Cincinnati Financial Earnings 2018-12-31

CINF 10K Annual Report

Balance Sheet	Income Statement	Cash Flow

10-K 1 cinf-20181231x10k.htm 10-K Document

United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K



þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2018.



¨	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 000-04604

Cincinnati Financial Corporation

(Exact name of registrant as specified in its charter)



Ohio	31-0746871
(State of incorporation)	(I.R.S. Employer Identification No.)

6200 S. Gilmore Road

Fairfield, Ohio 45014-5141

(Address of principal executive offices) (Zip Code)

(513) 870-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

$2.00 par, common stock

(Title of Class)

6.125% Senior Notes due 2034

(Title of Class)

6.9% Senior Debentures due 2028

(Title of Class)

6.92% Senior Debentures due 2028

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

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.

Yes þ No ¨

Cincinnati Financial Corporation - 2018 10-K - Page 1

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 if 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). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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.

Large accelerated filer þ Accelerated filer ¨ Non-accelerated 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 Act). Yes ¨ No þ

The aggregate market value of voting stock held by nonaffiliates of the Registrant based on the closing price of $66.86 per share as reported on Nasdaq Global Select Market on June 30, 2018, was $10,123,221,318.

As of February 18, 2019, there were 162,937,899 shares of common stock outstanding.

Document Incorporated by Reference

Portions of the definitive Proxy Statement for Cincinnati Financial Corporation’s Annual Meeting of Shareholders to be held on April 27, 2019, are incorporated by reference into Part III of this Form 10-K.

Cincinnati Financial Corporation - 2018 10-K - Page 2

2018 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



Part I		4
Item 1.	Business	4
	Cincinnati Financial Corporation – Introduction	4
	Our Business and Our Strategy	5
	Our Segments	16
	Other	29
	Regulation	30
Item 1A.	Risk Factors	33
Item 1B.	Unresolved Staff Comments	43
Item 2.	Properties	43
Item 3.	Legal Proceedings	43
Item 4.	Mine Safety Disclosures	43
Part II		44
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	44
Item 6	Selected Financial Data	47
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
	Introduction	48
	Executive Summary	49
	Critical Accounting Estimates	54
	Recent Accounting Pronouncements	61
	Financial Results	62
	Liquidity and Capital Resources	94
	Safe Harbor Statement	111
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	113
Item 8.	Financial Statements and Supplementary Data	119
	Responsibility for Financial Statements	119
	Management’s Annual Report on Internal Control Over Financial Reporting	120
	Report of Independent Registered Public Accounting Firm	121
	Consolidated Balance Sheets	123
	Consolidated Statements of Income	124
	Consolidated Statements of Comprehensive Income	125
	Consolidated Statements of Shareholders’ Equity	126
	Consolidated Statements of Cash Flows	127
	Notes to Consolidated Financial Statements	128
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	179
Item 9A.	Controls and Procedures	179
Item 9B.	Other Information	179
Part III		180
Item 10.	Directors, Executive Officers and Corporate Governance	180
Item 11.	Executive Compensation	182
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	182
Item 13.	Certain Relationships and Related Transactions, and Director Independence	183
Item 14.	Principal Accounting Fees and Services	183
Part IV		184
Item 15.	Exhibits, Financial Statement Schedules	184

Cincinnati Financial Corporation - 2018 10-K - Page 3

Part I

ITEM 1. Business

Cincinnati Financial Corporation – Introduction

We are an Ohio corporation formed in 1968. Our lead subsidiary, The Cincinnati Insurance Company, was founded in 1950. Our main business is property casualty insurance marketed through independent insurance agencies in 42 states. Our headquarters is in Fairfield, Ohio. At year-end 2018, we employed 4,999 associates, including 3,282 headquarters associates who provide support to 1,717 field associates.

Cincinnati Financial Corporation owns 100 percent of three subsidiaries: The Cincinnati Insurance Company, CSU Producer Resources Inc. and CFC Investment Company. In addition, the parent company has an investment portfolio, owns the headquarters property and is responsible for corporate borrowings and shareholder dividends.

The Cincinnati Insurance Company owns 100 percent of four additional insurance subsidiaries. Our standard market property casualty insurance group includes two of those subsidiaries – The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This group writes a broad range of business, homeowner and auto policies. The Cincinnati Insurance Company also conducts the business of our reinsurance assumed operations, known as Cincinnati Re^SM. Other subsidiaries of The Cincinnati Insurance Company include: The Cincinnati Life Insurance Company (Cincinnati Life), which provides life insurance policies and fixed annuities; and The Cincinnati Specialty Underwriters Insurance Company (Cincinnati Specialty Underwriters), which offers excess and surplus lines insurance products. In this report and elsewhere we often refer to any or all of these five companies as The Cincinnati Insurance Companies.

The two noninsurance subsidiaries of Cincinnati Financial Corporation are CSU Producer Resources, which offers insurance brokerage services to our independent agencies so their clients can access our excess and surplus lines insurance products; and CFC Investment Company, which offers commercial leasing and financing services to our agencies, their clients and other customers.

On October 12, 2018, we announced the terms of an agreement to acquire all of the shares of MSP Underwriting Limited (MSP) in an all-cash transaction for £102 million based on MSP's projected net asset value at closing, or approximately $134 million based upon the October 9, 2018, exchange rate of 1.31 U.S. dollars per Pound Sterling (GBP). MSP, which operates through Beaufort Underwriting Agency Limited, is a London based global specialty underwriter and Munich Re subsidiary. We expect the transaction to contribute to future earnings and book value growth as it should provide opportunities to support business produced by our independent agencies in new geographies and lines of business. The transaction is expected to close during the first quarter of 2019, subject to regulatory approvals and other customary terms and conditions.

Our filings with the U.S. Securities and Exchange Commission (SEC) are available on our website,

cinfin.com/investors, as soon as possible after they have been filed with the SEC. Reports filed with the SEC may also be viewed at sec.gov. These filings include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. In this report we reference various websites. These websites, including our own, are not incorporated by reference in this Annual Report on Form 10-K.

Periodically, we refer to estimated industry data so that we can give information about our performance versus the overall U.S. insurance industry. Unless otherwise noted, the industry data is prepared by A.M. Best, a leading insurance industry statistical, analytical and insurer financial strength and credit rating organization. Information from A.M. Best is presented on a statutory accounting basis. When we provide our results on a comparable statutory accounting 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).

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Our Business and Our Strategy

Introduction

The Cincinnati Insurance Company was founded nearly 70 years ago by four independent insurance agents. They established the mission that continues to guide all of the companies in the Cincinnati Financial Corporation family – to grow profitably and enhance the ability of local independent insurance agents to deliver quality financial protection to the people and businesses they serve by:


•	providing insurance market stability through financial strength


•	producing competitive, up-to-date products and services


•	developing associates committed to superior service

At year-end 2018, a select group of independent agencies in 42 states actively marketed our property casualty insurance within their communities. Standard market commercial lines and excess and surplus lines policies were marketed in 39 of those states. Personal lines policies were marketed in 38 of those states. Within our select group of agencies, we also seek to become the life insurance carrier of choice and to help agents and their clients – our policyholders – by offering leasing and financing services.

Three competitive advantages distinguish our company, positioning us to build shareholder value and to be successful overall:


•	Commitment to our professional independent insurance agencies and to their continued success


•	Financial strength to fulfill our promises and be a consistent market for our agents’ business, supporting stability and confidence


•	Operating structure that supports local decision making, showcasing our claims excellence and allowing us to balance growth with underwriting discipline

The primary sources of our company’s net income are summarized below. We discuss the contribution to net income from each source in Item 7, Corporate Financial Highlights of Management’s Discussion and Analysis.

•

Underwriting profit (loss) – Includes revenues from earned premiums for insurance and reinsurance policies or contracts, reduced by losses and loss expenses from associated insurance coverages. Those revenues are further reduced by underwriting expenses associated with marketing policies or related to administration of our insurance operation. The net result represents an underwriting profit when revenues exceed losses and expenses.


•	Investment income – Is generated primarily from investing the premiums collected for insurance policies sold, until funds are needed to pay losses for insurance claims or other expenses. Interest income from bond investments or dividend income from stock investments are the main categories of our investment income, with additional contribution from compounding effects over time.


•	Investment gains and losses – Occur from appreciation or depreciation of invested assets over time. Gains or losses are generally recognized from changes in market values of equity securities without a sale or when invested assets are sold or become impaired.

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Independent Insurance Agency Marketplace

The U.S. property casualty insurance industry is a highly competitive marketplace with more than 2,000 stock and mutual companies operating independently or in groups. No single company or group dominates across all product lines and states. Standard market insurance companies (carriers) can market a broad array of products nationally or:


•	choose to sell a limited product line or only one type of insurance (monoline carrier)


•	target a certain segment of the market (for example, personal insurance)


•	focus on one or more states or regions (regional carrier)

Standard market property casualty insurers generally offer insurance products through one or more distribution channels:


•	independent agents, who represent multiple carriers


•	captive agents, who represent one carrier exclusively


•	direct marketing to consumers

For the most part, we compete with standard market insurance companies that market through independent insurance agents. Agencies marketing our commercial lines products typically represent six to 12 standard market insurance carriers for commercial lines products, including both national and regional carriers, most of which are mutual companies. Our agencies typically represent four to six standard personal lines carriers. We also compete with carriers that market personal lines products through captive agents and direct writers. Some of our agencies describe their roles as brokers instead of agents. Distribution through independent insurance agents or brokers represents nearly 60 percent of overall U.S. property casualty insurance premiums and approximately 80 percent of commercial property casualty insurance premiums, according to studies by the Independent Insurance Agents and Brokers of America.

We are fully committed to the independent agency channel for marketing our insurance policies, while Cincinnati Re typically markets through broker organizations or similar intermediaries that specialize in reinsurance. The independent agencies that we choose to market our standard lines insurance products share our philosophies. They do business person to person; offer broad, value-added services; maintain sound balance sheets; and manage their agencies professionally, targeting long-term success. We develop our relationships with agencies that are active in their communities, providing important knowledge of local market trends, opportunities and challenges.

We work to support agencies with tools and resources that help communicate the value of our insurance policies to their clients and prospective clients. We plan to build on our recent marketing efforts and continue with our national advertising campaign in 2019. Our intent is to increase the visibility of our company, supporting our agents' efforts as they recommend policies and services offered through The Cincinnati Insurance Companies. We also continue to build our social media presence, focusing on providing content that agents can share on their own sites.

We help our agencies meet the broader needs of their clients and increase and diversify their revenues and profitability by offering insurance solutions beyond our standard market property casualty insurance products. We market life insurance products through the agencies that offer our property casualty products and through other independent life agencies that represent The Cincinnati Life Insurance Company without also representing our other subsidiaries. We operate our own excess and surplus lines insurance brokerage firm and insurance carrier so that we can offer our excess and surplus lines products exclusively to the independent agencies who market our other property casualty insurance products.

For our life insurance operation, property casualty agencies make up the main distribution system. To help that operation build scale, we also develop life insurance business from other independent life insurance agencies in geographic markets underserved through our property casualty agencies. We are careful to solicit business from these other agencies in a manner that does not compete with the life insurance marketing and sales efforts of our property casualty agencies. Cincinnati Life emphasizes up-to-date products, responsive underwriting, high-quality service and competitive pricing.

Our excess and surplus lines insurance operation helps meet the specific insurance needs of certain agency clients. Generally, excess and surplus lines insurance carriers provide insurance that is unavailable in the standard market due to market conditions or characteristics of the insured persons or organizations that are caused by their

Cincinnati Financial Corporation - 2018 10-K - Page 6

nature, claim history or the characteristics of their business. Insurers operating in the excess and surplus lines marketplace generally market business through excess and surplus lines brokers, whether they are small specialty insurers or specialized divisions of larger insurance organizations. Agencies have access to Cincinnati Specialty Underwriters' product line through CSU Producer Resources, the wholly owned insurance brokerage subsidiary of Cincinnati Financial Corporation. By providing superior service, we can help our agencies grow while also profitably growing our property casualty insurance business.

The table below includes data about property casualty agency relationships that market our standard market insurance products.



Agency Data	Years ended December 31,
	2018	2017
Property casualty agency relationships, January 1	1,702	1,614
New appointments that market all or most of The Cincinnati Insurance Companies' products	98	107
New appointments that market only personal lines insurance products for Cincinnati Insurance	69	104
Changes due to consolidation and other	(112)	(123)
Property casualty agency relationships, December 31	1,757	1,702

Property casualty reporting locations	2,344	2,256

New relationship appointments	111	138

Active states	42	42

The annual total of agency new appointments may be partially offset by other changes in agency structures, such as consolidation through mergers or acquisitions. An increasing number of agencies have multiple, separately identifiable locations, reflecting their growth as well as consolidation of ownership within the independent agency marketplace. The number of reporting agency locations indicates our agents’ regional scope and the extent of our presence within our active states. The difference between new appointments in total and the number of new relationships represents either: new branch offices opened by existing Cincinnati agencies; or agencies that merged with another Cincinnati agency and we still believed would produce a meaningful amount of new business premiums.

On average, we have an 8.4 percent share of the standard lines property casualty insurance purchased through our reporting agency locations, according to 2017 data from agency surveys. Our share is 14.3 percent in reporting agency locations that have represented us for more than 10 years; 7.6 percent in agencies that have represented us for six to 10 years; 2.2 percent in agencies that have represented us for two to five years; and 0.5 percent in agencies that have represented us for one year or less.

Our largest single agency relationship accounted for approximately 0.8 percent of our total property casualty earned premiums in 2018. No aggregate locations under a single ownership structure accounted for more than 4 percent of our earned premiums in 2018.

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Financial Strength

We believe that our financial strength and strong capital and surplus position, reflected in our insurer financial strength ratings, are clear, competitive advantages in the segments of the insurance marketplace that we serve. This strength supports the consistent, predictable performance that our policyholders, agents, associates and shareholders have always expected and received, helping us withstand significant challenges.

While the potential exists for short-term financial performance variability due to our exposures to possible natural or man-made catastrophes or to significant capital market losses, the rating agencies consistently assert that we have built appropriate financial strength and flexibility to manage that variability. We remain committed to strategies that emphasize being a consistent, stable market for our agents’ business rather than seeking short-term benefits that might accrue by quick, opportunistic reaction to changes in market conditions.

We use various principles and practices such as diversification and enterprise risk management to maintain strong capital. For example, we maintain a diversified investment portfolio by reviewing and applying diversification parameters and tolerances.

•

Our $10.689 billion fixed-maturity portfolio is diversified and exceeds total insurance reserves. The portfolio had an average rating of A2/A, and its fair value exceeded total insurance reserve liabilities by approximately 26 percent at December 31, 2018. No corporate bond exposure accounted for more than 0.8 percent of our fixed-maturity portfolio, and no municipal exposure accounted for more than 0.2 percent.

•

The strength of our fixed-maturity portfolio provides an opportunity to invest for potential capital appreciation by purchasing equity securities. Our $5.920 billion equity portfolio minimizes concentrations in single stocks or industries. At December 31, 2018, no single security accounted for more than 4.5 percent of our portfolio of publicly traded common stocks, and no single sector accounted for more than 21 percent.

Strong liquidity increases our flexibility through all periods to maintain our cash dividend and to continue to invest in and expand our insurance operations. At December 31, 2018, we held $2.514 billion of our cash and invested assets at the parent-company level, of which $2.233 billion, or 88.8 percent, was invested in common stocks, and $209 million, or 8.3 percent, was cash and cash equivalents.

