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CINCINNATI FINANCIAL CORP - Quarter Report: 2019 September (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 (Mark one)
       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the quarterly period ended September 30, 2019.
       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the transition period from _____________________ to _____________________.
Commission file number 0-4604
CINCINNATI FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Ohio
 
31-0746871
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
 
6200 S. Gilmore Road,
Fairfield,
Ohio
 
45014-5141
(Address of principal executive offices)
 
(Zip code)
Registrant's telephone number, including area code: (513) 870-2000
N/A
(Former name or former address, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock
 
CINF
 
Nasdaq Global Select Market
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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Nonaccelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes No
As of October 18, 2019, there were 163,374,035 shares of common stock outstanding.




CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED September 30, 2019
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Results
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 2



Part I – Financial Information
Item 1.    Financial Statements (unaudited)
 
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in millions, except per share data)
 
September 30,
 
December 31,
 
 
2019
 
2018
Assets
 
 

 
 

Investments
 
 

 
 

Fixed maturities, at fair value (amortized cost: 2019—$11,012; 2018—$10,643)
 
$
11,600

 
$
10,689

Equity securities, at fair value (cost: 2019—$3,548; 2018—$3,368)
 
7,176

 
5,920

Other invested assets
 
283

 
123

Total investments
 
19,059

 
16,732

Cash and cash equivalents
 
787

 
784

Investment income receivable
 
125

 
132

Finance receivable
 
78

 
71

Premiums receivable
 
1,839

 
1,644

Reinsurance recoverable
 
524

 
484

Prepaid reinsurance premiums
 
60

 
44

Deferred policy acquisition costs
 
783

 
738

Land, building and equipment, net, for company use (accumulated depreciation:
   2019—$269; 2018—$265)
 
207

 
195

Other assets
 
402

 
308

Separate accounts
 
878

 
803

Total assets
 
$
24,742

 
$
21,935

 
 
 
 
 
Liabilities
 
 

 
 

Insurance reserves
 
 

 
 

Loss and loss expense reserves
 
$
6,056

 
$
5,707

Life policy and investment contract reserves
 
2,816

 
2,779

Unearned premiums
 
2,859

 
2,516

Other liabilities
 
905

 
804

Deferred income tax
 
972

 
627

Note payable
 
38

 
32

Long-term debt and lease obligations
 
847

 
834

Separate accounts
 
878

 
803

Total liabilities
 
15,371

 
14,102

 
 
 
 
 
Commitments and contingent liabilities (Note 12)
 


 


 
 
 
 
 
Shareholders' Equity
 
 

 
 

Common stock, par value—$2 per share; (authorized: 2019 and 2018—500 million
   shares; issued: 2019 and 2018—198.3 million shares)
 
397

 
397

Paid-in capital
 
1,295

 
1,281

Retained earnings
 
8,722

 
7,625

Accumulated other comprehensive income
 
442

 
22

Treasury stock at cost (2019—34.9 million shares and 2018—35.5 million shares)
 
(1,485
)
 
(1,492
)
Total shareholders' equity
 
9,371

 
7,833

Total liabilities and shareholders' equity
 
$
24,742

 
$
21,935

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

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 3



Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Dollars in millions, except per share data)
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues
 

 
 

 
 

 
 

Earned premiums
$
1,446

 
$
1,298

 
$
4,163

 
$
3,852

Investment income, net of expenses
161

 
154

 
478

 
458

Investment gains and losses, net
86

 
458

 
1,113

 
372

Fee revenues
4

 
3

 
11

 
11

Other revenues
3

 
2

 
7

 
4

Total revenues
1,700

 
1,915

 
5,772

 
4,697

Benefits and Expenses
 

 
 

 
 

 
 

Insurance losses and contract holders' benefits
932

 
879

 
2,728

 
2,616

Underwriting, acquisition and insurance expenses
455

 
401

 
1,296

 
1,199

Interest expense
14

 
14

 
40

 
40

Other operating expenses
5

 
3

 
17

 
10

 Total benefits and expenses
1,406

 
1,297

 
4,081

 
3,865

Income Before Income Taxes
294

 
618

 
1,691

 
832

Provision (Benefit) for Income Taxes
 

 
 

 
 

 
 

Current
28

 
(98
)
 
84

 
(37
)
Deferred
18

 
163

 
236

 
130

Total provision for income taxes
46

 
65

 
320

 
93

Net Income
$
248

 
$
553

 
$
1,371

 
$
739

Per Common Share
 

 
 

 
 

 
 

Net income—basic
$
1.51

 
$
3.40

 
$
8.40

 
$
4.53

Net income—diluted
1.49

 
3.38

 
8.30

 
4.49

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

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 4



Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Net Income
 
$
248

 
$
553

 
$
1,371

 
$
739

Other Comprehensive Income (Loss)
 
 

 
 

 
 

 
 

Change in unrealized gains on investments, net of tax (benefit) of $21, ($17), $114 and ($81), respectively
 
79

 
(60
)
 
428

 
(297
)
Amortization of pension actuarial loss and prior service cost, net of tax of $0, $0, $0 and $0, respectively
 

 

 
1

 
1

Change in life deferred acquisition costs, life policy reserves and other, net of tax (benefit) of $0, $0, ($2) and $2, respectively
 
(1
)
 
1

 
(9
)
 
7

Other comprehensive income (loss)
 
78

 
(59
)
 
420

 
(289
)
Comprehensive Income
 
$
326

 
$
494

 
$
1,791

 
$
450

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


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 5



Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019

2018
Common Stock
 
 
 
 
 
 
 
 
   Beginning of period
 
$
397

 
$
397

 
$
397

 
$
397

   Share-based awards
 

 

 

 

   End of period
 
397

 
397

 
397

 
397

 
 
 
 
 
 
 
 
 
Paid-In Capital
 
 
 
 
 
 
 
 
   Beginning of period
 
1,286

 
1,266

 
1,281

 
1,265

   Share-based awards
 
1

 

 
(12
)
 
(17
)
   Share-based compensation
 
7

 
6

 
23

 
22

   Other
 
1

 
1

 
3

 
3

   End of period
 
1,295

 
1,273

 
1,295

 
1,273

 
 
 
 
 
 
 
 
 
Retained Earnings
 
 
 
 
 
 
 
 
   Beginning of period
 
8,566

 
7,696

 
7,625

 
5,180

Cumulative effect of change in accounting for equity securities as of January 1, 2018
 

 

 

 
2,503

Adjusted beginning of year
 
8,566

 
7,696

 
7,625

 
7,683

   Net income
 
248

 
553

 
1,371

 
739

Dividends declared (per share of $0.56, $0.53, $1.68 and
$1.59, respectively)
 
(92
)
 
(85
)
 
(274
)
 
(258
)
   End of period
 
8,722

 
8,164

 
8,722

 
8,164

 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
   Beginning of period
 
364

 
55

 
22

 
2,788

Cumulative effect of change in accounting for equity
securities as of January 1, 2018
 

 

 

 
(2,503
)
Adjusted beginning of year
 
364

 
55

 
22

 
285

   Other comprehensive income (loss)
 
78

 
(59
)
 
420

 
(289
)
   End of period
 
442

 
(4
)
 
442

 
(4
)
 
 
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
 
 
 
   Beginning of period
 
(1,482
)
 
(1,498
)
 
(1,492
)
 
(1,387
)
   Share-based awards
 
3

 
2

 
19

 
18

   Shares acquired - share repurchase authorization
 
(5
)
 

 
(5
)
 
(125
)
   Shares acquired - share-based compensation plans
 
(2
)
 
(1
)
 
(9
)
 
(4
)
   Other
 
1

 
1

 
2

 
2

   End of period
 
(1,485
)
 
(1,496
)
 
(1,485
)
 
(1,496
)
 
 

 

 
 
 
 
      Total Shareholders' Equity
 
$
9,371

 
$
8,334

 
$
9,371

 
$
8,334

 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
Common Stock - Shares Outstanding
 
 
 
 
 
 
 
 
   Beginning of period
 
163.3

 
162.6

 
162.8

 
163.9

   Share-based awards
 
0.1

 
0.1

 
0.6

 
0.6

   Shares acquired - share repurchase authorization
 

 

 

 
(1.8
)
   End of period
 
163.4

 
162.7

 
163.4

 
162.7

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

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 6



Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
 (Dollars in millions)
 
Nine months ended September 30,
 
 
2019
 
2018
Cash Flows From Operating Activities
 
 

 
 

Net income
 
$
1,371

 
$
739

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

 
 

Depreciation and amortization
 
54

 
48

Investment gains and losses, net
 
(1,103
)
 
(367
)
Share-based compensation
 
23

 
22

Interest credited to contract holders'
 
31

 
37

Deferred income tax expense
 
236

 
130

Changes in:
 
 

 
 

Investment income receivable
 
7

 
5

Premiums and reinsurance receivable
 
(156
)
 
(114
)
Deferred policy acquisition costs
 
(69
)
 
(53
)
Other assets
 
(36
)
 
(22
)
Loss and loss expense reserves
 
72

 
305

Life policy and investment contract reserves
 
79

 
68

Unearned premiums
 
255

 
187

Other liabilities
 
39

 
(37
)
Current income tax receivable/payable
 
77

 
(122
)
Net cash provided by operating activities
 
880

 
826

Cash Flows From Investing Activities
 
 

 
 

Sale of fixed maturities
 
61

 
6

Call or maturity of fixed maturities
 
988

 
920

Sale of equity securities
 
194

 
293

Purchase of fixed maturities
 
(1,345
)
 
(1,250
)
Purchase of equity securities
 
(341
)
 
(311
)
Investment in finance receivables
 
(25
)
 
(25
)
Collection of finance receivables
 
20

 
18

Investment in buildings and equipment
 
(22
)
 
(14
)
Change in other invested assets, net
 
(56
)
 
(17
)
Net cash used in investing activities
 
(526
)
 
(380
)
Cash Flows From Financing Activities
 
 

 
 

Payment of cash dividends to shareholders
 
(265
)
 
(251
)
Shares acquired - share repurchase authorization
 
(5
)
 
(125
)
Changes in note payable
 
6

 
6

Proceeds from stock options exercised
 
9

 
7

Contract holders' funds deposited
 
67

 
62

Contract holders' funds withdrawn
 
(133
)
 
(133
)
Other
 
(30
)
 
(53
)
Net cash used in financing activities
 
(351
)
 
(487
)
Net change in cash and cash equivalents
 
3

 
(41
)
Cash and cash equivalents at beginning of year
 
784

 
657

Cash and cash equivalents at end of period
 
$
787

 
$
616

Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Interest paid
 
$
27

 
$
27

Income taxes paid
 
3

 
82

Noncash Activities
 
 

 
 

Equipment acquired under capital lease obligations
 
$
6

 
$
14

Cashless exercise of stock options
 
9

 
4

Other assets and other liabilities
 
65

 
38

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

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 7



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 — Accounting Policies
The condensed consolidated financial statements include the accounts of Cincinnati Financial Corporation and its consolidated subsidiaries, each of which is wholly owned. These statements are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). Effective February 28, 2019, the company acquired MSP Underwriting Limited (MSP), a London-based, global specialty underwriter. MSP was rebranded as Cincinnati Global Underwriting Ltd.SM (Cincinnati Global) effective May 1, 2019, reflecting its new identity as a subsidiary of the company. Refer to Note 14, Acquisition, for additional information. The interim condensed consolidated financial statements include Cincinnati Global's results for the period from February 28, 2019, through September 30, 2019. Foreign exchange rates related to Cincinnati Global's operations did not have a material impact to our condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.
 
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been condensed or omitted.
 
Our September 30, 2019, condensed consolidated financial statements are unaudited. We believe that we have made all adjustments, consisting only of normal recurring accruals, that are necessary for fair presentation. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our 2018 Annual Report on Form 10-K. The results of operations for interim periods do not necessarily indicate results to be expected for the full year.

Adopted Accounting Updates
ASU 2016-02, Leases (Topic 842)
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The main provision of ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The effective date of ASU 2016-02 is for interim and annual reporting periods beginning after December 15, 2018. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 and ASU 2018-11, Targeted Improvements to Topic 842. ASU 2018-10 makes narrow-scope amendments to certain aspects of the new leasing standard while ASU 2018-11 provides relief from costs of implementing certain aspects of the new leasing standard.

The company adopted this ASU effective January 1, 2019, and it did not have a material impact on our company's consolidated financial position, cash flows or results of operations. The company has elected the practical expedient package for carrying forward historical lease classifications, not re-evaluating for embedded leases and not reassessing initial direct costs. The company also elected additional practical expedients to not recognize short-term leases on the balance sheet and to only combine lease and nonlease components for certain asset classes. We also elected not to restate prior periods. In support of our insurance operations, the company leases real estate properties which qualify as operating leases and also leases equipment and autos which qualify as finance leases. The lease term for real estate properties is typically five years while the term for equipment and autos is three to six years.

ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 amends guidance on the amortization period of premiums on certain purchased callable debt securities. The amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment to beginning retained earnings. The effective date of ASU 2017-08 is for interim and annual reporting periods beginning after December 15, 2018. The company adopted this ASU effective January 1, 2019, and it did not have a material impact on our company's consolidated financial position, cash flows or results of operations.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 8



ASU 2018-07, Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718, Compensation - Stock Compensation, which currently only includes share-based payments issued to employees, to include share-based payments issued to nonemployees for the acquisition of goods and services. The effective date of ASU 2018-07 is for interim and annual reporting periods beginning after December 15, 2018. The company adopted this ASU effective January 1, 2019, and it did not have a material impact on our company's consolidated financial position, cash flows or results of operations.

Pending Accounting Updates
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. In addition, through June 2019, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, ASU 2019-04, Codification Improvements to Topic 326 and ASU 2019-05, Targeted Transition Relief. These ASU’s amend previous guidance on the impairment of financial instruments by adding an impairment model that allows an entity to recognize expected credit losses as an allowance rather than impairing as they are incurred. The new guidance is intended to reduce complexity of credit impairment models and result in a more timely recognition of expected credit losses. The guidance is effective for reporting periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained earnings. These ASU's have not yet been adopted; however, they are not expected to have a material impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit and income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered. The effective date of ASU 2017-04 is for interim and annual goodwill impairment tests performed in any fiscal years beginning after December 15, 2019. The ASU has not yet been adopted; however, it is not expected to have a material impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2018, the FASB issued ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows. The ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplify amortization of deferred acquisition costs while improving and expanding required disclosures. The effective date of ASU 2018-12 is for interim and annual reporting periods beginning after December 15, 2020. The ASU has not yet been adopted. Management is currently evaluating the impact on our company's consolidated financial position, cash flows and results of operations.

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 clarifies the fair value measurement disclosure requirements of ASC 820 by adding, eliminating and modifying disclosures. The effective date of ASU 2018-13 is for interim and annual reporting periods beginning after December 15, 2019. The ASU has not yet been adopted; however, it is not expected to have a material impact on our company's consolidated financial position, cash flows or results of operations.

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 9




ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 clarifies the guidance in ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The effective date of ASU 2018-14 is for annual reporting periods ending after December 15, 2020. The ASU has not yet been adopted; however, it is not expected to have a material impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 amends ASC 350 to include implementation costs of a cloud computing arrangement that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a cloud computing arrangement that is considered a service contract. The effective date of ASU 2018-15 is for interim and annual reporting periods beginning after December 15, 2019. The ASU has not yet been adopted; however, it is not expected to have a material impact on our company's consolidated financial position, cash flows or results of operations.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 10



NOTE 2 – Investments
The following table provides amortized cost, gross unrealized gains, gross unrealized losses and fair value for our fixed-maturity securities:
(Dollars in millions)
 
Amortized
cost
 
Gross unrealized
 
Fair value
At September 30, 2019
 
 
gains
 
losses
 
Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
6,108

 
$
315

 
$
13

 
$
6,410

States, municipalities and political subdivisions
 
4,322

 
268

 

 
4,590

Commercial mortgage-backed
 
290

 
15

 

 
305

Government-sponsored enterprises
 
162

 

 

 
162

United States government
 
106

 
3

 

 
109

Foreign government
 
24

 

 

 
24

Total
 
$
11,012

 
$
601

 
$
13

 
$
11,600

At December 31, 2018
 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,712

 
$
85

 
$
87

 
$
5,710

States, municipalities and political subdivisions
 
4,251

 
84

 
31

 
4,304

Commercial mortgage-backed
 
287

 
3

 
2

 
288

Government-sponsored enterprises
 
316

 
1

 
7

 
310

United States government
 
67

 
1

 
1

 
67

Foreign government
 
10

 

 

 
10

Total
 
$
10,643

 
$
174

 
$
128

 
$
10,689

 
 
 
 
 
 
 
 
 

 
The net unrealized investment gains in our fixed-maturity portfolio at September 30, 2019, are primarily due to a decrease in interest rates. Our commercial mortgage-backed securities had an average rating of Aa1/AA at September 30, 2019, and December 31, 2018. At September 30, 2019, Microsoft Corporation (Nasdaq:MSFT) was our largest single equity holding with a fair value of $349 million, which was 5.0% of our publicly traded common equities portfolio and 1.9% of the total investment portfolio.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 11



The table below provides fair values and gross unrealized losses by investment category and by the duration of the securities' continuous unrealized loss positions:
(Dollars in millions)
 
Less than 12 months
 
12 months or more
 
Total
At September 30, 2019
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
254

 
$
4

 
$
198

 
$
9

 
$
452

 
$
13

States, municipalities and political subdivisions
 
9

 

 
13

 

 
22

 

Government-sponsored enterprises
 
19

 

 
78

 

 
97

 

United States government
 
5

 

 
4

 

 
9

 

Foreign government
 
12

 

 

 

 
12

 

Total
 
$
299

 
$
4

 
$
293

 
$
9

 
$
592

 
$
13

At December 31, 2018
 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
2,082

 
$
51

 
$
501

 
$
36

 
$
2,583

 
$
87

States, municipalities and political subdivisions
 
823

 
18

 
340

 
13

 
1,163

 
31

Commercial mortgage-backed
 
77

 

 
64

 
2

 
141

 
2

Government-sponsored enterprises
 
49

 
1

 
211

 
6

 
260

 
7

United States government
 

 

 
33

 
1

 
33

 
1

Total
 
$
3,031

 
$
70

 
$
1,149

 
$
58

 
$
4,180

 
$
128

 
 
 
 
 
 
 
 
 
 
 
 
 


Contractual maturity dates for fixed-maturities investments were:
(Dollars in millions)
 
Amortized
cost
 
Fair
value
 
% of fair
value
At September 30, 2019
 
 
 
Maturity dates:
 
 

 
 

 
 

Due in one year or less
 
$
470

 
$
475

 
4.1
%
Due after one year through five years
 
3,058

 
3,165

 
27.3

Due after five years through ten years
 
3,868

 
4,081

 
35.2

Due after ten years
 
3,616

 
3,879

 
33.4

Total
 
$
11,012

 
$
11,600

 
100.0
%
 
 
 
 
 
 
 


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

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 12



The following table provides investment income and investment gains and losses, net:
(Dollars in millions)
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Investment income:
 
 
 
 
 
 
 
Interest
$
110

 
$
111

 
$
332

 
$
333

Dividends
50

 
45

 
146

 
131

Other
5

 
1

 
10

 
3

Total
165

 
157

 
488

 
467

Less investment expenses
4

 
3

 
10

 
9

Total
$
161

 
$
154

 
$
478

 
$
458

 
 
 
 
 
 
 
 
Investment gains and losses, net:
 

 
 

 
 

 
 

Equity securities:
 

 
 

 
 

 
 

Investment gains and losses on securities sold, net
$

 
$
8

 
$
27

 
$
17

Unrealized gains and losses on securities still held, net
89

 
450

 
1,084

 
351

Subtotal
89

 
458

 
1,111

 
368

Fixed maturities:
 

 
 

 
 

 
 

Gross realized gains
6

 
2

 
9

 
9

Gross realized losses
(1
)
 
(1
)
 
(3
)
 
(2
)
Other-than-temporary impairments
(6
)
 

 
(6
)
 

Subtotal
(1
)
 
1

 

 
7

 
 
 
 
 
 
 
 
Other
(2
)
 
(1
)
 
2

 
(3
)
Total
$
86

 
$
458

 
$
1,113

 
$
372

 
 
 
 
 
 
 
 

 
During the three and nine months ended September 30, 2019, there were two fixed-maturity securities other-than-temporarily impaired. During the three and nine months ended September 30, 2018, there were no fixed-maturity securities other-than-temporarily impaired. There were no credit losses on fixed-maturity securities for which a portion of other-than-temporary impairment (OTTI) has been recognized in other comprehensive income for the three and nine months ended September 30, 2019 and 2018.

