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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Under Section 13 or 15 (d) of the
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Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
Transition Report Pursuant to Section 13 or 15 (d)
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of the Securities Exchange Act of 1934
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Commission File Number 0-4604
CINCINNATI FINANCIAL CORPORATION
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(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: 513/870-2001
*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 .
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Securities registered pursuant to Section 12(g) of the Act:
$2.00 Par Common--160,714,000 shares outstanding at March 31, 2001
$29,455,000 of 5.5% Convertible Senior Debentures Due 2002
$419,631,000 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
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
(Unaudited)
March 31, December 31,
2001 2000
---- ----
Assets
- ------
Investments
Fixed maturities (amortized cost: 2001--$2,884,009;
2000--$2,802,863) .............................. $ 2,866,750 $ 2,721,291
Equity securities (cost: 2001--$2,121,829;
2000--$2,067,984) .............................. 7,756,331 8,525,985
Other invested assets ............................. 68,428 68,560
Cash ................................................. 67,279 60,254
Investment income receivable ......................... 86,059 86,234
Finance receivables .................................. 29,812 30,718
Premiums receivable .................................. 657,693 652,340
Reinsurance receivables .............................. 281,764 214,576
Prepaid reinsurance premiums ......................... 19,225 15,246
Deferred acquisition costs pertaining to unearned
premiums and to life policies in force ............ 266,257 258,734
Land, buildings and equipment for company use (at
cost less accumulated depreciation) ............... 121,112 122,005
Other assets ......................................... 97,925 173,533
Separate accounts .................................... 376,613 357,615
------------ ------------
Total assets ................................... $ 12,695,248 $ 13,287,091
============ ============
Liabilities
- -----------
Insurance reserves:
Losses and loss expenses .......................... $ 2,531,900 $ 2,473,059
Life policy reserves .............................. 622,590 605,421
Unearned premiums .................................... 977,386 921,872
Other liabilities .................................... 250,638 257,254
Deferred income taxes ................................ 1,797,751 2,057,641
Notes payable ........................................ 158,000 170,000
6.9% Senior debentures due 2028 ...................... 419,631 419,631
5.5% Convertible senior debentures due 2002 .......... 29,455 29,603
Separate accounts .................................... 376,613 357,615
------------ ------------
Total liabilities .............................. 7,163,964 7,292,096
------------ ------------
Shareholders' equity
- --------------------
Common stock, $2 per share;
authorized 200,000 shares;
issued 2001--172,958; 2000--172,883 shares;
outstanding 2001--160,714; 2000--160,891 shares ... 345,915 345,766
Paid-in capital ...................................... 255,134 254,156
Retained earnings .................................... 1,658,765 1,619,954
Accumulated other comprehensive income-unrealized
net capital gains ................................ 3,661,237 4,155,929
------------ ------------
5,921,051 6,375,805
Less treasury shares at cost (2001--12,244 shares;
2000--11,992 shares) .............................. (389,767) (380,810)
------------ ------------
Total shareholders' equity ..................... 5,531,284 5,994,995
------------ ------------
Total liabilities and shareholders' equity .. $ 12,695,248 $ 13,287,091
============ ============
Accompanying notes are an integral part of these condensed consolidated
financial statements.
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(000's omitted except per share data)
Three Months Ended March 31,
2001 2000
---- ----
Revenues:
Premium income:
Property and casualty ................ $ 489,566 $ 430,370
Life ................................. 17,088 17,012
Accident and health .................. 853 711
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Premiums earned ................... 507,507 448,093
Net investment income .................... 101,768 106,279
Realized gains on investments ............ 3,351 14,524
Other income ............................. 5,256 2,374
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Total revenues ....................... 617,882 571,270
--------- ---------
Benefits & expenses:
Insurance losses and policyholder benefits 357,013 317,289
Commissions .............................. 94,229 84,526
Other operating expenses ................. 45,863 41,985
Taxes, licenses & fees ................... 17,627 13,497
Increase in deferred acquisition costs
pertaining to unearned premiums
and to life policies in force ........ (7,523) (4,001)
Interest expense ......................... 10,206 9,162
Other expenses ........................... 3,575 5,284
--------- ---------
Total benefits & expenses ............ 520,990 467,742
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Income before income taxes .................. 96,892 103,528
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Provision for income taxes:
Current .................................. 18,334 21,578
Deferred ................................. 5,945 2,587
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Total provision for income taxes ..... 24,279 24,165
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Net income .................................. $ 72,613 $ 79,363
========= =========
Average shares outstanding (diluted) ........ 166,154 164,859
========= =========
Per common share:
Net income (basic) ....................... $ .45 $ .49
========= =========
Net income (diluted) ..................... $ .44 $ .48
========= =========
Cash dividends declared .................. $ .21 $ .19
========= =========
Accompanying notes are an integral part of these condensed consolidated
financial statements.
