2010 Shareholder Meeting Notice and Proxy Statement
In addition, you will find information about your company's strategies and initiatives in the Letter from the Chairman and the Chief Executive Officer, and our quarterly letters to shareholders, as they become available. Together with the detailed analysis of the 2009 Annual Report on Form 10-K, these documents comprise a package of information similar to what appeared in our previous annual reports.
March 18, 2010 To the Shareholders of Cincinnati Financial Corporation:You are cordially invited to attend the Annual Meeting of Shareholders of Cincinnati Financial Corporation, which will take place at 9:30 a.m. on Saturday, May 1, 2010, at the Cincinnati Art Museum, located in Eden Park, Cincinnati, Ohio. The business to be conducted at the meeting includes:
Shareholders of record at the close of business on March 3, 2010, are entitled to vote at the meeting. Whether or not you plan to attend the meeting, please cast your vote as promptly as possible. We encourage you to vote via the Internet. It is convenient and saves your company significant postage and processing costs. You also may submit your vote by telephone or by mail, if you prefer. Your Internet or telephone vote must be received by 11:59 p.m. Eastern Daylight Time on April 30, 2010, to be counted in the final tabulation. If you choose to vote by mail, be sure to return you proxy card in time to be received and counted before the Annual Meeting. Your interest and participation in the affairs of the company are appreciated.
This proxy statement, the Annual Report on Form 10-K, Letter from the Chairman and the Chief Executive Officer and voting instructions were first made available to Cincinnati Financial Corporation shareholders on March 18, 2010 Table of Contents
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Frequently Asked QuestionsWho is soliciting my vote? The board of directors of Cincinnati Financial Corporation is soliciting your vote for the 2010 Annual Meeting of Shareholders. Who is entitled to vote? Shareholders of record at the close of business on March 3, 2010, may vote. How many votes do I have? You have one vote for each share of common stock you owned on March 3, 2010. How many votes can be cast by all shareholders? 162,927,521 outstanding shares of common stock can be voted as of the close of business on March 3, 2010. How many shares must be represented to hold the meeting? A majority of the outstanding shares, or 81,463,761 shares, must be represented to hold the meeting. How many votes are needed to elect directors and to approve the proposals? The nominees for director receiving the four highest vote totals will be elected as directors. The proposed amendment to our Articles of Incorporation to declassify the structure of the board will be approved if at least 75 percent of issued and outstanding shares are voted in favor of the proposal. The proposed amendment to our Code of Regulations to include advance notice provisions will be approved if at least 50 percent of issued and outstanding shares are voted in favor of the proposal. Selection of our independent registered public accounting firm is ratified if votes cast in favor of the proposal exceed votes cast against it. What if I vote "withhold" or "abstain?" "Withhold" or "abstain" votes have no effect on the votes required to elect directors or to ratify the independent registered public accounting firm. Abstain votes have the same effect as votes "against" the proposals to amend the Articles of Incorporation and Code of Regulations. Can my shares be voted if I don't return my proxy and don't attend the annual meeting? If your shares are registered in your name, the answer is no. If your shares are registered in the name of a bank, broker or other nominee and you do not direct your nominee as to how to vote your shares, applicable rules provide that the nominee generally may vote your shares on any of the routine matters scheduled to come before the meeting. The proposals to amend the Articles of Incorporation and to ratify the selection of the independent registered public accounting firm are believed to be the only routine matters scheduled to come before this year's annual meeting. If a bank, broker or other nominee indicates on a proxy that it does not have discretionary authority to vote certain shares on a particular matter, these shares (called broker non-votes) will be counted as present in determining whether we have a quorum but will have no effect on the votes required to elect directors, to ratify the independent registered public accounting firm or to approve or reject the other proposals. How do I vote? You may vote by proxy, whether or not you attend the meeting, in one of three ways:
Even if you plan to attend the annual meeting, we ask that you vote by Internet, telephone or mail. Attending the meeting does not constitute a revocation of a previously submitted vote. Instructions for voting via the Internet or by telephone, along with the required Control Number (the Control Number is unique to each account), are provided to you by mail or by e-mail in late March or early April. If you receive information from us by mail, you also received a Notice or proxy card that can be returned in the postage-paid envelope that was included in the same envelope. The deadline for Internet and telephone voting is 11:59 p.m., Eastern Daylight Time, April 30, 2010. If you choose to vote by mail, be sure to return your proxy card in time to be received and counted before the Annual Meeting. Where do I locate my Control Number so I can vote? If you receive our information in the mail, it will be on the card that also gives your name and the number of shares you hold. If you receive our information in e-mails, the Control Number is in the text of the e-mail. What if I cannot locate my Control Number If you hold shares directly in your name, you may obtain your Control Number by calling 866-638-6443. If your shares are registered in the name of a bank, broker or other nominee, that firm will be able to supply the Control Number. Page 3
Can I obtain another proxy card so I can vote by mail? If you hold shares directly in your name, you may obtain another proxy card by calling 800-579-1639. If your shares are registered in the name of a bank, broker or other nominee, that firm will be able to supply another proxy card. Can I change my vote or revoke my proxy? Yes. Just cast a new vote by Internet or telephone or send in a new signed proxy card with a later date. If you hold shares directly in your name, you may send a written notice of revocation to the secretary of the company. If you hold shares directly in your name and attend the annual meeting, you also may choose to vote in person at the meeting. To do so, at the meeting you can request a ballot and direct that your previously submitted proxy not be used. Otherwise, your attendance itself does not constitute a revocation of your previously submitted proxy. How are the votes counted? Votes cast by proxy are tabulated prior to the meeting by the holders of the proxies. Inspectors of election appointed at the meeting count the votes and announce the results. The proxy agent reserves the right not to vote any proxies that are altered in a manner not intended by the instructions contained in the proxy. Could other matters be decided at the meeting? We do not know of any matters to be considered at the annual meeting other than the election of directors and the proposals described in this proxy statement. For any other matters that do properly come before the meeting, your shares will be voted at the discretion of the proxy holder. Who can attend the meeting? The meeting is open to all interested parties. Can I listen to the meeting if I cannot attend in person? If you have access to the Internet, you can listen to a live webcast of the meeting. Instructions will be available on the Investors page of www.cinfin.com approximately two weeks before the meeting. An audio replay will be available on the Web site within two hours after the close of the meeting. Why did my materials arrive in different envelopes Again this year, our paper mailings are timed to meet new regulatory standards that help us keep mailing and paper costs low. Most shareholders who have not elected to receive information using electronic delivery will receive three mailings:
If you are enrolled in electronic delivery, you will receive an e-mail notifying you of the availability of the information on the Internet and providing electronic voting instructions. How can I obtain a 2009 Annual Report You can obtain our 2009 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (SEC) at no cost in several different ways. You may view, search or print the document online from www.cinfin.com/Investors. You may ask that a copy be mailed to you by contacting the secretary of Cincinnati Financial Corporation. Or, you may request it directly from Shareholder Services. Please see the Investor Contact Page of our www.cinfin.com/Investors. for details. Page 4
Security Ownership of Principal Shareholders and ManagementUnder Section 13(d) of the Securities Exchange Act of 1934 (Exchange Act), a beneficial owner of a security is any person who directly or indirectly has or shares voting power or investment authority over such security. A beneficial owner under this definition need not enjoy the economic benefit of such securities. The following are the only shareholders known to the company who are deemed to be beneficial owners of at least 5 percent of our common stock as of March 3, 2010. John J. Schiff, Jr. and Thomas R. Schiff, directors of the company, are brothers.
The outstanding common shares beneficially owned by each other director and all directors and executive officers as a group as of March 3, 2010, are shown below:
Except as otherwise indicated in the notes below, each person has sole voting and investment power with respect to the common shares noted.
