationships. By controlling the number of holdings, monitoring fundamentals and studying executive leadership, we manage concentration of risk and achieve advantages. Financial Services CFC Investment Company leases and finances vehicle, 67% equipment and real estate for Cincinnati’s independent agencies, Approximately $69 in invested assets supported each Cincinnati Financial common share at year-end 2002. Common stocks represented just 35% of the portfolio’s book value. These stocks have performed well over time, appreciating to account for 67% of market value. their commercial clients and other businesses. 2002 net income was $4 million, including $2 million from the sale of a property. CinFin Capital Management Company, now in its fourth year, manages $726 million of assets for 35 clients, mostly institutional clients such as pension funds and insurance companies or agencies. Net income was $1 million in 2002, up 19.4 percent. 4 Back to table of contents (cid:2) In 2002, we formalized a disclosure process and frequency and firmer prices offset committee to verify that financial reporting severity. On the investment side, book continues to exceed regulatory standards in both value declined to $34.65 versus $37.07 timing and content. at year-end 2001. We are monitoring We plan to adopt accounting standards to Fifth Third Bancorp and the other expense options on the income statement as soon well-managed companies in our as valuation methodology is finalized so that portfolio. Their market values should companies provide consistent, comparable recover over time as they continue to information. At this time, the effect of stock achieve earnings growth, comply with option grants shows up in diluted per-share regulations and benefit from any numbers on the income statement. broad marketplace events that reduce Your company’s associates are working to uncertainty. secure bright and stable futures. We provide Our commitment to increase reasonable compensation, including stock option earnings and book value has resulted grants, to deserving associates. Options align their in 42 consecutive years of steadily interests with those of shareholders. Your company increasing cash dividends paid to has been a leader in using options to motivate and shareholders. On February 1, 2003, reward non-executive associates, from field the board again voted to increase the associates to file clerks. The five most senior quarterly payout, bringing the indicated executives received less than 14 percent of options annual dividend to $1.00 per share. granted in 2002, while nearly 50 percent was Additionally, the company repurchased awarded to associates below the junior officer level. more than a million of its own shares Your company develops and promotes in 2002 and intends to continue associates to create depth and stability. CFC Vice repurchasing amounts that at least offset President Kenneth S. Miller, mentored by Jim dilution from options. During 2002, a Miller since 1979, now heads our investment total of $184 million was returned to Investment Income Less Expenses (dollars in millions) 5 4 1 4 2 4 0 1 7 4 8 3 8 6 3 98 01 *Excludes BOLI interest 00 99 * 02 Pre-tax investment income grew 5.6% in 2002, contributing to a five-year compound growth rate of 5%. Steadily increasing dividends from equity holdings helped offset low prevailing interest rates. Assets (dollars in millions) 4 1 9 , 3 1 9 5 0 , 4 1 9 3 2 , 3 1 2 8 4 , 1 1 0 7 7 , 1 1 98 99 00 01 02 Total assets rose $145 million as of December 31, 2002. Over the past five years, assets grew at a 7.3% compound rate. department. Ken and the 10 portfolio managers shareholders through dividends and repurchases. on his staff average eight years of Cincinnati experience, exemplifying the benefits of investing in associates. Shareholders seek a stable, fair return on their investment. We believe the way to increase the price of Cincinnati Financial shares is to keep increasing earnings and book value. While your company’s performance is affected by insurance pricing cycles and economic conditions, we * The discipline and momentum of 2002 have built * * strength that should help Cincinnati outperform in 2003 and beyond. We expect improved pricing and risk selection to continue driving healthy cash flow to pay claims and to invest for current income and future appreciation. We remain confident in a strong and stable future for your company. believe that the best long-term results will come /S/ John J. Schiff, Jr., when we hold unwaveringly to our underwriting and investing standards. Earnings improved in 2002, as underwriting initiatives reduced loss John J. Schiff, Jr., CPCU Chairman, President and Chief Executive Officer February 6, 2003 Back to table of contents 5 (cid:2) SELECTED FINANCIAL INFORMATION Cincinnati Financial Corporation and Subsidiaries (Dollars in millions except per share data) Income Statement Data (GAAP) Earned premiums . . . . . . . . . . . . . . . . . . . . Investment income, net of expenses . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . Net realized investment gains and losses . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . Net income per common share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends per common share: Declared . . . . . . . . . . . . . . . . . . . . . . . . . Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance Sheet Data (GAAP) Total assets . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . Book value per share . . . . . . . . . . . . . . . . . . Ratio Data (GAAP) Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . Loss expense ratio . . . . . . . . . . . . . . . . . . . . Expense ratio . . . . . . . . . . . . . . . . . . . . . . . Combined ratio . . . . . . . . . . . . . . . . . . . . Property Casualty Insurance Operations (Statutory Data) Written premiums . . . . . . . . . . . . . . . . . . . Earned premiums . . . . . . . . . . . . . . . . . . . . Investment income, net of expenses . . . . . . . Unearned premiums . . . . . . . . . . . . . . . . . . Loss reserves . . . . . . . . . . . . . . . . . . . . . . . . Loss expense reserves . . . . . . . . . . . . . . . . . Policyholders’ surplus . . . . . . . . . . . . . . . . . Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . Loss expense ratio . . . . . . . . . . . . . . . . . . . . Expense ratio . . . . . . . . . . . . . . . . . . . . . . . Combined ratio . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2001 2000 ____________________ ____________________ 2002 ____________________ $ 2,478 445 2,843 (62) 238 1.47 1.46 .89 .873/4 $14,059 420 5,598 34.65 $ 2,152 421 2,561 (17) 193 1.20 1.19 .84 .82 $13,914 426 5,998 37.07 1999 ____________________ $ 1,732 387 2,128 0 255 1.55 1.52 .68 .661/3 $ 1,907 415 2,331 (2) 118 .74 .73 .76 .74 $13,239 449 5,995 37.26 $11,770 456 5,421 33.46 61.5% 11.4 26.8 99.7% 66.6% 10.1 28.2 104.9% 71.1% 11.3 30.4 112.8% 61.6% 10.0 28.6 100.2% $ 2,613 2,393 234 1,270 2,090 519 2,340 61.5% 11.4 25.5 98.4% $ 2,188 2,067 223 1,033 1,886 466 2,533 66.8% 10.1 26.7 103.6% $ 1,936 1,828 223 507 1,730 452 3,172 71.1% 11.3 29.2 111.6% $ 1,681 1,658 208 455 1,513 419 2,852 61.6% 10.0 28.8 100.4% 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. As more fully discussed in the company’s Form 10-K for 2002, 2001 statutory data for the property casualty subsidiaries reflects the company’s adoption of Codification effective January 1, 2001. Codification of Statutory Accounting Principles required recognition of net written premiums on the basis of the policy contract term rather than the policy billing period. For comparison purposes, a $402 million one-time net written premium adjustment required to conform with Codification was excluded from 2001 data, and 2000 statutory data was reclassified; information was not readily available to reclassify earlier years’ statutory data presented above. 6 Back to table of contents (cid:2) Cincinnati Financial Corporation and Subsidiaries 1998 ____________________ 1997 ____________________ 1996 _____________________ 1995 ___________________ 1994 ____________________ 1993 ____________________ 1992 ____________________ $ 1,613 368 2,054 43 242 1.45 1.41 .611/3 .592/3 $ 1,516 349 1,942 45 299 1.81 1.77 .542/3 .531/3 $ 1,423 327 1,809 31 224 1.34 1.31 .482/3 .472/3 $11,482 472 5,621 33.72 $ 9,867 58 4,717 28.35 $ 7,397 80 3,163 18.95 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% 58.3% 10.1 30.0 98.4% 61.6% 13.8 28.2 103.6% $ 1,472 1,454 199 418 1,374 403 2,473 58.3% 10.1 29.9 98.3% $ 1,384 1,367 190 402 1,319 383 1,608 61.6% 13.8 28.1 103.5% $ 1,314 300 1,656 20 227 1.36 1.33 .422/3 .42 $ 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 27.6 99.9% $ 1,219 263 1,513 12 201 1.21 1.18 .382/3 .371/3 $ 1,141 239 1,442 33 216 1.30 1.27 .34 .331/3 $ 5,037 80 1,940 11.63 $ 4,888 80 1,947 11.70 $ 1,039 219 1,304 23 171 1.04 1.03 .31 .30 $ 4,357 80 1,714 10.37 63.3% 9.8 27.8 100.9% 63.5% 8.7 28.5 100.7% 63.8% 9.0 29.9 102.7% $ 1,191 1,170 162 354 1,213 219 999 63.3% 9.8 27.7 100.8% $ 1,124 1,092 153 334 1,100 193 1,012 63.5% 8.7 28.1 100.3% $ 1,015 992 142 302 961 177 934 63.8% 9.0 29.6 102.4% 2000 results include a one-time 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 con- form 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 7 (cid:2) Overview of Insurance Operations Property Casualty Insurance Operations: Growth Property casualty statutory net written premiums grew 19.4 percent for the year. For comparison purposes, the growth rate was 14 percent excluding an adjustment that reflected refinement of the estimation Premium Mix Percent of 2002 Consolidated Net Earned Premiums Life 4% Personal Lines 27% Commercial Lines 69% process for matching written and earned premiums to policy effective dates. Commercial statutory net written premiums rose 22.8 percent, or 15.8 percent to $1.795 billion excluding the adjustment; premiums for personal lines rose 11 percent, or 9.8 percent to $700 million excluding the adjustment. While firm commercial pricing drove this growth, increases also arose from agent and underwriter efforts to verify that coverage amounts matched insured values. New business written directly by agents in 2002 reached an all-time high of $317 million as double-digit price increases more than offset a lower number of new policies. New commercial business rose 14.4 percent and new personal lines business rose 27.2 percent. Growth of new business moderated during the fourth quarter as we continued making deliberate, case-by-case decisions to leave some risks on the table. We have historically written workers’ compensation to help agents present a full package of Cincinnati coverage to the policyholder. Because rising loss cost trends concern us, and agents in most states can easily provide workers’ compensation on a stand-alone basis, we reduced writings in this line. New workers’ compensation business was down 17.4 percent for the year while total direct written premiums rose 8.9 percent on improved pricing of new and renewal policies. As more fully discussed in the company’s Form 10-K for 2002, 2001 statutory data for the property casualty subsidiaries reflects the company’s adoption of Codification effective January 1, 2001. Codification of Statutory Accounting Principles required recognition of net written premiums on the basis of the policy contract term rather than the policy billing period. For comparison purposes, a $402 million one-time net written premium adjustment required to conform with Codification was excluded from 2001 data, and 2000 statutory data was reclassified; information was not readily available to reclassify earlier years’ statutory data presented above. * In 2002, the company refined its estimation process for matching written and earned premiums to policy effective dates. For comparison purposes only, pro forma results exclude the benefit. Including the 2002 adjustment, statutory written premiums rose 19.4 percent to $2.613 billion. In 2000, the company incurred a one-time charge for asset impairment. For comparison purposes only, pro forma results exclude the charge. Including the 2000 charge, the statutory combined ratio for 2000 was 111.6 percent. The Cincinnati Insurance Companies (statutory, property casualty subsidiaries) The Cincinnati Insurance Companies (statutory, including effects of Codification, property casualty subsidiaries) Property Casualty Premiums Statutory (dollars in millions) Net Written Premiums Net Earned Premiums 3 9 3 , 2 5 9 4 , 7 2 6 0 , 2 8 8 1 , 8 2 2 8 , 1 6 3 9 , 1 1 8 6 , 1 8 5 6 , 1 8 5 5 , 1 3 4 5 , 1 98 99 01 00 Pro Forma* 02 Pro Forma* Growth in established states fueled a $332 million increase in agency direct premiums. Ohio, with 24.2% of total direct volume, grew 11.4%. Other top states: Illinois, up 15.1%; Indiana, up 12.3%; Michigan, up 17.7%. Property Casualty Net Written Premium Growth Rate Statutory (percent) Cincinnati Insurance Companies Estimated Industry (A.M. Best) 14.2 0 . 