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EX-32 - EXHIBIT 32 - CINCINNATI FINANCIAL CORPcinf-2018331xex32.htm
EX-31.B - EXHIBIT 31.B - CINCINNATI FINANCIAL CORPcinf-2018331xex31b.htm
EX-31.A - EXHIBIT 31.A - CINCINNATI FINANCIAL CORPcinf-2018331xex31a.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(Mark one)
þ        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the quarterly period ended March 31, 2018.
 
¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the transition period from _____________________ to _____________________.
Commission file number 0-4604
 
CINCINNATI FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Ohio
 
31-0746871
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification
No.)
 
 
 
6200 S. Gilmore Road, Fairfield, Ohio
 
45014-5141
(Address of principal executive offices)
 
(Zip code)
 
Registrant’s telephone number, including area code: (513) 870-2000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
þYes ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þYes ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
þ Large accelerated filer ¨ Accelerated filer ¨ Nonaccelerated filer ¨ Smaller reporting company
¨ Emerging growth company
(Do not check if a smaller reporting company)

¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
¨Yes þ No
 
As of April 20, 2018, there were 164,145,978 shares of common stock outstanding.





CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED March 31, 2018
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Results
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Cincinnati Financial Corporation First-Quarter 2018 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)
 
March 31,
 
December 31,
 
 
2018
 
2017
Assets
 
 

 
 

Investments
 
 

 
 

Fixed maturities, at fair value (amortized cost: 2018—$10,364; 2017—$10,314)
 
$
10,528

 
$
10,699

Equity securities, at fair value (cost: 2017—$3,094)
 
6,086

 
6,249

Other invested assets
 
107

 
103

Total investments
 
16,721

 
17,051

Cash and cash equivalents
 
604

 
657

Investment income receivable
 
124

 
134

Finance receivable
 
61

 
61

Premiums receivable
 
1,626

 
1,589

Reinsurance recoverable
 
423

 
432

Prepaid reinsurance premiums
 
39

 
42

Deferred policy acquisition costs
 
691

 
670

Land, building and equipment, net, for company use (accumulated depreciation:
   2018—$259; 2017—$253)
 
186

 
185

Other assets
 
192

 
216

Separate accounts
 
803

 
806

Total assets
 
$
21,470

 
$
21,843

 
 
 
 
 
Liabilities
 
 

 
 

Insurance reserves
 
 

 
 

Loss and loss expense reserves
 
$
5,345

 
$
5,273

Life policy and investment contract reserves
 
2,740

 
2,729

Unearned premiums
 
2,459

 
2,404

Other liabilities
 
672

 
792

Deferred income tax
 
652

 
745

Note payable
 
24

 
24

Long-term debt and capital lease obligations
 
829

 
827

Separate accounts
 
803

 
806

Total liabilities
 
13,524

 
13,600

 
 
 
 
 
Commitments and contingent liabilities (Note 12)
 


 


 
 
 
 
 
Shareholders' Equity
 
 

 
 

Common stock, par value—$2 per share; (authorized: 2018 and 2017—500 million
   shares; issued: 2018 and 2017—198.3 million shares)
 
397

 
397

Paid-in capital
 
1,258

 
1,265

Retained earnings
 
7,565

 
5,180

Accumulated other comprehensive income
 
115

 
2,788

Treasury stock at cost (2018—34.2 million shares and 2017—34.4 million shares)
 
(1,389
)
 
(1,387
)
Total shareholders' equity
 
7,946

 
8,243

Total liabilities and shareholders' equity
 
$
21,470

 
$
21,843

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


Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 3



Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Dollars in millions, except per share data)
Three months ended March 31,
 
2018
 
2017
Revenues
 

 
 

Earned premiums
$
1,260

 
$
1,208

Investment income, net of expenses
150

 
149

Investment gains and losses, net
(191
)
 
160

Fee revenues
4

 
5

Other revenues
1

 
1

Total revenues
1,224

 
1,523

Benefits and Expenses
 

 
 

