1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 Commission file number 0-4604 CINCINNATI FINANCIAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio 31-0746871 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6200 S. Gilmore Road, Fairfield, Ohio 45014-5141 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (513) 870-2000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Exchange on Which Title of Each Class Registered ------------------- ---------- $2.00 Par, Common Over The Counter 5 1/2% Convertible Senior Debentures Due 2002 Over The Counter 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. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] The aggregate market value of voting stock held by nonaffiliates of Cincinnati Financial Corporation was $6,342,769,953 as of March 2, 1998. As of March 2, 1998, there were 55,562,285 shares of common stock outstanding. Documents Incorporated by Reference ----------------------------------- Annual Report to Shareholders for year ended December 31, 1997 (in part) into Parts I, II and IV and Registrant's Proxy Statement dated March 2, 1998 into Parts I, III and IV.
2 PART I ITEM 1. BUSINESS -------- Cincinnati Financial Corporation ("CFC") was incorporated on September 20, 1968 under the laws of the State of Delaware. On April 4, 1992, the shareholders voted to adopt an Agreement of Merger by means of which the reincorporation of the Corporation from the State of Delaware to the State of Ohio was accomplished. CFC owns 100% of The Cincinnati Insurance Company ("CIC") and 100% of CFC Investment Company ("CFC-I"). The principal purpose of CFC is to be a holding company for CIC and CFC-I and in addition for the purpose of acquiring other companies. CIC, incorporated in August, 1950, is an insurance carrier presently licensed to conduct multiple line underwriting in accordance with Section 3941.02 of the Revised Code of Ohio. This includes the sale of fire, automobile, casualty, bonds, and all related forms of property and casualty insurance in 50 states, the District of Columbia, and Puerto Rico. CIC is not authorized to write any other forms of insurance. CIC is in a highly competitive industry and competes in varying degrees with a large number of stock and mutual companies. CIC also owns 100% of the stock of the following insurance companies. 1. The Cincinnati Life Insurance Company ("CLIC") incorporated in 1987 under the laws of Ohio for the purpose of acquiring the business of Inter-Ocean and The Life Insurance Company of Cincinnati. CLIC acquired The Life Insurance Company of Cincinnati and Inter-Ocean Insurance Company on February 1, 1988. CLIC is engaged in the sale of life insurance and accident and health insurance in 46 states and the District of Columbia. 2. The Cincinnati Casualty Company ("CCC") (formerly the Queen City Indemnity Company), incorporated in 1972 under the laws of Ohio, is engaged in the fire and casualty insurance business on a direct billing basis in 31 states. The business of CIC and CCC is conducted separately, and there are no plans for combining the business of said companies. 3. The Cincinnati Indemnity Company ("CID"), incorporated in 1988 under the laws of Ohio, is engaged in the writing of nonstandard personal and casualty lines of insurance in 23 states. The business of CIC and CID is conducted separately, and there are no plans for combining the business of said companies. CFC-I, organized in 1970, owns certain real estate in the Greater Cincinnati area and is in the business of leasing or financing various items, principally automobiles, trucks, computer equipment, machine tools, construction equipment, and office equipment. Industry segment information for operating profits and identifiable assets is included on page 30 of the Company's Annual Report to Shareholders and is incorporated herein by reference (see Exhibit 13 to this filing). As more fully discussed in pages 4 through 9 in the Company's Annual Report to Shareholders, incorporated herein by reference (see Exhibit 13 to this filing), the Company sells insurance primarily in the Midwest and Southeast through a network of a limited number (973 in 27 states at December 31, 1997) of selectively appointed independent agents, most of whom own stock in the Company. Gross written premiums by property/casualty lines increased 6% to $1.567 billion in 1997. The Company's mix of property/casualty business did not change significantly in 1997. Life and accident and health insurance (which constituted only 4% of the Company's premium income for 1997) is also sold primarily through property/casualty agencies and the growth rate of 11.5% was the result of increased sales of both traditional and interest-sensitive products. 2
