Item 8. Financial Statements and Supplementary Data

Responsibility for Financial Statements

We have prepared the consolidated financial statements of Cincinnati Financial Corporation and our subsidiaries for the year ended December 31, 2017, in accordance with accounting principles generally accepted in the United States of America (GAAP).

We are responsible for the integrity and objectivity of these financial statements. The amounts, presented on an accrual basis, reflect our best estimates and judgment. These statements are consistent in all material aspects with other financial information in the Annual Report on Form 10-K. Our accounting system and related internal controls are designed to assure that our books and records accurately reflect the company’s transactions in accordance with established policies and procedures as implemented by qualified personnel.

Our board of directors has established an audit committee of independent outside directors. We believe these directors are free from any relationships that could interfere with their independent judgment as audit committee members.

The audit committee meets periodically with management, our independent registered public accounting firm and our internal auditors to discuss how each is handling its respective responsibilities. The audit committee reports its findings to the board of directors. The audit committee recommends to the board the annual appointment of the independent registered public accounting firm. The audit committee reviews with this firm the scope of the audit assignment and the adequacy of internal controls and procedures.

Deloitte & Touche LLP, our independent registered public accounting firm, audited the consolidated financial statements of Cincinnati Financial Corporation and subsidiaries for the year ended December 31, 2017. Deloitte & Touche LLP met with our audit committee to discuss the results of its examination. They have the opportunity to discuss the adequacy of internal controls and the quality of financial reporting without management present.

Cincinnati Financial Corporation - 2017 10-K - Page 112

Management’s Annual Report on Internal Control Over Financial Reporting

The management of Cincinnati Financial Corporation and its subsidiaries is responsible for establishing and maintaining adequate internal controls, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). The company’s internal control over financial reporting includes those policies and procedures that:

•	Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

•	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and

•	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

The company’s management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2017, as required by Section 404 of the Sarbanes Oxley Act of 2002. Management’s assessment was based on the criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and was designed to provide reasonable assurance that the company maintained effective internal control over financial reporting as of December 31, 2017. The assessment led management to conclude that, as of December 31, 2017, the company’s internal control over financial reporting was effective based on those criteria.

The company’s independent registered public accounting firm has issued an audit report on our internal control over financial reporting as of December 31, 2017.

/S/ Steven J. Johnston

Steven J. Johnston, FCAS, MAAA, CFA, CERA

President and Chief Executive Officer

/S/ Michael J. Sewell

Michael J. Sewell, CPA

Chief Financial Officer, Senior Vice President and Treasurer

(Principal Accounting Officer)

February 23, 2018

Cincinnati Financial Corporation - 2017 10-K - Page 113

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Cincinnati Financial Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Cincinnati Financial Corporation and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the schedules listed in the Index at Item 15(c) (collectively referred to as the “financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Basis for Opinions

The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Cincinnati Financial Corporation - 2017 10-K - Page 114

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/S/ DELOITTE & TOUCHE LLP

Cincinnati, Ohio

February 23, 2018

We have served as the Company’s auditor since 1980.

Cincinnati Financial Corporation - 2017 10-K - Page 115

Cincinnati Financial Corporation and Subsidiaries

Consolidated Balance Sheets

(Dollars in millions, except per share data)		December 31,				December 31,
		2017				2016
Assets
Investments
Fixed maturities, at fair value (amortized cost: 2017—$10,314; 2016—$9,799)		$	10,699			$	10,085
Equity securities, at fair value (cost: 2017—$3,094; 2016—$2,995)		6,249				5,334
Other invested assets		103				81
Total investments		17,051				15,500
Cash and cash equivalents		657				777
Investment income receivable		134				134
Finance receivable		61				51
Premiums receivable		1,589				1,533
Reinsurance recoverable		432				545
Prepaid reinsurance premiums		42				62
Deferred policy acquisition costs		670				637
Land, building and equipment, net, for company use (accumulated depreciation: 2017—$253; 2016—$237)		185				183
Other assets		216				198
Separate accounts		806				766
Total assets		$	21,843			$	20,386
Liabilities
Insurance reserves
Loss and loss expense reserves		$	5,273			$	5,085
Life policy and investment contract reserves		2,729				2,671
Unearned premiums		2,404				2,307
Other liabilities		792				786
Deferred income tax		745				865
Note payable		24				20
Long-term debt and capital lease obligations		827				826
Separate accounts		806				766
Total liabilities		13,600				13,326
Commitments and contingent liabilities (Note 16)		—				—
Shareholders' Equity
Common stock, par value—$2 per share; (authorized: 2017 and 2016—500 million shares; issued: 2017 and 2016—198.3 million shares)		397				397
Paid-in capital		1,265				1,252
Retained earnings		5,180				5,037
Accumulated other comprehensive income		2,788				1,693
Treasury stock at cost (2017—34.4 million shares and 2016—33.9 million shares)		(1,387		)		(1,319		)
Total shareholders' equity		8,243				7,060
Total liabilities and shareholders' equity		$	21,843			$	20,386

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

Cincinnati Financial Corporation - 2017 10-K - Page 116

Cincinnati Financial Corporation and Subsidiaries

Consolidated Statements of Income

(Dollars in millions, except per share data)		Years ended December 31,
		2017				2016				2015
Revenues
Earned premiums		$	4,954			$	4,710			$	4,480
Investment income, net of expenses		609				595				572
Realized investment gains, net		148				124				70
Fee revenues		16				15				13
Other revenues		5				5				7
Total revenues		5,732				5,449				5,142
Benefits and Expenses
Insurance losses and contract holders' benefits		3,390				3,107				2,808
Underwriting, acquisition and insurance expenses		1,546				1,465				1,387
Interest expense		53				53				53
Other operating expenses		13				12				13
Total benefits and expenses		5,002				4,637				4,261
Income Before Income Taxes		730				812				881
Provision (Benefit) for Income Taxes
Current		129				183				231
Deferred		(444		)		38				16
Total provision (benefit) for income taxes		(315		)		221				247
Net Income		$	1,045			$	591			$	634
Per Common Share
Net income—basic		$	6.36			$	3.59			$	3.87
Net income—diluted		6.29				3.55				3.83