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(000's omitted)
THREE MONTHS ENDED MARCH 31, 2000 AND 2001
Accumulated
Common Treasury Other Total
Common Stock Stock Paid-In Retained Comprehensive Shareholders'
Shares Amount Amount Capital Earnings Income Equity
------ ------ ------ ------- -------- ------ ------
Bal. Dec. 31,
1999 171,862 $ 343,725 $(314,294) $237,859 $1,623,890 $ 3,530,104 $ 5,421,284
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Net income 79,363 79,363
Change in unreal
gains net of
inc. taxes of
$337,084 (626,014) (626,014)
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Comprehensive
Income (loss) (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
======== ========= ========= ======== ========== =========== ===========
Bal. Dec. 31,
2000 172,883 $ 345,766 $(380,810) $254,156 $1,619,954 $ 4,155,929 $ 5,994,995
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Net income 72,613 72,613
Change in unreal
gains net of
inc. taxes of
$266,373 (494,692) (494,692)
-----------
Comprehensive
Income (loss) (422,079)
Div. declared (33,802) (33,802)
Purchase/issuance of
treasury shares (8,957) (1) (8,958)
Stock options
exercised 65 129 851 980
Conversion of
debentures 10 20 128 148
-------- --------- --------- -------- ---------- ----------- -----------
Bal. March 31,
2001 172,958 $ 345,915 $(389,767) $255,134 $1,658,765 $ 3,661,237 $ 5,531,284
======== ========= ========= ======== ========== =========== ===========
Accompanying notes are an integral part of these condensed consolidated
financial statements.
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000's omitted)
Three Months Ended March 31,
2001 2000
---- ----
Cash flows from operating activities:
Net income ........................................... $ 72,613 $ 79,363
Adjustments to reconcile operating income to net cash
provided by operating activities:
Depreciation and amortization ..................... 7,114 4,969
Decrease (increase) in investment income receivable 175 (6,018)
Increase in premiums receivable ................... (5,353) (28,713)
Increase in reinsurance receivable ................ (67,188) (14,693)
Increase (decrease) in prepaid reinsurance premiums (3,979) 571
Increase in deferred acquisition costs ............ (7,523) (3,998)
Decrease in accounts receivable ................... 1,929 29,016
Decrease (increase) in other assets ............... 53,892 (2,358)
Increase in loss and loss expense reserves ........ 58,841 31,593
Increase in life policy reserves .................. 17,169 12,342
Increase in unearned premiums ..................... 55,514 11,035
(Decrease) increase in other liabilities .......... (9,847) 34,638
Increase in deferred income taxes ................. 6,483 2,587
Realized gains on investments ..................... (3,351) (14,524)
Increase in current income taxes .................. 17,746 38,381
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Net cash provided by operating activities ..... 194,235 174,191
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Cash flows from investing activities:
Sale of fixed maturities .......................... 6,518 144,831
Call or maturity of fixed maturities investments .. 56,935 108,004
Sale of equity securities investments ............. 20,622 40,166
Collection of finance receivables ................. 3,433 3,512
Purchase of fixed maturities investments .......... (147,664) (607,833)
Purchase of equity securities investments ......... (69,529) (78,160)
Investment in land, buildings and equipment ....... (4,522) (14,861)
Investment in finance receivables ................. (2,527) (2,647)
Proceeds from (investment in) other invested assets 72 (2,287)
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Net cash used in investing activities ......... (136,662) (409,275)
--------- ---------
Cash flows from financing activities:
Proceeds from stock options exercised ............. 980 8,282
Purchase/Issuance of treasury shares .............. (8,958) (49,670)
(Decrease) increase in notes payable .............. (12,000) 19,000
Payment of cash dividends to shareholders ......... (30,570) (27,609)
--------- ---------
Net cash used in financial activities ......... (50,548) (49,997)
--------- ---------
Net decrease (increase) in cash ......................... 7,025 (285,081)
Cash at the beginning of the period ..................... 60,254 339,554
--------- ---------
Cash at the end of the period ........................... $ 67,279 $ 54,473
========= =========
Supplemental disclosures of cash flow information
Interest paid ........................................ $ 3,305 $ 1,636
========= =========
Income taxes paid .................................... $ 0 $ (18,048)
========= =========
Accompanying notes are an integral part of these condensed consolidated
financial statements.
