1
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 March 31, 1996
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--55,749,977 shares outstanding at March 31, 1996
$80,000,000 of 5-1/2% Convertible Senior Debentures Due 2002
2
PART I
ITEM 1. FINANCIAL STATEMENTS
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1996 1995
-------------- --------------
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,213,372 $ 20,019,459
Investments
Fixed Maturities (Cost: 1996--$2,355,589,683;
1995--$2,298,718,542). . . . . . . . . . . . . . . . 2,470,746,543 2,446,995,519
Equity Securities (Cost: 1996--$1,463,450,084;
1995--$1,423,671,759). . . . . . . . . . . . . . . . 3,323,978,226 3,041,762,260
Other Invested Assets. . . . . . . . . . . . . . . . . 39,574,152 39,801,776
Finance Receivables. . . . . . . . . . . . . . . . . . . 21,421,167 20,281,562
Premiums Receivable. . . . . . . . . . . . . . . . . . . 162,617,760 161,116,592
Reinsurance Receivable . . . . . . . . . . . . . . . . . 107,300,769 103,682,717
Prepaid Reinsurance Premiums . . . . . . . . . . . . . . 20,735,303 21,835,186
Investment Income Receivable . . . . . . . . . . . . . . 67,272,468 65,045,195
Land, Buildings and Equipment for Company Use (at Cost
Less Accumulated Depreciation) . . . . . . . . . . . . 33,499,146 33,056,396
Deferred Acquisition Costs Pertaining to Unearned
Premiums and to Life Policies in Force . . . . . . . . 119,933,390 119,589,232
Other Assets . . . . . . . . . . . . . . . . . . . . . . 32,478,590 36,112,005
-------------- --------------
Total Assets $6,412,770,886 $6,109,297,899
============== ==============
LIABILITIES
Insurance Reserves:
Life Policy Reserves . . . . . . . . . . . . . . . . . $ 412,821,142 $ 403,263,716
Losses and Loss Expenses . . . . . . . . . . . . . . . 1,785,724,559 1,743,533,951
Unearned Premiums. . . . . . . . . . . . . . . . . . . . 406,200,574 408,624,414
Notes Payable. . . . . . . . . . . . . . . . . . . . . . 221,468,657 221,005,282
5-1/2% Convertible Senior Debentures Due 2002. . . . . . 80,000,000 80,000,000
Federal Income Taxes
Current. . . . . . . . . . . . . . . . . . . . . . . . 30,396,424 10,475,088
Deferred . . . . . . . . . . . . . . . . . . . . . . . 558,180,064 487,840,052
Other Liabilities. . . . . . . . . . . . . . . . . . . . 82,313,645 96,584,203
-------------- --------------
Total Liabilities 3,577,105,065 3,451,326,706
-------------- --------------
SHAREHOLDERS' EQUITY
Common Stock, $2 per Share; Authorized 80,000,000
Shares; Issued 1996--55,774,782; 1995--53,084,081
Shares; Outstanding 1996--55,749,977; 1995--53,056,934
Shares . . . . . . . . . . . . . . . . . . . . . . . . 111,549,564 106,168,162
Paid-In Capital. . . . . . . . . . . . . . . . . . . . . 399,460,937 237,171,509
Retained Earnings. . . . . . . . . . . . . . . . . . . . 1,030,420,944 1,156,626,751
Unrealized Gain on Investments, Less Taxes . . . . . . . 1,295,444,654 1,159,388,263
-------------- --------------
2,836,876,099 2,659,354,685
Less Treasury Shares at Cost (1996--24,805 Shares;
1995--27,147 Shares) . . . . . . . . . . . . . . . . . (1,210,278) (1,383,492)
Total Shareholders' Equity . . . . . . . . . . . . . 2,835,665,821 2,657,971,193
-------------- --------------
Total Liabilities and Shareholders' Equity . . . . $6,412,770,886 $6,109,297,899
============== ==============
Accompanying notes are an integral part of these financial statements.
