1
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 JUNE 30, 2001
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--161,628,000 shares outstanding at June 30, 2001
$13,528,000 of 5.5% Convertible Senior Debentures Due 2002
$419,634,000 of 6.9% Senior Debentures Due 2028
Page 1 of 13
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PART I
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ITEM 1. FINANCIAL STATEMENTS
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
(Unaudited)
June 30, December 31,
Assets 2001 2000
- ------ ------------ ------------
Investments
Fixed maturities (cost: 2001--$2,961,967;
2000--$2,802,863) $ 2,937,114 $ 2,721,291
Equity securities (cost: 2001--$2,152,364;
2000--$2,067,984) 8,499,441 8,525,985
Other invested assets .......................... 66,443 68,560
Cash .............................................. 42,894 60,254
Investment income receivable ...................... 91,154 86,234
Finance receivables ............................... 29,557 30,718
Premiums receivable ............................... 704,157 652,340
Reinsurance receivable ............................ 271,117 214,576
Prepaid reinsurance premiums ...................... 19,082 15,246
Deferred policy acquisition costs ................. 274,901 258,734
Property and equipment, net, for Company use ...... 132,853 122,005
Other assets ...................................... 113,720 173,533
Separate accounts ................................. 375,243 357,615
------------ ------------
Total assets ................................ $ 13,557,676 $ 13,287,091
============ ============
Liabilities
Insurance reserves:
Losses and loss expenses ....................... $ 2,590,859 $ 2,473,059
Life policy reserves ........................... 636,218 605,421
Unearned premiums ................................. 1,016,533 921,872
Notes payable ..................................... 175,000 170,000
5.5% Convertible senior debentures due 2002 ....... 13,528 29,603
6.9% Senior debentures due 2028 ................... 419,634 419,631
Federal income taxes
Current ........................................ 17,926 0
Deferred ....................................... 2,036,892 2,057,641
Other liabilities ................................. 263,502 257,254
Separate accounts ................................. 375,243 357,615
------------ ------------
Total liabilities ........................... 7,545,335 7,292,096
------------ ------------
Shareholders' Equity
Common stock, $2 per share; authorized 200,000
shares; issued 2001--174,077; 2000--172,883
shares; outstanding 2001--161,628; 2000--160,891
shares ......................................... 348,153 345,766
Paid-in capital ................................... 269,673 254,156
Retained earnings ................................. 1,673,790 1,619,954
Accumulated other comprehensive income - unrealized
net capital gains .............................. 4,118,272 4,155,929
------------ ------------
6,409,888 6,375,805
Less treasury shares at cost (2001--12,449 shares;
2000--11,992 shares) ........................... (397,547) (380,810)
------------ ------------
Total shareholders' equity .................. 6,012,341 5,994,995
------------ ------------
Total liabilities and shareholders' equity $ 13,557,676 $ 13,287,091
============ ============
Accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 2 of 13
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(000's omitted except per share data)
Six Months Ended June 30, Three Months Ended June 30,
Revenues: 2001 2000 2001 2000
----------- ----------- ----------- -----------
Premium income:
Property and casualty ...................... $ 999,383 $ 880,089 $ 509,817 $ 449,719
Life ....................................... 37,750 37,015 20,662 20,003
Accident and health ........................ 1,766 1,476 913 765
----------- ----------- ----------- -----------
Net premiums earned ..................... 1,038,899 918,580 531,392 470,487
Net investment income ....................... 212,032 209,020 110,263 102,741
Realized gains on investments ............... 6,240 17,624 2,889 3,100
Other income ................................ 6,101 4,853 845 2,479
----------- ----------- ----------- -----------
Total revenues ............................. 1,263,272 1,150,077 645,389 578,807
----------- ----------- ----------- -----------
Benefits & expenses:
Insurance losses and policyholder benefits .. 781,628 646,895 424,616 329,605
Commissions ................................. 196,605 169,706 102,376 86,984
Other operating expenses .................... 95,191 82,698 49,328 41,184
Taxes, licenses & fees ...................... 29,527 27,313 11,898 14,092
