Cincinnati Financial Corporation

Cincinnati Financial Corporation

P.O. Box 145496
Cincinnati, Ohio 45250-5496
U.S.A.
(513) 870-2000
Fax: (513) 870-0609

Public Company
Incorporated: 1950 as The Cincinnati Insurance
Company
Employees: 2,289
Total Assets: $6.10 billion (1995)
Stock Exchanges: NASDAQ
SICs: 6331 Fire, Marine & Casualty Insurance; 6311 Life Insurance; 6321 Accident & Health Insurance; 6719 Holding Companies, Not Elsewhere Classified

With assets of over $6 billion, Cincinnati Financial Corporation ranks among America’s 20 most profitable publicly-traded property-casualty insurance companies. This holding company—known in some circles as “Cin-Fin”—controls three property and casualty insurers, a life insurance subsidiary, and a leasing firm. Within the property-casualty field, Cincinnati Financial Corp. specializes in personal policies for auto and home owners as well as commercial insurance for small businesses. All of the company’s insurance products are sold and serviced through a network of fewer than 1,000 independent insurance agents. Although the firm writes insurance policies in 26 midwestern and southeastern states, home state Ohio remained its largest single market in the mid-1990s.

Throughout its history Cincinnati Financial’s low cost structure, conservative investment strategy, and strong network of agents have enabled it to consistently outperform property and casualty insurance industry averages. In fact, Barron’s analyst Harlan S. Byrne has characterized Cin-Fin as “one of the best-performing of property-casualty insurance companies.” Its revenues increased from $1.05 billion in 1990 to $1.74 billion in 1995, and net income grew from $128.96 million to $227.35 million during the same period. The 45-year-old company celebrated its 35th consecutive year of dividend increases in 1995. At that time, independent agent and co-founder John J. Schiff continued to chair Cincinnati Financial’s executive committee, while his son, John J. Schiff, Jr., served as company chairman. Robert Morgan started his 13th year as Cin-Fin’s president and CEO that year.

Postwar Origins

The business was chartered as The Cincinnati Insurance Company in 1950 by two brothers, John (“Jack”) and Robert Schiff. Jack, the elder of the two, had graduated from Ohio State University in 1938 and started working with Travelers Insurance Company that same year. After serving in the military during World War II, Jack launched an independent insurance agency. His independent insurance agency did not represent any single firm and could therefore sell policies from any number of companies. Robert joined his brother’s business in 1946, when he graduated from Ohio State.

It wasn’t long before Jack conceived of a new insurance company, one created, owned, and operated by insurance agents themselves. A 1949 meeting with family friend and respected colleague Chester T. Field helped bring the idea to life in 1950. Field and the Schiffs persuaded several local independent agents to join them, including Harry Turner, who became the company’s first president. Robert Schiff was the company’s first vice-president, while Jack Schiff was named secretary-treasurer, and Chester Field served as a board member. The board raised $200,000 in initial investments and enlisted several independent agents from around the state to begin promoting Cincinnati Insurance Company’s fire, auto, and later marine and theft insurance.

The Cincinnati Insurance Company (CIC) was founded on several key concepts, including a conservative investment and growth strategy, low expenses, and a strong agent network. The company kept costs low by hiring agents who either had their own offices or worked out of their homes. This strategy would continue throughout CIC’s history; in the early 1990s, expenses were only about ten percent of annual premiums, one of the lowest rates in the industry. The company also kept costs low by carefully choosing its clients as well as its agents, making sure that both were “cream of the crop.”

The firm had two primary constituencies: the independent agents to whom it offered insurance products, and the clients to whom independent agents sold the individual policies. CIC forged strong relationships with its agents by paying high commissions (up to 20 percent of premiums); providing responsive claims service, and encouraging agents to own company stock. In a 1990 Financial World article, McDonald & Co. analyst Nancy Benacci noted that Cin-Fin had “a claims person in every town and [made] payments and adjustments fast.” A newspaper article written around the time of the company’s formation called CIC “the first company owned exclusively by Ohio insurance agents and Cincinnati businessmen.” By the early 1990s, company agents owned about one-fifth of its equity. Financial World’s Adrienne Linsenmeyer noted that in 1990 “70 percent of Cin-Fin’s independent agents rate the company tops and book their best business with the company.” CIC won over customers by offering guaranteed rates; policies with premiums that did not increase for up to five years. These factors laid a solid foundation upon which the Schiff brothers and their colleagues built a prosperous business.