3
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended March 31,
-----------------------------------
Revenues: 1996 1995
---- ----
Premiums Earned:
Property and Casualty . . . . . . . . . . . . . . . . . . . . $ 333,372,036 $ 307,146,925
Life. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,952,931 10,949,844
Accident and Health . . . . . . . . . . . . . . . . . . . . . 1,895,383 1,833,146
------------- -------------
Net Premiums Earned . . . . . . . . . . . . . . . . . . . . 347,220,350 319,929,915
Investment Income, Less Expenses. . . . . . . . . . . . . . . . 82,471,695 71,813,695
Realized Gain on Investments. . . . . . . . . . . . . . . . . . 19,277,148 21,018,001
Other Income. . . . . . . . . . . . . . . . . . . . . . . . . . 2,829,255 1,926,188
------------- -------------
Total Revenues. . . . . . . . . . . . . . . . . . . . . . . . 451,798,448 414,687,799
------------- -------------
Benefits & Expenses:
Insurance Losses and Policyholder Benefits. . . . . . . . . . . 272,754,764 233,385,026
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . 61,077,667 59,217,649
Other Operating Expenses. . . . . . . . . . . . . . . . . . . . 26,528,905 24,805,094
Taxes, Licenses & Fees. . . . . . . . . . . . . . . . . . . . . 9,904,410 8,944,612
Increase in Deferred Acquisition. . . . . . . . . . . . . . . .
Costs Pertaining to Unearned
Premiums and to Life Policies
in Force. . . . . . . . . . . . . . . . . . . . . . . . . . . (344,158) (1,010,378)
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . 4,558,151 3,662,971
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 870,113 1,859,960
------------- -------------
Total Expenses. . . . . . . . . . . . . . . . . . . . . . . . 375,349,852 330,864,934
------------- -------------
Income Before Income Taxes . . . . . . . . . . . . . . . . . . . 76,448,596 83,822,865
------------- -------------
Provision (Benefit) for Income Taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,921,333 21,313,367
Deferred. . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,921,119) (735,101)
------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000,214 20,578,266
------------- -------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,448,382 $ 63,244,599
============= =============
Weighted Average Shares Outstanding. . . . . . . . . . . . . . . 57,816,427 57,619,829*
============= =============
Per Common Share:
Total Net Income. . . . . . . . . . . . . . . . . . . . . . . $1,04 $1.11*
===== =====
Cash Dividends Declared . . . . . . . . . . . . . . . . . . . $ .35 $ .30*
===== =====
<FN>
*Adjusted to reflect 5% stock dividend effective March 15, 1996.
Accompanying notes are an integral part of these financial statements.
4
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
------------------------------------------
Common Stock Treasury Paid-In Retained Unrealized
Shares Amount Stock Capital Earnings Capital Gains
------ ------- ---------- --------- ---------- ---------------
Bal. Dec. 31,
1994 50,435,974 $100,871,948 $ (913,765) $105,791,761 $1,133,104,811 $ 601,192,480
Net Income 63,244,599
Change in Unreal.
Gains Net of
Inc. Taxes of
$61,016,852 113,317,011
Div. Declared (17,164,239)
5% Stock Div.
at Market 2,521,546 5,043,092 127,338,073 (132,564,883)*
Issuance of
Treasury Shares 10,465 4,437
Stock Options
Exercised 64,806 129,612 1,702,477
---------- ------------ ----------- ------------ -------------- -------------
Bal. March 31,
1995 53,022,326 $106,044,652 $ (903,300) $234,836,748 $1,046,620,288 $ 714,509,491
========== ============ =========== ============ ============== ==============
Bal. Dec. 31,
1995 53,084,081 $106,168,162 $(1,383,492) $237,171,509 $1,156,626,751 $1,159,388,263
Net Income 59,448,382
Change in Unreal.
Gains Net of
Inc. Taxes of
$73,261,132 136,056,391
Div. Declared (19,645,462)
5% Stock Div.
at Market 2,652,110 5,304,220 160,452,655 (166,008,727)*
Issuance of
Treasury Shares 173,214 58,105
Stock Options
Exercised 38,591 77,182 1,778,668
---------- ------------ ----------- ------------ -------------- --------------
Bal. March 31,
1996 55,774,782 $111,549,564 $(1,210,278) $399,460,937 $1,030,420,944 $1,295,444,654
========== ============ =========== ============ ============== ==============
<FN>
Accompanying notes are an integral part of these financial statements.
*Includes $183,718 and $251,852 for fractional shares in March 17, 1995 and
March 15, 1996, respectively.