We minimize reliance on debt as a source of capital, with a debt-to-total-capital ratio of 9.5 percent at year-end 2018. Long-term debt at year-end 2018 totaled $788 million, compared with $787 million at year-end 2017, and our short-term debt was $32 million, up from $24 million at the end of the prior year. The long-term debt consists of three nonconvertible, noncallable debentures, two due in 2028 and one in 2034. Ratings for our long-term debt are discussed in Item 7, Liquidity and Capital Resources, Additional Sources of Liquidity.

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At year-end 2018 and 2017, risk-based capital (RBC) for our standard market property casualty insurance, excess and surplus lines insurance and life insurance subsidiaries was strong, far exceeding regulatory requirements.

•

We ended 2018 with a 1.0-to-1 ratio of property casualty premiums to surplus, a key measure of property casualty insurance company capacity and security. A lower ratio indicates more security for policyholders and greater capacity for growth by an insurer. We believe our ratio provides ample flexibility to diversify risk by expanding our operations into new geographies and product areas. The estimated industry average ratio was 0.8-to-1 at year-end 2018, based on industry data reported through the first nine months of 2018.


•	We ended 2018 with a 6.4 percent ratio of life statutory adjusted risk-based surplus to liabilities, a key measure of life insurance company capital strength. A higher ratio indicates an insurer’s stronger security for policyholders and capacity to support business growth.



(Dollars in millions) Statutory Information	At December 31,
	2018		2017
Standard market property casualty insurance subsidiary
Statutory capital and surplus	$	4,919	$	5,094
Risk-based capital	4,952		5,127
Authorized control level risk-based capital	723		686

Risk-based capital to authorized control level risk-based capital ratio	6.8		7.5
Written premium to surplus ratio	1.0		1.0
Excess and surplus lines insurance subsidiary
Statutory capital and surplus	$	479	$	436
Risk-based capital	479		436
Authorized control level risk-based capital	41		35

Risk-based capital to authorized control level risk-based capital ratio	11.8		12.3
Written premium to surplus ratio	0.5		0.5
Life insurance subsidiary
Statutory capital and surplus	$	191	$	195
Risk-based capital	223		229
Authorized control level risk-based capital	51		45
Total liabilities excluding separate account business	3,538		3,436

Risk-based capital to authorized control level risk-based capital ratio	4.4		5.1
Life statutory risk-based adjusted surplus to liabilities ratio	6.4		6.7

The consolidated property casualty insurance group’s ratio of investments in common stock, at fair value, to statutory capital and surplus was 70.9 percent at year-end 2018 compared with 73.5 percent at year-end 2017.

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Cincinnati Financial Corporation’s senior debt is rated by four independent rating firms. In addition, the rating firms award our property casualty and life operations insurance financial strength ratings based on their quantitative and qualitative analyses. These ratings 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 shareholders. Ratings may be subject to revision or withdrawal at any time by the ratings agency, and each rating should be evaluated independently of any other rating.

At February 21, 2019, our insurance subsidiaries continued to be highly rated.



	Insurer Financial Strength Ratings
Rating agency	Standard market property casualty insurance subsidiary			Life insurance subsidiary			Excess and surplus lines insurance subsidiary			Outlook
			Rating Tier			Rating Tier			Rating Tier
A.M. Best Company ambest.com	A+	Superior	2 of 16	A	Excellent	3 of 16	A+	Superior	2 of 16	Stable/ Positive/ 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	-	-	-	-	-	-	Positive
S&P Global Ratings spratings.com	A+	Strong	5 of 21	A+	Strong	5 of 21	-	-	-	Stable

On January 30, 2019, A.M. Best affirmed the financial strength rating of The Cincinnati Insurance Company, and its property casualty insurance subsidiaries, that it had assigned in December 2008, continuing its stable outlook. On the same date, A.M. Best affirmed the financial strength rating of The Cincinnati Life Insurance Company, maintaining its positive outlook. On December 21, 2018, Moody's affirmed the ratings that it had assigned to us in September 2008, changing its outlook to positive. On November 16, 2018, Fitch affirmed the ratings that it had assigned to us in August 2009, continuing its stable outlook. On July 11, 2018, S&P affirmed the ratings that it had assigned to us in June 2015, continuing its stable outlook.

Our debt ratings are discussed in Item 7, Liquidity and Capital Resources, Additional Sources of Liquidity.

Cincinnati Financial Corporation - 2018 10-K - Page 10

Operating Structure

We offer our broad array of insurance products through the independent agency distribution channel. We recognize that locally based independent agencies have relationships in their communities and local marketplace intelligence that can lead to profitable business and policyholder satisfaction and loyalty. Several of our strategic initiatives are intended not only to help us compete but also to enhance support of agencies that represent us, thereby contributing to agency success. We seek to be a consistent and predictable property casualty carrier that agencies can rely on to serve their clients.

In our 10 highest volume states for consolidated property casualty premiums, 1,181 reporting agency locations wrote 58.4 percent of our 2018 consolidated property casualty earned premium volume compared with 1,170 locations and 59.7 percent in 2017. We continue efforts to geographically diversify our property casualty risks.

Our 10 largest states based on property casualty premium volume are shown in the table below.



(Dollars in millions)	Earned premiums		% of total earned		Agency locations	Average premium per location
Year ended December 31, 2018
Ohio	$	781	15.9	%	247	$	3.2
Illinois	293		6.0		149	2.0
Georgia	282		5.7		108	2.6
Indiana	264		5.4		115	2.3
North Carolina	263		5.3		104	2.5
Pennsylvania	247		5.0		136	1.8
Michigan	224		4.6		138	1.6
Tennessee	187		3.8		64	2.9
Virginia	170		3.5		68	2.5
Alabama	158		3.2		52	3.0

Field Focus Emphasizing Service

We rely on our force of 1,717 field associates to provide service and be accountable to our agencies for decisions we make at the local level. These associates live in the communities our agents serve, so they are readily available when agencies or policyholders need them. While their work is often conducted at the premises of the agency or policyholder, they also work from offices in their homes. Headquarters associates support agencies and field associates with underwriting, accounting, technology assistance, training and other services. Company executives and headquarters associates regularly travel to visit agencies, strengthening the personal relationships we have with these organizations. Agents have opportunities for direct, personal conversations with our senior management team, and headquarters associates have opportunities to refresh their knowledge of marketplace conditions and field activities.

The field team is coordinated by field marketing representatives responsible for underwriting new commercial lines business. They are joined by field representatives specializing in claims, loss control, commercial lines key accounts, personal lines, excess and surplus lines, machinery and equipment, management liability and surety, premium audit and life insurance. The field team provides a variety of services, such as recommending specific actions to improve the safety of the policyholder’s operations. We seek to develop long-term relationships by understanding the unique needs of each agency's clients, who are also our policyholders.

Technology enhances our service to agencies, allowing them to more easily access our systems and process business transactions. Policyholders can conveniently access pertinent policy information online, helping to reduce costs for agencies and the company. Technology also helps our associates collaborate and process business efficiently, providing more time for personal service to agencies and their clients.

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We also provide and continue to develop enhanced, tailored services offered at the time a claim is reported for an insured loss event. Those services include assisting with car rental or towing, arranging temporary housing and coordinating emergency repairs to homes so additional damage is minimized.

Our claims philosophy reflects our belief that we prosper as a company by responding to claims person to person, paying covered claims promptly, preventing false claims from unfairly adding to overall premiums and building financial strength to meet future obligations.

Our 954 locally based field claims associates work from their homes and are assigned to specific agencies. They respond personally to policyholders and claimants and are equipped to handle a claim from nearly anywhere. We believe we have a competitive advantage because of the person-to-person approach and the resulting high level of service that our field claims representatives deliver. We also help our agencies provide prompt service to policyholders by providing them authority to immediately pay, up to $2,500, most first-party claims covered by our standard market policies. Agencies also have the option of submitting those claims to our Express Claims Center where professional headquarters associates will provide immediate customer service, processing the claims promptly and efficiently. We believe this same local approach to handling claims is a competitive advantage for our agents providing excess and surplus lines coverage in their communities. Handling of these claims includes guidance from headquarters-based excess and surplus lines claims managers.

Catastrophe response teams are comprised of our experienced field claims associates who have the authority they need to do their jobs. In times of widespread loss, our field claims representatives confidently and quickly resolve claims, often providing claims payments on the same day they inspect the loss. Technology helps to enable fast initial contact with policyholders and easy sharing of information and data among storm teams, headquarters associates and local field claims representatives. When hurricanes or other weather events are predicted, we can identify through mapping technologies the expected number of our policyholders that may be impacted by the event and choose to have catastrophe response team members travel to strategic locations near the expected impact area. They are then in position to quickly get to the affected area and begin providing service to policyholders.

We staff a Special Investigations Unit (SIU) with former law enforcement and claims professionals whose qualifications make them well suited to gathering facts to uncover potential fraud. While we believe our job is to pay what is due under each policy contract, we also want to prevent false claims from unfairly increasing overall premiums. Our SIU also operates a computer forensics lab, using sophisticated software to recover data and mitigate the cost of computer-related claims for business interruption and loss of records.

We seek to attract and retain high-quality independent insurance agencies with knowledgeable, professional staffs. In turn, we make an exceptionally strong commitment to assist them in keeping their knowledge up to date and educating new people they bring on board as they grow. This includes offering classes, usually at no cost to agencies, except travel-related expenses they may incur, and other training support. We also offer noninsurance financial services. We believe that providing these services enhances agency relationships with the company and their clients, increasing loyalty while diversifying the agency’s revenues.

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Insurance Products

We provide well-designed property casualty and life insurance to bring policyholders convenience, discounts and a reduced risk of coverage gaps or disputes. For most agencies that represent us, we believe we offer insurance solutions for approximately 75 percent of the typical insurable risks of their clients. Products for various business lines within our reporting segments include insurance coverages for business property and liability, automobiles and homes.

The following table shows net written premiums by segment and business line at year-end 2018, 2017 and 2016:



(Dollars in millions)	2018		2017		2016		Percent of total 2018
Segment:
Commercial lines insurance	$	3,245	$	3,202	$	3,122	60.9	%
Personal lines insurance	1,378		1,294		1,198		25.9
Excess and surplus lines insurance	249		219		189		4.7
Life insurance	298		278		281		5.6
Other	158		125		71		2.9
Total	$	5,328	$	5,118	$	4,861	100.0	%

Business line:
Commercial lines insurance:
Commercial casualty	$	1,080	$	1,082	$	1,061	20.3	%
Commercial property	932		919		880		17.5
Commercial auto	682		651		611		12.8
Workers' compensation	311		326		352		5.8
Other commercial	240		224		218		4.5
Total commercial lines insurance	3,245		3,202		3,122		60.9

Personal lines insurance:
Personal auto	622		603		563		11.7
Homeowner	588		542		500		11.0
Other personal	168		149		135		3.2
Total personal lines insurance	1,378		1,294		1,198		25.9

Excess and surplus lines insurance	249		219		189		4.7

Life insurance:
Term life insurance	181		167		156		3.4
Universal life insurance	44		41		36		0.8
Other life insurance and annuity products	73		70		89		1.4
Subtotal	298		278		281		5.6

Cincinnati Re	158		125		71		2.9
Total	$	5,328	$	5,118	$	4,861	100.0	%

We discuss our insurance segments in their respective sections later in this report.

Cincinnati Financial Corporation - 2018 10-K - Page 13

Strategic Initiatives to Manage Insurance Profitability and Drive Premium Growth

Management has identified a strategy that can position us for long-term success. The board of directors and management expect execution of our strategic plan to create significant value for shareholders over time. We broadly group key strategic initiatives into two areas of focus – managing insurance profitability and driving premium growth. These areas correlate with how we measure progress toward our long-term financial objectives. Our strategic priorities include meeting the wants and needs of our agent customers, attracting and developing talented associates, providing comprehensive product solutions, achieving best-in-class field service and continually enhancing operational efficiency and effectiveness. We believe successful execution of our long-term strategy and related shorter-term initiatives will help us achieve our long-term objectives despite potential unfavorable shorter-term effects of difficult economic, market or pricing cycles. We describe our expectations for the results of these initiatives in Item 7, Executive Summary of Management's Discussion and Analysis.

Effective capital management is an important part of creating long-term shareholder value, serving as a foundation to support other strategic areas focused on profitable growth of our insurance business. Our capital management philosophy is intended to preserve and build our capital while maintaining appropriate liquidity. A strong capital position provides the capacity to support premium growth, and liquidity provides for our investment in the people and infrastructure needed to implement our strategic initiatives. Our strong capital and liquidity also provide financial flexibility for shareholder dividends or other capital management actions.

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. We will continue collaborative efforts to address underpriced or underperforming business in 2019, including improving underwriting and rate adequacy for our commercial auto and personal auto lines of business.

We take ongoing actions intended to improve efficiency and make it easier for agencies and their clients to do business with us. In addition to benefiting agencies we serve, improved processes support our strategy, helping to more quickly deploy product or service enhancements. They also help reduce internal costs and allow us to focus more resources on agency services and providing local, individualized insurance solutions for small businesses and other agency clients. Initiatives include continuing to enhance the experiences of agencies and policy consumers through real-time messaging to an agency's management system and further development of online portals providing more robust policy information for billing, claims and other areas. Other ongoing initiatives aim for continuous improvement of workflow tools and processes for underwriters.

We also seek to further penetrate insurance markets as we strive to be the best company serving independent insurance agencies. We expect initiatives aimed at specific market opportunities, along with enhancements to provide industry-leading services, to encourage our agents to grow and to increase our share of their business. Our growth plans incorporate general business statistics and historical profitability trends to estimate premium growth from existing agencies and to make careful projections to assess the number of additional agencies needed. Our focus remains on key components of agent satisfaction based on factors that agents tell us are most important.

We continue to appoint new agencies to develop additional points of distribution. In 2019, we are planning approximately 100 appointments of independent agencies that offer most or all of our property casualty insurance products. We generally earn a 10 percent share of an agency’s business within 10 years of its appointment. See Item 1, Our Business and Our Strategy, Independent Insurance Agency Marketplace, for additional discussion.

We also plan to appoint other agencies that focus on high net worth personal lines clients. In 2019, we are targeting the appointment of approximately 80 agencies that market only personal lines insurance products for us, primarily ones with a high net worth focus. In 2018, we appointed 69 new agencies that meet that criteria. As we continue to expand availability of our Executive Capstone™ suite of insurance products and services to additional states over the next several years, we intend to appoint additional agencies as we work to become the carrier of choice for this portion of our agencies’ accounts.

Cincinnati Financial Corporation - 2018 10-K - Page 14

For all of our insurance products, we will work to increase penetration with recently appointed agencies. This includes increasing opportunities for agencies to cross-serve their clients by providing updated products and services that aim to meet their life insurance needs. We will also continue to add field marketing representatives or provide expertise where needed for additional agency support in selected areas. We expect our strategy and initiatives to contribute to our objective of being ranked the No. 1 or No. 2 carrier based on premium volume in agencies that have represented us for at least five years. We continued to reach that objective in approximately two-thirds of such agencies based on 2017 premiums.

During 2019, we will continue to produce premiums through the disciplined expansion of Cincinnati Re, which assumes risks through reinsurance treaties covering various lines of business where we receive a share of premiums and associated liabilities from other insurers and reinsurers. We have staffed this operation with seasoned underwriting and analytical talent and strive to assume risks that we understand well, both quantitatively and qualitatively. We seek risks that have attractive underwriting margins on a stand-alone basis as well as on a diversified risk-adjusted return basis. We have adequate capital to support this operation and intend to be selective and patient in its expansion.

We also expect that our pending acquisition of MSP, which is expected to close during the first quarter of 2019, will produce profitable premium growth over time. We also believe MSP, which operates through Beaufort Underwriting Agency Limited, will provide opportunities to support business produced by our independent agencies in new geographies and lines of business.

