UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(Mark one)
þ         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the quarterly period ended September 30, 2017.
 
¨        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the transition period from _____________________ to _____________________.
Commission file number 0-4604
 
CINCINNATI FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Ohio
 
31-0746871
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification
No.)
 
 
 
6200 S. Gilmore Road, Fairfield, Ohio
 
45014-5141
(Address of principal executive offices)
 
(Zip code)
 
Registrant’s telephone number, including area code: (513) 870-2000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
þ Yes ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ Yes ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
þ Large accelerated filer ¨ Accelerated filer ¨ Nonaccelerated filer ¨ Smaller reporting company
¨ Emerging growth company
(Do not check if a smaller reporting company)

¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
¨ Yes þ No
 
As of October 20, 2017, there were 164,071,775 shares of common stock outstanding.





CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2017
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Results
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 2



Part I – Financial Information
Item 1.    Financial Statements (unaudited)
 
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in millions except per share data)
 
September 30,
 
December 31,
 
 
2017
 
2016
Assets
 
 

 
 

Investments
 
 

 
 

Fixed maturities, at fair value (amortized cost: 2017—$10,135; 2016—$9,799)
 
$
10,540

 
$
10,085

Equity securities, at fair value (cost: 2017—$3,264; 2016—$2,995)
 
6,025

 
5,334

Other invested assets
 
99

 
81

Total investments
 
16,664

 
15,500

Cash and cash equivalents
 
674

 
777

Investment income receivable
 
128

 
134

Finance receivable
 
56

 
51

Premiums receivable
 
1,640

 
1,533

Reinsurance recoverable
 
522

 
545

Prepaid reinsurance premiums
 
44

 
62

Deferred policy acquisition costs
 
676

 
637

Land, building and equipment, net, for company use (accumulated depreciation:
   2017—$251; 2016—$237)
 
186

 
183

Other assets
 
204

 
198

Separate accounts
 
798

 
766

Total assets
 
$
21,592

 
$
20,386

 
 
 
 
 
Liabilities
 
 

 
 

Insurance reserves
 
 

 
 

Loss and loss expense reserves
 
$
5,350

 
$
5,085

Life policy and investment contract reserves
 
2,716

 
2,671

Unearned premiums
 
2,475

 
2,307

Other liabilities
 
800

 
786

Deferred income tax
 
1,087

 
865

Note payable
 
17

 
20

Long-term debt and capital lease obligations
 
826

 
826

Separate accounts
 
798

 
766

Total liabilities
 
14,069

 
13,326

 
 
 
 
 
Commitments and contingent liabilities (Note 12)
 


 


 
 
 
 
 
Shareholders' Equity
 
 

 
 

Common stock, par value—$2 per share; (authorized: 2017 and 2016—198.3 million shares; issued: 2017 and 2016—198.3 million shares)
 
397

 
397

Paid-in capital
 
1,256

 
1,252

Retained earnings
 
5,193

 
5,037

Accumulated other comprehensive income
 
2,047

 
1,693

Treasury stock at cost (2017—34.3 million shares and 2016—33.9 million shares)
 
(1,370
)
 
(1,319
)
Total shareholders' equity
 
7,523

 
7,060

Total liabilities and shareholders' equity
 
$
21,592

 
$
20,386

 
 
 
 
 
 Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 3



Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Dollars in millions except per share data)
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 

 
 

 
 

 
 

Earned premiums
$
1,247

 
$
1,191

 
$
3,696

 
$
3,518

Investment income, net of expenses
153

 
148

 
453

 
442

Realized investment gains and losses, net
7

 
56

 
156

 
161

Fee revenues
3

 
5

 
12

 
11

Other revenues
2

 
2

 
4

 
5

Total revenues
1,412

 
1,402

 
4,321

 
4,137

Benefits and Expenses
 

 
 

 
 

 
 

Insurance losses and contract holders' benefits
874

 
753

 
2,581

 
2,298

Underwriting, acquisition and insurance expenses
393

 
380

 
1,157

 
1,106

Interest expense
13

 
13

 
39

 
39

Other operating expenses
3

 
3

 
11

 
10

 Total benefits and expenses
1,283

 
1,149

 
3,788

 
3,453

Income Before Income Taxes
129

 
253

 
533

 
684

Provision for Income Taxes
 

 
 

 
 

 
 

Current
27

 
60

 
98

 
173

Deferred

 
13

 
32

 
20

Total provision for income taxes
27

 
73

 
130

 
193

Net Income
$
102

 
$
180

 
$
403

 
$
491

Per Common Share
 

 
 

 
 

 
 

Net income—basic
$
0.62

 
$
1.09

 
$
2.45

 
$
2.98

Net income—diluted
0.61

 
1.08

 
2.42

 
2.95

 
 
 
 
 
 
 
 
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 4



Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net Income
 
$
102

 
$
180

 
$
403

 
$
491

Other Comprehensive Income
 
 

 
 

 
 

 
 

Change in unrealized gains on investments, net of tax
  of $66, $21, $189 and $224, respectively
 
123

 
41

 
352

 
417

Amortization of pension actuarial loss and prior
  service cost, net of tax of $1, $0, $1 and $1,
  respectively
 

 

 
1

 
1

Change in life deferred acquisition costs, life policy
  reserves and other, net of tax (benefit) of $(1), $0,
  $0 and $(4), respectively
 
(1
)
 
(3
)
 
1

 
(10
)
Other comprehensive income
 
122

 
38

 
354

 
408

Comprehensive Income
 
$
224

 
$
218

 
$
757

 
$
899

 
 
 
 
 
 
 
 
 
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 5



Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in millions)
 
Nine months ended September 30,
 
 
2017
 
2016
Common Stock
 
 
 
 
   Beginning of year
 
$
397

 
$
397

   Share-based awards
 

 

   End of period
 
397

 
397

 
 
 
 
 
Paid-In Capital
 
 
 
 
   Beginning of year
 
1,252

 
1,232

   Share-based awards
 
(18
)
 
(9
)
   Share-based compensation
 
19

 
18

   Other
 
3

 
3

   End of period
 
1,256

 
1,244

 
 
 
 
 
Retained Earnings
 
 
 
 
   Beginning of year
 
5,037

 
4,762

   Net income
 
403

 
491

   Dividends declared
 
(247
)
 
(237
)
   End of period
 
5,193

 
5,016

 
 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
 
   Beginning of year
 
1,693

 
1,344

   Other comprehensive income
 
354

 
408

   End of period
 
2,047

 
1,752

 
 
 
 
 
Treasury Stock
 
 
 
 
   Beginning of year
 
(1,319
)
 
(1,308
)
   Share-based awards
 
22

 
29

   Shares acquired - share repurchase authorization
 
(70
)
 
(2
)
   Shares acquired - share-based compensation plans
 
(6
)
 
(10
)
   Other
 
3

 
3

   End of period
 
(1,370
)
 
(1,288
)
 
 
 
 
 
      Total Shareholders' Equity
 
$
7,523

 
$
7,121

 
 
 
 
 
(In millions)
 
 
 
 
Common Stock - Shares Outstanding
 
 
 
 
   Beginning of year
 
164.4

 
163.9

   Share-based awards
 
0.7

 
0.8

   Shares acquired - share repurchase authorization
 
(1.0
)
 

   Shares acquired - share-based compensation plans
 
(0.1
)
 
(0.1
)
   Other
 

 
0.1

   End of period
 
164.0

 
164.7

 
 
 
 
 
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
 


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 6



Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
 (Dollars in millions)
 
Nine months ended September 30,
 
 
2017
 
2016
Cash Flows From Operating Activities
 
 

 
 

Net income
 
$
403

 
$
491

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
40

 
34

Realized investment gains, net
 
(156
)
 
(161
)
Share-based compensation
 
19

 
18

Interest credited to contract holders'
 
36

 
36

Deferred income tax expense
 
32

 
20

Changes in:
 
 

 
 

Investment income receivable
 
6

 
8

Premiums and reinsurance receivable
 
(66
)
 
(111
)
Deferred policy acquisition costs
 
(44
)
 
(31
)
Other assets
 
(34
)
 
(32
)
Loss and loss expense reserves
 
265

 
273

Life policy reserves
 
71

 
75

Unearned premiums
 
168

 
187

Other liabilities
 
(46
)
 
11

Current income tax receivable/payable
 
52

 
17

Net cash provided by operating activities
 
746

 
835

Cash Flows From Investing Activities
 
 

 
 

Sale of fixed maturities
 
20

 
15

Call or maturity of fixed maturities
 
815

 
1,160

Sale of equity securities
 
290

 
311

Purchase of fixed maturities
 
(1,155
)
 
(1,465
)
Purchase of equity securities
 
(399
)
 
(396
)
Investment in finance receivables
 
(21
)
 
(13
)
Collection of finance receivables
 
17

 
24

Investment in buildings and equipment, net
 
(14
)
 
(9
)
Change in other invested assets, net
 
(12
)
 
(13
)
Net cash used in investing activities
 
(459
)
 
(386
)
Cash Flows From Financing Activities
 
 

 
 

Payment of cash dividends to shareholders
 
(239
)
 
(229
)
Shares acquired - share repurchase authorization
 
(70
)
 
(2
)
Payments of note payable
 
(3
)
 
(15
)
Proceeds from stock options exercised
 
10

 
17

Contract holders' funds deposited
 
60

 
71

Contract holders' funds withdrawn
 
(119
)
 
(118
)
Excess tax benefits on share-based compensation
 

 
4

Other
 
(29
)
 
(21
)
Net cash used in financing activities
 
(390
)
 
(293
)
Net change in cash and cash equivalents
 
(103
)
 
156

Cash and cash equivalents at beginning of year
 
777

 
544

Cash and cash equivalents at end of period
 
$
674

 
$
700

Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Interest paid
 
$
26

 
$
26

Income taxes paid
 
44

 
152

Noncash Activities
 
 

 
 

Conversion of securities
 
$
5

 
$
4

Equipment acquired under capital lease obligations
 
10

 
18

Cashless exercise of stock options
 
6

 
10

Other assets and other liabilities
 
74

 
29

 
 
 
 
 
 Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 7



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 — Accounting Policies
The condensed consolidated financial statements include the accounts of Cincinnati Financial Corporation and its consolidated subsidiaries, each of which is wholly owned. These statements are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
 
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been condensed or omitted.
 
Our September 30, 2017 , condensed consolidated financial statements are unaudited. We believe that we have made all adjustments, consisting only of normal recurring accruals, that are necessary for fair presentation. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our 2016 Annual Report on Form 10-K. The results of operations for interim periods do not necessarily indicate results to be expected for the full year.

Adopted Accounting Updates

ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-07, Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. ASU 2016-07 eliminates the requirement to retroactively adjust an investment, results of operations, and retained earnings once an investment qualifies for use of the equity method. It requires the equity method investor to add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting without retroactive adjustment. The effective date of ASU 2016-07 was for interim and annual reporting periods beginning after December 15, 2016, and was applied prospectively. The company adopted this ASU effective January 1, 2017, and it did not have a material impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The effective date of ASU 2016-09 was for interim and annual reporting periods beginning after December 15, 2016. The recognition and classification of the excess tax benefit provisions were applied prospectively in the results of operations and statement of cash flows. This adoption resulted in excess tax benefits of an immaterial amount for the three months ended September 30, 2017, and
$7 million for the nine months ended September 30, 2017, which reduced our current provision for income taxes in our results of operations. The statutory tax withholding classification, which are cash payments made to taxing authorities for shares withheld, were applied retrospectively and reclassified the statutory tax withholding requirements in the statement of cash flows from Other liabilities in operating activities to Other in financing activities. This statutory tax withholding reclassification resulted in $13 million and $11 million being included in financing activities for the nine months ended September 30, 2017 and 2016, respectively. There were no cumulative effect adjustments upon adoption of this ASU.





Pending Accounting Updates


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 8



ASU 2014-09 Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers . ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Insurance contracts do not fall within the scope of this ASU. The effective date of ASU 2014-09 is for interim and annual reporting periods beginning after December 15, 2017. The ASU has not yet been adopted and will not have a material impact on our company’s financial position, cash flows or results of operations.

ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. Our results of operations will be impacted as changes in fair value of equity securities will be reported in net income instead of reported in other comprehensive income. The effective date of ASU 2016-01 is for interim and annual reporting periods beginning after December 15, 2017, and will be applied prospectively. The ASU has not yet been adopted. Had we adopted this ASU on September 30, 2017, $1.795 billion of after-tax unrealized gains on equity securities would have been reclassified from accumulated other comprehensive income to retained earnings. The actual amount reclassified upon adoption will vary depending on the future changes in fair value of our equity portfolio.

ASU 2016-02, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main provision of ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The effective date of ASU 2016-02 is for interim and annual reporting periods beginning after December 15, 2018. The ASU has not yet been adopted. Management is currently evaluating the impact on our company’s consolidated financial position, cash flows and results of operations.

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 amends previous guidance on the impairment of financial instruments by adding an impairment model that allows an entity to recognize expected credit losses as an allowance rather than impairing as they are incurred. The new guidance is intended to reduce complexity of credit impairment models and result in a more timely recognition of expected credit losses. The effective date of ASU 2016-13 is for interim and annual reporting periods beginning after December 15, 2019. The ASU has not yet been adopted. Management is currently evaluating the impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments . ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of ASU 2016-15 is for interim and annual reporting periods beginning after December 15, 2017. The ASU has not yet been adopted; however, it will not have a material impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Postretirement Benefit Costs . ASU 2017-07 provides guidance on how to present the components of net periodic benefit costs in the income statement for pension plans and other post-retirement benefit plans. The effective date of ASU 2017-07 is for interim and annual reporting periods beginning after December 15, 2017. The ASU has not yet been adopted; however, it will not have a material impact on our company's consolidated financial position, cash flows or results of operations.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 9



ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 amends guidance on the amortization period of premiums on certain purchased callable debt securities. The amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment to beginning retained earnings. The effective date of ASU 2017-08 is for interim and annual reporting periods beginning after December 15, 2018. The ASU has not yet been adopted; however, it is not expected to have a material impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The amendment should be applied on a prospective basis. The effective date of ASU 2017-09 is for interim and annual reporting periods, beginning after December 15, 2017. The ASU has not yet been adopted; however, it will not have a material impact on our company's consolidated financial position, cash flows or results of operations upon adoption.





Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 10




NOTE 2 – Investments
The following table provides cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value for our fixed-maturity and equity securities:
(Dollars in millions)
 
Cost or amortized cost
 
 
 
 
 
 
 
 
 
Gross unrealized
 
Fair value
At September 30, 2017
 
 
gains
 
losses
 
Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,514

 
$
280

 
$
11

 
$
5,783

States, municipalities and political subdivisions
 
4,103

 
144

 
13

 
4,234

Commercial mortgage-backed
 
280

 
8

 

 
288

Government-sponsored enterprises
 
207

 

 
3

 
204

United States government
 
16

 

 

 
16

Foreign government
 
10

 

 

 
10

Convertibles and bonds with warrants attached
 
5

 

 

 
5

Subtotal
 
10,135

 
432

 
27

 
10,540

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
3,084

 
2,762

 
38

 
5,808

Nonredeemable preferred equities
 
180

 
37

 

 
217

Subtotal
 
3,264

 
2,799

 
38

 
6,025

Total
 
$
13,399

 
$
3,231

 
$
65

 
$
16,565

At December 31, 2016
 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,555

 
$
252

 
$
26

 
$
5,781

States, municipalities and political subdivisions
 
3,770

 
100

 
42

 
3,828

Commercial mortgage-backed
 
282

 
7

 
2

 
287

Government-sponsored enterprises
 
167

 

 
3

 
164

United States government
 
10

 

 

 
10

Foreign government
 
10

 

 

 
10

Convertibles and bonds with warrants attached
 
5

 

 

 
5

Subtotal
 
9,799

 
359

 
73

 
10,085

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
2,812

 
2,320

 
9

 
5,123

Nonredeemable preferred equities
 
183

 
28

 

 
211

Subtotal
 
2,995

 
2,348

 
9

 
5,334

Total
 
$
12,794

 
$
2,707

 
$
82

 
$
15,419

 
 
 
 
 
 
 
 
 
 
The net unrealized investment gains in our fixed-maturity portfolio at September 30, 2017 , are primarily the result of the continued low interest rate environment that increased the fair value of our fixed-maturity portfolio. Our commercial mortgage-backed securities had an average rating of Aa1/AA at September 30, 2017 , and December 31, 2016 . At September 30, 2017 , the  seven  largest unrealized investment gains in our common stock portfolio are from Honeywell International Incorporated (NYSE:HON), JP Morgan Chase & Co. (NYSE:JPM), Apple Inc. (Nasdaq:AAPL), Blackrock Inc. (Nasdaq:BLK), Microsoft Corporation (Nasdaq:MSFT), Johnson & Johnson (NYSE:JNJ) and 3M Company (NYSE:MMM), which had a combined gross unrealized gain of $864 million . At September 30, 2017 , Apple Inc. was our largest single equity holding with a fair value of $216 million , which was 3.7  percent of our publicly traded common equities portfolio and 1.3  percent of the total investment portfolio.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 11



The table below provides fair values and gross unrealized losses by investment category and by the duration of the securities’ continuous unrealized loss positions:
(Dollars in millions)
 
Less than 12 months
 
12 months or more
 
Total
 
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
At September 30, 2017
 
 
 
 
 
 
Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
231

 
$
4

 
$
193

 
$
7

 
$
424

 
$
11

States, municipalities and political subdivisions
 
508

 
8

 
122

 
5

 
630

 
13

Commercial mortgage-backed securities
 
43

 

 
3

 

 
46

 

Government-sponsored enterprises
 
152

 
3

 
43

 

 
195

 
3

United States government
 
7

 

 

 

 
7

 

Subtotal
 
941

 
15

 
361

 
12

 
1,302

 
27

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
276

 
38

 

 

 
276

 
38

Subtotal
 
276

 
38

 

 

 
276

 
38

Total
 
$
1,217

 
$
53

 
$
361

 
$
12

 
$
1,578

 
$
65

At December 31, 2016
 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
733

 
$
15

 
$
189

 
$
11

 
$
922

 
$
26

States, municipalities and political subdivisions
 
989

 
42

 

 

 
989

 
42

Commercial mortgage-backed
 
89

 
2

 
2

 

 
91

 
2

Government-sponsored enterprises
 
155

 
3

 

 

 
155

 
3

United States government
 
6

 

 

 

 
6

 

Subtotal
 
1,972

 
62

 
191

 
11

 
2,163

 
73

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
103

 
9

 

 

 
103

 
9

Nonredeemable preferred equities
 
4

 

 

 

 
4

 

Subtotal
 
107

 
9

 

 

 
107

 
9

Total
 
$
2,079

 
$
71

 
$
191

 
$
11

 
$
2,270

 
$
82

 
 
 
 
 
 
 
 
 
 
 
 
 

Contractual maturity dates for fixed-maturity investments were:
(Dollars in millions)
 
Amortized
cost
 
Fair
value
 
% of fair
value
At September 30, 2017
 
 
 
Maturity dates:
 
 

 
 

 
 

Due in one year or less
 
$
674

 
$
686

 
6.5
%
Due after one year through five years
 
2,668

 
2,803

 
26.6

Due after five years through ten years
 
3,853

 
4,009

 
38.0

Due after ten years
 
2,940

 
3,042

 
28.9

Total
 
$
10,135

 
$
10,540

 
100.0
%
 
 
 
 
 
 
 

Actual maturities may differ from contractual maturities when there is a right to call or prepay obligations with or without call or prepayment penalties.
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 12



The following table provides investment income, realized investment gains and losses, the change in unrealized investment gains and losses:
(Dollars in millions)
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Investment income:
 
 
 
 
 
 
 
Interest
$
112

 
$
111

 
$
334

 
$
330

Dividends
43

 
39

 
124

 
117

Other
1

 
1

 
3

 
2

Total
156

 
151

 
461

 
449

Less investment expenses
3

 
3

 
8

 
7

Total
$
153

 
$
148

 
$
453

 
$
442

 
 
 
 
 
 
 
 
Realized investment gains and losses:
 

 
 

 
 

 
 

Fixed maturities:
 

 
 

 
 

 
 

Gross realized gains
$
3

 
$
10

 
$
16

 
$
17

Gross realized losses

 

 

 
(1
)
Other-than-temporary impairments

 

 
(6
)
 
(2
)
Equity securities:
 

 
 

 
 

 
 

Gross realized gains
1

 
47

 
160

 
147

Gross realized losses

 

 
(14
)
 
(1
)
Other-than-temporary impairments

 

 
(3
)
 

Other
3

 
(1
)
 
3

 
1

Total
$
7

 
$
56

 
$
156

 
$
161

 
 
 
 
 
 
 
 
Change in unrealized investment gains and losses:
 

 
 

 
 

 
 

Fixed maturities
$
9

 
$
(20
)
 
$
119

 
$
274

Equity securities
180

 
82

 
422

 
367

Income tax provision
(66
)
 
(21
)
 
(189
)
 
(224
)
Total
$
123

 
$
41

 
$
352

 
$
417

 
 
 
 
 
 
 
 
 
During the three months ended September 30, 2017 , there were no equity securities and no fixed-maturity securities other-than-temporarily impaired. During the nine months ended September 30, 2017 , there were five equity securities and one fixed-maturity security other-than-temporarily impaired. There were no credit losses on fixed-maturity securities for which a portion of other-than-temporary impairment (OTTI) has been recognized in other comprehensive income for the three and nine months ended September 30, 2017 and 2016 .

At  September 30, 2017 , 94 fixed-maturity investments with a total unrealized loss of $12 million had been in an unrealized loss position for 12 months or more. Of that total, no  fixed-maturity investment had a fair value below 70 percent of amortized cost. At September 30, 2017 , no equity investment had been in an unrealized loss position for 12 months or more. There were no equity investments with a fair value below 70 percent of amortized cost. At December 31, 2016 , 32 fixed-maturity investments with a total unrealized loss of $11 million had been in an unrealized loss position for 12 months or more. Of that total, no  fixed-maturity investments had fair values below 70 percent of amortized cost. There were no equity security investments in an unrealized loss position for 12 months or more as of December 31, 2016 . There were no equity investments with a fair value below 70 percent of amortized cost at December 31, 2016.
 