Insurance losses and contract holders' benefits
854

 
853

Underwriting, acquisition and insurance expenses
403

 
377

Interest expense
13

 
13

Other operating expenses
4

 
4

 Total benefits and expenses
1,274

 
1,247

Income (Loss) Before Income Taxes
(50
)
 
276

Provision (Benefit) for Income Taxes
 

 
 

Current
28

 
40

Deferred
(47
)
 
35

Total provision (benefit) for income taxes
(19
)
 
75

Net Income (Loss)
$
(31
)
 
$
201

Per Common Share
 

 
 

Net income (loss)—basic
$
(0.19
)
 
$
1.22

Net income (loss)—diluted
(0.19
)
 
1.21

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

Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 4



Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Dollars in millions)
Three months ended March 31,
 
2018
 
2017
Net Income (Loss)
$
(31
)
 
$
201

Other Comprehensive Income (Loss)
 

 
 

Change in unrealized gains on investments, net of tax (benefit) of ($46) and $46, respectively
(175
)
 
85

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

 
1

Change in life deferred acquisition costs, life policy reserves and other, net of tax of $1 and $1, respectively
5

 
1

Other comprehensive income (loss)
(170
)
 
87

Comprehensive Income (Loss)
$
(201
)
 
$
288

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


Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 5



Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in millions)
 
Three months ended March 31,
 
 
2018
 
2017
Common Stock
 
 
 
 
   Beginning of year
 
$
397

 
$
397

   Share-based awards
 

 

   End of period
 
397

 
397

 
 
 
 
 
Paid-In Capital
 
 
 
 
   Beginning of year
 
1,265

 
1,252

   Share-based awards
 
(17
)
 
(18
)
   Share-based compensation
 
9

 
8

   Other
 
1

 
1

   End of period
 
1,258

 
1,243

 
 
 
 
 
Retained Earnings
 
 
 
 
   Beginning of year
 
5,180

 
5,037

Cumulative effect of change in accounting for equity securities as of January 1, 2018
 
2,503

 

Adjusted beginning of year
 
7,683

 
5,037

   Net income (loss)
 
(31
)
 
201

   Dividends declared
 
(87
)
 
(82
)
   End of period
 
7,565

 
5,156

 
 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
 
   Beginning of year
 
2,788

 
1,693

Cumulative effect of change in accounting for equity securities as of January 1, 2018
 
(2,503
)
 

Adjusted beginning of year
 
285

 
1,693

   Other comprehensive income (loss)
 
(170
)
 
87

   End of period
 
115

 
1,780

 
 
 
 
 
Treasury Stock
 
 
 
 
   Beginning of year
 
(1,387
)
 
(1,319
)
   Share-based awards
 
14

 
17

   Shares acquired - share repurchase authorization
 
(15
)
 
(15
)
   Shares acquired - share-based compensation plans
 
(2
)
 
(4
)
   Other
 
1

 
1

   End of period
 
(1,389
)
 
(1,320
)
 
 
 
 
 
      Total Shareholders' Equity
 
$
7,946

 
$
7,256

 
 
 
 
 
(In millions)
 
 
 
 
Common Stock - Shares Outstanding
 
 
 
 
   Beginning of year
 
163.9

 
164.4

   Share-based awards
 
0.4

 
0.5

   Shares acquired - share repurchase authorization
 
(0.2
)
 
(0.2
)
   Shares acquired - share-based compensation plans
 

 
(0.1
)
   Other
 

 

   End of period
 
164.1

 
164.6

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

Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 6



Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
 (Dollars in millions)
 
Three months ended March 31,
 
 
2018
 
2017
Cash Flows From Operating Activities
 
 

 
 

Net income (loss)
 
$
(31
)
 
$
201

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
18

 
14

Investment gains and losses, net
 
191

 
(160
)
Share-based compensation
 
9

 
8

Interest credited to contract holders'
 
11

 
13

Deferred income tax expense
 
(47
)
 
35

Changes in:
 
 

 
 

Investment income receivable
 
10

 
11

Premiums and reinsurance receivable
 
(26
)
 
(44
)
Deferred policy acquisition costs
 
(10
)
 
(25
)
Other assets
 
(8
)
 
