UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-Q
X Quarterly Report Under Section 13 or 15 (d) of the
------- Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
Transition Report Pursuant to Section 13 or 15 (d)
-------- of the Securities Exchange Act of 1934
-----------------------------
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--161,527,000 shares outstanding at October 31, 2001
$12,856,000 of 5.5% Convertible Senior Debentures Due 2002
$419,638,000 of 6.9% Senior Debentures Due 2028
Page 1 of 12
PART I
------
ITEM 1. FINANCIAL STATEMENTS
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
(Unaudited)
September 30, December 31,
2001 2000
------------- ------------
Assets
- ------
Investments:
Fixed maturities (cost: 2001--$2,989,453;
2000--$2,802,863)........................................ $ 2,949,403 $ 2,721,291
Equity securities (cost: 2001--$2,179,320;
2000--$2,067,984)........................................ 8,420,264 8,525,985
Other invested assets...................................... 65,996 68,560
Cash ........................................................ 137,225 60,254
Investment income receivable.................................. 88,017 86,234
Finance receivables........................................... 28,771 30,718
Premiums receivable........................................... 710,748 652,340
Reinsurance receivable........................................ 232,697 214,576
Prepaid reinsurance premiums.................................. 18,830 15,246
Deferred policy acquisition costs............................. 280,721 258,734
Property and equipment, net, for Company use.................. 129,256 122,005
Other assets.................................................. 106,633 173,533
Assets held in separate accounts.............................. 390,356 357,615
------------ ------------
Total assets $ 13,558,917 $ 13,287,091
============ ============
Liabilities
- -----------
Insurance reserves:
Losses and loss expenses................................... $ 2,625,469 $ 2,473,059
Life policy reserves....................................... 655,813 605,421
Unearned premiums............................................. 1,041,473 921,872
Notes payable ................................................ 175,000 170,000
5.5% Convertible senior debentures due 2002................... 12,856 29,603
6.9% Senior debentures due 2028............................... 419,638 419,631
Federal income taxes
Current.................................................... 26,657 0
Deferred .................................................. 1,983,319 2,057,641
Other liabilities............................................. 302,786 257,254
Liabilities related to separate accounts...................... 390,356 357,615
------------ ------------
Total liabilities 7,633,367 7,292,096
------------ ------------
Shareholders' Equity
- --------------------
Common stock, $2 per share; authorized 200,000
shares; issued 2001--174,495; 2000--172,883
shares; outstanding 2001--161,512; 2000--160,891
shares..................................................... 348,990 345,766
Paid-in capital .............................................. 277,395 254,156
Retained earnings............................................. 1,675,626 1,619,954
Accumulated other comprehensive income - unrealized
net capital gains......................................... 4,041,606 4,155,929
------------ ------------
6,343,617 6,375,805
Less treasury shares at cost (2001--12,983 shares;
2000--11,992 shares)....................................... (418,067) (380,810)
------------ ------------
Total shareholders' equity.............................. 5,925,550 5,994,995
------------ ------------
Total liabilities and shareholders' equity........... $ 13,558,917 $ 13,287,091
============ ============
Accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 2 of 12
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(000's omitted except per share data)
Nine Months Ended September 30, Three Months Ended September 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues:
Premium income:
Property and casualty ...................... $ 1,519,010 $ 1,345,746 $ 519,629 $ 465,657
Life ....................................... 55,084 55,198 17,333 18,183
Accident and health ........................ 2,708 2,396 942 920
----------- ----------- ----------- -----------
Net premiums earned ..................... 1,576,802 1,403,340 537,904 484,760
Net investment income ....................... 313,342 311,650 105,809 102,630
Realized gains (losses) on investments ...... 7,865 27,769 (2,874) 10,145
Other income ................................ 9,133 7,108 3,031 2,255
----------- ----------- ----------- -----------
Total revenues ............................. 1,907,142 1,749,867 643,870 599,790
----------- ----------- ----------- -----------
Benefits & expenses:
Insurance losses and policyholder benefits .. 1,226,837 1,065,279 445,208 418,384
Commissions ................................. 296,556 265,262 99,951 91,949
Other operating expenses .................... 135,628 123,310 40,437 40,718
Taxes, licenses & fees ...................... 44,340 42,992 14,813 15,127
Increase in deferred policy acquisition costs (21,987) (21,407) (5,820) (9,303)
Interest expense ............................ 30,162 29,195 10,028 9,007
Other expenses .............................. 13,249 53,799 4,952 42,639
----------- ----------- ----------- -----------
Total benefits & expenses .................. 1,724,785 1,558,430 609,569 608,521
----------- ----------- ----------- -----------
Income (loss) before income taxes ............. 182,357 191,437 34,301 (8,731)
----------- ----------- ----------- -----------
Provision (benefit) for income taxes:
Current ...................................... 38,211 42,331 11,263 1,304
Deferred ..................................... (13,175) (10,528) (12,703) (15,612)
----------- ----------- ----------- -----------
Total provision (benefit) for income taxes . 25,036 31,803 (1,440) (14,308)
----------- ----------- ----------- -----------
Net income .................................... $ 157,321 $ 159,634 $ 35,741 $ 5,577
=========== =========== =========== ===========
Average shares outstanding (basic) ............ 161,022 160,924 159,277 159,732
Average shares outstanding (diluted) .......... 163,297 164,158 161,846 161,560
Per common share:
Net income (basic) ............................ $ .98 $ .99 $ .22 $ . 03
=========== =========== =========== ===========
Net income (diluted) .......................... $ .97 $ .98 $ .22 $ .03
=========== =========== =========== ===========
Cash dividends declared ....................... $ .63 $ .57 $ .21 $ . 19
=========== =========== =========== ===========
Accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3 of 12
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(000's omitted)
Nine Months Ended September 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 159,634 159,634
Change in unreal. gains
net of inc. taxes
of $(33,114) 61,497 61,497
----------
Comprehensive
income 221,131
Div. declared (91,732) (91,732)
Purchase/issuance of
treasury shares (62,109) 9 (62,100)
Stock options
exercised 467 934 8,878 9,812
Conversion of
debentures 399 798 5,146 (1) 5,943
-------- --------- ---------- --------- ----------- ----------- ----------
Bal. Sept. 30, 2000 172,728 $ 345,457 $ (376,403) $ 251,892 $ 1,691,791 $ 3,591,601 $5,504,338
======== ========= ========== ========= =========== =========== ==========
Bal. Dec. 31, 2000 172,883 $ 345,766 $ (380,810) $ 254,156 $ 1,619,954 $ 4,155,929 $5,994,995
----------
Net income 157,321 157,321
Change in unreal. gains
net of inc. taxes
of $61,559 (114,323) (114,323)
----------
Comprehensive income 42,998
Div. declared (101,646) (101,646)
Purchase/issuance of
treasury shares (37,257) (37,257)
Stock options exercised 484 968 8,748 9,716
Conversion of
debentures 1,128 2,256 14,491 (3) 16,744
-------- --------- ---------- --------- ----------- ----------- ----------
Bal. Sept. 30, 2001 174,495 $ 348,990 $ (418,067) $ 277,395 $ 1,675,626 $ 4,041,606 $5,925,550
======== ========= ========== ========= =========== =========== ==========
Accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4 of 12
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000's omitted)
Nine Months Ended September 30,
2001 2000
---- ----
Cash flows from operating activities:
Net income .................................................................. $ 157,321 $ 159,634
Adjustments to reconcile operating income to net cash
provided by operating activities:
Depreciation and amortization ............................................ 18,831 12,446
Asset impairment - software written off .................................. 0 39,100
Realized gains on investments ............................................ (7,865) (27,769)
Changes in:
Investment income receivable ........................................ (1,783) (9,069)
Premiums receivable ................................................. (58,408) (90,972)
Reinsurance receivable .............................................. (18,121) (39,472)
Prepaid reinsurance premiums ........................................ (3,584) (1,578)
Deferred policy acquisition costs ................................... (21,987) (21,404)
Accounts receivable ................................................. (22,453) 19,992
Other assets ........................................................ 45,050 (17,213)
Loss and loss expense reserves ...................................... 152,410 144,940
Life policy reserves ................................................ 50,392 35,363
Unearned premiums ................................................... 119,601 64,069
Other liabilities ................................................... 42,196 40,905