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

Cincinnati Financial Corporation - 2017 10-K - Page 117

Cincinnati Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Dollars in millions)		Years ended December 31,
		2017				2016				2015
Net Income		$	1,045			$	591			$	634
Other Comprehensive Income
Change in unrealized gains and losses on investments, net of tax of $317, $186 and $(220), respectively		598				345				(405		)
Amortization of pension actuarial gains and losses and prior service cost, net of tax of $7, $6 and $(2), respectively		7				10				(4		)
Change in life deferred acquisition costs, life policy reserves and other, net of tax of $1, $(4) and $4, respectively		(2		)		(6		)		9
Other comprehensive income (loss)		603				349				(400		)
Comprehensive Income		$	1,648			$	940			$	234

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

Cincinnati Financial Corporation - 2017 10-K - Page 118

Cincinnati Financial Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(Dollars in millions)	Years ended December 31,
	2017				2016				2015
Common Stock
Beginning of year	$	397			$	397			$	397
Share-based awards	—				—				—
End of year	397				397				397
Paid-In Capital
Beginning of year	1,252				1,232				1,214
Share-based awards	(18		)		(8		)		(7		)
Share-based compensation	26				23				20
Other	5				5				5
End of year	1,265				1,252				1,232
Retained Earnings
Beginning of year	5,037				4,762				4,505
Net income	1,045				591				634
Dividends declared	(410		)		(316		)		(377		)
Reclassification of certain tax effects from accumulated other comprehensive income	(492		)		—				—
End of year	5,180				5,037				4,762
Accumulated Other Comprehensive Income
Beginning of year	1,693				1,344				1,744
Other comprehensive income (loss)	603				349				(400		)
Reclassification of certain tax effects to retained earnings	492				—				—
End of year	2,788				1,693				1,344
Treasury Stock
Beginning of year	(1,319		)		(1,308		)		(1,287		)
Share-based awards	26				36				41
Shares acquired - share repurchase authorization	(92		)		(39		)		(53		)
Shares acquired - share-based compensation plans	(7		)		(13		)		(16		)
Other	5				5				7
End of year	(1,387		)		(1,319		)		(1,308		)
Total Shareholders' Equity	$	8,243			$	7,060			$	6,427
(In millions)
Common Stock - Shares Outstanding
Beginning of year	164.4				163.9				163.7
Share-based awards	0.8				1.0				1.3
Shares acquired - share repurchase authorization	(1.3		)		(0.5		)		(1.0		)
Shares acquired - share-based compensation plans	(0.1		)		(0.2		)		(0.3		)
Other	0.1				0.2				0.2
End of year	163.9				164.4				163.9

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

Cincinnati Financial Corporation - 2017 10-K - Page 119

Cincinnati Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in millions)	Years ended December 31,
	2017				2016				2015
Cash Flows From Operating Activities
Net income	$	1,045			$	591			$	634
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	55				48				52
Realized investment gains, net	(148		)		(124		)		(70		)
Share-based compensation	26				23				20
Interest credited to contract holders'	48				48				44
Deferred income tax expense	(444		)		38				16
Changes in:
Investment income receivable	—				(5		)		(6		)
Premiums and reinsurance receivable	77				(113		)		(48		)
Deferred policy acquisition costs	(36		)		(26		)		(18		)
Other assets	(43		)		34				(39		)
Loss and loss expense reserves	188				367				233
Life policy and investment contract reserves	96				102				101
Unearned premiums	97				106				119
Other liabilities	24				61				55
Current income tax receivable/payable	67				(35		)		(18		)
Net cash provided by operating activities	1,052				1,115				1,075
Cash Flows From Investing Activities
Sale of fixed maturities	23				15				43
Call or maturity of fixed maturities	1,172				1,511				1,199
Sale of equity securities	523				465				342
Purchase of fixed maturities	(1,723		)		(1,994		)		(1,722		)
Purchase of equity securities	(513		)		(439		)		(493		)
Investment in finance receivables	(32		)		(17		)		(14		)
Collection of finance receivables	23				30				30
Investment in buildings and equipment	(16		)		(13		)		(10		)
Change in other invested assets, net	(15		)		(14		)		1
Net cash used in investing activities	(558		)		(456		)		(624		)
Cash Flows From Financing Activities
Payment of cash dividends to shareholders	(400		)		(306		)		(366		)
Shares acquired - share repurchase authorization	(92		)		(39		)		(53		)
Changes in note payable	4				(15		)		(14		)
Proceeds from stock options exercised	13				21				24
Contract holders' funds deposited	79				95				83
Contract holders' funds withdrawn	(164		)		(155		)		(148		)
Excess tax benefits on share-based compensation	—				5				4
Other	(54		)		(32		)		(28		)
Net cash used in financing activities	(614		)		(426		)		(498		)
Net change in cash and cash equivalents	(120		)		233				(47		)
Cash and cash equivalents at beginning of year	777				544				591
Cash and cash equivalents at end of year	$	657			$	777			$	544
Supplemental Disclosures of Cash Flow Information
Interest paid	$	52			$	52			$	52
Income taxes paid	60				213				245
Noncash Activities
Conversion of securities	$	5			$	4			$	3
Equipment acquired under capital lease obligations	14				20				20
Cashless exercise of stock options	7				13				16
Other assets and other liabilities	75				53				27

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

Cincinnati Financial Corporation - 2017 10-K - Page 120

Notes to Consolidated Financial Statements

NOTE 1 – Summary of Significant Accounting Policies

Nature of Operations

Cincinnati Financial Corporation (CFC) operates through our insurance group and two complementary subsidiary companies.