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - ACCOUNTING POLICIES
The condensed 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 accounting principles generally accepted in the
United States of America. All significant inter-company investments and
transactions have been eliminated in consolidation. The December 31, 2000
consolidated balance sheet amounts are derived from the audited financial
statements but do not include all disclosures required by accounting principles
generally accepted in the United States of America.
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.
INVESTMENTS--Fixed maturities and equity securities have been classified as
available for sale and are carried at fair values at March 31, 2001 and December
31, 2000.
UNREALIZED GAINS AND LOSSES (000's omitted)--The increases (decreases) in
unrealized gains for fixed maturities and equity securities (net of income tax
effect) for the three-month periods ended March 31 are as follows:
Fixed Equity
Year Maturities Securities Total
---- ---------- ---------- -----
2001 $ 41,354 $(536,046) $(494,692)
2000 $(19,587) $(606,427) $(626,014)
Such amounts are included as deductions from shareholders' equity.
REINSURANCE (000's omitted)--Premiums earned are net of $37,477 and $27,710
premiums on ceded business for March 31, 2001 and 2000, respectively. Insurance
losses and policyholder benefits in the accompanying consolidated statements of
income are net of $67,435 and $22,866 reinsurance recoveries for March 31, 2001
and 2000, 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, 2001, outstanding options for Stock Plan IV totalled 1,984,025 shares
with purchase prices ranging from a low of $10.07 to a high of $42.87,
outstanding options for Stock Plan V totalled 1,179,470 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 3,971,277 shares with purchase prices ranging from a
low of $29.38 to a high of $41.47.
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NOTE III - 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 in the following table. Information
regarding income before income taxes and identifiable assets is not available
for two reportable segments - commercial lines and personal lines - property
casualty insurance.
Quarter Ended March 31,
(000's omitted) 2001 2000
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REVENUES
Commercial lines insurance .......... $ 337,943 $ 283,393
Personal lines insurance ............ 151,623 146,977
Life insurance ...................... 17,941 17,723
Investment operations ............... 105,119 120,803
Corporate and other ................. 5,256 2,374
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Total revenues ................. $ 617,882 $ 571,270
============ ============
INCOME BEFORE INCOME TAXES
Property and casualty insurance ..... $ 8,412 $ 7,459
Life insurance ...................... 2,556
(312)
Investment operations ............... 95,991 108,186
Corporate and other ................. (10,067) (11,805)
------------ ------------
Total income before income taxes $ 96,892 $ 103,528
============ ============
IDENTIFIABLE ASSETS
Property and casualty insurance ..... $ 6,311,238 $ 5,144,927
Life insurance ...................... 1,650,825 1,455,394
Corporate and other ................. 4,733,185 3,963,587
------------ ------------
Total identifiable assets ...... $ 12,695,248 $ 10,563,908
============ ============
NOTE IV - FINANCIAL ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 133 (SFAS
133), Accounting for Derivative Instruments and Hedging Activities, on January
1, 2001. SFAS 133 requires that all derivative financial instruments, such as
convertible debt, convertible preferred stock, interest rate swap contracts and
foreign exchange contracts, be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair market value of derivative financial instruments are either
recognized periodically in income or shareholders' equity (as a component of
comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value or cash flows. The adoption of SFAS 133 did not have
a significant impact on the consolidated results of operations, financial
position or cash flows of the Company because the Company does not have
significant derivative activity.