4 1 1 . 3 1 8.1 9 . 1 1 4.4 01 00 Pro Forma* 02 Pro Forma* 9 7. 1.9 99 8 . 5 1.8 98 Cincinnati’s five-year average growth of 12.2% doubled the 6% industry average. Commercial premiums accounted for 73% of 2002 property casualty volume. Combined Loss and Expense Ratio Statutory, Post-Dividend (percent) Cincinnati Insurance Companies Estimated Industry (A.M. Best) 105.6 107.8 110.1 116.0 105.7 2 . 4 0 1 4 . 0 0 1 9 . 9 0 1 6 . 3 0 1 4 . 8 9 98 99 00 Pro Forma* 01 02 Cincinnati’s ratio improved to 98.4%, the best full-year result since 1997. The 2002 ratio included 3.6 points for catastrophes and compared favorably with the industry average of 105.7%, with 1.4 catastrophe points. 8 Back to table of contents (cid:2) Property Casualty Insurance Operations: Profitability In 2002, the company recorded its best statutory combined ratio in five years, outperforming the 105.7 percent industry average estimated by A.M. Best Co. Our ratio improved to the sub-100 level on both a statutory basis, at 98.4 percent, and on a GAAP accounting basis, at 99.7 percent. We achieved a GAAP underwriting profit of $8 million, with $48 million of profits for the second half offsetting a first-half underwriting loss due to unusually heavy catastrophes. This was our first full-year underwriting profit since 1997 and compared with a loss of $102 million last year. It reflected better pricing and profitability initiatives such as re-underwriting programs, renewal field reviews, risk reports, rate increases and changes in policy terms and conditions. Task forces have researched, recommended and implemented changes to eligibility and underwriting guidelines for business lines that have incurred some of our largest losses, including commercial auto and contractor risks. For commercial lines business, our statutory combined ratio was very satisfactory at 95.3 percent versus 103.4 percent estimated for the industry. And while our personal lines ratio remained above the level we consider acceptable, at 106.5 percent versus the industry’s estimated 105.6 percent, our ratio included 7.1 percentage points of catastrophes versus only 1.8 percentage points in the industry ratio. As has been the case over the past two years, our homeowner business was the main cause of the high ratio, with a loss and loss expense ratio of 98.6 percent versus 67.6 percent for Net Earned Premiums The Cincinnati Life Insurance Company (dollars in millions) 7 8 0 8 1 8 5 7 0 7 98 99 00 01 02 Cincinnati Life’s 2002 net earned premiums rose 8.3%, contributing to a five-year compound growth rate of 7.3%. Life Policy Face Amounts in Force Excluding Annuities, Accident and Health Business (dollars in millions) 6 8 4 , 2 3 4 3 5 7, 2 5 2 5 , 3 2 0 0 9 7, 1 0 6 0 , 3 1 personal auto. In addition to stricter underwriting and policy changes, we are working 98 99 00 01 02 Face amounts of ordinary life insurance policies in force increased 18% from 2001 to 2002. Policy count rose to 332,783 from 319,281. to package homeowner accounts with the more profitable auto business. New direct homeowner-auto package business rose 47.4 percent to $26 million. Life Insurance Operations The Cincinnati Life Insurance Company reported net income of $17 million in 2002. Revenues rose 2.8 percent, with earned premiums up 8.3 percent and pre-tax investment income up 6.9 percent. After higher expenses related to strong growth and increased regulatory and legal expenses, 2002 net income before net realized investment gains and losses was $25 million, compared with $30 million in 2001. New submitted applications rose 16 percent to more than 47,600 on strong sales of ordinary life products. Excluding the sale of a $33 million bank-owned life insurance policy, first-year net ordinary life premiums written in 2002 increased 21 percent to $24 million, primarily from the sale of LifeHorizons term and universal life products. First-year annuities written reached $84 million, up from $9 million in 2001, reflecting the appeal of return of principal and guaranteed income and interest-rate features in today’s low interest-rate environment. Back to table of contents 9 (cid:2) ByDesign Merging Responsiveness and Cost-effectiveness Structure That Reverses the Norm heavily in agency and associate education, we Cincinnati’s founders established a structure achieve high staff retention. By minimizing unlike any other insurer’s, designed to support advertising expense, we can afford to provide and preserve responsiveness to local conditions as outstanding claims service that is a more powerful your company grew. A flat operating structure is reputation-builder on the local level. By writing the platform for strategic differences such as three-year insurance policies, we benefit from agents who function as frontline underwriters, the both processing savings and high policy retention. absence of branch office hierarchy and bureaucracy, Just as responsiveness and cost-effectiveness are and assignment of field claims representatives to structural imperatives, financial strength is a agency instead of type of claim. While other strategic imperative. Cincinnati stands among insurers have adopted central authority models, the most financially secure insurance groups in Cincinnati deliberately reverses the norm. the nation, with a property casualty written Our headquarters staff of 2,500 supports the premiums-to-surplus ratio of 1.12 versus an more than 1,000 decision-making representatives in the field. To achieve cost-effectiveness, we keep things