The Cincinnati Insurance Company leads our insurance group that also includes two subsidiaries: The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This group markets a broad range of standard market commercial and personal policies. The group focuses on delivery of quality customer service to our select group of 1,702 independent insurance agencies with 2,256 reporting locations across 42 states. Other subsidiaries of The Cincinnati Insurance Company include The Cincinnati Life Insurance Company, which markets life and disability income insurance and fixed annuities, and The Cincinnati Specialty Underwriters Insurance Company, which offers excess and surplus lines property casualty insurance products. The Cincinnati Insurance Company also conducts the business of our reinsurance assumed operations, Cincinnati ReSM.

The two CFC complementary subsidiaries are CSU Producer Resources Inc., which provides insurance brokerage services to our independent agencies so their clients can access our excess and surplus lines insurance products, and CFC Investment Company, which offers commercial leasing and financing services to our agents, their clients and other customers.

Basis of Presentation

Our consolidated financial statements include the accounts of the parent and its wholly owned subsidiaries and 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 the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. Our actual results could differ from those estimates.

Investments

Our portfolio investments are primarily in publicly traded fixed-maturity and equity security investments. Fixed-maturity investments (taxable bonds, tax-exempt bonds, redeemable preferred equities and commercial mortgage- backed securities) and equity investments (common and nonredeemable preferred equities) are classified as available for sale and recorded at fair value in the consolidated financial statements. The number of fixed-maturity securities with fair value below 100 percent of amortized cost can be expected to fluctuate as interest rates rise or fall. Because of our strong capital and long-term investment horizon, our general intent is to hold fixed-maturity investments until maturity, regardless of short-term fluctuations in fair values.

Impairment charges for fixed maturities are recorded for other-than-temporary declines in value if fair value is below amortized cost and, in the asset impairment committee’s judgment, the fair value is not expected to be recouped within a designated recovery period. Our invested asset impairment policy also states that fixed maturities below their amortized cost that the company (1) intends to sell or (2) more likely than not will be required to sell before recovery of their amortized cost basis are deemed to be other-than-temporarily impaired (OTTI). The amortized cost of any such securities is reduced to fair value as the new cost basis, and a realized loss is recorded in the period in which it is recognized. When these two criteria are not met, and the company believes that full collection of interest and/or principal is not likely, we determine the net present value of future cash flows by using the effective interest rate implicit in the security at the date of acquisition as the discount rate and compare that amount with the amortized cost and fair value of the security. The difference between the net present value of the expected future cash flows and amortized cost of the security is considered a credit loss and recognized as a realized loss in the period in which it occurred. The difference between the fair value and the net present value of the cash flows of the security, the noncredit loss, is recognized in other comprehensive income as an unrealized loss. We had no fixed-maturity securities with a noncredit loss for the years ended 2017, 2016 and 2015.

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When determining OTTI charges for our equity portfolio, our invested asset impairment policy considers qualitative and quantitative factors, including facts and circumstances specific to individual securities; asset classes; the financial condition of the issuer; changes in dividend payment; the length of time fair value had been less than cost; the severity of the decline in fair value below cost; the volatility of the security; and our ability and intent to hold each position until its forecasted recovery.

We include the noncredit portion of fixed-maturity OTTI charges and all other unrealized gains and losses on investments, net of taxes, in shareholders’ equity as accumulated other comprehensive income (AOCI). Realized gains and losses on investments are recognized in net income based on the trade date accounting method.

Included within our other invested assets were $31 million and $31 million of life policy loans, $35 million and $23 million of private equity investments and $37 million and $27 million of real estate through direct property ownership and development projects in the United States at December 31, 2017 and 2016, respectively. Life policy loans are carried at the receivable value. The private equity investments provide their financial statements to us and generally report investments on their balance sheets at fair value. We use the equity method of accounting for private equity and real estate development investments.

Investment income, net of expenses, consists mainly of interest and dividends. We record interest on an accrual basis and record dividends at the ex-dividend date. We amortize premiums and discounts on fixed-maturity securities using the effective interest method over the expected life of the security.

Fair Value Disclosures

Fair value is defined as the exit price or the amount that would be (1) received to sell an asset or (2) paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date. When determining an exit price, we rely upon observable market data whenever possible. We primarily base fair value for investments in equity and fixed-maturity securities (including redeemable preferred stock and assets held in separate accounts) on quoted market prices or on prices from the company’s nationally recognized pricing vendor, an outside resource that supplies global securities pricing, dividend, corporate action and descriptive information to support fund pricing, securities operations, research and portfolio management. The company obtains and reviews the pricing service’s valuation methodologies and related inputs and validates these prices by replicating a sample across each asset class using a discounted cash flow model. When a price is not available from these sources, as in the case of securities that are not publicly traded, we determine the fair value using various inputs including quotes from independent brokers. The fair value of investments not priced by the company’s nationally recognized pricing vendor is less than 1 percent of the fair value of our total investment portfolio.

For the purpose of ASC 825 disclosure, we estimate the fair value of our long-term senior notes on market pricing of similar debt instruments that are actively trading. We estimate the fair value of our note payable on the year-end outstanding balance because it is short term and tied to a variable interest rate. We estimate the fair value of liabilities for investment contracts and annuities using discounted cash flow calculations across a wide range of economic interest rate scenarios with a provision for our nonperformance risk. We estimate the fair value for policyholder loans on insurance contracts using a discounted cash flow model. Determination of fair value for structured settlements assumes the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2017, to account for nonperformance risk. See Note 3, Fair Value Measurements, for further details.