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Section 16(a) Beneficial Ownership Reporting ComplianceDirectors, executive officers and 10 percent shareholders are required to report their beneficial ownership of our stock according to Section 16 of the Exchange Act. Those individuals are required by SEC regulations to furnish the company with copies of all Section 16(a) forms they file. SEC regulations require us to identify in this proxy statement anyone who filed a required report late during the most recent calendar year. Based on our review of forms we received, or written representations from reporting persons stating that they were not required to file these forms, we believe that, during the calendar year 2009, all Section 16(a) filing requirements were satisfied on a timely basis except as set forth below: James E. Benoski acquired 6,100 shares from performance-based stock units that vested upon his retirement from active employment on January 17, 2009. Of those shares, 1,827 were withheld to satisfy tax obligations. A Form 4 was filed on March 18, 2009 reporting this transaction. David H. Popplewell acquired 2,719 shares of phantom stock on March 11, 2009 under the company's Top Hat Savings Plan, an "excess benefits plan" within the meaning of Rule 16b-3(b)(2). A Form 4 was filed March 18, 2009 reporting this transaction. Timothy L. Timmel acquired 73 and 83 shares of phantom stock on January 2, 2009 and January 16, 2009, respectively, through fixed contributions under the company's Top Hat Savings Plan, an "excess benefits plan" within the meaning of Rule 16b-3(b)(2). A Form 4 was filed on January 21, 2009 reporting these transactions. Information About the Board of DirectorsThe mission of the board is to encourage, facilitate and foster the long-term success of Cincinnati Financial Corporation. The board directs management in the performance of the company's obligations to our independent agents, policyholders, associates, communities and suppliers in a manner consistent with the company's mission and with the board's responsibility to shareholders to achieve the highest sustainable shareholder value over the long term. Proposal 1 Election of DirectorsThe board of directors currently consists of 14 directors divided into three classes, and each year the directors in one class are elected to serve terms of three years. This means that shareholders generally elect one-third of the members of the board of directors annually. For information about the board's proposal to amend the Articles of Incorporation to declassify its structure so that all directors would stand for election each year, see Proposal 2 beginning on Page 12. This year, the term of office of five directors expires as of the 2010 Annual Meeting of Shareholders. Four of the directors with expiring terms are nominated for re-election. The fifth director with an expiring term, Mr. Benoski, is not standing for re-election because he has reached the recommended retirement age specified in our Corporate Governance Guidelines. We thank Mr. Benoski for his many years of service to the company. Following the election of directors at the Annual Meeting of Shareholders, the board intends to reduce its size to 13 directors. The board of directors recommends a vote FOR Gregory T. Bier, Linda W. Clement-Holmes, Douglas S. Skidmore and Larry R. Webb as directors to hold office until the 2013 Annual Meeting of Shareholders and until their successors are elected. We do not know of any reason that any of the nominees for director would not accept the nomination, and it is intended that votes will be cast to elect all four nominees as directors. In the event, however, that any nominee should refuse or be unable to accept the nomination, the people acting under the proxies intend to vote for the election of such person or people as the board of directors may recommend. Page 6
Nominees and Continuing Directors of Your CompanyEach of our directors brings to our board extensive management and leadership experience gained through their service as executives and, in several cases chief executive officers of diverse businesses. In these executive roles, they have taken hands-on, day-to-day responsibility for strategy and operations, including management of capital, risk and business cycles. In addition, most current directors bring public company board experience - either significant experience on other boards or long service on our board - that broadens their knowledge of board policies and processes, rules and regulations, issues and solutions. Further, each director has civic and community involvement that mirrors our company's values emphasizing personal service and relationships and local decision making. The nominating committee's process to recommend qualified director candidates is described on Page 16 under "Director Nomination Considerations and Process." In the paragraphs below, we describe specific individual qualifications and skills of our directors that contribute to the overall effectiveness of our board and its committees. Set forth below are the names of the nominees for election to the office of director and each current director whose term does not expire at this time, along with their ages, the year first elected as a director, their present positions, principal occupations and public company directorships held in the past five or more years. Nominees for Directors for Terms Expiring 2013(Data as of March 3, 2010)
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Continuing Directors for Terms Expiring 2011(Data as of March 3, 2010)
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Continuing Directors for Terms Expiring 2012(Data as of March 3, 2010)
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Proposal 2 Approval of Amendment to Articles of Incorporation to Declassify the Structure of Our Board of DirectorsPurposeArticle Sixth of our Articles of Incorporation (the Articles) currently provides for the classification of the board of directors into three classes, with election of each class every three years, and contains classification provisions concerning the filling of director vacancies. At last year's Annual Meeting of Shareholders, a majority of the voting shareholders voted to ask the board of directors to take steps toward declassifying the structure of our board, ultimately requiring all directors to stand for election each year. These votes represented a total of 49.06 percent of the issued and outstanding common shares of the company. Accordingly, the board of directors recommends approval of an amendment to Article Sixth of the company's Articles that would declassify the board and ultimately cause each director to be elected annually for a one-year term. A classified board of directors can make it more difficult for shareholders to change a majority of directors even if a majority of the shareholders are dissatisfied with the performance of incumbent directors. Many investors believe that the election of directors is the primary means for shareholders to influence corporate governance policies and to hold management accountable for implementing these policies. Our board of directors is committed to good corporate governance. They examined the arguments for and against continuation of the classified board, in light of the size and financial strength of the company and the vote of the company's shareholders, and determined that the classified board structure should be eliminated. The board believes that all directors should be equally accountable at all times for the company's performance and that the will of the majority of shareholders should not be impeded by a classified board structure. Upon approval, the proposed amendment will allow shareholders to review and express their opinions on the performance of all directors each year. Because the number of terms an individual may serve is not limited, except by age as provided in our Corporate Governance Guidelines, the continuity and stability of the board's membership and our policies and long-term strategic planning should not be affected. If our shareholders do not approve these amendments, the board will remain classified and the directors will continue to be elected to serve three-year terms, subject to their earlier death, resignation, retirement or removal. Page 12
Description of AmendmentIf the proposed amendment is approved by the requisite vote of the shareholders, the classification of the board will be phased out as follows:
The foregoing description is a summary of the proposal and is not complete. The summary is qualified by reference to the actual text of the proposed amended and restated Article Sixth of the Articles, which, if approved, will replace the current Article Sixth in its entirety and is attached to this 2010 Shareholder Meeting Notice and Proxy Statement as Appendix A. Additions to the current Article Sixth are underlined and deletions are shown as text that has been struck through. Vote RequiredApproval of this proposal to amend the Articles to declassify our board of directors requires the affirmative vote of the holders of 75 percent of the issued and outstanding common shares. Abstentions and broker non-votes have the same effect as votes against the proposal. The board of directors recommends that shareholders vote FOR approval of the amendments to the company's Articles of Incorporation to declassify the company's board of directors. Page 13
Committees of the Board and MeetingsThere are five standing committees of the board: the audit committee, the compensation committee, the executive committee, the investment committee and the nominating committee. Each committee operates pursuant to a written charter adopted by the board, copies of which are posted on our website at www.cinfin.com/Investors. Each year the board considers changes to the charters recommended by each committee, if any, and reapproves them. The following table summarizes the current membership of the board and each of its committees, as well as the number of times the board and each committee met during 2009:
Board members are encouraged to attend the Annual Meeting of Shareholders, all meetings of the board and the meetings of committees of which they are a member. In 2009, all directors attended 100 percent of the board and committee meetings of which they were members. The annual meeting of directors is held immediately following the annual shareholders’ meeting at the same location. In May 2009, all of the company’s then 13 directors attended the Annual Meeting of Shareholders. The board of directors will review committee assignments at its meeting on May 1, 2010. Audit Committee The purpose of the audit committee is to oversee the process of accounting and financial reporting, audits and financial statements of the company. The report of the audit committee begins on Page 20.
All of the members of the audit committee meet the NASDAQ criteria for independence and audit committee membership and also are independent for purposes of Section 10A-3 of the Exchange Act. Further, Mr. Bahl and Ms. Price qualify as financial experts according to the SEC definition and meet the standards established by NASDAQ for financial expertise. Compensation Committee The compensation committee discharges the responsibility of the board of directors relating to compensation of the company's directors, its principal executive officers and its internal audit officer. The committee also administers the company's stock- and performance-based compensation plans. The report of the compensation committee begins on Page 22.
All of the members of the compensation committee meet the NASDAQ criteria for independence, qualify as “non-employee directors” for purposes of Rule 16b-3 of the Exchange Act, and as “outside directors” for purposes of Section 162(m) of the Internal Revenue Code (Section 162(m)). Page 14
Executive Committee The purpose of the executive committee is to exercise the powers of the board of directors in the management of the business and affairs of the company between meetings of the board of directors. Independence requirements do not apply to the executive committee. Investment Committee The investment committee provides oversight of the policies and procedures of the investment department of the company and its subsidiaries and reviews the invested assets of the company. The objective of the committee is to oversee the management of the portfolio to ensure the long-term security of the company. Independence requirements do not apply to the investment committee. Nominating Committee The nominating committee identifies, recruits and recommends qualified candidates for election as directors and officers of the company and as directors of its subsidiaries. The committee also nominates directors for committee membership. Further, the committee oversees compliance with the corporate governance policies for the company.
All of the members of the nominating committee meet the NASDAQ criteria for independence. Governance of Your CompanyOur primary governance policies and practices are set forth in our Corporate Governance Guidelines, Code of Ethics for Senior Financial Officers and Code of Conduct applicable to all associates of the company. The nominating committee reviews these documents annually, and occasionally recommends changes for the board's consideration and approval. These guidelines and codes are available on our Web site at www.cinfin.com/Investors. Certain of the board's governance policies and practices are summarized below: Code of Conduct Our Code of Conduct applies to all of our associates, including our officers and directors. It establishes ethical standards for a variety of topics, including, complying with laws and regulations, observing blackout periods for trading in the company's securities, accepting and giving gifts, handling conflicts of interest, proper handling the company's confidential information and personal data of consumers, and reporting illegal or unethical behavior.
Governance Hotline Our audit
committee oversees a governance hotline for the reporting of concerns about the company’s auditing, accounting and financial reporting activities.
Callers can remain anonymous or identify themselves. The hotline is maintained
by a third-party vendor. Transcripts of all calls are reported to the
audit committee.
Board Leadership and Executive Sessions The chairman of the board presides at all meetings of the
board. The chairman is appointed on an annual basis by at least a majority
vote of the remaining directors. Currently, the offices of chairman of the board
and chief executive officer are separated. The company has no fixed policy with
respect to the separation of the offices of the chairman of the board and chief
executive officer. The board believes that the separation of the offices of the
chairman of the board and chief executive officer is part of the succession
planning process and that it is in the best interests of the company to make
this determination from time to time.
The chairs of our audit, compensation and nominating committees are our co-lead independent directors. These independent directors chair the executive sessions of board meetings without management present, and facilitate the communication between the independent directors and management on matters of interest. The independent directors meet in executive session, outside of the presence of management, at every regularly scheduled meeting of the board of directors. Stock Ownership Guidelines Our directors and officers are subject to stock ownership guidelines that set
targets for levels of ownership at a multiple of the officer’s salary or
director’s meeting fees. Because of recent disruptions of the market, in October
2008 the time for achieving targeted levels of ownership was extended to five
years after joining the board or earning a promotion or 10 years from October
2008, whichever is later. Director and Officer Ownership Guidelines are
available on our Web site at www.cinfin.com/Investors.
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Risk Management The board
believes that oversight of the company’s risk management efforts is the
responsibility of the entire board. It views enterprise risk management as an
integral part of the company’s strategic planning process. The subject of risk
management is a recurring agenda item, for which the board receives a report at
each regularly scheduled board meeting from the vice president of planning and
risk management, including in-person reports twice each year. The vice president
of planning and risk management reports directly to the board of
directors.
Additionally, the charters of certain of the board’s committees assign oversight responsibility for particular areas of risk. For example, our audit committee oversees management of risks related to accounting, auditing and financial reporting and maintaining effective internal controls for financial reporting. Our nominating committee oversees risk associated with our corporate governance guidelines and code of conduct, including compliance with listing standards for independent directors, committee assignments and conflicts of interest. Our compensation committee oversees the risk related to our executive compensation plans and arrangements. Our investment committee oversees the risks related to managing our investment portfolio. All of these risks are discussed with the entire board in the ordinary course of the chairperson’s report of committee activities at regular board meetings. Director Independence Each
year, based on all relevant facts and circumstances, the board determines which
directors satisfy the criteria for independence. To be found independent, a
director must not have a material relationship with the company, either directly
or indirectly as a partner, other than a limited partner, controlling
shareholder or executive officer of another organization that has a relationship
with the company that could affect the director’s ability to exercise
independent judgment.