Increase in deferred policy acquisition costs (16,167) (7,004) (8,644) (5,553)
Interest expense ............................ 20,134 19,141 9,929 9,979
Other expenses .............................. 8,297 11,160 4,722 5,876
----------- ----------- ----------- -----------
Total benefits & expenses .................. 1,115,215 949,909 594,225 482,167
----------- ----------- ----------- -----------
Income before income taxes .................... 148,057 200,168 51,164 96,640
----------- ----------- ----------- -----------
Provision for income taxes:
Current ...................................... 26,948 41,027 8,614 19,449
Deferred ..................................... (472) 5,084 (6,417) 2,497
----------- ----------- ----------- -----------
Total provision for income taxes ........... 26,476 46,111 2,197 21,946
----------- ----------- ----------- -----------
Net income .................................... $ 121,581 $ 154,057 $ 48,967 $ 74,694
=========== =========== =========== ===========
Average shares outstanding (basic) ............ 161,909 161,527 161,139 161,623
Average shares outstanding (diluted) .......... 164,395 164,895 163,810 165,549
Per common share:
Net income (basic) ............................ $ .75 $ .95 $ .30 $ . 46
=========== =========== =========== ===========
Net income (diluted) .......................... $ .74 $ .94 $ .30 $ . 45
=========== =========== =========== ===========
Cash dividends declared ....................... $ .42 $ .38 $ .21 $ . 19
=========== =========== =========== ===========
Accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3 of 13
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(000's omitted)
SIX MONTHS ENDED JUNE 30, 2000 AND 2001
---------------------------------------
Accumulated
Other Total
Common Stock Treasury Paid-In Retained Comprehensive Shareholders'
Shares Amount Stock 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
----------
Net income 154,057 154,057
Change in unreal.
gains net of
inc. taxes of
$325,210 (603,962) (603,962)
----------
Comprehensive
(loss) (449,905)
Div. declared (61,168) (61,168)
Purchase/issuance of
treasury shares (56,097) 4 (56,093)
Stock options
exercised 423 846 8,226 9,072
Conversion of
debentures 360 718 4,630 5,348
------- -------- ---------- --------- ----------- ----------- ----------
Bal. June 30,
2000 172,645 $345,289 $ (370,391) $ 250,719 $ 1,716,779 $ 2,926,142 $4,868,538
======= ======== ========== ========= =========== =========== ==========
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 121,581 121,581
Change in unreal.
gains net of
inc. taxes of
$20,277 (37,657) (37,657)
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Comprehensive
income 83,924
Div. declared (67,742) (67,742)
Purchase/issuance of
treasury shares (16,737) (1) (16,738)
Stock options
exercised 111 222 1,608 1,830
Conversion of
debentures 1,083 2,165 13,910 (3) 16,072
------- -------- ---------- --------- ----------- ----------- ----------
Bal. June 30,
2001 174,077 $ 348,153 $ (397,547) $ 269,673 $ 1,673,790 $ 4,118,272 $ 6,012,341
======== ========= ========== ========= =========== =========== ===========
Accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4 of 13
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000's omitted)
Six Months Ended June 30,
Cash flows from operating activities: 2001 2000
---- ----
Net income .......................................... $ 121,581 $ 154,057
Adjustments to reconcile operating income to net cash
provided by operating activities:
Depreciation and amortization .................... 12,627 8,252
Realized gains on investments .................... (5,471) (17,624)
Changes in:
Investment income receivable ................. (4,920) (9,011)
Premiums receivable .......................... (51,817) (28,675)
Reinsurance receivable ....................... (56,541) (34,597)
Prepaid reinsurance premiums ................. (3,836) 187
Deferred policy acquisition costs ............ (16,167) (7,004)
Accounts receivable .......................... (27,457) 26,136
Other assets ................................. 34,790 (19,655)
Loss and loss expense reserves ............... 117,800 47,077
Life policy reserves ......................... 30,797 25,286
Unearned premiums ............................ 94,661 10,294
Other liabilities ............................ 2,878 3,675
Deferred income taxes ........................ (472) 5,084
Current income taxes ......................... 50,833 47,274
--------- ---------
Net cash provided by operating activities .... 299,286 210,756
--------- ---------
Cash flows from investing activities:
Sale of fixed maturities ......................... 8,807 21,512