At September 30, 2019, 62 fixed-maturity securities with a total unrealized loss of $9 million had been in an unrealized loss position for 12 months or more. Of that total, two fixed-maturity securities had a fair value below 70% of amortized cost. At December 31, 2018, 400 fixed-maturity securities with a total unrealized loss of $58 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity securities had fair values below 70% of amortized cost.
 
NOTE 3 – Fair Value Measurements
In accordance with accounting guidance for fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for the valuation technique used, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2018, and ultimately management determines fair value. See our 2018 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 141, for information on characteristics and valuation techniques used in determining fair value.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 13



Fair Value Disclosures for Assets
The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at September 30, 2019, and December 31, 2018. We do not have any liabilities carried at fair value. There were no transfers between Level 1 and Level 2.
(Dollars in millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At September 30, 2019
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$

 
$
6,410

 
$

 
$
6,410

States, municipalities and political subdivisions
 

 
4,590

 

 
4,590

Commercial mortgage-backed
 

 
305

 

 
305

Government-sponsored enterprises
 

 
162

 

 
162

United States government
 
109

 

 

 
109

Foreign government
 

 
24

 

 
24

Subtotal
 
109

 
11,491

 

 
11,600

Common equities
 
6,956

 

 

 
6,956

Nonredeemable preferred equities
 

 
220

 

 
220

Separate accounts taxable fixed maturities
 

 
868

 

 
868

Top Hat savings plan mutual funds and common
equity (included in Other assets)
 
45

 

 

 
45

Total
 
$
7,110

 
$
12,579

 
$

 
$
19,689

 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$

 
$
5,709

 
$
1

 
$
5,710

States, municipalities and political subdivisions
 

 
4,300

 
4

 
4,304

Commercial mortgage-backed
 

 
288

 

 
288

Government-sponsored enterprises
 

 
310

 

 
310

United States government
 
67

 

 

 
67

Foreign government
 

 
10

 

 
10

Subtotal
 
67

 
10,617

 
5

 
10,689

Common equities
 
5,742

 

 

 
5,742

Nonredeemable preferred equities
 

 
178

 

 
178

Separate accounts taxable fixed maturities
 

 
791

 

 
791

Top Hat savings plan mutual funds and common
  equity (included in Other assets)
 
34

 

 

 
34

Total
 
$
5,843

 
$
11,586

 
$
5

 
$
17,434

 
 
 
 
 
 
 
 
 
 
Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value as of September 30, 2019. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 14



The following table provides the changes in Level 3 assets for the three months ended September 30, 2019.
 (Dollars in millions)
 
Asset fair value measurements using significant unobservable inputs
 
 
Corporate
fixed
maturities
 
States,
municipalities
and political
subdivisions
fixed maturities
 
Total
Beginning balance, July 1, 2019
 
$
1

 
$
4

 
$
5

Total gains or losses (realized/unrealized):
 
 

 
 

 
 

Included in net income
 

 

 

Included in other comprehensive income
 

 

 

Purchases
 

 

 

Sales
 
(1
)
 

 
(1
)
Transfers into Level 3
 

 

 

Transfers out of Level 3
 

 
(4
)
 
(4
)
Ending balance, September 30, 2019
 
$

 
$

 
$

 
 
 
 
 
 
 
Beginning balance, July 1, 2018
 
$
1

 
$
4

 
$
5

Total gains or losses (realized/unrealized):
 
 

 
 

 
 

Included in net income
 

 

 

Included in other comprehensive income
 

 

 

Purchases
 

 

 

Sales
 

 

 

Transfers into Level 3
 

 

 

Transfers out of Level 3
 

 

 

Ending balance, September 30, 2018
 
$
1

 
$
4

 
$
5

 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 15



The following table provides the changes in Level 3 assets for the nine months ended September 30, 2019:
(Dollars in millions)
Asset fair value measurements using significant unobservable inputs
 
 
Corporate
fixed
maturities
 
States,
municipalities
and political
subdivisions
fixed maturities
 
Total
Beginning balance, January 1, 2019
 
$
1

 
$
4

 
$
5

Total gains or losses (realized/unrealized):
 
 
 
 

 
 

Included in net income
 

 

 

Included in other comprehensive income
 

 

 

Purchases
 

 

 

Sales
 
(1
)
 

 
(1
)
Transfers into Level 3
 

 

 

Transfers out of Level 3
 

 
(4
)
 
(4
)
Ending balance, September 30, 2019
 
$

 
$

 
$

 
 
 
 
 
 
 
Beginning balance, January 1, 2018
 
$
1

 
$
5

 
$
6

Total gains or losses (realized/unrealized):
 
 
 
 

 
 
Included in net income (loss)
 

 

 

Included in other comprehensive income (loss)
 

 
(1
)
 
(1
)
Purchases
 

 

 

Sales
 

 

 

Transfers into Level 3
 

 

 

Transfers out of Level 3
 

 

 

Ending balance, September 30, 2018
 
$
1

 
$
4

 
$
5

 
 
 
 
 
 
 


With the exception of the above table, additional disclosures for the Level 3 category are not material and therefore not provided.

Fair Value Disclosures for Assets and Liabilities Not Carried at Fair Value 
The disclosures below are presented to provide information about the effects of current market conditions on financial instruments that are not reported at fair value in our condensed consolidated financial statements.
 
This table summarizes the book value and principal amounts of our long-term debt:
(Dollars in millions)
 
 
 
Book value
 
Principal amount
Interest
rate
 
Year of 
issue
 
 
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
 
 
 
2019
 
2018
 
2019
 
2018
6.900
%
 
1998
 
Senior debentures, due 2028
 
$
27

 
$
27

 
$
28

 
$
28

6.920
%
 
2005
 
Senior debentures, due 2028
 
391

 
391

 
391

 
391

6.125
%
 
2004
 
Senior notes, due 2034
 
370

 
370

 
374

 
374

 

 
 
 
Total
 
$
788

 
$
788

 
$
793

 
$
793

 
 
 
 
 
 
 
 
 
 
 
 
 

 

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 16



The following table shows fair values of our note payable and long-term debt:
(Dollars in millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other observable inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At September 30, 2019
 
 
 
 
Note payable
 
$

 
$
38

 
$

 
$
38

6.900% senior debentures, due 2028
 

 
35

 

 
35

6.920% senior debentures, due 2028
 

 
512

 

 
512

6.125% senior notes, due 2034
 

 
510

 

 
510

Total
 
$

 
$
1,095

 
$

 
$
1,095

 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
 
Note payable
 
$

 
$
32

 
$

 
$
32

6.900% senior debentures, due 2028
 

 
32

 

 
32

6.920% senior debentures, due 2028
 

 
471

 

 
471

6.125% senior notes, due 2034
 

 
440

 

 
440

Total
 
$

 
$
975

 
$

 
$
975

 
 
 
 
 
 
 
 
 

 
The following table shows the fair value of our life policy loans included in other invested assets and the fair values of our deferred annuities and structured settlements included in life policy and investment contract reserves:
(Dollars in millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At September 30, 2019
 
 
 
 
Life policy loans
 
$

 
$

 
$
43

 
$
43

 
 
 
 
 
 
 
 
 
Deferred annuities
 

 

 
787

 
787

Structured settlements
 

 
212

 

 
212

Total
 
$

 
$
212

 
$
787

 
$
999

 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
 
Life policy loans
 
$

 
$

 
$
40

 
$
40

 
 
 
 
 
 
 
 
 
Deferred annuities
 

 

 
742

 
742

Structured settlements
 

 
185

 

 
185

Total
 
$

 
$
185

 
$
742

 
$
927

 
 
 
 
 
 
 
 
 

 
Outstanding principal and interest for these life policy loans totaled $32 million and $33 million at
September 30, 2019 and December 31, 2018, respectively.
 
Recorded reserves for the deferred annuities were $768 million and $787 million at September 30, 2019 and December 31, 2018, respectively. Recorded reserves for the structured settlements were $152 million and $156 million at September 30, 2019 and December 31, 2018, respectively.



Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 17



NOTE 4 – Property Casualty Loss and Loss Expenses
This table summarizes activity for our consolidated property casualty loss and loss expense reserves:
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Gross loss and loss expense reserves, beginning
   of period
 
$
5,954

 
$
5,423

 
$
5,646

 
$
5,219

Less reinsurance recoverable
 
269

 
188

 
238

 
187

Net loss and loss expense reserves, beginning
   of period
 
5,685

 
5,235

 
5,408

 
5,032

 
 
 
 
 
 
 
 
 
Net loss and loss expense reserves related to
   acquisition of MSP at February 28, 2019
 

 

 
246

 

 
 
 
 
 
 
 
 
 
Net incurred loss and loss expenses related to:
 
 

 
 

 
 

 
 

Current accident year
 
916

 
857

 
2,720

 
2,548

Prior accident years
 
(52
)
 
(44
)
 
(203
)
 
(123
)
Total incurred
 
864

 
813

 
2,517

 
2,425

Net paid loss and loss expenses related to:
 
 

 
 

 
 

 
 

Current accident year
 
457

 
392

 
995

 
928

Prior accident years
 
373

 
313

 
1,457

 
1,186

Total paid
 
830

 
705

 
2,452

 
2,114

Net loss and loss expense reserves, end of period
 
5,719

 
5,343

 
5,719

 
5,343

Plus reinsurance recoverable
 
278

 
186

 
278

 
186

Gross loss and loss expense reserves, end of
   period
 
$
5,997

 
$
5,529

 
$
5,997

 
$
5,529

 
 
 
 
 
 
 
 
 

 
We use actuarial methods, models and judgment to estimate, as of a financial statement date, the property casualty loss and loss expense reserves required to pay for and settle all outstanding insured claims, including incurred but not reported (IBNR) claims, as of that date. The actuarial estimate is subject to review and adjustment by an inter-departmental committee that includes actuarial, claims, underwriting, loss prevention and accounting management. This committee is familiar with relevant company and industry business, claims and underwriting trends, as well as general economic and legal trends that could affect future loss and loss expense payments. The amount we will actually have to pay for claims can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. The reserve for loss and loss expenses in the condensed consolidated balance sheets also included $59 million at September 30, 2019, and $49 million at September 30, 2018, for certain life and health loss and loss expense reserves.

For the three months ended September 30, 2019, we experienced $52 million of favorable development on prior accident years, including $33 million of favorable development in commercial lines, $6 million of favorable development in personal lines and $4 million of favorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $20 million for the workers' compensation line, $8 million for the commercial casualty line and $7 million for the commercial property line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Within personal lines, we recognized favorable reserve development of $3 million in personal auto.
 


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 18



For the nine months ended September 30, 2019, we experienced $203 million of favorable development on prior accident years, including $153 million of favorable development in commercial lines, $17 million of favorable development in personal lines and $11 million of favorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $65 million for the commercial casualty line, $62 million for the workers' compensation line, $15 million for the commercial property line and $7 million for the commercial auto line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Within personal lines, we recognized favorable reserve development of $23 million in personal auto. We recognized unfavorable reserve development of $15 million for the homeowner line of business due primarily to higher-than-anticipated loss development on known claims.

For the three months ended September 30, 2018, we experienced $44 million of favorable development on prior accident years, including $37 million of favorable development in commercial lines, $8 million of favorable development in excess and surplus lines and $1 million of adverse development in our reinsurance assumed operations. This included $5 million from favorable development of catastrophe losses. Within commercial lines, we recognized favorable reserve development of $20 million for the commercial casualty line, $9 million for the workers' compensation line, $9 million for the commercial property line and $2 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. This was partially offset by unfavorable reserve development of $3 million for the commercial auto line. Within personal lines, we recognized unfavorable reserve development of $7 million for the homeowner line of business due primarily to higher-than-anticipated loss development on known claims.

For the nine months ended September 30, 2018, we experienced $123 million of favorable development on prior accident years, including $114 million of favorable development in commercial lines, $16 million of unfavorable development in personal lines, $22 million of favorable development in excess and surplus lines and $3 million of favorable development in our reinsurance assumed operations. This included $12 million from favorable development of catastrophe losses. Within commercial lines, we recognized favorable reserve development of $39 million for the workers' compensation line, $37 million for the commercial property line, $31 million for the commercial casualty line and $14 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. This was partially offset by unfavorable reserve development of $7 million for the commercial auto line. Within personal lines, we recognized unfavorable reserve development of $24 million for the homeowner line of business due primarily to higher-than-anticipated loss development on known claims.

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


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 19



This table summarizes our life policy and investment contract reserves:
(Dollars in millions)
 
September 30,
2019
 
December 31, 2018
Life policy reserves:
 
 
 
 
Ordinary/traditional life
 
$
1,206

 
$
1,149

Other
 
49

 
48

Subtotal
 
1,255

 
1,197

Investment contract reserves:
 
 
 
 
Deferred annuities
 
768

 
787

Universal life
 
635

 
632

Structured settlements
 
152

 
156

Other
 
6

 
7

Subtotal
 
1,561

 
1,582

Total life policy and investment contract reserves
 
$
2,816

 
$
2,779

 
 
 
 
 



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

2019
 
2018
 
2019
 
2018
Property casualty:
 
 
 
 
 
 
 
Deferred policy acquisition costs asset, beginning of period
$
526

 
$
472

 
$
464

 
$
438

Capitalized deferred policy acquisition costs
256

 
229

 
790

 
712

Amortized deferred policy acquisition costs
(257
)
 
(225
)
 
(729
)
 
(674
)
Deferred policy acquisition costs asset, end of period
$
525

 
$
476

 
$
525

 
$
476

 
 
 
 
 
 
 
 
Life:
 
 
 
 
 
 
 
Deferred policy acquisition costs asset, beginning of period
$
260

 
$
256

 
$
274

 
$
232

Capitalized deferred policy acquisition costs
15

 
15

 
46

 
43

Amortized deferred policy acquisition costs
(13
)
 
(6
)
 
(38
)
 
(27
)
Shadow deferred policy acquisition costs
(4
)
 
2

 
(24
)
 
19

Deferred policy acquisition costs asset, end of period
$
258

 
$
267

 
$
258

 
$
267

 
 
 
 
 
 
 
 
Consolidated:
 
 
 
 
 
 
 
Deferred policy acquisition costs asset, beginning of period
$
786

 
$
728

 
$
738

 
$
670

Capitalized deferred policy acquisition costs
271

 
244

 
836

 
755

Amortized deferred policy acquisition costs
(270
)
 
(231
)
 
(767
)
 
(701
)
Shadow deferred policy acquisition costs
(4
)
 
2

 
(24
)
 
19

Deferred policy acquisition costs asset, end of period
$
783

 
$
743

 
$
783

 
$
743

 
 
 
 
 
 
 
 

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

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 20



NOTE 7 – Accumulated Other Comprehensive Income
Accumulated other comprehensive income (AOCI) includes changes in unrealized gains and losses on investments, changes in pension obligations and changes in life deferred acquisition costs, life policy reserves and other as follows:
(Dollars in millions)
 
Three months ended September 30,
 
 
2019
 
 
2018
 
 
Before tax
 
Income tax
 
Net
 
 
Before tax
 
Income tax
 
Net
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
488

 
$
102

 
$
386

 
 
$
84

 
$
17

 
$
67

OCI before investment gains and losses, net, recognized in net income
 
99

 
21

 
78

 
 
(76
)
 
(17
)
 
(59
)
Investment gains and losses, net, recognized in net income
 
1

 

 
1

 
 
(1
)
 

 
(1
)
OCI
 
100

 
21

 
79

 
 
(77
)
 
(17
)
 
(60
)
AOCI, end of period
 
$
588

 
$
123

 
$
465

 
 
$
7

 
$

 
$
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
(15
)
 
$
(2
)
 
$
(13
)
 
 
$
(11
)
 
$
(1
)
 
$
(10
)
OCI excluding amortization recognized in net income
 

 

 

 
 

 

 

Amortization recognized in net income
 

 

 

 
 

 

 

OCI
 

 

 

 
 

 

 

AOCI, end of period
 
$
(15
)
 
$
(2
)
 
$
(13
)
 
 
$
(11
)
 
$
(1
)
 
$
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life deferred acquisition costs, life policy reserves and other:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
(11
)
 
$
(2
)
 
$
(9
)
 
 
$
(2
)
 
$

 
$
(2
)
OCI before investment gains and losses, net, recognized in net income
 
(3
)
 

 
(3
)
 
 

 

 

Investment gains and losses, net, recognized in net income
 
2

 

 
2

 
 
1

 

 
1

OCI
 
(1
)
 

 
(1
)
 
 
1

 

 
1

AOCI, end of period
 
$
(12
)
 
$
(2
)
 
$
(10
)
 
 
$
(1
)
 
$

 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Summary of AOCI:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
462

 
$
98

 
$
364

 
 
$
71

 
$
16

 
$
55

Investments OCI
 
100

 
21

 
79

 
 
(77
)
 
(17
)
 
(60
)
Pension obligations OCI
 

 

 

 
 

 

 

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

 
(1
)
 
 
1

 

 
1

Total OCI
 
99

 
21

 
78

 
 
(76
)
 
(17
)
 
(59
)
AOCI, end of period
 
$
561

 
$
119

 
$
442

 
 
$
(5
)
 
$
(1
)
 
$
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 21



(Dollars in millions)
 
Nine months ended September 30,
 
 
2019
 
 
2018
 
 
Before tax
 
Income tax
 
Net
 
 
Before tax
 
Income tax
 
Net
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
46

 
$
9

 
$
37

 
 
$
3,540

 
$
733

 
$
2,807

Cumulative effect of change in accounting for equity securities as of January 1, 2018
 

 

 

 
 
(3,155
)
 
(652
)
 
(2,503
)
Adjusted AOCI, beginning of period
 
46

 
9

 
37

 
 
385

 
81

 
304

OCI before investment gains and losses, net, recognized in net income
 
542

 
114

 
428

 
 
(371
)
 
(80
)
 
(291
)
Investment gains and losses, net, recognized in net income
 

 

 

 
 
(7
)
 
(1
)
 
(6
)
OCI
 
542

 
114

 
428

 
 
(378
)
 
(81
)
 
(297
)
AOCI, end of period
 
$
588

 
$
123

 
$
465

 
 
$
7

 
$

 
$
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
(16
)
 
$
(2
)
 
$
(14
)
 
 
$
(12
)
 
$
(1
)
 
$
(11
)
OCI excluding amortization recognized in net income
 

 

 

 
 

 

 

Amortization recognized in net income
 
1

 

 
1

 
 
1

 

 
1

OCI
 
1

 

 
1

 
 
1

 

 
1

AOCI, end of period
 
$
(15
)
 
$
(2
)
 
$
(13
)
 
 
$
(11
)
 
$
(1
)
 
$
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life deferred acquisition costs, life policy reserves and other:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
(1
)
 
$

 
$
(1
)
 
 
$
(10
)
 
$
(2
)
 
$
(8
)
OCI before investment gains and losses, net, recognized in net income
 
(9
)
 
(2
)
 
(7
)
 
 
6

 
1

 
5

Investment gains and losses, net, recognized in net income
 
(2
)
 

 
(2
)
 
 
3

 
1

 
2

OCI
 
(11
)
 
(2
)
 
(9
)
 
 
9

 
2

 
7

AOCI, end of period
 
$
(12
)
 
$
(2
)
 
$
(10
)
 
 
$
(1
)
 