To help guide our strategic efforts, we have placed an emphasis on innovation to accelerate improvement and to also favorably position us for the future. We find innovative ideas in many places, including: internally through management and other associates, with our traditional business partners and in the start-up business community. These efforts are primarily focused on operational improvements, customer engagement and improving pricing and risk selection.

Cincinnati Financial Corporation - 2018 10-K - Page 15

Our Segments

Consolidated financial results primarily reflect the results of our five reporting segments. These segments are defined based on financial information we use to evaluate performance and to determine the allocation of assets.


•	Commercial lines insurance


•	Personal lines insurance


•	Excess and surplus lines insurance


•	Life insurance


•	Investments

Revenues, income before income taxes and identifiable assets for each segment are shown in Item 8, Note 18 of the Consolidated Financial Statements. Some of that information is discussed in this section, where we explain the business operations of each segment. The financial performance of each segment is discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cincinnati Financial Corporation - 2018 10-K - Page 16

Commercial Lines Insurance Segment

In 2018, the commercial lines insurance segment contributed net earned premiums of $3.218 billion, representing 59.5 percent of consolidated total revenues. This segment reported profit before income taxes of $151 million. Commercial lines net earned premiums rose 2 percent in both 2018 and 2017.

We believe that our commercial lines business is best measured and evaluated on a segment basis. However, we also provide selected line of business data to summarize growth and profitability trends separately for our business lines. The five commercial business lines are:

•

Commercial casualty – Provides coverage to businesses against third-party liability from accidents occurring on their premises or arising out of their operations, including injuries sustained from products or liability related to professional services. Specialized casualty policies may include similar coverage such as umbrella liability or employment practices. The commercial casualty business line includes liability coverage written as part of commercial package policies.

•

Commercial property – Provides coverage for loss or damage to buildings, inventory and equipment caused by covered causes of loss such as fire, wind, hail, water, theft and vandalism, as well as business interruption resulting from a covered loss. Commercial property also includes other coverages such as inland marine, which covers losses related to builder’s risk, cargo or equipment. Various property coverages can be written as stand-alone policies or can be added to a commercial package policy.


•	Commercial auto – Protects businesses against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicles, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists.


•	Workers’ compensation – Covers employers for government-specified benefits from work-related injuries to employees.


•	Other commercial lines – This includes several other types of insurance products for businesses, including:

◦

Management liability and surety – Includes director and officer (D&O) liability insurance, which covers liability for actual or alleged errors in judgment, breaches of duty or other wrongful acts related to activities of organizations and can optionally include other liability coverages. We market primarily to nonprofit organizations, privately held businesses, healthcare organizations, financial institutions and educational institutions. The for-profit portion includes approximately 175 bank or savings and loan financial institutions, with only two having assets of $1 billion or more. The surety portion includes contract and commercial surety bonds for losses resulting from dishonesty, failure to perform and other acts and also includes fidelity bonds for fraudulent acts by specified individuals or dishonest acts by employees.


◦	Specialty packages – Includes coverages for property, liability and business interruption tailored to meet the needs of specific industry classes such as artisan contractors, dentists or smaller main street businesses.


◦	Machinery and equipment – Specialized coverage provides protection for loss or damage to boilers and machinery, including production and computer equipment and business interruption, due to sudden and accidental mechanical breakdown, steam explosion or artificially generated electrical current.

Our history of emphasizing products and services that agencies can market to small or midsized businesses in their communities remains a critical piece of our strategy even as we expand our appetite to insure larger businesses. While some of our property casualty agencies market only our personal lines or management liability and surety products, approximately 86 percent offer some or all of our standard market commercial insurance products.

In 2018, our 10 highest volume commercial lines states generated 58.7 percent of our earned premiums compared with 59.1 percent in 2017 as we continued efforts to geographically diversify our property casualty risks. Earned premiums in the 10 highest volume states increased 1 percent in 2018, compared with 2 percent in the remaining states. The aggregate number of reporting agency locations in our 10 highest volume states increased to 1,142 in 2018 from 1,134 in 2017.

Cincinnati Financial Corporation - 2018 10-K - Page 17

Our 10 largest states based on commercial lines premium volume are shown in the table below.



(Dollars in millions)	Earned premiums		% of total earned		Agency locations	Average premium per location
Year ended December 31, 2018
Ohio	$	462	14.4	%	242	$	1.9
Illinois	210		6.5		141	1.5
Pennsylvania	204		6.3		125	1.6
Indiana	180		5.6		115	1.6
North Carolina	173		5.4		100	1.7
Georgia	152		4.7		96	1.6
Michigan	135		4.2		128	1.1
Virginia	133		4.1		63	2.1
Tennessee	133		4.1		64	2.1
Texas	109		3.4		68	1.6

For new commercial lines business, case-by-case underwriting and pricing is coordinated by our locally based field marketing representatives who are also responsible for selecting new independent agencies. Our agents and our team of field associates get to know the people and businesses in their communities and can make informed decisions about each risk.

Commercial lines policy renewals are managed by headquarters underwriters who are assigned to specific agencies and consult with local field associates as needed. As part of our team approach, headquarters underwriters also help oversee agency growth and profitability. They are responsible for formal issuance of all new business and renewal policies as well as policy endorsements. Further, the headquarters underwriters provide day-to-day customer service to agencies and our field marketing representatives by offering product training, answering underwriting questions, helping to determine underwriting eligibility and assisting with the mechanics of premium determination. We also continue a target markets emphasis to analyze opportunities and to develop new products and services, new coverage options and improvements to existing insurance products.

Understanding evolving market conditions is a critical function for our success, accomplished through both informal commentary and formal reviews. Informally, our field marketing representatives, underwriters and product development associates routinely receive market intelligence from a variety of channels, including from the agencies with which they work. This market information helps identify the top competitors and our market strengths and weaknesses. The information obtained encompasses pricing, breadth of coverage and use of underwriting guidelines.

Our historical emphasis on small to midsized businesses is reflected in the mix of our commercial lines premium volume by policy size. Approximately 80 percent of our commercial in-force policies have annual premiums of $10,000 or less, accounting in total for approximately 20 percent of our 2018 commercial lines premium volume. The remainder of policies have annual premiums greater than $10,000, including policies with annual premiums greater than $100,000 that account for approximately one-quarter of our 2018 commercial lines premium volume.

Our commercial lines packages typically are offered on a three-year policy term for most insurance coverages – a key competitive advantage. In our experience, multi-year packages appeal to the quality-conscious insurance buyers who we believe are typical clients of our independent agents. Customized insurance programs on a three-year term complement the long-term relationships these policyholders typically have with their agents and with our company. By reducing annual administrative efforts, multi-year policies lower expenses for our company and for our agents. The commitment we make to policyholders encourages long-term relationships and reduces their need to annually re-evaluate their insurance carrier or agency. We believe that the advantages of three-year policies in terms of improved policyholder convenience, increased account retention and reduced administrative costs outweigh the potential disadvantage of these policies, even in periods of rising rates.

Cincinnati Financial Corporation - 2018 10-K - Page 18

Although we offer three-year policy terms, premiums for some coverages within those policies are adjustable at the anniversary for the next annual period, and policies may be canceled at any time at the discretion of the policyholder. Contract terms often provide that rates for property, general liability, inland marine and crime coverages, as well as policy terms and conditions, are fixed for the term of the policy. However, the exposure we insure is reviewed annually, near the policy anniversary date, and the amount of premiums may be adjusted based on changes to that exposure.

The general liability exposure basis may be audited annually. Commercial auto, workers’ compensation, professional liability and most umbrella liability coverages within multi-year packages are rated at each of the policy’s annual anniversaries for the next one-year period. The annual pricing could incorporate rate changes approved by state insurance regulatory authorities between the date the policy was written and its annual anniversary date, as well as changes in risk exposures and premium credits or debits relating to loss experience and other underwriting judgment factors. We estimate that approximately 75 percent of 2018 commercial premiums were subject to annual rating or were written on a one-year policy term. That 75 percent includes approximately one-third of policies offered on a three-year policy term that expire during any given year.

We believe our commercial lines insurance segment premiums reflect a higher concentration, relative to industry commercial lines premiums, in contractor-related businesses. Since economic activity related to construction, which can heavily influence insured exposures of contractors, may experience cycles that vary significantly with the economy as a whole, our commercial lines premium trends could vary from commercial lines premium trends for the property casualty insurance industry. In 2018, we estimated that 39 percent of our general liability premiums, and 37 percent of our workers’ compensation premiums, came from the construction industry based on North American Industry Classification System (NAICS) codes.

Cincinnati Financial Corporation - 2018 10-K - Page 19

Personal Lines Insurance Segment

The personal lines insurance segment contributed net earned premiums of $1.336 billion to 2018 consolidated total revenues, or 24.7 percent of the total, and reported a loss before income taxes of $20 million. Personal lines net earned premiums rose 8 percent in 2018 and 7 percent in 2017.

We prefer to write personal lines coverage in accounts that include both auto and homeowner coverages as well as coverages that are part of our other personal business line. At the end of 2018, for example, 83.6 percent of our homeowner policies were accompanied by a personal auto policy in the same account. As a result of our account-based approach, we believe that our personal lines business is best measured and evaluated on a segment basis. However, we provide line of business data to summarize growth and profitability trends separately for three business lines:

•

Personal auto – Protects against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicle, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists. In addition, many states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage.


•	Homeowner – Protects against losses to dwellings and contents from a wide variety of perils, as well as liability arising out of personal activities both on and off the covered premises. We also offer coverage for condominium unit owners and renters.


•	Other personal lines – This includes the other types of insurance products we offer to individuals, including dwelling fire, inland marine, personal umbrella liability and watercraft coverages.

At year-end 2018, we marketed personal lines insurance products through 1,698, or approximately 72 percent, of our 2,344 agency reporting locations. The 1,698 personal lines agency locations were in 38 of the 42 states in which we offered property casualty insurance. Those agencies produced approximately 1.1 million personal lines policies in force for us, representing approximately 410,000 policyholders.

We continue to evaluate opportunities to expand our marketing of personal lines to other states. Primary factors considered in the evaluation of a potential new state include market opportunity or potential, weather-related catastrophe history and the legal climate.

Expansion of our personal lines insurance segment includes marketing through independent agencies to profitably grow our premiums for products and services offered to their high net worth personal lines clients. At year-end 2018, our appointed agencies produced for us nearly $310 million in annual premiums from policyholders with insured home values of $1 million or more. We estimate those policyholders represent approximately 8 percent of our total personal lines policyholders.

In 2018, our 10 highest volume personal lines states generated 70.1 percent of our earned premiums compared with 74.0 percent in 2017. Earned premiums in the five highest volume states increased 1 percent in 2018 while increasing 14 percent in the remaining states, reflecting progress toward our long-term objective of geographic diversification through new states for our personal lines operation. The aggregate number of reporting agency locations in our 10 highest volume states decreased to 879 in 2018 from 881 in 2017.

Cincinnati Financial Corporation - 2018 10-K - Page 20

Our 10 largest states based on personal lines premium volume are shown in the table below.



(Dollars in millions)	Earned premiums		% of total earned		Agency locations	Average premium per location
Year ended December 31, 2018
Ohio	$	300	22.5	%	223	$	1.3
Georgia	115		8.6		93	1.2
Michigan	83		6.2		97	0.9
North Carolina	79		5.9		87	0.9
Indiana	71		5.3		86	0.8
Alabama	67		5.0		48	1.4
Illinois	65		4.9		93	0.7
Kentucky	58		4.3		46	1.3
Minnesota	50		3.7		57	0.9
Tennessee	49		3.7		49	1.0

New and renewal personal lines business reflects our risk-specific underwriting philosophy. Each agency selects personal lines business primarily from within the geographic territory that it serves, based in part on agency staff’s knowledge of the risks in those communities or familiarity with the policyholder. At year-end 2018, we had 21 full-time personal lines field marketing representatives who have underwriting authority and visit agencies on a regular basis. They focus primarily on key states targeted for growth, reinforcing the advantages of our personal lines products and offering training in the use of our policy processing system. Personal lines activities are further supported by headquarters associates assigned to individual agencies.

Cincinnati Financial Corporation - 2018 10-K - Page 21

Excess and Surplus Lines Insurance Segment

The excess and surplus lines segment contributed net earned premiums of $234 million to 2018 consolidated total revenues, or 4.3 percent of the total, and reported profit before income taxes of $63 million. Excess and surplus lines net earned premium increased 12 percent in 2018 and 14 percent in 2017.

Our excess and surplus lines policies typically cover business risks with unique characteristics, such as the nature of the business or its claim history, that are difficult to profitably insure in the standard commercial lines market. Excess and surplus lines insurers have more flexibility in coverage terms and rates compared with standard lines companies, generally resulting in policies with higher rates and terms and conditions customized for specific risks, including restricted coverage where appropriate. We target small to midsized risks, and policyholders in many cases also have standard market insurance with one of our other subsidiaries. Our average excess and surplus lines policy size is approximately $6,000 in annual premiums, and the majority have coverage limits of $1 million or less. All of our excess and surplus lines policies are written for a maximum term of one year. Approximately 89 percent of our 2018 earned premiums for the excess and surplus lines insurance segment provided commercial casualty coverages and about 11 percent provided commercial property coverages. Those coverages are described below.

•

Commercial casualty – Covers businesses for third-party liability from accidents occurring on their premises or arising out of their operations, including injuries sustained from products. Other coverages available include miscellaneous errors and omissions, professional liability and excess liability. Typical businesses covered include contractors, manufacturers, real estate owners and managers, retail, consultants, and bars or taverns. Policies covering liability at special events are also available.


•	Commercial property – Insures buildings, inventory, equipment and business income from loss or damage due to causes such as fire, wind, hail, water, theft and vandalism. Examples of property we commonly insure with excess and surplus lines policies include temporarily vacant buildings, habitational, restaurants and relatively higher-hazard manufacturing classes.

At the end of 2018, we marketed excess and surplus lines insurance products in each of the 39 states in which we offer standard market commercial lines insurance. Offering excess and surplus lines helps agencies representing The Cincinnati Insurance Companies meet the insurance needs of their clients when coverage is unavailable in the standard market. By providing outstanding service, we can help agencies grow and prosper while also profitably growing our property casualty business.

In 2018, our 10 highest volume excess and surplus lines states generated 57.6 percent of our earned premiums, compared with 58.1 percent in 2017.

Our 10 largest states based on excess and surplus lines premium volume are shown in the table below.



(Dollars in millions)	Earned premiums		% of total earned
Year ended December 31, 2018
Ohio	$	19	8.3	%
Illinois	19		8.1
Texas	18		7.7
Georgia	15		6.6
Indiana	13		5.5
North Carolina	11		4.7
Pennsylvania	11		4.6
Alabama	10		4.1
Minnesota	9		4.0
Missouri	9		4.0

Cincinnati Financial Corporation - 2018 10-K - Page 22

Agencies representing The Cincinnati Insurance Companies produce approximately $4 billion in annual premiums for all carriers writing excess and surplus lines policies for their clients. We estimate that approximately half of that premium volume matches the targeted business types and coverages we offer through our excess and surplus lines insurance segment. We structured the operations of this segment to meet the needs of these agencies and to market exclusively through them.

Agencies have access to Cincinnati Specialty Underwriters' product line through CSU Producer Resources, the wholly owned insurance brokerage subsidiary of Cincinnati Financial Corporation. CSU Producer Resources has binding authority on all classes of business written through Cincinnati Specialty Underwriters and maintains appropriate agent and surplus lines licenses.