Call or maturity of fixed maturities investments . 116,021 305,611
Sale of equity securities investments ............ 65,875 56,868
Collection of finance receivables ................ 6,875 7,892
Purchase of fixed maturities investments ......... (291,418) (708,523)
Purchase of equity securities investments ........ (137,518) (118,742)
Investment in land, buildings and equipment ...... (7,291) (17,884)
Investment in finance receivables ................ (5,714) (6,584)
Net decrease (increase) in other invested assets . 1,998 (3,035)
--------- ---------
Net cash used in investing activities ........ (242,365) (462,885)
--------- ---------
Cash flows from financing activities:
Proceeds from stock options exercised ............ 1,830 9,072
Purchase/issuance of treasury shares ............. (16,738) (56,093)
Increase in notes payable ........................ 5,000 55,000
Payment of cash dividends to shareholders ........ (64,373) (58,157)
--------- ---------
Net cash used in financing activities ........ (74,281) (50,178)
--------- ---------
Net decrease in cash ................................... (17,360) (302,307)
Cash at beginning of period ............................ 60,254 339,554
--------- ---------
Cash at end of period .................................. $ 42,894 $ 37,247
========= =========
Supplemental disclosures of cash flow information
Interest paid ....................................... $ 5,405 $ 19,173
========= =========
Income taxes (refunded) ............................. $ (24,000) $ (7,604)
========= =========
Supplemental disclosures of non-cash activities
Noncash transaction - During the second quarter 2000,
the Company established a separate account. This
resulted in a noncash transfer to the separate
account of the following:
$300,818 from investments, $207,762 from life policy
reserves, $11,394 from cash, $8,984 from accounts
payable securities, $4,932 from investment income
receivable, $540 from other liabilities, and $142 from
accounts receivable securities.
The company converted the following securities during
the six month periods ended June 30;
Conversion of 6.9% senior debentures to common
stock.............................................. $ 16,073 $ 5,348
========= =========
Conversion of fixed maturity to equity security
investments........................................ $ 23,453 $ 11,685
========= =========
Accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5 of 13
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CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED 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 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 are not necessarily an indication of results to be expected for the
remaining six months of the year.
INVESTMENTS--Fixed maturities and equity securities have been classified as
available for sale and are carried at fair values at June 30, 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
effects) for the six-month and three-month periods ended June 30 are as follows:
Six Months Ended June 30, Three Months Ended June 30,
2001 2000 2001 2000
---- ---- ---- ----
Fixed maturities ... $ 37,295 $ (40,368) ($ 4,059) $ (20,781)
Equity securities .. (74,953) (563,594) 461,093 42,833
--------- --------- --------- ---------
Total ............ $ (37,658) $(603,962) $ 457,034 $ 22,052
========= ========= ========= =========
Such amounts are included as additions to and deductions from shareholders'
equity.
REINSURANCE (000's omitted)--Premiums earned are net of premiums on ceded
business, and insurance losses and policyholder benefits are net of reinsurance
recoveries in the accompanying statements of income for the six-month and
three-month periods ended June 30 as follows:
Six Months Ended June 30, Three Months Ended June 30,
2001 2000 2001 2000
---- ---- ---- ----
Ceded premiums ........... $ 77,428 $ 57,401 $ 39,950 $ 29,691
========== ========== ========== ==========
Reinsurance recoveries ... $ 102,544 $ 59,291 $ 35,108 $ 36,425
========== ========== ========== ==========
NOTE II - STOCK OPTIONS (000's omitted except per share data)
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
June 30, 2001, outstanding options for Stock Plan No. IV totaled 1,924 shares
with purchase prices ranging from a low of $11.56 to a high of $42.87,
outstanding options for Stock Plan V totaled 1,172 shares with purchase prices
ranging from a low of $20.47 to a high of $45.37 and outstanding options for
Stock Plan VI totaled 3,978 shares with purchase prices ranging from a low of
$29.38 to a high of $41.57.
Page 6 of 13
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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.
