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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X Quarterly Report Under Section 13 or 15(d) of the
- ------- Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
Transition Report Pursuant to Section 13 or 15(d)
- -------- of the Securities Exchange Act of 1934
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Commission File Number 0-4604
CINCINNATI FINANCIAL CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
An Ohio Corporation 31-0746871
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6200 South Gilmore Road
Fairfield, Ohio 45014-5141
(Address of principal executive offices)
Registrant's telephone number, including area code: 513/870-2000
*Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
YES X . NO .
------- -------
Securities registered pursuant to Section 12(g) of the Act:
$2.00 Par Common--160,780,000 shares outstanding at March 31, 2000
$36,347,000 of 5.5% Convertible Senior Debentures Due 2002
$419,618,000 of 6.9% Senior Debentures Due 2028
Page 1 of 12
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PART I
ITEM 1. FINANCIAL STATEMENTS
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's omitted)
(Unaudited)
March 31, December 31,
2000 1999
------------ ------------
ASSETS
Investments
Fixed Maturities (Cost: 2000--$3,046,552;
1999--$2,692,154) ........................... $ 2,941,676 $ 2,617,412
Equity Securities (Cost: 2000--$2,076,282;
1999--$2,022,555) ........................... 6,631,681 7,510,918
Other Invested Assets .......................... 68,127 65,909
Cash .............................................. 54,473 339,554
Investment Income Receivable ...................... 86,146 80,128
Finance Receivables ............................... 32,066 32,931
Premiums Receivable ............................... 184,693 166,585
Reinsurance Receivable ............................ 173,922 159,229
Prepaid Reinsurance Premiums ...................... 24,113 24,684
Deferred Acquisition Costs Pertaining to Unearned
Premiums and to Life Policies in Force ......... 155,836 154,385
Land, Buildings and Equipment for Company Use (at
Cost Less Accumulated Depreciation) ............ 115,414 107,784
Other Assets ...................................... 95,761 120,695
------------ ------------
Total Assets ................................ $ 10,563,908 $ 11,380,214
============ ============
LIABILITIES
Insurance Reserves:
Losses and Loss Expenses ....................... $ 2,185,742 $ 2,154,149
Life Policy Reserves ........................... 872,903 860,561
Unearned Premiums ................................. 480,883 480,453
Notes Payable ..................................... 137,000 118,000
5.5% Convertible Senior Debentures Due 2002 ....... 36,347 36,759
6.9% Senior Debentures Due 2028 ................... 419,618 419,614
Federal Income Taxes
Current ........................................ 68,873 30,492
Deferred ....................................... 1,385,175 1,719,673
Other Liabilities ................................. 174,259 139,229
------------ ------------
Total Liabilities ........................... 5,760,800 5,958,930
------------ ------------
SHAREHOLDERS' EQUITY
Common Stock, $2 per Share; Authorized 200,000
Shares; Issued 2000--172,269; 1999--171,862
Shares; Outstanding 2000--160,780; 1999--162,021
Shares ......................................... 344,537 343,725
Paid-In Capital ................................... 245,742 237,859
Retained Earnings ................................. 1,672,704 1,623,890
Accumulated Other Comprehensive Income ............ 2,904,090 3,530,104
------------ ------------
5,167,073 5,735,578
Less Treasury Shares at Cost (2000--11,489 Shares;
1999--9,841 Shares) ............................ (363,965) (314,294)
------------ ------------
Total Shareholders' Equity .................. 4,803,108 5,421,284
------------ ------------
Total Liabilities and Shareholders' Equity $ 10,563,908 $ 11,380,214
============ ============
Accompanying notes are an integral part of these financial statements.