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 13



NOTE 3 – Fair Value Measurements

In accordance with accounting guidance for fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for the valuation technique used, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2016 , and ultimately management determines fair value. See our 2016 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 132, for information on characteristics and valuation techniques used in determining fair value.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 14



Fair Value Disclosures for Assets
The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at  September 30, 2017 , and December 31, 2016 . We do not have any material liabilities carried at fair value. There were no transfers between Level 1 and Level 2.
(Dollars in millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At September 30, 2017
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$

 
$
5,782

 
$
1

 
$
5,783

States, municipalities and political subdivisions
 

 
4,229

 
5

 
4,234

Commercial mortgage-backed
 

 
288

 

 
288

Government-sponsored enterprises
 

 
204

 

 
204

United States government
 
16

 

 

 
16

Foreign government
 

 
10

 

 
10

Convertibles and bonds with warrants attached
 

 
5

 

 
5

Subtotal
 
16

 
10,518

 
6

 
10,540

Common equities, available for sale
 
5,808

 

 

 
5,808

Nonredeemable preferred equities, available for sale
 

 
217

 

 
217

Separate accounts taxable fixed maturities
 

 
783

 

 
783

Top Hat savings plan mutual funds and common
equity (included in Other assets)
 
30

 

 

 
30

Total
 
$
5,854

 
$
11,518

 
$
6

 
$
17,378

 
 
 
 
 
 
 
 
 
At December 31, 2016
 
 
 
 
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$

 
$
5,703

 
$
78

 
$
5,781

States, municipalities and political subdivisions
 

 
3,828

 

 
3,828

Commercial mortgage-backed
 

 
287

 

 
287

Government-sponsored enterprises
 

 
164

 

 
164

United States government
 
10

 

 

 
10

Foreign government
 

 
10

 

 
10

Convertibles and bonds with warrants attached
 

 
5

 

 
5

Subtotal
 
10

 
9,997

 
78

 
10,085

Common equities, available for sale
 
5,123

 

 

 
5,123

Nonredeemable preferred equities, available for sale
 

 
211

 

 
211

Separate accounts taxable fixed maturities
 

 
750

 

 
750

Top Hat savings plan mutual funds and common
  equity (included in Other assets)
 
24

 

 

 
24

Total
 
$
5,157

 
$
10,958

 
$
78

 
$
16,193

 
 
 
 
 
 
 
 
 
 
Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value as of September 30, 2017 . Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the condensed consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. Transfers out of Level 3 included situations where a broker quote was used without observable inputs or data that could be corroborated by our pricing vendors in the prior period and significant other observable inputs were identified in the current period. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 15



The following table provides the change in Level 3 assets for the three months ended September 30 :

  (Dollars in millions)
 
Asset fair value measurements using significant unobservable inputs (Level 3)
 
 
Corporate
fixed
maturities
 
Taxable
fixed
maturities - separate accounts
 
States,
municipalities
and political
subdivisions
fixed maturities
 
Nonredeemable preferred
equities
 
Total
Beginning balance, July 1, 2017
 
$
1

 
$

 
$
5

 
$

 
$
6

Total gains or losses (realized/unrealized):
 
 

 
 
 
 

 
 

 
 

Included in net income
 

 

 

 

 

Included in other comprehensive income
 

 

 

 

 

Purchases
 

 

 

 

 

Sales
 

 

 

 

 

Transfers into Level 3
 

 

 

 

 

Transfers out of Level 3
 

 

 

 

 

Ending balance, September 30, 2017
 
$
1

 
$

 
$
5

 
$

 
$
6

 
 
 
 
 
 
 
 
 
 
 
Beginning balance, July 1, 2016
 
$
52

 
$
1

 
$

 
$

 
$
53

Total gains or losses (realized/unrealized):
 
 

 
 
 
 

 
 

 
 

Included in net income
 

 

 

 

 

Included in other comprehensive income
 
1

 

 

 

 
1

Purchases
 

 

 

 

 

Sales
 
(1
)
 

 

 

 
(1
)
Transfers into Level 3
 

 

 

 

 

Transfers out of Level 3
 
(10
)
 
(1
)
 

 

 
(11
)
Ending balance, September 30, 2016
 
$
42

 
$

 
$

 
$

 
$
42

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 16



The following table provides the change in Level 3 assets for the nine months ended September 30 :
(Dollars in millions)
Asset fair value measurements using significant unobservable inputs
 
 
Corporate
fixed
maturities
 
Taxable
fixed
maturities - separate accounts
 
States,
municipalities
and political
subdivisions
fixed maturities
 
Nonredeemable
preferred
equities
 
Total
Beginning balance, January 1, 2017
 
$
78

 
$

 
$

 
$

 
$
78

Total gains or losses (realized/unrealized):
 
 
 
 
 
 

 
 

 
 

Included in net income
 

 

 

 

 

Included in other comprehensive income
 

 

 

 

 

Purchases
 

 

 
5

 

 
5

Sales
 

 

 

 

 

Transfers into Level 3
 

 

 

 

 

Transfers out of Level 3
 
(77
)
 

 

 

 
(77
)
Ending balance, September 30, 2017
 
$
1

 
$

 
$
5

 
$

 
$
6

 
 
 
 
 
 
 
 
 
 
 
Beginning balance, January 1, 2016
 
$
51

 
$
1

 
$

 
$
3

 
$
55

Total gains or losses (realized/unrealized):
 
 
 
 
 
 

 
 

 
 
Included in net income
 

 

 

 

 

Included in other comprehensive income
 
1

 

 

 
(1
)
 

Purchases
 
22

 

 

 

 
22

Sales
 
(1
)
 

 

 
(2
)
 
(3
)
Transfers into Level 3
 

 

 

 

 

Transfers out of Level 3
 
(31
)
 
(1
)
 

 

 
(32
)
Ending balance, September 30, 2016
 
$
42

 
$

 
$

 
$

 
$
42

 
 
 
 
 
 
 
 
 
 
 

Additional disclosures for the Level 3 category are not material.

Fair Value Disclosures for Assets and Liabilities Not Carried at Fair Value
 
The disclosures below are presented to provide information about the effects of current market conditions on financial instruments that are not reported at fair value in our condensed consolidated financial statements.
 
This table summarizes the book value and principal amounts of our long-term debt:
(Dollars in millions)
 
 
 
Book value
 
Principal amount
Interest
rate
 
Year of 
issue
 
 
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
 
 
 
2017
 
2016
 
2017
 
2016
6.900
%
 
1998
 
Senior debentures, due 2028
 
$
26

 
$
26

 
$
28

 
$
28

6.920
%
 
2005
 
Senior debentures, due 2028
 
391

 
391

 
391

 
391

6.125
%
 
2004
 
Senior notes, due 2034
 
370

 
370

 
374

 
374

 

 
 
 
Total
 
$
787

 
$
787

 
$
793

 
$
793

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 17



The following table shows fair values of our note payable and long-term debt:
(Dollars in millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other observable inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At September 30, 2017
 
 
 
 
Note payable
 
$

 
$
17

 
$

 
$
17

6.900% senior debentures, due 2028
 

 
34

 

 
34

6.920% senior debentures, due 2028
 

 
503

 

 
503

6.125% senior notes, due 2034
 

 
459

 

 
459

Total
 
$

 
$
1,013

 
$

 
$
1,013

 
 
 
 
 
 
 
 
 
At December 31, 2016
 
 
 
 
 
 
 
 
Note payable
 
$

 
$
20

 
$

 
$
20

6.900% senior debentures, due 2028
 

 
33

 

 
33

6.920% senior debentures, due 2028
 

 
488

 

 
488

6.125% senior notes, due 2034
 

 
435

 

 
435

Total
 
$

 
$
976

 
$

 
$
976

 
 
 
 
 
 
 
 
 
 
The following table shows the fair value of our life policy loans included in other invested assets:
(Dollars in millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At September 30, 2017
 
 
 
 
Life policy loans
 
$

 
$

 
$
41

 
$
41

 
 
 
 
 
 
 
 
 
At December 31, 2016
 
 
 
 
 
 
 
 
Life policy loans
 
$

 
$

 
$
40

 
$
40

 
 
 
 
 
 
 
 
 
 
Outstanding principal and interest for these life policy loans totaled $31 million at September 30, 2017 , and December 31, 2016 .
 
The following table shows fair values of our deferred annuities and structured settlements included in life policy and investment contract reserves:
(Dollars in millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At September 30, 2017
 
 
 
 
Deferred annuities
 
$

 
$

 
$
846

 
$
846

Structured settlements
 

 
209

 

 
209

Total
 
$

 
$
209

 
$
846

 
$
1,055

 
 
 
 
 
 
 
 
 
At December 31, 2016
 
 
 
 
 
 
 
 
Deferred annuities
 
$

 
$

 
$
839

 
$
839

Structured settlements
 

 
206

 

 
206

Total
 
$

 
$
206

 
$
839

 
$
1,045

 
 
 
 
 
 
 
 
 

Recorded reserves for the deferred annuities were $844 million and $861 million at September 30, 2017 , and December 31, 2016, respectively. Recorded reserves for the structured settlements were $163 million and $170 million at September 30, 2017 , and December 31, 2016 , respectively.



Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 18



NOTE 4 – Property Casualty Loss and Loss Expenses
This table summarizes activity for our consolidated property casualty loss and loss expense reserves:
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Gross loss and loss expense reserves, beginning
  of period
 
$
5,213

 
$
4,918

 
$
5,035

 
$
4,660

Less reinsurance recoverable
 
283

 
310

 
298

 
281

Net loss and loss expense reserves, beginning of
  period
 
4,930

 
4,608

 
4,737

 
4,379

Net incurred loss and loss expenses related to:
 
 

 
 

 
 

 
 

Current accident year
 
835

 
730

 
2,493

 
2,261

Prior accident years
 
(20
)
 
(40
)
 
(96
)
 
(151
)
Total incurred
 
815

 
690

 
2,397

 
2,110

Net paid loss and loss expenses related to:
 
 

 
 

 
 

 
 

Current accident year
 
411

 
374

 
969

 
848

Prior accident years
 
314

 
288

 
1,145

 
1,005

Total paid
 
725

 
662

 
2,114

 
1,853

Net loss and loss expense reserves, end of period
 
5,020

 
4,636

 
5,020

 
4,636

Plus reinsurance recoverable
 
280

 
301

 
280

 
301

Gross loss and loss expense reserves, end of
  period
 
$
5,300

 
$
4,937

 
$
5,300

 
$
4,937

 
 
 
 
 
 
 
 
 
 
We use actuarial methods, models and judgment to estimate, as of a financial statement date, the property casualty loss and loss expense reserves required to pay for and settle all outstanding insured claims, including incurred but not reported (IBNR) claims, as of that date. The actuarial estimate is subject to review and adjustment by an inter-departmental committee that includes actuarial, claims, underwriting, loss prevention and accounting management. This committee is familiar with relevant company and industry business, claims and underwriting trends, as well as general economic and legal trends that could affect future loss and loss expense payments. The amount we will actually have to pay for claims can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. The reserve for loss and loss expenses in the condensed consolidated balance sheets also included $50 million at  September 30, 2017 , and
$54 million at September 30, 2016 , for certain life and health loss and loss expense reserves.

For the three months ended September 30, 2017 , we experienced $20 million of favorable development on prior accident years, including $18 million of favorable development in commercial lines, $3 million of favorable development in excess and surplus lines and $1 million of adverse development in our reinsurance assumed operations. This included $6 million from favorable development of catastrophe losses for the three months ended September 30, 2017 . For the three months ended September 30, 2017 , we recognized favorable reserve development of $14 million for the workers' compensation line, $7 million for the commercial property line and $5 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. For the three months ended September 30, 2017 , we recognized unfavorable reserve development of $8 million for the commercial auto line.

For the nine months ended September 30, 2017 , we experienced $96 million of favorable development on prior accident years, including $55 million of favorable development in commercial lines, $13 million of favorable development in personal lines, $25 million of favorable development in excess and surplus lines and $3 million of favorable development in our reinsurance assumed operations. This included $20 million from favorable development of catastrophe losses for the nine months ended September 30, 2017 . For the nine months ended September 30, 2017 , we recognized favorable reserve development of $44 million for the workers' compensation line, $21 million for the commercial property line and $25 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. For the nine months ended September 30, 2017 , we recognized unfavorable reserve development of $27 million for the commercial auto line and $8 million for the commercial casualty line. The unfavorable reserve development for commercial casualty reflected higher large loss activity than prior year.

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 19




For the three months ended September 30, 2016 , we experienced $40 million of favorable development on prior accident years, including $31 million of favorable development in commercial lines, $4 million of adverse development in personal lines, $12 million of favorable development in excess and surplus lines and $1 million of favorable development in our reinsurance assumed operations. We recognized favorable reserve development during the three months ended September 30, 2016 , of $16 million for the workers' compensation line, $7 million for commercial casualty line and $11 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expenses for these lines. We recognized unfavorable reserve development during the three months ended September 30, 2016, of $9 million for the personal auto line and $4 million for the commercial auto line. Both lines developed unfavorably due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled.

For the nine months ended September 30, 2016 , we experienced $151 million of favorable development on prior accident years, including $118 million of favorable development in commercial lines, $4 million of favorable development in personal lines, $27 million of favorable development in excess and surplus lines and $2 million of favorable development in our reinsurance assumed operations. This included $5 million from favorable development of catastrophe losses for the nine months ended September 30, 2016 . We recognized favorable reserve development during the nine months ended September 30, 2016 , of $52 million for the workers' compensation line, $30 million for the commercial casualty line, $25 million for the commercial property line and $37 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expenses for these lines. We recognized unfavorable reserve development during the nine months ended September 30, 2016, of $26 million for the commercial auto line and $15 million for the personal auto line. Both lines developed unfavorably due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet settled.



Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 20



NOTE 5 – Life Policy and Investment Contract Reserves
We establish the reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates, timing of claim presentation and investment yields, including a provision for uncertainty. Once these assumptions are established, they generally are maintained throughout the lives of the contracts. We use both our own experience and industry experience, adjusted for historical trends, in arriving at our assumptions for expected mortality, morbidity and withdrawal rates as well as for expected expenses. We base our assumptions for expected investment income on our own experience adjusted for current economic conditions.
 
We establish reserves for the company’s deferred annuity, universal life and structured settlement policies equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals. Some of our universal life policies contain no-lapse guarantee provisions. For these policies, we establish a reserve in addition to the account balance, based on expected no-lapse guarantee benefits and expected policy assessments.

This table summarizes our life policy and investment contract reserves:
(Dollars in millions)
 
September 30,
2017
 
December 31, 2016
Life policy reserves:
 
 
 
 
Ordinary/traditional life
 
$
1,063

 
$
1,011

Other
 
46

 
45

Subtotal
 
1,109

 
1,056

Investment contract reserves:
 
 
 
 
Deferred annuities
 
844

 
861

Universal life
 
594

 
578

Structured settlements
 
163

 
170

Other
 
6

 
6

Subtotal
 
1,607

 
1,615

Total life policy and investment contract reserves
 
$
2,716

 
$
2,671

 
 
 
 
 



Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 21



NOTE 6 – Deferred Policy Acquisition Costs
Expenses directly related to successfully acquired insurance policies – primarily commissions, premium taxes and underwriting costs – are deferred and amortized over the terms of the policies. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate the costs for recoverability. The table below shows the deferred policy acquisition costs and asset reconciliation.
(Dollars in millions)
Three months ended September 30,
 
Nine months ended September 30,

2017
 
2016
 
2017
 
2016
Property casualty:
 
 
 
 
 
 
 
Deferred policy acquisition costs asset, beginning of period
$
448

 
$
412

 
$
408

 
$
388

Capitalized deferred policy acquisition costs
223

 
216

 
686

 
644

Amortized deferred policy acquisition costs
(220
)
 
(207
)
 
(643
)
 
(611
)
Deferred policy acquisition costs asset, end of period
$
451

 
$
421

 
$
451

 
$
421

 
 
 
 
 
 
 
 
Life:
 
 
 
 
 
 
 
Deferred policy acquisition costs asset, beginning of period
$
230

 
$
212

 
$
229

 
$
228

Capitalized deferred policy acquisition costs
13

 
11

 
38

 
35

Amortized deferred policy acquisition costs
(17
)
 
(15
)
 
(37
)
 
(37
)
Amortized shadow deferred policy acquisition costs
(1
)
 
(2
)
 
(5
)
 
(20
)
Deferred policy acquisition costs asset, end of period
$
225

 
$
206

 
$
225

 
$
206

 
 
 
 
 
 
 
 
Consolidated:
 
 
 
 
 
 
 
Deferred policy acquisition costs asset, beginning of period
$
678

 
$
624

 
$
637

 
$
616

Capitalized deferred policy acquisition costs
236

 
227

 
724

 
679

Amortized deferred policy acquisition costs
(237
)
 
(222
)
 
(680
)
 
(648
)
Amortized shadow deferred policy acquisition costs
(1
)
 
(2
)
 
(5
)
 
(20
)
Deferred policy acquisition costs asset, end of period
$
676

 
$
627

 
$
676

 
$
627

 
 
 
 
 
 
 
 

No premium deficiencies were recorded in the condensed consolidated statements of income, as the sum of the anticipated loss and loss expenses, policyholder dividends and unamortized deferred acquisition expenses did not exceed the related unearned premiums and anticipated investment income.
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 22



NOTE 7 – Accumulated Other Comprehensive Income
Accumulated other comprehensive income (AOCI) includes changes in unrealized gains and losses on investments, changes in pension obligations and changes in life deferred acquisition costs, life policy reserves and other as follows:
(Dollars in millions)
 
Three months ended September 30,
 
 
2017
 
 
2016
 
 
Before tax
 
Income tax
 
Net
 
 
Before tax
 
Income tax
 
Net
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
2,977

 
$
1,031

 
$
1,946

 
 
$
2,673

 
$
925

 
$
1,748

OCI before realized gains recognized in net income
 
193

 
67

 
126

 
 
119

 
41

 
78

Realized gains recognized in net income
 
(4
)
 
(1
)
 
(3
)
 
 
(57
)
 
(20
)
 
(37
)
OCI
 
189

 
66

 
123

 
 
62

 
21

 
41

AOCI, end of period
 
$
3,166

 
$
1,097

 
$
2,069

 
 
$
2,735

 
$
946

 
$
1,789

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
(25
)
 
$
(8
)
 
$
(17
)
 
 
$
(40
)
 
$
(13
)
 
$
(27
)
OCI excluding amortization recognized in net income
 

 

 

 
 

 

 

Amortization recognized in net income
 
1

 
1

 

 
 

 

 

OCI
 
1

 
1

 

 
 

 

 

AOCI, end of period
 
$
(24
)
 
$
(7
)
 
$
(17
)
 
 
$
(40
)
 
$
(13
)
 
$
(27
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life deferred acquisition costs, life policy reserves and other:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
(6
)
 
$
(2
)
 
$
(4
)
 
 
$
(10
)
 
$
(3
)
 
$
(7
)
OCI before realized gains and losses recognized in net
  income
 
1

 

 
1

 
 
(4
)
 
(1
)
 
(3
)
Realized gains and losses recognized in net income
 
(3
)
 
(1
)
 
(2
)
 
 
1

 
1

 

OCI
 
(2
)
 
(1
)
 
(1
)
 
 
(3
)
 

 
(3
)
AOCI, end of period
 
$
(8
)
 
$
(3
)
 
$
(5
)
 
 
$
(13
)
 
$
(3
)
 
$
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Summary of AOCI:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
2,946

 
$
1,021

 
$
1,925

 
 
$
2,623

 
$
909

 
$
1,714

Investments OCI
 
189

 
66

 
123

 
 
62

 
21

 
41

Pension obligations OCI
 
1

 
1

 

 
 

 

 

Life deferred acquisition costs, life policy reserves and other OCI
 
(2
)
 
(1
)
 
(1
)
 
 
(3
)
 

 
(3
)
Total OCI
 
188

 
66

 
122

 
 
59

 
21

 
38

AOCI, end of period
 
$
3,134

 
$
1,087

 
$
2,047

 
 
$
2,682

 
$
930

 
$
1,752

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 23



(Dollars in millions)
Nine months ended September 30,
 
2017
 
 
2016
 
Before tax
 
Income tax
 
Net
 
 
Before tax
 
Income tax
 
Net
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
$
2,625

 
$
908

 
$
1,717

 
 
$
2,094

 
$
722

 
$
1,372

OCI before realized gains recognized in net income
694

 
243

 
451

 
 
801

 
280

 
521

Realized gains recognized in net income
(153
)
 
(54
)
 
(99
)
 
 
(160
)
 
(56
)
 
(104
)
OCI
541

 
189

 
352

 
 
641

 
224

 
417

AOCI, end of period
$
3,166

 
$
1,097

 
$
2,069

 
 
$
2,735

 
$
946

 
$
1,789

 
 
 
 
 
 
 
 
 
 
 
 
 
Pension obligations:
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
$
(26
)
 
$
(8
)
 
$
(18
)
 
 
$
(42
)
 
$
(14
)
 
$
(28
)
OCI excluding amortization recognized in net income

 

 

 
 

 

 

Amortization recognized in net income
2

 
1

 
1

 
 
2

 
1

 
1

OCI
2

 
1

 
1

 
 
2

 
1

 
1

AOCI, end of period
$
(24
)
 
$
(7
)
 
$
(17
)
 
 
$
(40
)
 
$
(13
)
 
$
(27
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Life deferred acquisition costs, life policy reserves and other:
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
$
(9
)
 
$
(3
)
 
$
(6
)
 
 
$
1

 
$
1

 
$

OCI before realized gains and losses recognized in net
  income
4

 
1

 
3

 
 
(13
)
 
(4
)
 
(9
)
Realized gains recognized in net income
(3
)
 
(1
)
 
(2
)
 
 
(1
)
 

 
(1
)
OCI
1

 

 
1

 
 
(14
)
 
(4
)
 
(10
)
AOCI, end of period
$
(8
)
 
$
(3
)
 
$
(5
)
 
 
$
(13
)
 
$
(3
)
 
$
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Summary of AOCI:
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
$
2,590

 
$
897

 
$
1,693

 
 
$
2,053

 
$
709

 
$
1,344

Investments OCI
541

 
189

 
352

 
 
641

 
224

 
417

Pension obligations OCI
2

 
1

 
1

 
 
2

 
1

 
1

Life deferred acquisition costs, life policy reserves and other OCI
1

 

 
1

 
 
(14
)
 
(4
)
 
(10
)
Total OCI
544

 
190

 
354

 
 
629

 
221

 
408

AOCI, end of period
$
3,134

 
$
1,087

 
$
2,047

 
 
$
2,682

 
$
930

 
$
1,752

 
 
 
 
 
 
 
 
 
 
 
 
 

Investments realized gains and life deferred acquisition costs, life policy reserves and other realized gains are recorded in the realized investment gains, net, line item in the condensed consolidated statements of income. Amortization on pension obligations is recorded in the insurance losses and contract holders' benefits and underwriting, acquisition and insurance expenses in the condensed consolidated statements of income.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 24



NOTE 8 – Reinsurance
Primary components of our property casualty reinsurance assumed include involuntary and voluntary assumed risks as well as contracts from our reinsurance assumed operations, known as Cincinnati Re. Primary components of our ceded reinsurance include a property per risk treaty, property excess treaty, casualty per occurrence treaty, casualty excess treaty, property catastrophe treaty and catastrophe bonds and retrocessions on our reinsurance assumed operations. Management's decisions about the appropriate level of risk retention are affected by various factors, including changes in our underwriting practices, capacity to retain risks and reinsurance market conditions.

