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"), 100% of CFC Investment Company ("CFC-I") and 100% of CinFin Capital Management Company ("CinFin"). CFC is the parent for CIC, CFC-I and CinFin.
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 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 licensed for the sale of life insurance and accident and health insurance in 48 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 licensed in the fire and casualty insurance business on both a direct and agency billing basis in 40 states. The business of CIC and CCC is conducted separately, and there are no plans for combining the business of said companies. CCC reinsures substantially all of their business to CIC.
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 31 states. The business of CIC and CID is conducted separately, and there are no plans for combining the business of said companies. CID reinsures substantially all of their business to CIC.
CFC-I, incorporated 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.
CinFin, incorporated in 1998, offers investment management services to corporations, insurance agencies and companies, institutions, pension plans, and high net worth individuals.
Industry segment information for revenues, income before income taxes, and identifiable assets is included on page 46 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 10 through 17 in the Company's Annual Report to Shareholders, incorporated herein by reference (see Exhibit 13 to this filing), the Company primarily sells insurance through a network of a limited number of selectively appointed independent agents. Net earned premiums by property casualty lines increased 13% to $2.071 billion in 2001. The Company's mix of property casualty business did not change significantly in 2001. Life and accident and health insurance (which constituted 4% of the Company's premium income for 2001) is sold primarily through property casualty agencies and independent life agencies. The earned premium growth rate of 2% compares to 6% growth in 2000 and 7% in 1999.
The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses ("LAE") of the Company's property casualty insurance subsidiaries. Property 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 (for estimates of unreported claims) 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 the liability for losses and LAE. The first table, providing a reconciliation of beginning and ending liability balances for 2001, 2000, and 1999, is on page 42 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 2001 is presented on the next page.
The reconciliation referred to in the preceding paragraph shows recognition of approximately $62 million in redundant reserves during 2001 related to the December 31, 2000 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 incurred but not reported (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 are written with post-date coverages that 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. Average severities are 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 principal reason for differences between the property casualty liabilities reported in the accompanying consolidated financial statements in accordance with accounting principles generally accepted ("GAAP") in The United States of America and that reported in the annual statements filed with state insurance departments in accordance with statutory accounting practices ("SAP") relates to the reporting of reinsurance recoverables which are recognized as receivables for GAAP purposes and as an offset to reserves for SAP purposes.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
The table above presents the development of balance sheet liabilities for 1991 through 2001. The top line of the table shows the estimated net 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.
The "net cumulative redundancy" represents the aggregate change in the estimates over all prior years. For example, the 1991 liability has developed a $194 million 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 referred to above.
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, 2001, the Company had paid $705 million of the currently estimated $792 million of losses and LAE that have been incurred as of the end of 1991; thus an estimated $87 million of losses incurred as of the end of 1991 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 1996, but incurred in 1991, will be included in the cumulative deficiency or redundancy amount for 1991 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 risks (ceding) with other insurers or reinsurers. The Company's property casualty risk retention program is affected by various factors, which include, but are not limited to, the Company's changes in underwriting practices, the capacity to retain risks, and reinsurance market conditions. The Companies property casualty working treaties provide coverage up to $25,000,000 per occurrence, excess of retention limits. The Company raised its casualty line per occurrence retention limits in 1995 and 1999 from $1,000,000 to $2,000,000 to $2,400,000, respectively, and raised its property line per occurrence retention limits in 1995 from $1,000,000 to $2,000,000. The Company reinsures with only financially sound companies. The composition of reinsurers in the Company's property casualty working treaties changed effective January 1, 2002, reducing from four to three reinsurance companies. 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 26 through 30 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 (focusing on 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 1.5 to 3 percent and annual dividend increases. The Company's strategy in equity investments is to identify approximately 10 to 15 companies in which it can accumulate 5 to 10 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, 2001, CFC employed 3,299 associates.
ITEM 2.
ITEM 2. PROPERTIES ----------
CFC owns the Home Office building located on 75 acres of land in Fairfield, Ohio. This building contains approximately 615,000 square feet. The John J. and Thomas R. Schiff & Company, an affiliated company, occupies approximately 6,750 square feet, and the balance of the building is occupied by CFC and its subsidiaries. The property, including land, is carried in the financial statements at $86,835,820 as of December 31, 2001 and is classified as "Property and equipment, net, for Company use."
CFC-I 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 96,000 rentable square feet. CFC and its subsidiaries occupy approximately 38% of the building, unaffiliated tenants occupy approximately 14% of the building, approximately 28% of the building is available for future CFC usage and approximately 20% is available for rent. The property is carried in the financial statements at $8,638,211 as of December 31, 2001 and is classified as "Property and equipment, net, for Company use."
CFC-I also owns an 85,000 square feet office building in downtown Cincinnati that was leased to an unaffiliated company, on a net, net, net lease basis that expired at the end of 2000. The building is currently available for rent or for sale. This property is carried in the financial statements at $535,000 as of December 31, 2001 and is classified as "Other invested assets."
CLIC owns a four-story office building in the Tri-County area of Cincinnati containing approximately 102,000 rentable 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 $3,196,061 as of December 31, 2001 and is classified as "Other invested assets."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
The Company is involved in no material litigation other than routine litigation incident to the nature of its insurance business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
CFC filed with the Securities and Exchange Commission (SEC) on March 8, 2002, a definitive proxy statement and an annual report pursuant to Regulation 14A and is incorporated herein by reference. No matters were submitted during the fourth quarter of 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED ------------------------------------------------------ STOCKHOLDER MATTERS -------------------
Cincinnati Financial Corporation had approximately 11,325 direct shareholders of record as of December 31, 2001. The information related to the market for the registrant's common stock is included in the Annual Report of the Registrant to its shareholders on page 48 for the year ended December 31, 2001 and is incorporated herein by reference (see exhibit 13 to this filing).