We seek to earn a share of each agency’s best excess and surplus lines accounts by offering several unique benefits. Agency producers have direct access through CSU Producer Resources to a group of our underwriters who focus exclusively on excess and surplus lines business. Those underwriters can tap into broader services we offer to provide policyholders additional value and help producers build the relationship through experienced and responsive loss control services and claims handling. CSU Producer Resources gives extra support to our independent agency producers by remitting surplus lines taxes and stamping fees and retaining admitted market diligent search affidavits, where required. Agencies marketing through CSU Producer Resources instead of a competing brokerage generally receive a higher commission because use of our internal brokerage subsidiary eliminates some of the intermediary costs. This business is factored in their profit-sharing agreement with The Cincinnati Insurance Companies. We also offer prompt service, generally issuing approximately 95 percent of policies within 24 hours of a request to bind a policy.

Cincinnati Financial Corporation - 2018 10-K - Page 23

Life Insurance Segment

The life insurance segment contributed $250 million of net earned premiums, representing 4.6 percent of 2018 consolidated total revenues, and reported a profit before income taxes of $8 million. Life insurance net earned premiums grew 8 percent in 2018 and 2 percent in 2017.

The Cincinnati Life Insurance Company supports our agency-centered business model by deepening the relationships we have with agents while also diversifying revenue and profitability for both the agency and our company. We primarily focus on life products that feature a steady stream of premium payments and that have the potential for generating revenue growth through increasing demand.

Life Insurance Business Lines

Four lines of business – term life insurance, universal life insurance, worksite products and whole life insurance – account for 97.6 percent of the life insurance segment’s revenues:


•	Term life insurance – Policies under which a death benefit is payable only if the insured dies during a specific period of time. Policy options include a return of premium provision, a benefit equal to the sum of all paid base premiums that is payable if the insured person survives to the end of the term. The policies are fully underwritten using traditional and accelerated methods.

•

Universal life insurance – Long-duration life insurance policies that are fully underwritten. Contract premiums are neither fixed nor guaranteed; however, the contract does specify a minimum interest crediting rate and a maximum cost of insurance charge and expense charge. The cash values, available as a loan collateralized by the cash surrender value, are not guaranteed and depend on the amount and timing of actual premium payments and the amount of actual contract assessments.

•

Worksite products – Term life insurance, return of premium term life insurance and whole life insurance offered to employees through their employer. Premiums are collected by the employer using payroll deduction. Policies are issued using a simplified underwriting approach and on a guaranteed issue basis. Worksite insurance products provide our property casualty agency force with excellent cross-serving opportunities for both commercial and personal accounts.

•

Whole life insurance – Policies that provide life insurance for the entire lifetime of the insured. The death benefit is guaranteed never to decrease and premiums are guaranteed never to increase. While premiums are fixed, they must be paid as scheduled. These policies provide guaranteed cash values that are available as loans collateralized by the cash surrender value. The policies are fully underwritten.

In addition, Cincinnati Life markets:

•

Deferred annuities that provide regular income payments that commence after the end of a specified period or when the annuitant attains a specified age. During the deferral period, any payments made under the contract accumulate at the crediting rate declared by the company but not less than a contract-specified guaranteed minimum interest rate. A deferred annuity may be surrendered during the deferral period for a cash value equal to the accumulated payments plus interest less the surrender charge, if any.


•	Immediate annuities that provide some combination of regular income and lump-sum payments in exchange for a single premium.

Life Insurance Distribution

Cincinnati Life is licensed in 49 states and the District of Columbia. At year-end 2018, approximately 83 percent of our 2,344 property casualty agency reporting locations offered Cincinnati Life products to their clients. We also develop life business from approximately 502 other independent life insurance agencies. We are careful to solicit business from these other agencies in a manner that does not conflict with or compete with the marketing and sales efforts of our property casualty agencies.

When marketing through our property casualty agencies, we have specific competitive advantages:


•	Because our property casualty operations are held in high regard, property casualty agency management is predisposed to consider selling our life products.


•	Marketing efforts for both our property casualty and life insurance businesses are directed by our field marketing department, coordinated with our life field marketing representatives, which assures consistency of communication and operations. Life field marketing representatives are available to meet face-to-face with

Cincinnati Financial Corporation - 2018 10-K - Page 24

agency personnel and their clients as well. Our life headquarters underwriters and other associates are available to the agents and field team to assist in the placement of business.

We continue to emphasize the cross-serving opportunities of our life insurance, including term and worksite products, for the property casualty agency’s personal and commercial accounts. In both the property casualty and independent life agency distribution systems, we enjoy the advantages of offering competitive, up-to-date products and providing personal attention in combination with financial strength and stability.


•	Term life insurance is our largest life insurance product line. We continue to develop and offer term products with features our agents indicate are important, such as a return of premium benefit and an option for an accelerated underwriting product for our personal lines agents.


•	We also offer products addressing the needs of businesses with key person and buy-sell coverages. We offer quality, personal life insurance coverage to personal and commercial clients of our agencies.

Because of our strong capital position, we can offer a competitive product portfolio, including guaranteed products, giving our agents a marketing edge. Our life insurance company maintains strong insurer financial strength ratings: A.M. Best, A (Excellent); Fitch, A+ (Strong); and S&P, A+ (Strong). Our life insurance company has chosen not to establish a Moody’s rating.

In 2018, our five highest volume states for life insurance premiums, based on information contained in statements filed with state insurance departments, are reflected in the table below.



(Dollars in millions)	Premiums		% of total earned
Year ended December 31, 2018
Ohio	$	54	16.8	%
Pennsylvania	22		7.0
Indiana	19		6.0
Illinois	19		6.0
Michigan	16		5.2

Cincinnati Financial Corporation - 2018 10-K - Page 25

Investments Segment

Revenues of the investments segment are primarily from net investment income and from net investment gains and losses from investment portfolios managed for the holding company and each of the operating subsidiaries.

Our investment department operates under guidelines set forth in our investment policy along with oversight of the investment committee of our board of directors. These guidelines set parameters for risk tolerances governing, among other items, the allocation of the portfolio as well as security and sector concentrations. These parameters are part of an integrated corporate risk management program. When allocating cash to various asset classes, we consider market-based factors such as risk adjusted after-tax yields as well as internal measures based in part on insurance department regulations and rating agency guidance.

The fair value of our investment portfolio was $16.609 billion and $16.948 billion at year-end 2018 and 2017, respectively, as shown in the table below. Fair value decreased, largely reflecting equity markets that were generally down in 2018, but the overall portfolio remained in an unrealized gain position. While value stocks, similar to the general makeup of our portfolio, underperformed the broader market in 2018, our portfolio outperformed the S&P 500 Index, in part due to our strategy of primarily investing in companies that tend to grow their dividends. The unrealized gain position in our fixed-maturity investments decreased in 2018, due to an increase in interest rates and a widening of corporate credit spreads.



(Dollars in millions)	At December 31, 2018								At December 31, 2017
	Cost or amortized cost		Percent of total				Percent of total		Cost or amortized cost		Percent of total				Percent of total
	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	$	6,920	49.4	%	$	6,926	41.7	%	$	6,383	47.6	%	$	6,637	39.2	%
Tax-exempt fixed maturities	3,723		26.6		3,763		22.6		3,931		29.3		4,062		24.0
Common equity securities	3,195		22.8		5,742		34.6		2,918		21.8		6,039		35.6
Nonredeemable preferred equity securities	173		1.2		178		1.1		176		1.3		210		1.2
Total	$	14,011	100.0	%	$	16,609	100.0	%	$	13,408	100.0	%	$	16,948	100.0	%

The cash we generate from insurance operations historically has been invested in two broad categories of investments:


•	Fixed-maturity investments – Includes taxable and tax-exempt bonds and redeemable preferred stocks. During 2018, the combined effect of a net decrease in unrealized gains, sales and calls offset purchases of fixed-maturity securities in our portfolio. During 2017, purchases and a net increase in unrealized gains offset sales and calls.


•	Equity investments – Includes common and nonredeemable preferred stocks. During 2018, the combined effect of a net decrease in fair value and sales offset purchases of equity securities in our portfolio. During 2017, purchases and a net increase in unrealized gains offset sales.

At year-end 2018, less than 1 percent of the value of our investment portfolio was made up of securities that are classified as Level 3 assets and that require management’s judgment to develop pricing or valuation techniques. We generally obtain at least two outside valuations for these assets and generally use the more conservative estimate. These investments include private placements, small issues and various thinly traded securities. See Item 7, Critical Accounting Estimates, Fair Value Measurements, and Item 8, Note 3 of the Consolidated Financial Statements, for additional discussion of our valuation techniques.

In addition to securities held in our investment portfolio, other invested assets included $33 million of life policy loans, $60 million of private equity investments and $30 million of real estate through direct property ownership and development projects in the United States at year-end 2018.

Our investment portfolio is further described below. Additional information about the composition of investments is included in Item 8, Note 2 of the Consolidated Financial Statements. A detailed listing of our portfolio is updated on our website, cinfin.com/investors, each quarter when we report our quarterly financial results.

Cincinnati Financial Corporation - 2018 10-K - Page 26

Fixed-Maturity Securities Investments

By maintaining a well-diversified fixed-maturity portfolio, we attempt to manage overall interest rate, reinvestment, credit and liquidity risk. We pursue a buy-and-hold strategy and do not attempt to make large-scale changes to the portfolio in anticipation of rate movements. By investing new money on a regular basis and analyzing risk-adjusted after-tax yields, we work to achieve a laddering effect to our portfolio that may mitigate some of the effects of adverse interest rate movements.

At December 31, 2018, our investment-grade and noninvestment-grade fixed-maturity securities represented 87.0 percent and 2.4 percent of the portfolio, respectively. The remaining 10.6 percent represented fixed-maturity securities that were not rated by Moody’s or S&P. Our nonrated securities include smaller municipal issues and private placement corporate securities. Many of these, although not rated by Moody’s or S&P, are rated by the Securities’ Valuation Office of the National Association of Insurance Commissioners (NAIC). Also included in this category are smaller public corporate securities, many of which carry a rating by an agency other than Moody’s or S&P, such as Fitch or Kroll.

Other selected attributes of the fixed-maturity portfolio are shown in the table below. Additional maturity periods and other information for our fixed-maturity portfolio are shown in Item 8, Note 2 of the Consolidated Financial Statements.



	At December 31,
	2018		2017
Weighted average yield-to-amortized cost	4.20	%	4.40	%
Weighted average maturity	7.6	yrs	7.7	yrs
Effective duration	5.2	yrs	5.2	yrs

The fair values of our taxable fixed-maturity securities portfolio at the end of the last two years were:



(Dollars in millions)	At December 31,
	2018		2017
Investment-grade corporate	$	5,464	$	5,252
States, municipalities and political subdivisions	541		403
Government-sponsored enterprises	310		254
Commercial mortgage-backed	288		286
Noninvestment-grade corporate	246		401
United States government	67		31
Foreign government	10		10
Total	$	6,926	$	6,637

While our strategy typically is to buy and hold fixed-maturity investments to maturity, we monitor credit profiles and fair value movements when determining holding periods for individual securities. With the exception of U.S. agency issues, no individual issuer's securities accounted for more than 1.2 percent of the taxable fixed-maturity portfolio at year-end 2018. Investment-grade corporate bonds had an average rating of Baa2 by Moody’s or BBB by S&P at year-end 2018. Our taxable fixed-maturity portfolio included $288 million of commercial mortgage-backed securities with an average rating of Aa1/AA at year-end 2018.

Relative to a broad bond market index such as the Barclay’s Aggregate, we are most heavily exposed to the investment grade corporate bond asset class. Within that asset class we have a weighting of 47.1 percent for the financial sector, higher than the 29.3 percent weighting for the financial sector of the Bank of America Merrill Lynch U.S. Corporate Index. Relative to the Barclay’s Aggregate we are overweight in the commercial mortgage-backed securities asset class while having no exposure to the much larger residential mortgage-backed market.

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At December 31, 2018, we had $3.763 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody’s and S&P. The portfolio is well diversified among approximately 1,450 municipal bond issuers. No single municipal issuer accounted for more than 0.6 percent of the tax-exempt fixed-maturity portfolio at year-end 2018.

Equity Securities Investments

After covering both our intermediate and long-range insurance obligations with fixed-maturity investments, we historically have used some available cash flow to invest in equity securities. Our equity securities portfolio includes common stocks and nonredeemable preferred stocks. Investment in equity securities has played an important role in achieving our portfolio objectives and has contributed to portfolio appreciation. We remain committed to our long-term equity focus, which we believe is key to our company’s long-term growth and stability. We believe our strategy of primarily investing in a diversified selection of larger-capitalization, high-quality, dividend-increasing companies generally results in reduced volatility relative to the broader equity markets.

For federal income tax purposes, taxes on gains from appreciated investments generally are not due until securities are sold. We believe that the appreciated value of equity securities, compared with the cost of securities that is generally used as a tax basis, is a useful measure to help evaluate how fair value can change over time. On this basis, the net unrealized investment gains at year-end 2018 consisted of a net gain position in our equity portfolio of $2.552 billion. Events or factors such as economic growth or recession can affect the fair value of our equity securities.

At year-end 2018, Microsoft Corporation (Nasdaq:MSFT) was our largest single common stock investment, comprising 4.4 percent of our publicly traded common stock portfolio and 1.5 percent of the entire investment portfolio. The parent company held 38.9 percent of our common stock holdings (measured by fair value). The distribution of the portfolio among industry sectors is shown in the table below.

Common Stock Portfolio Industry Sector Distribution



	Percent of common stock portfolio
	At December 31, 2018				At December 31, 2017
	Cincinnati Financial		S&P 500 Industry Weightings		Cincinnati Financial		S&P 500 Industry Weightings
Sector:
Information technology	20.9	%	20.1	%	19.5	%	23.7	%
Financial	15.6		13.3		16.2		14.8
Healthcare	14.9		15.6		13.2		13.8
Industrials	12.5		9.2		14.3		10.3
Consumer discretionary	10.5		10.0		13.6		12.2
Energy	6.7		5.3		7.3		6.1
Consumer staples	5.6		7.4		6.2		8.2
Materials	4.9		2.7		5.6		3.0
Telecomm services	3.5		10.1		1.7		2.1
Utilities	2.7		3.3		2.1		2.9
Real estate	2.2		3.0		0.3		2.9
Total	100.0	%	100.0	%	100.0	%	100.0	%

We evaluate nonredeemable preferred stocks in a manner similar to our evaluation of fixed-maturity investments, seeking attractive relative yields. We generally focus on investment-grade nonredeemable preferred stocks issued by companies with strong histories of paying common dividends, providing us with another layer of protection. Consideration is also given to nonredeemable preferred stocks that offer a dividend received deduction for income tax purposes. During 2018, we purchased $1 million of nonredeemable preferred stocks and converted $3 million in this portfolio to common stock. During 2017, we purchased $10 million of nonredeemable preferred stocks, converted $3 million to common stock and sold $15 million.

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Other

We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary CFC Investment Company. At year-end 2018, this subsidiary had $71 million in receivables related to its commercial leasing and financing services, compared with $61 million in receivables at year-end 2017.

We also report as Other the results of Cincinnati Re, which has contracts, also referred to as treaties, with other insurance or reinsurance companies to assume a portion of their insured risk in exchange for a portion of premiums from insurance policies covering those risks. The treaties and their exposure to losses are diverse in nature, including various lines of business and geographies for the reinsured risks. Some of our treaties reflect a type of contract commonly referred to as participating or proportional, typically sharing premiums and losses between the reinsured entity and us, as reinsurer, on a pro rata basis. Some are a contract type commonly referred to as excess of loss, where we indemnify the reinsured entity only for losses exceeding a predetermined amount.