3 The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses ("LAE") of the Company's property/casualty ("P/C") insurance subsidiaries. Property and casualty insurance is written in 50 states, the District of Columbia, and Puerto Rico. The liabilities for losses and LAE are determined using case-basis evaluations and statistical projections and represent estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effect of trends in future claim severity and frequency. These estimates are continually reviewed; and as experience develops and new information becomes known, the liability is adjusted as necessary. Such adjustments, if any, are reflected in current operations. The Company does not discount any of its property/casualty liabilities for unpaid losses and unpaid loss adjustment expenses. There are two tables used to present an analysis of losses and LAE. The first table, providing a reconciliation of beginning and ending liability balances for 1997, 1996, and 1995, is on page 27 in the Company's Annual Report to Shareholders, incorporated herein by reference (see Exhibit 13 to this filing). The second table, showing the development of the estimated liability for the ten years prior to 1997 is presented on the next page. The reconciliation referred to in the preceding paragraph shows a 1997 recognition of $119,654,000 redundancy in the December 31, 1996 liability. This redundancy is due in part to the effects of settling case reserves established in prior years for less than expected and also in part to the over estimation of the severity of IBNR losses. Average severity continues to increase primarily because of increases in medical costs related to workers' compensation and auto liability insurance. Litigation expenses for recent court cases on pending liability claims continue to be very costly; and judgments continue to be high and difficult to estimate. Reserves for environmental claims have been reviewed, and the Company believes that the reserves are adequate. Environmental exposures are minimal as a result of the types of risks we have insured in the past. Historically, most commercial accounts written post-date the coverages which afford clean-up costs and Superfund responses. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for anticipated changes in underwriting standards, policy provisions, and general economic trends. These trends are monitored based on actual development and are modified if necessary. The limits on risks retained by the Company vary by type of policy, and risks in excess of the retention limits are reinsured. Because of the growth in the Company's capacity to underwrite risks and reinsurance market conditions, in 1987 and 1989, the Company raised its retention limits from $500,000 to $750,000 to $1,000,000, respectively, for casualty and property lines of insurance. In 1995, the casualty and property lines retention limits were further raised to $2,000,000. There are no differences between the liability reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles ("GAAP") and that reported in the annual statements filed with state insurance departments in accordance with statutory accounting practices ("SAP"). 3
4 <TABLE> <CAPTION> ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (Millions of Dollars) Year Ended December 31 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 - ---------------------- ---- ---- ---- ---- ---- ---- ---- ----- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Net Liability for Unpaid Losses and Loss Adjustment Expenses $ 534 $ 631 $ 742 $ 833 $ 986 $1,138 $1,293 $1,432 $1,581 $1,702 $1,777 Net Liability Reestimated as of: One Year Later 548 671 751 869 956 1,098 1,200 1,306 1,429 1,582 Two Years Later 584 634 747 816 928 993 1,116 1,220 1,380 Three Years Later 544 622 696 795 823 949 1,067 1,214 Four Years Later 535 596 676 723 814 937 1,067 Five Years Later 523 580 635 720 824 943 Six Years Later 508 551 637 732 827 Seven Years Later 496 558 653 734 Eight Years Later 505 571 655 Nine Years Later 519 571 Ten Years Later 518 Net Cumulative Redundancy $ 16 $ 60 $ 87 $ 99 $ 159 $ 195 $ 226 $ 218 $ 201 $ 120 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Net Cumulative Amount of Liability Paid Through: One Year Later $ 178 $ 204 $ 238 $ 232 $ 280 $ 310 $ 343 $ 368 $ 395 $ 453 Two Years Later 292 321 356 397 440 498 538 578 630 Three Years Later 362 390 446 493 546 612 663 709 Four Years Later 398 441 497 552 611 681 734 Five Years Later 427 467 528 588 647 718 Six Years Later 441 485 550 610 666 Seven Years Later 454 496 563 621 Eight Years Later 461 502 570 Nine Years Later 465 507 Ten Years Later 469 $1,200 $1,365 $1,510 $1,690 $1,824 $1,889 Gross Liability--End of Year Reinsurance Recoverable 62 72 78 109 122 112 ------ ------ ------ ------ ------ ------ Net Liability--End of Year $1,138 $1,293 $1,432 $1,581 $1,702 $1,777 ====== ====== ====== ====== ====== ====== Gross Reestimated Liability--Latest $1,035 $1,162 $1,319 $1,498 $1,699 Reestimated Recoverable--Latest 92 95 105 118 117 ------ ------ ------ ------ ------ Net Reestimated Liability--Latest $ 943 $1,067 $1,214 $1,380 $1,582 ====== ====== ====== ====== ====== Gross Cumulative Redundancy $ 195 $ 226 $ 218 $ 201 $ 120 ====== ====== ====== ====== ====== </TABLE> The table above presents the development of balance sheet liabilities for 1987 through 1997. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the reestimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims for individual years. 4