Directors deemed independent are believed to satisfy the definitions of independence required by the rules and regulations of the SEC and the listing standards of NASDAQ. The board has determined that these directors and nominees meet the applicable criteria for independence as of January 29, 2010: William F. Bahl, Linda Clement-Holmes, Kenneth C. Lichtendahl, W. Rodney McMullen, Gretchen W. Price, Douglas S. Skidmore, John F. Steele, Jr. and E. Anthony Woods. Following the re-election of the directors included in this proxy, a majority (eight) of the 13 directors would meet the applicable criteria for independence under the listing standards of NASDAQ. Director Nomination Considerations and Process The nominating committee considers many factors when
determining the eligibility of candidates for nomination as director. The
committee does not have a diversity policy; however, the committee’s goal is to
nominate candidates from a broad range of experiences and backgrounds who can
contribute to the board’s overall effectiveness in meeting its mission. The
committee is charged with identifying nominees with certain
characteristics:
The nominating committee also considers the needs of the board in accounting and finance, business judgment, management, industry knowledge, leadership and such other areas as the board deems appropriate. The committee further considers factors included in the Corporate Governance Guidelines that might preclude nomination or re-nomination. In particular, the nominating committee seeks to support our unique, agent-centered business model. The committee believes that the board should include a variety of individuals, serving alongside independent insurance agents who bring a special knowledge of policyholders and agents in the communities where we do business. Potential board nominees generally are identified by referral. The nominating committee follows a five-part process to evaluate nominees for director. The committee first performs initial screening that includes reviewing background information on the candidates, evaluating their qualifications against the criteria set forth in the company’s Corporate Governance Guidelines and, as the committee believes is appropriate, discussing the potential candidates with the individual or individuals making the referrals. Second, for candidates who qualify for additional consideration, the committee interviews the potential nominees as to their background, interests and potential commitment to the company and its operating philosophy. Third, the Page 16
committee may seek references from sources identified by the candidates as well as sources known to the committee members. Fourth, the committee may ask other members of the board for their input. Finally, the committee develops a list of nominees who exhibit the characteristics desired of directors and satisfy the needs of the board. The nominating committee will consider candidates recommended by shareholders. Shareholders wishing to propose a candidate for consideration may provide information about such a candidate in writing to the secretary of the company, giving the candidate’s name, biographical data and qualifications, and emphasizing the characteristics set forth in our Corporate Governance Guidelines available on our Web site at www.cinfin.com/Investors. Preferably, any such referral would contain sufficient information to enable the committee to preliminarily screen the referred candidate for the needs of the board, if any, in accounting and finance, business judgment, management, industry knowledge, leadership, and the board’s independence requirements. Since the 2009 annual shareholders’ meeting, no fees were paid to any third party to identify, evaluate, or assist in identifying and evaluating potential nominees. In 2009, one of our independent directors referred Linda Clement-Holmes to our nominating committee as a candidate. On the recommendation of the nominating committee, the board of directors increased its size to 14 and appointed Ms. Clement-Holmes to the board at its regularly scheduled meeting on January 29, 2010. Communicating with the Board Shareholders may direct a communication to board members by sending it to the
attention of the secretary of the company, Cincinnati Financial Corporation,
P.O. Box 145496, Cincinnati, Ohio, 45250-5496. The company and board of
directors have not established a formal process for determining whether all
shareholder communication received by the secretary will be forwarded to
directors. Nonetheless, the board welcomes shareholder communication and has
instructed the secretary of the company to use reasonable criteria to determine
whether correspondence should be forwarded. The board believes that
correspondence has been and will continue to be forwarded appropriately.
However, exceptions may occur, and the board does not intend to provide
management with instructions that limit its ability to make reasonable business
decisions. Examples of exceptions would be routine items such as requests for
publicly available information that can be provided by company associates;
vendor solicitations that appear to be mass-directed to board members of a
number of companies; or correspondence that raises issues related to specific
company transactions (insurance policies or claims) where there may be privacy
concerns or other issues.
In some circumstances, the board anticipates that management would provide the board or board member with summary information regarding correspondence. Certain Relationships and Transactions The audit committee follows a written policy for review
and approval of transactions involving the company and related persons, defined
as directors and executive officers or their immediate family members, or
shareholders owning 5 percent or greater of our outstanding stock.
The policy covers any related transaction that meets the minimum threshold
for disclosure in the proxy statement under the relevant SEC rules,
generally transactions involving amounts exceeding $120,000 in which a related
person has a direct or indirect material interest.
As it examines individual transactions for approval, the committee considers:
Consideration of transactions with related parties is a regular item on the audit committee’s agenda. Most of the transactions fall into the categories of standard agency contracts with directors who are principals of independent insurance agencies that sell our insurance products or with directors and executive officers who purchase the company’s insurance products on the same terms as such products are offered to the public. Because the committee does not believe these classes of transactions create conflicts of interest or otherwise violate our Code of Conduct, the committee deems such transactions pre-approved. Page 17
The following transactions in 2009 with related persons were determined to pose no actual conflict of interest and were approved by the committee pursuant to its policy: Kenneth C. Lichtendahl is a director of Cincinnati Financial Corporation and the president and chief executive officer of Tradewinds Beverage Company, which entered into a three-year lease for certain bottle capping equipment valued at $273,900 from CFC Investment Company, the company’s leasing subsidiary. John J. Schiff, Jr. is chairman of the board of Cincinnati Financial Corporation, and all its subsidiaries in 2009 except former subsidiary CinFin Capital Management Company. He and Thomas R. Schiff, also a director of Cincinnati Financial Corporation, are principal owners and directors of John J. & Thomas R. Schiff & Co. Inc., a privately owned insurance agency that represents a number of insurance companies, including our insurance subsidiaries. Our insurance and leasing subsidiaries paid John J. & Thomas R. Schiff & Co. Inc. commissions and finder’s fees of $4,981,750 and $668, respectively. The company purchased various insurance policies through John J. & Thomas R. Schiff & Co. Inc. for premiums totaling $1,141,889. John J. & Thomas R. Schiff & Co. Inc. purchased group health coverage from our life insurance subsidiary for a premium of $132,171 and paid rent to the company in the amount of $122,445 for office space located in the headquarters building. Douglas S. Skidmore is a director of Cincinnati Financial Corporation and principal owner, director, chief executive officer and president of Skidmore Sales & Distributing Company Inc., which purchased property, casualty and life insurance from our insurance subsidiaries for premiums totaling $278,475. John F. Steele, Jr. is a director of Cincinnati Financial Corporation and chairman and chief executive officer of Hilltop Basic Resources Inc., which purchased property casualty insurance from our insurance subsidiaries for premiums totaling $383,880. Larry R. Webb is a director of Cincinnati Financial Corporation and president, director and a principal owner of Webb Insurance Agency Inc., a privately owned insurance agency that represents a number of insurance companies, including our insurance subsidiaries. The company’s insurance subsidiaries paid Webb Insurance Agency Inc. commissions of $554,490. A brother of Timothy L. Timmel, senior vice president of operations of the company’s insurance subsidiaries, is a secretary of the company’s property casualty insurance subsidiary and manager of workers’ compensation claims in the Headquarters Claims department with 32 years of experience in both the Field Claims and Headquarters Claims departments. In 2009, Mr. Timmel’s brother earned compensation consisting of salary, cash bonus, stock-based compensation and perquisites totaling $134,692. The amount of compensation was established by the company in accordance with our employment and compensation practices applicable to associates with equivalent qualifications and responsibilities and holding similar positions. Page 18
Proposal 3 Approval of Amendments to Regulations to Establish Procedures for Advance Notice of Director Nominations and Other Proposals at Shareholder MeetingsPurposeOur Code of Regulations (Regulations) currently contains no provisions that set forth the procedural requirements regarding a shareholder’s ability to propose business at shareholder meetings or nominate a candidate for election to the board of directors. While SEC rules require a shareholder to notify a corporation within a specified period of time prior to an annual meeting of shareholders if the shareholder seeks to have a proposal included in a proxy statement, a shareholder could disrupt a meeting by attempting to bring inappropriate business before the meeting without providing advance notice to the corporation. Rules of order for the conduct of shareholder meetings are appropriate, and many corporations provide for such rules. Description of AmendmentThe proposed amendment sets forth the time period in which a shareholder must provide notice to the company and the procedure to be followed in order to propose business at shareholder meetings or nominate a candidate for election to the board. The proposed amendment does not affect any rights of shareholders to request inclusion of proposals in our proxy statement pursuant to Rule 14a-8 under the U.S. Securities Exchange Act, as amended (the Exchange Act) by satisfying the notice and other requirements of Rule 14a-8 in lieu of satisfying the requirements in the proposed amendments. Under the proposed amendment, Section 5 would be added to Article I of the Regulations, expressly providing the chairman or other presiding officer of the meeting with the ability to set and modify the agenda for the meeting. Section 6 would be added to Article I of the Regulations, allowing a shareholder to propose business at an annual meeting by delivering a notice of a proposal to the secretary of the corporation not less than 60 days nor more than 100 days prior to the first anniversary of the previous year’s annual meeting. If, however, the date of the annual meeting is more than 30 days before or more than 60 days after the first anniversary of the previous year’s annual meeting, shareholders would instead be required to deliver such notice not earlier than the 100th day prior to the annual meeting and not later than the day that is the later of the 60th day prior to the annual meeting or the 10th day following the day on which we first publicly disclose the date of the annual meeting. Section 6 provides that shareholders would not be permitted to propose business for special meetings. As proposed, Section 6 requires the notice of a shareholder be in a certain form that includes information about the item of business to be brought before the meeting and specific information about the shareholder and its interests. Section 6 also provides a requirement that the shareholder update its proposed item of business as necessary. Section 7 would be added to Article I of the regulations, permitting a shareholder to nominate a candidate for election to the board of directors by delivering timely notice of such nomination to the secretary of the corporation within the same time frames as required for a shareholder’s proposal of business, as described in the paragraph above. The notice delivered to the company must include specific information about the nominating shareholder, as well as about the proposed nominee. Section 7 also requires that the shareholder update its nomination as necessary. The foregoing descriptions are summaries of the proposals and are not complete. The summaries are qualified by reference to the actual text of the proposed Sections 5, 6 and 7 to Article I of our Regulations, which is attached to this 2010 Shareholder Meeting Notice and Proxy Statement as Appendix B. Vote RequiredApproval of this proposal to amend the Regulations to establish procedures for advance notice of director nominations and other proposals at shareholder meetings requires the affirmative vote of the holders of a majority of the issued and outstanding common shares. Abstentions and broker non-votes will have the same effect as votes against the proposal. The board of directors recommends that shareholders vote FOR approval of the amendments to the company’s Code of Regulations to establish procedures for advance notice of shareholder proposals and shareholder nominations. Page 19
Audit-Related MattersProposal 4 Management’s Proposal to Ratify Appointment of the Independent Registered Public Accounting FirmThe audit committee has appointed the firm of Deloitte & Touche LLP as the company’s independent registered public accounting firm for 2010. Although action by shareholders in this matter is not required, the audit committee believes that it is appropriate to seek shareholder ratification of this appointment and to seriously consider shareholder opinion on this issue. Representatives from Deloitte & Touche LLP, which also served as the company’s independent registered public accounting firm for the last calendar year, will be present at the 2010 Annual Meeting of Shareholders and will be afforded the opportunity to make any statements they wish and to answer appropriate questions. To ratify the appointment of Deloitte & Touche LLP, a majority of votes cast at the meeting must be voted for the proposal. The board of directors recommends a vote FOR the proposal to ratify appointment of the independent registered public accounting firm. Report of the Audit CommitteeThe audit committee is responsible for monitoring the integrity of the company’s consolidated financial statements, the company’s system of internal controls, the qualifications and independence of the company’s independent registered accounting firm, the performance of the company’s internal audit department and independent registered accounting firm and the company’s compliance with certain legal and regulatory requirements. The committee has sole authority and responsibility to select, determine the compensation of, and evaluate the company’s independent registered accounting firm. The committee has six independent directors and operates under a written charter. The board has determined that each committee member is independent under the standards of director independence established by the NASDAQ listing requirements and is also independent for purposes of Section 10A(m)(3) of the Exchange Act. Management is responsible for the financial reporting process, including the system of internal controls; for the preparation of consolidated financial statements in accordance with generally accepted accounting principles; and for the report on the company’s internal control over financial reporting. The company’s independent registered public accounting firm is responsible for auditing those financial statements and expressing an opinion as to their conformity with accounting principles generally accepted in the United States of America. The committee’s responsibility is to oversee and review the financial reporting process and to review and discuss management’s report on the company’s internal control over financial reporting. However, the committee is not professionally engaged in the practice of accounting or auditing and does not provide any expert or special assurance as to such financial statements concerning compliance with laws, regulations or generally accepted accounting principles or as to auditor independence. The committee relies, without independent verification, on the information provided to it and on the representations made by management and the independent registered accounting firm. The committee reviewed and discussed the audited consolidated financial statements for the fiscal year ended December 31, 2009, with management, the internal auditors and Deloitte & Touche LLP. The committee also discussed with management, the internal auditors and Deloitte & Touche LLP the process used to support certifications by the company’s chief executive officer and chief financial officer that are required by the SEC and the Sarbanes Oxley Act of 2002 to accompany the company’s periodic filings with the SEC and the processes used to support management’s annual report on the company’s internal controls over financial reporting. The committee also discussed with Deloitte & Touche LLP matters that independent registered public accounting firms must discuss with audit committees under generally accepted auditing standards and standards of the Public Company Accounting Oversight Board (PCAOB), including, among other things, matters related to the conduct of the audit of the company’s consolidated financial statements and the matters required to be discussed by Auditing Standards No. 61, as modified or supplemented (AICPA, Professional Standards, Vol. 1. AU Section 380), as adopted by the PCAOB in Rule 3200T. The committee has received the written disclosures and the letter from Deloitte & Touche LLP required by applicable standards of the PCAOB regarding its communications with the committee concerning independence, and the committee has discussed with Deloitte & Touche the independent registered accounting firm’s independence from the company. When considering Deloitte & Touche LLP’s independence, the committee considered whether Page 20