$

 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Summary of AOCI:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
29

 
$
7

 
$
22

 
 
$
3,518

 
$
730

 
$
2,788

Cumulative effect of change in accounting for equity securities as of January 1, 2018
 

 

 

 
 
(3,155
)
 
(652
)
 
(2,503
)
Adjusted AOCI, beginning of period
 
29

 
7

 
22

 
 
363

 
78

 
285

Investments OCI
 
542

 
114

 
428

 
 
(378
)
 
(81
)
 
(297
)
Pension obligations OCI
 
1

 

 
1

 
 
1

 

 
1

Life deferred acquisition costs, life policy reserves and other OCI
 
(11
)
 
(2
)
 
(9
)
 
 
9

 
2

 
7

Total OCI
 
532

 
112

 
420

 
 
(368
)
 
(79
)
 
(289
)
AOCI, end of period
 
$
561

 
$
119

 
$
442

 
 
$
(5
)
 
$
(1
)
 
$
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 22



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

The table below summarizes our consolidated property casualty insurance net written premiums, earned premiums and incurred loss and loss expenses:
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Direct written premiums
 
$
1,361

 
$
1,248

 
$
4,168

 
$
3,831

Assumed written premiums
 
41

 
42

 
203

 
143

Ceded written premiums
 
(50
)
 
(44
)
 
(162
)
 
(121
)
Net written premiums
 
$
1,352

 
$
1,246

 
$
4,209

 
$
3,853

 
 
 
 
 
 
 
 
 
Direct earned premiums
 
$
1,386

 
$
1,238

 
$
3,971

 
$
3,680

Assumed earned premiums
 
52

 
38

 
145

 
107

Ceded earned premiums
 
(62
)
 
(39
)
 
(156
)
 
(120
)
Earned premiums
 
$
1,376

 
$
1,237

 
$
3,960

 
$
3,667

 
 
 
 
 
 
 
 
 
Direct incurred loss and loss expenses
 
$
855

 
$
792

 
$
2,508

 
$
2,394

Assumed incurred loss and loss expenses
 
37

 
26

 
87

 
55

Ceded incurred loss and loss expenses
 
(28
)
 
(5
)
 
(78
)
 
(24
)
Incurred loss and loss expenses
 
$
864

 
$
813

 
$
2,517

 
$
2,425

 
 
 
 
 
 
 
 
 


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

The table below summarizes our consolidated life insurance earned premiums and contract holders' benefits incurred:
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Direct earned premiums
 
$
87

 
$
79

 
$
256

 
$
237

Ceded earned premiums
 
(17
)
 
(18
)
 
(53
)
 
(52
)
Earned premiums
 
$
70

 
$
61

 
$
203

 
$
185

 
 
 
 
 
 
 
 
 
Direct contract holders' benefits incurred
 
87

 
82

 
259

 
228

Ceded contract holders' benefits incurred
 
(19
)
 
(16
)
 
(48
)
 
(37
)
Contract holders' benefits incurred
 
$
68

 
$
66

 
$
211

 
$
191

 
 
 
 
 
 
 
 
 

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


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 23



NOTE 9 – Income Taxes
The differences between the 21% statutory federal income tax rate and our effective income tax rate were as follows:
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Tax at statutory rate:
 
$
62

 
21.0
 %
 
$
130

 
21.0
 %
 
$
355

 
21.0
 %
 
$
175

 
21.0
 %
Increase (decrease) resulting from:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Tax-exempt income from municipal bonds
 
(5
)
 
(1.7
)
 
(5
)
 
(0.8
)
 
(14
)
 
(0.8
)
 
(15
)
 
(1.8
)
Dividend received exclusion
 
(3
)
 
(1.0
)
 
(3
)
 
(0.5
)
 
(11
)
 
(0.7
)
 
(11
)
 
(1.3
)
Tax accounting method changes
 

 

 
(50
)
 
(8.1
)
 

 

 
(50
)
 
(6.0
)
Other
 
(8
)
 
(2.7
)
 
(7
)
 
(1.1
)
 
(10
)
 
(0.6
)
 
(6
)
 
(0.7
)
Provision for income taxes
 
$
46

 
15.6
 %
 
$
65

 
10.5
 %
 
$
320

 
18.9
 %
 
$
93

 
11.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

During the third quarter of 2018, we received approval from the IRS to change our method of tax accounting for certain items applicable for the 2017 tax year and tax return, primarily related to the valuation of our tax base unpaid losses. We recognized a benefit in the third quarter 2018 provision for income taxes for the difference between the current tax rate and the 2017 tax rate for the related items. This reduced our effective tax rate by
8.1% and 6.0% for the three months and nine months ended September 30, 2018, respectively.
During third quarter of 2019, the IRS notified us they would be examining the tax year ended December 31, 2017.

Unrecognized Tax Benefits
As of September 30, 2019 and December 31, 2018, we had a gross unrecognized tax benefit of $34 million. There were no changes to this amount during the first nine months ended 2019.

Acquisition of Cincinnati Global
As more fully discussed in Note 1, Accounting Policies and Note 14, Acquisition, we closed on the acquisition of Cincinnati Global during the first quarter of 2019. As a result of this acquisition, $59 million of net deferred tax assets were acquired or established at the acquisition date with an offsetting valuation allowance of $55 million.

As a result of operations for the nine months ended September 30, 2019, Cincinnati Global had $44 million of net deferred tax assets with an offsetting valuation allowance of $43 million.

Accounting guidance requires deferred tax assets to be reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred tax assets will not be realized. After considering all positive and negative evidence related to the Cincinnati Global operations, we believe it was appropriate to set up a valuation allowance for purposes of our opening Cincinnati Global balance sheet.

As of September 30, 2019, Cincinnati Global had operating loss carryforwards of $161 million which are subject to certain limitations. These Cincinnati Global losses can only be utilized within the Cincinnati Global group and cannot offset the income of our CFC group. Other than the Cincinnati Global loss carryforwards, we had no other operating or capital loss carryforwards as of September 30, 2019.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 24



NOTE 10 – Net Income Per Common Share
Basic earnings per share are computed based on the weighted average number of common shares outstanding. Diluted earnings per share are computed based on the weighted average number of common and dilutive potential common shares outstanding using the treasury stock method. The table shows calculations for basic and diluted earnings per share:
(In millions, except per share data)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 

 
 

 
 

 
 

Net income—basic and diluted
 
$
248

 
$
553

 
$
1,371

 
$
739

Denominator:
 
 

 
 

 
 

 
 

Basic weighted-average common shares outstanding
 
163.3

 
162.7

 
163.2

 
163.3

Effect of share-based awards:
 
 

 
 

 
 

 
 

Stock options
 
1.4

 
0.8

 
1.2

 
0.9

Nonvested shares
 
0.9

 
0.5

 
0.7

 
0.5

Diluted weighted-average shares
 
165.6

 
164.0

 
165.1

 
164.7

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
1.51

 
$
3.40

 
$
8.40

 
$
4.53

Diluted
 
$
1.49

 
$
3.38

 
$
8.30

 
$
4.49

Number of anti-dilutive share-based awards
 

 
1.1

 
0.4

 
1.3

 
 
 
 
 
 
 
 
 


The sources of dilution of our common shares are certain equity-based awards. See our 2018 Annual Report on Form 10-K, Item 8, Note 17, Share-Based Associate Compensation Plans, Page 173, for information about share-based awards. The above table shows the number of anti-dilutive share-based awards for the three and nine months ended September 30, 2019 and 2018. These share-based awards were not included in the computation of net income per common share (diluted) because their exercise would have anti-dilutive effects.

NOTE 11 – Employee Retirement Benefits
The following summarizes the components of net periodic benefit cost for our qualified and supplemental pension plans:
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
2

 
$
3

 
$
6

 
$
8

Non-service costs (benefit):
 
 
 
 
 
 
 
 
Interest cost
 
4

 
4

 
10

 
10

Expected return on plan assets
 
(5
)
 
(6
)
 
(15
)
 
(17
)
Amortization of actuarial loss and prior
  service cost
 

 

 
1

 
1

Other
 

 

 
1

 

 Total non-service benefit
 
(1
)
 
(2
)
 
(3
)
 
(6
)
Net periodic benefit cost
 
$
1

 
$
1

 
$
3

 
$
2

 
 
 
 
 
 
 
 
 


See our 2018 Annual Report on Form 10-K, Item 8, Note 13, Employee Retirement Benefits, Page 166, for information on our retirement benefits. Service costs and non-service costs (benefit) are allocated in the same proportion primarily to the underwriting, acquisition and insurance expenses line item with the remainder allocated to the insurance losses and contract holders' benefits line item on the condensed consolidated statements of income for both 2019 and 2018.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 25



We made matching contributions totaling $6 million and $5 million to our 401(k) and Top Hat savings plans during the third quarter of 2019 and 2018 and contributions of $15 million for both the first nine months of 2019 and 2018, respectively.

We made no contributions to our qualified pension plan during the first nine months of 2019.

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

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

We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company. We also report as Other the underwriting results of Cincinnati Re, our reinsurance assumed operation, and Cincinnati Global, our London-based global specialty underwriter, which was acquired on February 28, 2019. See our 2018 Annual Report on Form 10-K, Item 8, Note 18, Segment Information, Page 176, for a description of revenue, income or loss before income taxes and identifiable assets for each of the five segments.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 26



Segment information is summarized in the following table: 
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 

 
 

 
 

 
 

Commercial lines insurance
 
 

 
 

 
 

 
 

Commercial casualty
 
$
277

 
$
268

 
$
822

 
$
805

Commercial property
 
241

 
229

 
709

 
688

Commercial auto
 
179

 
168

 
524

 
495

Workers' compensation
 
73

 
80

 
224

 
245

Other commercial
 
64

 
60

 
188

 
174

Commercial lines insurance premiums
 
834

 
805

 
2,467

 
2,407

Fee revenues
 
1

 
1

 
3

 
3

Total commercial lines insurance
 
835

 
806

 
2,470

 
2,410

 
 
 
 
 
 
 
 
 
Personal lines insurance
 
 

 
 

 
 

 
 

Personal auto
 
156

 
155

 
466

 
459

Homeowner
 
154

 
142

 
450

 
417

Other personal
 
44

 
41

 
130

 
118

Personal lines insurance premiums
 
354

 
338

 
1,046

 
994

Fee revenues
 
1

 
1

 
3

 
4

Total personal lines insurance
 
355

 
339

 
1,049

 
998

 
 
 
 
 
 
 
 
 
Excess and surplus lines insurance
 
72

 
60

 
202

 
173

Fee revenues
 
1

 

 
2

 
1

Total excess and surplus lines insurance
 
73

 
60

 
204

 
174

 
 
 
 
 
 
 
 
 
Life insurance premiums
 
70

 
61

 
203

 
185

Fee revenues
 
1

 
1

 
3

 
3

Total life insurance
 
71

 
62

 
206

 
188

 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
    Investment income, net of expenses
 
161

 
154

 
478

 
458

    Investment gains and losses, net
 
86

 
458

 
1,113

 
372

Total investment revenue
 
247

 
612

 
1,591

 
830

 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
Premiums
 
116

 
34

 
245

 
93

Other
 
3

 
2

 
7

 
4

Total other revenues
 
119

 
36

 
252

 
97

Total revenues
 
$
1,700

 
$
1,915

 
$
5,772

 
$
4,697

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes:
 
 

 
 

 
 

 
 

Insurance underwriting results
 
 

 
 

 
 

 
 

Commercial lines insurance
 
$
56

 
$
34

 
$
144

 
$
96

Personal lines insurance
 
3

 
(9
)
 
4

 
(50
)
Excess and surplus lines insurance
 
12

 
17

 
40

 
48

Life insurance
 
5

 
3

 
2

 
13

Investments
 
222

 
588

 
1,517

 
758

Other
 
(4
)
 
(15
)
 
(16
)
 
(33
)
Total income before income taxes
 
$
294

 
$
618

 
$
1,691

 
$
832

Identifiable assets:
 
September 30,
2019
 
December 31, 2018
Property casualty insurance
 
$
3,364

 
$
3,285

Life insurance
 
1,536

 
1,424

Investments
 
18,906

 
16,741

Other
 
936

 
485

Total
 
$
24,742

 
$
21,935

 
 
 
 
 


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 27



NOTE 14 – Acquisition
On February 28, 2019 (closing date or acquisition date), pursuant to the agreement (the SPA) for the sale and purchase of the entire issued share capital of MSP Underwriting Limited, dated October 11, 2018, by and between the company and Münchener Rückversicherungs Gesellschaft AG (Munich Re), the company acquired from Munich Re all of the issued and outstanding share capital of MSP and its subsidiaries, including the Lloyd's managing agent, Beaufort Underwriting Agency Limited for Syndicate 318 (the acquisition). MSP was rebranded as Cincinnati Global effective May 1, 2019, reflecting its new identity as a subsidiary of the company. The acquisition of Cincinnati Global reflects progress toward our long-term objective of diversifying revenue and profitability by expanding our operations geographically and by line of business.

As aggregate consideration for the purchase of the share capital of Cincinnati Global and its subsidiaries, the company paid £48 million, or $64 million, in cash to Munich Re at the closing of the acquisition. The amount paid at closing was calculated as the difference between the target net asset value (NAV) set forth in the SPA and the estimated NAV of Cincinnati Global and its subsidiaries at the closing date. On August 1, 2019, the company and Munich Re agreed to an adjusted purchase price of £47 million, or $63 million, reflecting a £1 million decrease in the NAV of Cincinnati Global.

The allocation of the purchase price was based on information included in Cincinnati Global's financial statements at the closing date, which was subject to negotiation per the SPA. The purchase price allocation is subject to change if additional information becomes available within the measurement period, which cannot exceed 12 months from the acquisition date.



Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 28



The fair value of the assets acquired, liabilities assumed and the allocation of the adjusted purchase price on the acquisition date have been summarized in the following table:
(Dollars in millions)
 
Amount
Assets
 
 
Investments and other invested assets
 
$
198

Cash and cash equivalents
 
64

Premiums receivable
 
45

Reinsurance recoverable
 
42

Other assets
 
23

Total assets acquired
 
$
372

 
 
 
Liabilities
 
 
Loss and loss expense reserves
 
$
277

Unearned premiums
 
88

Other liabilities
 
24

Total liabilities assumed
 
$
389

 
 
 
Fair value of identifiable intangible assets:
 
 
Syndicate capacity - indefinite lived
 
$
31

Syndicate broker relationships - definite lived
 
12

Value of business acquired - definite lived
 
4

Internally developed technology - definite lived
 
3

Total fair value of identifiable intangible assets
 
$
50

 
 
 
Total purchase price paid
 
$
63

 
 
 
Total assets acquired (including fair value of identifiable intangible assets)
 
422

Total liabilities assumed
 
389

Fair value of net assets acquired prior to allocation of goodwill
 
33

 
 
 
Excess of purchase price paid over fair value of net assets acquired assigned to goodwill
 
$
30

 
 
 


Identifiable intangible assets and goodwill are included in other assets in the condensed consolidated balance sheets. The goodwill arose as the fair value of the consideration transferred exceeded the fair value of the net identifiable assets acquired at the acquisition date. The broker relationships and internally developed technology will be amortized straight-line over five and 15 years, respectively. Value of business acquired will be amortized over the remaining coverage period of the underlying insurance contracts. Goodwill and intangibles are tested for impairment on an annual basis or more frequently if events or circumstances indicate the assets might be impaired. The company performed its annual impairment test on goodwill and intangibles on September 30, which did not result in the recognition of an impairment loss in the most recent period.

The financial results of Cincinnati Global are included in the condensed consolidated statements of income from the acquisition date and are deemed to be immaterial.

In connection with the acquisition, the company incurred immaterial transaction related expenses.




Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 29



Item 2.    Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion highlights significant factors influencing the condensed consolidated results of operations and financial position of Cincinnati Financial Corporation. It should be read in conjunction with the consolidated financial statements and related notes included in our 2018 Annual Report on Form 10-K. Unless otherwise noted, the industry data is prepared by A.M. Best Co., a leading insurance industry statistical, analytical and financial strength rating organization. Information from A.M. Best is presented on a statutory basis for insurance company regulation in the United States of America. When we provide our results on a comparable statutory basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP).
 
We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and dividends. Dollar amounts are rounded to millions; calculations of percent changes are based on dollar amounts rounded to the nearest million. Certain percentage changes are identified as not meaningful (nm).
 
SAFE HARBOR STATEMENT
This is our "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in our 2018 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 33.
Factors that could cause or contribute to such differences include, but are not limited to:
Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes
Increased frequency and/or severity of claims or development of claims that are unforeseen at the time of policy issuance
Inadequate estimates, assumptions or reliance on third-party data used for critical accounting estimates
Declines in overall stock market values negatively affecting the company's equity portfolio and book value
Prolonged low interest rate environment or other factors that limit the company's ability to generate growth in investment income or interest rate fluctuations that result in declining values of fixed-maturity investments, including declines in accounts in which we hold bank-owned life insurance contract assets
Domestic and global events resulting in capital market or credit market uncertainty, followed by prolonged periods of economic instability or recession, that lead to:
Significant or prolonged decline in the fair value of a particular security or group of securities and impairment of the asset(s)
Significant decline in investment income due to reduced or eliminated dividend payouts from a particular security or group of securities
Significant rise in losses from surety and director and officer policies written for financial institutions or other insured entities
Our inability to integrate Cincinnati Global and its subsidiaries into our on-going operations, or disruptions to our on-going operations due to such integration
Recession or other economic conditions resulting in lower demand for insurance products or increased payment delinquencies
Difficulties with technology or data security breaches, including cyberattacks, that could negatively affect our ability to conduct business; disrupt our relationships with agents, policyholders and others; cause reputational damage, mitigation expenses and data loss and expose us to liability under federal and state laws
Disruption of the insurance market caused by technology innovations such as driverless cars that could decrease consumer demand for insurance products
Delays, inadequate data developed internally or from third parties, or performance inadequacies from ongoing development and implementation of underwriting and pricing methods, including telematics and other usage-based insurance methods, or technology projects and enhancements expected to increase our pricing accuracy, underwriting profit and competitiveness
Increased competition that could result in a significant reduction in the company's premium volume
Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could alter our competitive advantages

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 30



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



Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 31



CORPORATE FINANCIAL HIGHLIGHTS
 
Net Income and Comprehensive Income Data
(Dollars in millions, except per share data)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Earned premiums
 
$
1,446

 
$
1,298

 
11

 
$
4,163

 
$
3,852

 
8
Investment income, net of expenses (pretax)
 
161

 
154

 
5

 
478

 
458

 
4
Investment gains and losses, net (pretax)
 
86

 
458

 
(81
)
 
1,113

 
372

 
199
Total revenues
 
1,700

 
1,915

 
(11
)
 
5,772

 
4,697

 
23
Net income
 
248

 
553

 
(55
)
 
1,371

 
739

 
86
Comprehensive income
 
326

 
494

 
(34
)
 
1,791

 
450

 
298
Net income per share—diluted
 
1.49

 
3.38

 
(56
)
 
8.30

 
4.49

 
85
Cash dividends declared per share
 
0.56

 
0.53

 
6

 
1.68

 
1.59

 
6
Diluted weighted average shares outstanding
 
165.6

 
164.0

 
1

 
165.1

 
164.7

 
0
 
 
 
 
 
 
 
 
 
 
 
 
 

Total revenues decreased by 11% for the third quarter of 2019, compared with third-quarter 2018, as a decrease in net investment gains offset increases in earned premiums and investment income. For the first nine months of 2019, compared with the first nine months of 2018, total revenues increased 23%, primarily due to higher earned premiums and net investment gains. Premium and investment revenue trends are discussed further in the respective sections of Financial Results.

Investment gains and losses are recognized on the sales of investments, on certain changes in fair values of securities even though we continue to hold the securities or as otherwise required by GAAP. We have substantial discretion in the timing of investment sales, and that timing generally is independent of the insurance underwriting process. The change in fair value of securities is also generally independent of the insurance underwriting process.
 