5 The "cumulative redundancy" represents the aggregate change in the estimates over all prior years. For example, the 1987 liability has developed a $16,000,000 redundancy over ten years and has been reflected in income over the ten years. The effects on income of the past three years of changes in estimates of the liabilities for losses and LAE for all accident years is shown in the reconciliation table. The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. For example, as of December 31, 1997, the Company had paid $469,000,000 of the currently estimated $518,000,000 of losses and LAE that have been incurred as of the end of 1987; thus an estimated $49,000,000 of losses incurred as of the end of 1987 remain unpaid as of the current financial statement date. In evaluating this information, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of deficiency or redundancy related to losses settled in 1992, but incurred in 1987, will be included in the cumulative deficiency or redundancy amount for 1987 and each subsequent year. This table does not present accident or policy year development data which readers may be more accustomed to analyzing. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. The Company limits the maximum net loss that can arise by large risks or risks concentrated in areas of exposure by reinsuring (ceding) with other insurers or reinsurers. Related thereto, the Company's retention levels were last increased from $1,000,000 to $2,000,000 in 1995. The Company reinsures with only financially sound companies. The composition of its reinsurers has not changed, and the Company has not experienced any uncollectible reinsurance amounts or coverage disputes with its reinsurers in more than ten years. Information concerning the Company's investment strategy and philosophy is contained on Pages 16 through 18 of the Annual Report to Shareholders, incorporated herein by reference (see Exhibit 13 to this filing). The Company's primary strategy is to maintain liquidity to meet both its immediate and long-range insurance obligations through the purchase and maintenance of medium-risk fixed maturity and equity securities, while earning optimal returns on medium-risk equity securities which offer growing dividends and capital appreciation. The Company usually holds these securities to maturity unless there is a change in credit risk or the securities are called by the issuer. Historically, municipal bonds (with concentrations in the essential services, i.e. schools, sewer, water, etc.) have been attractive to the Company due to their tax exempt features. Because of Alternative Minimum Tax matters, the Company uses a blend of tax-exempt and taxable fixed maturity securities. Investments in common stocks have been made with an emphasis on securities with an annual dividend yield of at least 2 to 3 percent and annual dividend increases. The Company's strategy in equity investments is to identify approximately 10 to 12 companies in which it can accumulate 10 to 20 percent of their common stock. As a long-term investor, a buy and hold strategy has been followed for many years, resulting in an accumulation of a significant amount of unrealized appreciation on equity securities. As of December 31, 1997, CFC employed 2,670 associates. 5
6 ITEM 2. PROPERTIES ---------- CFC-I owns a fully leased 85,000 square feet office building in downtown Cincinnati that is currently leased to Procter and Gamble Company, an unaffiliated company, on a net, net, net lease basis. This property is carried in the financial statements at $535,000 as of December 31, 1997. CFC-I also owns the Home Office building located on 75 acres of land in Fairfield, Ohio. This building contains approximately 380,000 square feet. The John J. and Thomas R. Schiff & Company, an affiliated company, occupies approximately 5,350 square feet, and the balance of the building is occupied by CFC and its subsidiaries. The property is carried in the financial statements at $10,724,475 as of December 31, 1997. CFC-I also owns the Fairfield Executive Center which is located on the northwest corner of the home office property in Fairfield, Ohio. This is a four-story office building containing approximately 103,000 rentable square feet. CFC and its subsidiaries occupy approximately 84% of the building, unaffiliated tenants occupy approximately 11% of the building, and the balance is available for Company expansion. The property is carried in the financial statements at $10,399,094 as of December 31, 1997. The CLIC owns a four-story office building in the Tri-County area of Cincinnati containing approximately 127,000 square feet. At the present time, 100% of the building is currently being leased by an unaffiliated tenant. This property is carried in the financial statements at $4,010,201 as of December 31, 1997. ITEM 3. LEGAL PROCEEDINGS ----------------- The Company is involved in no material litigation other than routine litigation incident to the nature of the insurance industry. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- CFC filed with the commission on March 2, 1998, definitive proxy statements and annual reports pursuant to Regulation 14A. Material filed was the same as that described in Item 4 and is incorporated herein by reference. No matters were submitted during the fourth quarter. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER ----------------------------------------------------------------- MATTERS ------- This information is included in the Annual Report of the Registrant to its shareholders on the inside back cover for the year ended December 31, 1997 and is incorporated herein by reference (see Exhibit 13 to this filing). ITEM 6. SELECTED FINANCIAL DATA ----------------------- This information is included in the Annual Report of the Registrant to its shareholders on pages 12 and 13 for the year ended December 31, 1997 and is incorporated herein by reference (see Exhibit 13 to this filing). 6