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS FOR INCOME
(UNAUDITED)
(000's omitted except per share data)
Three Months Ended March 31,
2000 1999
--------- ---------
Revenues:
Premiums Earned:
Property and Casualty ......................... $ 430,370 $ 396,097
Life .......................................... 17,012 15,532
Accident and Health ........................... 711 2,171
--------- ---------
Net Premiums Earned ........................ 448,093 413,800
Investment Income, Less Expenses .................. 106,279 95,816
Realized Gains on Investments ..................... 14,524 24,746
Other Income ...................................... 2,374 2,297
--------- ---------
Total Revenues ................................ 571,270 536,659
--------- ---------
Benefits & Expenses:
Insurance Losses and Policyholder Benefits......... 317,290 324,466
Commissions ....................................... 82,722 72,915
Other Operating Expenses .......................... 41,514 37,807
Taxes, Licenses & Fees ............................ 13,221 10,208
Increase in Deferred Acquisition Costs
Pertaining to Unearned Premiums
and to Life Policies in Force ................. (1,451) (102)
Interest Expense .................................. 9,162 7,785
Other Expenses .................................... 5,284 1,519
--------- ---------
Total Benefits & Expenses ..................... 467,742 454,598
--------- ---------
Income Before Income Taxes ........................... 103,528 82,061
--------- ---------
Provision for Income Taxes:
Current ........................................... 21,578 20,839
Deferred .......................................... 2,587 (3,255)
--------- ---------
Total Provision for Income Taxes .............. 24,165 17,584
--------- ---------
Net Income ........................................... $ 79,363 $ 64,477
========= =========
Average Shares Outstanding ........................... 161,430 166,102
========= =========
Average Shares Outstanding (diluted) ................. 164,859 171,116
========= =========
Per Common Share:
Net Income (basic) ................................ $ .49 $ .39
========= =========
Net Income (diluted) .............................. $ .48 $ .38
========= =========
Cash Dividends Declared ........................... $ .19 $ .17
========= =========
Accompanying notes are an integral part of these financial statements.
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(000's omitted)
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
------------------------------------------
Accumulated
Other Total
Common Stock Treasury Paid-In Retained Comprehensive Shareholders'
Shares Amount Stock Capital Earnings Income Equity
------- -------- --------- -------- ---------- ------------- -------------
Bal. Dec. 31,
1998 170,435 $340,871 $ (97,196) $218,328 $1,480,914 $3,678,019 $5,620,936
----------
Net Income 64,477 64,477
Change in Unreal
Gains Net of
Inc. Taxes of
$102,675 (190,682) (190,682)
----------
Comprehensive
Income (126,205)
Div. Declared (28,122) (28,122)
Purchase/Issuance of
Treasury Shares (62,389) 7 (62,382)
Stock Options
Exercised 100 200 1,453 1,653
Conversion of
Debentures 73 145 936 1,081
------- -------- --------- -------- ---------- ---------- ----------
Bal. March 31,
1999 170,608 $341,216 $(159,585) $220,724 $1,517,269 $3,487,337 $5,406,961
======= ======== ========= ======== ========== ========== ==========
Bal. Dec. 31,
1999 171,862 $343,725 $(314,294) $237,859 $1,623,890 $3,530,104 $5,421,284
----------
Net Income 79,363 79,363
Change in Unreal
Gains Net of
Inc. Taxes of
$337,084 (626,014) (626,014)
----------
Comprehensive
Income (546,651)
Div. Declared (30,549) (30,549)
Purchase/Issuance of
Treasury Shares (49,671) 1 (49,670)
Stock Options
Exercised 379 757 7,525 8,282
Conversion of
Debentures 28 55 357 412
------- -------- --------- -------- ---------- ---------- ----------
Bal. March 31,
2000 172,269 $344,537 $(363,965) $245,742 $1,672,704 $2,904,090 $4,803,108
======= ======== ========= ======== ========== ========== ==========
Accompanying notes are an integral part of these financial statements.