simple, introduce changes incrementally and develop This reverse structure relationships for the long term. leads to competitive advantages and cost-effectiveness. As a matter of record, Within our unorthodox structure, savings and stability arise from unorthodox business approaches. estimated 1.3 for the industry. Significant assets held by Cincinnati Financial at the parent company level provide further access to capital. While the current climate favors strongly Cincinnati’s ratios for expenses other than capitalized insurers, some industry observers have commissions are among the very lowest in the labeled large surpluses as wasteful. Capital has industry. By being cost-conscious at headquarters, been a Cincinnati priority because it allows us we can choose to reward our professional agents to operate flexibly and protect policyholders; to for their work providing the personal service that continue growing even as capacity constricts due sets Cincinnati apart. to insurance or investment market conditions; and To achieve cost-effectiveness, we keep things to pursue an equity-focused investment strategy simple, introduce changes incrementally and that consistently rewards shareholders. develop relationships for the long term. Within our unorthodox structure, savings and stability Financial Strength for Policyholder Safety and Shareholder Return arise from unorthodox business approaches: By Our business is paying claims, and financial concentrating our resources on a relatively small strength enables us to meet this commitment number of agencies, we earn a large share of their promptly, consistently and fairly. Policyholders business and high policy retention. By investing can gauge an insurer’s ability to pay claims partly 10 Back to table of contents (cid:2) through the financial strength ratings awarded by the industry’s independent ratings organizations. During 2002, Fitch Ratings initiated an AA (Very Strong) insurer financial strength rating for the property casualty companies and for The Cincinnati Life Insurance Company, recognizing profitability, premium growth, financial flexibility and capitalization. In November, other leading firms affirmed their ratings: • A.M. Best Co., the nation’s oldest and most authoritative insurance rating firm, affirmed its highest rat- ing for the property casualty group, A++ (Superior), noting superior capitalization, sus- tained profitability and the long-standing independent agency strategy. Best also affirmed Cincinnati Life’s rating of A+ (Superior) based on strong capitaliza- tion, consistently positive operating results and Policyholder Frank M. Hancock (foreground), president and CEO of Sport Graphics Printing in Indianapolis, resumed business quickly in a new facility after a September tornado destroyed the plant. He credits his agent from City Securities, Corp., Executive VP Patrick J. O’Connor (left), and Cincinnati’s Senior Claims Representative Bruce P. Graham (center). new business growth. Cincinnati was one of only eight insurers that • Moody’s Investors Service affirmed its Aa3 merited a place on both lists and one of just eight rating on the property casualty companies, citing property casualty insurers that had qualified every Cincinnati’s sound balance sheet, capitalization, year since the study’s inception 12 years ago. conservative leverage profile and agency franchise. Your company’s long record of increasing • Standard & Poor’s affirmed its AA- (Very dividends earned the No. 14 spot in The 2002 Strong) rating on each of the property casualty Mergent’s Handbook of Dividend Achievers. companies and Cincinnati Life. S&P recognized Fortune Magazine (December 9, 2002), took note Cincinnati’s competitive position, agency as well, identifying Cincinnati Financial as one relationships, business persistency, capitalization of the top 15 “secure dividend payers” in the and financial flexibility. S&P 500 Index. In February 2003, directors During 2002, Ward Group, an insurance voted to raise the quarterly cash dividend management consulting firm, again recognized Cincinnati as one of the nation’s best performers. Ward annually examines five years of data from 12.4 percent, with the indicated annual dividend of $1.00 per share marking our 43rd year of increased cash dividends. nearly 4,000 insurers, selecting the top 50 property Despite the difficult investment environment, casualty and the top 50 life/health insurers. Ward Cincinnati Financial common stock returned a chooses companies that excel at balancing financial positive 0.6 percent, compared with a negative safety, consistency and performance. In 2002, return of 22 percent for the S&P 500 Index. Back to table of contents 11 (cid:2) ByDesign Merging Agency Success and Company Success Doing Business Person to Person The Cincinnati Franchise The agents who founded Cincinnati thought Cincinnati has appointed approximately their neighbors and local business clients 1,000 high-caliber agencies with compatible deserved an insurer structured for heightened philosophies and business practices, sound sensitivity to local market conditions. They saw balance sheets and succession plans. Agents write an opportunity to benefit their communities business within a reasonable radius of their while rewarding investors who backed their offices, where they can expect to have personal concept: Cincinnati would be an agent-centered relationships with policyholders and perform as insurer that valued agents’ knowledge of their frontline underwriters. Serving just 950 agencies communities, supported their personal in 31 states, we know our agency customers. relationships with clients and delegated Before appointment, agency principals come to decision-making to representatives in the field. Cincinnati to interview key staff and executives, Cincinnati’s one-size-does-NOT-fit-all exploring the match. It’s up to us to demonstrate approach seemed like a good, contrarian idea in the value of the franchise: the 1950s when direct writers began making a • Agencies receive personal service from the bid for market share. The idea may make even entire organization. They and their clients know