Net income for the third quarter of 2019, compared with the same period of 2018, decreased by $305 million, including a decrease of $291 million in after-tax net investment gains and losses and the absence of $56 million for certain other non-recurring items, primarily the impact of various tax accounting method changes, that occurred in 2018. Those decreases were partially offset by an increase of $32 million in after-tax property casualty underwriting income and $5 million in after-tax investment income. Third-quarter 2019 catastrophe losses, mostly weather related, were $36 million lower after taxes and favorably affected both net income and property casualty underwriting income. Life insurance segment results on a pretax basis for the third quarter of 2019 increased $2 million compared with the third quarter of 2018.

For the first nine months of 2019, net income rose $632 million, compared with the 2018 period, including increases of $587 million in after-tax investment gains and losses, $91 million in after-tax property casualty underwriting income and $15 million in after-tax investment income, partially offset by the $56 million of other non-recurring items noted above. The property casualty underwriting income improvement included an unfavorable $14 million after-tax effect from higher catastrophe losses. Life insurance segment results decreased by $11 million on a pretax basis.

Performance by segment is discussed below in Financial Results. As discussed in our 2018 Annual Report on Form 10-K, Item 7, Factors Influencing Our Future Performance, Page 53, there are several reasons why our performance during 2019 may be below our long-term targets. In that annual report, as part of Financial Results, we also discussed the full-year 2019 outlook for each reporting segment.
 
The board of directors is committed to rewarding shareholders directly through cash dividends and through share repurchase authorizations. Through 2018, the company had increased the annual cash dividend rate for 58 consecutive years, a record we believe is matched by only seven other publicly traded companies. In February 2019, the board of directors increased the regular quarterly dividend to 56 cents per share, setting the stage for our 59th consecutive year of increasing cash dividends. During the first nine months of 2019, cash dividends declared by the company increased 6% compared with the same period of 2018. Our board regularly evaluates relevant factors in decisions related to dividends and share repurchases. The 2019 dividend

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 32



increase reflected our strong earnings performance and signaled management's and the board's positive outlook and confidence in our outstanding capital, liquidity and financial flexibility.

As disclosed in Item 1, Note 14 – Acquisition, we completed our transaction to acquire MSP Underwriting Limited, a London-based global specialty underwriter for Lloyd's Syndicate 318, on February 28, 2019. We rebranded the acquired company to Cincinnati Global Underwriting Ltd.SM (Cincinnati Global) effective May 1, 2019. We expect the transaction to contribute to future earnings and book value growth as we believe it should provide opportunities to support business produced by our independent agencies in new geographies and lines of business.

Balance Sheet Data and Performance Measures
(Dollars in millions, except share data)
 
At September 30,
 
At December 31,
 
 
2019
 
2018
Total investments
 
$
19,059

 
$
16,732

Total assets
 
24,742

 
21,935

Short-term debt
 
38

 
32

Long-term debt
 
788

 
788

Shareholders' equity
 
9,371

 
7,833

Book value per share
 
57.37

 
48.10

Debt-to-total-capital ratio
 
8.1
%
 
9.5
%
 
 
 
 
 

Total assets at September 30, 2019, increased 13% compared with year-end 2018, and included a 14% increase in total investments that reflected a combination of net purchases and higher fair values for many securities in our portfolio. Shareholders' equity increased 20%, and book value per share increased 19% during the first nine months of 2019. Our debt-to-total-capital ratio (capital is the sum of debt plus shareholders' equity) decreased compared with year-end 2018.

Our value creation ratio is our primary performance metric. That ratio was 22.8% for the first nine months of 2019, more than the same period in 2018 primarily due to a higher amount of overall net gains from our investment portfolio. The $9.27 increase in book value per share during the first nine months of 2019 contributed 19.3 percentage points to the value creation ratio, while dividends declared at $1.68 per share contributed 3.5 points. Value creation ratios for comparable periods by major components and in total, along with calculations from per-share amounts, are shown in the tables below.
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Value creation ratio major components:
 
 

 
 

 
 

 
 

Net income before investment gains
 
2.0
%
 
2.4
 %
 
6.3
 %
 
5.4
 %
Change in fixed-maturity securities, realized and unrealized gains
 
0.8

 
(0.7
)
 
5.4

 
(3.6
)
Change in equity securities, investment gains
 
0.8

 
4.6

 
11.2

 
3.6

Other
 
0.0

 
0.0

 
(0.1
)
 
(0.4
)
     Value creation ratio
 
3.6
%
 
6.3
 %
 
22.8
 %
 
5.0
 %
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 33



(Dollars are per share)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Value creation ratio:
 
 

 
 

 
 

 
 

End of period book value*
 
$
57.37

 
$
51.22

 
$
57.37

 
$
51.22

Less beginning of period book value
 
55.92

 
48.68

 
48.10

 
50.29

Change in book value
 
1.45

 
2.54

 
9.27

 
0.93

Dividend declared to shareholders
 
0.56

 
0.53

 
1.68

 
1.59

Total value creation
 
$
2.01

 
$
3.07

 
$
10.95

 
$
2.52

 
 
 
 
 
 
 
 
 
Value creation ratio from change in book value**
 
2.6
%
 
5.2
%
 
19.3
%
 
1.8
%
Value creation ratio from dividends declared to shareholders***
 
1.0

 
1.1

 
3.5

 
3.2

Value creation ratio
 
3.6
%
 
6.3
%
 
22.8
%
 
5.0
%
 
 
 
 
 
 
 
 
 
    * 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 period book value
 
 
*** Dividend declared to shareholders divided by beginning of period book value
 
 

DRIVERS OF LONG-TERM VALUE CREATION
Operating through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on 2018 net written premiums for approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies as discussed in our 2018 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. At September 30, 2019, we actively marketed through agencies located in 44 states. We maintain a long-term perspective that guides us in addressing immediate challenges or opportunities while focusing on the major decisions that best position our company for success through all market cycles.

To measure our long-term progress in creating shareholder value, our value creation ratio is our primary financial performance target. As discussed in our 2018 Annual Report on Form 10-K, Item 7, Executive Summary, Page 49, management believes this measure is a meaningful indicator of our long-term progress in creating shareholder value and has three primary performance drivers:

Premium growth – We believe our agency relationships and initiatives can lead to a property casualty written premium growth rate over any five-year period that exceeds the industry average. For the first nine months of 2019, our consolidated property casualty net written premium year-over-year growth was 9%, comparing favorably with the industry’s 1% growth rate reported by A.M. Best for the first six months of 2019. For the five-year period 2014 through 2018, our growth rate slightly exceeded that of the industry. The industry's growth rate excludes its mortgage and financial guaranty lines of business.
Combined ratio – We believe our underwriting philosophy and initiatives can generate a GAAP combined ratio over any five-year period that is consistently within the range of 95% to 100%. For the first nine months of 2019, our GAAP combined ratio was 94.6%, including 7.7 percentage points of current accident year catastrophe losses partially offset by 5.1 percentage points of favorable loss reserve development on prior accident years. Our statutory combined ratio was 93.6% for the first nine months of 2019, comparing favorably with the 97.4% reported for the industry by A.M. Best for the first six months of 2019. 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 return of the Standard & Poor's 500 Index. For the first nine months of 2019, pretax investment income was $478 million, up 4% compared with the same period in 2018. We believe our investment portfolio mix provides an appropriate balance of income stability and growth with capital appreciation potential.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 34



Highlights of Our Strategy and Supporting Initiatives
Management has worked to identify a strategy that can lead to long-term success, with concurrence by the board of directors. Our strategy is intended to position us to compete successfully in the markets we have targeted while appropriately managing risk. Further description of our long-term, proven strategy can be found in our 2018 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. We believe successful implementation of initiatives that support our strategy will help us better serve our agent customers and reduce volatility in our financial results while we also grow earnings and book value over the long term, successfully navigating challenging economic, market or industry pricing cycles.

Manage insurance profitability – Implementation of these initiatives is intended to enhance underwriting expertise and knowledge, thereby increasing our ability to manage our business while also gaining efficiency. Better profit margins can arise from additional information and more focused action on underperforming product lines, plus pricing capabilities we are expanding through the use of technology and analytics. In addition to enhancing company efficiency, improving internal processes also supports the ability of the independent agencies that represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage agency expenses.
We continue to enhance our property casualty underwriting expertise and to effectively and efficiently underwrite individual policies and process transactions. Ongoing initiatives supporting this work include expanding our pricing and segmentation capabilities through experience and use of predictive analytics and additional data. Our segmentation efforts emphasize identification and retention of insurance policies we believe have relatively stronger pricing, while seeking more aggressive renewal terms and conditions on policies we believe have relatively weaker pricing. In 2019, we are continuing to improve underwriting and rate adequacy for our commercial auto and personal auto lines of business. Our commercial auto policies that renewed during the first nine months of 2019 experienced an estimated average price increase at percentages in the high-single-digit range, and our personal auto policies that renewed during that period also averaged an estimated price increase at percentages in the high-single-digit range.
Drive premium growth – Implementation of these initiatives is intended to further penetrate each market we serve through our independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Premium growth initiatives also include expansion of Cincinnati ReSM, our reinsurance assumed operation, and successful integration of Cincinnati Global. Diversified growth also may reduce variability of losses from weather-related catastrophes.
We continue to appoint new agencies to develop additional points of distribution. In 2019, we are planning approximately 100 appointments of independent agencies that offer most or all of our property casualty insurance products. During the first nine months of 2019, we appointed 88 new agencies that meet that criteria.
We also plan to appoint additional 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 products for us. During the first nine months of 2019, we appointed 58 new agencies that meet that criteria.
As of September 30, 2019, a total of 1,795 agency relationships market our property casualty insurance products from 2,445 reporting locations. The totals do not include Lloyd's brokers or coverholders that source business for Cincinnati Global.
We also continue to grow premiums through the disciplined expansion of Cincinnati Re and the acquisition of Cincinnati Global. During the first nine months of 2019, Cincinnati Re contributed $62 million of growth in consolidated property casualty insurance net written premiums while Cincinnati Global contributed $103 million. We also believe that over time Cincinnati Global will provide opportunities to support business produced by our independent agencies in new geographies and lines of business.
By early 2020, we plan to expand our excess and surplus lines business into personal lines by offering an excess and surplus lines homeowner policy in California through our wholly owned insurance broker, CSU Producer Resources Inc. We see this expansion as a natural evolution of our agency-focused strategy, as some agents need a solution to serve clients who have attractive high net worth personal lines accounts that are not eligible for admitted insurance market coverage.
 

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 35



Financial Strength
An important part of our long-term strategy is financial strength, which is described in our 2018 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Financial Strength, Page 8. One aspect of our financial strength is prudent use of reinsurance ceded to help manage financial performance variability due to catastrophe loss experience. A description of how we use reinsurance ceded is included in our 2018 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, 2019 Reinsurance Ceded Programs, Page 105. Another aspect of our financial strength is our investment portfolio, which remains well-diversified as discussed in this quarterly report in Item 3, Quantitative and Qualitative Disclosures About Market Risk. Our strong parent-company liquidity and financial strength increase our flexibility to maintain a cash dividend through all periods and to continue to invest in and expand our insurance operations.

At September 30, 2019, we held $3.198 billion of our cash and invested assets at the parent-company level, of which $2.803 billion, or 87.6%, was invested in common stocks, and $270 million, or 8.4%, was cash or cash equivalents. Our debt-to-total-capital ratio was 8.1% at September 30, 2019. Another important indicator of financial strength is our ratio of property casualty net written premiums to statutory surplus, which was 1.0-to-1 for the 12 months ended September 30, 2019, matching year-end 2018.

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

At October 23, 2019, our insurance subsidiaries continued to be highly rated.
Insurer Financial Strength Ratings
Rating
agency
Standard market property casualty insurance subsidiaries
Life insurance
 subsidiary
Excess and surplus lines insurance subsidiary
Outlook
 
 
 
Rating
tier
 
 
Rating
tier
 
 
Rating
tier
 
A.M. Best Co.
 ambest.com
A+
Superior
2 of 16
A
Excellent
3 of 16
A+
Superior
2 of 16
Stable/ 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
-
-
-
-
-
-
Stable
S&P Global  Ratings
 spratings.com
A+
Strong
5 of 21
A+
Strong
5 of 21
-
-
-
Stable
 

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 36



CONSOLIDATED PROPERTY CASUALTY INSURANCE HIGHLIGHTS
Consolidated property casualty insurance results include premiums and expenses for our standard market insurance segments (commercial lines and personal lines), our excess and surplus lines segment, Cincinnati Re and our London-based global specialty underwriter known as Cincinnati Global.
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Earned premiums
 
$
1,376

 
$
1,237

 
11

 
$
3,960

 
$
3,667

 
8

Fee revenues
 
3

 
2

 
50

 
8

 
8

 
0

Total revenues
 
1,379

 
1,239

 
11

 
3,968

 
3,675

 
8

Loss and loss expenses from:
 
 

 
 

 
 

 
 

 
 

 
 

Current accident year before catastrophe losses
 
829

 
732

 
13

 
2,417

 
2,276

 
6

Current accident year catastrophe losses
 
87

 
125

 
(30
)
 
303

 
272

 
11

Prior accident years before catastrophe losses
 
(39
)
 
(39
)
 
0

 
(178
)
 
(111
)
 
(60
)
Prior accident years catastrophe losses
 
(13
)
 
(5
)
 
(160
)
 
(25
)
 
(12
)
 
(108
)
Loss and loss expenses
 
864

 
813

 
6

 
2,517

 
2,425

 
4

Underwriting expenses
 
432

 
384

 
13

 
1,229

 
1,143

 
8

Underwriting profit
 
$
83

 
$
42

 
98

 
$
222

 
$
107

 
107

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 

 
 

 
Pt. Change

 
 

 
 

 
Pt. Change
    Current accident year before catastrophe losses
 
60.3
 %
 
59.1
 %
 
1.2

 
61.0
 %
 
62.0
 %
 
(1.0
)
    Current accident year catastrophe losses
 
6.2

 
10.1

 
(3.9
)
 
7.7

 
7.4

 
0.3

    Prior accident years before catastrophe losses
 
(2.8
)
 
(3.1
)
 
0.3

 
(4.5
)
 
(3.0
)
 
(1.5
)
    Prior accident years catastrophe losses
 
(0.9
)
 
(0.4
)
 
(0.5
)
 
(0.6
)
 
(0.3
)
 
(0.3
)
Loss and loss expenses
 
62.8

 
65.7

 
(2.9
)
 
63.6

 
66.1

 
(2.5
)
Underwriting expenses
 
31.4

 
31.1

 
0.3

 
31.0

 
31.2

 
(0.2
)
Combined ratio
 
94.2
 %
 
96.8
 %
 
(2.6
)
 
94.6
 %
 
97.3
 %
 
(2.7
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
94.2
 %
 
96.8
 %
 
(2.6
)
 
94.6
 %
 
97.3
 %
 
(2.7
)
Contribution from catastrophe losses and prior
  years reserve development
 
2.5

 
6.6

 
(4.1
)
 
2.6

 
4.1

 
(1.5
)
Combined ratio before catastrophe losses and
  prior years reserve development
 
91.7
 %
 
90.2
 %
 
1.5

 
92.0
 %
 
93.2
 %
 
(1.2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our consolidated property casualty insurance operations generated an underwriting profit of $83 million for the third quarter of 2019 and $222 million for the first nine months of 2019. The third-quarter improvement of $41 million, compared with the same period of 2018, included a decrease of $46 million in losses from natural catastrophes, mostly caused by severe weather. The nine-month underwriting profit improved $115 million, compared with the first nine months of 2018, despite the unfavorable effect of an increase of $18 million in losses from natural catastrophes. We believe future property casualty underwriting results will continue to benefit from price increases and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices.
For all property casualty lines of business in aggregate, excluding Cincinnati Global reserves as of the February 28, 2019, acquisition date, net loss and loss expense reserves at September 30, 2019, were $64 million higher than at year-end 2018, including an increase of $50 million for the incurred but not reported (IBNR) portion. The $64 million reserve increase raised year-end 2018 net loss and loss expense reserves by 1%.

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

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 37




Our consolidated property casualty combined ratio for the third quarter of 2019 improved by 2.6 percentage points, compared with the same period of 2018, including a decrease of 4.4 points from lower catastrophe losses and loss expenses. For the first nine months of 2019, compared with the same period of 2018, our consolidated property casualty combined ratio improved by 2.7 percentage points, including no change from catastrophe losses and loss expenses.
 
The combined ratio can be affected significantly by natural catastrophe losses and other large losses as discussed in detail below. The combined ratio can also be affected by updated estimates of loss and loss expense reserves established for claims that occurred in prior periods, referred to as prior accident years. Net favorable development on prior accident year reserves, including reserves for catastrophe losses, benefited the combined ratio by 5.1 percentage points in the first nine months of 2019, compared with 3.3 percentage points in the same period of 2018. Net favorable development is discussed in further detail in Financial Results by property casualty insurance segment.
 
The ratio for current accident year loss and loss expenses before catastrophe losses improved in the first nine months of 2019. That 61.0% ratio was 1.0 percentage points lower, compared with the 62.0% accident year 2018 ratio measured as of September 30, 2018, including a decrease of 0.8 points in the ratio for large losses of $1 million or more per claim, discussed below.
 
The underwriting expense ratio increased slightly for the third quarter and decreased slightly for the first nine months of 2019, compared with the same periods a year ago. The nine-month ratio matched the average of full-year ratios during 2016 through 2018, and reflected ongoing expense management efforts and higher earned premiums.

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

 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Agency renewal written premiums
 
$
1,119

 
$
1,088

 
3
 
$
3,435

 
$
3,321

 
3

Agency new business written premiums
 
192

 
154

 
25
 
585

 
494

 
18

Other written premiums
 
40

 
4

 
nm
 
188

 
38

 
395

Net written premiums
 
1,351

 
1,246

 
8
 
4,208

 
3,853

 
9

Unearned premium change
 
25

 
(9
)
 
nm
 
(248
)
 
(186
)
 
(33
)
Earned premiums
 
$
1,376

 
$
1,237

 
11
 
$
3,960

 
$
3,667

 
8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
The trends in net written premiums and earned premiums summarized in the table above include the effects of price increases. Price change trends that heavily influence renewal written premium increases or decreases, along with other premium growth drivers for 2019, are discussed in more detail by segment below in Financial Results.
 
Consolidated property casualty net written premiums for the three and nine months ended September 30, 2019, grew $105 million and $355 million compared with the same periods of 2018, primarily from our commercial lines insurance segment and Cincinnati Global. Our premium growth initiatives from prior years have provided an ongoing favorable effect on growth during the current year, particularly as newer agency relationships mature over time.

Consolidated property casualty agency new business written premiums increased by $38 million and $91 million for the third quarter and first nine months of 2019, compared with the same periods of 2018. The increase for both 2019 periods was primarily from our commercial lines and excess and surplus lines insurance segments. New agency appointments during 2018 and 2019 produced a $32 million increase in standard lines new business for the first nine months of 2019 compared with the same period of 2018. As we appoint new agencies that choose to move accounts to us, we report these accounts as new business. While this business is new to us, in many cases it is not new to the agent. We believe these seasoned accounts tend to be priced more accurately than business that may be less familiar to our agent upon obtaining it from a competing agent.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 38



Net written premiums for Cincinnati Re, included in other written premiums, decreased by $1 million for the third quarter of 2019 and increased by $62 million for the nine months ended September 30, 2019, compared with the same periods of 2018, to $35 million and $192 million, respectively. Cincinnati Re assumes risks through reinsurance treaties and in some cases cedes part of the risk and related premiums to one or more unaffiliated reinsurance companies through transactions known as retrocessions. Cincinnati Re earned premiums were $49 million and $134 million for the third quarter and first nine months of 2019, compared with $34 million and $93 million for the same periods a year ago.
 
Cincinnati Global also contributed to the increase in other written premiums, following our acquisition of it on February 28, 2019. Net written premiums were $38 million for the third quarter of 2019 and $103 million since the acquisition, while earned premiums were $67 million and $111 million for those respective periods.
 