Cash and Cash Equivalents

Cash and cash equivalents are highly liquid instruments that include liquid debt instruments with original maturities of less than three months. These are carried at cost, which approximates fair value.

Property Casualty Insurance

The consolidated property casualty companies actively write property casualty insurance through independent agencies in 42 states. Our 10 largest states generated 59.7 percent and 61.4 percent of total earned premiums in 2017 and 2016, respectively. Ohio, our largest state, accounted for 16.2 percent and 16.8 percent of total earned premiums in 2017 and 2016, respectively. Illinois, Georgia, Indiana, North Carolina, Pennsylvania and Michigan each accounted for between 5 percent and 7 percent of total earned premiums in 2017. Our largest single agency relationship accounted for approximately 0.8 percent of our total property casualty earned premiums in 2017. No aggregate agency relationship locations under a single ownership structure accounted for

Cincinnati Financial Corporation - 2017 10-K - Page 122

more than 4 percent of our total property casualty earned premiums in 2017. We record revenues for installment charges as fee revenues in the consolidated statements of income.

Property casualty written premiums are deferred and recorded as earned premiums on a pro rata basis over the terms of the policies. We record as unearned premiums the portion of written premiums that applies to unexpired policy terms. Expenses associated with successfully acquiring insurance policies – commissions, premium taxes and underwriting costs – are deferred and amortized over the terms of the policies. We assess recoverability of deferred acquisition costs at a level consistent with the way we acquire, service and manage insurance policies and measure profitability. We analyze our acquisition cost assumptions to reflect actual experience, and we evaluate potential premium deficiencies.

Certain property casualty policies are not entered into policy underwriting systems as of the effective date of coverage. An estimate is recorded for these unprocessed written premiums. A large majority of the estimate is unearned and has no material impact on earned premiums.

Premiums receivable are reviewed for impairment on a quarterly basis. We maintain an allowance for uncollectible premiums.

We establish reserves to cover the expected cost of claims, losses and expenses related to investigating, processing and resolving claims. Although the appropriate amount of reserves is inherently uncertain, we base our decisions on past experience and current facts. Reserves are based on claims reported prior to the end of the year and estimates of unreported claims. We regularly review and update reserves using the most current information available. Any resulting adjustments are reflected in current calendar year insurance losses and policyholder benefits. We estimate that we may recover some of our costs through salvage and subrogation.

Policyholder Dividends

Certain workers’ compensation policies include the possibility of a policyholder earning a return of a portion of premium in the form of a policyholder dividend. The dividend generally is calculated by determining the profitability of a policy year along with the associated premium. We reserve for all probable future policyholder dividend payments. We record policyholder dividends as other underwriting expenses.

Life Insurance

We offer several types of life insurance and disability income insurance, and we account for each according to the duration of the contract. Short-duration life and health contracts are written to cover claims that arise during a short, fixed term of coverage. We generally have the right to change the amount of premium charged or cancel the coverage at the end of each contract term. We record premiums for short-duration life and health contracts similarly to property casualty contracts.

Long-duration contracts are written to provide coverage for an extended period of time. Traditional long-duration contracts require policyholders to pay scheduled gross premiums, generally not less frequently than annually, over the term of the coverage. Premiums for these contracts, such as whole life insurance and disability income insurance, are recognized as revenue when due. Some traditional long-duration contracts, such as ten-pay whole life insurance, have premium payment periods shorter than the period over which coverage is provided. For these contracts, the excess of premium over the amount required to pay expenses and benefits is recognized over the term of the coverage rather than over the premium payment period.

We establish a liability for traditional long-duration contracts as we receive premiums. The amount of this liability is the present value of future expenses and benefits less the present value of future net premiums. Net premium is the portion of gross premium required to provide for all expenses and benefits. We estimate future expenses and benefits and net premium using assumptions for expected expenses, mortality, morbidity, withdrawal rates and investment income. We include a provision for deviation, meaning we allow for some uncertainty in making our assumptions. We establish our assumptions when the contract is issued, and we generally maintain those assumptions for the life of the contract. 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. We use our own experience and historical trends for setting our assumption for expected expenses. We base our assumption for expected investment income on our own experience, adjusted for current economic conditions.

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We capitalize acquisition costs for traditional long-duration contracts. We charge these capitalized costs associated with successfully acquiring traditional long-duration contract insurance policies in proportion to premium revenue recognized. We use the same assumptions used in establishing the liability for the contract. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate our deferred acquisition costs for recoverability.

Universal life contracts are long-duration contracts for which contractual provisions are not fixed, unlike whole life insurance. Universal life contracts allow policyholders to vary the amount of premium, within limits, without our consent. However, we may vary the mortality, expense charges and the interest crediting rate, within limits, used to accumulate policy values. We do not record universal life premiums as revenue. Instead we recognize as revenue the mortality charges, administration charges and surrender charges when received. Some of our universal life contracts assess administration charges in the early years of the contract that are compensation for services we will provide in the later years of the contract. These administration charges are deferred and are recognized over the period when we provide those future services. We maintain a policy reserve liability equal to the policyholder account value. There is no provision for adverse deviation. 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.

We capitalize acquisition costs associated with successfully acquiring universal life long-duration contracts. We charge these capitalized costs to expenses over the term of coverage of the contract in accordance with the recognition of gross profit from the contract. When we charge deferred policy acquisition costs to expenses, we use assumptions based on our best estimates of long-term experience. We review and modify these assumptions on a regular basis.

Separate Accounts

We have issued universal life contracts with guaranteed minimum returns, referred to as bank-owned life insurance contracts (BOLIs). A BOLI is designed so the bank is the policy owner and the policy beneficiary. We legally segregate and record as separate accounts the assets and liabilities for some of our BOLIs, based on the specific contract provisions. We guarantee minimum investment returns, account values and death benefits for our separate account BOLIs. Our other BOLIs are general account products.