Net written premiums for Cincinnati Re totaled $158 million in 2018, compared with $125 million in 2017. Approximately 29 percent of 2018 net written premiums was for property exposures that include risk of loss from natural catastrophes and approximately 56 percent was for casualty exposures from various liability risks. The remainder of approximately 15 percent was a combination of what we consider to be more specialized coverages that include, but are not limited to, transactional liability and credit risk transfer related to residential mortgages.

When we disclose probable maximum loss (PML) estimates on a gross basis, we also typically disclose amounts on a basis that is net of income taxes and applicable reinsurance ceded, including any retrocessions for reinsurance assumed. Based on treaties in effect at January 1, 2019, Cincinnati Re increased other property casualty catastrophe probable maximum loss estimates disclosed in Item 7, Liquidity and Capital Resources, 2019 Reinsurance Ceded Programs, by the following amounts that are net of the benefit of estimated reinstatement premiums: $116 million for a once-in-a-100-year event and $81 million for a once-in-a-250-year event. Those amounts represent a marginal basis, reflecting differences between the Cincinnati Re reinsurance portfolio and property casualty insurance written on a direct basis by The Cincinnati Insurance Companies. Ignoring diversification effects provided by those two components, on a standalone basis, probable maximum loss estimates for Cincinnati Re include the following amounts: $127 million for a once-in-a-100-year event and $150 million for a once-in-a-250-year event. Each of those effects represent a single hurricane event and are net of income taxes, based on probable maximum loss estimates from Applied Insurance Research's Touchstone^®version 5.1 catastrophe model.

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Regulation

The business of insurance is primarily regulated by state law. All of our insurance company subsidiaries are domiciled in the state of Ohio except The Cincinnati Specialty Underwriters Insurance Company, which is domiciled in Delaware. Each insurance subsidiary is primarily governed by the insurance laws and regulations in its respective state of domicile. We also are subject to regulatory authorities of all states in which we write insurance. The state laws and regulations that have the most significant effect on our insurance operations and financial reporting are discussed below.

•

Insurance Holding Company Regulation – We are regulated as an insurance holding company system in the respective states of domicile of our primary standard market property casualty company subsidiary and its surplus lines and life insurance subsidiaries. These regulations require that we annually furnish financial and other information about the operations of the individual companies within the holding company system. Information about the risks posed by any noninsurance company subsidiaries must also be disclosed. All transactions within a holding company system affecting insurers must be fair and equitable. Notice to the state insurance commissioner is required prior to the consummation of transactions affecting the ownership or control of an insurer and prior to certain material transactions between an insurer and any person or entity in its holding company group. In addition, some of those transactions cannot be consummated without the commissioner’s prior approval.

•

Subsidiary Dividends – The Cincinnati Insurance Company is fully owned by Cincinnati Financial Corporation. The dividend-paying capacity of The Cincinnati Insurance Company and its fully owned subsidiaries is regulated by the laws of the applicable state of domicile. Under these laws, our insurance subsidiaries must provide a 10-day advance informational notice to the insurance commissioner for the domiciliary state prior to payment of any dividend or distribution to its shareholders. Generally, the most our insurance subsidiary can pay without prior regulatory approval is the greater of 10 percent of statutory capital and surplus or 100 percent of statutory net income for the prior calendar year.

The insurance company subsidiaries must give 30 days of notice to, and obtain prior approval from, the state insurance commissioner before the payment of an extraordinary dividend as defined by the state’s insurance code. You can find information about the dividends paid by our insurance subsidiary in 2018 in Item 8, Note 9 of the Consolidated Financial Statements.

•

Insurance Operations – All of our insurance subsidiaries are subject to licensing and supervision by departments of insurance in the states in which they do business. The nature and extent of such regulations vary, but generally are rooted in statutes that delegate regulatory, supervisory and administrative powers to state insurance departments. Such regulations, supervision and administration of the insurance subsidiaries include: the standards of solvency that must be met and maintained; the licensing of insurers and their agents and brokers; the nature and limitations on investments; deposits of securities for the benefit of policyholders; regulation of standard market policy forms and premium rates; policy cancellations and nonrenewals; test audit programs; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; requirements regarding reserves for unearned premiums, losses and other matters; the nature of and limitations on dividends to policyholders and shareholders; the nature and extent of required participation in insurance guaranty funds; the involuntary assumption of hard-to-place or high-risk insurance business, primarily workers’ compensation insurance; and the collection, remittance and reporting of certain taxes and fees. Our primary insurance regulators have adopted the Model Audit Rule for annual statutory financial reporting. This regulation closely mirrors the Sarbanes-Oxley Act on matters such as auditor independence, corporate governance and internal controls over financial reporting. The regulation permits the audit committee of Cincinnati Financial Corporation’s board of directors to also serve as the audit committee of each of our insurance subsidiaries for purposes of this regulation.

•

Insurance Guaranty Associations – For certain obligations of insolvent insurance companies to policyholders and claimants, states assess each member insurer in an amount relative to the insurer’s proportionate share of business written by all member insurers in the state. While the amount of such assessments has not been material in recent years, we cannot predict the amount and timing of any future assessments or refunds on our insurance subsidiaries under these laws.

•

Shared Market and Joint Underwriting Plans – Assigned risk plans, reinsurance facilities and joint underwriting associations are mechanisms that generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. States can require participation based upon the amount of an insurance company’s voluntary market share, and underwriting results related to these pools could be adverse to our company.

Cincinnati Financial Corporation - 2018 10-K - Page 30

•

Statutory Accounting – For public reporting, insurance companies prepare financial statements in accordance with GAAP. However, certain data also must be calculated according to statutory accounting rules as defined in the NAIC’s Accounting Practices and Procedures Manual. While not a substitute for any GAAP measure of performance, statutory data frequently is used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies.


•	Insurance Reserves – State insurance laws require that property casualty and life insurers annually analyze the adequacy of reserves. Our appointed actuaries must submit an opinion that reserves are adequate for policy claims-paying obligations and related expenses.

•

Investment Regulation – Insurance company investments must comply with laws and regulations pertaining to the type, quality and concentration of investments. Such laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and other qualifications.

•

Risk-Based Capital Requirements – The NAIC’s risk-based capital (RBC) requirements for property casualty and life insurers serve as an early warning tool for the NAIC and state regulators to identify companies that may be undercapitalized and may merit further regulatory action. The NAIC has a standard formula for annually assessing RBC. The formula for calculating RBC for property casualty companies takes into account asset and credit risks but places more emphasis on underwriting factors for reserving and pricing. The formula for calculating RBC for life insurance companies takes into account factors relating to insurance, business, asset and interest-rate risks.

Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal legislation and administrative rules adopted can affect our business. Privacy laws, such as the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act and the Health Insurance Portability and Accounting Act (HIPAA) are the federal laws that most affect our day-to-day operations. These apply to us because we gather and use personal nonpublic information to underwrite insurance and process claims. We also are subject to other federal laws, such as the Terrorism Risk Insurance Act (TRIA), anti-money laundering statute (AML), the Nonadmitted and Reinsurance Reform Act (NRRA), and the rules and regulations of the Office of Foreign Assets Control (OFAC).

Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) created the Federal Insurance Office to monitor the insurance industry and gather information to identify issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry that affects the United States’ financial system and to recommend to the Financial Stability Oversight Council that it designate an insurer as a systemically significant entity requiring additional supervision by the Federal Reserve Board. We do not expect Dodd-Frank to result in federal oversight of our operations as a systemically significant entity.

We do not expect to have any material effects on our expenditures, earnings or competitive position as a result of compliance with any federal, state or local provisions enacted or adopted relating to the protection of the environment. We currently do not have any material estimated capital expenditures for environmental control facilities.

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Enterprise Risk Management

We manage enterprise risk through formal risk management programs overseen by our chief risk officer, an executive officer of the company. Our ERM framework includes an enterprise risk management committee, which is responsible for overseeing risk activities and is comprised of senior executive-level risk owners from across the enterprise. The risk committee's activities are supported by a team of representatives from business areas that focus on identifying, evaluating and developing risk plans for emerging risks. A comprehensive report is provided quarterly to our chairman, our president and chief executive officer, our board of directors and our senior executive team, as appropriate, on the status of risk metrics relative to identified tolerances and limits, risk assessments and risk plans. Our use of operational audits, strategic plans and departmental business plans, as well as our culture of open communications and our fundamental respect for our Code of Conduct, continue to help us manage risks on an ongoing basis.

Our risk management programs include a formalized risk appetite element and a risk identification and quantification process. The overall enterprise objective is to appropriately balance risk and reward to achieve an appropriate return on risk capital. The company’s key risks are discussed in Item 1A, Risk Factors, including risks related to natural catastrophes, investments and operations.

We continue to study emerging risks, including climate change risk and its potential financial effects on our results of operation and on those we insure. These effects include deterioration in the credit quality of our municipal or corporate bond portfolios and increased losses without sufficient corresponding increases in premiums. As with any risk, we seek to identify the extent of the risk exposure and possible actions to mitigate potential negative effects of risk at an enterprise level.

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ITEM 1A. Risk Factors

Our business involves various risks and uncertainties that may affect achievement of our business objectives. Many of the risks could have ramifications across our organization. For example, while risks related to setting insurance rates and establishing and adjusting loss reserves are insurance activities, errors in these areas could have an impact on our investment activities, growth and overall results.

The following discussion should be viewed as a starting point for understanding the significant risks we face. It is not a definitive summary of their potential impacts or of our strategies to manage and control the risks. Please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of those strategies.

If any risks or uncertainties discussed here develop into actual events, they could have a material adverse effect on our business, financial condition, results of operations or cash flows. In that case, the market price of our common stock could decline materially. The failure of our risk management strategies could have a material adverse impact on our consolidated financial condition, results of operations or cash flows.

Readers should carefully consider this information together with the other information we have provided in this report and in other reports and materials we file periodically with the Securities and Exchange Commission as well as news releases and other information we disseminate publicly.

We rely primarily on independent insurance agents to distribute our products.

We market our main products, insurance policies for businesses and individuals, through independent, nonexclusive insurance agents. These agents are not obligated to promote our products and can and do sell our competitors’ products. We must offer insurance products that meet the needs of these agents and their clients. We need to maintain good relationships with the agents who market our products. If we do not, these agents may market our competitors’ products instead of ours, which may lead to us having a less desirable mix of business and could affect our results of operations.

In addition to insurance policies for businesses and individuals, a relatively small part of our business is reinsuring policies written by other insurance companies. Reinsurance assumed is marketed through reinsurance intermediaries and is generally not offered by the typical independent agents who market our insurance policies.

Certain events or conditions could diminish our agents’ desire to produce business for us and the competitive advantage that our independent agents enjoy, including:

•

Downgrade of the financial strength ratings of our insurance subsidiaries. We believe our strong insurer financial strength ratings, in particular, the A+ (Superior) ratings from A.M. Best for our standard market property casualty insurance group and each subsidiary in that group, are an important competitive advantage. See Item 1, Our Business and Our Strategy, Financial Strength, for additional discussion of our financial strength ratings.


•	Concerns that doing business with us is difficult or not profitable, perceptions that our level of service is no longer a distinguishing characteristic in the marketplace, perceptions that our products do not meet the needs of our agents’ clients or perceptions that our business practices are not compatible with agents’ business models.


•	Mergers and acquisitions could result in a concentration of a significant amount of premium in one agency.


•	Delays in the development, implementation, performance and benefits of technology systems and enhancements or independent agent perceptions that our technology solutions do not match their needs.

A reduction in the number of independent agencies marketing our products, the failure of agencies to successfully market our products or pay amounts due to us, changes in the strategy or operations of agencies or the choice of agencies to reduce their writings of our products could affect our results of operations if we were unable to replace them with agencies that produce adequate and profitable premiums.

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Further, policyholders may choose a competitor’s product rather than our own because of real or perceived differences in price, terms and conditions, coverage or service. If the quality of the independent agencies with which we do business were to decline, that also might cause policyholders to purchase their insurance through different agencies or channels. Consumers, especially in the personal insurance industry segment, may increasingly choose to purchase insurance from distribution channels other than independent insurance agents, such as direct marketers. Increased advertising by insurers, especially direct marketers, could cause consumers to shift their buying habits, bypassing independent agents altogether. Innovation, new or changing technologies and/or buying trends or consumer preferences could reduce or eliminate the need or demand for products we sell.

Our credit ratings or financial strength ratings of our insurance subsidiaries could be downgraded.

A downgrade in one or more of our company’s credit or debt ratings could adversely impact our borrowing costs or limit our access to capital. Financial strength ratings reflect a rating agency’s opinion of our insurance subsidiaries’ financial strength, operating performance, strategic position and ability to meet obligations to policyholders. Our ratings are subject to periodic review and there is no assurance that our ratings will not be changed. Ratings agencies could change or expand their requirements or could find that our insurance subsidiaries no longer meet the criteria established for current ratings. If our property casualty insurer financial strength ratings were to be downgraded, our agents might find it more difficult to market our products or might choose to emphasize the products of other carriers. See Item 7, Liquidity and Capital Resources, Additional Sources of Liquidity, for additional discussion of ratings for our long-term debt.

We could experience an unusually high level of losses due to catastrophic, terrorism or pandemic events or risk concentrations.

In the normal course of our business, both in our insurance and reinsurance operations, we provide coverage against perils for which estimates of losses are highly uncertain, in particular catastrophic and terrorism events. Catastrophes can be man-made or caused by natural perils. Man-made catastrophes to which we may be exposed include, but are not limited to, industrial accidents, terrorist attacks, social unrest and riot. Natural peril catastrophe events to which we may be exposed include, but are not limited to, hurricanes, tornadoes, windstorms, earthquakes, landslides, hailstorms, flooding, severe winter weather and wildfires. Due to the nature of these events, we are unable to predict precisely the frequency or potential cost of catastrophe occurrences. Various scientists and other experts believe that changing climate conditions have added to the unpredictability, frequency and severity of such natural disasters in certain parts of the world and have created additional uncertainty as to future trends and exposures. We cannot predict the impact that changing climate conditions may have on our results of operations nor can we predict how any legal, regulatory or social responses to concerns about climate change may impact our business. Additionally, man-made events, such as hydraulic fracturing, could cause damage from earth movement or create environmental and/or health hazards.

The extent of losses from a catastrophe is a function of both the total amount of insured and reinsured exposure in the area affected by the event and the severity of the event. Our ability to appropriately manage catastrophe risk depends partially on catastrophe models, which may be affected by inaccurate or incomplete data, the uncertainty of the frequency and severity of future events and the uncertain impact of climate change. Additionally, these models are recalibrated and changed over time, with more data availability and changing opinions regarding the effect of current or emerging loss patterns and conditions.

According to these models, probable maximum loss estimates from a single hurricane event that combine the effects of property casualty insurance written on a direct basis by The Cincinnati Insurance Companies and the Cincinnati Re reinsurance portfolio include the following amounts, net of amounts recoverable through reinsurance ceded, and also income taxes: $211 million for a once-in-a-100-year event and $333 million for a once-in-a-250-year event. In addition, the pending acquisition of MSP is estimated to increase the $333 million amount by approximately $55 million, based on estimates as of October 2018. Please see Item 7, Liquidity and Capital Resources, 2019 Reinsurance Programs, for a discussion of modeled losses considered in evaluating our risk mitigation strategy, which includes our ceded reinsurance program.

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The geographic regions in which we market insurance and reinsurance are exposed to numerous natural catastrophes, such as:


•	Hurricanes in the gulf, eastern, southeastern and northeastern coastal regions.