Solid Growth in the 1950s and 1960s

Insurance companies typically have two possible profit centers: underwriting (or selling insurance policies) and investing. An underwriting profit is expressed in industry parlance as the “underwriting margin” or “combined ratio.” The combined operating ratio compares claims and overhead to premiums collected. A combined operating ratio of 100 or more indicates that a company’s expenses equaled or exceeded the premiums that it collected. A ratio of 105, for example, indicates that a company suffered a loss of five percent on underwriting; premiums collected fell short of claims and operating expenses. Beginning in the 1960s, property and casualty insurers in general did not make money on underwriting. Consequently, any profits made were usually generated through shrewd investment of premiums.

CIC consistently achieved underwriting profits throughout the 1950s and 1960s. By 1955, CIC’s roster of products included homeowner’s and commercial all-risk plans. From the outset, the firm tailored its policies to small businesses across the Midwest. CIC expanded geographically during its first five years in business, hiring agents in Kentucky in 1955 and Indiana the following year. Gross annual premiums multiplied from $92,000 in 1951 to $928,000 in 1956.

From 1956 to 1971 the company averaged a 9.2 percent annual profit on underwriting. During this period of CIC’s history, the company conservatively invested its surplus in government bonds, one of the most low-risk vehicles available. From 1956 to 1968, CIC expanded its reach into six new, primarily Midwestern, states: Michigan, Pennsylvania, Florida, Georgia, Alabama, and Tennessee. The company also broadened the types of coverage it offered during this period, adding earthquake, automobile comprehensive and collision, burglary, and robbery options. By 1967, CIC offered 13 types of insurance. Harry Turner served as president until 1963, providing the young company’s first decade with what successor Jack Schiff called “wise, conservative management.”

Reorganization Brings New Era of Growth

As president of CIC from 1963 to 1975, Jack Schiff ushered in a more aggressive era. In line with a trend that swept the insurance industry in the 1960s, CIC established Cincinnati Financial Corp. as a holding company in 1968. Harry Turner served as the new entity’s chairman, while Jack Schiff was president and, starting in 1973, chief executive officer.

The corporate reorganization signaled a period of diversification and rapid growth in revenues and net income. In 1970, Cin-Fin created CFC Investment Company. This segment of Cin-Fin bought and sold commercial real estate for investment purposes. It also provided low cost loans to agents and offered vehicle leases and loans for the agents and their customers.

Public stock floatations in 1971 and 1972 raised about $14 million, $3.5 million of which was used for debt reduction. The remainder went into a fund used in 1972 to acquire The Life Insurance Company of Cincinnati and Queen City Indemnity, a property/casualty firm. Cin-Fin made its biggest purchase ever the following year, merging with Inter-Ocean Corporation, another Cincinnati company and life insurer. The transaction increased Cin-Fin’s asset based by almost 60 percent, to $161 million, by the end of 1973. Inter-Ocean Chairman W.G. Alpaugh, Jr. replaced the retiring Harry Turner as Cin-Fin chairman in 1973.

This string of acquisitions helped increase Cincinnati Financial’s revenues dramatically, from $19.7 million in 1968 to $96.7 million in 1973, while its net income shot from $1.1 million to $9.8 million. During this time, Cin-Fin’s primary profit center shifted from underwriting to investing. From the 1970s through the early 1990s, the insurance industry overall averaged a seven percent annual loss on underwriting. Cincinnati Financial’s insurance businesses were more profitable than most, but they still only broke even on average, bringing an increased emphasis on investing.