services it provided to the company beyond those rendered in connection with its audit of the company’s consolidated financial statements, and its reviews of the company’s interim condensed consolidated financial statements included in its Quarterly Reports on Form 10-Q compatible with maintaining its independence. The committee also reviewed, among other things, the audit, audit-related and tax services performed by, and the amount of fees paid for such services to Deloitte & Touche LLP. The committee received regular updates on the amount of fees and scope of audit, audit-related and tax services provided. Based on the above-mentioned review and these meetings, discussions and reports, and subject to the limitations on the committee’s role and responsibilities referred to above and in the committee’s charter, the committee recommended to the board that the company’s audited consolidated financial statements for the fiscal year ended December 31, 2009, be included in the company’s Annual Report on Form 10-K. The committee also selected Deloitte & Touche LLP as the company’s independent registered accounting firm for the fiscal year ending December 31, 2010, and is presenting the selection to the shareholders for ratification. Submitted by the audit committee: William
F. Bahl, Linda Clement-Holmes, Kenneth C. Lichtendahl (chair), Gretchen W. Price, Fees Billed by the Independent Registered Public Accounting FirmThe audit committee engaged Deloitte & Touche LLP to perform an annual audit of the company’s financial statements for the year ended December 31, 2009.
Services Provided by the Independent Registered Public Accounting FirmAll services rendered by the independent registered public accounting firm are permissible under applicable laws and regulations. In 2009 and 2008, all services rendered by the independent registered accounting firm were pre-approved by the audit committee, and no fees were charged pursuant to the de minimis safe harbor exception to the pre-approval requirement described in the audit committee charter. Under the pre-approval policy, the audit committee pre-approves specific services related to the primary service categories of audit services, audit-related services, tax services, and other services. A one-time pre-approval dollar limit for specified services related to a specific primary category is established for the audit period. Examples of non-audit services specified under the policy requiring pre-approval may include: financial and tax due diligence, benefit plan audits, American Institute of Certified Public Accountants (AICPA) agreed upon procedures, security and privacy control-related assessments, technology control assessments, technology quality assurance, financial reporting control assessments, enterprise security architecture assessment, tax controversy assistance (IRS examinations), sales tax and lease compliance, employee benefit tax, tax compliance and support, tax research, corporate finance modeling assistance, and allowable actuarial reviews and assistance. Engagements for services falling below the dollar threshold approved for specified services may be entered into with the consent of the chief financial officer. The committee must individually approve engagements for permissible services not included in the pre-approval list or that exceed the dollar threshold established for such services. All engagements are periodically reported to the audit committee. Pursuant to the rules of the SEC, the fees billed by the independent registered public accounting firm for services are disclosed in the table above. Audit Fees These are fees for professional services performed by the independent registered public accounting firm for the integrated audit of the company’s annual financial statements; review of financial statements included in our Form 10-K and Form 10-Q filings; and services that are normally provided in connection with statutory and regulatory filings or engagements. Page 21
Audit-related Fees These are fees for assurance and related services performed by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements. These services include employee benefit plan audits; and independent project risk auditing services. Tax Fees These are fees for professional services performed by the independent registered public accounting firm with respect to tax compliance and preparation including review of our tax returns and related research as well as IRS audit assistance, which totaled $346,004 in 2009. In addition to these items, $2,776 of the tax fees in 2009 were related to tax advice, planning or consulting for retired executives. Our independent registered public accounting firm does not perform any tax shelter work on our behalf. All Other Fees These fees are for advisory services provided by the independent registered public accounting firm to assist the company in gathering and grouping data for the underwriting of commercial lines policies. Compensation of Named Executive Officers and DirectorsReport of the Compensation CommitteeThe compensation committee reviewed and discussed the Compensation Discussion and Analysis with management. Based on the review and discussions, the compensation committee recommended to the board of directors that the Compensation Discussion and Analysis be included in the company’s 2010 proxy statement. Submitted by the compensation committee: W. Rodney McMullen (chair), Gretchen W. Price and E. Anthony Woods Compensation Committee Interlocks and Insider ParticipationIn 2009, W. Rodney McMullen, Gretchen W. Price and E. Anthony Woods served on the compensation committee. During the 2009 fiscal year, none of the compensation committee members was an officer, employee or former officer of Cincinnati Financial Corporation. Compensation Discussion and AnalysisThe following discussion and analysis contains statements about individual and company performance targets and goals. These targets and goals are disclosed in the limited context of Cincinnati Financial Corporation’s compensation programs and should not be understood to be statements of management’s expectations, outlook, estimates of results or other guidance. We encourage investors to read our 2009 Annual Report on Form 10-K for more comprehensive discussion of our expectations for company performance, as well as factors we have identified as risks to our ability to achieve our overall targets. The compensation committee of the board of directors (committee) is responsible for determining compensation for the executive officers named in the Summary Compensation Table, Page 38 (named executive officers). 2009 Performance Highlights: Although 2009 was a difficult year for our economy, our industry and our company, our long-term perspective lets us address the immediate challenges while focusing on the major decisions that best position the company for success through all market cycles. We believe that this forward-looking view has consistently benefited our shareholders, agents, policyholders and associates. Our overall executive compensation is designed to align with shareholder interests and to motivate management behavior to increase shareholder value over the long term. While there is no doubt that the economy and price competition continue to challenge our insurance business we have seen signs during 2009 of an improving environment and are working to manage effectively in the midst of external influences. Management’s actions and corresponding results include:
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To measure our progress, we have defined a measure of value creation that we believe captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders. We refer to this measure as our value creation ratio. It is made up of two primary components: 1) our rate of growth in book value per share plus 2) the ratio of dividends declared per share to beginning book value per share. For the period 2010 through 2014, an annual value creation ratio averaging 12 percent to 15 percent is our primary performance target. With heightened economic and market uncertainty since 2008, we believe the long-term nature of this ratio is an appropriate way to measure our long-term progress in creating shareholder value. For 2009, we aligned The Annual Incentive Compensation Plan of 2009’s performance goal to our one-year value creation ratio compared to our Peer Group. Awards of incentive compensation tie vesting of a portion of annual cash compensation to performance goals and support the committee’s efforts to maximize the company’s federal income tax deduction for executive compensation. In 2009, our one-year value creation ratio was a healthy 19.7 percent, exceeding our longer term target. While we are pleased with this result, compared to peers our value creation ratio placed near the bottom quartile. Nevertheless, we believe value creation ratio compared to peers remains an appropriate performance goal for our annual incentive compensation awards because it fosters teamwork among our executive officers, requiring them to make sure the contribution of their individual areas of responsibility add to book value through positive earnings, producing healthy cash flow for investment activities and dividend payments. Performance-based restricted stock units tie vesting of a portion of stock-based compensation to performance goals and support the committee’s efforts to maximize the company’s federal income tax deduction for executive compensation. The three-year performance period for awards of restricted stock units reinforces the company’s long-term focus and matches the period after which stock option awards are fully vested and exercisable. The most recent performance-based restricted stock awards granted were during November 2008. For those grants, the performance target is measured based on three-year total shareholder return for us compared to our Peer Group for the three calendar years ending December 31, 2011. At year-end 2009, our three-year shareholder return was between the 25th and 50th percentile of our eight peer companies, indicating that an improved level of performance is required for those performance-based restricted stock units to vest at the target level and reward our executive officers. Nevertheless, the committee intends that these awards link the interests of our executive officers to shareholders, and we remain committed to delivering an acceptable level of shareholder return over the long term. While overall performance is not where we would like it to be, in 2009 the management of the company successfully responded to the challenging environment, taking actions to position the company to achieve profitable growth over the long term as economic and business cycles improve. Taking into consideration the efforts of our management team, the company’s performance and the economic and business environments, the committee determined that the compensation paid to our named executive officers for 2009 is reasonable. Page 23
Executive Compensation Philosophy and Objectives The U.S. property casualty insurance industry is a highly competitive marketplace with over 2,000 stock and mutual companies operating independently or in groups. We compete with these companies, as well as companies offering surplus lines and life insurance, seeking to increase our share of these multibillion-dollar markets. We market our products exclusively through independent insurance agents. We set ourselves apart from other insurance companies by maintaining an agent-centered focus and strategies that we believe can lead over the long term to a property casualty written premium growth rate that exceeds the industry average and generate consistent underwriting profit, and by maintaining an investment philosophy that we believe can drive investment income growth and lead to a total return on our equity investment portfolio that exceeds the Standard & Poor’s 500’s five-year return. Critical to our long-term success are highly experienced, dedicated and capable executives who can manage our business day to day and who possess the vision to plan for and adjust to changes in the market. It is also important that we nurture the capabilities of our emerging leaders to ensure that we have an appropriate depth of executive talent. The committee endeavors to ensure that overall compensation paid to our executive officers is appropriate and in line with our overall compensation objective to attract, motivate, reward and retain the executive talent required to achieve the corporate objectives described above, with the ultimate goal of increasing shareholder value. At the same time, the committee is careful to ensure that compensation paid to executives is not excessive as compared with peers and does not encourage unreasonable risk-taking, that its decisions are transparent and easily understood by all stakeholders, and that the elements of compensation employed are in keeping with compensation paid to associates at all levels of the company, allowing for differences due to level of responsibility and individual performance. With this philosophy in mind, the committee applies certain fundamentals that are key characteristics of our overall compensation program, including:
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Overview of 2009 CompensationEvents and Decisions Affecting 2008 Compensation. The compensation disclosed for the named executive officers for 2009 was affected by the following events and decisions: The committee intentionally decreased total direct compensation (defined as the sum of base annual salary, discretionary bonus, annual incentive compensation payout and target values of stock-based compensation grants) paid to named executive officers for 2009 by:
Restructuring of Executive Compensation Effective for 2010. In 2009 the committee studied the existing compensation structure for executive officers to transition to compensation that was more performance-based while maintaining the level of base compensation that it had historically considered not to be at risk. The committee also was interested in balancing performance-based compensation between short and long-term components. Key features of the new executive compensation structure effective beginning 2010 include:
Compensation Practices and PoliciesRole of executive officers. Our chief executive officer makes recommendations to the committee for base annual salary, discretionary bonus, and performance-based compensation. Supporting these recommendations are his assessment of each officer’s performance and current compensation compared with changes in responsibilities during the year, if any, and his assessment of what the company can afford to pay based on the performance of the company in the current year. Additionally, our chief executive officer provides the committee with historical compensation data sheets for each executive officer containing all elements of compensation paid to each executive officer, and pro forma compensation disclosure tables for all executive officers, similar to those included in this proxy statement, as well as comparative performance and compensation data compiled by Equilar Inc., an independent subscription service that automates the collection of such information. Role of committee. The committee makes the final determination of base salary, discretionary bonus and performance-based compensation for the chief executive officer and for each of the other named executive officers. The committee takes into account the recommendations of the chief executive officer regarding the other named executive officers and the data supplied by the chief executive officer. Traditionally, the committee met in the fourth quarter of each calendar year to award discretionary bonuses for the current year and salaries for the upcoming year and met in the first quarter of the calendar year to grant stock-based and incentive compensation awards and consider the payment of any incentive compensation earned upon satisfaction of performance goals established in the prior year’s incentive compensation award grant. Beginning in 2010, the committee will meet in February each year to make these decisions. The committee also may meet during the year to set or adjust compensation appropriately if management changes or new executive officers join the company. The committee considers its own experience with and information received from and about the named executive officers, including:
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The committee also considers specific financial and operational metrics for business segments, business units and other subsets of the organization. Management monitors and provides these reports to the directors, including committee members, on an ongoing basis. This information is shared with the board and the committee through a variety of channels. For example:
The committee does not have a pre-defined formula that determines which of these factors may be more or less important, and the emphasis placed on specific factors may vary among the named executive officers. Ultimately, it is the committee’s judgment of these factors, in its normal deliberations and in executive session, along with competitive data and discussions with and recommendations from the chief executive officer, that form the basis for determining the compensation for the named executive officers. Benchmarking, compensation consultants and peer groups. We believe our business philosophies and strategies differentiate our company in many positive ways, while diminishing comparability to industry peer groups. Except for establishing targets for performance-based compensation under certain incentive plans, we do not tie compensation at any level to specific benchmarks or formulas. We believe the levels of compensation we provide should be competitively reasonable and appropriate for our business needs and circumstances. Our approach is to consider competitive compensation practices and relevant factors rather than establishing total compensation at specific benchmark percentiles. This provides us with flexibility in maintaining and enhancing our executive officers’ focus, motivation and enthusiasm for our future. While we do not compare compensation of individual named executive officers with executives carrying similar titles across a peer group, the committee reviews performance and compensation data of the Peer Group to gain a sense of whether we are providing generally competitive compensation for our named executive officers individually and as a group. Until 2008, the committee monitored corporate performance and compensation levels for the named executive officers of certain property casualty companies that were part of the Standard & Poor’s Composite 1500 Property & Casualty Insurance Index. Over the last several years, the number of companies in the selected peer group decreased due to merger and acquisition activity. Page 26
For 2009 the committee continued to use the Peer Group of eight companies selected in November 2008: The Chubb Corporation, The Hanover Insurance Group Inc., Harleysville Group Inc., The Hartford Financial Services Group Inc., Markel Corporation, Selective Insurance Group Inc., State Auto Financial Corporation, and The Travelers Companies Inc. (Peer Group). Not all of these companies are included in the Index. These eight publicly traded companies were selected because they generally market their products through the same types of independent insurance agencies that represent our company and they provide both commercial lines and personal lines of insurance, as we do. We also included in the Peer Group a company that historically has followed an equity investment strategy similar to ours and that offers surplus lines coverages, similar to the business we entered in 2008. Comparative performance and compensation data reviewed by the committee suggests that the company’s executive compensation is at levels consistent with its performance as compared with the Peer Group. The following table ranks the company and the eight companies in the Peer Group according to market capitalization at December 31, 2009 and ranks one-, three-, and five-year total shareholder returns as of December 31, 2009 as reported by Bloomberg L.P. and compensation data compiled by Equilar from the 2008 proxy statements, the most current recent year for which such data is available.
As reported by Equilar, total direct compensation of $10,005,807 paid to our named executive officers in 2008 was 59 percent of the average total direct compensation of $16,866,161 paid by companies in the Peer Group to their named executive officers in the same year. The committee does not employ compensation consultants for recommendations concerning executive compensation. Our chief executive officer annually provides the committee with Peer Group performance and compensation data collected by the chief financial officer from the Equilar service and publicly available proxy statements and Form 10-K filings. Tax policies. Section 162(m) of the Internal Revenue Code limits to $1 million per year the federal income tax deduction to public corporations for compensation paid for any fiscal year to any individual who is identified as a named executive officer as of the end of the fiscal year in accordance with the Exchange Act. This limitation does not apply to qualifying “performance-based compensation.” Our committee designed our annual incentive compensation awards (which permit the committee to exercise negative discretion to reduce or eliminate payment of awards as it did in 2008) and performance based restricted stock units to qualify for the performance-based compensation exception to the $1 million limit. In addition, stock options are considered performance-based compensation that qualify for the exception. The committee believes that our shareholders are best served by not restricting our committee’s discretion and flexibility in making compensation decisions, such as annual salaries, variable compensation awards, service-based restricted stock units and similar non-performance based awards, although some of these elements of compensation may from time to time result in certain non-deductible compensation expenses. Accordingly, the committee may from time to time approve compensation for certain named executive officers that is not fully deductible and reserves the right to do so in the future, in appropriate circumstances. In 2009, portions of the non-performance based compensation paid to Mr. Stecher were not tax deductible due to the value of de minimis perquisites and benefits and adjustments in base annual salary and discretionary bonus awards in line with adjustments to those compensation components for all of our exempt associates as a group. For information about how 2009 salaries and variable compensation awards were determined, see Annual Cash Compensation, Non-incentive cash compensation, Page 29. Page 27
The committee generally does not favor the payment of tax gross-ups. Except in limited circumstances, such as a retirement gift of nominal value or relocation assistance offered on the same basis offered to all retiring or relocating associates, the committee does not authorize payment of tax gross-ups to executive officers. Employment agreements, change in control provisions and post-retirement benefits. We do not have employment agreements with any of our named executive officers, who are all at-will employees. Our long-standing corporate perspective has been that employment contracts do not provide the company with any significant advantage. We believe our corporate culture, current compensation practices and levels of stock ownership by our executive officers have resulted in stability in our current 14-member executive officer group, who average 26 years with the company. Change in control provisions are included only in our 2006 Stock Compensation Plan and our Annual Incentive Compensation Plan of 2009, and those provisions apply to all associates receiving awards under the plan, not just to executive officers. The change in control provisions in these plans contains a “double trigger,” which requires both a change in control event, as defined in the plan, and termination of the associate’s employment due to the change in control within a specified time period. The double trigger ensures that we will become obligated to accelerate vesting of prior awards only if the associate is actually or constructively discharged because of the change in control event. We occasionally provide post-retirement benefits to long-tenured, executive officer-level associates who continue to provide services to the company after retirement from their executive positions. These post-retirement benefits are intended to compensate the associate for ongoing services associated with maintaining continuity of relationships and providing guidance to their successors and other associates. We have no formal agreements with any of the current named executive officers for specific post-retirement benefits upon their future retirement. However, when a named executive officer retires, we may choose to provide him or her with modest cash compensation, office space, access to administrative support, and continuation of certain health and welfare benefits generally available to all associates in exchange for services rendered. In 2009, one associate who had previously retired from an executive position received one or more of the described benefits at a total cost to the company of $18,599. Components of CompensationThe primary components of compensation are discussed below. 3-Year History of Total Direct Compensation at a Glance
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Total direct compensation (the sum of base annual salary, discretionary bonus, annual incentive compensation and stock-based awards) represents the sum of compensation the committee awards to the named executive officers each year. In 2009 total direct compensation decreased from 2008 levels as the committee acted to reduce cash compensation by 15 percent and did not grant stock-based awards in the first quarter of 2009, having accelerated those grants to November 2008 to link them to management changes made earlier that year. In the table above, the level of total direct compensation realized is lower than the targeted amounts as named executive officers have not realized compensation:
At its meeting on February 19, 2010, the committee acted to restructure the components of total direct compensation it awards to executive officers each year. Key features of the new structure include:
The primary components of compensation, and the changes for the last three years, and information about restructured levels of each component are discussed below. Annual Cash CompensationNon-incentive cash compensation. In 2009, non-incentive cash compensation for named executive officers consisted of base annual salary and discretionary bonus. Amounts shown as salary in the Summary Compensation Table on Page 38 reflect adjustments to base salary made the preceding November, any adjustments during the calendar year, and the number of pay periods during the year. Through 2009, we considered salary and discretionary bonus as a unit to make decisions about the non-incentive cash compensation for all of our associates, including our named executive officers. Base salary reflects the requirements and responsibilities of each officer’s particular role, the performance of his current responsibilities and market conditions. Advancements in abilities, experience or responsibilities are recognized with increases in base salary. Changes to discretionary bonus awards reflect base salary, length of service, individual performance and company performance. While awards of discretionary bonuses were not guaranteed, we traditionally did not consider compensation in this form “at risk.” Rather, the discretionary nature of that form of compensation was used as a tool available to the committee and to management, through its recommendation to the committee, to control overall company compensation expense. Page 29
As a unit, the combined 2009 level of salary and discretionary bonus for the named executive officers decreased 15 percent from 2009 base annual salary plus 2008 discretionary bonus. Salaries for 2009 were set in November 2008 to reflect a 4 percent increase, in line with salary increases for the companywide salary pool established for all associates, and matching increases to 2008 base annual salaries established in November 2007. The committee determined the 4 percent increase in the companywide salary pool was appropriate based on the assumption that it was competitive with general salary increases in the Cincinnati marketplace. For 2009, discretionary bonuses paid to named executive officers as a group declined 24 percent from 2008 levels. This element was used to effect the decrease in the overall level of non-incentive cash compensation (salary plus discretionary bonus) uniformly for all named executive officers by 15 percent, taking that reduction entirely out of the discretionary bonus component. The level of discretionary bonus reduction varied for each named executive officer and was purely a function of the prior allocation of overall non-incentive cash compensation for the individual officer between salary and discretionary bonus. Those individuals with a higher percentage of overall non-incentive cash compensation weighted to salary saw greater percentage decreases in their discretionary bonuses. The committee determined to reduce non-incentive cash compensation by this amount to reflect the overall challenging economic environment and the company’s mixed performance during the year. In the two preceding years, discretionary bonuses were flat in 2008 following a 5 percent increase in 2007. Restructuring for 2010: At its February 19, 2010 meeting, as a part of its restructuring of executive compensation described above, the committee restructured the components of non-incentive cash compensation for the named executive officers. Beginning in 2010, non-incentive cash compensation is in the form of salary only. Discretionary bonuses are eliminated as a regular component of compensation. For 2010, the committee set annual base levels of non-incentive cash compensation for the named executive officers as follows: $963,863 for Mr. Stecher; $627,590 for Mr. Johnston; $701,602 for Mr. Scherer; $570,244 for Mr. Joseph; and $455,860 for Mr. Popplewell. Annual incentive compensation. Under the Annual Incentive Compensation Plan of 2009 approved by shareholders in 2009 (Incentive Compensation Plan), all executive officers are eligible to annually receive an award of up to $1 million in cash based on achievement of specific performance-based criteria. The Incentive Compensation Plan replaced an older plan in which only the named executive officers were eligible to participate. Page 30
The Incentive Compensation Plan offers a wide range of performance objectives from which the committee may select one or more performance targets to focus the attention of executive officers on short term tactical actions believed to be important for achievement of longer term strategic goals. It also features a forfeiture and recoupment provision to enable the company to recover payments under this plan when circumstances warrant.