better sense today, as some insurers move toward the representative who handles their claims by a commodity approach. The Cincinnati way name. They know a team of people is looking appeals to those who weigh value above price. out for their business and available to listen. They expect their agent and insurer to earn their • Agents know they will see our CEO and trust and their business by giving them personal senior officers. Executives are traveling to attention, top-of-the-line claims service, 25 cities in 2003 to meet agents and discuss informed underwriting decisions and tailored results, goals and issues at our annual sales insurance programs. Your company’s success meetings. Additionally, underwriters visit reaching these value-oriented buyers is directly agencies regularly and executives travel with linked to the success of the professional marketing representatives, calling on agencies independent agents who deliver the value. and policyholders. There are few shortcuts to offering truly • Agencies receive individualized attention; they personal service. We’re highly dependent on are not broadly categorized by regions or risks. having the right talent in the right place – on Territories are subdivided to maintain or our ability to appoint top-tier agencies. improve the level of service as business volume Willingness to work on the relationship is the grows. During 2002, seven territories split, key to merging agency and company success. reducing the average number of agencies per 12 Back to table of contents (cid:2) marketing representative to 11 from 13. Plans for 2003 include six additional marketing territories. • Field representatives are accessible, empowered and accountable. They make the decision; they inspect the property; they write the claim checks. Decades of experience stand behind them. Field claims representatives have an average of 14 years of industry experience; property casualty marketing representatives average 15 years; and life marketing representatives average 22 years. Field-based decisions speed response times and reduce layers of red tape and expenses. • Agencies that reach growth and profitability targets share in the success of The Cincinnati Insurance Companies through profit-sharing commissions. Support, Above and Beyond Value-added service also extends to agent Peter N. Ewend, CIC (foreground), president and CEO of Saginaw Bay Underwriters, appreciates Cincinnati’s sales meetings in field locations that make it convenient for multiple agency associates to meet executives. Left to right (background): Cincinnati Senior VP J.F. Scherer; Cincinnati Life President & COO David H. Popplewell, FALU, LLIF; Saginaw Bay Underwriters’ Senior VP Larry H. Sims. education. That means sales schools and management, agents, claims associates and roundtables where agents share management headquarters staff often teach these classes, ideas. It means seminars for agency staff ensuring that instructors are active members of on Cincinnati coverages, policy rating and the industry. production or software systems. It means Cincinnati graduated five classes of entry-level practical advice on how to effectively transfer underwriters in 2002, for the third consecutive contractor risk, how to accurately measure and year, and has plans for another five classes in insure property values, or how to find 2003. When other insurers cut back in recent cross-selling opportunities using the agency’s years, we expanded our program, recognizing management system. that skilled underwriters are key to the agents’ and Just as important, it means training our own company’s profitability. In 2003, we will meet associates to provide optimal service to agents agency requests to open these classes to producers. and their clients. During 2002, we provided Integrating underwriter perspectives into their online and traditional classes on topics from marketing activities, agents effectively perform keeping records to estimating auto physical the frontline underwriting that assures our damage repairs. Cincinnati’s own underwriters, mutual success. Back to table of contents 13 (cid:2) ByDesign Merging flexibility and control Open for Business to work out terms that will let us write a more Your company makes a commitment to be a challenging account. Collaborating with agents to market for 60 percent to 70 percent of an agency’s create a book of business that is healthy in total, typical accounts. We intend to earn a position as we can accept that occasional piece of business each agency’s carrier of choice in terms of number that is not as natural a fit but is very important to of accounts, and approximately 80 percent of the agency. Maybe the agent knows good things commercial accounts have total premium under about management and safety; maybe the account $10,000. Yet, even without writing the largest has a high profile in the community; or maybe accounts, our overall share of each agency’s the policyholder is a center of influence or premium volume is high at nearly 20 percent, or controls other good accounts. $2.6 million on average. These numbers indicate Trust and Teamwork exceptional success turning policy quotes into policies and keeping business on our books. One reason Cincinnati continues to accept business when others back away is that we have As the insurance marketplace changes, overall or for specific lines, some carriers take pride in responding quickly to the changed The agent-centered structure teams of people supporting and requires a relationship strategy, and monitoring each agency, our primary effort is to underwrite agency relationships rather than policies, accounts or lines keeping their eyes open for ways to grow profitably together: • The agency’s field team – Cincinnati’s environment. Often of business. these responses may be decisions to severely restrict or to cease entirely writing whole classes or lines of business on a state or national basis. Cincinnati doesn’t make fast, across-the-board changes, preferring instead to respond deliberately and case by case. While this choice requires more work and more time to turn around negative trends, it is a strategic