(5
)
Loss and loss expense reserves
 
72

 
92

Life policy and investment contract reserves
 
21

 
25

Unearned premiums
 
55

 
70

Other liabilities
 
(137
)
 
(139
)
Current income tax receivable/payable
 
26

 
40

Net cash provided by operating activities
 
154

 
136

Cash Flows From Investing Activities
 
 

 
 

Sale of fixed maturities
 
5

 
12

Call or maturity of fixed maturities
 
393

 
249

Sale of equity securities
 
104

 
216

Purchase of fixed maturities
 
(438
)
 
(403
)
Purchase of equity securities
 
(110
)
 
(313
)
Investment in finance receivables
 
(6
)
 
(5
)
Collection of finance receivables
 
6

 
6

Investment in buildings and equipment
 
(3
)
 
(2
)
Change in other invested assets, net
 
(5
)
 
(6
)
Net cash used in investing activities
 
(54
)
 
(246
)
Cash Flows From Financing Activities
 
 

 
 

Payment of cash dividends to shareholders
 
(80
)
 
(77
)
Shares acquired - share repurchase authorization
 
(15
)
 
(15
)
Payments of note payable
 

 
(3
)
Proceeds from stock options exercised
 
4

 
6

Contract holders' funds deposited
 
21

 
23

Contract holders' funds withdrawn
 
(46
)
 
(43
)
Other
 
(37
)
 
(15
)
Net cash used in financing activities
 
(153
)
 
(124
)
Net change in cash and cash equivalents
 
(53
)
 
(234
)
Cash and cash equivalents at beginning of year
 
657

 
777

Cash and cash equivalents at end of period
 
$
604

 
$
543

Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Interest paid
 
$

 
$

Income taxes paid
 

 

Noncash Activities
 
 

 
 

Conversion of securities
 
$
3

 
$
4

Equipment acquired under capital lease obligations
 
5

 
3

Cashless exercise of stock options
 
2

 
4

Other assets and other liabilities
 
30

 
73

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

Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 7



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 — Accounting Policies
The condensed consolidated financial statements include the accounts of Cincinnati Financial Corporation and its consolidated subsidiaries, each of which is wholly owned. These statements are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
 
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been condensed or omitted.
 
Our March 31, 2018, 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 2017 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 2014-09 Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Insurance contracts do not fall within the scope of this ASU. The effective date of ASU 2014-09 was for interim and annual reporting periods beginning after December 15, 2017. The company adopted this ASU effective January 1, 2018 and it did not have a material impact on the company's consolidated financial position, cash flows or results of operations.

ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 revised the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The effective date of ASU 2016-01 was for interim and annual reporting periods beginning after December 15, 2017. The company adopted this ASU on January 1, 2018, and applied it prospectively without prior period amounts restated. As a result of the adoption, $2.503 billion of after-tax unrealized gains on equity securities was reclassified on January 1, 2018, from accumulated other comprehensive income to retained earnings. Results of operations were impacted as changes in fair value of equity securities are now reported in net income (loss) instead of reported in other comprehensive income (loss). As a result of the adoption of this ASU, the first quarter 2018 net investment loss of $191 million in the condensed consolidated statements of income included $198 million from the fair value change of equity securities.

ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of ASU 2016-15 is for interim and annual reporting periods beginning after December 15, 2017. The company adopted this ASU effective January 1, 2018, and it did not have a material impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost


Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 8



In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Postretirement Benefit Costs. ASU 2017-07 provides guidance on how to present the components of net periodic benefit costs in the income statement for pension plans and other post-retirement benefit plans and allows only the service cost component of net benefit cost to be eligible for capitalization when applicable. The effective date of ASU 2017-07 is for interim and annual reporting periods beginning after December 15, 2017. The company adopted this ASU effective January 1, 2018 and disclosed the line items used in the statements of income to present the service and non-service components of net periodic benefit costs in Note 11, Employee Retirement Benefits, to these consolidated financial statements. The adoption did not have a material impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The effective date of ASU 2017-09 was for interim and annual reporting periods, beginning after December 15, 2017, and was applied prospectively. The company adopted this ASU effective January 1, 2018, 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 2016-02, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main provision of ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The effective date of ASU 2016-02 is for interim and annual reporting periods beginning after December 15, 2018. The ASU has not yet been adopted; however, it is not expected to have a material impact on our company’s consolidated financial position, cash flows or results of operations.