Other written premiums also include premiums ceded to reinsurers as part of our reinsurance ceded program. An increase in ceded premiums reduced net written premiums by $1 million and $13 million for the third quarter and first nine months of 2019, compared with the same periods of 2018.

Catastrophe losses and loss expenses typically have a material effect on property casualty results and can vary significantly from period to period. Losses from natural catastrophes contributed 5.3 and 7.1 percentage points to the combined ratio in the third quarter and first nine months of 2019, compared with 9.7 and 7.1 percentage points in the same period of 2018. Some of those losses were applicable to annual loss deductible provisions of our collateralized reinsurance funded through catastrophe bonds. For our collateralized reinsurance arrangement that became effective in January 2017, we can recover catastrophe bond funds if aggregate losses, after the $8 million per occurrence deductible, exceed $190 million during an annual coverage period. There were eight events between January 1 and September 30, 2019, that met the requirements for recovery, such as occurrences within the specific geographic locations included in the severe convective storm portion of our coverage with losses exceeding our per occurrence deductible. Aggregate losses from those events totaled $150 million, after our per occurrence deductible.

Effective July 1, 2019, we renewed for a period of one year our property catastrophe occurrence and aggregate excess of loss treaty, discussed in our 2018 Annual Report on Form 10-K, Item 7, 2019 Reinsurance Ceded Programs, Page 105. The combined coverage noted below applies to business written on a direct basis and by Cincinnati Re. Cincinnati Global catastrophe losses are not applicable to the treaty. Ceded premiums for the renewal period of coverage from this treaty are estimated to be approximately $9 million, with a total limit of $50 million for all coverages combined. The summary below includes other important changes from the treaty that expired June 30, 2019.
Combined – Aggregate net recovery up to $50 million after retaining the first $125 million of each loss
Cincinnati Re-only – Aggregate net recovery up to $8 million after retaining the first $45 million in aggregate
Direct business-only in certain Western states – Aggregate net recovery up to $31 million for:
Earthquake: After retaining the first $20 million of each loss
Brushfire or wildfire: After retaining the first $40 million of each loss

The following table shows consolidated property casualty insurance catastrophe losses and loss expenses incurred, net of reinsurance, as well as the effect of loss development on prior period catastrophe events. We individually list declared catastrophe events for which our incurred losses reached or exceeded $10 million.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 39



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

 
Comm.
 
Pers.
 
E&S
 
 
 
 

Dates
Region
lines
 
lines
 
lines
 
Other
 
Total
 
lines
 
lines
 
lines
 
Other
 
Total
2019
 
 


 


 


 
 
 


 
 
 
 
 
 
 
 
 
Jan. 29-Feb. 1
Midwest, Northeast
$
(1
)
 
$

 
$

 
$

 
$
(1
)

$
10

 
$
10

 
$

 
$
1

 
$
21

Feb. 23-26
Midwest, Northeast, South
(1
)
 

 

 

 
(1
)

10

 
10

 

 

 
20

Mar. 12-17
Midwest, Northeast, West, South

 
(2
)
 

 
2

 


5

 
4

 

 
4

 
13

May 16-17
Midwest
3

 

 

 

 
3


9

 
6

 

 

 
15

May 26-28
Midwest, Northeast, West, South
(2
)
 
1

 

 

 
(1
)

76

 
25

 

 

 
101

Aug. 4-5
Midwest
5

 
7

 

 

 
12


5

 
7

 

 

 
12

Aug. 10-11
West
24

 
1

 

 

 
25

 
24

 
1

 

 

 
25

Aug. 28-Sep. 6
International, South (Dorian)
3

 
1

 

 
13

 
17


3

 
1

 

 
13

 
17

All other 2019 catastrophes
8

 
17

 
1

 
7

 
33


34

 
37

 
1

 
7

 
79

Development on 2018 and prior catastrophes
(4
)
 
(2
)
 

 
(7
)
 
(13
)

(18
)
 
3

 

 
(10
)
 
(25
)
Calendar year incurred total
$
35

 
$
23

 
$
1

 
$
15

 
$
74


$
158

 
$
104

 
$
1

 
$
15

 
$
278


 






 
 


 
 
 
 
 
 
 
 
 
2018
 
 

 

 

 
 
 

 
 
 
 
 
 
 
 
 
Jan. 8-10
West
$


$


$


$

 
$


$

 
$
10

 
$

 
$

 
$
10

Mar. 1-3
Northeast, South


(1
)




 
(1
)

6

 
5

 

 

 
11

Mar. 18-21
South
(1
)






 
(1
)

20

 
7

 
1

 

 
28

Apr. 13-17
Midwest, Northeast, South
(2
)

1





 
(1
)

20

 
8

 

 

 
28

Jul. 19-22
Midwest, South
10


8





 
18


10

 
8

 

 

 
18

Sep. 13-19
South
68


16




7

 
91


68

 
16

 

 
7

 
91

All other 2018 catastrophes
8


9


1


1

 
19


44

 
40

 
1

 
1

 
86

Development on 2017 and prior catastrophes
(7
)

2





 
(5
)

(16
)
 
4

 

 

 
(12
)
Calendar year incurred total
$
76


$
35


$
1


$
8

 
$
120


$
152

 
$
98

 
$
2

 
$
8

 
$
260

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 40



The following table includes data for losses incurred of $1 million or more per claim, net of reinsurance.
 
Consolidated Property Casualty Insurance Losses Incurred by Size
(Dollars in millions, net of reinsurance)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Current accident year losses greater than $5 million
 
$
(1
)
 
$
8

 
nm

 
$
13

 
$
29

 
(55
)
Current accident year losses $1 million - $5 million
 
76

 
70

 
9

 
166

 
164

 
1

Large loss prior accident year reserve development
 
33

 
10

 
230

 
54

 
48

 
13

Total large losses incurred
 
108

 
88

 
23

 
233

 
241

 
(3
)
Losses incurred but not reported
 
(24
)
 
(10
)
 
(140
)
 
9

 
87

 
(90
)
Other losses excluding catastrophe losses
 
566

 
482

 
17

 
1,606

 
1,435

 
12

Catastrophe losses
 
70

 
117

 
(40
)
 
268

 
251

 
7

Total losses incurred
 
$
720

 
$
677

 
6

 
$
2,116

 
$
2,014

 
5

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year losses greater than $5 million
 
(0.1
)%
 
0.7
 %
 
(0.8
)
 
0.3
%
 
0.8
%
 
(0.5
)
Current accident year losses $1 million - $5 million
 
5.5

 
5.7

 
(0.2
)
 
4.2

 
4.5

 
(0.3
)
Large loss prior accident year reserve development
 
2.4

 
0.7

 
1.7

 
1.4

 
1.3

 
0.1

Total large loss ratio
 
7.8

 
7.1

 
0.7

 
5.9

 
6.6

 
(0.7
)
Losses incurred but not reported
 
(1.8
)
 
(0.8
)
 
(1.0
)
 
0.2

 
2.4

 
(2.2
)
Other losses excluding catastrophe losses
 
41.2

 
39.0

 
2.2

 
40.5

 
39.0

 
1.5

Catastrophe losses
 
5.1

 
9.5

 
(4.4
)
 
6.8

 
6.9

 
(0.1
)
Total loss ratio
 
52.3
 %
 
54.8
 %
 
(2.5
)
 
53.4
%
 
54.9
%
 
(1.5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
We believe the inherent variability of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the variability in addition to general inflationary trends in loss costs. Our analysis continues to indicate no unexpected concentration of large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The third-quarter 2019 property casualty total large losses incurred of $108 million, net of reinsurance, were higher than the $83 million quarterly average during full-year 2018 and higher than the $88 million experienced for the third quarter of 2018. The ratio for these large losses was 0.7 percentage points higher compared with last year's third quarter. The third-quarter 2019 amount of total large losses incurred had an unfavorable effect on the nine-month 2019 total large loss ratio, compared with 2018, reducing the benefit of a first-half 2019 ratio that was 1.5 points lower than the first half of 2018. We believe results for the three- and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million. Losses by size are discussed in further detail in results of operations by property casualty insurance segment.
 

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 41



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


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 42



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

 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Earned premiums
 
$
834

 
$
805

 
4

 
$
2,467

 
$
2,407

 
2

Fee revenues
 
1

 
1

 
0

 
3

 
3

 
0

Total revenues
 
835

 
806

 
4

 
2,470

 
2,410

 
2

Loss and loss expenses from:
 
 

 
 

 
 

 
 

 
 

 
 

Current accident year before catastrophe losses
 
504

 
469

 
7

 
1,518

 
1,490

 
2

Current accident year catastrophe losses
 
39

 
83

 
(53
)
 
176

 
168

 
5

Prior accident years before catastrophe losses
 
(29
)
 
(30
)
 
3

 
(135
)
 
(98
)
 
(38
)
Prior accident years catastrophe losses
 
(4
)
 
(7
)
 
43

 
(18
)
 
(16
)
 
(13
)
Loss and loss expenses
 
510

 
515

 
(1
)
 
1,541

 
1,544

 
0

Underwriting expenses
 
269

 
257

 
5

 
785

 
770

 
2

Underwriting profit
 
$
56

 
$
34

 
65

 
$
144

 
$
96

 
50

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year before catastrophe losses
 
60.5
 %
 
58.2
 %
 
2.3

 
61.5
 %
 
61.9
 %
 
(0.4
)
Current accident year catastrophe losses
 
4.6

 
10.3

 
(5.7
)
 
7.1

 
7.0

 
0.1

Prior accident years before catastrophe losses
 
(3.4
)
 
(3.8
)
 
0.4

 
(5.4
)
 
(4.1
)
 
(1.3
)
Prior accident years catastrophe losses
 
(0.5
)
 
(0.8
)
 
0.3

 
(0.7
)
 
(0.7
)
 
0.0

Loss and loss expenses
 
61.2

 
63.9

 
(2.7
)
 
62.5

 
64.1

 
(1.6
)
Underwriting expenses
 
32.2

 
32.0

 
0.2

 
31.8

 
32.0

 
(0.2
)
Combined ratio
 
93.4
 %
 
95.9
 %
 
(2.5
)
 
94.3
 %
 
96.1
 %
 
(1.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
93.4
 %
 
95.9
 %
 
(2.5
)
 
94.3
 %
 
96.1
 %
 
(1.8
)
Contribution from catastrophe losses and prior
  years reserve development
 
0.7

 
5.7

 
(5.0
)
 
1.0

 
2.2

 
(1.2
)
Combined ratio before catastrophe losses and
  prior years reserve development
 
92.7
 %
 
90.2
 %
 
2.5

 
93.3
 %
 
93.9
 %
 
(0.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Overview
Performance highlights for the commercial lines segment include:
Premiums – Earned premiums and net written premiums for the commercial lines segment rose during the third quarter and first nine months of 2019, compared with the same periods a year ago, reflecting higher new business premiums and renewal written premium growth that continued to include higher average pricing. The table below analyzes the primary components of premiums. We continue to use predictive analytics tools to improve pricing precision and segmentation while leveraging our local relationships with agents through the efforts of our teams that work closely with them. We seek to maintain appropriate pricing discipline for both new and renewal business as our agents and underwriters assess account quality to make careful decisions on a case-by-case basis whether to write or renew a policy.
Agency renewal written premiums increased by 2% during the third quarter and the first nine months of 2019, compared with the same periods of 2018. During the third quarter of 2019, our overall standard commercial lines policies averaged estimated renewal price increases at percentages in the low-single-digit range, similar to the second quarter of 2019. We continue to segment commercial lines policies, emphasizing identification and retention of policies we believe have relatively stronger pricing. Conversely, we have been seeking stricter renewal terms and conditions on policies we believe have relatively weaker pricing, thus retaining fewer of those policies. We measure average changes in commercial lines renewal pricing as the percentage rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for the respective policies.
Our average overall commercial lines renewal pricing change includes the impact of flat pricing for certain coverages within package policies written for a three-year term that were in force but did not expire during the

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 43



period being measured. Therefore, our reported change in average commercial lines renewal pricing reflects a blend of three-year policies that did not expire and other policies that did expire during the measurement period. For commercial lines policies that did expire and were then renewed during the third quarter of 2019, we estimate that our average percentage price increase for commercial auto continued in the high-single-digit range. The estimated average percentage price change for our commercial property line of business was an increase in the mid-single-digit range and for commercial casualty it was an increase in the low-single-digit range, higher than the second quarter. The estimated average percentage price change for workers' compensation was a decrease in the mid-single-digit range.
Renewal premiums for certain policies, primarily our commercial casualty and workers' compensation lines of business, include the results of policy audits that adjust initial premium amounts based on differences between estimated and actual sales or payroll related to a specific policy. Audits completed during the first nine months of 2019 contributed $50 million to net written premiums.
New business written premiums for commercial lines increased $30 million and $65 million during the third quarter and first nine months of 2019, compared with the same periods of 2018. The increase reflected growth for each major line of business in our commercial lines insurance segment. Trend analysis for year-over-year comparisons of individual quarters is more difficult to assess for commercial lines new business written premiums, due to inherent variability. That variability is often driven by larger policies with annual premiums greater than $100,000.
Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. For our commercial lines insurance segment, an increase in ceded premiums reduced net written premiums by less than $1 million and $7 million for the third quarter and first nine months of 2019, compared with the same periods of 2018.

Commercial Lines Insurance Premiums
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Agency renewal written premiums
 
$
713

 
$
702

 
2

 
$
2,279

 
$
2,231

 
2

Agency new business written premiums
 
124

 
94

 
32

 
381

 
316

 
21

Other written premiums
 
(21
)
 
(22
)
 
5

 
(69
)
 
(63
)
 
(10
)
Net written premiums
 
816

 
774

 
5

 
2,591

 
2,484

 
4

Unearned premium change
 
18

 
31

 
(42
)
 
(124
)
 
(77
)
 
(61
)
Earned premiums
 
$
834

 
$
805

 
4

 
$
2,467

 
$
2,407

 
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio – The commercial lines third-quarter 2019 combined ratio improved by 2.5 percentage points, compared with the same period a year ago, including a decrease of 5.4 points in losses from natural catastrophes. For the first nine months of 2019, the combined ratio decreased by 1.8 percentage points, compared with the same period a year ago, despite an increase of 0.1 points in losses from natural catastrophes. Underwriting results for the nine-month period included a higher level of favorable reserve development on prior accident years in addition to better loss experience for the current accident year.
The current accident year loss and loss expenses before catastrophe losses ratio for commercial lines improved in the first nine months of 2019. That 61.5% ratio was 0.4 percentage points lower, compared with the 61.9% accident year 2018 ratio measured as of September 30, 2018, including a decrease of 1.2 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
Catastrophe losses and loss expenses accounted for 4.1 and 6.4 percentage points of the combined ratio for the third quarter and first nine months of 2019, compared with 9.5 and 6.3 percentage points for the same periods a year ago. Through 2018, the 10-year annual average for that catastrophe measure for the commercial lines segment was 5.4 percentage points, and the five-year annual average was 5.1 percentage points.
The net effect of reserve development on prior accident years during the third quarter and first nine months of 2019 was favorable for commercial lines overall by $33 million and $153 million, compared with $37 million and $114 million for the same periods in 2018. For the first nine months of 2019, our commercial casualty and workers' compensation lines of business were the largest contributors to the total commercial lines net favorable reserve development on prior accident years, representing approximately 80% of the total. The net favorable reserve development recognized during the first nine months of 2019 for our commercial

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 44



lines insurance segment was largely for accident years 2017 through 2018 and was primarily due to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2018 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 54.
The commercial lines underwriting expense ratio increased for the third quarter and decreased for the first nine months of 2019, compared with the same periods a year ago. The ratio for the first nine months of 2019 is within 0.1 percentage point of our full-year 2018 ratio, reflecting ongoing expense management efforts and higher earned premiums.

Commercial Lines Insurance Losses Incurred by Size
(Dollars in millions, net of reinsurance)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Current accident year losses greater than $5
  million
 
$
(1
)
 
$
8

 
nm

 
$
13

 
$
29

 
(55
)
Current accident year losses $1 million - $5
  million
 
56

 
62

 
(10
)
 
124

 
135

 
(8
)
Large loss prior accident year reserve
  development
 
32

 
11

 
191

 
48

 
41

 
17

Total large losses incurred
 
87

 
81

 
7

 
185

 
205

 
(10
)
Losses incurred but not reported
 
(22
)
 
(23
)
 
4

 
14

 
46

 
(70
)
Other losses excluding catastrophe losses
 
314

 
284

 
11

 
919

 
856

 
7

Catastrophe losses
 
32

 
75

 
(57
)
 
151

 
148

 
2

Total losses incurred
 
$
411

 
$
417

 
(1
)
 
$
1,269

 
$
1,255

 
1

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year losses greater than $5
  million
 
(0.1
)%
 
1.1
 %
 
(1.2
)
 
0.5
%
 
1.2
%
 
(0.7
)
Current accident year losses $1 million - $5
  million
 
6.8

 
7.7

 
(0.9
)
 
5.1

 
5.6

 
(0.5
)
Large loss prior accident year reserve
  development
 
3.8

 
1.3

 
2.5

 
1.9

 
1.7

 
0.2

Total large loss ratio
 
10.5

 
10.1

 
0.4

 
7.5

 
8.5

 
(1.0
)
Losses incurred but not reported
 
(2.6
)
 
(2.9
)
 
0.3

 
0.6

 
1.9

 
(1.3
)
Other losses excluding catastrophe losses
 
37.6

 
35.3

 
2.3

 
37.2

 
35.6

 
1.6

Catastrophe losses
 
3.8

 
9.3

 
(5.5
)
 
6.1

 
6.2

 
(0.1
)
Total loss ratio
 
49.3
 %
 
51.8
 %
 
(2.5
)
 
51.4
%
 
52.2
%
 
(0.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 

We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The third-quarter 2019 commercial lines total large losses incurred of $87 million, net of reinsurance, were higher than the quarterly average of $71 million during full-year 2018 and the $81 million total large losses incurred for the third quarter of 2018. The decrease in commercial lines large losses for the first nine months of 2019 was primarily due to our commercial casualty and commercial property lines of business. The third-quarter 2019 ratio for commercial lines total large losses was 0.4 percentage points higher than last year's third-quarter ratio. The third-quarter 2019 amount of total large losses incurred had a minor, but unfavorable, effect on the decrease in the nine-month 2019 total large loss ratio, compared with 2018, reducing the benefit of a first-half 2019 ratio that was 1.7 points lower than the first half of 2018. We believe results for the three- and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 45



PERSONAL LINES INSURANCE RESULTS
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Earned premiums
 
$
354

 
$
338

 
5

 
$
1,046

 
$
994

 
5

Fee revenues
 
1

 
1

 
0

 
3

 
4

 
(25
)
Total revenues
 
355

 
339

 
5

 
1,049

 
998

 
5

Loss and loss expenses from:
 
 

 
 

 
 

 
 

 
 

 
 

Current accident year before catastrophe losses
 
226

 
216

 
5

 
651

 
646

 
1

Current accident year catastrophe losses
 
25

 
33

 
(24
)
 
101

 
94

 
7

Prior accident years before catastrophe losses
 
(5
)
 
(2
)
 
(150
)
 
(21
)
 
12

 
nm

Prior accident years catastrophe losses
 
(2
)
 
2

 
nm

 
3

 
4

 
(25
)
Loss and loss expenses
 
244

 
249

 
(2
)
 
734

 
756

 
(3
)
Underwriting expenses
 
108

 
99

 
9

 
311

 
292

 
7

Underwriting profit (loss)
 
$
3

 
$
(9
)
 
nm

 
$
4

 
$
(50
)
 
nm

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year before catastrophe losses
 
63.8
 %
 
64.0
 %
 
(0.2
)
 
62.2
 %
 
65.0
%
 
(2.8
)
Current accident year catastrophe losses
 
7.2

 
9.7

 
(2.5
)
 
9.7

 
9.5

 
0.2

Prior accident years before catastrophe losses
 
(1.3
)
 
(0.5
)
 
(0.8
)
 
(2.0
)
 
1.2

 
(3.2
)
Prior accident years catastrophe losses
 
(0.5
)
 
0.5

 
(1.0
)
 
0.3

 
0.3

 
0.0

Loss and loss expenses
 
69.2

 
73.7

 
(4.5
)
 
70.2

 
76.0

 
(5.8
)
Underwriting expenses
 
30.4

 
29.3

 
1.1

 
29.7

 
29.4

 
0.3

Combined ratio
 
99.6
 %
 
103.0
 %
 
(3.4
)
 
99.9
 %
 
105.4
%
 
(5.5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
99.6
 %
 
103.0
 %
 
(3.4
)
 
99.9
 %
 
105.4
%
 
(5.5
)
Contribution from catastrophe losses and prior
  years reserve development
 
5.4

 
9.7

 
(4.3
)
 
8.0

 
11.0

 
(3.0
)
Combined ratio before catastrophe losses and
  prior years reserve development
 
94.2
 %
 
93.3
 %
 
0.9

 
91.9
 %
 
94.4
%
 
(2.5
)
 
 
 
 
 
 
 
 
 
 
 
 
 

Overview
Performance highlights for the personal lines segment include:
Premiums – Personal lines earned premiums and net written premiums continued to grow during the third quarter and first nine months of 2019, primarily due to increases in agency renewal written premiums reflecting higher average pricing. Personal lines net written premiums from high net worth policies totaled approximately $110 million and $302 million for the third quarter and first nine months of 2019, compared with $83 million and $233 million for the same periods of 2018. The table below analyzes the primary components of premiums.
Agency renewal written premiums increased 4% for the third quarter and 6% for the first nine months of 2019, largely due to rate increases in select states. We estimate that premium rates for our personal auto line of business increased at average percentages in the high-single-digit range during the first nine months of 2019. For our homeowner line of business, we estimate that premium rates for the first nine months of 2019 increased at average percentages in the mid-single-digit range. For both our personal auto and homeowner lines of business, some individual policies experienced lower or higher rate changes based on each risk's specific characteristics and enhanced pricing precision enabled by predictive models.
Personal lines new business written premiums decreased by 5% and 4% during the third quarter and first nine months of 2019, compared with the same periods of 2018, reflecting pricing discipline, particularly in select states.
Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. For our personal lines insurance segment, an increase in ceded premiums reduced net written premiums by less than $1 million and $5 million for the third quarter and first nine months of 2019, compared with the same periods of 2018.