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000's omitted)
Three Months Ended March 31,
2000 1999
--------- ---------
Cash flows from operating activities:
Net income .......................................... $ 79,363 $ 64,477
Adjustments to reconcile operating income to net cash
provided by operating activities:
Depreciation and amortization .................... 4,969 3,345
Increase in investment income receivable ......... (6,018) (808)
Increase in premiums receivable .................. (18,108) (2,591)
Increase in reinsurance receivable ............... (14,693) (3,121)
Decrease in prepaid reinsurance premiums ......... 571 2,724
Decrease in deferred acquisition costs ........... (1,451) (102)
Decrease (increase) in accounts receivable ....... 29,016 15,896
Increase (decrease) in other assets .............. 968 (10,063)
Decrease in loss and loss expense reserves ....... 31,593 38,360
Increase in life policy reserves ................. 12,342 9,880
Increase (decrease) in unearned premiums ......... 430 (3,757)
Increase in other liabilities .................... 32,091 11,805
Decrease (increase) in deferred income taxes ..... 2,587 (3,255)
Realized gains on investments .................... (14,524) (24,746)
Decrease in current income taxes ................. 38,381 20,839
Other ............................................ (3,326) 13,280
--------- ---------
Net cash provided by operating activities .... 174,191 132,163
--------- ---------
Cash flows from investing activities:
Sale of fixed maturities ......................... 144,831 13,416
Call or maturity of fixed maturities investments.. 108,004 88,301
Sale of equity securities investments ............ 40,166 65,565
Collection of finance receivables ................ 3,512 3,718
Purchase of fixed maturities investments ......... (607,833) (106,877)
Purchase of equity securities investments ........ (78,160) (67,859)
Investment in land, buildings and equipment ...... (14,861) (45,721)
Investment in finance receivables ................ (2,647) (3,409)
Investment in other invested assets .............. (2,287) (1,428)
--------- ---------
Net cash used in investing activities ........ (409,275) (54,294)
--------- ---------
Cash flows from financing activities:
Proceeds from stock options exercised ............ 8,282 1,653
Purchase/Issuance of treasury shares ............. (49,670) (62,382)
Increase in notes payable ........................ 19,000 10,000
Payment of cash dividends to shareholders ........ (27,609) (25,564)
--------- ---------
Net cash used in financial activities ........ (49,997) (76,293)
--------- ---------
Net increase (decrease) in cash ........................ (285,081) 1,576
Cash at beginning of period ............................ 339,554 58,611
--------- ---------
Cash at end of period .................................. $ 54,473 $ 60,187
========= =========
Supplemental disclosures of cash flow information
Interest paid ....................................... $ 1,636 $ 0
========= =========
Income taxes paid ................................... $ (18,048) $ 0
========= =========
Accompanying notes are an integral part of these financial statements.
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company and
all of its subsidiaries, each of which is wholly owned, and are presented in
conformity with generally accepted accounting principles. All significant
inter-company investments and transactions have been eliminated in
consolidation. The December 31, 1999 consolidated balance sheet amounts are
derived from the audited financial statements but do not include all disclosures
required by generally accepted accounting principles.
INVESTMENTS--Fixed maturities and equity securities have been classified as
available for sale and are carried at fair values at March 31, 2000 and December
31, 1999.
UNREALIZED GAINS AND LOSSES (000's omitted)--The increases in unrealized losses
for fixed maturities and decreases in unrealized gains for equity securities
(net of income tax effect) for the three-month periods ended March 31 are as
follows:
Fixed Equity
Year Maturities Securities Total
---- ---------- ---------- -----
2000 $(19,587) $(606,427) $(626,014)
1999 $(24,463) $(166,219) $(190,682)
Such amounts are included as deductions from shareholders' equity.
REINSURANCE (000's omitted)--Premiums earned are net $27,710 and $26,565 of
premiums on ceded business for March 31, 2000 and 1999, respectively. Insurance
losses and policyholder benefits in the accompanying consolidated statements of
income are net of $22,866 and $11,289 reinsurance recoveries for March 31, 2000
and 1999, respectively.
NOTE II - STOCK OPTIONS
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. On
March 31, 2000, outstanding options for Stock Plan IV totalled 2,200,318 shares
with purchase prices ranging from a low of $7.71 to a high of $42.87,
outstanding options for Stock Plan V totalled 1,200,774 shares with purchase
prices ranging from a low of $20.47 to a high of $45.37 and outstanding options
for Stock Plan VI totalled 2,716,293 shares with purchase prices ranging from a
low of $29.38 to a high of $41.47.