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

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







Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 9




NOTE 2 – Investments
In the first quarter of 2018, we adopted ASU 2016-01, which resulted in changes in the fair value of equity securities still held at March 31, 2018, being reported in net income (loss) instead of being reported in other comprehensive income (loss). See Note 1, Accounting Policies, for additional discussion.

The following table provides cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value for our fixed-maturity and equity securities:
(Dollars in millions)
 
Cost or
amortized
cost
 
Gross unrealized
 
Fair value
At March 31, 2018
 
 
gains
 
losses
 
Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,452

 
$
155

 
$
35

 
$
5,572

States, municipalities and political subdivisions
 
4,304

 
85

 
35

 
4,354

Commercial mortgage-backed
 
285

 
3

 
2

 
286

Government-sponsored enterprises
 
277

 

 
6

 
271

United States government
 
36

 

 
1

 
35

Foreign government
 
10

 

 

 
10

Total
 
10,364

 
243

 
79

 
10,528

At December 31, 2017
 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,420

 
$
246

 
$
13

 
$
5,653

States, municipalities and political subdivisions
 
4,316

 
155

 
6

 
4,465

Commercial mortgage-backed
 
280

 
7

 
1

 
286

Government-sponsored enterprises
 
257

 
1

 
4

 
254

United States government
 
31

 

 

 
31

Foreign government
 
10

 

 

 
10

Subtotal
 
10,314

 
409

 
24

 
10,699

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
2,918

 
3,135

 
14

 
6,039

Nonredeemable preferred equities
 
176

 
34

 

 
210

Subtotal
 
3,094

 
3,169

 
14

 
6,249

Total
 
$
13,408

 
$
3,578

 
$
38

 
$
16,948

 
 
 
 
 
 
 
 
 
 
The net unrealized investment gains in our fixed-maturity portfolio at March 31, 2018, are primarily the result of the continued low interest rate environment that increased the fair value of our fixed-maturity portfolio. Our commercial mortgage-backed securities had an average rating of Aa1/AA at March 31, 2018, and December 31, 2017.
At March 31, 2018, JP Morgan Chase & Co. (NYSE:JPM) was our largest single equity holding with a fair value of $248 million, which was 4.2 percent of our publicly traded common equities portfolio and 1.5 percent of the total investment portfolio.


Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 10



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 March 31, 2018
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
1,002

 
$
20

 
$
253

 
$
15

 
$
1,255

 
$
35

States, municipalities and political subdivisions
 
1,052

 
21

 
256

 
14

 
1,308

 
35

Commercial mortgage-backed securities
 
81

 
1

 
35

 
1

 
116

 
2

Government-sponsored enterprises
 
131

 
2

 
123

 
4

 
254

 
6

Foreign government
 
10

 

 

 

 
10

 

United States government
 
24

 
1

 
11

 

 
35

 
1

Total
 
$
2,300

 
$
45

 
$
678

 
$
34

 
$
2,978

 
$
79

At December 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
330

 
$
4

 
$
252

 
$
9

 
$
582

 
$
13

States, municipalities and political subdivisions
 
88

 
1

 
264

 
5

 
352

 
6

Commercial mortgage-backed
 
33

 

 
36

 
1

 
69

 
1

Government-sponsored enterprises
 
96

 
1

 
124

 
3

 
220

 
4

Foreign government
 
10

 

 

 

 
10

 

United States government
 
23

 

 
6

 

 
29

 

Subtotal
 
580

 
6

 
682

 
18

 
1,262

 
24

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
229

 
14

 

 

 
229

 
14

Subtotal
 
229

 
14

 

 

 
229

 
14

Total
 
$
809

 
$
20

 
$
682

 
$
18

 
$
1,491

 
$
38

 
 
 
 
 
 
 
 
 
 
 
 
 