choice to take care of our relationships and be a stable market for agents and policyholders. The agent-centered structure requires a relationship strategy, and our primary effort is to underwrite agency relationships rather than policies, accounts or lines of business. For a growing and profitable agency, we may be willing marketing representatives stand apart from other carriers’ associates with similar titles. By training, experience and daily actions, they are actually field underwriters, fully responsible for selecting and pricing new commercial business. As appropriate, they involve other field associates who perform valuable claims, loss control, premium audit, bond and equipment engineering services. These specialists help agents find the right coverage and terms to successfully quote and keep accounts. Based in offices in their homes, field representatives are nearby to help in urgent situations 24 hours a day, seven days a week. 14 Back to table of contents (cid:2) • Renewal review teams – Marketing representa- tives convene risk reviews for renewal business, bringing together agents and field team members who have interacted with policyholders and visited properties. Their observations about coverage needs, changes in the business conducted or physical premises help the agent provide the right coverage at the right price. • Catastrophe claim teams – When disaster strikes and the local field claims staff needs extra hands to get policyholders and property out of harm’s way, to pay claims and to help people get back to normal, your company sends in our own volunteers from other territories. Already familiar with Cincinnati’s policy forms and service standards, they can respond quickly and fairly. • The “10 o’clock” team – Every morning at 10 a.m., the company’s senior production officers meet to review new business and assess trends, evaluate agency books of business and consider our appetite for risk. Agency President and CEO John S. Delinsky, CIC (foreground), welcomed his Cincinnati field team for a quarterly renewal risk review at Apollo Insurance, Inc. in St. Cloud, Minnesota. Left to right: Cincinnati State Agent Robert C. Proudfoot, CIC; agents Barbara E. Harlander, CIC, and Barry A. Quernemoen, CIC, AAI, and Helga J. Bauerly, CISR; Cincinnati Field Claims Specialist Laurie A. Dustin, AIC, and Loss Control Consultant Kathy A. Barreth; agent Steve R. Rotenberger, CIC. contract. This offers policyholders peace of mind Authority and Superior Service and generally keeps them with their agent – and Loyal agents need more than viable markets; with Cincinnati – for the long term. they need superiority within those markets. Agents give their clients access to a full range of Cincinnati’s agents have exceptional authority and insurance products and financial services through control that helps them shine in front of their Cincinnati and its sister companies: Bond or clients. They write first-party claims checks up to boiler coverages, equipment leases or investment $2,500 on their own authority. They bind many management services and life insurance. Ninety coverages. They issue personal lines policies and percent of Cincinnati’s property casualty agencies endorsements in their own agencies, making it also offer Cincinnati Life products, diversifying possible to hand a client an updated policy with their revenue stream and ours. same-day service. They write convenient, three-year policies where peers may write single-year or even six- month contracts. While some coverages within multi-year policies are re-rated annually, other coverage rates are fixed for the duration of the Back to table of contents 15 (cid:2) ByDesign Merging purposeful management and corporate accountability Acting with Integrity supporting arts and educational activities and Every corporation has serious responsibilities working with local school districts on mentoring, to people outside the organization – to its literacy and other partnership programs. Financial shareholders and its communities. We believe and volunteer support for United Way, the Fine your company’s primary responsibility is to act Arts Fund and the blood donation program with integrity, defined as both consistency and continues to grow, both as corporate commitments honesty. We manage the business purposefully to and personal commitments. And across the states continually align decisions with our mission. . . in which we operate, field associates volunteer To grow profitably and enhance the ability of the their time to schools, churches, civic and local independent agent to deliver quality financial community endeavors. protection to the people and businesses they serve by providing market stability through financial strength; by providing competitive, up-to-date products and services; and by developing associates committed to superior service. True to our structural imperatives, Cincinnati Financial’s philosophy on legislative and Preserving Strategic Advantages Legislation and regulations enacted and proposed during 2002 imposed new governance requirements on public companies, primarily regarding board and committee composition, as well as financial reporting and disclosure. Your company has explicitly stated certain obligations regulatory matters reflects the voices of our agents to shareholders, agents, policyholders and and field force across our operating territories. We are resolved to reflect those independent voices rather than follow in step with industry trade organizations. Our stance tends to be nonconformist on issues such as proposed federal chartering, tort reform and credit scoring, just as we have designed our business with the agent at the center in a nonconformist fashion. Just as responsiveness to local conditions and affinity for personal involvement are cornerstones of our business operations, they also guide our civic and charitable programs. We support programs that build stronger communities, with associates personally involved at headquarters and in the field in the neighborhoods we serve. Headquarters associates have a tradition of associates in our mission statement. We believe the best way to