The table below includes our net written consolidated property casualty insurance premiums on assumed and ceded business:
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Direct written premiums
 
$
1,221

 
$
1,189

 
$
3,712

 
$
3,561

Assumed written premiums
 
26

 
23

 
101

 
86

Ceded written premiums
 
(39
)
 
(37
)
 
(103
)
 
(131
)
Net written premiums
 
$
1,208

 
$
1,175

 
$
3,710

 
$
3,516

 
 
 
 
 
 
 
 
 

Our condensed consolidated statements of income include earned consolidated property casualty insurance premiums on assumed and ceded business: 
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Direct earned premiums
 
$
1,195

 
$
1,153

 
$
3,547

 
$
3,409

Assumed earned premiums
 
39

 
22

 
99

 
53

Ceded earned premiums
 
(43
)
 
(42
)
 
(123
)
 
(119
)
Earned premiums
 
$
1,191

 
$
1,133

 
$
3,523

 
$
3,343

 
 
 
 
 
 
 
 
 
 
Our condensed consolidated statements of income include incurred consolidated property casualty insurance loss and loss expenses on assumed and ceded business:
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Direct incurred loss and loss expenses
 
$
760

 
$
691

 
$
2,318

 
$
2,131

Assumed incurred loss and loss expenses
 
62

 
9

 
97

 
30

Ceded incurred loss and loss expenses
 
(7
)
 
(10
)
 
(18
)
 
(51
)
Incurred loss and loss expenses
 
$
815

 
$
690

 
$
2,397

 
$
2,110

 
 
 
 
 
 
 
 
 
 
Our life insurance company purchases reinsurance for protection of a portion of the risks that are written. Primary components of our life reinsurance program include individual mortality coverage, aggregate catastrophe and accidental death coverage in excess of certain deductibles.

Our condensed consolidated statements of income include earned life insurance premiums on ceded business: 
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Direct earned premiums
 
$
72

 
$
74

 
$
223

 
$
220

Ceded earned premiums
 
(16
)
 
(16
)
 
(50
)
 
(45
)
Earned premiums
 
$
56

 
$
58

 
$
173

 
$
175

 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 25



Our condensed consolidated statements of income include life insurance contract holders' benefits incurred on ceded business: 
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Direct contract holders' benefits incurred
 
$
73

 
$
72

 
$
236

 
$
228

Ceded contract holders' benefits incurred
 
(14
)
 
(9
)
 
(52
)
 
(40
)
Contract holders' benefits incurred
 
$
59

 
$
63

 
$
184

 
$
188

 
 
 
 
 
 
 
 
 

The ceded benefits incurred can vary depending on the type of life insurance policy held and the year the policy was issued.

NOTE 9 – Income Taxes
As of September 30, 2017 , and December 31, 2016 , we had no liability for unrecognized tax benefits.
 
The differences between the 35 percent statutory federal income tax rate and our effective income tax rate were as follows:
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Tax at statutory rate:
 
$
46

 
35.0
 %
 
$
88

 
35.0
 %
 
$
187

 
35.0
 %
 
$
239

 
35.0
 %
Increase (decrease) resulting from:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Tax-exempt income from municipal bonds
 
(9
)
 
(7.0
)
 
(8
)
 
(3.2
)
 
(27
)
 
(5.1
)
 
(25
)
 
(3.7
)
Dividend received exclusion
 
(8
)
 
(6.2
)
 
(8
)
 
(3.2
)
 
(25
)
 
(4.7
)
 
(24
)
 
(3.5
)
Other
 
(2
)
 
(0.9
)
 
1

 
0.3

 
(5
)
 
(0.8
)
 
3

 
0.4

Provision for income taxes
 
$
27

 
20.9
 %
 
$
73

 
28.9
 %
 
$
130

 
24.4
 %
 
$
193

 
28.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The provision for federal income taxes is based upon filing a consolidated income tax return for the company and its subsidiaries.

Included in Other above is the adoption of ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , which decreased both the provision for income taxes and the effective income tax rate by an immaterial amount during the three months ended September 30, 2017 , and
$7 million and 1.3 percent , during the nine months ended September 30, 2017 .

As of September 30, 2017 , we had no operating or capital loss carry forwards.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 26



NOTE 10 – Net Income Per Common Share
Basic earnings per share are computed based on the weighted average number of common shares outstanding. Diluted earnings per share are computed based on the weighted average number of common and dilutive potential common shares outstanding using the treasury stock method. The table shows calculations for basic and diluted earnings per share:
(In millions except per share data)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 

 
 

 
 

 
 

Net income—basic and diluted
 
$
102

 
$
180

 
$
403

 
$
491

Denominator:
 
 

 
 

 
 

 
 

Basic weighted-average common shares
  outstanding
 
164.0

 
164.6

 
164.3

 
164.5

Effect of share-based awards:
 
 

 
 

 
 

 
 

Stock options
 
1.1

 
1.2

 
1.1

 
1.1

Nonvested shares
 
0.8

 
1.0

 
0.7

 
0.9

Diluted weighted-average shares
 
165.9

 
166.8

 
166.1

 
166.5

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.62

 
$
1.09

 
$
2.45

 
$
2.98

Diluted
 
0.61

 
1.08

 
2.42

 
2.95

Number of anti-dilutive share-based awards
 
0.6

 

 
0.7

 
0.3

 
 
 
 
 
 
 
 
 

The sources of dilution of our common shares are certain equity-based awards. See our 2016 Annual Report on Form 10-K, Item 8, Note 17, Share-Based Associate Compensation Plans, Page 160, for information about equity-based awards. The above table shows the number of anti-dilutive share-based awards for the three and nine months ended September 30, 2017 and 2016 . We did not include these share-based awards in the computation of net income per common share (diluted) because their exercise would have anti-dilutive effects.

NOTE 11 – Employee Retirement Benefits
The following summarizes the components of net periodic benefit cost for our qualified and supplemental pension plans:
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Service cost
 
$
3

 
$
3

 
$
8

 
$
8

Interest cost
 
4

 
4

 
11

 
11

Expected return on plan assets
 
(6
)
 
(5
)
 
(16
)
 
(14
)
Amortization of actuarial loss and prior service
 cost
 
1

 
0

 
2

 
2

Net periodic benefit cost
 
$
2

 
$
2

 
$
5

 
$
7

 
 
 
 
 
 
 
 
 

See our 2016 Annual Report on Form 10-K, Item 8, Note 13, Employee Retirement Benefits, Page 155, for information on our retirement benefits. We made matching contributions totaling $4 million and $3 million to our 401(k) and Top Hat savings plans during the third quarter of 2017 and 2016 and contributions of $13 million and
$11 million for the nine months of 2017 and 2016, respectively.

We contributed $5 million to our qualified pension plan during the first nine months of 2017.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 27



NOTE 12 – Commitments and Contingent Liabilities
In the ordinary course of conducting business, the company and its subsidiaries are named as defendants in various legal proceedings. Most of these proceedings are claims litigation involving the company's insurance subsidiaries in which the company is either defending or providing indemnity for third-party claims brought against insureds or litigating first-party coverage claims. The company accounts for such activity through the establishment of unpaid loss and loss expense reserves. We believe that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, is immaterial to our consolidated financial condition, results of operations and cash flows.
 
The company and its subsidiaries also are occasionally involved in other legal and regulatory proceedings, some of which assert claims for substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national class. Such proceedings have alleged, for example, breach of an alleged duty to search national databases to ascertain unreported deaths of insureds under life insurance policies. The company's insurance subsidiaries also are occasionally parties to individual actions in which extra-contractual damages, punitive damages or penalties are sought, such as claims alleging bad faith handling of insurance claims or writing unauthorized coverage or claims alleging discrimination by former or current associates.
 
On a quarterly basis, we review these outstanding matters. Under current accounting guidance, we establish accruals when it is probable that a loss has been incurred and we can reasonably estimate its potential exposure. The company accounts for such probable and estimable losses, if any, through the establishment of legal expense reserves. Based on our quarterly review, we believe that our accruals for probable and estimable losses are reasonable and that the amounts accrued do not have a material effect on our consolidated financial condition or results of operations. However, if any one or more of these matters results in a judgment against us or settlement for an amount that is significantly greater than the amount accrued, the resulting liability could have a material effect on the company's consolidated results of operations or cash flows. Based on our most recent review, our estimate of losses for any other matters for which the risk of loss is not probable, but more than remote, is immaterial.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 28



NOTE 13 – Segment Information
We operate primarily in two industries, property casualty insurance and life insurance. Our chief operating decision maker regularly reviews our reporting segments to make decisions about allocating resources and assessing performance. Our reporting segments are:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Life insurance
Investments

We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company and Cincinnati Re, our reinsurance assumed operations. See our 2016 Annual Report on Form 10-K, Item 8, Note 18, Segment Information, Page 163, for a description of revenue, income or loss before income taxes and identifiable assets for each of the five segments.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 29



Segment information is summarized in the following table: 
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 

 
 

 
 

 
 

Commercial lines insurance
 
 

 
 

 
 

 
 

Commercial casualty
 
$
268

 
$
265

 
$
804

 
$
785

Commercial property
 
225

 
217

 
674

 
646

Commercial auto
 
159

 
151

 
472

 
442

Workers' compensation
 
84

 
90

 
254

 
268

Other commercial
 
56

 
56

 
165

 
169

Commercial lines insurance premiums
 
792

 
779

 
2,369

 
2,310

Fee revenues
 
1

 
1

 
3

 
3

Total commercial lines insurance
 
793

 
780

 
2,372

 
2,313

 
 
 
 
 
 
 
 
 
Personal lines insurance
 
 

 
 

 
 

 
 

Personal auto
 
148

 
137

 
433

 
403

Homeowner
 
131

 
122

 
384

 
362

Other personal
 
35

 
34

 
104

 
99

Personal lines insurance premiums
 
314

 
293

 
921

 
864

Fee revenues
 
1

 
1

 
4

 
3

Total personal lines insurance
 
315

 
294

 
925

 
867

 
 
 
 
 
 
 
 
 
Excess and surplus lines insurance
 
53

 
48

 
153

 
136

Fee revenues
 

 
1

 
1

 
1

Total excess and surplus lines insurance
 
53

 
49

 
154

 
137

 
 
 
 
 
 
 
 
 
Life insurance premiums
 
56

 
58

 
173

 
175

Fee revenues
 
1

 
2

 
4

 
4

Total life insurance
 
57

 
60

 
177

 
179

 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
    Investment income, net of expenses
 
153

 
148

 
453

 
442

    Realized investment gains and losses, net
 
7

 
56

 
156

 
161

Total investment revenue
 
160

 
204

 
609

 
603

 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
Cincinnati Re insurance premiums
 
32

 
13

 
80

 
33

Other
 
2

 
2

 
4

 
5

Total other revenues
 
34

 
15

 
84

 
38

Total revenues
 
$
1,412

 
$
1,402

 
$
4,321

 
$
4,137

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes:
 
 

 
 

 
 

 
 

Insurance underwriting results
 
 

 
 

 
 

 
 

Commercial lines insurance
 
$
39

 
$
72

 
$
61

 
$
148

Personal lines insurance
 
(9
)
 
(8
)
 
(48
)
 

Excess and surplus lines insurance
 
13

 
20

 
50

 
42

Life insurance
 
(4
)
 
(4
)
 

 
(4
)
Investments
 
136

 
181

 
539

 
536

Other
 
(46
)
 
(8
)
 
(69
)
 
(38
)
Total income before income taxes
 
$
129

 
$
253

 
$
533

 
$
684

Identifiable assets:
 
September 30,
2017
 
December 31, 2016
Property casualty insurance
 
$
2,997

 
$
2,967

Life insurance
 
1,424

 
1,366

Investments
 
16,693

 
15,569

Other
 
478

 
484

Total
 
$
21,592

 
$
20,386

 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 30



Item 2.    Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion highlights significant factors influencing the condensed consolidated results of operations and financial position of Cincinnati Financial Corporation. It should be read in conjunction with the consolidated financial statements and related notes included in our 2016 Annual Report on Form 10-K. Unless otherwise noted, the industry data is prepared by A.M. Best Co., a leading insurance industry statistical, analytical and financial strength rating organization. Information from A.M. Best is presented on a statutory basis. When we provide our results on a comparable statutory basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP).
 
We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and dividends. Dollar amounts are rounded to millions; calculations of percent changes are based on dollar amounts rounded to the nearest million. Certain percentage changes are identified as not meaningful (nm).
 
SAFE HARBOR STATEMENT
This is our “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in our 2016 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 29.
 
Factors that could cause or contribute to such differences include, but are not limited to:
Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes
Increased frequency and/or severity of claims or development of claims that are unforeseen at the time of policy issuance
Inadequate estimates, assumptions or reliance on third-party data used for critical accounting estimates
Declines in overall stock market values negatively affecting the company’s equity portfolio and book value
Prolonged low interest rate environment or other factors that limit the company’s ability to generate growth in investment income or interest rate fluctuations that result in declining values of fixed-maturity investments, including declines in accounts in which we hold bank-owned life insurance contract assets
Domestic and global events resulting in capital market or credit market uncertainty, followed by prolonged periods of economic instability or recession, that lead to:
Significant or prolonged decline in the fair value of a particular security or group of securities and impairment of the asset(s)
Significant decline in investment income due to reduced or eliminated dividend payouts from a particular security or group of securities
Significant rise in losses from surety and director and officer policies written for financial institutions or other insured entities
Recession or other economic conditions resulting in lower demand for insurance products or increased payment delinquencies
Difficulties with technology or data security breaches, including cyberattacks, that could negatively affect our ability to conduct business and our relationships with agents, policyholders and others
Disruption of the insurance market caused by technology innovations such as driverless cars that could decrease consumer demand for insurance products
Delays, inadequate data developed internally or from third parties, or performance inadequacies from ongoing development and implementation of underwriting and pricing methods, including telematics and other usage-based insurance methods, or technology projects and enhancements expected to increase our pricing accuracy, underwriting profit and competitiveness
Increased competition that could result in a significant reduction in the company’s premium volume
Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could alter our competitive advantages

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 31



Inability to obtain adequate ceded reinsurance on acceptable terms, amount of reinsurance coverage purchased, financial strength of reinsurers and the potential for nonpayment or delay in payment by reinsurers
Inability to defer policy acquisition costs for any business segment if pricing and loss trends would lead management to conclude that segment could not achieve sustainable profitability
Inability of our subsidiaries to pay dividends consistent with current or past levels
Events or conditions that could weaken or harm the company’s relationships with its independent agencies and hamper opportunities to add new agencies, resulting in limitations on the company’s opportunities for growth, such as:
Downgrades of the company’s financial strength ratings
Concerns that doing business with the company is too difficult
Perceptions that the company’s level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace
Inability or unwillingness to nimbly develop and introduce coverage product updates and innovations that our competitors offer and consumers expect to find in the marketplace
Actions of insurance departments, state attorneys general or other regulatory agencies, including a change to a federal system of regulation from a state-based system, that:
Impose new obligations on us that increase our expenses or change the assumptions underlying our critical accounting estimates
Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations
Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business
Add assessments for guaranty funds, other insurance‑related assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes
Increase our provision for federal income taxes due to changes in tax law
Increase our other expenses
Limit our ability to set fair, adequate and reasonable rates
Place us at a disadvantage in the marketplace
Restrict our ability to execute our business model, including the way we compensate agents
Adverse outcomes from litigation or administrative proceedings
Events or actions, including unauthorized intentional circumvention of controls, that reduce the company’s future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002
Unforeseen departure of certain executive officers or other key employees due to retirement, health or other causes that could interrupt progress toward important strategic goals or diminish the effectiveness of certain longstanding relationships with insurance agents and others
Events, such as an epidemic, natural catastrophe or terrorism, that could hamper our ability to assemble our workforce at our headquarters location
Further, the company’s insurance businesses are subject to the effects of changing social, global, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock, such as measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.



Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 32



CORPORATE FINANCIAL HIGHLIGHTS
 
Net Income and Comprehensive Income Data
(Dollars in millions except per share data)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Earned premiums
 
$
1,247

 
$
1,191

 
5

 
$
3,696

 
$
3,518

 
5

Investment income, net of expenses (pretax)
 
153

 
148

 
3

 
453

 
442

 
2

Realized investment gains and losses, net
  (pretax)
 
7

 
56

 
nm

 
156

 
161

 
(3
)
Total revenues
 
1,412

 
1,402

 
1

 
4,321

 
4,137

 
4

Net income
 
102

 
180

 
(43
)
 
403

 
491

 
(18
)
Comprehensive income
 
224

 
218

 
3

 
757

 
899

 
(16
)
Net income per share—diluted
 
0.61

 
1.08

 
(44
)
 
2.42

 
2.95

 
(18
)
Cash dividends declared per share
 
0.50

 
0.48

 
4

 
1.50

 
1.44

 
4

Diluted weighted average shares outstanding
 
165.9

 
166.8

 
(1
)
 
166.1

 
166.5

 
0

 
 
 
 
 
 
 
 
 
 
 
 
 

Total revenues increased for the third quarter of 2017, compared with the same period of 2016, as higher earned premiums offset a reduction in realized investment gains. For the first nine months of 2017, compared with the same period a year ago, total revenues also rose, primarily due to higher earned premiums. Premium and investment revenue trends are discussed further in the respective sections of Financial Results.
 
Realized investment gains and losses are recognized on the sales of investments or as otherwise required by GAAP. We have substantial discretion in the timing of investment sales, and that timing generally is independent of the insurance underwriting process. GAAP also requires us to recognize in net income the gains or losses from certain changes in fair values of securities even though we continue to hold the securities.
 
Net income for third-quarter of 2017, compared with third-quarter 2016, decreased $78 million primarily due to a $51 million reduction in after-tax property casualty underwriting income and a $32 million decrease in after-tax net realized investment gains and losses. Catastrophe losses, mostly weather related, were $34 million more after taxes and unfavorably affected both net income and property casualty underwriting income. Third-quarter 2017 after-tax investment income in our investments segment results rose $5 million. Life insurance segment results on a pretax basis for the third quarter of 2017 were flat compared with the third quarter of 2016.

For the nine months ended September 30, 2017, net income decreased $88 million compared with the first nine months of 2016, reflecting a $101 million decrease in after-tax property casualty underwriting income and a decrease of $4 million in after-tax net realized investment gains. The property casualty underwriting income decrease included an unfavorable $48 million after-tax effect from higher catastrophe losses. After-tax investment income in our investments segment results for the first nine months of 2017 rose $10 million compared with the same period of 2016. Life insurance segment results on a pretax basis improved by $4 million.

Performance by segment is discussed below in Financial Results. As discussed in our 2016 Annual Report on Form 10-K, Item 7, Factors Influencing Our Future Performance, Page 47, there are several reasons that our performance during 2017 may be below our long-term targets. In that annual report, as part of Financial Results, we also discussed the full-year 2017 outlook for each reporting segment.
 
The board of directors is committed to rewarding shareholders directly through cash dividends and through share repurchase authorizations. Through 2016, the company had increased the annual cash dividend rate for 56 consecutive years, a record we believe is matched by only seven other publicly traded companies. In January 2017, the board of directors increased the regular quarterly dividend to 50 cents per share, setting the stage for our 57 th consecutive year of increasing cash dividends. During the first nine months of 2017, cash dividends declared by the company increased slightly more than 4 percent compared with the same period of 2016. Our board regularly evaluates relevant factors in decisions related to dividends and share repurchases. The 2017 dividend increase reflected our strong earnings performance and signaled management’s and the board’s positive outlook and confidence in our outstanding capital, liquidity and financial flexibility.

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 33




Balance Sheet Data and Performance Measures
(In millions except share data)
 
At September 30,
 
At December 31,
 
 
2017
 
2016
Total investments
 
$
16,664

 
$
15,500

Total assets
 
21,592

 
20,386

Short-term debt
 
17

 
20

Long-term debt
 
787

 
787

Shareholders' equity
 
7,523

 
7,060

Book value per share
 
45.86

 
42.95

Debt-to-total-capital ratio
 
9.7
%
 
10.3
%
 
 
 
 
 

Total assets at September 30, 2017, increased 6 percent compared with year-end 2016, and included 8 percent growth in investments that reflected a combination of net purchases and higher fair values for many securities in our portfolio. Shareholders’ equity increased 7 percent, and book value per share also increased 7 percent during the first nine months of 2017. Our debt-to-total-capital ratio (capital is the sum of debt plus shareholders’ equity) was lower than at year-end 2016.