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Subsequent to March 31, 2001, the Company entered into an interest rate swap as
a cash flow hedge of variable interest payments. (The risk designated as being
hedged is the risk of changes in cash flows attributable to changes in market
interest rates.) For this interest rate swap contract under which the Company
agrees to pay a fixed rate of interest, the contract is considered to be a hedge
against changes in the amount of future cash flows associated with the Company's
interest payments of certain variable rate debt obligations ($31 million
notional amount). Accordingly, the interest rate swap contract will be reflected
at fair value in the Company's consolidated balance sheet and the related gain
or loss on this contract will be a component of comprehensive income. The net
effect of this accounting on the Company's operating results will be that
interest expense on the portion of variable rate debt being hedged will
generally be recorded based on fixed interest rates.
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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 to the condensed 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, 2001 have increased $59,414
(13%) over the three months ended March 31, 2000. For our property and casualty
insurance companies, gross written premiums increased $83,434, net written
premiums increased by $69,094 and net earned premiums increased by $59,365. The
premium growth rates are greater than last year primarily because of rate
increases. Commercial lines new business increased 5%. Earned premiums of our
life company increased $218. 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, 2001, investment income,
net of expenses, has increased $.9 (1%) when compared with the first three
months of 2000, excluding $5.3 million in 2000 interest income from a bank-owned
life insurance (BOLI) policy. Lack of growth was attributable to the average
yield for the bond portfolio decreasing and lower dividends earned in the
quarter. Realized gains on investments for the three months ended March 31, 2001
amounted to $3,351 compared to $14,524 for the comparable three-month period
March 31, 2000.
Insurance losses and policyholder benefits (net of reinsurance recoveries)
increased $39,724 (13%) for the first three months of 2001 over the same period
in 2000. Property and casualty company losses increased $43,376 in the first
quarter of 2001, compared to the first quarter of 2000, while policy holder
benefits decreased $3,652 over the first quarter of 2000 in the life insurance
subsidiary. The increase in property casualty losses is primarily due to a 30%
increase in losses incurred for claims $250 or less. Catastrophic claims were
lower by $1,415 in the same period.
Commission expenses increased $9,703 for the first quarter of 2001 compared to
the same period of 2000. Property and casualty commissions increased $10,503,
reflecting higher contingent commissions and higher growth of premiums written.
Life commissions decreased $800. In the first quarter 2000, a backlog of "Triple
X" term insurance processing resulted in higher premiums and commissions. 2001
commissions are lower, as these policies now are paying a renewal commission
instead of a first year commission. Other operating expenses increased $3,878
for the three-month period ended March 31, 2001 compared to the same period for
2000. The increase is attributable to increases in staff and other internal
development costs associated with our investment in infrastructure to support
future growth. Taxes, licenses and fees increased $4,130 for the first quarter
of 2001 compared to the first quarter of 2000 primarily due to growth in written
premiums. Interest expense increased $1,044 for the three-month period ended
March 31, 2001 compared to the same period for 2000. A large portion of the
increase is attributable to more short-term debt held at March 31, 2001.
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There was no significant change in the provision for federal income taxes for
the first three months of 2001 compared to the first three months of 2000.
In the first quarter of 2001 and 2000, the Company experienced a decrease in
unrealized gains in investments resulting in comprehensive income of ($422,079)
in 2001 compared to ($546,651) in 2000. Our top 10 equity holdings accounted for
$517,697 of the decrease in unrealized gains for 2001.
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.
The Company's Board of Directors has authorized the repurchase of outstanding
shares. At March 31, 2001, 8.9 million shares remain authorized for repurchase
at any time in the future. During the first quarter 2001, 252 shares were
repurchased at a cost of $8,967. As of March 31, 2001, the Company has
repurchased 12,027 shares.
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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.
(b) The Company was not required to file any reports on Form
8-K during the quarter ended March 31, 2001.
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 8, 2001
---------------------------
By/s/ Kenneth W. Stecher
-----------------------------
Kenneth W. Stecher
Chief Financial Officer
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