7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- This information is included in the Annual Report of the Registrant to its shareholders on pages 14 through 18 for the year ended December 31, 1997 and is incorporated herein by reference (see Exhibit 13 to this filing). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- (a) Financial Statements The following consolidated financial statements of the Registrant and its subsidiaries, included in the Annual Report of the Registrant to its shareholders on pages 19 to 30 for the year ended December 31, 1997, are incorporated herein by reference (see Exhibit 13 to this filing). Independent Auditors' Report Consolidated Balance Sheets--December 31, 1997 and 1996 Consolidated Statements of Income--Years ended December 31, 1997, 1996, and 1995 Consolidated Statements of Shareholders' Equity--Years ended December 31, 1997, 1996, and 1995 Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996, and 1995. Notes to Consolidated Financial Statements (b) Supplementary Data Selected quarterly financial data, included in the Annual Report of the Registrant to its shareholders on the inside back cover for the year ended December 31, 1997, is incorporated herein by reference (see Exhibit 13 to this filing). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- There were no disagreements on accounting and financial disclosure requirements with accountants within the last 24 months prior to December 31, 1997. PART III CFC filed with the Commission on March 2, 1998 definitive proxy statements pursuant to regulation 14-A. Material filed was the same as that described in Item 10, Directors and Executive Officers of the Registrant; Item 11, Executive Compensation; Item 12, Security Ownership of Certain Beneficial Owners and Management; Item 13, Certain Relationships and Related Transactions, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ---------------------------------------------------------------- (a) Filed Documents. The following documents are filed as part of this report: 1. Financial Statements--incorporated herein by reference (see Exhibit 13 to this filing) as listed in Part II of this Report. 7
8 2. Financial Statement Schedules and Independent Auditors' Report: Independent Auditors' Report Schedule I--Summary of Investments Other than Investments in Related Parties Schedule II--Condensed Financial Information of Registrant Schedule III--Supplementary Insurance Information Schedule IV--Reinsurance Schedule VI--Supplemental Information Concerning Property-Casualty Insurance Operations All other schedules are omitted because they are not required, inapplicable or the information is included in the financial statements or notes thereto. 3. Exhibits: Exhibit 11--Statement recomputation of per share earnings for years ended December 31, 1997, 1996, and 1995 Exhibit 13--Material incorporated by reference from the annual report of the registrant to its shareholders for the year ended December 31, 1997 Exhibit 21--Subsidiaries of the registrant--information contained in Part I of this report Exhibit 22--Notice of Annual Meeting of Shareholders and Proxy Statement dated March 2, 1998--incorporated by reference to such document previously filed with Securities and Exchange Commission, Washington, D.C., 20549 Exhibit 23--Independent Auditors' Consent Exhibit 27--Financial Data Schedule (b) Reports on Form 8-K--NONE 8
9 INDEPENDENT AUDITORS' REPORT To The Shareholders and Board of Directors of Cincinnati Financial Corporation We have audited the consolidated financial statements of Cincinnati Financial Corporation and its subsidiaries as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated February 4, 1998; such consolidated financial statements and report are included in your 1997 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedules of Cincinnati Financial Corporation and its subsidiaries, listed in Item 14(a)(2). These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein DELOITTE & TOUCHE LLP /S/ Deloitte & Touche LLP Cincinnati, Ohio February 4, 1998 9
10 <TABLE> <CAPTION> SCHEDULE I CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1997 (000 omitted) Amount at Fair which shown in Type of Investment Cost Value balance sheet ------------------ ---- ----- ------------- <S> <C> <C> <C> Fixed Maturities: Bonds: United States Government and government agencies and authorities The Cincinnati Insurance Company................... $ 2,250 $ 2,323 $ 2,323 The Cincinnati Indemnity Company................... 456 474 474 The Cincinnati Casualty Company.................... 403 428 428 The Cincinnati Life Insurance Company ............. 6,169 6,289 6,289 ------------ ------------- ------------ Total................................................ 9,278 9,514 9,514 ------------ ------------- ------------ States, municipalities and political subdivisions: The Cincinnati Insurance Company................... 810,174 852,806 852,806 The Cincinnati Indemnity Company................... 8,553 9,438 9,438 The Cincinnati Casualty Company.................... 21,121 22,469 22,469 The Cincinnati Life Insurance Company.............. 3,216 3,517 3,517 ------------ ------------- ------------ Total................................................ 843,064 888,230 888,230 ------------ ------------- ------------ Public utilities: The Cincinnati Insurance Company................... 