Contractual maturity dates for fixed-maturity investments were:
(Dollars in millions)
 
Amortized
cost
 
Fair
value
 
% of fair
value
At March 31, 2018
 
 
 
Maturity dates:
 
 

 
 

 
 

Due in one year or less
 
$
449

 
$
457

 
4.4
%
Due after one year through five years
 
2,714

 
2,768

 
26.3

Due after five years through ten years
 
3,986

 
4,046

 
38.4

Due after ten years
 
3,215

 
3,257

 
30.9

Total
 
$
10,364

 
$
10,528

 
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 First-Quarter 2018 10-Q
Page 11



The following table provides investment income and investment gains and losses, net:
(Dollars in millions)
Three months ended March 31,
 
2018
 
2017
Investment income:
 
 
 
Interest
$
110

 
$
111

Dividends
42

 
39

Other
1

 
1

Total
153

 
151

Less investment expenses
3

 
2

Total
$
150

 
$
149

 
 
 
 
Investment gains and losses, net:
 

 
 

Equity securities:
 

 
 

Investment gains and losses on securities sold, net
$
3

 
$

Unrealized gains and losses on securities still held, net
(198
)
 

Gross realized gains

 
153

Gross realized losses

 
(4
)
Subtotal
(195
)
 
149

Fixed maturities:
 

 
 

Gross realized gains
4

 
10

Gross realized losses

 

Subtotal
4

 
10

 
 
 
 
Other

 
1

Total
$
(191
)
 
$
160

 
 
 
 
 
During the three months ended March 31, 2018, there were no fixed-maturity securities other-than-temporarily impaired. During the three months ended March 31, 2017, there were no equity securities and 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 (loss) for the three months ended March 31, 2018 and 2017.

At March 31, 2018, 250 fixed-maturity investments with a total unrealized loss of $34 million had been in an unrealized loss position for 12 months or more. Of that total, one fixed-maturity investment had a fair value below 70 percent of amortized cost. At December 31, 2017, 249 fixed-maturity investments with a total unrealized loss of $18 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below 70 percent of amortized cost. There were no equity security investments in an unrealized loss position for 12 months or more as of December 31, 2017.
 


Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 12



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, 2017, and ultimately management determines fair value. See our 2017 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 132, for information on characteristics and valuation techniques used in determining fair value.

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 March 31, 2018, and December 31, 2017. 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 March 31, 2018
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$

 
$
5,571

 
$
1

 
$
5,572

States, municipalities and political subdivisions
 

 
4,350

 
4

 
4,354

Commercial mortgage-backed
 

 
286

 

 
286

Government-sponsored enterprises
 

 
271

 

 
271

United States government
 
35

 

 

 
35

Foreign government
 

 
10

 

 
10

Subtotal
 
35

 
10,488

 
5

 
10,528

Common equities
 
5,893

 

 

 
5,893

Nonredeemable preferred equities
 

 
193

 

 
193

Separate accounts taxable fixed maturities
 

 
793

 

 
793

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

 

 

 
34

Total
 
$
5,962

 
$
11,474

 
$
5

 
$
17,441

 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$

 
$
5,652

 
$
1

 
$
5,653

States, municipalities and political subdivisions
 

 
4,460

 
5

 
4,465

Commercial mortgage-backed
 

 
286

 

 
286

Government-sponsored enterprises
 

 
254

 

 
254

United States government
 
31

 

 

 
31

Foreign government
 

 
10

 

 
10

Subtotal
 
31

 
10,662

 
6

 
10,699

Common equities, available for sale
 
6,039

 

 

 
6,039

Nonredeemable preferred equities, available for sale
 

 
210

 

 
210

Separate accounts taxable fixed maturities
 

 
795

 

 
795

Top Hat savings plan mutual funds and common
  equity (included in Other assets)
 
31

 

 

 
31

Total
 
$
6,101

 
$
11,667

 
$
6

 
$
17,774

 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 13



 
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 March 31, 2018. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the condensed consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. Transfers out of Level 3 included situations where a broker quote was used without observable inputs or data that could be corroborated by our pricing vendors in the prior period and significant other observable inputs were identified in the current period. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.
 