•	Earthquakes in many regions, most particularly in the New Madrid fault zone, California, the Northwest and Southwest.


•	Tornado, wind and hail in the Midwest, South, Southeast, Southwest and the mid-Atlantic.


•	Wildfires.


•	On a worldwide basis, in the event of a severe catastrophic event or terrorist attack we may be exposed to material losses through our reinsurance assumed operations.

The occurrence of terrorist attacks in the geographic areas we serve could result in substantially higher claims under our insurance policies than we have anticipated. While our insurance policies provide coverage for terrorism risk in all areas we serve, we have identified our major terrorism exposure geographically as general commercial risks in the Tier 1 cities of metropolitan Chicago, Dallas and New York areas, and to a much lesser degree, Houston, Los Angeles and Washington D.C. We have a greater amount of business in less hazardous Tier 2 cities such as Atlanta, Cincinnati, Cleveland, Denver, Minneapolis, Phoenix-Mesa, Pittsburgh, St. Louis and Tampa-St. Petersburg. We have exposure to small co-op utilities, water utilities, wholesale fuel distributors, small shopping malls and small colleges throughout our 42 active states and, because of the number of associates located there, our Fairfield, Ohio, headquarters. Additionally, our life insurance subsidiary could be adversely affected in the event of a terrorist event or an epidemic such as the avian or swine flu, particularly if the epidemic were to affect a broad range of the population beyond just the very young or the very old. Our associate health plan is self-funded and could similarly be affected.

Our results of operations would be adversely affected if the level of losses we experience over a period of time were to exceed our actuarially determined expectations. In addition, our financial condition may be adversely affected if we were required to sell securities prior to maturity or at unfavorable prices to pay an unusually high level of loss and loss expenses. Securities pricing might be even less favorable if a number of insurance or other companies and other investors needed to sell securities during a short period of time because of unusually high losses from catastrophic events.

Our geographic concentration ties our performance to business, economic, environmental and regulatory conditions in certain states. We market our standard market property casualty insurance products in 42 states, but our business is concentrated in the Midwest and Southeast. We also have exposure in states where we do not actively market insurance when clients of our independent agencies have businesses or properties in multiple states.

The Cincinnati Insurance Company is expanding in the area of reinsurance assumed and has staffed this operation with seasoned underwriting and analytical talent who strive to assume risks that we understand well, both quantitatively and qualitatively. Business written includes treaties that provide coverage for property catastrophe and terrorism events on a worldwide basis. At January 1, 2019, the largest loss exposure to us for our Cincinnati Re reinsurance assumed operations is from natural catastrophe events. That exposure includes probable maximum loss estimates, on a marginal basis, of the following amounts: $116 million for a once-in-a-100-year event and $81 million for a once-in-a-250-year event. Those effects represent a single hurricane event and are net of income taxes, with the marginal basis reflecting diversification effects of the Cincinnati Re reinsurance portfolio and property casualty insurance written on a direct basis by The Cincinnati Insurance Companies. If there is a high frequency of large property catastrophe or terrorism events, or a single extreme event, during the coverage period of these treaties, our financial position and results of operations could be materially affected.

Additionally, the companies we invest in might be severely affected by a severe catastrophic event or terrorist attack, which could affect our financial condition and results of operations. Our reinsurers might experience significant losses, potentially jeopardizing their ability to pay losses we cede to them. It could also reduce the availability of reinsurance. If we cannot obtain adequate coverage at a reasonable cost, it could constrain where we can write business or reduce the amount of business we can write in certain areas. We also may be exposed to state guaranty fund assessments if other carriers in a state cannot meet their obligations to policyholders. A catastrophe or epidemic event also could affect our operations by damaging our headquarters facility, injuring associates and visitors at our Fairfield, Ohio, headquarters or disrupting our associates’ ability to perform their assigned tasks.

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Our ability to achieve our performance objectives could be affected by changes in the financial, credit and capital markets or the general economy.

We invest premiums received from policyholders and other available cash to generate investment income and capital appreciation, while also maintaining sufficient liquidity to pay covered claims and operating expenses, service our debt obligations and pay dividends. The value of our invested assets is an important component of shareholders’ equity, also known as book value. Changes in the valuation of invested assets can significantly affect changes in book value per share, a key performance objective as discussed in Item 7, Executive Summary of Management’s Discussion and Analysis.

For fixed-maturity investments such as bonds, which represented 64.3 percent of the fair value of our investment portfolio at the end of 2018, the inverse relationship between interest rates and bond prices leads to falling bond values during periods of increasing interest rates. A significant increase in the general level of interest rates could have an adverse effect on our shareholders’ equity.

Investment income is an important component of our revenues and net income. The ability to increase investment income and generate longer-term growth in book value is affected by factors beyond our control, such as: inflation, economic growth, interest rates, world political conditions, changes in laws and regulations, terrorism attacks or threats, adverse events affecting other companies in our industry or the industries in which we invest, market events leading to credit constriction, and other widespread unpredictable events. These events may adversely affect the economy generally and could cause our investment income or the value of securities we own to decrease. A significant decline in our investment income could have an adverse effect on our net income, and thereby on our shareholders’ equity and our statutory capital and surplus. For example, a significant increase in the general level of interest rates could lead to falling bond values. For a more detailed discussion of risks associated with our investments, please refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk.

We have issued life contracts with guaranteed minimum returns, referred to as bank-owned life insurance contracts (BOLIs). BOLI investment assets must meet certain criteria established by the regulatory authorities in the jurisdiction for which the group contract holder is subject. Therefore, sales of investments may be mandated to maintain compliance with these regulations, possibly requiring gains or losses to be recorded. We could experience losses if the assets in the accounts were less than liabilities at the time of maturity or termination.

Our investment performance also could suffer because of the types of investments, industry groups and/or individual securities in which we choose to invest. Market value changes related to these choices could cause a material change in our financial condition or results of operations.

At year-end 2018, common stock holdings made up 34.6 percent of our investment portfolio. Adverse news or events affecting the global or U.S. economy or the equity markets could affect our net income, book value and overall results, as well as our ability to pay our common stock dividend. See Item 7, Investments Results, and Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for a discussion of our investment activities.

Deterioration in the banking sector or in banks with which we have relationships could affect our results of operations. Our ability to maintain or obtain short-term lines of credit could be affected if the banks from which we obtain these lines are acquired, fail or are otherwise negatively affected. We may lose premium revenue if a bank that owns appointed agencies were to change its strategies. We could experience increased losses in our director and officer liability line of business if claims were made against insured financial institutions.

A deterioration of credit and market conditions could also impair our ability to access credit markets and could affect existing or future lending arrangements.

Our overall results could be affected if a significant portion of our commercial lines policyholders, including those purchasing surety bonds, are adversely affected by marked or prolonged economic downturns and events such as a downturn in construction and related sectors, tightening credit markets and higher fuel costs. Such events could make it more difficult for policyholders to finance new projects, complete projects or expand their businesses, leading to lower premiums from reduced payrolls and sales and lower purchases of equipment and vehicles. These events could also cause claims, including surety claims, to increase due to a policyholder’s inability to secure necessary financing to complete projects or to collect on underlying lines of credit in the claims process. Such economic downturns and events could have a greater impact in the construction sector where we have a concentration of risks and in geographic areas that are hardest hit by economic downturns.

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Deteriorating economic conditions could also increase the degree of credit risk associated with amounts due from independent agents who collect premiums for payment to us and could hamper our ability to recover amounts due from reinsurers.

Our ability to properly underwrite and price risks and increased competition could adversely affect our results.

Our financial condition, results of operations and cash flows depend on our ability to underwrite and set rates accurately for a full spectrum of risks. We establish our pricing based on assumptions about the level of losses that may occur within classes of business, geographic regions and other criteria.

To properly price our products, we must collect, properly analyze and use data to make decisions and take appropriate action; the data must be sufficient, reliable and accessible; we need to develop appropriate rating methodologies and formulae; and we may need to identify and respond to trends quickly. We may overestimate or underestimate loss cost trends or these trends may unexpectedly change, leading to losing business by pricing risks above our competitors or charging rates too low to maintain profitability. Inflation trends, especially outside of historical norms, may make it more difficult to determine adequate pricing. If rates are not accurate, we may not generate enough premiums to offset losses and expenses, or we may not be competitive in the marketplace.

Our ability to set appropriate rates could be hampered if states where we write business refuse to allow rate increases that we believe are necessary to cover the risks insured. A state could also hamper our ability to set appropriate rates if it no longer allowed us to use factors that we believe are predictive of loss, such as credit-based factors. Multiple states require us to purchase reinsurance from a mandatory reinsurance fund. Such reinsurance funds can create a credit risk for insurers if not adequately funded by the state and, in some cases, the existence of a reinsurance fund could affect the prices charged for our policies. The effect of these and similar arrangements could reduce our profitability in any given period or limit our ability to grow our business.

The insurance industry is cyclical and intensely competitive. From time to time, the insurance industry goes through prolonged periods of intense competition during which it is more difficult to attract new business, retain existing business and maintain profitability. Competition in our insurance business is based on many factors, including:


•	Competitiveness of premiums charged


•	Relationships among carriers, agents, brokers and policyholders


•	Underwriting and pricing methodologies that allow insurers to identify and flexibly price risks


•	Compensation provided to agents


•	Underwriting discipline


•	Terms and conditions of insurance coverage


•	Speed with which products are brought to market


•	Product and marketing innovations, including advertising


•	Technological competence and innovation


•	Ability to control expenses


•	Adequacy of financial strength ratings by independent ratings agencies such as A.M. Best


•	Quality of services and tools provided to agents and policyholders


•	Claims satisfaction and reputation

We compete with major U.S., Bermuda, European, and other international insurers and reinsurers and with underwriting syndicates, some of which have greater financial, marketing and management resources than we do. Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources. We also compete with new companies that continue to enter the insurance and reinsurance markets. In addition, capital market participants have created alternative products that are intended to compete with reinsurance products that we sell in our reinsurance assumed operations. Increased competition could result in fewer submissions, lower premium rates, and less favorable policy terms and conditions, which could reduce our underwriting margins and have a material adverse effect on our results of operations and financial condition.

Cincinnati Financial Corporation - 2018 10-K - Page 37

If our pricing was incorrect or we were unable to compete effectively because of one or more of these factors, our premium writings could decline and our results of operations and financial condition could be materially adversely affected. Large competitors could intentionally disrupt the market by targeting certain lines or underpricing the market.

Please see the discussion of our Commercial Lines, Personal Lines, Excess and Surplus Lines and Life Insurance Segments in Item 1, Our Segments, for a discussion of our competitive position in the insurance marketplace.

Our pricing and capital models could be flawed.

We use various predictive pricing models, stochastic models and/or forecasting techniques to help us understand our business, analyze risk and estimate future trends. The output of these models is used to assist us in making underwriting, pricing, reinsurance, reserving and capital decisions and helps us set our strategic direction. These models contain numerous assumptions, including the assumption that the data used is sufficient and accurate. They are also subject to uncertainties and limitations inherent in any statistical analysis. Actual results may be materially different from modeled output, resulting in pricing our products incorrectly, overestimating or underestimating reserves, or inaccurately forecasting the impact of modeled events on our results. This could materially adversely impact the results of our operations.

Our loss reserves, our largest liability, are based on estimates and could be inadequate to cover our actual losses.

Our consolidated financial statements are prepared using GAAP. These principles require us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates. For a discussion of the significant accounting policies we use to prepare our financial statements, the material implications of uncertainties associated with the methods, assumptions and estimates underlying our critical accounting policies and the process used to determine our loss reserves, please refer to Item 8, Note 1 of the Consolidated Financial Statements, and Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves and Life Insurance Policy Reserves.

Our most critical accounting estimate is loss reserves. Loss reserves are the amounts we expect to pay for covered claims and expenses we incur to settle those claims. The loss reserves we establish in our financial statements represent an estimate of amounts needed to pay and administer claims arising from insured events that have already occurred, including events that have not yet been reported to us. Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability. Inflationary scenarios, especially scenarios outside of historical norms or regulatory changes that affect the assumptions underlying our critical accounting estimates, may make it more difficult to estimate loss reserves. Accordingly, our loss reserves for past periods could prove to be inadequate to cover our actual losses and related expenses. Any changes in these estimates are reflected in our results of operations during the period in which the changes are made. An increase in our loss reserves would decrease earnings, while a decrease in our loss reserves would increase earnings.

Unforeseen losses, the type and magnitude of which we cannot predict, may emerge. These additional losses could arise from changes in the legal environment, laws and regulations, climate change, catastrophic events, increases in loss severity or frequency, environmental claims, mass torts or other causes. Such future losses could be substantial. Inflationary scenarios may cause the cost of claims, especially medical claims, to rise, impacting reserve adequacy and our results of operations.

In addition to the risks stated above, reinsurance assumed reserves are subject to uncertainty because a reinsurer relies on the original underwriting decisions and claims reserving practices of ceding companies. As a result, we are subject to the risk that our ceding companies may not have adequately evaluated the risks reinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. In addition, there is generally a longer lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer and ultimate resolution or settlement of the loss.

Cincinnati Financial Corporation - 2018 10-K - Page 38

We may not be able to successfully or timely complete the transaction to acquire MSP Underwriting Limited.

On October 11, 2018, we entered into an agreement with Münchener Rückversicherungs Gesellschaft AG (Munich Re) for the sale and purchase of the entire issued share capital of MSP Underwriting Limited, pursuant to which we agreed to purchase, and Munich Re agreed to sell, all of the issued and outstanding share capital of MSP and its subsidiaries, which includes the Lloyds' managing agent, Beaufort Underwriting Agency Limited for Lloyd's Syndicate 318.

The transaction may not be completed, or may not be completed in the time frame, on the terms or in the manner currently anticipated. The completion of the transaction is subject to the satisfaction or waiver of customary closing conditions, such as receipt of certain regulatory approvals. There can be no assurance that the conditions to closing of the transaction will be satisfied or waived or that other events will not intervene to delay or result in the failure to close the transaction. In addition, the agreement may be terminated prior to closing if certain closing conditions are not satisfied, including receipt of the previously referenced regulatory approvals, on or prior to April 11, 2019.

While we believe that we will receive all required approvals for the transaction, there can be no assurance as to the receipt or timing of receipt of these approvals. A substantial delay in obtaining any required authorizations, approvals or consents, or the imposition of unfavorable terms, conditions or restrictions contained in such authorizations, approvals or consents, could prevent the completion of the transaction or have an adverse effect on the anticipated benefits of the transaction.

The anticipated benefits of the transaction may not be realized.

If the transaction is completed, the company can provide no assurance that the anticipated benefits of the transaction will be fully realized in the time frame anticipated or at all, or that the costs or difficulties related to the integration of MSP’s operations into the company’s will not be greater than expected. The success of the transaction will depend, in part, on our ability to realize the anticipated business opportunities and growth prospects from acquiring MSP. We may never realize these business opportunities and growth prospects. Integrating MSP will require significant efforts and expenditures. Our management might have its attention diverted while trying to integrate operations and corporate and administrative infrastructures and the cost of integration may exceed our expectations.

MSP’s international operations will subject the company to additional regulation and could expose the company to additional investment, political and economic risks.

Following the completion of the transaction, we will have international operations that could expose the company to a number of additional risks. These risks include restrictions such as price controls, capital controls, currency exchange limits, ownership limits and other restrictive or anti-competitive governmental actions or requirements, which could have an adverse effect on the company’s business and reputation. The company’s business activities outside the United States could also be subject to political and economic risks, including foreign currency and credit risk. Additionally, MSP’s operations will expand the products offered by us.