38,330 40,679 40,679 The Cincinnati Casualty Company.................... 5,208 5,731 5,731 The Cincinnati Life Insurance Company.............. 30,903 32,925 32,925 Cincinnati Financial Corporation................... 430 500 500 ------------ ------------- ------------ Total................................................ 74,871 79,835 79,835 ------------ ------------- ------------ Convertibles and bonds with warrants attached: The Cincinnati Insurance Company................... 78,425 82,503 82,503 The Cincinnati Life Insurance Company.............. 15,617 16,901 16,901 Cincinnati Financial Corporation................... 9,082 9,988 9,988 ------------ ------------- ------------ Total................................................ 103,124 109,392 109,392 ------------ ------------- ------------ All other corporate bonds: The Cincinnati Insurance Company................... 610,918 662,932 662,932 The Cincinnati Indemnity Company................... 16,501 18,168 18,168 The Cincinnati Casualty Company.................... 34,031 38,173 38,173 The Cincinnati Life Insurance Company.............. 482,530 528,188 528,188 Cincinnati Financial Corporation................... 397,232 416,787 416,787 ------------ ------------- ------------ Total................................................ 1,541,212 1,664,248 1,664,248 ------------ ------------- ------------ TOTAL FIXED MATURITIES................................. $2,571,549 $2,751,219 $2,751,219 ------------ ------------- ------------ </TABLE> 10
11 <TABLE> <CAPTION> (000 omitted) Amount at Fair which shown in Type of Investment Cost Value balance sheet ------------------ ---- ----- ------------- <S> <C> <C> <C> Equity Securities: Common Stocks Public Utilities The Cincinnati Insurance Company................... $ 88,011 $ 252,429 $ 252,429 The Cincinnati Casualty Company.................... 3,697 9,503 9,503 The Cincinnati Life Insurance Company.............. 18,752 69,670 69,670 Cincinnati Financial Corporation................... 66,430 360,500 360,500 ------------ ------------- ------------ Total.............................................. 176,890 692,102 692,102 ------------ ------------- ------------ Banks, trust and insurance companies The Cincinnati Insurance Company................... 210,744 1,000,427 1,000,427 The Cincinnati Casualty Company.................... 16,883 71,353 71,353 The Cincinnati Life Insurance Company.............. 40,094 147,070 147,070 Cincinnati Financial Corporation................... 364,129 2,443,424 2,443,424 ------------ ------------- ------------ Total.............................................. 631,850 3,662,274 3,662,274 ------------ ------------- ------------ Industrial miscellaneous and all other The Cincinnati Insurance Company................... 371,041 842,887 842,887 The Cincinnati Indemnity Company................... 7,896 15,297 15,297 The Cincinnati Casualty Company.................... 18,203 38,577 38,577 The Cincinnati Life Insurance Company.............. 53,075 114,100 114,100 Cincinnati Financial Corporation................... 43,161 103,665 103,665 ------------ ------------- ------------ Total.............................................. 493,376 1,114,526 1,114,526 ------------ ------------- ------------ Nonredeemable preferred stocks The Cincinnati Insurance Company................... 367,982 466,116 466,116 The Cincinnati Life Insurance Company.............. 49,340 56,793 56,793 Cincinnati Financial Corporation................... 6,417 7,460 7,460 ------------ ------------- ------------ Total.............................................. 423,739 530,369 530,369 ------------ ------------- ------------ TOTAL EQUITY SECURITIES $1,725,855 $5,999,271 $5,999,271 ------------ ------------- ------------ Other Invested Assets: Mortgage loans on real estate The Cincinnati Life Insurance Company.............. $ 3,329 XXXXXX $ 3,329 CFC-I Investment Company........................... 8,236 XXXXXX 8,236 ------------ ------------ Total.............................................. 11,565 XXXXXX 11,565 ------------ ------------ Real estate The Cincinnati Life Insurance Company.............. 4,010 XXXXXX 4,010 CFC-I Investment Company........................... 688 XXXXXX 688 ------------ ------------ Total.............................................. 4,698 XXXXXX 4,698 ------------ ------------ Policy loans The Cincinnati Life Insurance Company.............. 20,035 XXXXXX 20,035 ------------ ------------ Notes receivable CFC-I Investment Company........................... 10,262 XXXXXX 10,262 ------------ ------------ TOTAL OTHER INVESTED ASSETS............................... $ 46,560 XXXXXX $ 46,560 ------------ ------------ TOTAL INVESTMENTS......................................... $4,343,964 XXXXXX $8,797,050 ============ ============ </TABLE> 11