fulfill obligations to shareholders is to do a good job with our obligations to others. After the 2002 addition of one independent director and the retirement of one inside director, the Cincinnati Financial board now is composed of 15 directors. Six directors are classified as independent outsiders. The remainder includes CEO John J. Schiff, Jr., two family members and six more affiliated directors. Among those six are four outside directors who are independent insurance agents. While we know of no other insurer with that level of independent agent representation on the board, we also know of no other insurer founded by agents and structured 16 Back to table of contents (cid:2) specifically to optimize inherent advantages of the independent agency system. We believe we can meet all new and proposed requirements for board composition while preserving this strategic advantage. Many of the new or proposed rules focus on audit committees. Cincinnati Financial’s audit committee, chartered in 1999, has been made up entirely of independent directors since 1976. Member directors are seasoned executives with relevant financial, operational and investment responsibilities and experiences. This committee recommends and directs our outside audit firm. The chair of the audit committee participated in an educational program for audit committee lead- ers during 2002. Kenneth C. Lichtendahl (foreground) chairs Cincinnati Financial Corporation’s audit committee. Members include (left to right): John M. Shepherd, E. Anthony Woods and William F. Bahl, CFA. Board members also serve your company Annual Report on Form 10-K to shareholders on executive, investment, nominating and in this annual report package. compensation committees. Charters for each Additionally, we have for several years posted committee are in the process of being written or information for the public on www.cinfin.com updated, as is the code of ethics. including news releases, financial reports, During 2002, your company formalized a SEC filings, stock price information, director disclosure process and committee of senior biographical information and committee service, officers. Their function is to verify that relevant conference call Webcasts and much more. You are information has been brought to the attention of invited to bookmark this site and to register for the chief executive and chief financial officers, automatic e-mail alerts of newly posted material, allowing them to make sound judgments which will include items mentioned above as regarding the accuracy and completeness of your well as any regulatory or Nasdaq exchange company’s financial reports. In fact, over the requirements. past several years management already had greatly enhanced both the quality and the quantity of information reported to regulators and investors. Members of the investment community have commented on the exceptional detail provided in our claims and loss analysis. This year, we are providing our expanded Back to table of contents 17 (cid:2) CINCINNATI FINANCIAL CORPORATION OFFICERS AND DIRECTORS W.F. Bahl J.E. Benoski M. Brown J.E. Field K.C. Lichtendahl W.R. McMullen J.G. Miller G.W. Price J.J. Schiff, Jr. R.C. Schiff T.R. Schiff F.J. Schultheis J.M. Shepherd L.R. Webb A.R. Weiler E.A. Woods Officers as of December 31, 2002 John J. Schiff, Jr., CPCU Chairman, President and Chief Executive Officer John E. Field, CPCU (3) Chairman Wallace & Turner, Inc. (insurance agency) Director since 1995 James G. Miller Chief Investment Officer and Senior Vice President, Assistant Secretary, Assistant Treasurer (Retired January 2003) Kenneth C. Lichtendahl (1*)(2) President and Chief Executive Officer Tradewinds Beverage Company Director since 1988 Kenneth W. Stecher Chief Financial Officer and Senior Vice President, Secretary, Treasurer Kenneth S. Miller, CLU, ChFC Vice President, Assistant Secretary, Assistant Treasurer Eric N. Mathews, AIAF Vice President, Assistant Secretary, Assistant Treasurer Directors as of December 31, 2002 William F. Bahl, CFA (1)(2*)(4)(5) Chairman Bahl & Gaynor, Inc. (investment advisors) Director since 1995 James E. Benoski Vice Chairman, Chief Insurance Officer and Senior Vice President The Cincinnati Insurance Company Director since 2000 Michael Brown (2)(3)(5*) President and General Manager Cincinnati Bengals, Inc. Director since 1980 W. Rodney McMullen (4) Executive Vice President The Kroger Co. Director since 2001 James G. Miller (4) Chief Investment Officer and Senior Vice President Cincinnati Financial Corporation Director since 1996 (Retired January 2003) Gretchen W. Price Vice President Finance & Accounting Global Market Development Organization Procter & Gamble Director since 2002 John J. Schiff, Jr., CPCU (3*)(4*) 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 18 Back to table of contents 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) Chairman (as of February 2003) Deaconess Associations, Inc. (health care) Director since 1998 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 (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 * Committee chairperson (cid:2) SUBSIDIARY OFFICERS AND DIRECTORS As of December 31, 2002, listed alphabetically The Cincinnati Insurance Company (CIC) The Cincinnati Indemnity Company (CID) The Cincinnati Life Insurance Company (CLIC) The Cincinnati Casualty Company (CCC) CFC Investment Company (CFC-I) CinFin Capital Management (CCM) Executive Officers James E. Benoski CIC, CID, CCC Vice Chairman of the Board CIC, CID, CCC, CLIC Chief Insurance Officer and Senior Vice President-Headquarters Claims CIC, CID, CCC, CLIC, CFC-I Director James G. Miller (Retired January 2003) CIC, CID, CCC, CLIC Chief Investment Officer and Senior Vice President-Investments CCM President CFC-I Senior Vice President and 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 Larry R. Plum, CPCU CCC President CIC, CID Senior Vice President-Personal Lines CIC, CID, CCC, CLIC Director David H. Popplewell, FALU, LLIF CLIC President and Chief Operating Officer; Director CCM Director 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 Chief Financial Officer and Senior Vice President-Corporate