Our value creation ratio is a non-GAAP measure defined below and is our primary performance metric. That ratio was 10.3 percent for the first nine months of 2017, and was less than the same period in 2016 primarily due to less net income before net realized gains and less overall net gains from our investment portfolio. The $2.91 increase in book value per share during the first nine months of 2017 contributed 6.8 percentage points to the value creation ratio, while dividends declared at $1.50 per share contributed 3.5 points. Value creation ratio trends in total and by major components, along with a reconciliation of the non-GAAP measure to comparable GAAP measures, are shown in the tables below.
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Value creation ratio major components:
 
 

 
 

 
 

 
 

Net income before net realized gains
 
1.3
%
 
2.1
 %
 
4.3
 %
 
6.0
 %
Change in fixed-maturity securities, realized
  and unrealized gains
 
0.1

 
(0.1
)
 
1.2

 
2.9

Change in equity securities, realized and
  unrealized gains
 
1.6

 
1.2

 
5.2

 
5.2

Other
 
0.1

 
0.0

 
(0.4
)
 
(0.1
)
     Value creation ratio
 
3.1
%
 
3.2
 %
 
10.3
 %
 
14.0
 %
 
 
 
 
 
 
 
 
 


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 34



(Dollars are per share)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Book value change per share:
 
 
 
 
 
 
 
 
End of period book value
 
$
45.86

 
$
43.24

 
$
45.86

 
$
43.24

Less beginning of period book value
 
44.97

 
42.37

 
42.95

 
39.20

     Change in book value
 
$
0.89

 
$
0.87

 
$
2.91

 
$
4.04

 
 
 
 
 
 
 
 
 
Change in book value:
 
 

 
 

 
 

 
 

Net income before realized gains
 
$
0.59

 
$
0.87

 
$
1.84

 
$
2.34

Change in fixed-maturity securities, realized
  and unrealized gains
 
0.05

 
(0.04
)
 
0.53

 
1.14

Change in equity securities, realized and
  unrealized gains
 
0.72

 
0.51

 
2.23

 
2.02

Dividend declared to shareholders
 
(0.50
)
 
(0.48
)
 
(1.50
)
 
(1.44
)
Other
 
0.03

 
0.01

 
(0.19
)
 
(0.02
)
Change in book value
 
$
0.89

 
$
0.87

 
$
2.91

 
$
4.04

 
 
 
 
 
 
 
 
 
 
(Dollars are per share)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Value creation ratio:
 
 

 
 

 
 

 
 

End of period book value
 
$
45.86

 
$
43.24

 
$
45.86

 
$
43.24

Less beginning of period book value
 
44.97

 
42.37

 
42.95

 
39.20

Change in book value
 
0.89

 
0.87

 
2.91

 
4.04

Dividend declared to shareholders
 
0.50

 
0.48

 
1.50

 
1.44

Total value creation
 
$
1.39

 
$
1.35

 
$
4.41

 
$
5.48

 
 
 
 
 
 
 
 
 
Value creation ratio from change in book
  value*
 
2.0
%
 
2.1
%
 
6.8
%
 
10.3
%
Value creation ratio from dividends declared to
  shareholders**
 
1.1

 
1.1

 
3.5

 
3.7

Value creation ratio
 
3.1
%
 
3.2
%
 
10.3
%
 
14.0
%
 
 
 
 
 
 
 
 
 
*Change in book value divided by the beginning of period book value
 
 
 
 
**Dividend declared to shareholders divided by beginning of period book value
 
 
 
 


DRIVERS OF LONG-TERM VALUE CREATION
Operating through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on 2016 net written premiums for approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies as discussed in our 2016 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. At September 30, 2017, we actively marketed through agencies located in 42 states. We maintain a long-term perspective that guides us in addressing immediate challenges or opportunities while focusing on the major decisions that best position our company for success through all market cycles.

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 35




To measure our long-term progress in creating shareholder value, our value creation ratio is our primary financial performance target. As discussed in our 2016 Annual Report on Form 10-K, Item 7, Executive Summary, Page 43, management believes this non-GAAP measure is a meaningful indicator of our long-term progress in creating shareholder value, is a useful supplement to GAAP information and has three primary performance drivers:

Premium growth – We believe our agency relationships and initiatives can lead to a property casualty written premium growth rate over any five-year period that exceeds the industry average. For the first nine months of 2017, our consolidated property casualty net written premium year-over-year growth was 6 percent, comparing favorably with the industry’s 4.5 percent growth rate reported by A.M. Best for the first six months of 2017. For the five-year period 2012 through 2016, our growth rate was approximately double that of the industry.
Combined ratio – We believe our underwriting philosophy and initiatives can generate a GAAP combined ratio over any five-year period that is consistently within the range of 95 percent to 100 percent. For the first nine months of 2017, our GAAP combined ratio was 99.1 percent and our statutory combined ratio was 98.3 percent, both including 9.9 percentage points of current accident year catastrophe losses partially offset by 2.7 percentage points of favorable loss reserve development on prior accident years. Our nine-month statutory combined ratio was lower than the 100.9 percent reported for the industry by A.M. Best for the first six months of 2017.
Investment contribution – We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year return of the Standard & Poor’s 500 Index. For the first nine months of 2017, pretax investment income was $453 million, up 2 percent compared with the same period in 2016. We believe our investment portfolio mix provides an appropriate balance of income stability and growth with capital appreciation potential.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 36



Highlights of Our Strategy and Supporting Initiatives
Management has worked to identify a strategy that can lead to long-term success, with concurrence by the board of directors. Our strategy is intended to position us to compete successfully in the markets we have targeted while appropriately managing risk. Further description of our long-term, proven strategy can be found in our 2016 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. We believe successful implementation of initiatives that support our strategy will help us better serve our agent customers and reduce volatility in our financial results while we also grow earnings and book value over the long term, successfully navigating challenging economic, market or industry pricing cycles.

Manage insurance profitability – Implementation of these initiatives is intended to enhance underwriting expertise and knowledge, thereby increasing our ability to manage our business while also gaining efficiency. Better profit margins can arise from additional information and more focused action on underperforming product lines, plus pricing capabilities we are expanding through the use of technology and analytics. In addition to enhancing company efficiency, improving internal processes also supports the ability of the independent agencies that represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage agency expenses.
We continue to enhance our property casualty underwriting expertise and to effectively and efficiently underwrite individual policies and process transactions. Ongoing initiatives supporting this work include expanding our pricing and segmentation capabilities through experience and use of predictive analytics and additional data. Our segmentation efforts emphasize identification and retention of insurance policies we believe have relatively stronger pricing, while seeking more aggressive renewal terms and conditions on policies we believe have relatively weaker pricing. In 2017, we continue to improve underwriting and rate adequacy for our commercial auto and personal auto lines of business. Our commercial auto policies that renewed during the first nine months of 2017 experienced an estimated average price increase at percentages in the high-single-digit range, with the third quarter higher than the second quarter. Our personal auto policies that renewed during the first nine months of 2017 averaged an estimated price increase at percentages near the low end of the high-single-digit range.
Drive premium growth – Implementation of these initiatives is intended to further penetrate each market we serve through our independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Premium growth initiatives also include expansion of Cincinnati Re SM – our reinsurance assumed operation. Diversified growth also may reduce variability of losses from weather-related catastrophes.
We continue to appoint new agencies to develop additional points of distribution. In 2017, we are planning approximately 100 appointments of independent agencies that offer most or all of our property casualty insurance products. During the first nine months of 2017, we appointed 86 new agencies that meet that criteria.
We also plan to appoint additional agencies that focus on high net worth personal lines clients. In 2017, we are targeting the appointment of approximately 100 agencies that market only personal lines products for us. During the first nine months of 2017, we appointed 92 new agencies that meet that criteria.
As of September 30, 2017, a total of 1,704 agency relationships market our property casualty insurance products from 2,237 reporting locations.
We also continue to grow premiums through the disciplined expansion of Cincinnati Re. During the first nine months of 2017, Cincinnati Re contributed $48 million of growth in consolidated property casualty insurance net written premiums.
 
Financial Strength
An important part of our long-term strategy is financial strength, which is described in our 2016 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Financial Strength, Page 7. One aspect of our financial strength is prudent use of reinsurance ceded to help manage financial performance variability due to catastrophe loss experience. A description of how we use reinsurance ceded is included in our 2016 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, 2017 Reinsurance Ceded Programs, Page 101. Another aspect of our financial strength is our investment portfolio, which remains well-diversified as discussed in this quarterly report in Item 3, Quantitative and Qualitative Disclosures About Market Risk. Our strong parent-company liquidity and financial strength increase our flexibility to maintain a cash dividend through all periods and to continue to invest in and expand our insurance operations.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 37



At September 30, 2017, we held $2.515 billion of our cash and invested assets at the parent-company level, of which $2.202 billion, or 87.6 percent, was invested in common stocks, and $234 million, or 9.3 percent, was cash or cash equivalents. Our debt-to-total-capital ratio of 9.7 percent remains well below our target limit. Another important indicator of financial strength is our ratio of property casualty net written premiums to statutory surplus, which was 1.0-to-1 for the 12 months ended September 30, 2017, matching year-end 2016.

Financial strength ratings assigned to us by independent rating firms also are important. In addition to rating our parent company’s senior debt, four firms award insurer financial strength ratings to one or more of our insurance subsidiary companies based on their quantitative and qualitative analyses. These ratings primarily assess an insurer’s ability to meet financial obligations to policyholders and do not necessarily address all of the matters that may be important to investors. Ratings are under continuous review and subject to change or withdrawal at any time by the rating agency. Each rating should be evaluated independently of any other rating; please see each rating agency's website for its most recent report on our ratings.

At October 25, 2017, our insurance subsidiaries continued to be highly rated.
Insurer Financial Strength Ratings
Rating
agency
Standard market property casualty insurance subsidiaries
Life insurance
 subsidiary
Excess and surplus lines insurance subsidiary
Outlook
 
 
 
Rating
tier
 
 
Rating
tier
 
 
Rating
tier
 
A.M. Best Co.
  ambest.com
A+
Superior
2 of 16
A
Excellent
3 of 16
A+
Superior
2 of 16
Stable
Fitch Ratings
  fitchratings.com
A+
Strong
5 of 21
A+
Strong
5 of 21
-
-
-
Stable
Moody's Investors  Service
  moodys.com
A1
Good
5 of 21
-
-
-
-
-
-
Stable
S&P Global  Ratings
  spratings.com
A+
Strong
5 of 21
A+
Strong
5 of 21
-
-
-
Stable
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 38



CONSOLIDATED PROPERTY CASUALTY INSURANCE HIGHLIGHTS
Consolidated property casualty insurance results include premiums and expenses for our standard market insurance segments (commercial lines and personal lines), our excess and surplus lines segment and our reinsurance assumed operations.
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Earned premiums
 
$
1,191

 
$
1,133

 
5

 
$
3,523

 
$
3,343

 
5

Fee revenues
 
2

 
3

 
(33
)
 
8

 
7

 
14

Total revenues
 
1,193

 
1,136

 
5

 
3,531

 
3,350

 
5

Loss and loss expenses from:
 
 

 
 

 
 

 
 

 
 

 
 

Current accident year before catastrophe losses
 
721

 
676

 
7

 
2,144

 
2,001

 
7

Current accident year catastrophe losses
 
114

 
54

 
111

 
349

 
260

 
34

Prior accident years before catastrophe losses
 
(14
)
 
(42
)
 
67

 
(76
)
 
(146
)
 
48

Prior accident years catastrophe losses
 
(6
)
 
2

 
nm

 
(20
)
 
(5
)
 
(300
)
Loss and loss expenses
 
815

 
690

 
18

 
2,397

 
2,110

 
14

Underwriting expenses
 
367

 
356

 
3

 
1,094

 
1,044

 
5

Underwriting profit
 
$
11

 
$
90

 
(88
)
 
$
40

 
$
196

 
(80
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 

 
 

 
Pt. Change

 
 

 
 

 
Pt. Change

    Current accident year before catastrophe losses
 
60.4
 %
 
59.8
 %
 
0.6

 
60.8
 %
 
59.9
 %
 
0.9

    Current accident year catastrophe losses
 
9.6

 
4.7

 
4.9

 
9.9

 
7.8

 
2.1

    Prior accident years before catastrophe losses
 
(1.1
)
 
(3.7
)
 
2.6

 
(2.1
)
 
(4.4
)
 
2.3

    Prior accident years catastrophe losses
 
(0.5
)
 
0.2

 
(0.7
)
 
(0.6
)
 
(0.2
)
 
(0.4
)
Loss and loss expenses
 
68.4

 
61.0

 
7.4

 
68.0

 
63.1

 
4.9

Underwriting expenses
 
30.9

 
31.4

 
(0.5
)
 
31.1

 
31.3

 
(0.2
)
Combined ratio
 
99.3
 %
 
92.4
 %
 
6.9

 
99.1
 %
 
94.4
 %
 
4.7

 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
99.3
 %
 
92.4
 %
 
6.9

 
99.1
 %
 
94.4
 %
 
4.7

Contribution from catastrophe losses and prior
  years reserve development
 
8.0

 
1.2

 
6.8

 
7.2

 
3.2

 
4.0

Combined ratio before catastrophe losses and
  prior years reserve development
 
91.3
 %
 
91.2
 %
 
0.1

 
91.9
 %
 
91.2
 %
 
0.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our consolidated property casualty insurance operations generated an underwriting profit of $11 million and $40 million for the three and nine months ended September 30, 2017. The three-month decrease of $79 million, compared with the same period of 2016, was largely due to an increase of $52 million in losses from natural catastrophes that were mostly weather related. The nine-month decrease of $156 million, compared with the first nine months of 2016, included an increase of $74 million in losses from natural catastrophes. Both 2017 periods also experienced lower amounts of favorable reserve development on prior accident years. We believe future property casualty underwriting results will continue to benefit from price increases and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices.
For all property casualty lines of business in aggregate, net loss and loss expense reserves at September 30, 2017, were $284 million higher than at year-end 2016, including $123 million for the incurred but not reported (IBNR) portion. The $284 million reserve increase raised year-end 2016 net loss and loss expense reserves by 6 percent.

We measure and analyze property casualty underwriting results primarily by the combined ratio and its component ratios. The GAAP-basis combined ratio is the percentage of incurred losses plus all expenses per each earned premium dollar – the lower the ratio, the better the performance. An underwriting profit results when the combined ratio is below 100 percent. A combined ratio above 100 percent indicates that an insurance company’s losses and expenses exceeded premiums.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 39



Our consolidated property casualty combined ratio for the third quarter of 2017 rose 6.9 percentage points, compared with the same period of 2016, including 4.2 points from higher catastrophe losses and loss expenses. For the first nine months of 2017, compared with the same period of 2016, our consolidated property casualty combined ratio rose 4.7 percentage points, including 1.7 points from higher catastrophe losses and loss expenses.
 
The combined ratio can be affected significantly by natural catastrophe losses and other large losses as discussed in detail below. The combined ratio can also be affected by updated estimates of loss and loss expense reserves established for claims that occurred in prior periods, referred to as prior accident years. Net favorable development on prior accident year reserves, including reserves for catastrophe losses, benefited the combined ratio by 2.7 percentage points in the first nine months of 2017, compared with 4.6 percentage points in the same period of 2016. Net favorable development is discussed in further detail in Financial Results by property casualty insurance segment.
 
The ratio for current accident year loss and loss expenses before catastrophe losses rose in the first nine months of 2017. That 60.8 percent ratio increased 0.9 percentage points compared with the 59.9 percent accident year 2016 ratio measured as of September 30, 2016, including an increase of 0.7 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
 
The underwriting expense ratio for the third quarter and first nine months of 2017 decreased, compared with the same periods of 2016. Strategic investments that include enhancement of underwriting expertise were offset by the favorable effects of higher earned premiums and ongoing expense management efforts.

Consolidated Property Casualty Insurance Premiums
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,

 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Agency renewal written premiums
 
$
1,064

 
$
1,036

 
3

 
$
3,211

 
$
3,121

 
3

Agency new business written premiums
 
157

 
149

 
5

 
475

 
417

 
14

Cincinnati Re net written premiums
 
24

 
21

 
14

 
104

 
56

 
86

Other written premiums
 
(37
)
 
(31
)
 
(19
)
 
(80
)
 
(78
)
 
(3
)
Net written premiums
 
1,208

 
1,175

 
3

 
3,710

 
3,516

 
6

Unearned premium change
 
(17
)
 
(42
)
 
60

 
(187
)
 
(173
)
 
(8
)
Earned premiums
 
$
1,191

 
$
1,133

 
5

 
$
3,523

 
$
3,343

 
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
The trends in net written premiums and earned premiums summarized in the table above include the effects of price increases. Price change trends that heavily influence renewal written premium increases or decreases, along with other premium growth drivers for 2017, are discussed in more detail by segment below in Financial Results.
 
Consolidated property casualty net written premiums for the three and nine months ended September 30, 2017, grew $33 million and $194 million compared with the same periods of 2016. Each of our property casualty segments continued to grow during the third quarter and first nine months of 2017. Our premium growth initiatives from prior years have provided an ongoing favorable effect on growth during the current year, particularly as newer agency relationships mature over time.

Consolidated property casualty agency new business written premiums rose $8 million and $58 million for the third quarter and first nine months of 2017, compared with the same periods of 2016. New business written premiums in the first nine months of 2017 were higher than the same period of 2016 for each of our property casualty insurance segments. New agency appointments during 2016 and 2017 produced a $44 million increase in standard lines new business for the first nine months of 2017 compared with the same period of 2016. As we appoint new agencies that choose to move accounts to us, we report these accounts as new business. While this business is new to us, in many cases it is not new to the agent. We believe these seasoned accounts tend to be priced more accurately than business that may be less familiar to our agent upon obtaining it from a competing agent.

Net written premiums for Cincinnati Re increased $3 million and $48 million for the third quarter and first nine months of 2017, compared with the same periods of 2016. Cincinnati Re assumes risks through reinsurance treaties and in some cases cedes part of the risk and related premiums to one or more unaffiliated reinsurance

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 40



companies through transactions known as retrocessions. For the first nine months of 2017, earned premiums for Cincinnati Re totaled $80 million, compared with $33 million earned in the same period a year ago.
 
Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. Those ceded premium totals for the third quarter and first nine months of 2017 were substantially similar to the same periods of 2016.
 
Catastrophe losses and loss expenses typically have a material effect on property casualty results and can vary significantly from period to period. Losses from natural catastrophes contributed 9.1 and 9.3 percentage points to the combined ratio in the third quarter and first nine months of 2017, respectively, compared with 4.9 and 7.6 percentage points in the same periods of 2016. Some of those losses were applicable to annual loss deductible provisions of our collateralized reinsurance funded through catastrophe bonds. For our collateralized reinsurance arrangement that became effective in January 2017, we can recover catastrophe bond funds if aggregate losses, after the $8 million per occurrence deductible, exceed $190 million during an annual coverage period. Aggregate losses from 10 events between January 23 and September 30, 2017, which occurred within the specific geographic locations included in the severe convective storm portion of our coverage, totaled $135 million, after our per occurrence deductible. The following table shows consolidated property casualty insurance catastrophe losses and loss expenses incurred, net of reinsurance, as well as the effect of loss development on prior period catastrophe events. We individually list declared catastrophe events for which our incurred losses reached or exceeded $10 million.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 41



Consolidated Property Casualty Insurance Catastrophe Losses and Loss Expenses Incurred
(Dollars in millions, net of reinsurance)
Three months ended September 30,
 
Nine months ended September 30,
 
 
Comm.
 
Pers.
 
E&S
 
Cin.
 
 

 
Comm.
 
Pers.
 
E&S
 
Cin.
 
 

Dates
Region
lines
 
lines
 
lines
 
Re
 
Total
 
lines
 
lines
 
lines
 
Re
 
Total
2017
 
 


 


 


 
 
 


 
 
 
 
 
 
 
 
 
Feb. 28-
Mar. 1
Midwest, South
$
(2
)
 
$
1

 
$

 
$

 
$
(1
)

$
19

 
$
23

 
$
1

 
$

 
$
43

Mar. 6-9
Midwest, Northeast, South

 

 

 

 


25

 
11

 

 

 
36

Mar. 21-22
South
(3
)
 
1

 

 

 
(2
)

19

 
10

 

 

 
29

Apr. 4-6
Midwest, South
1

 
2

 

 

 
3


8

 
14

 

 

 
22

Apr. 28-
May 1
Midwest, Northeast, South
1

 

 

 

 
1


5

 
5

 

 

 
10

May 8-11
Midwest, South, West

 

 

 

 


14

 

 

 

 
14

May 15-18
Midwest, Northeast, South

 
2

 

 

 
2

 
3

 
9

 

 

 
12

Jun. 11
Midwest

 
2

 

 

 
2


4

 
14

 

 

 
18

Jun. 16-19
Midwest, Northeast, South

 
1

 

 

 
1

 
7

 
4

 

 

 
11

Jun. 27-29
Midwest
16

 

 

 
 
 
16

 
18

 
1

 

 

 
19

Aug. 25-
Sep. 1
South
4

 
3

 

 
12

 
19


4

 
3

 

 
12

 
19

Sep. 6-12
International, South
14

 
21

 
1

 
25

 
61


14

 
21

 
1

 
25

 
61

All other 2017 catastrophes
2

 
4

 

 
6

 
12


31

 
18

 

 
6

 
55

Development on 2016 and prior
catastrophes
(4
)
 
(2
)
 

 

 
(6
)

(15
)
 
(4
)
 

 
(1
)
 
(20
)
Calendar year incurred total
$
29

 
$
35

 
$
1

 
$
43

 
$
108


$
156

 
$
129

 
$
2

 
$
42

 
$
329


 






 
 


 
 
 
 
 
 
 
 
 
2016
 
 

 

 

 
 
 

 
 
 
 
 
 
 
 
 
Apr. 2-3
Midwest, Northeast, South
$


$


$


$

 
$


$
6

 
$
6

 
$

 
$

 
$
12

Apr. 10-15
South







 


55

 

 
1

 

 
56

Apr. 25-28
Midwest, South







 


8

 
4

 

 

 
12

Apr. 29-
May 3
Midwest, South
1


1





 
2


19

 
8

 

 

 
27

May 7-10
Midwest, South, West
3


5





 
8


17

 
11

 

 

 
28

May 11-12
Midwest, South
(1
)

1





 


10

 
2

 

 

 
12

May 21-28
Midwest, South, West
1







 
1


12

 
3

 

 

 
15

Jul. 28-29
West
11







 
11


11

 

 

 

 
11

Sep. 19-23
Midwest
1


10





 
11


1

 
10

 

 

 
11

All other 2016 catastrophes
11


10





 
21


47

 
28

 
1

 

 
76

Development on 2015 and prior
catastrophes
4


(2
)




 
2


(2
)
 
(3
)
 

 

 
(5
)
Calendar year incurred total
$
31


$
25


$


$

 
$
56


$
184

 
$
69

 
$
2

 
$

 
$
255

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 42



The following table includes data for losses incurred of $1 million or more per claim, net of reinsurance.
 