 
 
 
 
 
 
 
 
 
 
The following table provides the change in Level 3 assets for the three months ended March 31:
(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, 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, March 31, 2018
 
$
1

 
$
4

 
$
5

 
 
 
 
 
 
 
Beginning balance, January 1, 2017
 
$
78

 
$

 
$
78

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
 
(77
)
 

 
(77
)
Ending balance, March 31, 2017
 
$
1

 
$

 
$
1

 
 
 
 
 
 
 

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.
 

Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 14



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
 
 
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
 
 
 
2018
 
2017
 
2018
 
2017
6.900
%
 
1998
 
Senior debentures, due 2028
 
$
26

 
$
26

 
$
28

 
$
28

6.920
%
 
2005
 
Senior debentures, due 2028
 
391

 
391

 
391

 
391

6.125
%
 
2004
 
Senior notes, due 2034
 
370

 
370

 
374

 
374

 

 
 
 
Total
 
$
787

 
$
787

 
$
793

 
$
793

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 March 31, 2018
 
 
 
 
Note payable
 
$

 
$
24

 
$

 
$
24

6.900% senior debentures, due 2028
 

 
33

 

 
33

6.920% senior debentures, due 2028
 

 
490

 

 
490

6.125% senior notes, due 2034
 

 
464

 

 
464

Total
 
$

 
$
1,011

 
$

 
$
1,011

 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
Note payable
 
$

 
$
24

 
$

 
$
24

6.900% senior debentures, due 2028
 

 
34

 

 
34

6.920% senior debentures, due 2028
 

 
505

 

 
505

6.125% senior notes, due 2034
 

 
477

 

 
477

Total
 
$

 
$
1,040

 
$

 
$
1,040

 
 
 
 
 
 
 
 
 
 
The following table shows the fair value of our life policy loans included in other invested assets:
(Dollars in millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At March 31, 2018
 
 
 
 
Life policy loans
 
$

 
$

 
$
40

 
$
40

 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
Life policy loans
 
$

 
$

 
$
41

 
$
41

 
 
 
 
 
 
 
 
 
 
Outstanding principal and interest for these life policy loans totaled $31 million at March 31, 2018, and December 31, 2017.
 

Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 15



The following table shows fair values of our deferred annuities and structured settlements included in life policy and investment contract reserves:
(Dollars in millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At March 31, 2018
 
 
 
 
Deferred annuities
 
$

 
$

 
$
788

 
$
788

Structured settlements
 

 
200

 

 
200

Total
 
$

 
$
200

 
$
788

 
$
988

 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
Deferred annuities
 
$

 
$

 
$
834

 
$
834

Structured settlements
 

 
210

 

 
210

Total
 
$

 
$
210

 
$
834

 
$
1,044

 
 
 
 
 
 
 
 
 

Recorded reserves for the deferred annuities were $821 million and $835 million at March 31, 2018, and December 31, 2017, respectively. Recorded reserves for the structured settlements were $161 million at March 31, 2018, and December 31, 2017.



Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 16



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 March 31,
 
 
2018
 
2017
Gross loss and loss expense reserves, beginning of period
 
$
5,219

 
$
5,035

Less reinsurance recoverable
 
187

 
298

Net loss and loss expense reserves, beginning of period
 
5,032

 
4,737

Net incurred loss and loss expenses related to:
 
 

 
 

Current accident year
 
839

 
826

Prior accident years
 
(48
)
 
(38
)
Total incurred
 
791

 
788

Net paid loss and loss expenses related to:
 
 

 
 

Current accident year
 
195

 
185

Prior accident years
 
519

 
509

Total paid
 
714

 
694

Net loss and loss expense reserves, end of period
 
5,109

 
4,831

Plus reinsurance recoverable
 
184

 
297

Gross loss and loss expense reserves, end of period
 
$
5,293

 
$
5,128

 
 
 
 
 
 
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 $52 million at March 31, 2018, and
$49 million at March 31, 2017, for certain life and health loss and loss expense reserves.