5
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
--------------------------------------
1996 1995
---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 59,448,382 $ 63,244,599
Adjustments to reconcile operating income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . (564,606) 2,432,438
Decrease in net unearned premiums. . . . . . . . . . (1,323,957) (1,834,016)
Increase in net life policy reserves . . . . . . . . 9,557,426 6,627,189
Increase in net loss and loss expense reserves . . . 38,572,556 46,437,067
(Increase) Decrease in net premiums receivable . . . (1,501,168) 807,044
Increase in deferred acquisition costs . . . . . . . (344,158) (1,010,377)
Decrease in other liabilities. . . . . . . . . . . . (16,129,744) (3,569,850)
Increase in investment income receivable . . . . . . (2,227,273) (1,995,983)
Decrease (Increase) in policy loans and accounts
receivable . . . . . . . . . . . . . . . . . . . . 5,664,701 (5,759,188)
Decrease in deferred income taxes. . . . . . . . . . (2,921,119) (2,571,897)
Increase in current income taxes . . . . . . . . . . 19,921,333 26,725,886
Realized gain on investments . . . . . . . . . . . . (19,277,148) (21,018,001)
Other. . . . . . . . . . . . . . . . . . . . . . . . (1,724,089) 1,216,919
------------ -------------
Net cash provided by operating activities. . . . . 87,151,136 109,731,830
------------ -------------
Cash flows from investing activities:
Sale of fixed maturities investments . . . . . . . . 57,477,616 20,509,272
Maturity of fixed maturities investments . . . . . . 33,964,392 47,190,434
Sale of equity securities investments. . . . . . . . 56,449,745 83,764,258
Collection of mortgage loans . . . . . . . . . . . . 591,961 65,418
Collection of finance receivables. . . . . . . . . . 2,088,718 1,828,410
Purchase of fixed maturities investments . . . . . . (142,549,614) (167,264,970)
Purchase of equity securities investments. . . . . . (79,678,432) (102,142,181)
Investment in mortgage loans . . . . . . . . . . . . (350,000) -0-
Investment in land, buildings and equipment. . . . . (2,857,885) (2,334,980)
Investment in finance receivables. . . . . . . . . . (3,228,321) (2,601,634)
Investment in real estate and other. . . . . . . . . (377,818) (53,991)
------------ -------------
Net cash used in investing activities. . . . . . . (78,469,638) (121,039,964)
------------ -------------
Cash flows from financing activities:
Proceeds from stock options exercised. . . . . . . . 1,855,850 1,832,089
Issuance of treasury shares. . . . . . . . . . . . . 231,319 14,902
Increase in notes payable. . . . . . . . . . . . . . 463,375 10,500,547
Payment of cash dividends to shareholders. . . . . . (18,038,129) (16,133,741)
------------ -------------
Net cash used in financing activities. . . . . . . (15,487,585) (3,786,203)
------------ -------------
Net decrease in cash . . . . . . . . . . . . . . . . . . (6,806,087) (15,094,337)
Cash at beginning of period. . . . . . . . . . . . . . . 20,019,459 48,254,464
------------ -------------
Cash at end of period. . . . . . . . . . . . . . . . . . $ 13,213,372 $ 33,160,127
============ =============
Supplemental disclosures of cash flow information
Interest paid. . . . . . . . . . . . . . . . . . . . . $ 3,966,246 $ 2,234,417
============ =============
Income taxes paid. . . . . . . . . . . . . . . . . . . $ -0- $ -0-
============ =============
Accompanying notes are an integral part of these financial statements.
6
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries, each of which is wholly owned, and are presented in
conformity with generally accepted accounting principles. All significant
inter-company investments and transactions have been eliminated in
consolidation. The December 31, 1995 consolidated balance sheet amounts are
derived from the audited financial statements but do not include all disclosures
required by generally accepted accounting principles.
INVESTMENTS--Fixed maturities and equity securities have been classified as
available for sale and are carried at fair values at March 31, 1996 and
December 31, 1995.
UNREALIZED GAINS AND LOSSES--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
Maturities Securities Total
----------- ---------- ------
1996 $(21,528,076) $157,584,467 $136,056,391
----
1995 $ 47,307,079 $ 66,009,932 $113,317,011
----
Such amounts are included as additions to and deductions from shareholders'
equity.