Consolidated Property Casualty Insurance Losses Incurred by Size
(Dollars in millions, net of reinsurance)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Current accident year losses greater than $5
  million
 
$
6

 
$
10

 
(40
)
 
$
34

 
$
33

 
3

Current accident year losses $1 million - $5
  million
 
75

 
46

 
63

 
152

 
122

 
25

Large loss prior accident year reserve
  development
 
4

 
1

 
300

 
42

 
4

 
nm

Total large losses incurred
 
85

 
57

 
49

 
228

 
159

 
43

Losses incurred but not reported
 
(9
)
 
(7
)
 
29

 
(6
)
 
100

 
nm

Other losses excluding catastrophe losses
 
499

 
467

 
7

 
1,453

 
1,269

 
14

Catastrophe losses
 
104

 
53

 
96

 
319

 
249

 
28

Total losses incurred
 
$
679

 
$
570

 
19

 
$
1,994

 
$
1,777

 
12

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year losses greater than $5
  million
 
0.5
 %
 
0.9
 %
 
(0.4
)
 
1.0
 %
 
1.0
%
 
0.0

Current accident year losses $1 million - $5
  million
 
6.4

 
4.1

 
2.3

 
4.3

 
3.6

 
0.7

Large loss prior accident year reserve
  development
 
0.3

 
0.2

 
0.1

 
1.2

 
0.1

 
1.1

Total large loss ratio
 
7.2

 
5.2

 
2.0

 
6.5

 
4.7

 
1.8

Losses incurred but not reported
 
(0.7
)
 
(0.7
)
 
0.0

 
(0.2
)
 
3.0

 
(3.2
)
Other losses excluding catastrophe losses
 
41.7

 
41.3

 
0.4

 
41.2

 
38.1

 
3.1

Catastrophe losses
 
8.8

 
4.7

 
4.1

 
9.1

 
7.4

 
1.7

Total loss ratio
 
57.0
 %
 
50.5
 %
 
6.5

 
56.6
 %
 
53.2
%
 
3.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
We believe the inherent variability of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the variability in addition to general inflationary trends in loss costs. Our analysis continues to indicate no unexpected concentration of large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The third-quarter 2017 property casualty total large losses incurred of $85 million, net of reinsurance, were higher than the $51 million quarterly average during full-year 2016 and higher than the $57 million experienced for the third quarter of 2016. The ratio for these large losses was 2.0 percentage points higher compared with last year’s third quarter. The third-quarter 2017 amount of total large losses incurred helped contribute to the increase in the nine-month 2017 total large loss ratio, compared with 2016, in addition to a first-half 2017 ratio that was 1.5 points higher than the first half of 2016. We believe results for the three-month and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million. Losses by size are discussed in further detail in results of operations by property casualty insurance segment.
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 43



FINANCIAL RESULTS
Consolidated results reflect the operating results of each of our five segments along with the parent company, Cincinnati Re and other activities reported as “Other.” The five segments are:
Commercial lines property casualty insurance
Personal lines property casualty insurance
Excess and surplus lines property casualty insurance
Life insurance
Investments


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 44



COMMERCIAL LINES INSURANCE RESULTS
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,

 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Earned premiums
 
$
792

 
$
779

 
2

 
$
2,369

 
$
2,310

 
3

Fee revenues
 
1

 
1

 
0

 
3

 
3

 
0

Total revenues
 
793

 
780

 
2

 
2,372

 
2,313

 
3

Loss and loss expenses from:
 
 

 
 

 
 

 
 

 
 

 
 

Current accident year before catastrophe losses
 
486

 
460

 
6

 
1,439

 
1,357

 
6

Current accident year catastrophe losses
 
33

 
27

 
22

 
171

 
186

 
(8
)
Prior accident years before catastrophe losses
 
(14
)
 
(35
)
 
60

 
(40
)
 
(116
)
 
66

Prior accident years catastrophe losses
 
(4
)
 
4

 
nm

 
(15
)
 
(2
)
 
(650
)
Loss and loss expenses
 
501

 
456

 
10

 
1,555

 
1,425

 
9

Underwriting expenses
 
253

 
252

 
0

 
756

 
740

 
2

Underwriting profit
 
$
39

 
$
72

 
(46
)
 
$
61

 
$
148

 
(59
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year before catastrophe losses
 
61.3
 %
 
59.1
 %
 
2.2

 
60.7
 %
 
58.7
 %
 
2.0

Current accident year catastrophe losses
 
4.3

 
3.5

 
0.8

 
7.2

 
8.1

 
(0.9
)
Prior accident years before catastrophe losses
 
(1.8
)
 
(4.5
)
 
2.7

 
(1.6
)
 
(5.0
)
 
3.4

Prior accident years catastrophe losses
 
(0.5
)
 
0.4

 
(0.9
)
 
(0.6
)
 
(0.1
)
 
(0.5
)
Loss and loss expenses
 
63.3

 
58.5

 
4.8

 
65.7

 
61.7

 
4.0

Underwriting expenses
 
31.9

 
32.3

 
(0.4
)
 
31.9

 
32.0

 
(0.1
)
Combined ratio
 
95.2
 %
 
90.8
 %
 
4.4

 
97.6
 %
 
93.7
 %
 
3.9

 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
95.2
 %
 
90.8
 %
 
4.4

 
97.6
 %
 
93.7
 %
 
3.9

Contribution from catastrophe losses and prior
  years reserve development
 
2.0

 
(0.6
)
 
2.6

 
5.0

 
3.0

 
2.0

Combined ratio before catastrophe losses and
  prior years reserve development
 
93.2
 %
 
91.4
 %
 
1.8

 
92.6
 %
 
90.7
 %
 
1.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Overview
Performance highlights for the commercial lines segment include:
Premiums – Earned premiums and net written premiums for the commercial lines segment grew during the third quarter and first nine months of 2017, in part due to renewal premium growth that continued to reflect price increases and a higher level of insured exposures. Higher new business written premiums also contributed to the increase in net written premiums for the nine months ended September 30, 2017. The table below analyzes the primary components of premiums. We continue using predictive analytics tools to improve pricing precision and segmentation while also leveraging our local relationships with agents through the efforts of our teams that work closely with them. We seek to maintain appropriate pricing discipline for both new and renewal business as our agents and underwriters assess account quality to make careful decisions on a case-by-case basis whether to write or renew a policy.
Agency renewal written premiums grew 1 percent during third-quarter 2017 and 2 percent during the nine months ended September 30, 2017, compared with the same periods of 2016. The growth reflected price increases and improving economic conditions. During the third quarter of 2017, our overall standard commercial lines policies continued to average estimated renewal price increases at percentages in the low-single-digit range, similar to the second quarter of 2017. We continue to segment commercial lines policies, emphasizing identification and retention of policies we believe have relatively stronger pricing. Conversely, we have been seeking stricter renewal terms and conditions on policies we believe have relatively weaker pricing, in turn retaining fewer of those policies. We measure average changes in commercial lines renewal pricing as the percentage rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for the respective policies.

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 45



Our average overall commercial lines renewal pricing change includes the impact of flat pricing for certain coverages within package policies written for a three-year term that were in force but did not expire during the period being measured. Therefore, the change in average commercial lines renewal pricing we report reflects a blend of three-year policies that did not expire and other policies that did expire during the measurement period. For commercial lines policies that did expire and were then renewed during the third quarter of 2017, we estimate that our average percentage price increase for commercial auto continued in the high-single-digit range, higher in that range than second-quarter 2017. The estimated average percentage price change for our commercial property line of business was an increase in the mid-single-digit range and for commercial casualty it was an increase near the low end of the low-single-digit range. The estimated average percentage price change for workers’ compensation was a decrease in the mid-single-digit range.
Renewal premiums for our commercial casualty and workers’ compensation lines include the results of policy audits that adjust initial premium amounts based on differences between estimated and actual sales or payroll related to a specific policy. Audits completed during the first nine months of 2017 contributed $54 million to net written premiums.
New business written premiums for commercial lines decreased $2 million during the third quarter of 2017 and increased $20 million during the first nine months of 2017, compared with the same periods of 2016. The third-quarter total reflected a modest decrease for each major line of business in our commercial lines insurance segment except commercial property. The nine-month increase reflected growth for each major line of business except workers' compensation, which decreased by approximately $1 million. Trend analysis for year-over-year comparisons of individual quarters are more difficult to assess for commercial lines new business written premiums, due to inherent variability. That variability is often driven by larger policies with annual premiums greater than $100,000.
Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. For our commercial lines insurance segment, ceded premium totals for the third quarter and first nine months of 2017 were similar to the same periods of 2016.

Commercial Lines Insurance Premiums
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Agency renewal written premiums
 
$
707

 
$
698

 
1

 
$
2,208

 
$
2,174

 
2
Agency new business written premiums
 
99

 
101

 
(2
)
 
301

 
281

 
7
Other written premiums
 
(28
)
 
(22
)
 
(27
)
 
(53
)
 
(54
)
 
2
Net written premiums
 
778

 
777

 
0

 
2,456

 
2,401

 
2
Unearned premium change
 
14

 
2

 
nm

 
(87
)
 
(91
)
 
4
Earned premiums
 
$
792

 
$
779

 
2

 
$
2,369

 
$
2,310

 
3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio – The commercial lines combined ratio rose 4.4 percentage points for the third quarter and 3.9 points for the first nine months of 2017, compared with the same periods a year ago, largely due to lower amounts of favorable reserve development on prior accident years, discussed below. In addition, the current accident year loss and loss expenses ratio increased for our commercial casualty line of business, which represents approximately one-third of premiums for our commercial lines insurance segment. Commercial casualty paid losses and loss expenses for the third quarter of 2017 were higher than any quarter since the beginning of 2015, in part due to an increase in large losses discussed below. Although the ratio for our commercial casualty case incurred losses was approximately 2 percentage points better than the first half of 2017, it remained approximately 4 points worse than the average for the prior two years. After considering these trends, we maintained our consistently prudent approach to setting reserves with IBNR reserves that resulted in no favorable development on third-quarter 2017 commercial casualty prior accident year reserves and a nine-month commercial casualty current accident year loss and loss expenses ratio approximately 2 percentage points higher than full-year 2016.
The commercial lines ratio for current accident year loss and loss expenses before catastrophe losses rose in the first nine months of 2017. That 60.7 percent ratio increased 2.0 percentage points compared with the 58.7 percent accident year 2016 ratio measured as of September 30, 2016, including an increase of 0.5 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 46



Catastrophe losses and loss expenses accounted for 3.8 and 6.6 percentage points of the combined ratio for the third quarter and first nine months of 2017, compared with 3.9 and 8.0 percentage points for the same periods a year ago. The 10-year annual average for that catastrophe measure through 2016 for the commercial lines segment was 4.8 percentage points, and the five-year annual average was 5.2 percentage points.
Commercial auto, representing 19 percent of 2016 earned premiums for our commercial lines insurance segment, was the only major line of business in that segment with a third-quarter 2017 total loss and loss expense ratio before catastrophe losses significantly higher than we desired. As discussed above, during the first nine months of 2017, our commercial auto policies experienced average renewal price increases at percentages in the high-single-digit range, with the third quarter higher than the second quarter. We believe pricing and risk selection actions we are taking will help improve future profitability. Further segmentation of policies as they renew should also help improve profitability, as we seek more adequate pricing on individual policies that need it based on analytics and underwriter judgment. As an example, for our 2016 commercial auto policies that we determined have relatively weaker pricing, representing approximately one-third of commercial auto renewal written premiums, we obtained 2016 percentage price increases that averaged in the high-single digits. We also continued to improve premium rate classification and the use of other rating variables in risk selection and pricing.
The net effect of reserve development on prior accident years during the third quarter and first nine months of 2017 was favorable for commercial lines overall by $18 million and $55 million compared with $31 million and $118 million for the same periods in 2016. For the first nine months of 2017, our workers’ compensation line of business was the largest contributor to the total commercial lines net favorable reserve development on prior accident years, followed by other commercial lines, which was largely attributable to director and officer liability insurance. Commercial property also contributed to the total commercial lines net favorable reserve development. Those contributions were partially offset by unfavorable reserve development for our commercial auto and commercial casualty lines of business. The unfavorable reserve development for commercial casualty reflected higher than usual large loss activity for the first and third quarters of 2017. The net favorable reserve development recognized during the first nine months of 2017 for our commercial lines insurance segment was largely for accident year 2016 and accident years prior to 2014, and was primarily due to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2016 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 48.
The commercial lines underwriting expense ratio for the third quarter and first nine months of 2017 decreased, compared with the same periods of 2016, as earned premiums increased at a faster pace than underwriting expenses.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 47



Commercial Lines Insurance Losses Incurred by Size
(Dollars in millions, net of reinsurance)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Current accident year losses greater than $5
  million
 
$
6

 
$
10

 
(40
)
 
$
34

 
$
33

 
3

Current accident year losses $1 million - $5
  million
 
56

 
34

 
65

 
115

 
103

 
12

Large loss prior accident year reserve
  development
 
1

 
5

 
(80
)
 
37

 
8

 
nm

Total large losses incurred
 
63

 
49

 
29

 
186

 
144

 
29

Losses incurred but not reported
 
1

 
4

 
(75
)
 
17

 
70

 
(76
)
Other losses excluding catastrophe losses
 
313

 
287

 
9

 
911

 
786

 
16

Catastrophe losses
 
27

 
28

 
(4
)
 
149

 
179

 
(17
)
Total losses incurred
 
$
404

 
$
368

 
10

 
$
1,263

 
$
1,179

 
7

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year losses greater than $5
  million
 
0.8
%
 
1.3
%
 
(0.5
)
 
1.5
%
 
1.4
%
 
0.1

Current accident year losses $1 million - $5
  million
 
7.2

 
4.4

 
2.8

 
4.8

 
4.4

 
0.4

Large loss prior accident year reserve
  development
 
0.1

 
0.8

 
(0.7
)
 
1.6

 
0.4

 
1.2

Total large loss ratio
 
8.1

 
6.5

 
1.6

 
7.9

 
6.2

 
1.7

Losses incurred but not reported
 

 
0.4

 
(0.4
)
 
0.7

 
3.0

 
(2.3
)
Other losses excluding catastrophe losses
 
39.6

 
36.7

 
2.9

 
38.4

 
34.1

 
4.3

Catastrophe losses
 
3.4

 
3.7

 
(0.3
)
 
6.3

 
7.8

 
(1.5
)
Total loss ratio
 
51.1
%
 
47.3
%
 
3.8

 
53.3
%
 
51.1
%
 
2.2

 
 
 
 
 
 
 
 
 
 
 
 
 

We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The third-quarter 2017 commercial lines total large losses incurred of $63 million, net of reinsurance, were higher than the quarterly average of $48 million during full-year 2016 and higher than the $49 million total large losses incurred for the third quarter of 2016. The rise in commercial lines large losses for the third-quarter and first nine months of 2017 was largely due to our commercial casualty and commercial property lines of business. The third-quarter 2017 ratio for commercial lines total large losses was 1.6 percentage points higher compared with last year’s third-quarter ratio. The third-quarter 2017 amount of total large losses incurred helped contribute to the increase in the nine-month 2017 total large loss ratio, compared with 2016, in addition to a first-half 2017 ratio that was 1.6 points higher than the first half of 2016. We believe results for the three- and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 48



PERSONAL LINES INSURANCE RESULTS
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Earned premiums
 
$
314

 
$
293

 
7

 
$
921

 
$
864

 
7

Fee revenues
 
1

 
1

 
0

 
4

 
3

 
33

Total revenues
 
315

 
294

 
7

 
925

 
867

 
7

Loss and loss expenses from:
 
 

 
 

 
 

 
 

 
 

 
 

Current accident year before catastrophe losses
 
196

 
186

 
5

 
586

 
546

 
7

Current accident year catastrophe losses
 
37

 
27

 
37

 
133

 
72

 
85

Prior accident years before catastrophe losses
 
2

 
6

 
(67
)
 
(9
)
 
(1
)
 
(800
)
Prior accident years catastrophe losses
 
(2
)
 
(2
)
 
0

 
(4
)
 
(3
)
 
(33
)
Loss and loss expenses
 
233

 
217

 
7

 
706

 
614

 
15

Underwriting expenses
 
91

 
85

 
7

 
267

 
253

 
6

Underwriting loss
 
$
(9
)
 
$
(8
)
 
13

 
$
(48
)
 
$

 
nm

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year before catastrophe losses
 
62.2
 %
 
63.7
 %
 
(1.5
)
 
63.6
 %
 
63.2
 %
 
0.4

Current accident year catastrophe losses
 
11.7

 
8.9

 
2.8

 
14.5

 
8.3

 
6.2

Prior accident years before catastrophe losses
 
0.7

 
2.1

 
(1.4
)
 
(1.0
)
 
(0.1
)
 
(0.9
)
Prior accident years catastrophe losses
 
(0.6
)
 
(0.5
)
 
(0.1
)
 
(0.5
)
 
(0.3
)
 
(0.2
)
Loss and loss expenses
 
74.0

 
74.2

 
(0.2
)
 
76.6

 
71.1

 
5.5

Underwriting expenses
 
29.1

 
29.2

 
(0.1
)
 
29.0

 
29.3

 
(0.3
)
Combined ratio
 
103.1
 %
 
103.4
 %
 
(0.3
)
 
105.6
 %
 
100.4
 %
 
5.2

 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
103.1
 %
 
103.4
 %
 
(0.3
)
 
105.6
 %
 
100.4
 %
 
5.2

Contribution from catastrophe losses and prior
  years reserve development
 
11.8

 
10.5

 
1.3

 
13.0

 
7.9

 
5.1

Combined ratio before catastrophe losses and
  prior years reserve development
 
91.3
 %
 
92.9
 %
 
(1.6
)
 
92.6
 %
 
92.5
 %
 
0.1

 
 
 
 
 
 
 
 
 
 
 
 
 

Overview
Performance highlights for the personal lines segment include:
Premiums – Personal lines earned premiums and net written premiums for the third quarter and first nine months of 2017 continued to grow, reflecting increases in renewal written premiums and new business written premiums from agencies that represent us. Price increases and a high level of policy retention were the main drivers of renewal premium growth. The table below analyzes the primary components of premiums.
Agency renewal written premiums increased 5 percent for both the third quarter and first nine months of 2017, largely reflecting rate increases. We estimate that premium rates for our personal auto line of business increased at average percentages near the low end of the high-single-digit range during the first nine months of 2017. For our homeowner line of business, we estimate that premium rates for the first nine months of 2017 increased at average percentages near the low end of the mid-single-digit range. For both our personal auto and homeowner lines of business, some individual policies experienced lower or higher rate changes based on each risk's specific characteristics and enhanced pricing precision enabled by predictive models.
Personal lines new business written premiums grew $11 million or 34 percent during the third quarter and $31 million or 34 percent during the first nine months of 2017, compared with the same periods of 2016. That growth included approximately $9 million for the third quarter, and $22 million for the first nine months of 2017, from high net worth clients of our agencies. Personal lines new business written premiums from our high net worth policies totaled approximately $16 million for the third quarter and $42 million for the first nine months of 2017. The primary factors driving growth in the middle market portion included recent-year expansion into new states and other additional marketing efforts directed toward agencies. Marketing efforts included assisting agencies with processing qualified policies expiring from other insurance companies, sometimes referred to as

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 49



“book rolls”. Similar to recent years, such processing has not materially contributed to 2017 increases or decreases in personal lines new business written premiums.
Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. For our personal lines insurance segment, ceded premium totals for the third quarter and first nine months of 2017 were similar to the same periods of 2016.
We continue to implement strategies discussed in our 2016 Annual Report on Form 10-K, Item 1, Strategic Initiatives, Page 13, to enhance our responsiveness to marketplace changes and to help achieve our long-term objectives for personal lines growth and profitability. These strategies include initiatives to more profitably underwrite personal auto policies.
 
Personal Lines Insurance Premiums
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Agency renewal written premiums
 
$
318

 
$
303

 
5

 
$
881

 
$
841

 
5

Agency new business written premiums
 
43

 
32

 
34

 
122

 
91

 
34

Other written premiums
 
(6
)
 
(6
)
 
0

 
(18
)
 
(17
)
 
(6
)
Net written premiums
 
355

 
329

 
8

 
985

 
915

 
8

Unearned premium change
 
(41
)
 
(36
)
 
(14
)
 
(64
)
 
(51
)
 
(25
)
Earned premiums
 
$
314

 
$
293

 
7

 
$
921

 
$
864

 
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio – Our personal lines combined ratio for the third quarter of 2017 decreased 0.3 percentage points, compared with the same period a year ago. For the first nine months of 2017, compared with the same period of 2016, it rose 5.2 percentage points, driven by an increase of 6.0 percentage points in the ratio for weather-related natural catastrophe losses and loss expenses.
The personal lines ratio for current accident year loss and loss expenses before catastrophe losses rose in the first nine months of 2017. That 63.6 percent ratio increased 0.4 percentage points compared with the 63.2 percent accident year 2016 ratio measured as of September 30, 2016, including an increase of 2.2 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
In addition to the average rate increases discussed above, we continue to refine our pricing to better match premiums to the risk of loss on individual policies. Improved pricing precision and broad-based rate increases are expected to help position the combined ratio at a profitable level over the long term. In addition, greater geographic diversification is expected to reduce the volatility of homeowner loss ratios attributable to weather-related catastrophe losses over time.
Personal auto, representing 47 percent of 2016 earned premiums for our personal lines insurance segment, was the only major line of business in that segment with a third-quarter 2017 total loss and loss expense ratio before catastrophe losses significantly higher than we desired. As discussed above, during the first nine months of 2017, our personal auto policies experienced average renewal price increases at percentages near the low end of the high-single-digit range. We believe rate increases and other actions to improve pricing precision and reduce loss costs will improve future profitability.
Catastrophe losses and loss expenses accounted for 11.1 and 14.0 percentage points of the combined ratio for the third quarter and first nine months of 2017, compared with 8.4 and 8.0 percentage points for the same periods of 2016. The 10-year annual average catastrophe loss ratio through 2016 for the personal lines segment was 10.7 percentage points, and the five-year annual average was 9.3 percentage points.
The net effect of reserve development on prior accident years during the third quarter of 2017 was unfavorable for personal lines overall by less than $1 million, compared with an unfavorable $4 million for the same period in 2016. For the first nine months of 2017, total personal lines net reserve development was favorable by $13 million, compared with a favorable $4 million for the same period in 2016. Our homeowner and other personal lines of business were the largest contributors to the nine-month 2017 total personal lines net favorable reserve development on prior accident years, followed by personal auto. The favorable reserve development was due primarily to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2016 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 48.

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 50



The underwriting expense ratio decreased slightly for the third quarter and first nine months of 2017, compared with the same periods of 2016, as earned premiums increased at a faster pace than underwriting expenses.
 