Deferred income taxes ............................................... (13,175) (10,528)
Current income taxes ................................................ 59,976 18,616
--------- ---------
Net cash provided by operating activities ........................... 498,401 317,060
--------- ---------
Cash flows from investing activities:
Sale of fixed maturity investments ....................................... 22,142 7,965
Call or maturity of fixed maturity investments ........................... 167,259 201,683
Sale of equity security investments ...................................... 105,266 125,125
Collection of finance receivables ........................................ 11,244 11,320
Purchase of fixed maturity investments ................................... (381,599) (641,308)
Purchase of equity security investments .................................. (205,599) (198,237)
Investment in land, buildings and equipment .............................. (12,378) (26,725)
Investment in finance receivables ........................................ (9,297) (8,897)
Investment in other invested assets ...................................... 2,386 (2,607)
--------- ---------
Net cash used in investing activities ................................ (300,576) (531,681)
--------- ---------
Cash flows from financing activities:
Proceeds from stock options exercised .................................... 9,716 9,812
Purchase/issuance of treasury shares ..................................... (37,257) (62,100)
Increase in notes payable ................................................ 5,000 40,000
Payment of cash dividends to shareholders ................................ (98,313) (88,777)
--------- ---------
Net cash used in financial activities ................................ (120,854) (101,065)
--------- ---------
Net increase (decrease) in cash ................................................ 76,971 (315,686)
Cash at beginning of period .................................................... 60,254 339,554
--------- ---------
Cash at end of period .......................................................... $ 137,225 $ 23,868
========= =========
Supplemental disclosures of cash flow information
Interest paid ............................................................... $ 23,437 $ 21,801
========= =========
Income taxes (refunded) paid ................................................ $ (24,000) $ 21,396
========= =========
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, $307,762 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 nine-month periods
ended September 30:
Conversion of 5.5% senior debentures to common stock ........................ $ 16,744 $ 5,943
========= =========
Conversion of fixed maturity to equity security investments ................. $ 48,250 $ 11,685
========= =========
Accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5 of 12
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 three months of the year.
INVESTMENTS--Fixed maturities and equity securities have been classified as
available for sale and are carried at fair values at September 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 nine-month and three-month periods ended September 30 are as
follows:
Nine Months Ended September 30, Three Months Ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
Fixed maturities $ 28,214 $ (37,844) $ (9,081) $ 2,525
Equity securities (142,537) 99,341 (67,584) 662,935
--------- --------- --------- ---------
Total $(114,323) $ 61,497 $ (76,665) $ 665,460
========= ========= ========= =========
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 nine-month and
three-month periods ended September 30 as follows:
Nine Months Ended September 30, Three Months Ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
Ceded premiums $121,961 $ 88,868 $ 44,533 $ 31,466
======== ======== ======== ========
Reinsurance recoveries $138,928 $ 86,143 $ 36,385 $ 26,852
======== ======== ======== ========
WRITE DOWN OF CAPITALIZED SOFTWARE - During the third quarter of 2000, the
company recorded a $39.1 million ($25.4 million after tax, or 16 cents per
share) non-cash charge to write off a substantial portion of previously
capitalized costs related to the development of "next-generation" software to
process property/casualty policies.
RECLASSIFICATIONS - Certain amounts have been reclassified to conform with the
current quarters' classification.
Page 6 of 12
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
September 30, 2001, outstanding options for Stock Plan No. IV totaled 1,556,625
shares with purchase prices ranging from a low of $11.28 to a high of $42.87,
outstanding options for Stock Plan V totaled 1,159,891 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 3,939,819 shares with purchase prices ranging from a
low of $29.38 to a high of $41.57.
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.