We carry the assets of separate account BOLIs at fair value. The liabilities on separate account BOLIs primarily are the contract holders’ claims to the related assets and are carried at an amount equal to the contract holders’ account value. At December 31, 2017, the current fair value of the BOLI invested assets and cash exceeded the current fair value of the contract holders’ account value by approximately $29 million. If the BOLI projected fair value were to fall below the value we guaranteed, a liability would be established with a corresponding charge to the company’s earnings.

Generally, investment income and realized investment gains and losses of the separate accounts accrue directly to the contract holder, and we do not include them in the consolidated statements of income. Revenues and expenses related to separate accounts consist of contractual fees and mortality, surrender and expense risk charges. Also, each separate account BOLI includes a negotiated capital gain and loss sharing arrangement between the company and the bank. A percentage of each separate account’s realized capital gain and loss representing contract fees and assessments accrues to us and is transferred from the separate account to our general account and is recognized as revenue or expense. We record as revenues separate account investment management fees in fee revenues of the consolidated statements of income.

Reinsurance

The Cincinnati Insurance Company offers reinsurance assumed for casualty and specialty (predominantly domestic exposure) and property (worldwide exposure). Treaties are written on a pro rata and excess of loss basis. We also continue to assume risk with limited exposure as a reinsurer for involuntary state pools.

Written premium is recorded, net of contract specific retrocessions, on an ultimate estimate basis and earned on a pro rata basis over the coverage period of the treaty. Expenses are recorded as per contract terms and deferred over the earning period of the premium.

We establish known loss reserves when reported. We establish reserves for losses in excess of reported activity in the form of IBNR. Reserves are established using actuarial analysis which includes models and methods

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traditionally used for the types of exposures written. We establish reserves for event specific occurrences using modeling data and company specific data when available.

We enter into other reinsurance transactions to reduce risk and uncertainty by buying property casualty reinsurance and retrocessional reinsurance as well as life reinsurance. Reinsurance and retrocessional reinsurance contracts do not relieve us from our obligation to policyholders, but rather help protect our financial strength to perform that duty. All of these ceded reinsurance contracts transfer the economic risk of loss.

Premiums that we cede are deferred and recorded as earned premiums on a pro rata basis over the terms of the contracts. We estimate loss amounts recoverable from our reinsurers based on the reinsurance policy terms. Historically, our claims with reinsurers have been paid. We establish an insignificant allowance for uncollectible reinsurance.

Income Taxes

We calculate deferred income tax liabilities and assets using tax rates in effect when temporary differences in the consolidated financial statement income and taxable income are expected to reverse. We recognize deferred income taxes for numerous temporary differences between our taxable income and consolidated financial statement income and other changes in shareholders’ equity. Such temporary differences relate primarily to unrealized gains and losses on investments and differences in the recognition of deferred acquisition costs, unearned premiums, insurance reserves and basis differences in the carrying value of investments held. We charge deferred income taxes associated with balances that impact other comprehensive income, such as unrealized appreciation and depreciation of investments (except the amount related to the effect of income tax rate changes), to shareholders’ equity in accumulated other comprehensive income (AOCI). We charge deferred taxes associated with other differences to income. Although no Internal Revenue Service (IRS) penalties currently are accrued, if incurred, they would be recognized as a component of income tax expense.

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and reduced U.S. corporate income tax rates from 35 percent to 21 percent. The effect of the rate change was recorded as a one-time noncash benefit to income tax expense in our consolidated statements of income for the year ended December 31, 2017. See Note 11, Income Taxes, for further detail on the Tax Act, our uncertain tax positions and other income tax items.

Earnings per Share

Net income per common share is based on the weighted average number of common shares outstanding during each of the respective years. We calculate net income per common share (diluted) assuming the exercise or conversion of share‑based awards using the treasury stock method.

Land, Building and Equipment

We record land at cost, and record building and equipment at cost less accumulated depreciation. Equipment held under capital leases also is classified as property and equipment with the related lease obligations recorded as liabilities. We capitalize and amortize costs for internally developed computer software during the application development stage. These costs generally consist of external consulting, internal payroll and payroll-related costs. Our depreciation is based on estimated useful lives (ranging from three years to 39.5 years) using straight-line and accelerated methods. Depreciation expense was $28 million for 2017, $30 million for 2016 and $36 million for 2015. We review our accumulated depreciation for our building, equipment and software assets and write off fully depreciated assets for obsolesce and nonuse. We monitor land, building and equipment and software assets for potential impairments. Potential impairments may include a significant decrease in the fair values of the assets, considerable cost overruns on projects, a change in legal factors or business climate or other factors that indicate that the carrying amount may not be recoverable or useful. There were no recorded land, building and equipment impairments for 2017, 2016 or 2015.

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Finance Receivables

Our leasing subsidiary provides auto and equipment direct financing (leases and loans) to commercial and individual clients. We generally transfer ownership of the property to the client as the terms of the leases expire. Our lease contracts contain bargain purchase options. We account for these leases and loans as direct financing-type leases. We capitalize and amortize lease or loan origination costs over the life of the financing, using the effective interest method. These costs may include, but are not limited to finder fees, broker fees, filing fees and the cost of credit reports. We record income as other revenues over the financing term using the effective interest method in the consolidated statements of income. Finance receivables are reviewed for impairment and are insignificant to our consolidated financial position, results of operations and cash flows.

Employee Benefit Pension Plan

We sponsor a defined benefit pension plan that was modified during 2008. We closed entry into the pension plan, and only participants 40 years of age or older could elect to remain in the plan. Our pension expense is based on certain actuarial assumptions and also is composed of several components that are determined using the projected unit credit actuarial cost method. Refer to Note 13, Employee Retirement Benefits, for more information about our defined benefit pension plan.