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA -----------------------
This information is included in the Annual Report of the Registrant to its shareholders on pages 18 and 19 for the year ended December 31, 2001 and is incorporated herein by reference (see exhibit 13 to this filing).
ITEM 7
ITEM 7 AND 7(A). MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE ----------------------------------------------------------- DISCLOSURES ABOUT MARKET RISK -----------------------------
This information is included in the Annual Report of the Registrant to its shareholders on pages 20 to 33 for the year ended December 31, 2001 and is incorporated herein by reference (see Exhibit 13 to this filing).
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- (a) Financial Statements The following Independent Auditor's Report and consolidated financial statements of the Registrant and its subsidiaries, included in the Annual Report of the Registrant to its shareholders on pages 34 to 46 for the year ended December 31, 2001, are incorporated herein by reference (see Exhibit 13 to this filing).
Independent Auditors' Report Consolidated Balance Sheets--December 31, 2001 and 2000 Consolidated Statements of Income--Years ended December 31, 2001, 2000, and 1999 Consolidated Statements of Shareholders' Equity--Years ended December 31, 2001, 2000, and 1999 Consolidated Statements of Cash Flows--Years ended December 31, 2001, 2000, and 1999. Notes to Consolidated Financial Statements
(b) Supplementary Data Selected quarterly financial data, included in the Annual Report of the Registrant to its shareholders on page 33 for the year ended December 31, 2001, is incorporated herein by reference (see Exhibit 13 to this filing).
ITEM 9.
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, 2001.
PART III
CFC filed with the SEC on March 8, 2002 a definitive proxy statement 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.
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.
2. Financial Statement Schedules: 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 V--Valuation Allowances and Qualifying Accounts 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 3(i)--Amended Articles of Incorporation of Cincinnati Financial Corporation incorporated by reference to the 1999 Annual Report on Form 10K dated March 23, 2000. Exhibit 3(ii)--Regulations of Cincinnati Financial Corporation--incorporated by reference to Exhibit 2 to registrant's Proxy Statement dated March 2, 1992. Exhibit 11--Statement re computation of per share earnings for years ended December 31, 2001, 2000, and 1999 Exhibit 13--Material incorporated by reference from the annual report of the registrant to its shareholders for the year ended December 31, Exhibit 21--Subsidiaries of the registrant--information contained in Part I of this report
Exhibit 22--Published Report regarding matters submitted to vote of securityholders--Notice of Annual Meeting of Shareholders and Proxy Statement dated March 8, 2002--incorporated by reference to such document previously filed with Securities and Exchange Commission, Washington, D.C., 20549 Exhibit 23--Independent Auditors' Consent
(b) Reports on Form 8-K--NONE
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, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, and have issued our report thereon dated February 6, 2002; such consolidated financial statements and report are included in your 2001 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. These consolidated 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 6, 2002
SCHEDULE I CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2001
SCHEDULE II CINCINNATI FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT
This condensed financial information should be read in conjunction with the consolidated financial statements and notes included in the Registrant's 2001 Annual Report to Shareholders.
SCHEDULE II CINCINNATI FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT
This condensed financial information should be read in conjunction with the consolidated financial statements and notes included in the Registrant's 2001 Annual Report to Shareholders.
A subsidiary transferred land and a building to the Company valued at $34 during 2000. During 2001, the Company deemed this transfer a dividend.
Reclassifications - Certain prior year amounts included in the condensed financial information of the registrant have been reclassified to conform with the current year presentation.
SCHEDULE III CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION FOR YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (in millions)
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) This segment information is not regularly allocated to segments and reviewed by Company management in making decisions about resources to be allocated to the segments and assess their performance. (4) Amounts represent written premiums on accident and health insurance business only.
SCHEDULE IV CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES REINSURANCE FOR YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (in millions)
SCHEDULE V
CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY CASUALTY INSURANCE OPERATIONS FOR YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (in millions)
SCHEDULE VI
CINCINNATI FINANCIAL CORPORATION & SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY CASUALTY INSURANCE OPERATIONS FOR YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (in millions)
Index of Exhibits
Exhibit 3(i) -- Amended Articles of Incorporation of Cincinnati Financial Corporation incorporated by reference to the 1999 Annual Report on Form 10K dated March 23, 2000.
Exhibit 3(ii) -- Regulations of Cincinnati Financial Corporation--incorporated by reference to Exhibit 2 to registrant's Proxy Statement dated March 2, 1992
Exhibit 11 -- Statement re computation of per share earnings for the years ended December 31, 2001, 2000, and 1999
Exhibit 13 -- Material incorporated by reference from the annual report of the registrant to its shareholders for the year ended December 31, 2001
Exhibit 21 -- Subsidiaries of the registrant--information contained in Part I of this report
Exhibit 22 -- Published report regarding matters submitted to vote of securityholders - Notice of Annual Meeting of Shareholders and Proxy Statement dated March 8, 2002--incorporated by reference to such document previously filed with Securities and Exchange Commission, Washington, D.C., 20549
Exhibit 23 -- Independent Auditors' Consent
S I G N A T U R E S
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