Six Months Ended Three Months Ended
June 30, June 30,
---------- ----------
(000's omitted) 2001 2000 2001 2000
---- ---- ---- ----
REVENUES
Commercial lines insurance ..... $ 693,181 $ 584,028 $ 355,238 $ 300,635
Personal lines insurance ....... 306,202 296,061 154,579 149,084
Life insurance ................. 39,516 38,491 21,575 20,768
Investment operations .......... 218,272 226,644 113,152 105,841
Corporate and other ............ 6,101 4,853 845 2,479
----------- ----------- ----------- -----------
Total revenues ............. $ 1,263,272 $ 1,150,077 $ 645,389 $ 578,807
=========== =========== =========== ===========
INCOME (LOSS) BEFORE INCOME TAXES
Property and casualty insurance $ (30,138) $ 14,302 $ (38,550) $ 6,843
Life insurance ................. 2,058 3,433 (498) 3,745
Investment operations .......... 199,479 204,128 103,488 95,942
Corporate and other ............ (23,342) (21,695) (13,276) (9,890)
----------- ----------- ----------- -----------
Total income before income taxes $ 148,057 $ 200,168 $ 51,164 $ 96,640
=========== =========== =========== ===========
June 30, December 31,
2001 2000
----------- -------------
IDENTIFIABLE ASSETS
Property and casualty insurance........................ $ 6,625,738 $ 6,487,819
Life insurance......................................... 1,705,299 1,619,169
Corporate and other ................................... 5,226,639 5,180,103
---------- -----------
Total identifiable assets.......................... $13,557,676 $13,287,091
=========== ===========
NOTE IV - FINANCIAL ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - SFA No. 133 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.
Page 7 of 13
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During the second quarter of 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 related unrealized gain or loss on
this contract is a component of comprehensive income. The interest rate swap
contract is reflected at fair value in the Company's consolidated balance sheet.
This unrealized gain at June 30, 2001 is not significant. The net effect of this
accounting on the Company's operating results is that interest expense on the
portion of variable rate debt being hedged is recorded based on fixed interest
rates.
On June 29, 2001, Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations" was approved by the Financial Accounting Standards Board
(FASB). SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Goodwill and certain
intangible assets will remain on the balance sheet and not be amortized. On an
annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. The Company is required to implement SFAS No. 141
on July 1, 2001 and it has not determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company is required to implement SFAS No. 142 on
January 1, 2002. The Company does not expect that SFAS No. 142 will have a
material effect on its consolidated financial statements.
Page 8 of 13
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (000's omitted, except percentages)
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 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 six months ended June 30, 2001 have increased $120,319
(13%) over the six months ended June 30, 2000. Also, premiums earned have
increased $60,905 (13%) for the three months ended June 30, 2001 over the three
months ended June 30, 2000. For the six-month and three-month periods ended June
30, 2001, the premium growth rate of our property and casualty subsidiaries is
more than last year because of rate increases of approximately 15-20 percent on
many commercial policies. Three-month new business was $66.8 million, the same
level as last year this time as we have instituted stricter underwriting
guidelines. The premium growth of our life and health subsidiary increased 3
percent for the six months ended June 30, 2001 and 4 percent for the three
months ended June 30, 2001 compared to the same periods of 2000. The premium
growth in our life subsidiary is mainly attributable to increased sales of both
traditional and work site marketing products.
For the six-month and three-month periods ended June 30, 2001, investment
income, net of expenses, has increased $8,332 (4%) and $7,522 (7%) when compared
with the first six months and second three months of 2000, respectively,
excluding $5.3 million in 2000 interest income from a bank-owned life insurance
(BOLI) policy. The increase is the result of the growth of the investment
portfolio because of investing cash flows from operations and dividend increases
from equity securities. Included in investment income for the six- and
three-month periods ended June 30, 2001 are approximately $4,500 and $1,877
related to changes in fair values of embedded derivatives in the Company's
investment portfolio.
Realized gains on investments for the six months ended June 30, 2001 amounted to
$6,240 compared to $17,624 for the six-month period ended June 30, 2000, and
$2,889 for the three-month period ended June 30, 2001 compared to $3,100 for the
three-month period ended June 30, 2000. 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)
increased $134,733 (21%) for the first six months of 2001 over the same period
in 2000 and increased $95,011 (29%) for the second quarter when compared to the
second quarter of 2000. The losses of the property and casualty companies have
increased $135,328 for the six-month period and increased $91,693 for the second
quarter of 2001, compared to the comparable periods for 2000. Catastrophe losses
were $41,654 and $31,488 respectively, for the first six months of 2001 and 2000
and were $34,958 and $23,376 respectively, for the second quarter of 2001 and
2000. Losses on newly reported claims of $250 and greater were $58,308 in the
second quarter 2001, compared to $40,817 in the second quarter 2000.
