Annual Report (Form 10-K), fiscal year 1994

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 and the District of Columbia. 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 29 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 nonpreferred personal and casualty lines of insurance in 21 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 7 through 12 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 (974 in 25
states at December 31, 1994) of selectively appointed independent agents, most of whom own stock in the Company. Gross written premiums by property/casualty lines increased 5.8% to $1.287 billion in 1994. The Company's mix of property/casualty business did not change significantly in 1994. Life and accident and health insurance (which constituted only 4% of the Company's premium income for 1994) is also sold primarily through property/casualty agencies and did not change significantly in 1994.
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. The subsidiaries write property and casualty insurance in 50 states and the District of Columbia. 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.
The two tables are used to present an analysis of losses and LAE. The first table, providing a reconciliation of beginning and ending liability balances for 1994, 1993, and 1992, 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 1994 is presented on the next page.
The reconciliation shows a 1994 recognition of $92,892,000 redundancy in the December 31, 1993 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. Also, reserves for environmental claims have been reviewed and the Company believes that the reserves are adequate. 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, the Company raised its retention limits from $500,000 to $750,000 for casualty lines of insurance. In 1989, the casualty and property lines retention limits were further raised to $1,000,000.
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 statement filed with state insurance departments in accordance with statutory accounting practices ("SAP").
The table above presents the development of balance sheet liabilities for 1984 through 1994. 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.
The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the 1987 liability has developed a $38,000,000 redundancy over seven years and has been reflected in income over the seven 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, 1994, the Company had paid $454,000,000 of the currently estimated $496,000,000 of losses and LAE that have been incurred as of the end of 1987; thus an estimated $42,000,000 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 $750,000 to $1,000,000 during 1989. Management presently intends to raise such retention levels in 1995 to $2,000,000. 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 in page 32 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 Mininum 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 4 to 5 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, 1994, CFC employed 2,110 persons.
ITEM 2.



ITEM 2. PROPERTIES ----------
CFC-I owns a fully leased 85,000 square feet office building in downtown Cincinnati that is currently leased to Proctor and Gamble Company, a non-affiliated company, on a net, net, net lease basis. This property is carried in the financial statements at $691,040 as of December 31, 1994.
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 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 $12,870,631 as of December 31, 1994.
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 124,000 square feet. CFC and its subsidiaries occupy approximately 9% of the building, unaffiliated tenants occupy approximately 89% of the building, and the balance is currently available for lease. The property is carried in the financial statements at $10,441,164 as of December 31, 1994.
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. This property is carried in the financial statements at $4,982,622 as of December 31, 1994.
ITEM 3.

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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
CFC filed with the commission on February 27, 1995, 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.

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 page 5 for the year ended December 31, 1994 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, 1994 and is incorporated herein by reference (see Exhibit 13 to this filing).
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS ----------------------------------------------
This information is included in the Annual Report of the Registrant to its shareholders on pages 31 and 32 for the year ended December 31, 1994 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 consolidated financial statements of the Registrant and its subsidiaries, included in the Annual Report of the Registrant to its shareholders on pages 19 to 29 for the year ended December 31, 1994, are incorporated herein by reference (see Exhibit 13 to this filing).
Independent Auditors' Report Consolidated Balance Sheets--December 31, 1994 and 1993 Consolidated Statements of Income--Years ended December 31, 1994, 1993, and 1992 Consolidated Statements of Shareholders' Equity--Years ended December 31, 1994, 1993, and 1992 Consolidated Statements of Cash Flows--Years ended December 31, 1994, 1993, and 1992.
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 1 for the year ended December 31, 1994, 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, 1994.
PART III
CFC filed with the Commission on February 27, 1995 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.







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 and Independent Auditors' Report: Independent Auditors' Report Schedule I--Summary of Investments Other than Investments in Related Parties 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 re computation of per share earnings for years ended December 31, 1994, 1993, and 1992 Exhibit 13--Material incorporated by reference from the annual report of the registrant to its shareholders for the year ended December 31, 1994 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 February 27, 1995 filed with Securities and Exchange Commission, Washington, D.C., 20549 Exhibit 23--Independent Auditors' Consent Exhibit 27--Financial Data Schedule Exhibit 28--Information from reports furnished to state insurance regulatory authorities
(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, 1994 and 1993 and for each of the three years in the period ended December 31, 1994, and have issued our report thereon dated February 13, 1995; such consolidated financial statements and report are included in your 1994 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 13, 1995
Index of Exhibits
Exhibit 11--Statement re computation of per share earnings for the years ended December 31, 1994, 1993, and 1992.
Exhibit 13--Material incorporated by reference from the annual report of the registrant to the shareholders for the year ended December 31, 1994.
Exhibit 23--Independent Auditors' Consent
Exhibit 27--Financial Data Schedule
Exhibit 28--Information from reports furnished to state insurance regulatory authorities.