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 46



We continue to implement strategies discussed in our 2018 Annual Report on Form 10-K, Item 1, Strategic Initiatives, Page 14, to enhance our responsiveness to marketplace changes and to help achieve our long-term objectives for personal lines growth and profitability. These strategies include initiatives to more profitably underwrite personal auto policies.
 
Personal Lines Insurance Premiums
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Agency renewal written premiums
 
$
356

 
$
342

 
4

 
$
1,003

 
$
948

 
6

Agency new business written premiums
 
40

 
42

 
(5
)
 
122

 
127

 
(4
)
Other written premiums
 
(8
)
 
(7
)
 
(14
)
 
(26
)
 
(20
)
 
(30
)
Net written premiums
 
388

 
377

 
3

 
1,099

 
1,055

 
4

Unearned premium change
 
(34
)
 
(39
)
 
13

 
(53
)
 
(61
)
 
13

Earned premiums
 
$
354

 
$
338

 
5

 
$
1,046

 
$
994

 
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio – Our personal lines combined ratio improved for the third quarter and first nine months of 2019, compared with the same periods a year ago. The third-quarter improvement was primarily due to lower weather-related natural catastrophe losses and loss expenses, but also reflected better loss experience before catastrophe effects. The nine-month improvement was primarily due to better experience in the ratio for current accident year loss and loss expenses before catastrophe losses and favorable reserve development on prior accident years.
The current accident year loss and loss expenses before catastrophe losses ratio for personal lines improved in the first nine months of 2019. That 62.2% ratio was 2.8 percentage points lower, compared with the 65.0% accident year 2018 ratio measured as of September 30, 2018, including an increase of 0.9 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
Catastrophe losses and loss expenses accounted for 6.7 and 10.0 percentage points of the combined ratio for the third quarter and first nine months of 2019, compared with 10.2 and 9.8 percentage points for the same periods of last year. Through 2018, the 10-year annual average catastrophe loss ratio for the personal lines segment was 10.9 percentage points, and the five-year annual average was 8.9 percentage points.
In addition to the average rate increases discussed above, we continue to refine our pricing to better match premiums to the risk of loss on individual policies. Improved pricing precision and broad-based rate increases are expected to help position the combined ratio at a profitable level over the long term. In addition, greater geographic diversification is expected to reduce the volatility of homeowner loss ratios attributable to weather-related catastrophe losses over time.
Our homeowner line of business, representing 42% of our 2018 personal lines earned premiums, was the only major line in this segment with a nine-month 2019 total loss and loss expense ratio before catastrophe losses significantly higher than we desired, although it improved compared with the prior-year period. Its catastrophe loss experience has been elevated in recent quarters, in part due to wildfire losses that have affected much of the property casualty industry. In recent quarters, our homeowner policies have experienced average renewal price increases at percentages near the high end of the mid-single-digit range. We believe rate increases and other actions to improve pricing precision and reduce loss costs will improve future profitability.
The net effect of reserve development on prior accident years during the third quarter and first nine months of 2019 was favorable for personal lines overall by $7 million and $18 million, compared with less than $1 million for the third quarter a year ago and $16 million of unfavorable net reserve development for the first nine months of 2018. Our personal auto line of business was the largest contributor to the 2019 total personal lines net favorable reserve development on prior accident years, partially offset by net unfavorable reserve development for our homeowner line of business. The net favorable reserve development was primarily due to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2018 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 54.
The underwriting expense ratio increased for the third quarter and first nine months of 2019, compared with the same periods a year ago, largely due to more agency profit-sharing commissions. The ratio for both periods also reflects ongoing expense management efforts and higher earned premiums.

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 47



 
Personal Lines Insurance Losses Incurred by Size
(Dollars in millions, net of reinsurance)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Current accident year losses greater than $5 million
 
$

 
$

 
nm

 
$

 
$

 
nm

Current accident year losses $1 million - $5 million
 
20

 
7

 
186

 
39

 
28

 
39

Large loss prior accident year reserve development
 
(1
)
 
(1
)
 

 
2

 
7

 
(71
)
Total large losses incurred
 
19

 
6

 
217

 
41

 
35

 
17

Losses incurred but not reported
 

 
11

 
(100
)
 
(1
)
 
41

 
nm

Other losses excluding catastrophe losses
 
172

 
172

 

 
504

 
496

 
2

Catastrophe losses
 
23

 
33

 
(30
)
 
101

 
95

 
6

Total losses incurred
 
$
214

 
$
222

 
(4
)
 
$
645

 
$
667

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

 
 %
 
%
 
0.0

Current accident year losses $1 million - $5 million
 
5.4

 
2.0

 
3.4

 
3.7

 
2.8

 
0.9

Large loss prior accident year reserve development
 
(0.2
)
 
(0.3
)
 
0.1

 
0.2

 
0.7

 
(0.5
)
Total large loss ratio
 
5.2

 
1.7

 
3.5

 
3.9

 
3.5

 
0.4

Losses incurred but not reported
 
(0.1
)
 
3.4

 
(3.5
)
 
(0.1
)
 
4.2

 
(4.3
)
Other losses excluding catastrophe losses
 
48.9

 
50.5

 
(1.6
)
 
48.1

 
49.7

 
(1.6
)
Catastrophe losses
 
6.4

 
10.0

 
(3.6
)
 
9.7

 
9.6

 
0.1

Total loss ratio
 
60.4
 %
 
65.6
 %
 
(5.2
)
 
61.6
 %
 
67.0
%
 
(5.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 

We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the third quarter of 2019, the personal lines total large loss ratio, net of reinsurance, was 3.5 percentage points higher than last year's third quarter. The increase in personal lines large losses for the first nine months of 2019 occurred primarily for our homeowner line of business. The third-quarter 2019 amount of total large losses incurred drove the increase in the nine-month 2019 total large loss ratio, compared with 2018, offsetting a first-half 2019 ratio that was 1.2 points lower than the first half of 2018. We believe results for the three- and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 48



EXCESS AND SURPLUS LINES INSURANCE RESULTS
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Earned premiums
 
$
72

 
$
60

 
20

 
$
202

 
$
173

 
17

Fee revenues
 
1

 

 
nm

 
2

 
1

 
100

Total revenues
 
73

 
60

 
22

 
204

 
174

 
17

 
 
 
 
 
 
 
 
 
 
 
 
 
Loss and loss expenses from:
 
 

 
 

 
 

 
 

 
 

 
 

Current accident year before catastrophe losses
 
41

 
32

 
28

 
110

 
95

 
16

Current accident year catastrophe losses
 
1

 
1

 
0

 
1

 
2

 
(50
)
Prior accident years before catastrophe losses
 
(3
)
 
(8
)
 
63

 
(10
)
 
(22
)
 
55

Prior accident years catastrophe losses
 

 

 
0

 

 

 
0

Loss and loss expenses
 
39

 
25

 
56

 
101

 
75

 
35

Underwriting expenses
 
22

 
18

 
22

 
63

 
51

 
24

Underwriting profit
 
$
12

 
$
17

 
(29
)
 
$
40

 
$
48

 
(17
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year before catastrophe losses
 
57.6
 %
 
53.3
 %
 
4.3

 
54.7
 %
 
54.9
 %
 
(0.2
)
Current accident year catastrophe losses
 
0.6

 
0.9

 
(0.3
)
 
0.5

 
1.2

 
(0.7
)
Prior accident years before catastrophe losses
 
(6.0
)
 
(11.3
)
 
5.3

 
(5.5
)
 
(12.6
)
 
7.1

Prior accident years catastrophe losses
 
0.5

 
(0.3
)
 
0.8

 
0.1

 
0.0

 
0.1

Loss and loss expenses
 
52.7

 
42.6

 
10.1

 
49.8

 
43.5

 
6.3

Underwriting expenses
 
30.5

 
29.4

 
1.1

 
31.1

 
29.3

 
1.8

Combined ratio
 
83.2
 %
 
72.0
 %
 
11.2

 
80.9
 %
 
72.8
 %
 
8.1

 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
83.2
 %
 
72.0
 %
 
11.2

 
80.9
 %
 
72.8
 %
 
8.1

Contribution from catastrophe losses and prior
  years reserve development
 
(4.9
)
 
(10.7
)
 
5.8

 
(4.9
)
 
(11.4
)
 
6.5

Combined ratio before catastrophe losses and
  prior years reserve development
 
88.1
 %
 
82.7
 %
 
5.4

 
85.8
 %
 
84.2
 %
 
1.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Overview
Performance highlights for the excess and surplus lines segment include:
Premiums – Excess and surplus lines net written premiums continued to grow during the third quarter and first nine months of 2019, compared with the same periods a year ago, primarily due to an increase in new business written premiums. Agency renewal written premiums also grew. For the first nine months of 2019, excess and surplus lines policy renewals experienced estimated average price increases at percentages in the low-single-digit range. We measure average changes in excess and surplus lines renewal pricing as the percentage rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies.
New business written premiums produced by agencies increased by $10 million for the third quarter and $31 million for the first nine months of 2019, compared with the same periods of 2018. We believe the unusually large increases reflect more opportunities in the marketplace for insurance companies to obtain higher premium rates, plus our additional marketing efforts. Some of what we report as new business came from accounts that were not new to our agents. We believe our agents' seasoned accounts tend to be priced more accurately than business that may be less familiar to them.
 

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 49



Excess and Surplus Lines Insurance Premiums
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Agency renewal written premiums
 
$
50

 
$
44

 
14

 
$
153

 
$
142

 
8

Agency new business written premiums
 
28

 
18

 
56

 
82

 
51

 
61

Other written premiums
 
(4
)
 
(3
)
 
(33
)
 
(12
)
 
(9
)
 
(33
)
Net written premiums
 
74

 
59

 
25

 
223

 
184

 
21

Unearned premium change
 
(2
)
 
1

 
nm

 
(21
)
 
(11
)
 
(91
)
Earned premiums
 
$
72

 
$
60

 
20

 
$
202

 
$
173

 
17

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio – The excess and surplus lines combined ratio increased by 11.2 and 8.1 percentage points for the third quarter and first nine months of 2019, compared with the same periods of 2018. The increases were primarily due to less favorable reserve development on prior accident years.
The current accident year loss and loss expenses before catastrophe losses ratio for excess and surplus lines improved in the first nine months of 2019. That 54.7% ratio was 0.2 percentage points lower, compared with the 54.9% accident year 2018 ratio measured as of September 30, 2018, despite an increase of 0.8 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
Excess and surplus lines net favorable reserve development on prior accident years, as a ratio to earned premiums, was 5.5% and 5.4% for the third quarter and first nine months of 2019, compared with 11.6% and 12.6% for the same periods of 2018. The net favorable reserve development recognized during the first nine months of 2019 was largely attributable to accident year 2018 and primarily due to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2018 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 54.
The excess and surplus lines underwriting expense ratio for the third quarter and first nine months of 2019 increased, compared with the same periods of 2018, primarily due to higher internal expense allocations that offset higher earned premiums and ongoing expense management efforts.
 

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 50



Excess and Surplus Lines Insurance Losses Incurred by Size
(Dollars in millions, net of reinsurance)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Current accident year losses greater than $5 million
 
$

 
$

 
nm

 
$

 
$

 
nm

Current accident year losses $1 million - $5 million
 

 
1

 
(100
)
 
3

 
1

 
200

Large loss prior accident year reserve development
 
2

 

 
nm

 
4

 

 
nm

Total large losses incurred
 
2

 
1

 
100

 
7

 
1

 
600

Losses incurred but not reported
 
(2
)
 
2

 
nm

 
(4
)
 

 
nm

Other losses excluding catastrophe losses
 
25

 
11

 
127

 
61

 
42

 
45

Catastrophe losses
 
1

 
1

 

 
1

 
2

 
(50
)
Total losses incurred
 
$
26

 
$
15

 
73

 
$
65

 
$
45

 
44

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

 
 %
 
 %
 
0.0

Current accident year losses $1 million - $5 million
 

 
1.9

 
(1.9
)
 
1.5

 
0.7

 
0.8

Large loss prior accident year reserve development
 
2.7

 
0.4

 
2.3

 
1.8

 
(0.1
)
 
1.9

Total large loss ratio
 
2.7

 
2.3

 
0.4

 
3.3

 
0.6

 
2.7

Losses incurred but not reported
 
(2.6
)
 
4.3

 
(6.9
)
 
(2.2
)
 
0.1

 
(2.3
)
Other losses excluding catastrophe losses
 
34.5

 
18.7

 
15.8

 
30.3

 
24.4

 
5.9

Catastrophe losses
 
1.0

 
0.5

 
0.5

 
0.6

 
1.1

 
(0.5
)
Total loss ratio
 
35.6
 %
 
25.8
%
 
9.8

 
32.0
 %
 
26.2
 %
 
5.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the third quarter of 2019, the excess and surplus lines total ratio for large losses, net of reinsurance, was 0.4 percentage points higher than last year's third quarter. The third-quarter 2019 amount of total large losses incurred helped contribute to the increase in the nine-month 2019 total large loss ratio, compared with 2018, in addition to the effect of a first-half 2019 ratio that was 4.0 points higher than the first half of 2018. We believe results for the three- and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.
 


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 51



LIFE INSURANCE RESULTS
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Earned premiums
 
$
70

 
$
61

 
15

 
$
203

 
$
185

 
10

Fee revenues
 
1

 
1

 
0

 
3

 
3

 
0

Total revenues
 
71

 
62

 
15

 
206

 
188

 
10

Contract holders' benefits incurred
 
68

 
66

 
3

 
211

 
191

 
10

Investment interest credited to contract holders'
 
(25
)
 
(24
)
 
(4
)
 
(74
)
 
(72
)
 
(3
)
Underwriting expenses incurred
 
23

 
17

 
35

 
67

 
56

 
20

Total benefits and expenses
 
66

 
59

 
12

 
204

 
175

 
17

Life insurance segment profit
 
$
5

 
$
3

 
67

 
$
2

 
$
13

 
(85
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Overview
Performance highlights for the life insurance segment include:
Revenues – Revenues increased for the nine months ended September 30, 2019, compared with the same period a year ago, primarily due to higher earned premiums from term life insurance, our largest life insurance product line.
Net in-force life insurance policy face amounts increased to $69.197 billion at September 30, 2019, from $66.142 billion at year-end 2018.
Fixed annuity deposits received for the three and nine months ended September 30, 2019, were $11 million and $31 million, compared with $6 million and $23 million for the same periods of 2018. Fixed annuity deposits have a minimal impact to earned premiums because deposits received are initially recorded as liabilities. Profit is earned over time by way of interest-rate spreads. We do not write variable or equity-indexed annuities.
 
Life Insurance Premiums
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,

 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Term life insurance
 
$
47

 
$
42

 
12
 
$
139

 
$
127

 
9
Universal life insurance
 
11

 
9

 
22
 
31

 
27

 
15
Other life insurance and annuity products
 
12

 
10

 
20
 
33

 
31

 
6
Net earned premiums
 
$
70

 
$
61

 
15
 
$
203

 
$
185

 
10
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Profitability – Our life insurance segment typically reports a small profit or loss on a GAAP basis because profits from investment income spreads are included in our investment segment results. We include only investment income credited to contract holders (including interest assumed in life insurance policy reserve calculations) in our life insurance segment results. A gain of $2 million for our life insurance segment in the first nine months of 2019, compared with a gain of $13 million for the same period of 2018, was primarily due to increased mortality expense and less favorable effects from the unlocking of interest rate and actuarial assumptions.
Life insurance segment benefits and expenses consist principally of contract holders' (policyholders') benefits incurred related to traditional life and interest-sensitive products and operating expenses incurred, net of deferred acquisition costs. Total benefits increased in the first nine months of 2019. Life policy and investment contract reserves increased with continued growth in net in-force life insurance policy face amounts. Mortality results increased, compared with the same period of 2018, and were slightly higher than our 2019 projections.
Underwriting expenses for the first nine months of 2019 increased compared with the same period a year ago. For the first nine months of 2019, unlocking of interest rate and other actuarial assumptions decreased the amount of expenses deferred to future periods, increasing underwriting expenses. For the first nine months of 2018, unlocking of interest rate and other actuarial assumptions increased the amount of expenses deferred to future periods, decreasing underwriting expenses.

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 52



We recognize that assets under management, capital appreciation and investment income are integral to evaluating the success of the life insurance segment because of the long duration of life products. On a basis that includes investment income and investment gains or losses from life-insurance-related invested assets, the life insurance company reported net income of $12 million and $30 million for the three and nine months ended September 30, 2019, compared with net income of $15 million and $45 million for the same periods of 2018. The life insurance company portfolio had net after-tax investment losses of $1 million and $3 million for the three and nine months ended September 30, 2019, compared with less than $1 million of net after-tax investment losses for the three and nine months ended September 30, 2018.

INVESTMENTS RESULTS
 
Overview
The investments segment contributes investment income and investment gains and losses to results of operations. Investments traditionally are our primary source of pretax and after-tax profits.
 
Investment Income
Pretax investment income increased 5% for the third quarter of 2019 and 4% for the nine months ended September 30, 2019, compared with the same periods of 2018. Interest income was essentially flat, reflecting net purchases of fixed-maturity securities that generally offset the continuing effects of the low interest rate environment. Higher dividend income reflected rising dividend rates and net purchases of equity securities in recent quarters.