REINSURANCE--Premiums earned are net of $22,928,950 and $18,720,168 of premium
on ceded business for March 31, 1996 and 1995, respectively. Insurance losses
and policyholder benefits in the accompanying statements of income are net of
$9,929,733 and $14,617,542 reinsurance recoveries for March 31, 1996 and 1995,
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, 1996, outstanding options for Stock Option Plan No. III totalled
92,378 shares with purchase prices ranging from a low of $11.87 to a high of
$22.03 and outstanding options for Stock Option Plan No. IV totalled 848,409
shares with purchase prices ranging from a low of $22.38 to a high of $61.43.
All outstanding shares have been adjusted for the 5% stock dividend declared
February 3, 1996, payable April 30, 1996 to shareholders of record of March 15,
1996.
At the Shareholders' meeting on April 6, 1996, the shareholders approved Stock
Option Plan V for 500,000 shares. No shares have been granted from this plan at
this time.
7
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which will be effective for the Company beginning January 1,
1996. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock based compensation awards to employees.
NOTE III INTERIM ADJUSTMENTS
The preceding summary of financial information for Cincinnati Financial
Corporation and consolidated subsidiaries is unaudited, but the Company believes
that all adjustments (consisting only of normal recurring accruals) necessary
for fair presentation have been made. The results of operations for this
interim period is not necessarily an indication of results to be expected for
the remaining nine months of the year.
8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Premiums earned for the three months ended March 31, 1996 have increased
$27,290,435 (9%) over the three months ended March 31, 1995. The growth rate
of our property and casualty subsidiaries on a gross written basis is greater
than last year; but with higher costs of reinsurance, our premiums earned
increase of 9% was slightly less in the three-month period ended March 31, 1996
over March 31, 1995. The premium growth is attributable to new business and
some rate increases. The premium volume of our life and health company has
increased approximately 8% as the Company had increases in both life and health
insurance production. For the three-month period ended March 31, 1996,
Investment Income, net of expenses, has increased $10,658,000 (15%) when
compared with the first three months of 1995. This increase is the result of
the growth of the investment portfolio because of investing cash flows from
operations and dividend increases from equity securities.
Realized gains on investments for the three months ended March 31, 1996 amounted
to $19,277,148 compared to $21,018,001, for the comparable three-month period
ended March 31, 1995. The realized gains are predominantly the result of the
sale of equity securities and management's decision to realize the gains and
reinvest the proceeds at higher yields.
Insurance losses and policyholder benefits (net of reinsurance recoveries)
increased $39,369,738 (17%) for the first three months of 1996 over the same
period in 1995. The losses of the property and casualty companies have
increased $36,184,830 because of the growth of new business and a higher
incidence of claims. Policyholder benefits increased $3,184,908 over the first
quarter of 1995 in the life insurance subsidiary. The majority of the increase
is the result of a higher incidence of death claims and related costs.
Commission expenses increased $1,860,018 for the first quarter of 1996
compared to the first quarter of 1995. The increase attributable to increases
in written premium was somewhat offset by a reduction in contingent commission
relating to underwriting results.
Provision for income taxes, current and deferred, have decreased by
$3,578,052 for the first three months of 1996 compared to the first three months
of 1995. The decrease in federal taxes is primarily attributable to a decline
of the effective tax rate from 24.5% to 22.2% at March 31, 1995 and 1996.
Unrealized appreciation will fluctuate with changes in the overall fixed
maturities and equity securities market. Changes in unrealized appreciation are
discussed in Note 1. The Company's equity investment portfolio continues to
be primarily investments in common stocks of public utility companies and
financial institutions.
9
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
---------------------
On February 3, 1996, the Company declared a 5% stock dividend payable on
April 30, 1996 to shareholders of record of March 15, 1996.
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. On April 6, 1996, shareholders voted on and approved Stock Option
Plan No. V and the Incentive Compensation Plan.
ITEM 5. Other Information
-----------------
No matters to report.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits included:
Exhibit 11--Statement re Computation of Per Share Earnings.
Exhibit 27--Financial Data Schedule
(b) The Company was not required to file any reports on Form
8-K during the quarter ended March 31, 1996.
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 13, 1996
----------------------
By /s/ Robert J. Driehaus
----------------------------
R. J. Driehaus
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)