Share-Based Compensation

We grant qualified and nonqualified share-based compensation under authorized plans. The stock options generally vest on a graded scale over three years following the date of grant and are exercisable over 10-year periods. We grant service-based restricted stock units that cliff vest three years after the date of grant as well as service-based restricted stock units that vest ratably over the three-year vesting term. We also grant performance-based restricted stock units that vest if certain market conditions are attained. In 2017, the CFC compensation committee approved share-based awards including incentive stock options, nonqualified stock options, service-based restricted and performance-based restricted stock units. See Note 17, Share-Based Associate Compensation Plans, for further details.

Subsequent Events

There were no subsequent events requiring adjustment to the consolidated financial statements or disclosure.

Adopted Accounting Updates

ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting

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

ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The effective date of ASU 2016-09 was for interim and annual reporting periods beginning after December 15, 2016. The recognition and classification of the excess tax benefit provisions were applied prospectively in the results of operations and statement of cash flows. This adoption resulted in excess tax benefits of $7 million for the year ended December 31, 2017, which reduced our current provision for income taxes in our results of operations. The statutory tax withholding classification, which are cash payments made to taxing authorities for shares withheld, were applied retrospectively and reclassified the statutory

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tax withholding requirements in the statement of cash flows from Other liabilities in operating activities to Other in financing activities. This statutory tax withholding reclassification resulted in $13 million, $12 million and $11 million being included in financing activities for the years ended December 31, 2017, 2016 and 2015, respectively. There were no cumulative effect adjustments upon adoption of this ASU.

ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). ASU 2018-02 eliminates the stranded tax effects within AOCI resulting from the application of current GAAP in response to the change in the U.S. corporate income tax rate from 35 percent to 21 percent as part of the Tax Act. Stranded tax effects unrelated to the Tax Act are released from AOCI using the security-by-security approach. The effective date of ASU 2018-02 is for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted for public entities for which financial statements had not yet been issued. The company elected to early adopt ASU 2018-02 effective for the year ended December 31, 2017, and applied the provisions retrospectively within our consolidated balance sheets and statements of shareholders' equity. This adoption resulted in a one-time reclassification of the effect of remeasuring deferred tax liabilities related to items, primarily unrealized gains and losses on investments, within AOCI to retained earnings resulting from the change in the U.S. corporate income tax rate. This reclassification resulted in an increase to AOCI and a decrease to retained earnings in the amount of $492 million for the year ended December 31, 2017, with no net impact to total shareholders' equity.

Pending Accounting Updates

ASU 2014-09 Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Insurance contracts do not fall within the scope of this ASU. The effective date of ASU 2014-09 is for interim and annual reporting periods beginning after December 15, 2017. The ASU has not yet been adopted and will not have a material impact on our company’s 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 revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. Our results of operations will be impacted as changes in fair value of equity securities will be reported in net income instead of other comprehensive income. The effective date of ASU 2016-01 is for interim and annual reporting periods beginning after December 15, 2017, and will be applied prospectively. The ASU has not yet been adopted. Upon adoption of this ASU on January 1, 2018, $2.503 billion of after-tax unrealized gains on equity securities will be reclassified from AOCI to retained earnings.

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.

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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 and results of operations.

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

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

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

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

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 will 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 amendment should be applied on a prospective basis. The effective date of ASU 2017-09 is for interim and annual reporting periods, beginning after December 15, 2017. The ASU has not yet been adopted; however, it will not have a material impact on our company's consolidated financial position, cash flows or results of operations.

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NOTE 2 – Investments

The following table provides cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value for our fixed-maturity and equity securities:

(Dollars in millions)		Cost or amortized cost				Gross unrealized								Fair value
At December 31, 2017			gains				losses
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
At December 31, 2016
Fixed-maturity securities:
Corporate		$	5,555			$	252			$	26			$	5,781
States, municipalities and political subdivisions		3,770				100				42				3,828
Commercial mortgage-backed		282				7				2				287
Government-sponsored enterprises		167				—				3				164
United States government		10				—				—				10
Foreign government		10				—				—				10
Convertibles and bonds with warrants attached		5				—				—				5
Subtotal		9,799				359				73				10,085
Equity securities:
Common equities		2,812				2,320				9				5,123
Nonredeemable preferred equities		183				28				—				211
Subtotal		2,995				2,348				9				5,334
Total		$	12,794			$	2,707			$	82			$	15,419

The net unrealized investment gains in our fixed-maturity portfolio at December 31, 2017, are primarily the result of the continued low interest rate environment that increased the fair value of our fixed-maturity portfolio. Our commercial mortgage-backed securities had an average rating of Aa1/AA at December 31, 2017 and 2016. The seven largest net unrealized investment gains in our common stock portfolio are from JP Morgan Chase & Co. (NYSE:JPM), Honeywell International Incorporated (NYSE:HON), BlackRock Inc. (NYSE:BLK), Microsoft Corporation (Nasdaq:MFST), Apple Inc. (Nasdaq:AAPL), 3M Company (NYSE:MMM) and Johnson and Johnson (NYSE:JNJ), which had a combined gross unrealized gain of $1.013 billion. At December 31, 2017, JP Morgan Chase & Co. was our largest single equity holding with a fair value of 4.0 percent of our publicly traded common equities portfolio and 1.4 percent of the total investment portfolio.