Personal Lines Insurance Losses Incurred by Size
(Dollars in millions, net of reinsurance)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Current accident year losses greater than $5
  million
 
$

 
$

 
nm

 
$

 
$

 
nm

Current accident year losses $1 million - $5
  million
 
19

 
10

 
90

 
37

 
16

 
131

Large loss prior accident year reserve
  development
 
3

 
(3
)
 
nm

 
4

 
(4
)
 
nm

Total large losses incurred
 
22

 
7

 
nm

 
41

 
12

 
242

Losses incurred but not reported
 
(17
)
 
(9
)
 
89

 
(19
)
 
25

 
nm

Other losses excluding catastrophe losses
 
164

 
168

 
(2
)
 
472

 
442

 
7

Catastrophe losses
 
34

 
25

 
36

 
127

 
68

 
87

Total losses incurred
 
$
203

 
$
191

 
6

 
$
621

 
$
547

 
14

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year losses greater than $5
  million
 
 %
 
 %
 
0.0

 
 %
 
 %
 
0.0

Current accident year losses $1 million - $5
  million
 
6.0

 
3.5

 
2.5

 
4.0

 
1.8

 
2.2

Large loss prior accident year reserve
  development
 
1.0

 
(1.1
)
 
2.1

 
0.4

 
(0.4
)
 
0.8

Total large loss ratio
 
7.0

 
2.4

 
4.6

 
4.4

 
1.4

 
3.0

Losses incurred but not reported
 
(5.3
)
 
(3.2
)
 
(2.1
)
 
(2.1
)
 
2.9

 
(5.0
)
Other losses excluding catastrophe losses
 
52.1

 
57.7

 
(5.6
)
 
51.3

 
51.2

 
0.1

Catastrophe losses
 
10.8

 
8.2

 
2.6

 
13.8

 
7.8

 
6.0

Total loss ratio
 
64.6
 %
 
65.1
 %
 
(0.5
)
 
67.4
 %
 
63.3
 %
 
4.1

 
 
 
 
 
 
 
 
 
 
 
 
 

We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the third quarter of 2017, the personal lines total large loss ratio, net of reinsurance, was 4.6 percentage points higher than last year’s third quarter. The rise in personal lines large losses for the third-quarter and first nine months of 2017 was largely due to our homeowner line of business. The third-quarter 2017 amount of total large losses incurred helped contribute to the increase in the nine-month 2017 total large loss ratio, compared with 2016, in addition to a first-half 2017 ratio that was 2.2 points higher than the first half of 2016. We believe results for the three-month and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 51



EXCESS AND SURPLUS LINES INSURANCE RESULTS
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Earned premiums
 
$
53

 
$
48

 
10

 
$
153

 
$
136

 
13

Fee revenues
 

 
1

 
nm

 
1

 
1

 
0

Total revenues
 
53

 
49

 
8

 
154

 
137

 
12

 
 
 
 
 
 
 
 
 
 
 
 
 
Loss and loss expenses from:
 
 

 
 

 
 

 
 

 
 

 
 

Current accident year before catastrophe losses
 
26

 
27

 
(4
)
 
81

 
80

 
1

Current accident year catastrophe losses
 
1

 

 
nm

 
2

 
2

 
0

Prior accident years before catastrophe losses
 
(3
)
 
(12
)
 
(75
)
 
(25
)
 
(27
)
 
7

Prior accident years catastrophe losses
 

 

 
0

 

 

 
0

Loss and loss expenses
 
24

 
15

 
60

 
58

 
55

 
5

Underwriting expenses
 
16

 
14

 
14

 
46

 
40

 
15

Underwriting profit
 
$
13

 
$
20

 
(35
)
 
$
50

 
$
42

 
19

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year before catastrophe losses
 
49.1
 %
 
57.2
 %
 
(8.1
)
 
52.8
 %
 
58.9
 %
 
(6.1
)
Current accident year catastrophe losses
 
1.7

 
0.2

 
1.5

 
1.3

 
1.3

 
0.0

Prior accident years before catastrophe losses
 
(4.7
)
 
(25.5
)
 
20.8

 
(15.9
)
 
(19.6
)
 
3.7

Prior accident years catastrophe losses
 
(0.3
)
 
0.0

 
(0.3
)
 
(0.1
)
 
(0.1
)
 
0.0

Loss and loss expenses
 
45.8

 
31.9

 
13.9

 
38.1

 
40.5

 
(2.4
)
Underwriting expenses
 
29.0

 
29.4

 
(0.4
)
 
29.9

 
29.4

 
0.5

Combined ratio
 
74.8
 %
 
61.3
 %
 
13.5

 
68.0
 %
 
69.9
 %
 
(1.9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
74.8
 %
 
61.3
 %
 
13.5

 
68.0
 %
 
69.9
 %
 
(1.9
)
Contribution from catastrophe losses and prior
  years reserve development
 
(3.3
)
 
(25.3
)
 
22.0

 
(14.7
)
 
(18.4
)
 
3.7

Combined ratio before catastrophe losses and
  prior years reserve development
 
78.1
 %
 
86.6
 %
 
(8.5
)
 
82.7
 %
 
88.3
 %
 
(5.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Overview
Performance highlights for the excess and surplus lines segment include:
Premiums – Excess and surplus lines net written premiums continued to grow, primarily due to increases in renewal written premiums, during the third quarter and first nine months of 2017.
Renewal written premiums rose 11 percent and 15 percent for the three and nine months ended September 30, 2017, compared with the same periods of 2016, reflecting the opportunity to renew many accounts for the first time, as well as higher renewal pricing. For the first nine months of 2017, excess and surplus lines policy renewals experienced estimated average price increases at percentages in the low-single-digit range. We measure average changes in excess and surplus lines renewal pricing as the percentage rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies.
New business written premiums produced by agencies increased 16 percent for the first nine months of 2017, compared with the same period of 2016, reflecting an increase in our marketing efforts as we continued to carefully underwrite each policy in a highly competitive market. Some of what we report as new business came from accounts that were not new to our agents. We believe our agents’ seasoned accounts tend to be priced more accurately than business that may be less familiar to them.
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 52



Excess and Surplus Lines Insurance Premiums
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Agency renewal written premiums
 
$
39

 
$
35

 
11

 
$
122

 
$
106

 
15

Agency new business written premiums
 
15

 
16

 
(6
)
 
52

 
45

 
16

Other written premiums
 
(3
)
 
(3
)
 
0

 
(9
)
 
(7
)
 
(29
)
Net written premiums
 
51

 
48

 
6

 
165

 
144

 
15

Unearned premium change
 
2

 

 
nm

 
(12
)
 
(8
)
 
(50
)
Earned premiums
 
$
53

 
$
48

 
10

 
$
153

 
$
136

 
13

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio – The excess and surplus lines combined ratio increased by 13.5 percentage points for the third quarter of 2017, compared with the same period of 2016, primarily due to less favorable reserve development on prior accident years. For the first nine months of 2017, the combined ratio improved by 1.9 percentage points, compared with the first nine months of 2016, driven by a lower ratio for current accident year losses and loss expenses before catastrophe losses.
The excess and surplus lines ratio for current accident year loss and loss expenses before catastrophe losses improved in the first nine months of 2017. That 52.8 percent ratio decreased 6.1 percentage points compared with the 58.9 percent accident year 2016 ratio measured as of September 30, 2016, including a decrease of 2.3 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
Excess and surplus lines net favorable reserve development on prior accident years, as a ratio to earned premiums, was 5.0 percent and 16.0 percent for the third quarter and first nine months of 2017, compared with 25.5 percent and 19.7 percent for the same periods of 2016. Approximately two-thirds of the net favorable reserve development recognized during the first nine months of 2017 was attributable to accident years 2015 and 2014. The favorable reserve development was due primarily to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2016 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 48.
The underwriting expense ratio for the third quarter of 2017 decreased, compared with the same period of 2016, reflecting higher earned premiums, ongoing expense management efforts and a lower level of profit-sharing commissions for agencies. For the first nine months of 2017, the underwriting expense ratio increased, compared with the same period of 2016, primarily due to strategic investments that include enhancement of underwriting expertise, such as upgrades to systems used in underwriting or billing excess and surplus lines insurance policies.
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 53



Excess and Surplus Lines Insurance Losses Incurred by Size
(Dollars in millions, net of reinsurance)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Current accident year losses greater than $5
  million
 
$

 
$

 
nm

 
$

 
$

 
nm

Current accident year losses $1 million - $5
  million
 

 
2

 
(100
)
 

 
3

 
(100
)
Large loss prior accident year reserve
  development
 

 
(1
)
 
nm

 
1

 

 
nm

Total large losses incurred
 

 
1

 
(100
)
 
1

 
3

 
(67
)
Losses incurred but not reported
 
7

 
(2
)
 
nm

 
(4
)
 
5

 
nm

Other losses excluding catastrophe losses
 
8

 
11

 
(27
)
 
35

 
25

 
40

Catastrophe losses
 
1

 

 
nm

 
2

 
2

 

Total losses incurred
 
$
16

 
$
10

 
60

 
$
34

 
$
35

 
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year losses greater than $5
  million
 
 %
 
 %
 
0.0

 
 %
 
 %
 
0.0

Current accident year losses $1 million - $5
  million
 

 
4.4

 
(4.4
)
 

 
2.3

 
(2.3
)
Large loss prior accident year reserve
  development
 
(0.3
)
 
(2.0
)
 
1.7

 
0.6

 
(0.3
)
 
0.9

Total large loss ratio
 
(0.3
)
 
2.4

 
(2.7
)
 
0.6

 
2.0

 
(1.4
)
Losses incurred but not reported
 
13.8

 
(2.9
)
 
16.7

 
(2.4
)
 
4.1

 
(6.5
)
Other losses excluding catastrophe losses
 
15.3

 
21.8

 
(6.5
)
 
23.1

 
18.4

 
4.7

Catastrophe losses
 
1.3

 
0.1

 
1.2

 
1.1

 
1.1

 
0.0

Total loss ratio
 
30.1
 %
 
21.4
 %
 
8.7

 
22.4
 %
 
25.6
 %
 
(3.2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the third quarter of 2017, the excess and surplus lines total ratio for large losses, net of reinsurance, was 2.7 percentage points lower than last year’s third quarter. The third-quarter 2017 amount of total large losses incurred helped contribute to the decrease in the nine-month 2017 total large loss ratio, compared with 2016, in addition to a first-half 2017 ratio that was 0.7 points lower than the first half of 2016. We believe results for the three-month and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.
 


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 54



LIFE INSURANCE RESULTS
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Earned premiums
 
$
56

 
$
58

 
(3
)
 
$
173

 
$
175

 
(1
)
Fee revenues
 
1

 
2

 
(50
)
 
4

 
4

 
0

Total revenues
 
57

 
60

 
(5
)
 
177

 
179

 
(1
)
Contract holders' benefits incurred
 
59

 
63

 
(6
)
 
184

 
188

 
(2
)
Investment interest credited to contract holders'
 
(24
)
 
(23
)
 
(4
)
 
(70
)
 
(67
)
 
(4
)
Underwriting expenses incurred
 
26

 
24

 
8

 
63

 
62

 
2

Total benefits and expenses
 
61

 
64

 
(5
)
 
177

 
183

 
(3
)
Life insurance segment loss
 
$
(4
)
 
$
(4
)
 
0

 
$

 
$
(4
)
 
nm

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Overview
Performance highlights for the life insurance segment include:
Revenues – Revenues decreased for the nine months ended September 30, 2017, primarily due to lower earned premiums from universal life and other life insurance products, partially offset by higher earned premiums from term life insurance, our largest life insurance product line. The decline in universal life insurance premiums was attributable to the unlocking of actuarial assumptions that slowed amortization of unearned front-end loads.
Net in-force life insurance policy face amounts increased to $60.094 billion at September 30, 2017, from $56.808 billion at year-end 2016.
Fixed annuity deposits received for the three and nine months ended September 30, 2017, were $6 million and $23 million compared with $10 million and $36 million for same periods of 2016. Fixed annuity deposits have a minimal impact to earned premiums because deposits received are initially recorded as liabilities. Profit is earned over time by way of interest-rate spreads. We do not write variable or equity-indexed annuities.
 
Life Insurance Premiums
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,

 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Term life insurance
 
$
39

 
$
37

 
5

 
$
118

 
$
112

 
5

Universal life insurance
 
7

 
13

 
(46
)
 
28

 
34

 
(18
)
Other life insurance, annuity and disability
  income products
 
10

 
8

 
25

 
27

 
29

 
(7
)
Net earned premiums
 
$
56

 
$
58

 
(3
)
 
$
173

 
$
175

 
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Profitability – Our life insurance segment typically reports a small profit or loss on a GAAP basis because profits from investment income spreads are included in our investment segment results. We include only investment income credited to contract holders (including interest assumed in life insurance policy reserve calculations) in our life insurance segment results. A loss of less than $1 million for our life insurance segment in the first nine months of 2017, compared with a loss of $4 million for the same period of 2016, was largely due to more favorable mortality results.
Life insurance segment benefits and expenses consist principally of contract holders’ (policyholders’) benefits incurred related to traditional life and interest-sensitive products and operating expenses incurred, net of deferred acquisition costs. Total benefits decreased in the first nine months of 2017. Life policy and investment contract reserves increased with continued growth in net in-force life insurance policy face amounts. Mortality results decreased from the same period of 2016 and were less than our 2017 projections.
Underwriting expenses for the first nine months of 2017 increased slightly compared with the same period a year ago. For the first nine months of 2017, unlocking of interest rate and other actuarial assumptions had an

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 55



immaterial impact on the amount of expenses deferred to future periods. For the first nine months of 2016, unlocking decreased the amount of expenses deferred to future periods, increasing underwriting expenses.
We recognize that assets under management, capital appreciation and investment income are integral to evaluating the success of the life insurance segment because of the long duration of life products. On a basis that includes investment income and realized gains or losses from life-insurance-related invested assets, the life insurance company reported a net profit of $8 million and $33 million in the three and nine months ended September 30, 2017, compared with a net profit of $10 million and $32 million for the same periods of 2016. The life insurance company portfolio had net after-tax realized investment gains of less than $1 million and $2 million for the three and nine months ended September 30, 2017, compared with $2 million and $3 million of net after-tax realized investment gains for the three and nine months ended September 30, 2016.

INVESTMENTS RESULTS
 
Overview
The investments segment contributes investment income and realized gains and losses to results of operations. Investments traditionally are our primary source of pretax and after-tax profits.
 
Investment Income
Pretax investment income increased 3 percent for third-quarter 2017 and 2 percent for the nine months ended September 30, 2017, compared with the same periods of 2016. Interest income rose due to net purchases of fixed-maturity securities that offset the continuing effects of the low interest rate environment. Higher dividend income reflected rising dividend rates and net purchases of equity securities.

Investments Results
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,

 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Total investment income, net of expenses
 
$
153

 
$
148

 
3

 
$
453

 
$
442

 
2

Investment interest credited to contract holders'
 
(24
)
 
(23
)
 
(4
)
 
(70
)
 
(67
)
 
(4
)
Realized investment gains, net
 
7

 
56

 
nm

 
156

 
161

 
(3
)
Investments profit, pretax
 
$
136

 
$
181

 
(25
)
 
$
539

 
$
536

 
1

 
 
 
 
 
 
 
 
 
 
 
 
 

We continue to position our portfolio considering both the challenges presented by the current low interest rate environment and the risks presented by potential future inflation. As bonds in our generally laddered portfolio mature or are called over the near term, we will be challenged to replace their current yield. The table below shows the average pretax yield-to-amortized cost associated with expected principal redemptions for our fixed-maturity portfolio. The expected principal redemptions are based on par amounts and include dated maturities, calls and prefunded municipal bonds that we expect will be called during each respective time period.
(Dollars in millions)
% Yield
 
Principal redemptions
At September 30, 2017
 
Fixed-maturity pretax yield profile:
 
 
 
Expected to mature during the remainder of 2017
5.30
 
$
125

Expected to mature during 2018
5.69
 
916

Expected to mature during 2019
6.15
 
734

Average yield and total expected redemptions from the remainder of 2017 through 2019
5.85
 
$
1,775

 
 
 
 


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
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The table below shows the average pretax yield-to-amortized cost for fixed-maturity securities acquired during the periods indicated. The average yield for total fixed-maturity securities acquired during the first nine months of 2017 was lower than the 4.54 percent average yield-to-amortized cost of the fixed-maturity securities portfolio at the end of 2016. Our fixed-maturity portfolio's average yield of 4.47 percent for the first nine months of 2017, from the investment income table below, was also lower than that yield for the year-end 2016 fixed-maturities portfolio.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Average pretax yield-to-amortized cost on new
  fixed-maturities:
 
 
 
 
 
 
 
Acquired taxable fixed-maturities
3.81
%
 
3.73
%
 
4.00
%
 
4.27
%
Acquired tax-exempt fixed-maturities
3.15

 
2.66

 
3.34

 
2.89

Average total fixed-maturities acquired
3.55

 
3.39

 
3.68

 
3.86

 
 
 
 
 
 
 
 

While our bond portfolio more than covers our insurance reserve liabilities, we believe our diversified common stock portfolio of mainly blue chip, dividend-paying companies represents one of our best investment opportunities for the long term. In our 2016 Annual Report on Form 10-K, Item 1, Investments Segment, Page 23, and Item 7, Investments Outlook, Page 86, we discussed our portfolio strategies. We discuss risks related to our investment income and our fixed-maturity and equity investment portfolios in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk.

The table below provides details about investment income. Average yields in this table are based on the average invested asset and cash amounts indicated in the table, using fixed-maturity securities valued at amortized cost and all other securities at fair value.
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Investment income:
 
 

 
 

 
 
 
 

 
 

 
 
Interest
 
$
112

 
$
111

 
1
 
$
334

 
$
330

 
1
Dividends
 
43

 
39

 
10
 
124

 
117

 
6
Other
 
1

 
1

 
0
 
3

 
2

 
50
Less investment expenses
 
3

 
3

 
0
 
8

 
7

 
14
Investment income, pretax
 
153

 
148

 
3
 
453

 
442

 
2
Less income taxes
 
35

 
35

 
0
 
106

 
105

 
1
Total investment income, after-tax
 
$
118

 
$
113

 
4
 
$
347

 
$
337

 
3
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment returns:
 
 
 
 
 
 
 
 
 
 
 
 
Average invested assets plus cash and cash
  equivalents
 
$
16,769

 
$
15,564

 
 
 
$
16,462

 
$
15,192

 
 
Average yield pretax
 
3.65
%
 
3.80
%
 
 
 
3.67
%
 
3.88
%
 
 
Average yield after-tax
 
2.81

 
2.90

 
 
 
2.81

 
2.96

 
 
Effective tax rate
 
23.4

 
23.9

 
 
 
23.5

 
23.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-maturity returns:
 
 
 
 
 
 
 
 
 
 
 
 
Average amortized cost
 
$
10,121

 
$
9,588

 
 
 
$
9,967

 
$
9,491

 
 
Average yield pretax
 
4.43
%
 
4.63
%
 
 
 
4.47
%
 
4.64
%
 
 
Average yield after-tax
 
3.25

 
3.37

 
 
 
3.27

 
3.37

 
 
Effective tax rate
 
26.6

 
27.3

 
 
 
26.8

 
27.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 57



Net Realized Gains and Losses
We reported net realized investment gains of $7 million and $156 million for the three and nine months ended September 30, 2017, compared with $56 million and $161 million of net realized investment gains for the same periods of 2016. The total net realized investment gains for the first nine months of 2017 included $143 million in net gains from sales of various common and preferred stock holdings, compared with $146 million for the same period of 2016.
 
Investment gains or losses are recognized upon the sales of investments or as otherwise required under GAAP. The timing of realized gains or losses from sales can have a material effect on results in any quarter. However, such gains or losses usually have little, if any, effect on total shareholders’ equity because most equity and fixed-maturity investments are carried at fair value, with the unrealized gain or loss included as a component of accumulated other comprehensive income (AOCI). Accounting requirements for other-than-temporary impairment (OTTI) charges for the fixed-maturity portfolio are disclosed in our 2016 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 122.
 
Of the 3,484 securities in the portfolio, no securities were trading below 70 percent of amortized cost at September 30, 2017. Our asset impairment committee regularly monitors the portfolio, including a quarterly review of the entire portfolio for potential OTTI charges. We believe that if liquidity in the markets were to significantly deteriorate or economic conditions were to significantly weaken, we could experience declines in portfolio values and possibly additional OTTI charges.
 
The table below provides additional detail for OTTI charges:
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Fixed maturities:
 
 

 
 

 
 

 
 

Utilities
 
$

 
$

 
$

 
$
2

Banking
 

 

 
6

 

Total fixed maturities
 

 

 
6

 
2

Common equities:
 
 

 
 

 
 

 
 

Energy
 

 

 
3

 

Total common equities
 

 

 
3

 

Total
 
$

 
$

 
$
9

 
$
2

 
 
 
 
 
 
 
 
 
 
OTHER
We report as Other the noninvestment operations of the parent company and a noninsurance subsidiary, CFC Investment Company. We also report as Other the underwriting results of Cincinnati Re, our reinsurance assumed operation, including earned premiums, loss and loss expenses and underwriting expenses.

Total revenues for the first nine months of 2017 for our Other operations increased, compared with the same period of 2016, primarily due to earned premiums from Cincinnati Re. Total expenses for Other also increased for the first nine months of 2017, primarily due to losses and loss expenses and underwriting expenses from Cincinnati Re.

Other loss in the table below represents losses before income taxes. The net result of Cincinnati Re for the first nine months of 2017 was an underwriting loss of approximately $23 million, largely due to an increase in losses from natural catastrophes. For both periods shown, Other loss resulted largely from underwriting results for Cincinnati Re and interest expense from debt of the parent company.

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 58



(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Interest and fees on loans and leases
 
$
1

 
$
2

 
(50
)
 
$
3

 
$
4

 
(25
)
Earned premiums
 
32

 
13

 
146

 
80

 
33

 
142

Other revenues
 
1

 

 
nm

 
1

 
1

 
0

Total revenues
 
34

 
15

 
127

 
84

 
38

 
121

Interest expense
 
13

 
13

 
0

 
39

 
39

 
0

Loss and loss expenses
 
57

 
2

 
nm

 
78

 
16

 
388

Underwriting expenses
 
7

 
5

 
40

 
25

 
11

 
127

Operating expenses
 
3

 
3

 
0

 
11

 
10

 
10

Total expenses
 
80

 
23

 
248

 
153

 
76

 
101

Other loss
 
$
(46
)
 
$
(8
)
 
(475
)
 
$
(69
)
 
$
(38
)
 
(82
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TAXES
We had $27 million and $130 million of income tax expense for the three and nine months ended September 30, 2017, compared with $73 million and $193 million for the same periods of 2016. The effective tax rates for the three and nine months ended September 30, 2017, were 20.9 percent and 24.4 percent compared with 28.9 percent and 28.2 percent for the same periods last year. The change in our effective tax rate was primarily due to changes in pretax income from underwriting results and realized investment gains and losses, with immaterial changes in the amount of permanent book-tax differences. For the three and nine months ended September 30, 2017, the change in our effective tax rate also reflected the adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting .
 