12 <TABLE> <CAPTION> SCHEDULE II CINCINNATI FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT (000 OMITTED) Condensed Statements of Income (Parent Company Only) For the Years ended December 31 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Income - ------ Dividends from Subsidiaries............................... $ 125,000 $ 85,000 $ 149,000 Investment Income......................................... 87,312 81,220 65,839 Realized Gains on Investments............................. 4,415 2,232 742 Other..................................................... 99 0 0 ------------ ------------- ------------ Total ................................................. $ 216,826 $ 168,452 $ 215,581 ------------ ------------- ------------ Expenses - -------- Interest.................................................. $ 20,306 $ 20,098 $ 17,229 Other..................................................... 8,568 6,620 3,071 ------------ ------------- ------------ Total Expenses......................................... 28,874 26,718 20,300 ------------ ------------- ------------ Income Before Taxes and Earnings of Subsidiaries.......... 187,952 141,734 195,281 Applicable Income Taxes................................... 11,066 9,760 8,286 ------------ ------------- ------------ Net Income Before Change in Undistributed Earnings of Subsidiaries........................................... 176,886 131,974 186,995 Increase in Undistributed Earnings of Subsidiaries........ 122,489 91,786 40,355 ------------ ------------- ------------ Net Income............................................. $ 299,375 $ 223,760 $ 227,350 ============ ============= ============ <CAPTION> Condensed Balance Sheets (Parent Company Only) December 31 1997 1996 ---- ---- Assets - ------ <S> <C> <C> Cash....................................................................... $ 6,942 $ 5,494 Fixed Maturities, at Fair Value............................................ 427,275 435,368 Equity Securities, at Fair Value........................................... 2,915,049 1,641,291 Investment Income Receivable............................................... 18,569 18,341 Inter-Company Dividends Receivable......................................... 50,000 20,500 Equity in Net Assets of Subsidiaries....................................... 2,525,086 1,837,226 Finance Receivables........................................................ 7,829 -0- Other Assets............................................................... 7,101 10,518 ------------- ------------ Total Assets............................................................ $5,957,851 $3,968,738 ============= ============ Liabilities - ----------- Notes Payable.............................................................. $ 265,564 $ 262,098 Dividends Declared but Unpaid.............................................. 22,704 20,584 Federal Income Tax Current................................................................. 10,729 9,422 Deferred................................................................ 863,298 425,543 5.5% Convertible Senior Debentures Due 2002................................ 58,430 79,847 Other Liabilities.......................................................... 20,161 8,355 ------------- ------------ Total Liabilities....................................................... $1,240,886 $ 805,849 Stockholders' Equity....................................................... 4,716,965 3,162,889 ------------- ------------ Total Liabilities and Stockholders' Equity.............................. $5,957,851 $3,968,738 ============= ============ </TABLE> 12
13 <TABLE> <CAPTION> SCHEDULE II CINCINNATI FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT (000 OMITTED) Condensed Statements of Cash Flows (Parent Company Only) For the Years ended December 31 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Operating Activities - -------------------- Net Income................................................ $ 299,375 $ 223,760 $ 227,350 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Amortization.......................................... (624) (782) (706) Increase in investment income receivable.............. (228) (2,602) (4,590) Increase in Current Federal Income Taxes Payable...... 1,307 1,733 2,236 Provision for Deferred Income Taxes................... 159 1,116 1,125 Increase in Dividends Receivable from Subsidiaries........................................ (29,500) (7,973) (4,227) Decrease (Increase) in Other Assets.................... 3,417 (6,928) 206 Increase (Decrease) in Other Liabilities.............. 11,806 3,391 (1,843) Increase in Undistributed Earnings of Subsidiaries.... (122,489) (91,786) (40,355) Realized Gains on Investments......................... (4,415) (2,232) (742) ------------ ------------- ------------ Net Cash Provided by Operating Activities................. 158,808 117,697 178,454 ------------ ------------- ------------ Investing Activities - -------------------- Sale of Fixed Maturity Investments........................ 62,712 78,701 44,063 Maturity of Fixed Maturity Investments.................... 77,380 6,807 14,641 Sale of Equity Security Investments....................... 9,982 36,825 19,830 Collection of Finance Receivables......................... 1,330 -0- -0- Purchase of Fixed Maturity Investments.................... (119,592) (139,934) (203,081) Purchase of Equity Security Investments................... (40,834) (52,282) (79,739) Investment in Finance Receivables......................... (9,159) -0- -0- ------------ ------------- ------------ Net Cash Used in Investing Activities..................... (18,181) (69,883) (204,286) ------------ ------------- ------------ Financing Activities - -------------------- Increase in Other Short-Term Borrowings................... 3,466 41,093 91,889 Payment of Cash Dividends................................. (88,405) (79,203) (69,542) Purchase/Issuance of Treasury Shares...................... (60,714) (8,963) (287) Proceeds from Stock Options Exercised..................... 6,474 3,399 4,113 ------------ ------------- ------------ Net Cash (Used in) Provided by Financing Activities....... (139,179) (43,674) 26,173 ------------ ------------- ------------ Increase in Cash.......................................... 1,448 4,140 341 Cash at Beginning of Year................................. 5,494 1,354 1,013 ------------ ------------- ------------ Cash at End of Year....................................... $ 6,942 $ 5,494 $ 1,354 ============ ============= ============ </TABLE> 13