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------ -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
(000's omitted)
REVENUES
Commercial lines insurance ............... $ 1,057,311 $ 900,338 $ 364,130 $ 316,310
Personal lines insurance ................. 461,700 445,408 155,498 149,347
Life insurance ........................... 57,792 57,594 18,276 19,103
Investment operations .................... 321,207 339,419 102,935 112,775
Corporate and other ...................... 9,132 7,108 3,031 2,255
------------ ------------ ------------ ------------
Total revenues ........................ $ 1,907,142 $ 1,749,867 $ 643,870 $ 599,790
============ ============ ============ ============
INCOME (LOSS) BEFORE INCOME TAXES
Property and casualty insurance .......... $ (77,370) $ (92,062) $ (47,232) $ (106,364)
Life insurance ........................... 2,194 (276) 136 (3,709)
Investment operations .................... 296,183 315,777 96,704 111,649
Corporate and other ...................... (38,650) (32,002) (15,307) (10,307)
------------ ------------ ------------ ------------
Total income (loss) before income taxes $ 182,357 $ 191,437 $ 34,301 $ (8,731)
============ ============ ============ ============
September 30, December 31,
2001 2000
------------ ------------
IDENTIFIABLE ASSETS
Property and casualty insurance .......... $ 6,623,891 $ 6,487,819
Life insurance ........................... 1,740,826 1,619,169
Corporate and other ...................... 5,194,200 5,180,103
------------ ------------
Total identifiable assets .......... $ 13,558,917 $ 13,287,091
============ ============
Page 7 of 12
NOTE IV - FINANCIAL ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - 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, and related
interpretations, requires that all derivative financial instruments, such as
embedded options in convertible debt and 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.
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 September 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 was required to implement SFAS No. 141
on July 1, 2001 and it does not have a material effect on its consolidated
financial statements.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company is required to implement SFAS No. 142 on
January 1, 2002. The Company does not expect that SFAS No. 142 will have a
material effect on its consolidated financial statements.
In June and August 2001, respectively, the FASB issued SFAS No. 143, "Accounting
for Asset Retirement Obligations," and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. It applies
to legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. SFAS
No. 144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. It supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of while retaining the fundamental provisions
of Statement 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sale. The Company does not expect these standards to have a
material effect on its consolidated financial statements.
Page 8 of 12
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 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 nine months ended September 30, 2001 have increased
$173,462 (12%) over the nine months ended September 30, 2000. Premiums earned
increased $53,144 (11%) for the three months ended September 30, 2001 over the
three months ended September 30, 2000. For the nine-month and three-month
periods ending September 30, 2001, the premium growth rate of our property and
casualty subsidiaries is more than last year because of increases in new
commercial business along with some price firming in the commercial lines
market. The premium growth of our life and health subsidiary increased less than
1% for the nine months ended September 30, 2001 and decreased 4% for the three
months ended September 30, 2001 compared to the same periods of 2000. The nine
month premium growth in our life subsidiary is mainly attributable to increased
sales of both traditional and work site marketing products. The three month
decrease is mainly attributable to a group life premium experience credit from
our reinsurers of $.7 million which was previously received during the second
quarter of 2001. In 2000, a similar credit was received during the third
quarter.
For the nine-month and three-month periods ended September 30, 2001, investment
income, net of expenses, has increased $7,092 (2%) and $3,179 (3%) when compared
with the first nine months and third quarter of 2000, respectively. The
nine-month increase excludes $5.4 million from a $302.9 million premium for a
bank-owned life insurance (BOLI) policy booked at the end 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. The
growth has slowed due to lower interest rates in the fixed maturity investments.
Realized gains (losses) on investments for the nine months ended September 30,
2001 amounted to $7,865 compared to $27,769 for the nine-month period ended
September 30, 2000, and ($2,874) for the three-month period ended September 30,
2001 compared to $10,145 for the three-month period ended September 30, 2000.