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

 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Total investment income, net of expenses
 
$
161

 
$
154

 
5

 
$
478

 
$
458

 
4

Investment interest credited to contract holders'
 
(25
)
 
(24
)
 
(4
)
 
(74
)
 
(72
)
 
(3
)
Investment gains and losses, net
 
86

 
458

 
(81
)
 
1,113

 
372

 
199

Investments profit, pretax
 
$
222

 
$
588

 
(62
)
 
$
1,517

 
$
758

 
100

 
 
 
 
 
 
 
 
 
 
 
 
 

We continue to position our portfolio considering both the challenges presented by the current low interest rate environment and the risks presented by potential future inflation. As bonds in our generally laddered portfolio mature or are called over the near term, we will be challenged to replace their current yield. The table below shows the average pretax yield-to-amortized cost associated with expected principal redemptions for our fixed-maturity portfolio. The expected principal redemptions are based on par amounts and include dated maturities, calls and prefunded municipal bonds that we expect will be called during each respective time period.
(Dollars in millions)
% Yield
 
Principal redemptions
At September 30, 2019
 
Fixed-maturity pretax yield profile:
 
 
 
Expected to mature during the remainder of 2019
4.77
%
 
$
91

Expected to mature during 2020
4.63

 
600

Expected to mature during 2021
4.35

 
984

Average yield and total expected maturities from the remainder of 2019 through 2021
4.47

 
$
1,675

 
 
 
 


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 53



The table below shows the average pretax yield-to-amortized cost for fixed-maturity securities acquired during the periods indicated. The average yield for total fixed-maturity securities acquired during the first nine months of 2019 was slightly lower than the 4.20% average yield-to-amortized cost of the fixed-maturity securities portfolio at the end of 2018. Our fixed-maturity portfolio's average yield of 4.09% for the first nine months of 2019, from the investment income table below, was also lower than that yield for the year-end 2018 fixed-maturities portfolio.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Average pretax yield-to-amortized cost on new fixed-maturities:
 
 
 
 
 
 
 
Acquired taxable fixed-maturities
3.97
%
 
4.53
%
 
4.42
%
 
4.43
%
Acquired tax-exempt fixed-maturities
3.14

 
3.87

 
3.19

 
3.63

Average total fixed-maturities acquired
3.86

 
4.43

 
4.19

 
4.34

 
 
 
 
 
 
 
 

While our bond portfolio more than covers our insurance reserve liabilities, we believe our diversified common stock portfolio of mainly blue chip, dividend-paying companies represents one of our best investment opportunities for the long term. We discussed our portfolio strategies in our 2018 Annual Report on Form 10-K, Item 1, Investments Segment, Page 26, and Item 7, Investments Outlook, Page 91. We discuss risks related to our investment income and our fixed-maturity and equity investment portfolios in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk.

The table below provides details about investment income. Average yields in this table are based on the average invested asset and cash amounts indicated in the table, using fixed-maturity securities valued at amortized cost and all other securities at fair value.
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019

2018
 
% Change
Investment income:
 
 

 
 

 
 

 
 

 
 

 
 

Interest
 
$
110

 
$
111

 
(1
)
 
$
332

 
$
333

 
0

Dividends
 
50

 
45

 
11

 
146

 
131

 
11

Other
 
5

 
1

 
400

 
10

 
3

 
233

Less investment expenses
 
4

 
3

 
33

 
10

 
9

 
11

Investment income, pretax
 
161

 
154

 
5

 
478

 
458

 
4

Less income taxes
 
26

 
24

 
8

 
75

 
70

 
7

Total investment income, after-tax
 
$
135

 
$
130

 
4

 
$
403

 
$
388

 
4

 
 
 
 
 
 
 
 
 
 
 
 
 
Investment returns:
 
 
 
 
 
 
 
 
 
 
 
 
Average invested assets plus cash and cash equivalents
 
$
19,088

 
$
17,712

 
 
 
$
18,364

 
$
17,683

 
 
Average yield pretax
 
3.37
%
 
3.48
%
 
 
 
3.47
%
 
3.45
%
 
 
Average yield after-tax
 
2.83

 
2.94

 
 
 
2.93

 
2.93

 
 
Effective tax rate
 
15.7

 
15.4

 
 
 
15.6

 
15.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-maturity returns:
 
 
 
 
 
 
 
 
 
 
 
 
Average amortized cost
 
$
10,922

 
$
10,603

 
 
 
$
10,828

 
$
10,484

 
 
Average yield pretax
 
4.03
%
 
4.19
%
 
 
 
4.09
%
 
4.24
%
 
 
Average yield after-tax
 
3.36

 
3.50

 
 
 
3.41

 
3.54

 
 
Effective tax rate
 
16.5

 
16.5

 
 
 
16.6

 
16.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 54



Total Investment Gains and Losses
Investment gains and losses are recognized on the sales of investments, for certain changes in fair values of securities even though we continue to hold the securities or as otherwise required by GAAP. The change in fair value for equity securities still held are included in investment gains and losses and also in net income. The change in unrealized gains or losses for fixed-maturity securities are included as a component of other comprehensive income (OCI). Accounting requirements for other-than-temporary impairment (OTTI) charges for the fixed-maturity portfolio are disclosed in our 2018 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 128.
 
The table below summarizes total investment gains and losses, before taxes.
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019

2018
Investment gains and losses:
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Investment gains and losses on securities sold, net
 
$

 
$
8

 
$
27

 
$
17

Unrealized gains and losses on securities still held, net
 
89

 
450

 
1,084

 
351

Subtotal
 
89

 
458

 
1,111

 
368

Fixed maturities:
 
 
 
 
 
 
 
 
Gross realized gains
 
6

 
2

 
9

 
9

Gross realized losses
 
(1
)
 
(1
)
 
(3
)
 
(2
)
Other-than-temporary impairments
 
(6
)
 

 
(6
)
 

Subtotal
 
(1
)
 
1

 

 
7

Other
 
(2
)
 
(1
)
 
2

 
(3
)
Total investment gains and losses reported in net income
 
86

 
458

 
1,113

 
372

Change in unrealized investment gains and losses:
 
 
 
 
 
 
 
 
Fixed maturities
 
100

 
(77
)
 
542

 
(378
)
Total
 
$
186

 
$
381

 
$
1,655

 
$
(6
)
 
 
 
 
 
 
 
 
 

Of the 3,821 fixed-maturity securities in the portfolio, two securities were trading below 70% of amortized cost at September 30, 2019, with a fair value of $7 million and an unrealized loss of $3 million. Our asset impairment committee regularly monitors the portfolio, including a quarterly review of the entire portfolio for potential OTTI charges, resulting in charges disclosed in the table below. We believe that if liquidity in the markets were to significantly deteriorate or economic conditions were to significantly weaken, we could experience declines in portfolio values and possibly additional OTTI charges.

The table below provides additional details for OTTI charges.
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Fixed maturities:
 
 

 
 

 
 

 
 

Energy
 
$
6

 
$

 
$
6

 
$

Total fixed maturities
 
$
6

 
$

 
$
6

 
$

 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 55



OTHER
We report as Other the noninvestment operations of the parent company and a noninsurance subsidiary, CFC Investment Company. We also report as Other the underwriting results of Cincinnati Re, our reinsurance assumed operation, and Cincinnati Global, since its acquisition on February 28, 2019. Underwriting results in the table below for Cincinnati Re and Cincinnati Global include earned premiums, loss and loss expenses and underwriting expenses.

Total revenues for the first nine months of 2019 for our Other operations increased, compared with the same period of 2018, primarily due to earned premiums from Cincinnati Re and Cincinnati Global, with increases of $41 million and $111 million, respectively. Total expenses for Other increased for the first nine months of 2019, primarily due to more losses and loss expenses from Cincinnati Re and Cincinnati Global.

Other loss in the table below represents losses before income taxes. For both periods shown, Other loss resulted largely from interest expense from debt of the parent company.
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Interest and fees on loans and leases
 
$
1

 
$
2

 
(50
)
 
$
4

 
$
4

 
0
Earned premiums
 
116

 
34

 
241

 
245

 
93

 
163
Other revenues
 
2

 

 
nm

 
3

 

 
nm
Total revenues
 
119

 
36

 
231

 
252

 
97

 
160
Interest expense
 
14

 
14

 
0

 
40

 
40

 
0
Loss and loss expenses
 
71

 
24

 
196

 
141

 
50

 
182
Underwriting expenses
 
33

 
10

 
230

 
70

 
30

 
133
Operating expenses
 
5

 
3

 
67

 
17

 
10

 
70
Total expenses
 
123

 
51

 
141

 
268

 
130

 
106
 Total other loss
 
$
(4
)
 
$
(15
)
 
73

 
$
(16
)
 
$
(33
)
 
52
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TAXES
We had $46 million and $320 million of income tax expense for the three and nine months ended September 30, 2019, compared with $65 million and $93 million for the same periods of 2018. The effective tax rate for the three and nine months ended September 30, 2019, was 15.6% and 18.9% compared with 10.5% and 11.2% for the same periods last year. The change in our effective tax rate between periods was due to changes in our net investment gains and losses as well as changes in our underwriting income. During the third quarter of 2018, our change in the effective tax rate included a reduction by 8.1% and 6.0% for the three months and nine months ended September 30, 2018, respectively, as a result of approved changes to our tax accounting methods, primarily related to the valuation of our tax base unpaid losses. For the three and nine months ended September 30, 2019, there was no material impact to our effective tax rate as a result of our Cincinnati Global acquisition.

Historically, we have pursued a strategy of investing some portion of cash flow in tax-advantaged fixed-maturity and equity securities to minimize our overall tax liability and maximize after-tax earnings. See Tax-Exempt Fixed Maturities in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk for further discussion on municipal bond purchases in our fixed-maturity investment portfolio. For our property casualty insurance subsidiaries, approximately 75% of interest from tax-advantaged fixed-maturity investments and approximately 40% of dividends from qualified equities are exempt from federal tax after applying proration from the 1986 Tax Reform Act. Our noninsurance companies own an immaterial amount of tax-advantaged fixed-maturity investments. For our noninsurance companies, the dividend received deduction exempts 50% of dividends from qualified equities. Our life insurance company does not own tax-advantaged fixed-maturity investments or equities subject to the dividend received deduction. Details about our effective tax rate are in this quarterly report Item 1, Note 9 – Income Taxes.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 56



LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2019, shareholders' equity was $9.371 billion, compared with $7.833 billion at December 31, 2018. Total debt was $826 million at September 30, 2019, up $6 million from December 31, 2018. At September 30, 2019, cash and cash equivalents totaled $787 million, compared with $784 million at December 31, 2018.

SOURCES OF LIQUIDITY
 
Subsidiary Dividends
Our lead insurance subsidiary declared dividends of $400 million to the parent company in the first nine months of 2019, compared with $300 million for the same period of 2018. For full-year 2018, subsidiary dividends declared totaled $500 million. State of Ohio regulatory requirements restrict the dividends our insurance subsidiary can pay. For full-year 2019, total dividends that our insurance subsidiary could pay to our parent company without regulatory approval are approximately $626 million.
 
Investing Activities
Investment income is a source of liquidity for both the parent company and its insurance subsidiaries. We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth.
 
Parent company obligations can be funded with income on investments held at the parent-company level or through sales of securities in that portfolio, although our investment philosophy seeks to compound cash flows over the long term. These sources of capital can help minimize subsidiary dividends to the parent company, protecting insurance subsidiary capital.

For a discussion of our historic investment strategy, portfolio allocation and quality, see our 2018 Annual Report on Form 10-K, Item 1, Investments Segment, Page 26.
 
Insurance Underwriting
Our property casualty and life insurance underwriting operations provide liquidity because we generally receive premiums before paying losses under the policies purchased with those premiums. After satisfying our cash requirements, we use excess cash flows for investment, increasing future investment income.
 
Historically, cash receipts from property casualty and life insurance premiums, along with investment income, have been more than sufficient to pay claims, operating expenses and dividends to the parent company.
 
The table below shows a summary of operating cash flow for property casualty insurance (direct method):
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Premiums collected
 
$
1,405

 
$
1,263

 
11

 
$
4,197

 
$
3,842

 
9

Loss and loss expenses paid
 
(830
)
 
(705
)
 
(18
)
 
(2,452
)
 
(2,114
)
 
(16
)
Commissions and other underwriting expenses paid
 
(385
)
 
(356
)
 
(8
)
 
(1,282
)
 
(1,227
)
 
(4
)
Cash flow from underwriting
 
190

 
202

 
(6
)
 
463

 
501

 
(8
)
Investment income received
 
118

 
110

 
7

 
338

 
321

 
5

Cash flow from operations
 
$
308

 
$
312

 
(1
)
 
$
801

 
$
822

 
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collected premiums for property casualty insurance rose $355 million during the first nine months of 2019, compared with the same period in 2018. Loss and loss expenses paid for the 2019 period increased $338 million. Commissions and other underwriting expenses paid increased $55 million, primarily due to higher commissions paid to agencies, reflecting the increase in collected premiums.
 
We discuss our future obligations for claims payments and for underwriting expenses in our 2018 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 97, and Other Commitments also on Page 97.
 

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 57



Capital Resources
At September 30, 2019, our debt-to-total-capital ratio was 8.1%, with $788 million in long-term debt and $38 million in borrowing on our revolving short-term line of credit. That line of credit had a $32 million balance at December 31, 2018. At September 30, 2019, $262 million was available for future cash management needs as part of the general provisions of the line of credit agreement, with another $300 million available as part of an accordion feature. Based on our capital requirements at September 30, 2019, we do not anticipate a material increase in debt levels exceeding the available line of credit amount during the remainder of the year. As a result, we expect changes in our debt-to-total-capital ratio to continue to be largely a function of the contribution of unrealized investment gains or losses to shareholders' equity. As part of our Cincinnati Global acquisition, on February 25, 2019, we entered into an unsecured letter of credit agreement to provide a portion of the capital needed to support its obligations at Lloyd's. The amount of this unsecured letter of credit agreement was $234 million at September 30, 2019.
 
We provide details of our three long-term notes in this quarterly report Item 1, Note 3 – Fair Value Measurements. None of the notes are encumbered by rating triggers.
 
Four independent ratings firms award insurer financial strength ratings to our property casualty insurance companies and three firms rate our life insurance company. Those firms made no changes to our parent company debt ratings during the first nine months of 2019. Our debt ratings are discussed in our 2018 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, Other Sources of Liquidity, Page 95.
 
Off-Balance Sheet Arrangements
We do not use any special-purpose financing vehicles or have any undisclosed off-balance sheet arrangements (as that term is defined in applicable SEC rules) that are reasonably likely to have a current or future material effect on the company's financial condition, results of operation, liquidity, capital expenditures or capital resources. Similarly, the company holds no fair-value contracts for which a lack of marketplace quotations would necessitate the use of fair-value techniques.
 
USES OF LIQUIDITY
Our parent company and insurance subsidiary have contractual obligations and other commitments. In addition, one of our primary uses of cash is to enhance shareholder return.
 
Contractual Obligations
We estimated our future contractual obligations as of December 31, 2018, in our 2018 Annual Report on Form
10-K, Item 7, Contractual Obligations, Page 97. There have been no material changes to our estimates of future contractual obligations since our 2018 Annual Report on Form 10-K.

Other Commitments
In addition to our contractual obligations, we have other property casualty operational commitments.
Commissions – Commissions paid were $806 million in the first nine months of 2019. Commission payments generally track with written premiums, except for annual profit-sharing commissions typically paid during the first quarter of the year.
Other underwriting expenses – Many of our underwriting expenses are not contractual obligations, but reflect the ongoing expenses of our business. Noncommission underwriting expenses paid were $476 million in the first nine months of 2019.
Technology costs – In addition to contractual obligations for hardware and software, we anticipate capitalizing up to $7 million in spending for key technology initiatives in 2019. Capitalized development costs related to key technology initiatives were $6 million in the first nine months of 2019. These activities are conducted at our discretion, and we have no material contractual obligations for activities planned as part of these projects.
Funds at Lloyd's – From time to time, we may be required to meet certain cash funding requirements on behalf of Cincinnati Global. During the first nine months of 2019, the parent company deposited $50 million with Lloyd's to meet these funding requirements. 

There were no contributions to our qualified pension plan during the first nine months of 2019.
 

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 58



Investing Activities
After fulfilling operating requirements, we invest cash flows from underwriting, investment and other corporate activities in fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We discuss our investment strategy and certain portfolio attributes in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk.
 
Uses of Capital
Uses of cash to enhance shareholder return include dividends to shareholders. In February 2019, the board of directors declared regular quarterly cash dividends of 56 cents per share for an indicated annual rate of $2.24 per share. During the first nine months of 2019, we used $265 million to pay cash dividends to shareholders.

PROPERTY CASUALTY INSURANCE LOSS AND LOSS EXPENSE RESERVES
For the business lines in the commercial and personal lines insurance segments, and in total for the excess and surplus lines insurance segment and other property casualty insurance operations, the following table details gross reserves among case, IBNR (incurred but not reported) and loss expense reserves, net of salvage and subrogation reserves. Reserving practices are discussed in our 2018 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves, Page 98.
 
Total gross reserves at September 30, 2019, increased $351 million compared with December 31, 2018. Case loss reserves for losses increased $222 million, IBNR loss reserves increased by $105 million and loss expense reserves increased by $24 million. The total gross increase was primarily due to the inclusion of reserves for recently acquired Cincinnati Global.


Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 59



Property Casualty Gross Reserves
(Dollars in millions)
 
Loss reserves
 
Loss expense reserves
 
Total gross reserves
 
 
 
 
Case reserves
 
IBNR reserves
 
 
 
Percent of total
At September 30, 2019
 
 
 
 
 
Commercial lines insurance:
 
 

 
 

 
 

 
 

 
 

Commercial casualty
 
$
935

 
$
677

 
$
614

 
$
2,226

 
37.1
%
Commercial property
 
313

 
16

 
63

 
392

 
6.5

Commercial auto
 
401

 
169

 
140

 
710

 
11.8

Workers' compensation
 
409

 
508

 
91

 
1,008

 
16.8

Other commercial
 
107

 
9

 
68

 
184

 
3.1

Subtotal
 
2,165

 
1,379

 
976

 
4,520

 
75.3

Personal lines insurance:
 
 

 
 

 
 

 
 

 
 

Personal auto
 
230

 
54

 
76

 
360

 
6.0

Homeowner
 
147

 
10

 
39

 
196

 
3.3

Other personal
 
46

 
65

 
5

 
116

 
1.9

Subtotal
 
423

 
129

 
120

 
672

 
11.2

Excess and surplus lines insurance
 
146

 
91

 
97

 
334

 
5.6

Cincinnati Re
 
46

 
185

 
2

 
233

 
3.9

Cincinnati Global
 
166

 
70

 
2

 
238

 
4.0

Total
 
$
2,946

 
$
1,854

 
$
1,197

 
$
5,997

 
100.0
%
At December 31, 2018
 
 

 
 

 
 

 
 

 
 

Commercial lines insurance:
 
 

 
 

 
 

 
 

 
 

Commercial casualty
 
$
981

 
$
647

 
$
604

 
$
2,232

 
39.5
%
Commercial property
 
270

 
12

 
60

 
342

 
6.1

Commercial auto
 
402

 
152

 
141

 
695

 
12.3

Workers' compensation
 
384

 
542

 
92

 
1,018

 
18.0

Other commercial
 
99

 
7

 
73

 
179

 
3.2

Subtotal
 
2,136

 
1,360

 
970

 
4,466

 
79.1

Personal lines insurance:
 
 

 
 

 
 

 
 

 
 

Personal auto
 
240

 
50

 
72

 
362

 
6.3

Homeowner
 
152

 
9

 
40

 
201

 
3.6

Other personal
 
46

 
65

 
5

 
116

 
2.1

Subtotal
 
438

 
124

 
117

 
679

 
12.0

Excess and surplus lines insurance
 
118

 
96

 
84

 
298

 
5.3

Cincinnati Re
 
32

 
169

 
2

 
203

 
3.6

Total
 
$
2,724

 
$
1,749

 
$
1,173

 
$
5,646

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
LIFE POLICY AND INVESTMENT CONTRACT RESERVES
Gross life policy and investment contract reserves were $2.816 billion at September 30, 2019, compared with $2.779 billion at year-end 2018, reflecting continued growth in life insurance policies in force. We discuss our life insurance reserving practices in our 2018 Annual Report on Form 10-K, Item 7, Life Insurance Policyholder Obligations and Reserves, Page 104.