For the three months ended March 31, 2018, we experienced $48 million of favorable development on prior accident years, including $35 million of favorable development in commercial lines, $1 million of favorable development in personal lines, $10 million of favorable development in excess and surplus lines and $2 million of favorable development in our reinsurance assumed operations. This included $7 million from favorable development of catastrophe losses for the three months ended March 31, 2018. For the three months ended March 31, 2018, we recognized favorable reserve development of $21 million for the commercial property line, $13 million for the workers' compensation line, $2 million for the commercial auto line and $4 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. For the three months ended March 31, 2018, we recognized unfavorable reserve development of $5 million for the commercial casualty line. The unfavorable reserve development for commercial casualty was primarily due to an increase in case reserves for accident year 2017.

For the three months ended March 31, 2017, we experienced $38 million of favorable development on prior accident years, including $11 million of favorable development in commercial lines, $10 million of favorable development in personal lines, $13 million of favorable development in excess and surplus lines and $4 million of favorable development in our reinsurance assumed operations. This included $11 million from favorable development of catastrophe losses for the three months ended March 31, 2017. For the three months ended March 31, 2017, we recognized favorable reserve development of $18 million for the workers' compensation line, $10 million for the commercial property line and $8 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expenses for these lines. For the three months ended March 31, 2017, we recognized unfavorable reserve development of $15 million for the commercial casualty line and $10 million for the commercial auto line. The unfavorable reserve development for commercial casualty reflected higher

Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 17



than usual large loss activity. Commercial auto developed unfavorably due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled.



Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 18



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

This table summarizes our life policy and investment contract reserves:
(Dollars in millions)
 
March 31,
2018
 
December 31, 2017
Life policy reserves:
 
 
 
 
Ordinary/traditional life
 
$
1,098

 
$
1,080

Other
 
47

 
47

Subtotal
 
1,145

 
1,127

Investment contract reserves:
 
 
 
 
Deferred annuities
 
821

 
835

Universal life
 
607

 
601

Structured settlements
 
161

 
160

Other
 
6

 
6

Subtotal
 
1,595

 
1,602

Total life policy and investment contract reserves
 
$
2,740

 
$
2,729

 
 
 
 
 



Cincinnati Financial Corporation First-Quarter 2018 10-Q
Page 19



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 March 31,

2018
 
2017
Property casualty:
 
 
 
Deferred policy acquisition costs asset, beginning of period
$
438

 
$
408

Capitalized deferred policy acquisition costs
232

 
226

Amortized deferred policy acquisition costs
(224
)
 
(206
)
Deferred policy acquisition costs asset, end of period
$
446

 
$
428

 
 
 
 
Life:
 
 
 
Deferred policy acquisition costs asset, beginning of period
$
232

 
$
229

Capitalized deferred policy acquisition costs
13

 
13

Amortized deferred policy acquisition costs
(10
)
 
(8
)
Amortized shadow deferred policy acquisition costs
10

 
(2
)
Deferred policy acquisition costs asset, end of period
$
245

 
$
232

 
 
 
 
Consolidated:
 
 
 
Deferred policy acquisition costs asset, beginning of period
$
670

 
$
637

Capitalized deferred policy acquisition costs
245

 
239

Amortized deferred policy acquisition costs
(234
)
 
(214
)
Amortized shadow deferred policy acquisition costs
10

 
(2
)
Deferred policy acquisition costs asset, end of period
$
691

 
$
660

 
 
 
 

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 First-Quarter 2018 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 March 31,
 
2018
 
 
2017
 
Before tax
 
Income tax
 
Net
 
 
Before tax
 
Income tax
 
Net
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
$
3,540

 
$
733

 
$
2,807

 
 
$
2,625

 
$
908

 
$
1,717

Cumulative effect of change in accounting for equity securities as of January 1, 2018
(3,155
)
 
(652
)
 
(2,503
)
 
 

 

 

Adjusted AOCI, beginning of period
385

 
81

 
304

 
 
2,625

 
908

 
1,717

OCI before investment gains recognized in net income
(217
)
 
(45
)
 
(172
)
 
 
290

 
102

 
188

Investment gains recognized in net income