Additionally, adverse development on previously reported claims on excess of
$250 were $34,597 in the second quarter 2001, compared to $19,016 in the second
quarter 2000.
Page 9 of 13
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Policyholder benefits of the life insurance subsidiary decreased $335 for the
first six months of 2001 over the same period of 2000 and increased $3,318 for
the second quarter when compared to the second quarter of 2000. The majority of
the second quarter increase is the result of a higher incidence of death claims
and life related costs.
Property casualty commission expenses increased $23,293 for the six-month period
ended June 30, 2001 compared to the same period of 2000 and increased $13,590
for the second quarter of 2001 compared to the same period in 2000. The increase
is primarily attributable to increased written premiums. Other operating
expenses increased $11,550 for the six-month period ended June 30, 2001 compared
to the same period for 2000 and increased $7,672 for the second quarter of 2001
compared to the same period in 2000. These increases are attributable to
increases in staff and costs associated with or related to our investment in
technology and our infrastructure to support future growth. Taxes, licenses and
fees increased $1,662 for the six-month period ended June 30, 2001 compared to
the same period in 2000, and second quarter 2001 taxes, licenses and fees
decreased $2,469, compared to second quarter 2000.
Interest expense increased $993 for the six-month period ended June 30, 2001
compared to the same period for 2000 and decreased $50 for the second quarter of
2001 compared to the same period in 2000. The lower six-month increase and the
three-month decrease are both the result of lower interest rate costs on the
short term debt than in the same period in the prior year.
In the first six months of 2001, the Company experienced a small decrease in
unrealized gains in investments, resulting in comprehensive income (loss) of
$83,924 in 2001 compared to ($449,905) in 2000. The second quarter of 2001 and
2000 resulted in increased unrealized gains, resulting in comprehensive increase
of $506,002 in 2001 and $96,747 in 2000. Our top 10 equity holdings accounted
for $441,178 of the increase in unrealized gains, net of tax, in the second
quarter 2001 and ($76,519) during the year 2001.
Provision for income taxes, current and deferred, have decreased by $19,635 for
the first six months of 2001 compared to the first six months of 2000 and have
decreased $19,749 for the second quarter of 2001 compared to the second quarter
of 2000. The effective tax rates for the six months ended June 30, 2001 and 2000
were 17.9% and 23.0%, respectively. Second quarter effective tax rates were 4.3%
and 22.7%, for 2001 and 2000, respectively. Rates in 2001 were lower primarily
because of underwriting losses in 2001 compared to underwriting gains in 2000.
During 1996, the Company's Board of Directors authorized the repurchase of
outstanding shares. During 2001, 457 shares were repurchased at a cost of
$16,747. Since the inception of the repurchase program, the Company has
repurchased 12,232 shares. At June 30, 2001, 8.8 million shares remain
authorized for repurchase at any time in the future.
Comprehensive Income - The principal difference between net income and
comprehensive income is the net after-tax change in unrealized gains on
marketable securities. For the three- and six-month periods ended June 30, 2001
and 2000, such net unrealized gains increased (decreased), net of related income
tax effects, by the following amounts (in thousands):
2001 2000
----- ----
Three months ended June 30 $457,034 $ 22,052
Six months ended June 30 ($ 37,657) ($603,962)
Changes in net unrealized gains on marketable securities result from both market
conditions and realized gains recognized in a reporting period.
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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. The Company, 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 market risks associated with the Company's investment portfolios have not
changed materially from those disclosed at year-end 2000.
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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 second 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
On April 7, 2001, the registrant held its Annual Meeting of Stockholders for
which the Board of Directors solicited proxies; all nominees named in the
Registrant's Proxy Statement were elected.
SHARES (000'S)
------------------------------
FOR AGAINST/ABSTAIN
------- ---------------
W. Rodney McMullen 139,356 1,834
Michael Brown 138,830 2,359
John E. Field 139,206 1,983
Robert C. Schiff 139,173 2,016
John M. Shepherd 139,376 1,813
Alan R. Weiler 139,189 2,001
ITEM 5. OTHER INFORMATION
No matters to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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 June 30, 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 AUGUST 10, 2001
-------------------------------
BY/S/ KENNETH W. STECHER
---------------------------------
Kenneth W. Stecher
Chief Financial Officer
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