Company Perspectives

Our mission is to provide local independent agents with competitive insurance products, superior service and market stability, enhancing their ability to deliver quality financial protection to businesses and individuals in their communities.

In 1972, the company hired James Miller as its first full-time investment department employee. According to a late 1995 article in Forbes magazine, Miller and Cin-Fin demanded the same performance of its investments that it expected of its own stock: “We want dividends and companies that will increase their dividends.” For all its conservatism, by the early 1990s, about half of the insurer’s investment portfolio was in common stocks. In fact, nearly 43 percent of the fund was tied up in just two stocks: Fifth Third Bancorp and Alltel, both based in Ohio.

In spite of this fundamental change in its business, Cin-Fin’s growth continued unabated through the remainder of the decade. Revenues expanded from less than $100 million in 1973 to over $330 million by 1980, and profits jumped from $9.8 million to $33.4 million during the same period.

“Weathering the Storms” of the 1980s

Robert Morgan succeeded co-founder Jack Schiff as CEO in 1982. Morgan—who had joined Cincinnati Insurance in 1966, advanced to vice-president and general manager in 1972, and became president in 1976—oversaw a relatively difficult decade for Cin-Fin and other property-casualty insurers. A string of natural disasters highlighted by Hurricane Hugo battered underwriting results, and investment pitfalls including commercial real estate and junk bonds led to the downfall of several insurers. Cin-Fin suffered the effects of both these trends, though not nearly as severely as some of its rivals.

The company experienced its first-ever decline in profits from $68.7 million on $490.6 million revenues in 1984 to $55 million on $596.5 million in 1985. During the mid-1980s, property-casualty insurers averaged a combined ration of 116, but in the latter years of the decade, Cin-Fin managed to keep its combined ratio under 100. Revenues increased to $974.4 million and net grew to $111.5 million by 1989, and the dividend nearly doubled from 1986 to 1990.

Cin-Fin’s performance won it increased attention from business analysts in the early 1990s, but not necessarily for its insurance activities. To be sure, such observers as Barren’s Harían S. Byrne praised the company’s “better than average” underwriting results and “tight-fisted control of expenses.” But others, including Forbes’ Thomas Easton, admired the company as “a well-run insurer coupled to a closed-end fund with a superb performance record.” Easton noted that the insurer’s investment returns had beaten the Standard & Poor’s 500 by four percentage points from 1985 to 1995, for example. Cincinnati Financial Corp.’s bottom line bore out these accolades. Having broken the $1 billion revenue mark in 1990, Cincinnati Financial Corp. approached $2 billion in 1995. Net income increased from $128.9 million to $227.4 million during the same period.

Principal Subsidiaries

The Cincinnati Insurance Company; The Cincinnati Casualty Company; The Cincinnati Indemnity Company; The Cincinnati Life Insurance Company; CFC Investment Company.

Further Reading

Byrne, Harlan S., “Cincinnati Financial Corp.,” Barron’s, January 21, 1991, p. 49.

——, “Cincinnati Financial: Weathering the Storms, Feathering Its Profits,” Barron’s, May 31, 1993, p. 33.

Calise, Angela K., “Cincinnati Financial Moves to Relieve Investor Fears,” National Underwriter Property & Casualty-Risk & Benefits Management, October 15, 1990, p. 63.

Curry, Robert P., Prospectus Fulfilled: The Evolution of the Cincinnati Financial Corporation, Cincinnati: The Cincinnati Financial Corporation, 1984.

Easton, Thomas, “What’s in a Name?” Forbes, December 18, 1995, p. 294.

Geer, Carolyn T., “Its Agents Do Their Homework,” Forbes, January 4, 1993, p. 166.

Linsenmeyer, Adrienne, “Cincinnati Financial: Bucking the Trend,” Financial World, December 11, 1990, p. 14.

Weinstein, Marc, “Property and Casualty firms Expected to See Brighter ‘86; Local Insurers to Follow Industry Trend,” Cincinnati Business Courier, August 11, 1986, p. 15.

—April Dougal Gasbarre