Cincinnati Financial Corporation Third-Quarter 2019 10-Q
Page 60



OTHER MATTERS
 
SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are discussed in our 2018 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 128, and updated in this quarterly report Item 1, Note 1, Accounting Policies.
 
In conjunction with those discussions, in the Management's Discussion and Analysis in the 2018 Annual Report on Form 10-K, management reviewed the estimates and assumptions used to develop reported amounts related to the most significant policies. Management discussed the development and selection of those accounting estimates with the audit committee of the board of directors.
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
Our greatest exposure to market risk is through our investment portfolio. Market risk is the potential for a decrease in securities' fair value resulting from broad yet uncontrollable forces such as: inflation, economic growth or recession, interest rates, world political conditions or other widespread unpredictable events. It is comprised of many individual risks that, when combined, create a macroeconomic impact.
 
Our view of potential risks and our sensitivity to such risks is discussed in our 2018 Annual Report on Form 10-K, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Page 113.
 
The fair value of our investment portfolio was $18.776 billion at September 30, 2019, up $2.167 billion from year-end 2018, including a $911 million increase in the fixed-maturity portfolio and a $1.256 billion increase in the equity portfolio.
(Dollars in millions)
At September 30, 2019
 
At December 31, 2018
 
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
$
7,171

49.2
%
 
$
7,527

40.1
%
 
$
6,920

49.4
%
 
$
6,926

41.7
%
Tax-exempt fixed maturities
3,841

26.4

 
4,073

21.7

 
3,723

26.6

 
3,763

22.6

Common equities
3,350

23.0

 
6,956

37.0

 
3,195

22.8

 
5,742

34.6

Nonredeemable preferred
  equities
198

1.4

 
220

1.2

 
173

1.2

 
178

1.1

Total
$
14,560

100.0
%
 
$
18,776

100.0
%
 
$
14,011

100.0
%
 
$
16,609

100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2019, our consolidated investment portfolio included less than $1 million of assets for which values are based on prices or valuation techniques that require significant management judgment (Level 3 assets). This represented less than 1% of investment portfolio assets measured at fair value. See Item 1, Note 3, Fair Value Measurements, for additional discussion of our valuation techniques. We have generally obtained and evaluated two nonbinding quotes from brokers; then, our investment professionals determined our best estimate of fair value. These investments include private placements, small issues and various thinly traded securities.
 
In addition to our investment portfolio, the total investments amount reported in our condensed consolidated balance sheets includes Other invested assets. Other invested assets included $32 million of life policy loans, $148 million in Lloyd's deposits, $73 million of private equity investments and $30 million of real estate through direct property ownership and development projects in the United States at September 30, 2019.
 

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

In the first nine months of 2019, the increase in fair value of our fixed-maturity portfolio reflected both net purchases of securities and an increase in net unrealized gains, primarily due to a decrease in interest rates. At September 30, 2019, our fixed-maturity portfolio with an average rating of A3/A was valued at 105.3% of its amortized cost, compared with 100.4% at December 31, 2018.
 
At September 30, 2019, our investment-grade and noninvestment-grade fixed-maturity securities represented 86.0% and 2.5% of the portfolio, respectively. The remaining 11.5% represented fixed-maturity securities that were not rated by Moody's or S&P Global Ratings.

Attributes of the fixed-maturity portfolio include:
 
 
At September 30, 2019
 
At December 31, 2018
Weighted average yield-to-amortized cost
 
4.11
%
 
4.20
%
Weighted average maturity
 
7.7
yrs
 
7.6
yrs
Effective duration
 
4.8
yrs
 
5.2
yrs
 
 
 
 
 
 
 
 
We discuss maturities of our fixed-maturity portfolio in our 2018 Annual Report on Form 10-K, Item 8, Note 2, Investments, Page 137, and in this quarterly report Item 2, Investments Results.
 


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TAXABLE FIXED MATURITIES
Our taxable fixed-maturity portfolio, with a fair value of $7.527 billion at September 30, 2019, included:
(Dollars in millions)
 
At September 30, 2019
 
At December 31, 2018
Investment-grade corporate
 
$
6,128

 
$
5,464

States, municipalities and political subdivisions
 
517

 
541

Commercial mortgage backed
 
305

 
288

Noninvestment-grade corporate
 
282

 
246

Government sponsored enterprises
 
162

 
310

United States government
 
109

 
67

Foreign government
 
24

 
10

Total
 
$
7,527

 
$
6,926

 
 
 
 
 
 
Our strategy is to buy, and typically hold, fixed-maturity investments to maturity, but we monitor credit profiles and fair value movements when determining holding periods for individual securities. With the exception of United States agency issues that include government-sponsored enterprises, no individual issuer's securities accounted for more than 1.1% of the taxable fixed-maturity portfolio at September 30, 2019. Our investment-grade corporate bonds had an average rating of Baa2 by Moody's or BBB by S&P Global Ratings and represented 81.4% of the taxable fixed-maturity portfolio's fair value at September 30, 2019, compared with 78.9% at year-end 2018.
 
The heaviest concentration in our investment-grade corporate bond portfolio, based on fair value at
September 30, 2019, was the financial sector. It represented 43.4% of our investment-grade corporate bond portfolio, compared with 47.1% at year-end 2018. No other sector exceeded 10% of our investment-grade corporate bond portfolio.

Our taxable fixed-maturity portfolio at September 30, 2019, included $305 million of commercial mortgage-backed securities with an average rating of Aa1/AA.
 
TAX-EXEMPT FIXED MATURITIES
At September 30, 2019, we had $4.073 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody's and S&P Global Ratings. We traditionally have purchased municipal bonds focusing on general obligation and essential services issues, such as water, waste disposal or others. The portfolio is well diversified among approximately 1,450 municipal bond issuers. No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at September 30, 2019.

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

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The table below summarizes the effect of hypothetical changes in interest rates on the fair value of the fixed-maturity portfolio:
(Dollars in millions)
 
Effect from interest rate change in basis points
 
 
-200
 
 -100
 
-
 
100
 
200
At September 30, 2019
 
$
12,752

 
$
12,164

 
$
11,600

 
$
11,029

 
$
10,453

At December 31, 2018
 
$
11,793

 
$
11,245

 
$
10,689

 
$
10,121

 
$
9,576

 
 
 
 
 
 
 
 
 
 
 
 
The effective duration of the fixed-maturity portfolio as of September 30, 2019, was 4.8 years, down from 5.2 years at year-end 2018. The above table is a theoretical presentation showing that an instantaneous, parallel shift in the yield curve of 100 basis points could produce an approximately 4.9% change in the fair value of the fixed-maturity portfolio. Generally speaking, the higher a bond is rated, the more directly correlated movements in its fair value are to changes in the general level of interest rates, exclusive of call features. The fair values of average- to lower-rated corporate bonds are additionally influenced by the expansion or contraction of credit spreads.
 
In our dynamic financial planning model, the selected interest rate change of 100 to 200 basis points represents our view of a shift in rates that is quite possible over a one-year period. The rates modeled should not be considered a prediction of future events as interest rates may be much more volatile in the future. The analysis is not intended to provide a precise forecast of the effect of changes in rates on our results or financial condition, nor does it take into account any actions that we might take to reduce exposure to such risks.

EQUITY INVESTMENTS
Our equity investments, with a fair value totaling $7.176 billion at September 30, 2019, included $6.956 billion of common stock securities of companies generally with strong indications of paying and growing their dividends. Other criteria we evaluate include increasing sales and earnings, proven management and a favorable outlook. We believe our equity investment style is an appropriate long-term strategy. While our long-term financial position would be affected by prolonged changes in the market valuation of our investments, we believe our strong surplus position and cash flow provide a cushion against short-term fluctuations in valuation. Continued payment of cash dividends by the issuers of our common equity holdings can provide a floor to their valuation.

The table below summarizes the effect of hypothetical changes in market prices on fair value of our equity portfolio.
(Dollars in millions)
Effect from market price change in percent
 
 
-30%
 
-20%
 
-10%
 
 
10%
 
20%
 
30%
At September 30, 2019
 
$
5,023

 
$
5,741

 
$
6,458

 
$
7,176

 
$
7,894

 
$
8,611

 
$
9,329

At December 31, 2018
 
$
4,144

 
$
4,736

 
$
5,328

 
$
5,920

 
$
6,512

 
$
7,104

 
$
7,696

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

At September 30, 2019, Microsoft Corporation (Nasdaq:MSFT) was our largest single common stock holding with a fair value of $349 million, or 5.0% of our publicly traded common stock portfolio and 1.9% of the total investment portfolio. Thirty-eight holdings among 10 different sectors each had a fair value greater than $100 million.
 

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Common Stock Portfolio Industry Sector Distribution
 
Percent of common stock portfolio
 
At September 30, 2019
 
At December 31, 2018
 
Cincinnati
 Financial
 
S&P 500 Industry
Weightings
 
Cincinnati
Financial
 
S&P 500 Industry
Weightings
Sector:
 

 
 

 
 

 
 

Information technology
22.7
%
 
21.9
%
 
20.9
%
 
20.1
%
Financial
15.7

 
12.9

 
15.6

 
13.3

Industrials
12.5

 
9.4

 
12.5

 
9.2

Healthcare
11.7

 
13.7

 
14.9

 
15.6

Consumer discretionary
10.8

 
10.1

 
10.5

 
10.0

Energy
6.5

 
4.5

 
6.7

 
5.3

Consumer staples
6.3

 
7.6

 
5.6

 
7.4

Materials
5.0

 
2.7

 
4.9

 
2.7

Telecomm services
3.5

 
10.4

 
3.5

 
10.1

Utilities
2.7

 
3.6

 
2.7

 
3.3

Real Estate
2.6

 
3.2

 
2.2

 
3.0

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
 
UNREALIZED INVESTMENT GAINS AND LOSSES
At September 30, 2019, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $601 million and unrealized investment losses amounted to $13 million before taxes.
 
The $588 million net unrealized gain position in our fixed-maturity portfolio at September 30, 2019, increased in the first nine months of 2019, primarily due to a decrease in interest rates. The net gain position for our current fixed-maturity holdings will naturally decline over time as individual securities mature. In addition, changes in interest rates can cause rapid, significant changes in fair values of fixed-maturity securities and the net gain position, as discussed in Quantitative and Qualitative Disclosures About Market Risk.

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 September 30, 2019, consisted of a net gain position in our equity portfolio of $3.628 billion. Events or factors such as economic growth or recession can affect the fair value and unrealized investment gains of our equity securities. The five largest holdings in our common stock portfolio were Microsoft, Apple Inc. (Nasdaq:AAPL), JP Morgan Chase & Co. (NYSE:JPM), CME Group Inc. (NYSE:CME) and Accenture plc (NYSE:ACN), which had a combined fair value of $1.359 billion.

Unrealized Investment Losses
We expect the number of fixed-maturity securities trading below amortized cost to fluctuate as interest rates rise or fall and credit spreads expand or contract due to prevailing economic conditions. Further, amortized costs for some securities are revised through OTTI recognized in prior periods. At September 30, 2019, 127 of the 3,821 fixed-maturity securities we owned had fair values below amortized cost, compared with 1,262 of the 3,606 securities we owned at year-end 2018. The 127 holdings with fair values below amortized cost at September 30, 2019, represented 5.1% of the fair value of our fixed-maturity investment portfolio and $13 million in unrealized losses.
122 of the 127 holdings had fair value between 90% and 100% of amortized cost at September 30, 2019. These primarily consist of securities whose current valuation is largely the result of interest rate factors. The fair value of these 122 securities was $570 million, and they accounted for $6 million in unrealized losses.
3 of the 127 fixed-maturity holdings had fair value between 70% and 90% of amortized cost at September 30, 2019. We believe the three fixed-maturity securities will continue to pay interest and ultimately pay principal upon maturity. The issuers of these three securities have strong cash flow to service their debt and meet their

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contractual obligation to make principal payments. The fair value of these securities was $15 million, and they accounted for $4 million in unrealized losses.
2 of the 127 fixed-maturity holdings had fair value below 70% of amortized cost at September 30, 2019. We believe these fixed-maturity securities will continue to pay interest and ultimately pay principal upon maturity. The fair value of these securities was $7 million, and they accounted for $3 million in unrealized losses.

The table below reviews fair values and unrealized losses by investment category and by the overall duration of the securities' continuous unrealized loss position.
(Dollars in millions)
 
Less than 12 months
 
12 months or more
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
At September 30, 2019
 
value
 
losses
 
value
 
losses
 
value
 
losses
Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
254

 
$
4

 
$
198

 
$
9

 
$
452

 
$
13

States, municipalities and political subdivisions
 
9

 

 
13

 

 
22

 

Government-sponsored enterprises
 
19

 

 
78

 

 
97

 

United States government
 
5

 

 
4

 

 
9

 

Foreign government
 
12

 

 

 

 
12

 

Total
 
$
299

 
$
4

 
$
293

 
$
9

 
$
592

 
$
13

At December 31, 2018
 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 
 
 

 
 

 
 

 
 

 
 

Corporate
 
$
2,082

 
$
51

 
$
501

 
$
36

 
$
2,583

 
$
87

States, municipalities and political subdivisions
 
823

 
18

 
340

 
13

 
1,163

 
31

Commercial mortgage-backed
 
77

 

 
64

 
2

 
141

 
2

Government-sponsored enterprises
 
49

 
1

 
211

 
6

 
260

 
7

United States government
 

 

 
33

 
1

 
33

 
1

Total
 
$
3,031

 
$
70

 
$
1,149

 
$
58

 
$
4,180

 
$
128

 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2019, 62 fixed-maturity securities with a total unrealized loss of $9 million had been in an unrealized loss position for 12 months or more. Of that total, two fixed-maturity securities had a fair value below 70% of amortized cost with a fair value of $7 million and accounted for $3 million in unrealized losses; two fixed-maturity securities with a fair value of $13 million had a fair value from 70% to less than 90% of amortized cost and accounted for $4 million in unrealized losses; and 58 fixed-maturity securities with a fair value of $273 million had fair values from 90% to less than 100% of amortized cost and accounted for $2 million in unrealized losses.

At September 30, 2019, applying our invested asset impairment policy, we determined that the total of $9 million, for securities in an unrealized loss position for 12 months or more in the table above, was not other-than-temporarily impaired.

During the third quarter of 2019, two securities were written down through an impairment charge and none were written down during the first two quarters of 2019. OTTI resulted in $6 million of noncash charges for the three and nine months ended September 30, 2019. During the first nine months of 2018, there were no OTTI charges.
 
During full-year 2018, we wrote down one security and recorded $5 million in OTTI charges. At December 31, 2018, 400 fixed-maturity investments with a total unrealized loss of $58 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below 70% of amortized cost.


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The following table summarizes the investment portfolio by severity of decline:
(Dollars in millions)
 
Number
of issues
 
Amortized
cost
 
Fair value
 
Gross 
unrealized 
gain (loss)
 
Gross investment income
At September 30, 2019
 
 
 
 
 
Taxable fixed maturities:
 
 
 
 
 
 
 
 
 
 
Fair valued below 70% of amortized cost
 
2

 
$
10

 
$
7

 
$
(3
)
 
$

Fair valued at 70% to less than 100% of amortized cost
 
117

 
585

 
575

 
(10
)
 
11

Fair valued at 100% and above of amortized cost
 
1,592

 
6,576

 
6,945

 
369

 
212

Investment income on securities sold in current year
 

 

 

 

 
19

Total
 
1,711

 
7,171

 
7,527

 
356

 
242

Tax-exempt fixed maturities:
 
 

 
 

 
 

 
 

 
 

Fair valued below 70% of amortized cost
 

 

 

 

 

Fair valued at 70% to less than 100% of amortized cost
 
8

 
10

 
10

 

 

Fair valued at 100% and above of amortized cost
 
2,102

 
3,831

 
4,063

 
232

 
89

Investment income on securities sold in current year
 

 

 

 

 
2

Total
 
2,110

 
3,841

 
4,073

 
232

 
91

Fixed-maturities summary:
 
 

 
 

 
 

 
 

 
 

Fair valued below 70% of amortized cost
 
2

 
10

 
7

 
(3
)
 

Fair valued at 70% to less than 100% of amortized cost
 
125

 
595

 
585

 
(10
)
 
11

Fair valued at 100% and above of amortized cost
 
3,694

 
10,407

 
11,008

 
601

 
301

Investment income on securities sold in current year
 

 

 

 

 
21

Total
 
3,821

 
$
11,012

 
$
11,600

 
$
588

 
$
333

 
 
 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 

 
 

 
 

 
 

 
 

Fixed-maturities summary:
 
 

 
 

 
 

 
 

 
 

Fair valued below 70% of amortized cost
 

 
$

 
$

 
$

 
$

Fair valued at 70% to less than 100% of amortized cost
 
1,262

 
4,308

 
4,180

 
(128
)
 
147

Fair valued at 100% and above of amortized cost
 
2,344

 
6,335

 
6,509

 
174

 
269

Investment income on securities sold in current year
 

 

 

 

 
28

Total
 
3,606

 
$
10,643

 
$
10,689

 
$
46

 
$
444

 
 
 
 
 
 
 
 
 
 
 
 
See our 2018 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Asset Impairment, Page 58.

Item 4.        Controls and Procedures
Evaluation of Disclosure Controls and Procedures – The company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)).
 
Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The company's management, with the participation of the company's chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of the company's disclosure controls and procedures as of September 30, 2019. Based upon that evaluation, the company's chief executive officer and chief financial officer concluded that the design and operation of the company's disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to ensure:
that information required to be disclosed in the company's reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and
that such information is accumulated and communicated to the company's management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.

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Changes in Internal Control over Financial Reporting – During the three months ended September 30, 2019, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. On February 28, 2019, we completed the acquisition of MSP, rebranded as Cincinnati Global effective May 1, 2019. Cincinnati Global's existing disclosure controls and procedures supported our financial reporting as of September 30, 2019. In conducting our evaluation of the effectiveness of our internal control over financial reporting, we have elected to exclude Cincinnati Global from our evaluation as permitted under SEC rules. We are currently in the process of evaluating and integrating Cincinnati Global's internal controls over financial reporting with ours.
 
Part II – Other Information
Item 1.    Legal Proceedings
Neither the company nor any of our subsidiaries are involved in any litigation believed to be material other than ordinary, routine litigation incidental to the nature of our business.
 
Item 1A.    Risk Factors
Our risk factors have not changed materially since they were described in our 2018 Annual Report on Form 10-K filed February 22, 2019, and are incorporated herein by reference, except we no longer have risks or uncertainties associated with the timely or successful completion of the acquisition of Cincinnati Global. This transaction was completed as reported on Form 8-K filed February 28, 2019.


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Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any of our shares that were not registered under the Securities Act during the first nine months of 2019. 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, which expanded our current repurchase program. We have 15,430,320 shares available for purchase under our programs at September 30, 2019.
Period
 
Total number
 of shares
 purchased
 
Average
 price paid
 per share
 
Total number of shares 
purchased as part of
publicly announced
plans or programs
 
Maximum number of
shares that may yet be
purchased under the
plans or programs
July 1-31, 2019
 

 

 

 
15,476,785

August 1-31, 2019
 
46,465

 
$
104.98

 
46,465

 
15,430,320

September 1-30, 2019
 

 

 

 
15,430,320

Totals
 
46,465

 
104.98

 
46,465

 
 

 
 
 
 
 
 
 
 
 

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Item 6.    Exhibits
Exhibit No.
 
Exhibit Description
3.1
 
3.2
 
31A
 
31B
 
32
 
101.INS
 
The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
104
 
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
 

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CINCINNATI FINANCIAL CORPORATION
Date: October 24, 2019
 
/S/ Michael J. Sewell
Michael J. Sewell, CPA
Chief Financial Officer, Senior Vice President and Treasurer
(Principal Accounting Officer)


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