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The table below provides fair values and 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 December 31, 2017		Fair value				Unrealized losses				Fair value				Unrealized losses				Fair value				Unrealized losses
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
At December 31, 2016
Fixed-maturity securities:
Corporate		$	733			$	15			$	189			$	11			$	922			$	26
States, municipalities and political subdivisions		989				42				—				—				989				42
Commercial mortgage-backed		89				2				2				—				91				2
Government-sponsored enterprises		155				3				—				—				155				3
United States government		6				—				—				—				6				—
Subtotal		1,972				62				191				11				2,163				73
Equity securities:
Common equities		103				9				—				—				103				9
Nonredeemable preferred equities		4				—				—				—				4				—
Subtotal		107				9				—				—				107				9
Total		$	2,079			$	71			$	191			$	11			$	2,270			$	82

Contractual maturity dates for fixed-maturity investments were:

(Dollars in millions)		Amortized cost				Fair value				% of fair value
At December 31, 2017
Maturity dates:
Due in one year or less		$	511			$	519			4.9	%
Due after one year through five years		2,736				2,839				26.5
Due after five years through ten years		3,921				4,058				37.9
Due after ten years		3,146				3,283				30.7
Total		$	10,314			$	10,699			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.

At December 31, 2017 and 2016, the company had fixed-maturity investments with a fair value of $101 million and $72 million, respectively, on deposit with various states in compliance with regulatory requirements. In addition, cash and fixed-maturity investments deposited with third parties used as collateral to secure liabilities on behalf of insureds, cedants and other creditors had a fair value of $57 million and $22 million at December 31, 2017 and 2016, respectively.

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In the normal course of investing activities, the company enters into investments in limited partnerships, including private equity and real estate investments, and asset-backed securities issued by third-parties. The company’s maximum exposure to loss with respect to these investments is limited to the investment carrying values included in the company’s consolidated balance sheets and any unfunded commitments.

The following table provides investment income and realized investment gains and losses:

(Dollars in millions)		Years ended December 31,
		2017				2016				2015
Investment income:
Interest		$	445			$	440			$	428
Dividends		170				161				150
Other		4				3				3
Total		619				604				581
Less investment expenses		10				9				9
Total		$	609			$	595			$	572
Realized investment gains and losses:
Fixed maturities:
Gross realized gains		$	25			$	26			$	18
Gross realized losses		—				(1		)		—
Other-than-temporary impairments		(6		)		(2		)		(18		)
Equity securities:
Gross realized gains		195				152				129
Gross realized losses		(72		)		(53		)		(26		)
Other-than-temporary impairments		(3		)		—				(34		)
Other		9				2				1
Total		$	148			$	124			$	70

For the years ended December 31, 2017, 2016 and 2015, there were no credit losses on fixed-maturity securities for which a portion of OTTI has been recognized in other comprehensive income.

During 2017, we other-than-temporarily impaired six securities. 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.

During 2016, we other-than-temporarily impaired four securities. At December 31, 2016, 32 fixed-maturity investments with a total unrealized loss of $11 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below 70 percent of amortized cost. There were no equity security investments in an unrealized loss position for 12 months or more as of December 31, 2016.

During 2015, we other-than-temporarily impaired 20 securities. At December 31, 2015, 69 fixed-maturity investments with a total unrealized loss of $37 million had been in an unrealized loss position for 12 months or more. Of that total, five 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, 2015.

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NOTE 3 – Fair Value Measurements

Fair Value Hierarchy

The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2016, and ultimately management determines fair value. Financial instruments reported at fair value in our consolidated financial statements are categorized based upon the following characteristics or inputs to the valuation techniques:

•	Level 1 – Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in active markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.

•	Level 2 – Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets and liabilities that are actively traded. This also includes pricing models for which the inputs are corroborated by market data.

The technique used for the Level 2 fixed-maturity securities and taxable fixed maturities in separate accounts is the application of market based modeling. The inputs used for all classes of fixed-maturity securities listed in the table below include relevant market information by asset class, trade activity of like securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates, U.S. Treasury or swap curves, yield to maturity and economic events. Specific to commercial mortgage-backed securities, key inputs also include prepayment and default projections based on past performance of the underlying collateral and current market data. All of the Level 2 fixed-maturity securities are priced by a nationally recognized pricing vendor.

The Level 2 nonredeemable preferred equities technique used is the application of market based modeling. The inputs used, similar to those used by the pricing vendor for our fixed-maturity securities, include relevant market information, trade activity of like securities, yield to maturity, corporate action notices and economic events. All of the Level 2 nonredeemable preferred equities are priced by a nationally recognized pricing vendor.

•	Level 3 – Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following:

◦	Quotes from brokers or other external sources that are not considered binding;

◦	Quotes from brokers or other external sources where it cannot be determined that market participants would in fact transact for the asset or liability at the quoted price; or

◦	Quotes from brokers or other external sources where the inputs are not deemed observable.

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The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2017 and 2016. 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 unobservable inputs (Level 3)
At December 31, 2017			Significant other observable inputs (Level 2)					Total
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
At December 31, 2016
Fixed maturities, available for sale:
Corporate		$	—			$	5,703			$	78			$	5,781
States, municipalities and political subdivisions		—				3,828				—				3,828
Commercial mortgage-backed		—				287				—				287
Government-sponsored enterprises		—				164				—				164
United States Government		10				—				—				10
Foreign government		—				10				—				10
Convertibles and bonds with warrants attached		—				5				—				5
Subtotal		10				9,997				78				10,085
Common equities, available for sale		5,123				—				—				5,123
Nonredeemable preferred equities, available for sale		—				211				—				211
Separate accounts taxable fixed maturities		—				750				—				750
Top Hat savings plan mutual funds and common equity (included in Other assets)		24				—				—				24
Total		$	5,157			$	10,958			$	78			$	16,193

Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value for the years ended December 31, 2017 and 2016. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the 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 into Level 3 included situations where a fair value quote was not provided by the company's nationally recognized pricing vendor and as a result the price was stale or had been replaced with a broker quote where the inputs had not been corroborated to be market observable resulting in the security being classified as Level 3. Transfers out of Level 3 included situations where a broker quote was used without observable inputs or data that could not be corroborated by our pricing vendors in the prior period and significant observable inputs were identified in the current period.