14 <TABLE> <CAPTION> SCHEDULE III CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION FOR YEARS ENDED DECEMBER 31 1997, 1996, AND 1995 (000 omitted) Column A Column B Column C Column D Column E Column F Column G -------- -------- -------- -------- -------- -------- -------- Future Policy Deferred Benefits, Other Policy Policy Losses, Claims & Acquisition Claims & Unearned Benefits Premium Net Segment Cost Expense Premiums Payable Revenue Investment Losses Income - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> 1997 Property and Liability Insurance..................... $ 83,759 $1,888,883 $442,078 $24,614 $1,453,526 $199,427 Life/Health Insurance......... 51,554 491,374 976 14,110 62,852 60,923 ---------- ---------- --------- -------- ----------- --------- Total......................... $135,313 $2,380,257 $443,054 $38,724 $1,516,378 $260,350 ========== ========== ========= ======== =========== ========= 1996 Property and Liability Insurance..................... $ 79,914 $1,824,296 $424,487 $35,500 $1,366,544 $190,318 Life/Health Insurance......... 47,674 448,969 1,263 12,683 56,353 54,687 ---------- ---------- --------- -------- ----------- --------- Total......................... $127,588 $2,273,265 $425,750 $48,183 $1,422,897 $245,005 ========== ========== ========= ======== =========== ========= 1995 Property and Liability Insurance..................... $ 76,365 $1,690,461 $407,254 $32,180 $1,263,257 $180,074 Life/Health Insurance......... 43,224 412,552 1,371 11,604 50,869 52,440 ---------- ---------- --------- -------- --------- --------- Total......................... $119,589 $2,103,013 $408,625 $43,784 $1,314,126 $232,514 ========== ========== ========= ======== ========= ========= <CAPTION> Column H Column I Column J Column K -------- -------- -------- -------- Benefits, Amortization Claims, of Deferred Losses & Policy Other Settlement Acquisition Operating Premium Segment Expenses Costs Expenses Written - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 1997 Property and Liability Insurance..................... $ 994,274 $305,336 $130,960 $1,471,603 Life/Health Insurance......... 60,650 9,056 17,737 8,112(4) ---------- -------- --------- ---------- Total......................... $1,054,924 $314,392 $148,697 $1,479,715 ========== ======== ========= ========== 1996 Property and Liability Insurance..................... $1,030,157 $287,222 $ 98,844 $1,383,525 Life/Health Insurance......... 56,948 7,890 16,879 7,652(4) ---------- -------- --------- ---------- Total......................... $1,087,105 $295,112 $115,723 $1,391,177 ========== ======== ========= ========== 1995 Property and Liability Insurance..................... $ 913,139 $264,281 $ 87,420 $1,295,852 Life/Health Insurance......... 51,077 8,032 15,289 7,277(4) ---------- -------- --------- ---------- Total......................... $ 964,216 $272,313 $102,709 $1,303,129 ========== ======== ========= ========== <FN> Notes to Schedule III: - ---------------------- (1) The sum of columns C, D, & E is equal to the sum of Losses and loss expense reserves, Life policy reserves, and Unearned premium reserves reported in the Company's consolidated balance sheets. (2) The sum of columns I & J is equal to the sum of Commissions, Other operating expenses, Taxes, licenses, and fees, Increase in deferred acquisition costs, and Other expenses shown in the consolidated statements of income, less other expenses not applicable to the above insurance segments. (3) Investment income amounts for the above insurance segments represent investment income on the actual investment securities in each such segment. Investment expenses, which are deducted from investment income, and other operating expenses include both expenses incurred directly in the insurance segments and expenses allocated to and among the insurance segments based on historical usage factors. The life/health segment is conducted totally within one subsidiary that has no other segments. (4) Amounts represent written premiums on accident and health insurance business only. </TABLE> 14