Subject to shareholder approval of the plan, in February 2009 the committee granted incentive compensation awards to Messrs. Stecher, Johnston, Scherer and Joseph. Mr. Popplewell did not receive an award for 2009 because he was a named executive officer for 2008 only because of his election to receive distribution of the present value of his pension benefit during the company’s restructuring of retirement benefits that year, and not because of decisions made by the committee for such officers. Potential payouts of the awards range from 50 percent to 200 percent of target based upon the achievement of the performance target of the company’s value creation ratio compared with the value creation ratio of the eight companies in the Peer Group. The committee selected the performance objective of the company’s value creation ratio compared with peers because it captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders. Achievement of the 37.5, 50th and 75th percentiles of the value creation ratio of peer companies would earn 50, 100 and 200 percent payouts of the target level of awards. For 2009, the company achieved a value creation ratio of 19.7 percent, exceeding the company’s long-term target for this measure. However, on a relative basis, the company’s value creation ratio exceeded that ratio for 25 percent of the Peer Group but missed achievement of the threshold level of 37.5 percent of thePeer Group required for payout. Through 2009, target levels for awards were set at modest levels compared to peers, ranging from $75,000 to $200,000. Under the prior plan, for 2008 annual incentive awards, the company did not achieve the performance target established by the committee as the company’s adjusted gross written premiums declined 2.3 percent, exceeding the targeted decline of less than 1.5 percent and adjusted operating income declined 24.1 percent, exceeding the targeted decline of less than 14 percent. Because two of the performance targets were not achieved, the awards were not earned. Although the performance target for 2007 annual incentive compensation awards was achieved, the committee nevertheless exercised its negative discretion and reduced each of the awards to zero, determining that compensation already paid to these four named executive officers was appropriate in light of the individual performance of each and the overall performance of the company Restructuring for 2010: Beginning in 2010, all executive officers, including the named executive officers, will have the opportunity to earn annual incentive compensation bonuses under the 2009 Plan. Target levels for awards will be determined as a percentage of the named executive officer’s salary. The percentage of salary will range from 50 percent to 80 percent based on the named executive officer’s tier. Assignment to a particular tier is based on the named executive officer’s level of responsibility. Mr. Stecher is assigned to the CEO Tier for which target level awards are 80 percent of base annual salary. Messrs. Johnston, Scherer and Joseph are assigned to Tier I for which target level awards are 65 percent of base annual salary. Mr Popplewell is assigned to Tier II for which target level awards are 50 percent of base annual salary. The committee intends to use the same tier assignment and related percentage of salary to determine the target level of stock-based awards to balance overall performance-based short-term and long-term compensation. Page 31
At its February 19, 2010, meeting, the committee established target levels for awards for annual incentive compensation grants as follows: $771,091 for Mr. Stecher; $407,934 for Mr. Johnston; $456,041 for Mr. Scherer; $370,659 for Mr. Joseph; and $227,930 for Mr. Popplewell. The performance objective for the awards is the level of value creation ratio achieved for 2010 compared with the eight companies in the Peer Group. Performance hurdles for threshold, target and maximum awards were set at the 37.5th, 50th and 75th percentiles of the Peer Group. Achievement of threshold, target and maximum performance hurdles earn award payouts of 30 percent, 100 percent and 200 percent, respectively of target. Long-Term Stock-Based CompensationWe believe people tend to value and protect most that which they have paid for, generally by investing their time, effort or personal funds. Over the long run, we believe shareholders are better served when associates at all levels have a significant component of their financial net worth invested in the company. For that reason, we grant awards of stock-based compensation not only to our directors and to named executive officers, but also generally to all full-time salaried associates of the company. We believe this approach encourages associates at all levels to make decisions in the best interest of the company as a whole, linking their personal financial success with the organization’s success. Although we do not have access to information about broker accounts, we estimate that approximately 90 percent of our current associates hold shares of Cincinnati Financial Corporation. Stock ownership guidelines applicable to all directors and officers will help the committee monitor ownership for all directors and officers. Our Director and Officer Stock Ownership Guidelines may be found at www.cinfin.com/Investors. We award stock-based compensation not only to reward service to the company, but also to provide incentive for individuals to remain in the employ of the company and help it prosper. The committee currently uses two types of stock-based awards used for grants to the named executive officers. The committee uses non-qualified stock options that vest in equal amounts over the three years following the grant date and performance-based restricted stock units that cliff vest after three years if performance targets are achieved. Performance-based restricted stock units tie vesting of a portion of stock-based compensation to performance goals and support the committee’s efforts to maximize the company’s federal income tax deduction for executive compensation. Stock options tie the compensation realized from such awards, if any, to changes in the stock price experienced by shareholders generally. The three-year performance period for awards of restricted stock units reinforces the company’s long-term focus and matches the period after which stock option awards are fully vested and exercisable. If the restricted stock units vest, the award is paid in shares of common stock, one share for each restricted stock unit. For performance-based restricted stock units, the committee expects to set targets that it considers achievable, but that require some stretch, based on market conditions and the current insurance industry environment at the time of grant. As the committee considers stock-based awards for all associates as a group, it also considers these general objectives:
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Historically, the committee made decisions about stock-based compensation based on the number of shares underlying the award determined by position, which remained constant for each position year over year, rather than the cost of the awards in any given year. Beginning in 2010, award levels for the named executive officers will be restructured as described below. Stock-based awards granted to all associates in any year generally total less than 1.5 percent of total shares outstanding. The committee did not make its regular first-quarter grants of stock-based compensation in 2009 because it had accelerated the timing of those grants to November 2008, to tie them to management changes made earlier that year. This resulted in two rounds of stock-based awards in 2008, one in the first quarter and one in the fourth quarter, and none in 2009. At the time of the November 2008 grants, nearly all outstanding unexercised stock options granted in prior years were underwater. The three-year performance period for performance-based restricted stock units granted in 2007 ended December 31, 2009. These awards did not vest because the company did not achieve the stated performance target specified in the award agreement, the sum of “operating income” (as defined by the company’s prior incentive compensation plan) for the three calendar years ending December 31, 2009, equals or exceeds 315 percent of operating income for 2006. The company’s “operating income” for the performance period was 236 percent of operating income for 2006. Performance-based restricted stock units granted in February and July 2008 will vest based on the amount of operating income achieved over the three calendar years ending December 31, 2010. Threshold, target and maximum aggregate three-year performance targets of 285 percent, 300 percent and 315 percent of 2007 operating income were established for threshold, target and maximum awards. As with the 2007 performance-based restricted stock unit awards described above, the committee used the definition for operating income set forth in the prior incentive compensation plan, but amended that definition to include an annual cap of 2.5 percent for the contribution of favorable development on prior period reserves to address the atypically high level of favorable development in 2007. The performance-based restricted stock units granted in November 2008 will vest according to the level of total shareholder return achieved over the three calendar years ending December 31, 2011. Threshold, target and maximum aggregate three-year performance targets at the 25th, 50th and 75th percentiles of the Peer Group’s total shareholder return were established for threshold, target and maximum awards. Additionally, named executive officers are eligible to receive stock bonuses under the company’s broad-based Holiday Stock Bonus Plan, which annually awards one share of common stock to each full-time associate for each year of service up to a maximum of 10 shares. This plan, in effect since 1976, encourages stock ownership at all levels of the company. Restructuring for 2010: Beginning in 2010, the grant date fair value of target levels for awards for stock-based compensation is determined as a percentage of the named executive officer’s salary. The percentage of salary will range from 50 percent to 80 percent based on the named executive officer’s tier. Assignment to a particular tier is based on the named executive officer’s level of responsibility. Mr. Stecher is assigned to the CEO Tier for which target level awards are 80 percent of base annual salary. Messrs. Johnston, Scherer and Joseph are assigned to Tier I for which target level awards are 65 percent of base annual salary. Mr. Popplewell is assigned to Tier II for which target level awards are 50 percent of base annual salary. The committee intends to use the same tier assignment and related percentage of salary to determine the target Page 33
level of annual incentive compensation awards to balance overall performance-based short-term and long-term compensation. Two-thirds of the grant date fair value for stock-based compensation is allocated to non-qualified stock options and one-third is allocated to performance-based restricted stock units. The number of stock-options or restricted stock units is determined by dividing the allocated amount for each award by the grant date fair value per share on the date of grant. At its February 19, 2010, meeting, the committee granted non-qualified stock-options and target levels of performance-based restricted stock units to the named executive officers as follows: $771,091 grant date fair value for Mr. Stecher consisting of 19,344 stock options and 9,672 restricted stock units; $407,934 grant date fair value for Mr. Johnston consisting of 10,234 stock options and 5,117 restricted stock units; $456,041 grant date fair value for Mr. Scherer consisting of 11,441 stock options and 5,721 restricted stock units; $370,659 grant date fair value for Mr. Joseph consisting of 9,299 stock options and 4,650 restricted stock units; and $227,930 grant date fair value for Mr. Popplewell consisting of 5,718 stock options and 2,859 restricted stock units. The performance objective for the awards is the level of three-year total shareholder return achieved for the three years ending December 31, 2012 compared with the eight companies in the Peer Group. Performance hurdles for threshold, target and maximum awards were set at the 25 th, 50 th and 75 th percentiles of the Peer Group. Achievement of threshold, target and maximum performance hurdles earn award payouts of 75 percent, 100 percent and 125 percent, respectively of target. Stock-based award grant practices. In awarding stock options and other forms of stock-based compensation, the committee follows certain general precepts:
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Retirement BenefitsIn 2008, the company transitioned away from providing associates with a defined benefit pension plan, instead choosing to assist associates to build savings for retirement by providing a company match of associate contributions to a tax qualified 401(k) plan. This change was primarily in response to feedback from associates who wanted control over their retirement benefit accounts. Participation in the defined benefit pension plan terminated for associates under the age of 40, and they transitioned to the new tax qualified 401(k) plan with a company matching contribution. None of the named executive officers is under age 40. Associates age 40 and over as of August 31, 2008 were given a one-time election to remain in the defined benefit pension plan or to leave the plan and participate in the 401(k) plan with a company match. Those associates leaving the pension plan received distributions of their accumulated pension benefit from the defined benefit plan that they could choose to receive in cash, roll over to the company’s 401(k) plan or roll-over to an Individual Retirement Account. Mr. Popplewell elected to leave the pension plan, roll-over his accumulated benefit to Individual Retirement Accounts and participate in the 401(k) with the company match on a going forward basis. Mr. Johnston, hired after entry to the pension plan was closed, also participates in the 401(k) plan with the company match. All other named executive officers elected to remain in the pension plan. Tax-qualified defined benefit pension plan. The Cincinnati Financial Corporation Retirement Plan (Retirement Plan) is a tax-qualified defined benefit pension plan available to all full-time associates ages 40 and over on August 31, 2008 who elected to remain in the plan effective September 1, 2008. The Retirement Plan is closed to new participants. Members of the Retirement Plan earn one year of service for each calendar year in which they work at least 1,000 hours. Members also earn service for time that they are paid, or entitled to be paid, but do not actually work. These times include vacation, holidays, illness and military duty and some periods of disability. The maximum amount of service that may be earned under the Retirement Plan is 40 years. Vesting is 100 percent after five years of service, and there are no deductions for Social Security or other offset amounts. The Retirement Plan defines earnings for any given plan year as the base rate of salary in effect on the last day of the plan year, subject to the maximum recognizable compensation under Section 401(a)(17) of the Internal Revenue Code. Bonuses, stock-based awards and other forms of compensation do not contribute to earnings under the Retirement Plan. Normal retirement age as defined in the Retirement Plan is age 65. The normal retirement pension is computed as a single life annuity. The annual benefit payment is the greater of the following two calculated amounts: The first calculated amount is the sum of:
The second calculated amount is the sum of:
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The normal form of benefit payment under the terms of the Retirement Plan is a single life annuity for unmarried members and a joint and 50 percent survivor annuity for married members. The plan permits members to elect to receive payment of benefits in the following forms:
Alternative forms of benefit payment are offered to provide plan members some flexibility in retirement income and estate planning by giving them the option of electing monthly benefits with or without a survivor’s benefit. Generally, the single life annuity alternative provides the largest monthly benefit, but does not provide a survivor’s benefit. All other payment forms are the actuarial equivalent of the single life annuity alternative. Alternatives other than the single life annuity provide slightly lower monthly benefits to the plan member, depending on such factors as presence of survivor’s benefit, the member’s age and any contingent annuitant’s age. The lump sum payment permits plan members to roll the present value of their benefit into an Individual Retirement Account and defer income taxes until the member withdraws funds from that account. Supplemental retirement plan. The second retirement plan in which some named executive officers participate is The Cincinnati Financial Corporation Supplemental Retirement Plan (SERP). The SERP is unfunded and subject to forfeiture in the event of bankruptcy. The SERP is a non-tax-qualified plan maintained by the company to pay eligible associates the difference between the amount payable under the tax-qualified plan and the amount they would have received without the tax-qualified plan’s limit due to Section 401(a)(17) and Section 415 of the Internal Revenue Code. Accordingly, the SERP definitions for service, normal retirement and annual earnings are the same as those for the Retirement Plan except the SERP’s definition of annual earnings is not limited, and there is no limit on number of years of service. The SERP is integrated with Social Security. The integration level is equal to the average of the integration levels for the period of the member’s employment, using wages paid, with a maximum of $6,000 for years beginning before 1976 and wages subject to Social Security tax for all years after 1976. The pension benefit under the SERP is payable only in the form of a single lump sum. The normal retirement pension benefit for current members of the SERP is the sum of 0.75 percent of the member’s highest five-year average annual earnings below the integration level plus 1.25 percent of the member’s highest five-year average annual earnings in excess of the integration level, multiplied by the number of years of service, minus the pension benefit payable from the Retirement Plan. All of the named executive officers who participate in the SERP were members of the SERP on or before January 1, 2006. For members added to the SERP on or after December 1, 2006, the normal retirement benefit under the SERP will be equal to the excess of the member’s monthly benefit under the Retirement Plan as of the member’s retirement date, without regard to the limit on earnings under Section 401(a)(17) of the Internal Revenue Code and without regard to any limit on benefits under Section 415 of the Internal Revenue Code over the member’s monthly benefit payable under the Retirement Plan as of the member’s retirement date. Participation in the SERP terminated for Mr. Popplewell on December 31, 2008. Amounts equivalent to the calculated accrued benefit under the SERP were transferred in early 2009 to his Top Hat Savings Plan accounts where he may allocate investment of these amounts among the investment alternatives approved for that plan. Page 36
Both retirement plans permit early retirement between age 60 and age 65, provided the member has at least five years of service. Benefits for early retirement are calculated by adjusting for life expectancy and reducing the benefit payable at age 65 by 0.5 percent per month for each month prior to age 65 that the member elects to begin receiving pension benefits. For example, if a member elects to retire at age 60, he would receive 70 percent (60 months X 0.5 percent = 30 percent reduction) of the life-expectancy adjusted benefit payable at age 65. Actuarial work related to both the Retirement Plan and SERP is performed by Towers Watson, which provides human resource strategy, design and management; actuarial and management consulting to the financial services industry; and reinsurance intermediary services. The committee engaged Towers Watson to provide actuarial and consultative services related to the design of the company’s retirement and employee benefit plans. Towers Watson also brokers our property casualty and certain working reinsurance treaties, and we have used Towers Watson for various projects, including access to catastrophe loss modeling. Members of the SERP include executive officers whose benefits under the Retirement Plan are limited by Section 401(a)(17) of the Internal Revenue Code. Three members of the SERP, Messrs. Stecher, Scherer, and Joseph were added effective January 1, 2006. Defined contribution plans. The company sponsors a tax qualified 401(k) savings plan for all associates as well as the Cincinnati Financial Corporation Top Hat Savings Plan, a deferred compensation plan for certain highly compensated associates. The company made no cash contributions to the 401(k) or Top Hat plans until September 2008. In connection with retirement benefit plan changes effective September 1, 2008, the company began to match contributions to the 401(k) plan made by associates who were not members of the Retirement Plan, up to a maximum of 6 percent of the associate’s annual cash compensation (salary and variable compensation award). Participants in the Top Hat savings plan do not receive a matching contribution from the company unless their compensation level exceeds the maximum recognizable compensation under Section 401(a)(17) of the Internal Revenue Code, which for 2009 was $245,000. Contributions made by associates immediately vest, while company matching contributions vest with three years of service. Perquisites and Other Personal BenefitsPerquisites and other personal benefits are intended to support our corporate objectives or the performance of an individual’s responsibilities. Perquisites and personal benefits are offered to the named executive officers on the same basis as to all of the company’s officers, and may include personal umbrella liability insurance coverage, life insurance, executive tax services, use of a company car, safe driver award, executive health exams, club dues and spouse travel to and meals associated with certain business functions. Management is responsible for administering these programs. From time to time, the committee reviews these programs and may recommend changes or additions. The committee reviews the types and level of perquisites offered but does not control directly the actual amounts of named executive officer compensation paid pursuant to these programs. The committee believes that the level of perquisites and personal benefits we offer our officers is de minimis (totaling no more than $8,261 for any named executive officer in 2009). Because the level of perquisites is low and each perquisite has business value, the committee does not consider them when monitoring total compensation levels. Page 37
Summary Compensation Table
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2009 Grant of Plan-Based Awards (1)
Total 2009 compensation, excluding attributions of compensation related to retirement plans, declined from 2008 levels for each named executive officer, as base levels of non-incentive cash compensation (salary and bonus) were decreased 15 percent for each, and no stock options or restricted stock units were granted during the year. The committee decided to accelerate the timing of grants of stock options and restricted stock units otherwise scheduled for grant in the first quarter of 2009 to November 2008 to tie them to management changes made earlier in the year. As a result, the Summary Compensation Table reflects a level of stock-based compensation at normal levels for 2007, twice the normal level for 2008, and no grants in 2009. The year-over-year increase in 2008 compensation compared to 2007 unrelated to retirement plans for the named executive officers was due largely to increases in base annual salaries made mid-year in connection with promotions and changes in duties in responsibilities for Messrs. Stecher, Scherer and Joseph, increases to base annual salaries of 4 percent for each named executive officer in November 2008, and the early grants of stock-based compensation made in November 2008. Mr. Johnston’s employment with the company began June 30, 2008. No adjustments to base annual salary were made in 2009. Amounts shown in the Salary column do not exactly match the base annual salaries set by the committee for the following year because: 1) there were 27 bi-weekly pay periods in 2009 compared to 26 bi-weekly pay periods in 2008 and 2007 and 2) adjustments to base annual salary made in 2008 and 2007 were effective the first pay period in December of those years. The history of changes to base annual salaries for the named executive officers for the reported years are set forth below:
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See Annual Cash Compensation, Page 29. Amounts shown in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column of the Summary Compensation Table represent the annual incremental changes in the present values of benefits under the company’s defined benefit and SERP plans and changes in the balances of the Top Hat accounts of named executive officers due to their contributions and investment performance during the year. For Mr. Popplewell, the 2008 change in pension value includes a negative amount attributable to the distribution of an amount equal to the actuarial present value of his accumulated benefit that he rolled over into an Individual Retirement Account in connection with his move out of the defined benefit pension plan. The rollover amount is included in the All Other Compensation column for Mr. Popplewell for 2008. See Retirement Benefits, Page 35. Page 40
Outstanding Equity Awards at 2009 Year-End
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2009 Option Exercises and Stock Vested