Historically, we have pursued a strategy of investing some portion of cash flow in tax-advantaged fixed-maturity and equity securities to minimize our overall tax liability and maximize after-tax earnings. See Tax-Exempt Fixed Maturities in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk for further discussion on municipal bond purchases in our fixed-maturity investment portfolio. For our property casualty insurance subsidiaries, approximately 85 percent of interest from tax-advantaged fixed-maturity investments and approximately 60 percent of dividends from qualified equities are exempt from federal tax after applying proration from the 1986 Tax Reform Act. Our noninsurance companies own an immaterial amount of tax-advantaged fixed-maturity investments. For our noninsurance companies, the dividend received deduction exempts 70 percent of dividends from qualified equities. Our life insurance company does not own tax-advantaged fixed-maturity investments or equities subject to the dividend received deduction. Details about our effective tax rate are in this quarterly report Item 1, Note 9 – Income Taxes.

LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2017, shareholders’ equity was $7.523 billion, compared with $7.060 billion at December 31, 2016. Total debt was $804 million at September 30, 2017, down $3 million from December 31, 2016. At September 30, 2017, cash and cash equivalents totaled $674 million, compared with $777 million at December 31, 2016.

SOURCES OF LIQUIDITY
 
Subsidiary Dividends
Our lead insurance subsidiary declared dividends of $290 million to the parent company in the first nine months of 2017, compared with $300 million for the same period of 2016. For full-year 2016, subsidiary dividends declared totaled $475 million. State of Ohio regulatory requirements restrict the dividends our insurance subsidiary can pay. For full-year 2017, total dividends that our insurance subsidiary could pay to our parent company without regulatory approval are approximately $469 million.
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 59



Investing Activities
Investment income is a source of liquidity for both the parent company and its insurance subsidiary. We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth.
 
Parent company obligations can be funded with income on investments held at the parent-company level or through sales of securities in that portfolio, although our investment philosophy seeks to compound cash flows over the long term. These sources of capital can help minimize subsidiary dividends to the parent company, protecting insurance subsidiary capital.

See our 2016 Annual Report on Form 10-K, Item 1, Investments Segment, Page 23, for a discussion of our historic investment strategy, portfolio allocation and quality.
 
Insurance Underwriting
Our property casualty and life insurance underwriting operations provide liquidity because we generally receive premiums before paying losses under the policies purchased with those premiums. After satisfying our cash requirements, we use excess cash flows for investment, increasing future investment income.
 
Historically, cash receipts from property casualty and life insurance premiums, along with investment income, have been more than sufficient to pay claims, operating expenses and dividends to the parent company.
 
The table below shows a summary of operating cash flow for property casualty insurance (direct method):
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Premiums collected
 
$
1,217

 
$
1,185

 
3

 
$
3,723

 
$
3,534

 
5

Loss and loss expenses paid
 
(725
)
 
(662
)
 
(10
)
 
(2,114
)
 
(1,853
)
 
(14
)
Commissions and other underwriting expenses
  paid
 
(333
)
 
(318
)
 
(5
)
 
(1,163
)
 
(1,081
)
 
(8
)
Cash flow from underwriting
 
159

 
205

 
(22
)
 
446

 
600

 
(26
)
Investment income received
 
108

 
105

 
3

 
310

 
303

 
2

Cash flow from operations
 
$
267

 
$
310

 
(14
)
 
$
756

 
$
903

 
(16
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collected premiums for property casualty insurance rose $189 million during the first nine months of 2017, compared with the same period in 2016. Loss and loss expenses paid increased $261 million, including a $103 million increase for catastrophe losses and loss expenses. Commissions and other underwriting expenses paid rose $82 million, primarily due to higher commissions paid to agencies, reflecting the increase in collected premiums.
 
We discuss our future obligations for claims payments and for underwriting expenses in our 2016 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 91, and Other Commitments also on Page 91.
 
Capital Resources
At September 30, 2017, our debt-to-total-capital ratio was 9.7 percent, with $787 million in long-term debt and $17 million in borrowing on our revolving short-term line of credit. That line of credit had a $20 million balance at December 31, 2016. At September 30, 2017, $208 million was available for future cash management needs. Based on our capital requirements at September 30, 2017, we do not anticipate a material increase in debt levels during the remainder of 2017. As a result, we expect changes in our debt-to-total-capital ratio to continue to be largely a function of the contribution of unrealized investment gains or losses to shareholders’ equity.
 
We provide details of our three, long-term notes in this quarterly report Item 1, Note 3 – Fair Value Measurements. None of the notes are encumbered by rating triggers.
 
Four independent ratings firms award insurer financial strength ratings to our property casualty insurance companies and three firms rate our life insurance company. Those firms made no changes to our parent company

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 60



debt ratings during the first nine months of 2017. Our debt ratings are discussed in our 2016 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, Other Sources of Liquidity, Page 89.
 
Off-Balance Sheet Arrangements
We do not use any special-purpose financing vehicles or have any undisclosed off-balance sheet arrangements (as that term is defined in applicable SEC rules) that are reasonably likely to have a current or future material effect on the company’s financial condition, results of operation, liquidity, capital expenditures or capital resources. Similarly, the company holds no fair-value contracts for which a lack of marketplace quotations would necessitate the use of fair-value techniques.
 
USES OF LIQUIDITY
Our parent company and insurance subsidiary have contractual obligations and other commitments. In addition, one of our primary uses of cash is to enhance shareholder return.
 
Contractual Obligations
In our 2016 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 91, we estimated our future contractual obligations as of December 31, 2016. There have been no material changes to our estimates of future contractual obligations since our 2016 Annual Report on Form 10-K.

Other Commitments
In addition to our contractual obligations, we have other property casualty operational commitments.
Commissions – Commissions paid were $708 million in the first nine months of 2017. Commission payments generally track with written premiums, except for annual profit-sharing commissions typically paid during the first quarter of the year.
Other underwriting expenses – Many of our underwriting expenses are not contractual obligations, but reflect the ongoing expenses of our business. Noncommission underwriting expenses paid were $455 million in the first nine months of 2017.
Technology costs – In addition to contractual obligations for hardware and software, we anticipate capitalizing up to $7 million in spending for key technology initiatives in 2017. Capitalized development costs related to key technology initiatives were $6 million in the first nine months of 2017. These activities are conducted at our discretion, and we have no material contractual obligations for activities planned as part of these projects.

We contributed $5 million to our qualified pension plan during the first nine months of 2017.
 
Investing Activities
After fulfilling operating requirements, we invest cash flows from underwriting, investment and other corporate activities in fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We discuss our investment strategy and certain portfolio attributes in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk.
 
Uses of Capital
Uses of cash to enhance shareholder return include dividends to shareholders. In January, May and August 2017, the board of directors declared regular quarterly cash dividends of 50 cents per share for an indicated annual rate of $2.00 per share. During the first nine months of 2017, we used $239 million to pay cash dividends to shareholders.

PROPERTY CASUALTY INSURANCE LOSS AND LOSS EXPENSE RESERVES
For the business lines in the commercial and personal lines insurance segments, and in total for the excess and surplus lines segment, the following table details gross reserves among case, IBNR (incurred but not reported) and loss expense reserves, net of salvage and subrogation reserves. Reserving practices are discussed in our 2016 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves, Page 93.
 
Total gross reserves at September 30, 2017, increased $265 million compared with December 31, 2016. Case loss reserves for losses increased $139 million, IBNR loss reserves increased by $75 million and loss expense reserves

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 61



increased by $51 million. Accounting for most of the total gross increase was the aggregate of our commercial casualty and commercial auto lines of business and our Cincinnati Re reinsurance assumed operation.

Property Casualty Gross Reserves
(Dollars in millions)
 
Loss reserves
 
Loss expense reserves
 
Total gross reserves
 
 
 
 
Case reserves
 
IBNR reserves
 
 
 
Percent of total
At September 30, 2017
 
 
 
 
 
Commercial lines insurance:
 
 

 
 

 
 

 
 

 
 

Commercial casualty
 
$
956

 
$
586

 
$
588

 
$
2,130

 
40.3
%
Commercial property
 
270

 
10

 
61

 
341

 
6.4

Commercial auto
 
398

 
122

 
120

 
640

 
12.1

Workers' compensation
 
399

 
526

 
95

 
1,020

 
19.2

Other commercial
 
116

 
15

 
61

 
192

 
3.6

Subtotal
 
2,139

 
1,259

 
925

 
4,323

 
81.6

Personal lines insurance:
 
 

 
 

 
 

 
 

 
 

Personal auto
 
237

 
43

 
68

 
348

 
6.6

Homeowner
 
112

 
(4
)
 
31

 
139

 
2.6

Other personal
 
60

 
42

 
5

 
107

 
2.0

Subtotal
 
409

 
81

 
104

 
594

 
11.2

Excess and surplus lines
 
106

 
82

 
69

 
257

 
4.8

Cincinnati Re
 
16

 
108

 
2

 
126

 
2.4

Total
 
$
2,670

 
$
1,530

 
$
1,100

 
$
5,300

 
100.0
%
At December 31, 2016
 
 

 
 

 
 

 
 

 
 

Commercial lines insurance:
 
 

 
 

 
 

 
 

 
 

Commercial casualty
 
$
928

 
$
553

 
$
556

 
$
2,037

 
40.5
%
Commercial property
 
253

 
28

 
58

 
339

 
6.7

Commercial auto
 
374

 
86

 
103

 
563

 
11.2

Workers' compensation
 
382

 
553

 
95

 
1,030

 
20.4

Other commercial
 
116

 
19

 
75

 
210

 
4.2

Subtotal
 
2,053

 
1,239

 
887

 
4,179

 
83.0

Personal lines insurance:
 
 

 
 

 
 

 
 

 
 

Personal auto
 
228

 
24

 
66

 
318

 
6.3

Homeowner
 
102

 
22

 
29

 
153

 
3.0

Other personal
 
46

 
47

 
5

 
98

 
2.0

Subtotal
 
376

 
93

 
100

 
569

 
11.3

Excess and surplus lines
 
94

 
86

 
61

 
241

 
4.8

Cincinnati Re
 
8

 
37

 
1

 
46

 
0.9

Total
 
$
2,531

 
$
1,455

 
$
1,049

 
$
5,035

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
LIFE POLICY AND INVESTMENT CONTRACT RESERVES
Gross life policy and investment contract reserves were $2.716 billion at September 30, 2017, compared with $2.671 billion at year-end 2016, reflecting continued growth in life insurance policies in force. We discuss our life insurance reserving practices in our 2016 Annual Report on Form 10-K, Item 7, Life Insurance Policyholder Obligations and Reserves, Page 100.
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 62



OTHER MATTERS
 
SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are discussed in our 2016 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 122, and updated in this quarterly report Item 1, Note 1, Accounting Policies.
 
In conjunction with those discussions, in the Management’s Discussion and Analysis in the 2016 Annual Report on Form 10-K, management reviewed the estimates and assumptions used to develop reported amounts related to the most significant policies. Management discussed the development and selection of those accounting estimates with the audit committee of the board of directors.
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
Our greatest exposure to market risk is through our investment portfolio. Market risk is the potential for a decrease in securities’ fair value resulting from broad yet uncontrollable forces such as: inflation, economic growth or recession, interest rates, world political conditions or other widespread unpredictable events. It is comprised of many individual risks that, when combined, create a macroeconomic impact.
 
Our view of potential risks and our sensitivity to such risks is discussed in our 2016 Annual Report on Form 10-K, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Page 107.
 
The fair value of our investment portfolio was $16.565 billion at September 30, 2017 , up $1.146 billion from year-end 2016, including a $455 million increase in the fixed-maturity portfolio and a $691 million increase in the equity portfolio.
(Dollars in millions)
At September 30, 2017
 
At December 31, 2016
 
Cost or
amortized cost
Percent 
of total
 
Fair value
Percent 
of total
 
Cost or
amortized cost
Percent 
of total
 
Fair value
Percent 
of total
Taxable fixed maturities
$
6,404

47.8
%
 
$
6,699

40.4
%
 
$
6,381

49.9
%
 
$
6,630

43.0
%
Tax-exempt fixed maturities
3,731

27.9

 
3,841

23.2

 
3,418

26.7

 
3,455

22.4

Common equity securities
3,084

23.0

 
5,808

35.1

 
2,812

22.0

 
5,123

33.2

Nonredeemable preferred
  equity securities
180

1.3

 
217

1.3

 
183

1.4

 
211

1.4

Total
$
13,399

100.0
%
 
$
16,565

100.0
%
 
$
12,794

100.0
%
 
$
15,419

100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2017 , our consolidated investment portfolio included $6 million of assets for which values are based on prices or valuation techniques that require significant management judgment (Level 3 assets). This represented less than 1 percent of investment portfolio assets measured at fair value. See Item 1, Note 3, Fair Value Measurements, for additional discussion of our valuation techniques. We have generally obtained and evaluated two nonbinding quotes from brokers; then, our investment professionals determined our best estimate of fair value. These investments include private placements, small issues and various thinly traded securities.
 
In addition to our investment portfolio, the total investments amount reported in our condensed consolidated balance sheets includes Other invested assets. Other invested assets included $31 million of life policy loans, $31 million of private equity investments and $37 million of real estate through direct property ownership and development projects in the United States at September 30, 2017 .
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 63



FIXED-MATURITY SECURITIES INVESTMENTS
By maintaining a well-diversified fixed-maturity portfolio, we attempt to reduce overall risk. We invest new money in the bond market on a regular basis, targeting what we believe to be optimal risk-adjusted, after-tax yields. Risk, in this context, includes interest rate, call, reinvestment rate, credit and liquidity risk. We do not make a concerted effort to alter duration on a portfolio basis in response to anticipated movements in interest rates. By regularly investing in the bond market, we build a broad, diversified portfolio that we believe mitigates the impact of adverse economic factors.

In the first nine months of 2017, the increase in fair value of our fixed-maturity portfolio was driven by the combination of net purchases of securities and an increase in net unrealized gains that primarily reflected a slight decrease in interest rates and a narrowing of corporate credit spreads. At  September 30, 2017 , our fixed-maturity portfolio with an average rating of A2/A was valued at 104.0 percent of its amortized cost, compared with 102.9 percent at December 31, 2016.
 
At September 30, 2017 , our investment-grade and noninvestment-grade fixed-maturity securities represented 87.5 percent and 3.8 percent of the portfolio, respectively. The remaining 8.7 percent represented fixed-maturity securities that were not rated by Moody's or S&P Global Ratings .

Attributes of the fixed-maturity portfolio include:
 
 
At September 30, 2017
 
At December 31, 2016
Weighted average yield-to-amortized cost
 
4.40
%
 
4.54
%
Weighted average maturity
 
7.5
yrs
 
7.1
yrs
Effective duration
 
5.2
yrs
 
5.0
yrs
 
 
 
 
 
 
 
 
We discuss maturities of our fixed-maturity portfolio in our 2016 Annual Report on Form 10-K, Item 8, Note 2, Investments, Page 129, and in this quarterly report Item 2, Investments Results.
 


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 64



TAXABLE FIXED MATURITIES
Our taxable fixed-maturity portfolio, with a fair value of $6.699 billion at September 30, 2017 , included:
(Dollars in millions)
 
At September 30, 2017
 
At December 31, 2016
Investment-grade corporate
 
$
5,379

 
$
5,336

Noninvestment-grade corporate
 
404

 
445

States, municipalities and political subdivisions
 
393

 
373

Commercial mortgage-backed
 
288

 
287

Government sponsored enterprises
 
204

 
164

United States government
 
16

 
10

Foreign government
 
10

 
10

Convertibles and bonds with warrants attached
 
5

 
5

Total
 
$
6,699

 
$
6,630

 
 
 
 
 
 
Our strategy is to buy, and typically hold, fixed-maturity investments to maturity, but we monitor credit profiles and fair value movements when determining holding periods for individual securities. With the exception of United States agency issues that include government-sponsored enterprises, no individual issuer’s securities accounted for more than 1.1 percent of the taxable fixed-maturity portfolio at September 30, 2017 . Our investment-grade corporate bonds had an average rating of Baa2 by Moody’s or BBB+ by S&P Global Ratings and represented 80.3 percent of the taxable fixed-maturity portfolio’s fair value at September 30, 2017 , compared with 80.5 percent at year-end 2016.
 
The heaviest concentration in our investment-grade corporate bond portfolio, based on fair value at
September 30, 2017 , was the financial sector. It represented 45.2 percent of our investment-grade corporate bond portfolio, compared with 42.5 percent at year-end 2016. No other sector exceeded 10 percent of our investment-grade corporate bond portfolio.

Most of the $393 million of securities issued by states, municipalities and political subdivisions included in our taxable fixed-maturity portfolio at September 30, 2017 , were Build America Bonds.
 
Our taxable fixed-maturity portfolio at September 30, 2017 , included $288 million of commercial mortgage-backed securities with an average rating of Aa1/AA.
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 65



TAX-EXEMPT FIXED MATURITIES
At September 30, 2017 , we had $3.841 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody’s and S&P Global Ratings . We traditionally have purchased municipal bonds focusing on general obligation and essential services issues, such as water, waste disposal or others. The portfolio is well diversified among approximately 1,400 municipal bond issuers. No single municipal issuer accounted for more than 0.6 percent of the tax-exempt fixed-maturity portfolio at September 30, 2017 .

INTEREST RATE SENSITIVITY ANALYSIS
Because of our strong surplus, long-term investment horizon and ability to hold most fixed-maturity investments until maturity, we believe the company is adequately positioned if interest rates were to rise. Although the fair values of our existing holdings may suffer, a higher rate environment would provide the opportunity to invest cash flow in higher-yielding securities, while reducing the likelihood of untimely redemptions of currently callable securities. While higher interest rates would be expected to continue to increase the number of fixed-maturity holdings trading below 100 percent of amortized cost, we believe lower fixed-maturity security values due solely to interest rate changes would not signal a decline in credit quality. We continue to manage the portfolio with an eye toward both meeting current income needs and managing interest rate risk.
 
Our dynamic financial planning model uses analytical tools to assess market risks. As part of this model, the effective duration of the fixed-maturity portfolio is continually monitored by our investment department to evaluate the theoretical impact of interest rate movements.
 
The table below summarizes the effect of hypothetical changes in interest rates on the fair value of the fixed-maturity portfolio:
(Dollars in millions)
 
Effect from interest rate change in basis points
 
 
-200
 
 -100
 
-
 
100
 
200
At September 30, 2017
 
$
11,654

 
$
11,098

 
$
10,540

 
$
9,986

 
$
9,461

At December 31, 2016
 
$
11,131

 
$
10,603

 
$
10,085

 
$
9,577

 
$
9,094

 
 
 
 
 
 
 
 
 
 
 
 
The effective duration of the fixed-maturity portfolio as of September 30, 2017 , was 5.2 years, up from 5.0 years at year-end 2016. The above table is a theoretical presentation showing that an instantaneous, parallel shift in the yield curve of 100 basis points could produce an approximately 5.3 percent change in the fair value of the fixed-maturity portfolio. Generally speaking, the higher a bond is rated, the more directly correlated movements in its fair value are to changes in the general level of interest rates, exclusive of call features. The fair values of average- to lower-rated corporate bonds are additionally influenced by the expansion or contraction of credit spreads.
 
In our dynamic financial planning model, the selected interest rate change of 100 to 200 basis points represents our view of a shift in rates that is quite possible over a one-year period. The rates modeled should not be considered a prediction of future events as interest rates may be much more volatile in the future. The analysis is not intended to provide a precise forecast of the effect of changes in rates on our results or financial condition, nor does it take into account any actions that we might take to reduce exposure to such risks.



Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 66



EQUITY INVESTMENTS
Our equity investments, with a fair value totaling $6.025 billion at September 30, 2017 , included $5.808 billion of common stock securities of companies generally with strong indications of paying and growing their dividends. Other criteria we evaluate include increasing sales and earnings, proven management and a favorable outlook. We believe our equity investment style is an appropriate long-term strategy. While our long-term financial position would be affected by prolonged changes in the market valuation of our investments, we believe our strong surplus position and cash flow provide a cushion against short-term fluctuations in valuation. Continued payment of cash dividends by the issuers of our common equity holdings can provide a floor to their valuation.

The table below summarizes the effect of hypothetical changes in market prices on fair value of our equity portfolio.
(Dollars in millions)
Effect from market price change in percent
 
 
-30%
 
-20%
 
-10%
 
 
10%
 
20%
 
30%
At September 30, 2017
 
$
4,218

 
$
4,820

 
$
5,423

 
$
6,025

 
$
6,628

 
$
7,230

 
$
7,833

At December 31, 2016
 
$
3,734

 
$
4,267

 
$
4,801

 
$
5,334

 
$
5,867

 
$
6,401

 
$
6,934

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

At September 30, 2017 , Apple Inc. (Nasdaq:AAPL) was our largest single common stock holding with a fair value of $216 million , or 3.7 percent of our publicly traded common stock portfolio and 1.3 percent of the total investment portfolio. Twenty-nine holdings among eight different sectors each had a fair value greater than $100 million.
 
Common Stock Portfolio Industry Sector Distribution
 
Percent of common stock portfolio
 
At September 30, 2017
 
At December 31, 2016
 
Cincinnati
 Financial
 
S&P 500 Industry
Weightings
 
Cincinnati
Financial
 
S&P 500 Industry
Weightings
Sector:
 

 
 

 
 

 
 

Information technology
16.7
%
 
23.2
%
 
17.6
%
 
20.8
%
Financial
15.5

 
14.6

 
15.6

 
14.8

Industrials
14.9

 
10.2

 
14.9

 
10.3

Healthcare
14.7

 
14.5

 
12.6

 
13.6

Consumer discretionary
13.2

 
11.9

 
10.4

 
12.0

Consumer staples
7.9

 
8.2

 
10.3

 
9.4

Energy
7.6

 
6.1

 
8.5

 
7.5

Materials
5.4

 
3.0

 
5.8

 
2.8

Utilities
2.1

 
3.1

 
2.2

 
3.2

Telecomm services
1.7

 
2.2

 
2.1

 
2.7

Real Estate
0.3

 
3.0

 

 
2.9

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 67



UNREALIZED INVESTMENT GAINS AND LOSSES
At September 30, 2017 , unrealized investment gains before taxes for the consolidated investment portfolio totaled
$3.231 billion and unrealized investment losses amounted to $65 million .
 