Additionally, following the closing of the transaction, business activities outside the United States will subject the company to additional domestic and foreign laws and regulations, including the Foreign Corrupt Practices Act, the UK Bribery Act and similar laws in other countries that prohibit the making of improper payments to foreign officials. In addition, insurers in the United Kingdom (including managing agents and members of Lloyd’s of London) are subject to Solvency II and the UK regulatory regime, which itself includes rules promulgated by Lloyd's of London. Although the company has policies and controls in place that are designed to ensure compliance with these laws and regulatory requirements, if those controls are ineffective and an employee or intermediary fails to comply with applicable laws and regulations, the company could suffer civil and criminal penalties and the company’s business and reputation could be adversely affected. Some countries have laws and regulations that lack clarity and, even with local expertise and effective controls, it can be difficult to determine the exact requirements of, and potential liability under, the local laws. Failure to comply with local laws in a particular market may result in substantial liability and could have a significant and negative effect not only on the company’s business in that market but also on the company’s reputation generally.

Business activities at MSP will be subject to approval by Lloyd's of a business plan each year. There is risk that plans will not be approved or will be limited. As a Lloyd’s managing agent and syndicate, MSP is exposed to various risks and uncertainties associated with Lloyd's, including its obligation to maintain funds at Lloyd’s to support its underwriting activities and periodic assessment of its capital, governance and other aspects of its business.

Cincinnati Financial Corporation - 2018 10-K - Page 39

Recent developments relating to the United Kingdom’s referendum vote in favor of leaving the European Union could adversely affect MSP’s operations following the closing of the transaction.

The UK held a referendum on June 23, 2016, in which a majority of voters voted for the UK’s withdrawal from the European Union (Brexit). Because of this vote, the terms of the UK’s withdrawal from the European Union and the relationship between the UK and the European Union going forward is currently being negotiated, including the terms of trade between them. The ultimate impact of Brexit is uncertain and will depend on any agreements that the UK makes to retain access to European Union markets. Brexit could also lead to legal uncertainty and potentially divergent national laws and regulations as the UK determines which European Union laws to replace or replicate. These or other adverse consequences from Brexit could adversely affect the operations and business opportunities of MSP, following the closing of the transaction.

With a view to mitigating the potential effects of Brexit on business underwritten through Lloyd’s, as has been publicly announced, Lloyd’s has set up an insurance company subsidiary in Belgium, with the intention of underwriting European Economic Area insurance business via that subsidiary (where required) beginning on January 1, 2019. It is not possible at this stage to determine how effective this proposed Brexit contingency plan will be.

Our ability to obtain or collect on our reinsurance protection could affect our business, financial condition, results of operations and cash flows.

We buy property casualty and life reinsurance coverage to mitigate the liquidity risk and earnings volatility risk of an unexpected rise in claims severity or frequency from catastrophic events or a single large loss. The availability, amount and cost of reinsurance depend on market conditions and may vary significantly. If we were unable to obtain reinsurance on acceptable terms and in appropriate amounts, our business and financial condition could be adversely affected.

In addition, we are subject to credit risk with respect to our reinsurers. Although we purchase reinsurance to manage our risks and exposures to losses, this reinsurance does not discharge our direct obligations under the policies we write. We would remain liable to our policyholders even if we were unable to recover what we believe we are entitled to receive under our reinsurance contracts. Reinsurers might refuse or fail to pay losses that we cede to them, or they might delay payment. For long-tail claims, the creditworthiness of our reinsurers may change before we can recover amounts to which we are entitled. A reinsurer’s insolvency, inability or unwillingness to make payments under the terms of its reinsurance agreement with our insurance subsidiaries could have a material adverse effect on our financial position, results of operations or cash flows.

Please see Item 7, Liquidity and Capital Resources, 2019 Reinsurance Ceded Programs, for a discussion of selected reinsurance transactions.

Our business depends on the uninterrupted operation of our facilities, systems and business functions.

Our business depends on our associates’ ability to perform necessary business functions, such as processing new and renewal policies and handling claims. We increasingly rely on technology and systems to accomplish these business functions in an efficient and uninterrupted fashion. Our inability to access our headquarters facilities or a failure of technology, telecommunications or other systems or the loss or failure of services provided by key vendors, could significantly impair our ability to perform such functions on a timely basis or affect the accuracy of transactions. If sustained or repeated, such a business interruption or system failure could result in a deterioration of our ability to write and process new and renewal business, serve our agents and policyholders, pay claims in a timely manner, collect receivables or perform other necessary business functions. If our disaster recovery and business continuity plans did not sufficiently consider, address or reverse the circumstances of an interruption or failure, this could result in a materially adverse effect on our operating results and financial condition. This risk is exacerbated because approximately 66 percent of our associates work at our Fairfield, Ohio, headquarters.

Our ability to successfully execute business functions also depends on hiring and retaining qualified associates. Competition for high-quality executives and other key associates occurs within the insurance industry and from other industries. We also must effectively develop and manage associates, including providing training and resources. Such tools and information can allow them to effectively perform critical business functions and adapt to changing business needs. If we were unable to attract and retain certain associates, or if we fail to provide adequate training or resources, we could limit the success of executing our strategic plans and vital business functions.

Cincinnati Financial Corporation - 2018 10-K - Page 40

The effects of changes in industry practices, laws and regulations on our business are uncertain.

As industry practices and legal, judicial, legislative, regulatory, political, social and other environmental conditions change, unexpected and unintended issues related to insurance pricing, claims and coverage may emerge. These issues may adversely affect our business by impeding our ability to obtain adequate rates for covered risks or otherwise extending coverage beyond our underwriting intent, by increasing the number or size of claims, by varying assumptions underlying our critical accounting estimates or by increasing duties owed to policyholders beyond contractual obligations. In some instances, unforeseeable emerging and latent claim and coverage issues may not become apparent until sometime after we have issued the insurance policies that could be affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a policy is issued and our pricing and reserve estimates may not accurately reflect its effect.

We are required to adopt new or revised accounting standards issued by recognized authoritative organizations, including the Financial Accounting Standards Board (FASB) and the SEC. Future changes required to be adopted could change the current accounting treatment that we apply and could result in material adverse effects on our results of operations, financial position or cash flows.

Our investment income benefits from tax rate preferences for municipal bond interest and dividend income from equity securities. Market valuations for these securities also benefit from the tax-preference aspect of current tax laws, affecting the value of our investment portfolio and also shareholders’ equity. Future changes in tax laws could result in material adverse effects on our results of operations and financial condition.

The NAIC, state insurance regulators and state legislators continually re-examine existing laws and regulations governing insurance companies and insurance holding companies, specifically focusing on modifications to statutory accounting principles, interpretations of existing laws, regulations relating to product forms and pricing methodologies and the development of new laws and regulations that affect a variety of financial and nonfinancial components of our business. Any proposed or future legislation, regulation or NAIC initiatives, if adopted, may be more restrictive on our ability to conduct business than current regulatory requirements or may result in higher costs. The loss or significant restriction on the use of a particular variable, such as credit, in pricing and underwriting our products could lead to future unprofitability and increased costs.

Federal laws and regulations and the influence of international laws and regulations, including those that may be enacted in the wake of the financial and credit crises, may have adverse effects on our business, potentially including a change from a state-based system of regulation to a system of federal regulation, the repeal of the McCarran Ferguson Act, and/or measures under the Dodd-Frank Act that establish the Federal Insurance Office and provide for a determination that a nonbank financial company presents systemic risk and therefore should be subject to heightened supervision by the Federal Reserve Board. It is not known how this federal office will coordinate and interact with the NAIC and state insurance regulators. Adoption or implementation of any of these measures may restrict our ability to conduct our insurance business, govern our corporate affairs or increase our cost of doing business. Implementation of the Affordable Care Act (ACA) may affect the ability of the company to grow profitably.

The effects of such changes could adversely affect our results of operations. Please see Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves and Life Insurance Policy Reserves, for a discussion of our reserving practices.

Managing technology initiatives and meeting data security requirements are significant challenges.

While technology can streamline many business processes and ultimately reduce the costs of operations, technology initiatives present short-term cost and also have implementation and operational risks. In addition, we may have inaccurate expense projections, implementation schedules or expectations regarding the effectiveness and user acceptance of the end product. These issues could escalate over time. If we were unable to find and retain associates with key technical knowledge, our ability to develop and deploy key technology solutions could be hampered.

We necessarily collect, use and hold data concerning individuals and businesses with whom we have a relationship. Threats to data security, including unauthorized access and cyberattacks, rapidly emerge and change, exposing us to additional costs for protection or remediation and competing time constraints to secure our data in accordance with customer expectations and statutory and regulatory requirements.

Cincinnati Financial Corporation - 2018 10-K - Page 41

While we take commercially reasonable measures to keep our systems and data secure, it is difficult or impossible to defend against every risk being posed by changing technologies as well as criminals intent on committing cybercrime. Increasing sophistication of cyber criminals and terrorists make keeping up with new threats difficult and could result in a breach. Patching and other measures to protect existing systems and servers could be inadequate, especially on systems that are being retired. Controls employed by our U.S., off-shore and cloud vendors could prove inadequate. We could also experience a breach by intentional or negligent conduct on the part of associates or other internal sources. Our systems and those of our third-party vendors may become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses and malware.

A breach of our security or the security of a vendor that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs and reputational damage.

Our status as an insurance holding company with no direct operations could affect our ability to pay dividends in the future.

Cincinnati Financial Corporation is a holding company that transacts substantially all of its business through its subsidiaries. Our primary assets are the stock in our operating subsidiaries and our investments. Consequently, our cash flow to pay cash dividends and interest on our long-term debt depends on dividends we receive from our operating subsidiaries and income earned on investments held at the parent-company level.

Dividends received from our insurance subsidiary are restricted by the insurance laws of Ohio, its domiciliary state. These laws establish minimum solvency and liquidity thresholds and limits. In 2019, the maximum dividend that may be paid without prior regulatory approval is limited to the greater of 10 percent of statutory capital and surplus or 100 percent of statutory net income for the prior calendar year, up to the amount of statutory unassigned capital and surplus as of the end of the prior calendar year. Dividends exceeding these limitations may be paid only with prior approval of the Ohio Department of Insurance. We might not be able to receive dividends from our insurance subsidiary, or we might not receive dividends in the amounts necessary to meet our debt obligations or to pay dividends on our common stock without liquidating securities. This could affect our financial position.

Please see Item 1, Regulation, and Item 8, Note 9 of the Consolidated Financial Statements, for a discussion of insurance holding company dividend regulations.

Cincinnati Financial Corporation - 2018 10-K - Page 42

ITEM 1B. Unresolved Staff Comments

None

ITEM 2. Properties

Cincinnati Financial Corporation owns our headquarters building located on 102 acres of land in Fairfield, Ohio. This building has 1,508,200 square feet of total space. The property, including land is recorded in our financial statements at $131 million at December 31, 2018, and is classified as land, building and equipment, net, for company use. John J. & Thomas R. Schiff & Co. Inc., a related party, occupies 6,750 square feet (less than 1 percent). This property is used for the operations described in the Consolidated Financial Statements and accompanying Notes.

Cincinnati Financial Corporation owns Gilmore Pointe, located on the northwest corner of our headquarters property. This four-story building contains approximately 103,000 square feet of usable space. The property is recorded in the financial statements at $6 million at December 31, 2018, and is classified as investment property in Other Invested Assets, net. At December 31, 2018, unaffiliated tenants occupied 88 percent, Cincinnati Financial affiliates occupy 12 percent.

The Cincinnati Insurance Company owns the CFC Winton Center used for multiple operations with approximately 48,000 square feet of total space, located approximately six miles from our headquarters. The property, including land, is recorded in our financial statements at $9 million at December 31, 2018, and is classified as land, building and equipment, net, for company use.

ITEM 3. Legal Proceedings

Neither the company nor any of our subsidiaries is involved in any material litigation other than ordinary, routine litigation incidental to the nature of its business.

ITEM 4. Mine Safety Disclosures

This item is not applicable to the company.

Cincinnati Financial Corporation - 2018 10-K - Page 43

Part II

ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Cincinnati Financial Corporation had approximately 150,000 shareholders of record as of December 31, 2018. While approximately 13,000 shareholders are registered, the majority of shareholders are beneficial owners whose shares are held in “street name” by brokers and institutional accounts. We believe many of our independent agent representatives and most of the 4,999 associates of our subsidiaries own the company’s common stock. Our common shares are traded under the symbol CINF on Nasdaq.

We discuss the factors that affect our ability to pay cash dividends and repurchase shares in Item 7, Liquidity and Capital Resources. Regulatory restrictions on dividends our insurance subsidiary can pay to the parent company are discussed in Item 8, Note 9 of the Consolidated Financial Statements.

The following summarizes securities authorized for issuance under our equity compensation plans as of December 31, 2018:



Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights at December 31, 2018	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a)) at December 31, 2018
	(a)	(b)		(c)
Equity compensation plans approved by security holders	3,273,815	$	56.08	9,709,209
Equity compensation plans not approved by security holders	—	—		—
Total	3,273,815	$	56.08	9,709,209

The number of securities remaining available for future issuance includes: 8,570,563 shares available for issuance under the Cincinnati Financial Corporation 2016 Stock Compensation Plan (the 2016 Plan), 838,646 shares available for issuance under the Cincinnati Financial Corporation 2012 Stock Compensation Plan (the 2012 Plan), and 300,000 shares available for issuance of share grants under the Director’s Stock Plan of 2018. The number of securities remaining available for future issuance assumes the number of securities to be issued from performance-based awards are issued at the target-level performance level. Both the 2016 Plan and 2012 Plan allow for issuance of stock options, service-based or performance-based restricted stock units, stock appreciation rights or other equity-based grants. Awards other than stock options granted from the 2016 and 2012 plans are counted as three shares against the plan for each one share of common stock actually issued. Additional information about share-based associate compensation granted under our equity compensation plans is available in Item 8, Note 17 of the Consolidated Financial Statements.

Cincinnati Financial Corporation - 2018 10-K - Page 44

The following summarizes shares purchased under our repurchase programs:



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
October 1-31, 2018	—	$	—	—	15,476,785
November 1-30, 2018	—	—		—	15,476,785
December 1-31, 2018	—	—		—	15,476,785
Totals	—	—		—

We did not sell any of our shares that were not registered under the Securities Act during 2018. 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. On January 26, 2018, an additional 15 million shares were authorized, resulting in 15,476,785 shares available for purchase under our program at December 31, 2018.

Cincinnati Financial Corporation - 2018 10-K - Page 45

Cumulative Total Return

As depicted in the graph below, the five-year total return on a $100 investment made December 31, 2013, assuming the reinvestment of all dividends, was 74.6 percent for Cincinnati Financial Corporation’s common stock compared with 71.2 percent for the S&P Composite 1500 Property & Casualty Insurance Index and 50.3 percent for the S&P 500 Index.

The S&P Composite 1500 Property & Casualty Insurance Index included 26 companies at year-end 2018: The Allstate Corporation, Ambac Financial Group Inc., AMERISAFE Inc., Aspen Insurance Holdings Limited, Chubb Limited, Cincinnati Financial Corporation, Employers Holdings Inc., First American Financial Corporation, The Hanover Insurance Group Inc., HCI Group Inc., James River Group Holdings Ltd., Kemper Corporation, Mercury General Corporation, The Navigators Group Inc., Old Republic International Corporation, ProAssurance Corporation, The Progressive Corporation, RLI Corp., Safety Insurance Group Inc., Selective Insurance Group Inc., Stewart Information Services Corporation, The Travelers Companies Inc., United Fire Group Inc., United Insurance Holdings Corp., Universal Insurance Holdings Inc. and W. R. Berkley Corporation.