2009 Pension Benefits
See Retirement Benefits, Page 35, for details about plans providing retirement benefits to the named executive officers. At December 31, 2009, Mr. Stecher was eligible to elect early retirement under the Retirement Plan and the SERP. Page 42
2009 Nonqualified Deferred Compensation Plan (1)(2)
Compensation payable to the named executive officers may be deferred pursuant to the Top Hat Savings Plan. Under the Top Hat Savings Plan, highly compensated individuals as defined by the plan, including the named executive officers, may elect to defer up to 25 percent of salary and up to 100 percent of any discretionary bonus, less the required withholdings, provided that the total amount of salary and bonus deferred does not exceed the maximum amount permitted by the Internal Revenue Code, which was $49,000 in 2009. Deferral elections are made before the plan year for which compensation is to be deferred and are effective for the entire year and generally may not be modified or terminated for that year. Compensation deferred by the named executive officer is credited to the individual’s deferred compensation account maintained by the company. Beginning in 2008, in connection with the company’s redesign of our retirement benefits plans, we amended the Top Hat Savings Plan to eliminate the cap on the amount of salary that may be deferred and to permit company matching contributions for officers who have contributed to and received the maximum company match allowable in their 401(k) accounts, yet due to tax law limitations, are unable to contribute and receive a matching contribution for the compensation that exceeds the limit imposed on tax qualified 401(k) plans. We do not otherwise contribute to or match contributions to this plan. Participants are prohibited from borrowing or pledging amounts credited to their accounts. Fifth Third Bank, a subsidiary of Fifth Third Bancorp, is the third-party administrator of the Top Hat Savings Plan. Under the plan, individuals choose one or more of several specified investment alternatives, including an alternative for Cincinnati Financial Corporation common stock. Earnings credited to the named executive officer’s account are calculated based on the performance of the applicable investment choice(s) selected by the named executive officer. We do not guarantee any level of return on contributions to the Top Hat Savings Plan. Distributions from the Top Hat Savings Plan are made as soon as legally and administratively feasible after retirement, other termination of employment or death, or pursuant to a qualified domestic relations order. Distributions to the named executive officers due to retirement or other termination of employment are not permitted until 180 days after employment terminates. Other than distributions pursuant to qualified domestic relations orders, distributions are made in the form of either a single lump sum payment or monthly installments of not less than 12 months or more than 120 months, depending upon the participant’s prior election. To the extent that a participant chooses to have earnings credited based on the Cincinnati Financial Corporation common stock election, the participant may choose to receive any benefit payments in the form of stock. All other distributions are made in cash. Potential Payments upon Termination or Change of ControlAs of December 31, 2009, the only benefit a named executive officer could receive upon any termination of employment, except for retirement or termination due to a change in control is the balance of a Top Hat Savings Plan account disclosed in the “Aggregated Balance at 2009 Year End” column of the 2009 Nonqualified Deferred Compensation Plan table above. In the case of retirement, named executive officers who are at least 65 years of age additionally could receive vested retirement benefits and accelerated vesting of certain outstanding stock-based awards, while for retirement at age 60 without 35 years of service a named executive officer could receive a vested early retirement benefit, but no acceleration of outstanding Page 43
stock-based awards. Named executive officers who retire before reaching 60 years of age but who have achieved 35 years of continuous service or who retire due to total and permanent disability could receive accelerated vesting of certain outstanding stock-based awards. Named executive officers who are terminated due to a change in the control of the company could receive accelerated vesting of all stock-based awards made under the 2006 Stock Compensation Plan, but not under earlier plans. The following table reflects the values of retirement benefits and the acceleration of vesting of the pertinent stock-based awards assuming termination of employment due to retirement or a change of control on December 31, 2009. Potential Payments upon Termination
2009 Director Compensation (1)
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Outside directors are paid cash fees of:
Fees for all meetings in any one day are not to exceed $6,000. In 2009, outside directors were paid an annual cash retainer of $25,000. Outside directors are reimbursed for travel expenses incurred in attending meetings. Outside directors also receive compensation in the form of common stock under the Cincinnati Financial Corporation Directors’ Stock Plan of 2009 (2009 Stock Plan). The purpose of this shareholder-approved plan is to attract and retain the services of experienced and knowledgeable non-employee directors and to strengthen the alignment of interests between the non-employee directors and shareholders. Shares received under the plan assist directors in achieving ownership levels consistent with the company’s Director and Officer Stock Ownership Guidelines. Under the 2009 Stock Plan, directors receive restricted shares of the company’s common stock with a fair market value on the date of grant equal to $25,000 plus the cash director’s fees received by such directors during the last calendar year, up to a maximum of $60,000 of cash fees, for total stock awards up to a maximum of $85,000. Awards to individual directors may slightly exceed $85,000 in value as the plan provides for rounding up to whole shares. Shares granted under the 2009 Stock Plan are restricted shares, nontransferable, except upon death, for three years from the grant date. The committee and the board intends stock awards under this plan to increase stock ownership by outside directors in furtherance of the ownership guidelines. The restriction on transferability of the shares further aligns the outside director’s financial interest with the interests of shareholders. The committee grants awards for each director’s prior year’s board service under the 2009 Stock Plan at its first scheduled meeting each calendar year. See Stock-Based Award Grant Practices, Page 34. Amounts shown in the Stock Awards column reflect grants awarded under the 2009 Stock Plan at the committee’s meeting on January 29, 2010, based on cash fees earned for board service in 2009. The company also provides outside directors with life insurance, personal umbrella liability insurance and spouse travel and meals to certain business events. See Perquisites and Other Personal Benefits, Page 37, for details about these benefits. Amounts contained in the All Other Compensation column reflect the aggregate cost of these individual benefits. The company does not provide outside directors with retirement benefits, benefits under health and welfare plans or compensation in any form not described above, nor does it have any agreement with any director to make charitable donations in the director’s name. Page 45
ConclusionShareholder Proposals for Next YearAny qualified shareholder who wishes to present a proposal for action at the 2011 Annual Meeting of Shareholders must submit the proposal to Cincinnati Financial Corporation, P.O. Box 145496, Cincinnati, Ohio 45250-5496, on or before November 19, 2010, to be included in our proxy statement and proxy for the 2011 annual meeting. Any such proposal must conform to the rules and regulations of the SEC and otherwise be in accordance with other federal laws as well as the laws of the State of Ohio. If the date of the 2011 annual meeting is not within 30 days of May 1, 2011, the deadline will be a reasonable time before we begin to print and mail the proxy material for the 2011 Annual Meeting of Shareholders. In addition, the proxy solicited by the board for the 2011 annual meeting will confer discretionary authority on the persons named in such proxy to vote on any shareholder proposal presented at that meeting if we receive notice of such proposal later than February 1, 2011, without the matter having been discussed in such proxy. In addition, if Proposal 3 passes and our Code of Regulations is amended to include advance notice provisions for director nominations and other proposals, any qualified shareholder who wishes to present a proposal for action at the 2011 Annual Meeting of Shareholders (other than any proposal made pursuant to Rule 14a-8 under the Securities and Exchange Act of 1934) must deliver a notice of the proposal, in the form as required by Proposal 3, to our secretary on or before March 1, 2011, but not before January 20, 2011, or the shareholder’s proposal will not be permitted to be brought before the 2011 Annual Meeting of Shareholders. Cost of SolicitationProxies may be solicited by our directors, officers or other employees, either in person or by mail, telephone or e-mail. The cost of soliciting proxies will be borne by the company. We have contracted with Broadridge Financial Solutions Inc. to provide Internet and telephone voting service for our direct shareholders of record. We ask banks, brokerage houses, other custodians, nominees and fiduciaries to forward copies of the proxy material to beneficial owners of shares or to request authority for the execution of proxies; and we have agreed to reimburse reasonable out-of-pocket expenses incurred. We may retain the services of a proxy solicitation firm to assist us in soliciting proxies for the annual meeting should a need for such services be determined. The cost of such services, if used, would be approximately $12,500 plus out of pocket expenses. Other BusinessManagement does not know of any other matter or business that may be brought before the meeting; but if any other matter or business properly comes before the meeting, it is intended that a vote will be cast pursuant to the accompanying proxy in accordance with the judgment of the person or persons voting the same.
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Appendix AArticle Sixth would be amended as follows: “SIXTH: (a) Subject
to the provisions of part (c) of this Article Sixth, t (b) Directors of the Corporation shall only
be removed by the shareholders for cause. “Cause”for the removal of a director
shall exist only upon the occurrence of one (1) of the following events: (1) the
conviction of a director of a felony; or (2) a finding by a court of law that
the director has been or is guilty of negligence or misconduct in the
performance of his duties as a director of the Corporation. Vacancies in the
Board of Directors, whether arising through death, resignation or removal of a
director, or newly created directorships resulting from any increase in the
authorized number of directors, shall be filled by a majority of the directors
then in office, or by a sole remaining director, and the directors so chosen
shall hold office until the
next annual meeting of shareholders and until his or her successor has been duly
elected and qualified. No decrease in the number of authorized directors shall
shorten the term of any incumbent director. (c) Notwithstanding anything contained in parts (a) of this Article Sixth to the contrary, beginning at the 2011 annual meeting of shareholders, directors shall be elected annually for terms of one year, except that any director whose term expires at the 2012 annual meeting of shareholders or the 2013 annual meeting of shareholders shall continue to hold office until the end of the term for which such director was elected or appointed and until such Director’s successor shall have been elected and qualified, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Accordingly, (i) at the 2010 annual meeting of shareholders, the directors whose terms expire at that meeting shall be elected to hold office for a three-year term expiring at the 2013 annual meeting of shareholders; (ii) at the 2011 annual meeting of shareholders, the directors whose terms expire at that meeting shall be elected to hold office for a one-year term expiring at the 2012 annual meeting of shareholders; and (iii) at the 2012 annual meeting of shareholders, the directors whose terms expire at that meeting shall be elected to hold office for a one-year term expiring at the 2013 annual meeting of shareholders. Page 47
Appendix BThe following sections would be added to Article I of the Company’s Regulations, immediately following Section 4.
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