NOTE III - INTERIM ADJUSTMENTS
The preceding summary of financial information for Cincinnati Financial
Corporation and consolidated subsidiaries is unaudited, but the Company believes
that all adjustments (consisting only of normal recurring accruals) necessary
for fair presentation have been made. The results of operations for this interim
period is not necessarily an indication of results to be expected for the
remaining nine months of the year.
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NOTE IV - SEGMENT INFORMATION
The Company is organized and operates principally in two industries and has four
reportable segments--commercial lines property and casualty insurance, personal
lines property and casualty insurance, life insurance and investment operations.
The accounting policies of the segments are the same as those described in Note
I - Accounting Policies. 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, for which results are regularly reviewed by Company
management in making decisions about resources to be allocated to the segments
and assess their performance, is summarized as follows (000's omitted):
Quarter Ended March 31,
2000 1999
----------- -----------
REVENUES
Commercial lines insurance ................ $ 283,393 $ 258,455
Personal lines insurance .................. 146,977 137,642
Life insurance ............................ 17,723 17,703
Investment operations ..................... 120,803 120,562
Corporate and other ....................... 2,374 2,297
----------- -----------
Total revenues ....................... $ 571,270 $ 536,659
=========== ===========
INCOME BEFORE INCOME TAXES
Property and casualty insurance ........... $ 7,459 $ (20,836)
Life insurance (312) 138
Investment operations ..................... 108,186 112,883
Corporate and other ....................... (11,805) (10,124)
----------- -----------
Total income before income taxes...... $ 103,528 $ 82,061
=========== ===========
IDENTIFIABLE ASSETS
Property and casualty insurance ........... $ 5,144,927 $ 5,471,113
Life insurance ............................ 1,455,394 1,193,610
Corporate and other ....................... 3,963,587 4,190,482
----------- -----------
Total identifiable assets ............ $10,563,908 $10,855,205
=========== ===========
NOTE V - FINANCIAL ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - SFAS No. 133 "Accounting For
Derivative Instruments and Hedging Activities" is effective for the Company in
2001. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The effects of the Statement to the Company are not
yet known.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (000's omitted)
This Management Discussion is intended to supplement the data contained in the
financial statements and related notes of Cincinnati Financial Corporation and
subsidiaries. The following discussion, related consolidated financial
statements and accompanying notes contain certain forward-looking statements
that involve potential risks and uncertainties. The Company's future results
could differ materially from those discussed. Factors that could cause or
contribute to such differences include, but are not limited to: unusually high
levels of catastrophe losses due to changes in weather patterns or other natural
causes; changes in insurance regulations or legislation that place the Company
at a disadvantage in the marketplace; recession or other economic conditions
resulting in lower demand for insurance products; sustained decline in overall
stock market values negatively impacting the Company's equity portfolio and the
ability to generate investment income. Readers are cautioned that the Company
undertakes no obligation to review or update the forward-looking statements
included in this material.
Premiums earned for the three months ended March 31, 2000 have increased $34,293
(8%) over the three months ended March 31, 1999. For our property and casualty
insurance companies, gross written premiums increased $38,032 and gross earned
premiums increased by $33,975. The growth rate of our property and casualty
subsidiaries on a gross written and earned basis is greater than last year,
because of rate increases and increased new business in commercial lines. The
premium volume of our life and health company increased $20. The premium growth
in our life products is mainly attributable to increased sales of both
traditional and work site marketing products. For the three-month period ended
March 31, 2000, investment income, net of expenses, has increased $10,463 (11%)
when compared with the first three months of 1999. This increase includes $5.4
million from a $302.9 million premium for a bank-owned life insurance (BOLI)
policy booked at the end of 1999. Excluding BOLI interest income, pre-tax
investment income rose 5.4 percent to $100.9 million versus a comparable $95.8
million in the first quarter of 1999. This increase is the result of the growth
of the investment portfolio because of investing cash flows from operations and
dividend increases from equity securities.