15 <TABLE> <CAPTION> SCHEDULE IV CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES REINSURANCE FOR YEARS ENDING DECEMBER 31, 1997, 1996, AND 1995 (000 omitted) Column A Column B Column C Column D Column E Column F -------- -------- -------- -------- -------- -------- Ceded to Assumed Percentage of Gross Amount Other from Other Net Amount Amount Assumed to Companies Companies Net - ------------------------------------------------------------------------------------------------------------------------------------ 1997 - ---- <S> <C> <C> <C> <C> <C> Life Insurance in Force...................... $ 10,844,743 $1,313,957 $ 13,631 $9,544,417 .1% =============== ============= ============ ============ Premiums Life/Health Insurance........................ $ 68,073 $ 5,357 $ 136 $ 62,852 .2% Property/Liability Insurance................. 1,506,229 94,397 41,694 1,453,526 2.9% --------------- ------------- ------------ ------------ Total Premiums............................... $ 1,574,302 $ 99,754 $ 41,830 $1,516,378 2.8% =============== ============= ============ ============ 1996 - ---- Life Insurance in Force...................... $ 9,775,948 $1,272,331 $ 15,919 $8,519,536 .2% =============== ============= ============ ============ Premiums Life/Health Insurance........................ $ 60,994 $ 4,749 $ 108 $ 56,353 .2% Property/Liability Insurance................. 1,416,801 91,396 41,139 1,366,544 3.0% --------------- ------------- ------------ ------------ Total Premiums............................... $ 1,477,795 $ 96,145 $ 41,247 $1,422,897 2.9% =============== ============= ============ ============ 1995 - ---- Life Insurance in Force...................... $ 8,328,764 $ 980,023 $ 20,047 $7,368,788 .3% =============== ============= ============ ============ Premiums Life/Health Insurance........................ $ 54,437 $ 3,713 $ 145 $ 50,869 .3% Property/Liability Insurance................. 1,310,105 83,804 36,956 1,263,257 2.9% --------------- ------------- ------------ ------------ Total Premiums............................... $ 1,364,542 $ 87,517 $ 37,101 $1,314,126 2.8% =============== ============= ============ ============ </TABLE> 15
16 <TABLE> <CAPTION> SCHEDULE VI CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS FOR YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (000 omitted) Column A Column B Column C Column D Column E Column F Column G Column H Column I -------- -------- -------- -------- -------- -------- -------- -------- -------- Reserves Amortization for Unpaid Claims and Claim of Deferred Claims and Discount, Adjustment Expenses Deferred Affiliation Policy Claim if any, Net Incurred Related to Policy with Acquisition Adjustment Deducted in Unearned Earned Investment (1) (2) Acquisition Registrant Costs Expenses Column C Premiums Premiums Income Current Year Prior Years Costs - ------------ --------- --------- ---------- ---------- ---------- ---------- ------------------------ ---------- Consolidated Property-Casualty Entities <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> 1997 $ 83,759 $1,888,883 $ 0 $ 442,078 $1,453,526 $ 199,427 $1,115,140 $(119,654) $ 305,336 ========== ========== ========== ========== ========== ========== ========== ========= ========== 1996 $ 79,914 $1,824,296 $ 0 $ 424,487 $1,366,544 $ 190,318 $1,183,251 $(151,996) $ 287,222 ========== ========== ========== ========== ========== ========== ========== ========= ========== 1995 $ 76,365 $1,690,461 $ 0 $ 407,254 $1,263,257 $ 180,074 $1,040,541 $(126,509) $ 264,281 ========== ========== ========== ========== ========== ========== ========== ========= ========== <CAPTION> Column J Column K -------- -------- Paid Claims and Claim Adjustment Premiums Expenses Written ------------ ------------- Consolidated Property-Casualty Entities <S> <C> <C> 1997 $ 921,253 $1,471,603 ========== ========== 1996 $ 909,582 $1,383,525 ========== ========== 1995 $ 765,315 $1,295,852 ========== ========== </TABLE> 16
17 Index of Exhibits Exhibit 11-- Statement recomputation of per share earnings for the years ended December 31, 1997, 1996, and 1995 Exhibit 13-- Material incorporated by reference from the annual report of the registrant to its shareholders for the year ended December 31, 1997 Exhibit 23-- Independent Auditors' Consent Exhibit 27-- Financial Data Schedule 17
18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Signature Title Date --------- ----- ---- /s/ Robert B. Morgan - ------------------------- Chief Executive Officer March 19, 1998 Robert B. Morgan President and Director /s/ Theodore F. Elchynski - ------------------------- Senior Vice President March 19, 1998 Theodore F. Elchynski Chief Financial Officer Treasurer and Secretary (Principal Financial Officer) (Principal Accounting Officer) /s/ William F. Bahl - -------------------------- Director March 23, 1998 William F. Bahl /s/ Michael Brown - -------------------------- Director March 19, 1998 Michael Brown - -------------------------- Director March , 1998 Richard M. Burridge - -------------------------- Director March , 1998 John E. Field - -------------------------- Director March , 1998 William R. Johnson /s/ Kenneth C. Lichtendahl - -------------------------- Director March 20, 1998 Kenneth C. Lichtendahl /s/ James G. Miller - -------------------------- Senior Vice President March 19, 1998 James G. Miller Chief Investment Officer and Director 18
19 Signature Title Date --------- ----- ---- - -------------------------- Director March , 1998 Jackson H. Randolph /s/ John J. Schiff - -------------------------- Director March 14, 1998 John J. Schiff /s/ John J. Schiff, Jr. - -------------------------- Chairman of the March 19, 1998 John J. Schiff, Jr. Board and Director /s/ Robert C. Schiff - -------------------------- Director March 23, 1998 Robert C. Schiff /s/ Thomas R. Schiff - -------------------------- Director March 19, 1998 Thomas R. Schiff - -------------------------- Director March , 1998 Frank J. Schultheis - -------------------------- Director March , 1998 Larry R. Webb - -------------------------- Director March , 1998 Alan R. Weiler 19