The realized gains (losses) are predominantly the result of the sale of
preferred equity securities and management's decision to realize the gains
(losses) 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 $161,558 (15%) for the first nine months of 2001 over the same period
in 2000 and increased $26,824 for the third quarter when compared to the third
quarter of 2000. The losses and benefits of the property and casualty companies
have increased $135,068 for the nine-month period and increased $25,379 for the
third quarter of 2001 compared to the comparable periods for 2000. Catastrophe
losses were $55,039 and $46,942 respectively, for the first nine months of 2001
and 2000 and were $13,385 and $15,455 respectively, for the third quarter of
2001 and 2000. Included in third quarter 2001 is $8,671 from the events of
September 11. Reported direct losses accounted for $300 of that amount, with the
remaining $8,371 arising from the Company's participation in an aviation
insurance pool and other reinsurance agreements. Policyholder benefits of the
life insurance subsidiary increased $1,109 for the first nine months of 2001
over the same period of 2000 and increased $1,445 for the third quarter when
compared to the third quarter of 2000. The majority of the third quarter
increase is the result of a higher incidence of death claims and life related
costs.
Page 9 of 12
Commission expenses increased $31,294 for the nine-month period ended September
30, 2001 compared to the same period of 2000 and increased $8,002 for the third
quarter of 2001 compared to the same period in 2000. The increase is primarily
attributable to increased written premiums. Other operating expenses increased
$12,318 for the nine-month period ended September 30, 2001 compared to the same
period for 2000 and decreased $281 for the third quarter of 2001 compared to the
same period in 2000. The increases for the year are attributable to increases in
staff and costs associated with or related to our initiatives in developing
technology and our infrastructure to support future growth, although there was a
decrease during the quarter 2001 for the same expenses compared to third quarter
2000. Taxes, licenses and fees increased $1,348 for the nine-month period ended
September 30, 2001 compared to the same period in 2000, and third quarter 2001
taxes, licenses and fees decreased $314, compared to third quarter 2000.
Interest expense increased $967 for the nine-month period ended September 30,
2001 compared to the same period for 2000 and increased $1,021 for the third
quarter of 2001 compared to the same period in 2000. The increase for the year
and for the quarter is a result of an increase in short-term debt. At September
2001, short-term debt of $175,000 represents 29% of total debt while at
September 2000, short-term debt of $158,000 represented 26% of total debt.
Provision for income taxes, current and deferred, have decreased by $6,767 for
the first nine months of 2001 compared to the first nine months of 2000 and have
increased $12,868 for the third quarter of 2001 compared to the third quarter of
2000. The effective tax rates for the nine months ended September 30, 2001 and
2000 were 13.7% and 16.6%, respectively. Third quarter effective tax rates were
(4.2%) and (163.9%) for 2001 and 2000, respectively. Rates for the nine months
ended September 30, 2001 were lower primarily because of larger underwriting
losses in 2001. The lower negative rate for the quarter was a result of lower
underwriting losses in 2001 compared to 2000.
During 1996, the Company's Board of Directors authorized the repurchase of
outstanding shares. During 2001, 990 shares were repurchased at a cost of
$37,266. Since the inception of the repurchase program, the Company has
repurchased 12,766 shares. At September 30, 2001, 8.1 million shares remain
authorized for repurchase at any time in the future.
Comprehensive Income - The principal difference between net income and
comprehensive income is the net after-tax change in unrealized gains on
marketable securities. For the three- and nine-month periods ended September 30,
2001 and 2000, such net unrealized gains increased (decreased), net of related
income tax effects, by the following amounts (in thousands):
2001 2000
----- ----
Three months ended September 30 ($ 76,666) $ 665,459
Nine months ended September 30 ($ 114,323) $ 61,497
Our top 10 equity holdings accounted for ($29,597) of the decrease in unrealized
gains, net of tax, in the third quarter 2001 and ($106,115) during the
nine-months ended September 30, 2001.
Changes in net unrealized gains on marketable securities result from both market
conditions and realized gains recognized in a reporting period.
ITEM 3. Quantitative and Qualitative Disclosures About 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 market risks associated with the Company's investment portfolios have not
changed materially from those disclosed at year-end 2000.
Page 10 of 12
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
third 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
third quarter.
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 September 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 November 12, 2001
--------------------------
By/s/ Kenneth W. Stecher
-----------------------------------
Kenneth W. Stecher
Chief Financial Officer
Page 11 of 12