Realized gains on investments for the three months ended March 31, 2000 amounted
to $14,524 compared to $24,746 for the comparable three-month period March 31,
1999. The realized gains are predominantly the result of the sale of preferred
equity securities and management's decision to realize the gains and reinvest
the proceeds at higher yields. Other equity securities are sold at the
discretion of management and reinvested in other equity securities.
Insurance losses and policyholder benefits (net of reinsurance recoveries)
decreased $7,176 (2%) for the first three months of 2000 over the same period in
1999. Property and casualty company losses decreased $11,473 in the first
quarter of 2000, compared to the first quarter of 1999. Catastrophic claims were
lower by $15,474 in the same period. Policy holder benefits increased $4,297
over the first quarter of 1999 in the life insurance subsidiary.
Commission expenses increased $9,807 for the first quarter of 2000 compared to
the same period of 1999. Property and casualty commissions increased $8,055,
reflecting higher contingent commissions and higher growth of premiums written.
Life commissions increased 43%, or $1,752, caused by higher commissions on term
life insurance products. Other operating expenses increased $3,707 for the
three-month period ended March 31, 2000 compared to the same period for 1999.
The increase is attributable to increases in staff and costs associated to our
investment in infrastructure to support future growth. Taxes, licenses and fees
increased $3,013 for the first quarter of 2000 compared to the first quarter of
1999. First quarter 1999 reflected a savings of more than $2,000 from decreased
tax rates in our domicile state, Ohio, and related lower retaliatory taxes.
Interest expense increased $1,377 for the three-month period ended March 31,
2000 compared to the same period for 1999. The increase is attributable to
increased short-term debt compared to short-term debt previously held.
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Provision for income taxes, current and deferred, have increased by $6,581 for
the first three months of 2000 compared to the first three months of 1999. The
increase in federal taxes is attributable to higher income before taxes and an
increase in the effective tax rate of 23.34% at March 31, 2000 from 21.43% at
March 31, 1999.
In the first quarter of 2000 and 1999, the Company experienced a decrease in
unrealized gains in investments resulting in comprehensive income of ($546,651)
in 2000 compared to ($126,204) in 1999.
Market Risk - The Company could incur losses due to adverse changes in market
rates and prices. The Company's primary market risk exposures are to changes in
price for equity securities and changes in interest rates and credit ratings for
fixed maturity securities. The Company could alter the existing investment
portfolios or change the character of future investments to manage exposure to
market risk. CFC, with the Board of Directors, administers and oversees
investment risk through the Investment Committee, which provides executive
oversight of investment activities. The Company has specific investment
guidelines and policies that define the overall framework used daily by
investment portfolio managers to limit the Company's exposure to market risk.
On February 6, 1999, the Board authorized repurchase of up to seventeen million
of the Company's outstanding shares, with the intent to complete the repurchase
by December 31, 2000. This authorization supersedes the previous authorization
of nine million shares. As of March 31, 2000, the Company has repurchased 7,370
shares, leaving 9,630 future repurchased shares authorized.
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PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is involved in no material litigation other than routine litigation
incident to the nature of the insurance industry.
ITEM 2. Changes in Securities
There have been no material changes in securities during the first quarter.
ITEM 3. Defaults Upon Senior Securities
The Company has not defaulted on any interest or principal payment, and no
arrearage in the payment of dividends has occurred.
ITEM 4. Submission of Matters to a Vote of Security Holders
No special matters were voted upon by security holders during the first quarter.
ITEM 5. Other Information
No matters to report.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits included:
Exhibit 11--Statement re-Computation of Per Share Earnings.
Exhibit 27--Financial Data Schedule.
(b) The Company was not required to file any reports on Form 8-K
during the quarter ended March 31, 2000.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CINCINNATI FINANCIAL CORPORATION
--------------------------------
(Registrant)
Date May 4, 2000
---------------------------
By /s/ Kenneth W. Stecher
------------------------------------
Kenneth W. Stecher
Senior Vice President
(Principal Financial Officer)
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