The S&P 500 Index includes a representative sample of 500 leading companies in a cross section of industries of the U.S. economy. Although this index focuses on the large capitalization segment of the market, it is widely viewed as a proxy for the total market.

The following graph depicts $100 invested on December 31, 2013, in stock or index, including reinvestment of dividends. The years shown represent each respective fiscal year ending December 31.

Comparison of Five-Year Cumulative Total Return

Cincinnati Financial Corporation - 2018 10-K - Page 46

ITEM 6. Selected Financial Data



(In millions, except per share data and shares outstanding in thousands)	Years ended December 31,
	2018			2017			2016			2015			2014
Consolidated Income Statement Data
Earned premiums	$	5,170		$	4,954		$	4,710		$	4,480		$	4,243
Investment income, net of expenses	619			609			595			572			549
Investment gains and losses, net *	(402		)	148			124			70			133
Total revenues	5,407			5,732			5,449			5,142			4,945
Net income	287			1,045			591			634			525
Net income per common share:
Basic	$	1.76		$	6.36		$	3.59		$	3.87		$	3.21
Diluted	1.75			6.29			3.55			3.83			3.18
Cash dividends per common share:
Ordinary declared	2.12			2.00			1.92			1.84			1.76
Ordinary paid	2.09			1.98			1.90			1.82			1.74
Special declared and paid	—			0.50			—			0.46			—
Diluted weighted average shares	164.5			166.0			166.5			165.6			165.1
Consolidated Balance Sheet Data
Total investments	$	16,732		$	17,051		$	15,500		$	14,423		$	14,386
Net unrealized investment portfolio gains	2,598			3,540			2,625			2,094			2,719
Deferred policy acquisition costs	738			670			637			616			578
Total assets	21,935			21,843			20,386			18,888			18,748
Gross loss and loss expense reserves	5,707			5,273			5,085			4,718			4,485
Life policy and investment contract reserves	2,779			2,729			2,671			2,583			2,497
Long-term debt	788			787			787			786			786
Shareholders' equity	7,833			8,243			7,060			6,427			6,573
Book value per share	48.10			50.29			42.95			39.20			40.14
Shares outstanding	162,843			163,899			164,387			163,944			163,747
Value creation ratio	(0.1		)%	22.9		%	14.5		%	3.4		%	12.6		%
Consolidated Property Casualty Operations Data
Earned premiums	$	4,920		$	4,722		$	4,482		$	4,271		$	4,045
Unearned premiums	2,515			2,403			2,306			2,200			2,081
Gross loss and loss expense reserves	5,646			5,219			5,035			4,660			4,438
Investment income, net of expenses	401			392			384			368			358
Loss and loss expense ratio	65.5		%	66.4		%	63.8		%	60.2		%	65.0		%
Underwriting expense ratio	30.9			31.1			31.0			30.9			30.6
Combined ratio	96.4		%	97.5		%	94.8		%	91.1		%	95.6		%

We retrospectively adopted ASU 2015-15, Interest-Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, as of December 31, 2015. All prior year information has been restated.

Investment gains and losses are integral to our financial results over the long term, but our substantial discretion in the timing of investment sales may cause this value to fluctuate substantially. Also, applicable accounting standards require us to recognize gains and losses from changes in fair values of equity securities and changes in embedded derivatives without actual realization of those gains and losses. We discuss investment gains and losses for the past three years in Item 7, Investments Results.

Cincinnati Financial Corporation - 2018 10-K - Page 47

ITEM 7. Management's Discussion and Analysis of Financial Condition and

Results of Operations

Introduction

The purpose of Management’s Discussion and Analysis is to provide an understanding of Cincinnati Financial Corporation’s consolidated results of operations and financial condition. Our Management’s Discussion and Analysis should be read in conjunction with Item 6, Selected Financial Data, and Item 8, Consolidated Financial Statements and related Notes. We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and stock dividends.

We begin with an executive summary of our results of operations, followed by other highlights, an overview of our strategy, an outlook for future performance and details about critical accounting estimates. In several instances, we refer to estimated industry data so that we can provide information on our performance within the context of the overall insurance industry. Unless otherwise noted, the industry data is prepared by A.M. Best, a leading insurance industry statistical, analytical and financial strength rating organization. Information from A.M. Best is presented on a statutory accounting basis. When we provide our results on a comparable statutory accounting 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).

Through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on net written premium volume for the first nine months of 2018, among approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies in 42 states as discussed in Item 1, Our Business and Our Strategy.

The U.S. economy, the insurance industry and our company continue to face many challenges. Our long-term perspective has allowed us to address immediate challenges while also focusing on the major decisions that best position the company for success through all market cycles. We believe that this forward-looking view consistently benefits our shareholders, agents, policyholders and associates.

To measure our progress, we have defined a measure of value creation that we believe captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders. We refer to this measure as our value creation ratio, or VCR, and it is made up of two primary components: (1) our rate of growth in book value per share plus (2) the ratio of dividends declared per share to beginning book value per share. This measure, intended to be all-inclusive regarding changes in book value per share, uses originally reported book value per share in cases where book value per share has been adjusted, such as after the adoption of Accounting Standards Updates with a cumulative effect of a change in accounting.

Cincinnati Financial Corporation - 2018 10-K - Page 48

Executive Summary

Our value creation ratio, defined above, is our primary performance target. VCR trends are shown in the table below.



	One year		Three-year % average		Five-year % average
Value creation ratio:
As of December 31, 2018	(0.1	)%	12.4	%	10.7	%
As of December 31, 2017	22.9		13.6		13.9
As of December 31, 2016	14.5		10.2		11.8

We are targeting an annual value creation ratio averaging 10 percent to 13 percent over the next five-year period. At negative 0.1 percent for 2018, we were significantly below the low end of that range, but were within the range for the three-year and five-year periods that ended in December 2018.

The table below shows the primary components of our value creation ratio on a percentage basis. Analysis of the components aids understanding of our financial performance. Our financial results are further analyzed in the Corporate Financial Highlights section below.



	Years ended December 31,
	2018		2017		2016
Value creation ratio major components:
Net income before investment gains	7.4	%	13.5	%	7.9	%
Change in fixed-maturity securities, realized and unrealized gains	(3.2	)	1.1		(0.2	)
Change in equity securities, investment gains	(3.8	)	8.6		6.8
Other	(0.5	)	(0.3	)	0.0
Value creation ratio	(0.1	)%	22.9	%	14.5	%

The 2018 value creation ratio decreased by 23.0 percentage points, compared with 2017, and again included a significant contribution of operating results. VCR in 2018 included a 0.7 percent contribution from certain non-recurring items, including the impact of various tax accounting method changes. VCR in 2017 included a 7.0 percent contribution from a tax benefit due to net deferred income tax liability revaluation related to U.S. tax reform. The 2018 ratio decrease reflected a decline in market valuation, with reductions of 12.4 percentage-points from our equity securities investment portfolio and 4.3 points from our fixed-maturity securities investment portfolio. The 2017 value creation ratio was 8.4 percentage points higher than in 2016, reflecting the 7.0 percent tax benefit noted above and a 3.1 point increase in the contribution from realized gains plus the change in unrealized gains from our investment portfolios in aggregate.

Cincinnati Financial Corporation - 2018 10-K - Page 49

We believe our value creation ratio is a useful measure. With the continuation of economic and market uncertainty in recent years, the long-term nature of this measure provides a meaningful measure of our long-term progress in creating shareholder value. The table below shows calculations for VCR.



(Dollars are per share)	Years ended December 31,
	2018			2017			2016
Value creation ratio:
End of period book value*	$	48.10		$	50.29		$	42.95
Less beginning of period book value	50.29			42.95			39.20
Change in book value	(2.19		)	7.34			3.75
Dividend declared to shareholders	2.12			2.50			1.92
Total value creation	$	(0.07	)	$	9.84		$	5.67

Value creation ratio from change in book value**	(4.3		)%	17.1		%	9.6		%
Value creation ratio from dividends declared to shareholders***	4.2			5.8			4.9
Value creation ratio	(0.1		)%	22.9		%	14.5		%

* Book value per share is calculated by dividing end of period total shareholders' equity by end of period shares outstanding

** Change in book value divided by the beginning of year book value

*** Dividend declared to shareholders divided by beginning of year book value

When looking at our longer-term objectives, we see three primary performance drivers for our value creation ratio:

•

Premium growth – We believe over any five-year period our agency relationships and initiatives can lead to a property casualty written premium growth rate that exceeds the industry average. The compound annual growth rate of our net written premiums was 5.3 percent over the five-year period 2014 through 2018, slightly exceeding the 5.1 percent estimated growth rate for the property casualty insurance industry, with 2018 representing industry data reported through the first nine months of 2018. The industry’s growth rate excludes its mortgage and financial guaranty lines of business.

•

Combined ratio – We believe our underwriting philosophy and initiatives can drive performance to achieve our underwriting profitability target of a GAAP combined ratio over any five-year period that consistently averages within the range of 95 percent to 100 percent. Our GAAP combined ratio averaged 95.1 percent over the five-year period 2014 through 2018, near the more favorable end of the performance target range. Performance as measured by the combined ratio is discussed in Consolidated Property Casualty Insurance Results. Our statutory combined ratio averaged 94.7 percent over the five-year period 2014 through 2018, compared with an estimated 99.9 percent for the property casualty industry, with 2018 representing industry data reported through the first nine months of 2018. The industry’s ratio again excludes its mortgage and financial guaranty lines of business.


•	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 total return of the S&P 500 Index.


◦	Investment income growth, on a pretax basis, had a compound annual growth rate of 3.2 percent over the five-year period 2014 through 2018.

◦

Over the five years ended December 31, 2018, our equity portfolio compound annual total return was 8.4 percent compared with a compound annual total return of 8.5 percent for the Index. Our equity portfolio favors larger-capitalization, high-quality, dividend growing stocks with a slight value orientation. In recent years, returns for this type of stocks have generally lagged the broader market. For the year 2018, our annual equity portfolio total return was negative 3.3 percent, compared with negative 4.2 percent for the Index.

The board of directors is committed to rewarding shareholders directly through cash dividends and share repurchase authorizations. Through 2018, the company has increased the annual cash dividend rate for 58 consecutive years, a record we believe is matched by only seven other publicly traded U.S. companies. In addition to regular dividends, strong capital and excellent company performance provided opportunities to further reward shareholders with special dividends paid in December 2017. The board regularly evaluates relevant factors in dividend-related decisions, and the 2018 increase to the regular dividend reflected confidence in our strong

Cincinnati Financial Corporation - 2018 10-K - Page 50

capital, liquidity and financial flexibility, as well as progress through our initiatives to improve earnings performance while growing insurance premium revenues. We discuss our financial position in more detail in Liquidity and Capital Resources.

Corporate Financial Highlights

In addition to the value creation ratio discussion and analysis in the Executive Summary, we further analyze our financial results in the sections below.

Balance Sheet Data



(Dollars in millions, except share data)	At December 31,			At December 31,
	2018			2017
Total investments	$	16,732		$	17,051
Total assets	21,935			21,843
Short-term debt	32			24
Long-term debt	788			787
Shareholders' equity	7,833			8,243
Book value per share	48.10			50.29
Debt-to-total-capital ratio	9.5		%	9.0		%

Total investments decreased by 2 percent during 2018 on a fair value basis, with a decrease in our securities portfolio valuation that offset a 4 percent increase in its cost basis. Entering 2019, we believe the portfolio continues to be well diversified and is well positioned to withstand short-term fluctuations. We discuss our investment strategy in Item 1, Investments Segment, and results for the segment in Investments Results. Total assets rose less than 1 percent. Shareholders’ equity decreased by 5 percent and book value per share decreased by 4 percent, for reasons discussed in the preceding Executive Summary.

The amount of our debt obligations increased by $9 million in 2018, compared with 2017. Our 9.5 percent ratio of debt to total capital (debt plus shareholders’ equity) at year-end 2018 increased by 0.5 percentage points compared with the prior-year ratio.

Income Statement and Per Share Data



(In millions, except per share data)	Years ended December 31,							2018-2017		2017-2016
	2018			2017		2016		Change %		Change %
Earned premiums	$	5,170		$	4,954	$	4,710	4		5
Investment income, net of expenses (pretax)	619			609		595		2		2
Investment gains and losses, net (pretax)	(402		)	148		124		nm		19
Total revenues	5,407			5,732		5,449		(6	)	5
Net income	287			1,045		591		(73	)	77
Comprehensive income	24			1,648		940		(99	)	75
Net income per share - diluted	1.75			6.29		3.55		(72	)	77
Cash dividends declared per share	2.12			2.50		1.92		(15	)	30
Diluted weighted average shares outstanding	164.5			166.0		166.5		(1	)	0

Net income in 2018 decreased $758 million or 73 percent compared with 2017, largely due to a $495 million benefit in 2017 from net deferred income tax liability revaluation due to U.S. tax reform and a $413 million decrease for 2018 in net investment gains after taxes. The 2018 decrease in net income was partially offset by an increase in property casualty underwriting income of $64 million after taxes, as discussed below, and a $57 million increase in investment income after taxes. Our investment operation’s performance is discussed further in Investments Results. Net income in 2018 also included a $56 million benefit from certain other non-recurring items, primarily the impact of various tax accounting method changes as disclosed in Item 8, Note 11 of the Consolidated Financial Statements.

Cincinnati Financial Corporation - 2018 10-K - Page 51

Net income increased $454 million in 2017, compared with 2016, primarily due to a $495 million benefit from net deferred income tax liability revaluation due to U.S. tax reform.

As discussed in Investments Results, we reported a net investment loss in 2018, primarily due to unfavorable changes in fair values of equity securities even though we continued to hold the securities. For both 2017 and 2016 we reported investment gains, largely due to investment sales that were discretionary in timing and amount.

Contribution from Insurance Operations



(Dollars in millions)	Years ended December 31,			2018-2017	2017-2016
	2018	2017	2016	Change %	Change %
Consolidated property casualty data:

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$85.95	163	$13,990

10-K	2018-12-31	Annual: 2018-12-31
10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31

8-K	2019-02-06	Earnings, Off-BS Arrangement, Exhibits
8-K	2019-02-01	Regulation FD, Exhibits
8-K	2018-11-16	Regulation FD, Exhibits
8-K	2018-11-05	Regulation FD, Exhibits
8-K	2018-10-25	Earnings, Exhibits
8-K	2018-10-15	Off-BS Arrangement, Exhibits
8-K	2018-10-12	Earnings, Regulation FD, Exhibits
8-K	2018-10-11	Regulation FD, Exhibits
8-K	2018-09-04	Regulation FD, Exhibits
8-K	2018-08-20	Officers, Regulation FD, Exhibits
8-K	2018-08-10	Regulation FD, Exhibits
8-K	2018-07-26	Earnings, Exhibits
8-K	2018-05-05	Shareholder Vote, Regulation FD, Exhibits
8-K	2018-05-03	Regulation FD, Exhibits
8-K	2018-03-05	Regulation FD, Exhibits
8-K	2018-02-07	Earnings, Exhibits
8-K	2018-01-26	Regulation FD, Exhibits

RNR	Renaissancere Holdings
ESGR	Enstar
NAVG	Navigators Group
UVE	Universal Insurance Holdings
UFCS	United Fire Group
HCI	HCI Group
GLRE	Greenlight Capital
DGICA	Donegal Group
CNFR	Conifer Holdings
HGH	Hartford Financial Services Group

EX-23	exhibit23-02x22x19.htm
EX-31.A	exhibit31a-02x22x19.htm
EX-31.B	exhibit31b-02x22x19.htm
EX-32	exhibit32-02x22x19.htm