Accounting; Secretary CCM Treasurer Director of all subsidiaries Timothy L. Timmel CIC, CID, CCC, CLIC, CFC-I Senior Vice President-Operations Director of all subsidiaries Senior Officers and Directors 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 and Chief Underwriter David L. Burbrink CLIC Vice President-Life Field Services Richard W. Cumming, FSA, ChFC, CLU CIC, CID, CCC, CLIC Senior Vice President and Chief Actuary CLIC Director J. Michael Dempsey, CLU CLIC Vice President-Life Marketing Administration Mark R. DesJardins, CPCU, AIM, AIC, ARP Robert C. Schiff CIC, CID, CCC Vice President-Education & Training CIC, CID, CCC, CLIC Director 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-Headquarters Claims Craig W. Forrester, CLU CIC, CID, CCC, CLIC Senior Vice President- Information Technology Stephen C. Frechtling, FSA, MAAA, CLU, FLMI CLIC Vice President-Actuarial Michael J. Gagnon CIC, CID, CCC Vice President-Headquarters Claims Kevin E. Guilfoyle CFC-I Senior Vice President-Leasing David L. Helmers, CPCU, API, ARe, AIM CIC, CID, CCC Vice President-Personal Lines Theresa A. Hoffer CIC, CID, CCC Vice President-Corporate Accounting Martin F. Hollenbeck, CFA CCM Vice President-Investments Thomas A. Joseph, CPCU CIC, CID, CCC Senior Vice President- Commercial Lines CCC, CCM Director Thomas H. Kelly CIC, CID, CCC Vice President-Bond & Executive Risk Christopher O. Kendall, CPCU, AIT, AIM, ARe, ARM, ARP CIC, CID, CCC Vice President-Commercial Lines Eric N. Mathews, AIAF CIC, CID, CCC Senior Vice President-Corporate Accounting and Treasurer Richard P. Matson CIC, CID, CCC, CFC-I, CLIC Vice President- Purchasing/Fleet Daniel T. McCurdy CIC, CID, CCC Senior Vice President-Bond & Executive Risk CCC Director Glenn D. Nicholson, LLIF CLIC Senior Vice President and Senior Marketing Officer Marc A. O’Dowd, CPA, CPCU CIC, CID, CCC, CLIC Internal Audit Officer Todd H. Pendery, FLMI CLIC Vice President-Corporate Accounting and Treasurer Thomas J. Scheid CIC, CID, CCC, CLIC Vice President- Premium Audit Thomas R. Schiff CIC, CID, CCC, CLIC Director Gregory D. Schmidt, CPCU, ARP, CSF, ARC CIC, CID, CCC, CLIC Vice President-Staff Underwriting 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, CPCU, CLU CIC, CID, CCC Senior Vice President- Corporate Communications J. B. Shockey, CPCU, CIC, CLU CIC, CID, CCC Vice President-Sales & Marketing David W. Sloan CFC-I Vice President-Leasing Steven A. Soloria, CFA CCM Vice President and Secretary Henry W. Stein, Jr. CIC, CID, CCC Vice President-Commercial Lines Duane I. Swanson, CIC CIC, CID, CCC Vice President-Sales & Marketing Jody L. Wainscott CIC, CID, CCC Vice President-Research & Development Larry R. Webb, CPCU CIC, CID, CCM Director Alan R. Weiler, CPCU CIC, CID, CCM Director Mark A. Welsh CIC, CID, CCC, CLIC Vice President-Staff Underwriting Mark S. Wietmarschen CIC, CID, CCC Vice President-Commercial Lines Gregory J. Ziegler CIC, CID, CCC, CLIC, CFC-I Vice President- Personnel Mark J. Huller CIC, CID, CCC, CLIC Senior Counsel Eugene M. Gelfand CIC, CID, CCC, CLIC Counsel G. Gregory Lewis CIC, CID, CCC, CLIC Counsel Lisa A. Love CIC, CID, CCC, CLIC Counsel Stephen C. Roach CIC, CID, CCC, CLIC Counsel CIC Directors Emeriti Vincent H. Beckman Robert J. Driehaus Richard L. Hildbold, CPCU William H. Zimmer Back to table of contents 19 (cid:2) SHAREHOLDER INFORMATION Cincinnati Financial Corporation had 11,486 direct shareholders of record as of December 31, 2002. Registered owners hold 30 percent of Cincinnati Financial Corporation’s outstanding shares. Many of the company’s independent agent representatives and most of the 3,511 associates of its subsidiaries own the company’s common stock. Stock Listing Common shares are traded under the symbol CINF on the Nasdaq National Market List. Annual Meeting The Annual Meeting of Shareholders of Cincinnati Financial Corporation will take place at 9:30 a.m. on Saturday, April 19, 2003, at the Cincinnati Art Museum in Eden Park, Cincinnati, Ohio. Shareholder Services Please direct inquiries about stock transfer, dividend reinvestment, dividend direct deposit, lost certificates, change of address and elimination of duplicate mailings to Kenneth W. Stecher, Chief Financial Officer, Cincinnati Financial Corporation, P. O. Box 145496, Cincinnati, Ohio 45250-5496, (513) 870-2639, or e-mail to investor_inquiries@cinfin.com. Form 10-K Cincinnati Financial Corporation’s Annual Report on Form 10-K, filed annually with the Securities and Exchange Commission, is available at no cost by contacting Mr. Stecher. You may access this document through a link to the SEC’s EDGAR database from the Investors/Financial Reports section of the company’s Web site, www.cinfin.com. Interim Communications Information regarding interim release dates and a Webcast of the company’s quarterly earnings conference call is available approximately two weeks after the end of each quarter on www.cinfin.com, or by calling (513) 870-2639 or by e-mail to investor_inquiries@cinfin.com. Corporate Headquarters Cincinnati Financial Corporation 6200 South Gilmore Road Fairfield, Ohio 45014-5141 Phone: (513) 870-2000 Fax: (513) 870-2066 Independent Auditors Deloitte & Touche LLP 250 East Fifth Street Cincinnati, Ohio 45202 COMMON STOCK PRICE AND DIVIDEND DATA __________________________________________________________________________________________ 2002 _________________________________________________________________________________________ 2001 Quarter 0000000000000000000000_____0$000,000 _________________ 00_________________ _________________ 1st 2nd 3rd 4th _________________ 1st ________________ 2nd _________________ 3rd ________________ 4th ------------------------------- High close . . . . . . . . . . . . . . . . . $43.66 36.71 Low close . . . . . . . . . . . . . . . . . . 43.66 Period end close . . . . . . . . . . . . . .2100 Cash dividends paid . . . . . . . . . . $47.04 43.41 46.53 .2225 $46.41 35.37 35.58 .2225 $39.44 32.69 37.55 .2225 $41.25 34.75 37.94 .19 $42.92 34.00 39.50 .21 $42.20 34.36 41.62 .21 $42.93 36.33 38.15 .21 20 Back to table of contents (cid:2) 

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