The net unrealized investment gains at September 30, 2017 , consisted of a pretax net gain position in our fixed-maturity portfolio of $405 million and a net gain position in our equity portfolio of $2.761 billion . The net gain position in our fixed-maturity portfolio increased in the first nine months of 2017 primarily due to slight declines in both interest rates and corporate credit spreads. The net gain position for our current fixed-maturity holdings will naturally decline over time as individual securities mature. In addition, changes in interest rates can cause rapid, significant changes in fair values of fixed-maturity securities and the net gain position, as discussed in Quantitative and Qualitative Disclosures About Market Risk. Events or factors such as economic growth or recession can also affect the fair value of our equity securities. The seven largest contributors to our common stock portfolio net gain position were Honeywell International Inc. (NYSE:HON), JP Morgan Chase & Co. (NYSE:JPM), Apple, Blackrock Inc. (NYSE:BLK), Microsoft Corporation (Nasdaq:MSFT), Johnson & Johnson (NYSE:JNJ) and 3M Company (NYSE:MMM) which had a combined gross unrealized gain position of $864 million .

Unrealized Investment Losses
We expect the number of securities trading below amortized cost to fluctuate as interest rates rise or fall and credit spreads expand or contract due to prevailing economic conditions. Further, amortized costs for some securities are revised through OTTI recognized in prior periods. At September 30, 2017 , 492 of the 3,484 securities we owned had fair values below amortized cost, compared with 784 of the 3,315 securities we owned at year-end 2016. The 492  holdings with fair values below cost or amortized cost at September 30, 2017 , represented 9.5 percent of the fair value of our investment portfolio and $65 million in unrealized losses.
485 of the 492 holdings had fair value between 90 percent and 100 percent of amortized cost at September 30, 2017 . Ten of these 485 holdings are equity securities that may be subject to OTTI charges taken through earnings should they not recover by the recovery dates we determined. The fair value of these 10 equity securities was $102 million , and they accounted for $7 million in unrealized losses. The remaining 475 securities primarily consist of fixed-maturity securities whose current valuation is largely the result of interest rate factors. The fair value of these 475 securities was $1.295 billion , and they accounted for $26 million in unrealized losses.
Seven of the 492 holdings had fair value between 70 percent and 90 percent of amortized cost at September 30, 2017 . Four of these holdings were equity securities. The fair value of these four equity securities was $174 million, and they accounted for $31 million in unrealized losses. We believe the three fixed-maturity securities will continue to pay interest and ultimately pay principal upon maturity. The issuers of these three securities have strong cash flow to service their debt and meet their contractual obligation to make principal payments. The fair value of these securities was $7 million , and they accounted for $1 million in unrealized losses.
No securities had fair value below 70 percent of amortized cost at September 30, 2017 .


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 68



The table below reviews fair values and unrealized losses by investment category and by the overall duration of the securities’ continuous unrealized loss position.
(Dollars in millions)
 
Less than 12 months
 
12 months or more
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
At September 30, 2017
 
value
 
losses
 
value
 
losses
 
value
 
losses
Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
231

 
$
4

 
$
193

 
$
7

 
$
424

 
$
11

States, municipalities and political subdivisions
 
508

 
8

 
122

 
5

 
630

 
13

Commercial mortgage-backed securities
 
43

 

 
3

 

 
46

 

Government-sponsored enterprises
 
152

 
3

 
43

 

 
195

 
3

United States government
 
7

 

 

 

 
7

 

Subtotal
 
941

 
15

 
361

 
12

 
1,302

 
27

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
276

 
38

 

 

 
276

 
38

Subtotal
 
276

 
38

 

 

 
276

 
38

Total
 
$
1,217

 
$
53

 
$
361

 
$
12

 
$
1,578

 
$
65

At December 31, 2016
 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 
 
 

 
 

 
 

 
 

 
 

Corporate
 
$
733

 
$
15

 
$
189

 
$
11

 
$
922

 
$
26

States, municipalities and political subdivisions
 
989

 
42

 

 

 
989

 
42

Commercial mortgage-backed
 
89

 
2

 
2

 

 
91

 
2

Government-sponsored enterprises
 
155

 
3

 

 

 
155

 
3

United States government
 
6

 

 

 

 
6

 

Subtotal
 
1,972

 
62

 
191

 
11

 
2,163

 
73

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
103

 
9

 

 

 
103

 
9

Nonredeemable preferred equities
 
4

 

 

 

 
4

 

Subtotal
 
107

 
9

 

 

 
107

 
9

Total
 
$
2,079

 
$
71

 
$
191

 
$
11

 
$
2,270

 
$
82

 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2017 , 94 fixed-maturity securities with a total unrealized loss of $12 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity security had a fair value below 70 percent of amortized cost; two fixed-maturity securities with a fair value of $6 million had a fair value from 70 percent to less than 90 percent of amortized cost and accounted for $1 million in unrealized losses; and 92 fixed-maturity securities with a fair value of $355 million had fair values from 90 percent to less than 100 percent of amortized cost and accounted for $11 million in unrealized losses.
 
At September 30, 2017 , no equity securities had been in an unrealized loss position for 12 months or more.
 
At September 30, 2017 , applying our invested asset impairment policy, we determined that the total of $12 million, for securities in an unrealized loss position for 12 months or more in the table above, was not other-than-temporarily impaired.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 69



During the third quarter of 2017, no securities were written down through an impairment charge, keeping the total at six during the first nine months of 2017. OTTI resulted in pretax, noncash charges of $9 million for the nine months ended September 30, 2017. During the first nine months of 2016, four securities were written down resulting in $2 million in OTTI charges.
 
During full-year 2016, we wrote down four securities and recorded $2 million in OTTI charges. At December 31, 2016, 32 fixed-maturity investments with a total unrealized loss of $11 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below 70 percent of amortized cost. There were no equity security investments in an unrealized loss position for 12 months or more as of December 31, 2016.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 70



The following table summarizes the investment portfolio by severity of decline:
(Dollars in millions)
 
Number
of issues
 
Cost or 
amortized
cost
 
Fair value
 
Gross 
unrealized 
gain (loss)
 
Gross investment income
At September 30, 2017
 
 
 
 
 
Taxable fixed maturities:
 
 
 
 
 
 
 
 
 
 
Fair valued below 70% of amortized cost
 

 
$

 
$

 
$

 
$

Fair valued at 70% to less than 100% of amortized cost
 
213

 
759

 
743

 
(16
)
 
15

Fair valued at 100% and above of amortized cost
 
1,275

 
5,645

 
5,956

 
311

 
216

Investment income on securities sold in current year
 

 

 

 

 
12

Total
 
1,488

 
6,404

 
6,699

 
295

 
243

Tax-exempt fixed maturities:
 
 

 
 

 
 

 
 

 
 

Fair valued below 70% of amortized cost
 

 

 

 

 

Fair valued at 70% to less than 100% of amortized cost
 
265

 
570

 
559

 
(11
)
 
11

Fair valued at 100% and above of amortized cost
 
1,630

 
3,161

 
3,282

 
121

 
77

Investment income on securities sold in current year
 

 

 

 

 
3

Total
 
1,895

 
3,731

 
3,841

 
110

 
91

Common equities:
 
 

 
 

 
 

 
 

 
 

Fair valued below 70% of cost
 

 

 

 

 

Fair valued at 70% to less than 100% of cost
 
14

 
314

 
276

 
(38
)
 
8

Fair valued at 100% and above of cost
 
57

 
2,770

 
5,532

 
2,762

 
104

Investment income on securities sold in current year
 

 

 

 

 
2

Total
 
71

 
3,084

 
5,808

 
2,724

 
114

Nonredeemable preferred equities:
 
 

 
 

 
 

 
 

 
 

Fair valued below 70% of cost
 

 

 

 

 

Fair valued at 70% to less than 100% of cost
 

 

 

 

 

Fair valued at 100% and above of cost
 
30

 
180

 
217

 
37

 
9

Investment income on securities sold in current year
 

 

 

 

 

Total
 
30

 
180

 
217

 
37

 
9

Portfolio summary:
 
 

 
 

 
 

 
 

 
 

Fair valued below 70% of cost or amortized cost
 

 

 

 

 

Fair valued at 70% to less than 100% of cost or amortized cost
 
492

 
1,643

 
1,578

 
(65
)
 
34

Fair valued at 100% and above of cost or amortized cost
 
2,992

 
11,756

 
14,987

 
3,231

 
406

Investment income on securities sold in current year
 

 

 

 

 
17

Total
 
3,484

 
$
13,399

 
$
16,565

 
$
3,166

 
$
457

 
 
 
 
 
 
 
 
 
 
 
At December 31, 2016
 
 

 
 

 
 

 
 

 
 

Portfolio summary:
 
 

 
 

 
 

 
 

 
 

Fair valued below 70% of cost or amortized cost
 

 
$

 
$

 
$

 
$

Fair valued at 70% to less than 100% of cost or amortized cost
 
784

 
2,352

 
2,270

 
(82
)
 
62

Fair valued at 100% and above of cost or amortized cost
 
2,531

 
10,442

 
13,149

 
2,707

 
501

Investment income on securities sold in current year
 

 

 

 

 
38

Total
 
3,315

 
$
12,794

 
$
15,419

 
$
2,625

 
$
601

 
 
 
 
 
 
 
 
 
 
 
 
See our 2016 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Asset Impairment, Page 53.


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 71



Item 4.        Controls and Procedures
Evaluation of Disclosure Controls and Procedures – The company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)).
 
Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The company’s management, with the participation of the company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of the company’s disclosure controls and procedures as of September 30, 2017 . Based upon that evaluation, the company’s chief executive officer and chief financial officer concluded that the design and operation of the company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to ensure:
that information required to be disclosed in the company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and
that such information is accumulated and communicated to the company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting – During the three months ended September 30, 2017 , there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Part II – Other Information
Item 1.    Legal Proceedings
Neither the company nor any of our subsidiaries are involved in any litigation believed to be material other than ordinary, routine litigation incidental to the nature of our business.
 
Item 1A.    Risk Factors
Our risk factors have not changed materially since they were described in our 2016 Annual Report on Form 10-K filed February 24, 2017.
 
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any of our shares that were not registered under the Securities Act during the first nine months of 2017. Our repurchase program was expanded on October 22, 2007, to increase our repurchase authorization to approximately 13 million shares. Our repurchase program does not have an expiration date. We have 2,542,065 shares available for purchase under our programs at September 30, 2017 .
Period
 
Total number
 of shares
 purchased
 
Average
 price paid
 per share
 
Total number of shares 
purchased as part of
publicly announced
plans or programs
 
Maximum number of
shares that may yet be
purchased under the
plans or programs
July 1-31, 2017
 

 
$

 

 
2,542,065

August 1-31, 2017
 

 

 

 
2,542,065

September 1-30, 2017
 

 

 

 
2,542,065

Totals
 

 

 

 
 

 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 72




Item 6.    Exhibits
Exhibit No.
 
Exhibit Description
3.1
 
3.2
 
31A
 
31B
 
32
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 

Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 73



SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CINCINNATI FINANCIAL CORPORATION
Date: October 26, 2017
 
/S/ Michael J. Sewell
Michael J. Sewell, CPA
Chief Financial Officer, Senior Vice President and Treasurer
(Principal Accounting Officer)


Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page 74


AMENDEDANDRESTATEDARTICL001.JPG

1



CINCINNATI FINANCIAL CORPORATION BOARD OF DIRECTORS
AUGUST 18 , 2017

RESOLUTION TO APPROVE AMENDED AND RESTATED ARTICLES OF INCORPORATION

WHEREAS, the company's current Articles of Incorporation consist of the Amended Articles of Incorporation of Cincinnati Financial Corporation , adopted by resolution of the Board of Directors on November 19 , 2010 , along with an Amendment to the Amended Articles of Incorporation of Cincinnati Financial Corporation , adopted at an annual meeting of shareholders held on April 30,
2016.

WHEREAS , the Amended Articles of Incorporation of Cincinnati Financial Corporation and the Amendment to the Amended Articles of Incorporation of Cincinnati Financial Corporation have been previously filed with the Secretary of State of the State of Ohio;

WHEREAS , it is advantageous to consolidate the documents which jointly constitute the current Articles of Incorporation applicable to the corporation in a single document; and

WHEREAS, the document entitled Amended and Restated Articles of Incorporation of Cincinnati F i nancial Corporation attached hereto as Exhibit A accurately consolidates the Amended Articles of Incorporation and the Amendment thereto ;

RESOLVED , the board of directors approves the Amended and Restated Articles of Incorporation of C i ncinnati Financial Corporation (as of August 18 , 2017 ), as set forth i n Exh i bit A , and instructs the Secretary to file a copy of the Amended and Restated Articles of Incorporation (as of August 18, 2017) with the Secretary of State of the State of Ohio.

2




AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
CINCINNATI FINANCIAL CORPORATION
(as of August 18, 2017)

FIRST: The name of the corporation is CINCINNATI FINANCIAL CORPORATION (the "Corporation").

SECOND: The principal office of the Corporation in the State of Ohio shall be located in the City of Fairfield, County of Butler.

THIRD: The purpose for which the Corporation is formed is to engage in any lawful act or activity for which corporations may be organized under the Ohio General Corporation Law specifically including acting as a control entity in an insurance holding company system under Chapter 3901 of the Ohio Revised Code. The Corporation is hereby expressly authorized to repurchase and to redeem its outstanding securities to the maximum extent now or hereafter permitted by applicable law.

FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is Five Hundred Million (500,000,000) and the par value of each share shall be Two ($2.00) Dollars.

FIFTH:      No holder of shares of any class of the Corporation shall have any preemptive right to acquire shares of the Corporation and the preemptive rights described in Ohio Revised Code §1701 . 15 are hereby specifically denied to the holders of shares of any class of the Corporation.

SIXTH: (a) Subject to the provisions of part (c) of this Article SIXTH, the Board of Directors shall be divided into three (3) classes, each class consisting of one-third (as nearly as possible but in no event may any one class have greater than one more director than any other class) of the total number of directors. At each annual meeting of the shareholders, the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting. Subject to the right of the shareholders to fix the number of directors at a meeting called for the purpose of electing directors, the Board of Directors may change the number of directors constituting the Board of Directors by resolution.

(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 , o r newly created directorships resulting from any increase i n the authorized number of directors, shall be filled by a majority of the directors then in office, or by a sole remaining director,

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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 part (a) of th i s 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 that 2011 annual meeting of shareholders , the directors whose terms expire at that meeting shall be elected to hold office for a one­ year term expir i ng at the 2012 annual meeting of shareholders ; and (iii) at the 2012 annual meeting of shareholde r s, the directors whose terms expire at tha t meeting shall be elected to hold office for a one-yea r term expiring at the 2013 annual meeting of shareholders .

SEVENTH : In furtherance and not in limitation of the powers conferred by statute , the Board of Directors is expressly authorized:

To authorize and cause to be executed mortgages and liens upon the real and personal property of the corporation ;

To set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created ;

By a majority of the whole board, to designate one or more committees, each committee to consist of at least three of the directors of the corporation. The board may designate one or more directors as alternate members of any committee , who may replace any absent or d i squalified member at any meeting of the committee. Any such committee, to the extent provided in the resolution or in the regulations of the corporation , shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it.

EIGHTH : (a) Unless the conditions set forth in this Article are satisfied, the affirmative vote of the holders of seventy-five (75) percent of all shares of the corporation entitled to vote in elections of Directors, shall be required for the adoption or authorization of a business combination (as hereinafter defined) with any other entity (as here i nafter defined) i f, as of the record date for the determination of shareholders entitled t o notice thereof and to vote thereon, the other entity is the beneficial owner, directly or ind i rectly, of more than ten (10) percent of the outstand i ng shares of the Corporation entitled to vote in elections of Directors. The seventy-five (75) percent voting requirement set forth in the foregoing sentence shall not be applicable if:

4



The cash, or fair market value of other consideration, to be received per share by holders of common shares of the Corporation in the business combination is not less t han the greater of: (A) the highest per-share price (includ i ng brokerage commissions , soliciting dealers' fees, dealer-management compensation , and other expenses, including, but not limited to , costs of newspaper advertisements, printing expenses , and attorney fees) paid by the other entity in acquiring any of its holdings of the common shares of the Corporation or , (B ) an amount which bears the same or a greater percentage relationship to the market value price of the Corporation ' s common stock immediately pr i o r to the announcement of such business combination as the highest per-share price determined in
(A) above bears to the market price of the Corporation's common stock immediately prior to the commencement of acquis i tion of the Corporation ' s common stock by the other entity but in no event in excess of two times the highest per-share price determ i ned in (A ) above ;

The provisions of this Article shall also apply to a business combination with any other entity that at any time has been t he beneficial owner , directly or indirectly , of more than ten (10) percent of the outstanding shares of the Corporation entitled to vote in elections of Directors, notwithstanding the fact that the other entity has reduced its shareholdings below ten (10) percent if , as of the record date for the determination of shareholders entitled to notice of and to vote on the business combination, the other entity is an " affiliate " of the Corporation (as hereinafter defined) .

(a) As used in this Article, (1) the term " other entity " shall include any corporation, person, or other entity and any other entity with which it or its " affiliate" or "associate " (as defined below) has any agreement , arrangement , or understanding, directly or indirectly , for the purpose of acquiring, holding , voting or disposing of shares of the Corporation , or that is its "affiliate " or " associate" as those terms are defined in Rule 12b-2 of the general rules and regulations under the Securities Exchange Act of 1934, together with the successors and assigns of those persons in any transaction or series of transactions not i nvolving a public offering of the Corporation's shares within t he meaning of the Securities Act of 1933; (2) an other entity shall be deemed to be the beneficial owner of any shares of the Corporation that the other entity has the right to acquire pursuant to any agreement or upon exercise of conversion rights , warrants , or options or otherwise ; (3) the outstanding shares of any class of the Corporation shall include shares deemed owned through application of clause (2) above but shall not include any other shares that may be issuable pursuant to any agreement or upon exercise of conversion rights, warrants , or options or otherwise; (4) the term "business combination" shall include (A ) the sale, exchange , lease, transfer or other disposition by the Corporation of all, or substantially all , of its assets or business to any other entity , (B) the consolidation of the Corporation with or its merger into any other entity , (C) the merger into the Corporation of any other entity, or
(D) a " combination " or "majority share acquisition" in which the Corporation isthe " acquiring corporation " (as those terms are defined in Section 1701.01 of the Ohio Revised Code or any similar provision hereafter enacted) and its voting shares are issued or transferred to any other entity or to the shareholders of any other entity, and the term "business combination " shall also include any agreement , contract, or other arrangement with another entity providing for any of the transactions described in (A) through (D) of this clause (4) ; and ( 5) for the purposes of clause (a)(1) of this Article, the term " other consideration to be received" shall mean common shares of the Corporation retained by its existing public


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shareholders in the event of a business combination with the other entity in which the Corporation is the surviving corporation.

(a) Nothing contained in this Article shall be construed to relieve any other entity from any fiduciary obligation imposed by law.

NINTH: Meetings of stockholders may be held within or without the State of Ohio. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Ohio at such place or places as may be designated from time to time by the Board of Directors or in the Regulations of the Corporation. Elections of directors need not be by written ballot unless the Regulations of the Corporation shall so provide.

TENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon shareholders herein are granted subject to this reservation. Notwithstanding the foregoing, this Article and Articles SIXTH and EIGHTH of the Corporation' s Articles of Incorporation may be altered, amended or repealed only if seventy-five (75) percent of the outstanding stock of each class entitled to vote thereon as a class have been voted in favor of such action.

ELEVENTH: Each person who is or was a director or officer of the Corporation shall be indemnified by the Corporation to the full extent permitted by the General Corporation Law of the State of Ohio against any liability, cost or expense incurred by him in his capacity as a director or officer or arising out of his status as a director or officer. The Corporation may, but shall not be obligated to, maintain insurance, at its expense, to protect itself and any such person against any such liability, cost or expense. The indemnification authorized by this Article ELEVENTH shall not be exclusive of, and shall be in addition to, any other rights granted to a person seeking indemnification or advancement of expenses under any statute, the Regulations or any agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office.

TWELFTH: No action required to be taken or which may be taken at any annual or special meeting of shareholders of the Corporation may be taken without a meeting, and the power of shareholders to consent in writing, without a meeting, to the taking of any action, including (without limitation) the power of shareholders to adopt or amend the Regulations by written consent, is hereby specifically denied.

Special meetings of the shareholders of the Corporation may be called only by the Board of Directors or the Chief Executive Officer of the Corporation or by persons who hold fifty (50) percent of all shares of the Corporation outstanding and entitled to vote at such special meeting.

No holder of shares of any class of the Corporation shall have the right to cumulate his voting power in the election of the Board of Directors and the right to cumulative voting

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described in Ohio Revised Code §1701.55 is hereby specifically denied to the holders of shares of any class of the Corporation.

THIRTEENTH: At each meeting of shareholders at which directors are to be elected, a candidate for director shall be elected only if the votes "for" the candidate exceed the votes "against" the candidate. Abstentions and broker nonvotes shall not be counted as votes "for" or "against" a candidate. Notwithstanding the foregoing, if the Board of Directors determines that the number of candidates exceeds the number of Directors to be elected, then in that election the candidates receiving the greatest number of votes shall be elected.


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EXHIBIT 31A

CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES OXLEY ACT OF 2002
I, Steven J. Johnston, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Cincinnati Financial Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: October 26, 2017
/S/ Steven J. Johnston
Steven J. Johnston, FCAS, MAAA, CFA, CERA
President and Chief Executive Officer
 





EXHIBIT 31B

CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES OXLEY ACT OF 2002
I, Michael J. Sewell, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Cincinnati Financial Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 26, 2017
/S/ Michael J. Sewell
Michael J. Sewell, CPA
Chief Financial Officer, Senior Vice President and Treasurer
(Principal Accounting Officer)
 





EXHIBIT 32
 
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES OXLEY ACT OF 2002
The certification set forth below is being submitted in connection with this report on Form 10-Q for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code.
 
Steven J. Johnston, the chief executive officer, and Michael J. Sewell, the chief financial officer, of Cincinnati Financial Corporation each certifies that, to the best of his knowledge:
1.
the report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
2.
the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of Cincinnati Financial Corporation.

Date: October 26, 2017
 
/S/ Steven J. Johnston
Steven J. Johnston, FCAS, MAAA, CFA, CERA
President and Chief Executive Officer
 
/S/ Michael J. Sewell
Michael J. Sewell, CPA
Chief Financial Officer, Senior Vice President and Treasurer
(Principal Accounting Officer)