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The following table provides the change in Level 3 assets during 2017 and 2016:

(Dollars in millions)	Asset fair value measurements using significant unobservable input
		Corporate fixed maturities				Separate accounts taxable fixed maturities				States, municipalities and political subdivisions fixed maturities				Nonredeemable preferred equities				Total
Beginning balance, January 1, 2017		$	78			$	—			$	—			$	—			$	78
Total gains or losses (realized/unrealized):
Included in net income		—				—				—				—				—
Included in other comprehensive income		—				—				—				—				—
Purchases		—				—				5				—				5
Sales		—				—				—				—				—
Transfers into Level 3		—				—				—				—				—
Transfers out of Level 3		(77		)		—				—				—				(77		)
Ending balance, December 31, 2017		$	1			$	—			$	5			$	—			$	6
Beginning balance, January 1, 2016		$	51			$	1			$	—			$	3			$	55
Total gains or losses (realized/unrealized):
Included in net income		—				—				—				—				—
Included in other comprehensive income		—				—				—				(1		)		(1		)
Purchases		57				—				—				—				57
Sales		(1		)		—				—				(2		)		(3		)
Transfers into Level 3		13				—				—				—				13
Transfers out of Level 3		(42		)		(1		)		—				—				(43		)
Ending balance, December 31, 2016		$	78			$	—			$	—			$	—			$	78

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

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Fair Value Disclosure 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 consolidated financial statements.

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 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
At December 31, 2016
Note payable		$	—			$	20			$	—			$	20
6.900% senior debentures, due 2028		—				33				—				33
6.920% senior debentures, due 2028		—				488				—				488
6.125% senior notes, due 2034		—				435				—				435
Total		$	—			$	976			$	—			$	976

Fair value of the note payable was determined based upon the outstanding balance at December 31, 2017 and 2016, because it is short term and tied to a variable interest rate. Fair value of the long-term debt was determined under the fair value measurements and disclosure accounting rules based on market pricing of similar debt instruments that are actively trading. We determine fair value for our debt the same way that we value corporate fixed maturities in our investment portfolio. Fair value can vary with macroeconomic conditions. Regardless of the fluctuations in fair value, the outstanding principal amount of our long-term debt is $793 million at both December 31, 2017 and 2016. None of the long-term debt is encumbered by rating triggers. The note payable and long-term debt were classified as Level 2 as an active market does not exist, but fair value is determined based on observable inputs.

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 December 31, 2017
Life policy loans		$	—			$	—			$	41			$	41
At December 31, 2016
Life policy loans		$	—			$	—			$	40			$	40

Outstanding principal and interest for these life policy loans totaled $31 million at December 31, 2017 and 2016. To determine the fair value, we make the following significant assumptions: (1) the discount rates used to calculate the present value of expected payments are the risk-free spot rates, as nonperformance risk is minimal; and (2) the loan repayment rate by which policyholders pay off their loan balances is in line with past experience.

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The following table shows fair value 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 December 31, 2017
Deferred annuities		$	—			$	—			$	834			$	834
Structured settlements		—				210				—				210
Total		$	—			$	210			$	834			$	1,044
At December 31, 2016
Deferred annuities		$	—			$	—			$	839			$	839
Structured settlements		—				206				—				206
Total		$	—			$	206			$	839			$	1,045

Recorded reserves for the deferred annuities were $835 million and $861 million at December 31, 2017 and 2016, respectively. Recorded reserves for the structured settlements were $161 million and $170 million at December 31, 2017 and 2016, respectively.

Fair values for deferred annuities were calculated based upon internally developed models because active markets and observable inputs do not exist. To determine the fair value, we made the following significant assumptions: (1) the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2017 and 2016, to account for nonperformance risk; (2) the rate of interest credited to policyholders is the portfolio net earned interest rate less a spread for expenses and profit; and (3) additional lapses occur when the credited interest rate is exceeded by an assumed competitor credited rate, which is a function of the risk-free rate of the economic scenario being modeled.

Fair values for structured settlements were calculated based on internally developed models which assume the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2017 and 2016, to account for nonperformance risk. The structured settlements were classified as Level 2 as an active market does not exist, but fair value is based on observable inputs.

NOTE 4 – Property Casualty Loss and Loss Expenses

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.

Our reserving process takes into account known facts and interpretations of circumstances and factors including the type of claim, policy provisions pertaining to each claim, potential subrogation or salvage recoverable, large loss activity and trends, new business activity, judicial decisions, economic conditions, changes in law and regulation and product and underwriting changes. There have been no significant changes in methodologies and assumptions used in calculating loss and loss expense reserves for all years presented. There were no material additional premiums or return premiums accrued for as a result of prior-year effects.

Our field claims representatives establish case reserves when claims are reported to provide for our unpaid loss and loss expense obligation associated with individual claims.

For events designated as natural catastrophes resulting in losses incurred related to direct premiums, we calculate IBNR reserves directly as a result of an estimated claim counts and estimated average dollar amount per claim for each event. Once individual case reserves are established for a catastrophe event, we reduce the IBNR reserves.

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Our actuarial staff uses generally accepted actuarial methods and models to derive ultimate loss and IBNR reserve estimates. The time interval between a claims occurrence and its settlement is one of the crucial attributes when estimating ultimate losses and IBNR reserves.

Due to the uncertainties inherent with loss reserves, our ultimate loss experience could prove better or worse than what our carried reserves reflect. To the extent that reserves are inadequate and are required to be increased, the amount of the increase is a charge in that period, raising our loss and loss expense ratio and reducing earnings. To the extent that reserves are redundant and are required to be released, the amount of the release is a credit in that period, reducing our loss and loss expense ratio and increasing earnings.

This table summarizes activity for our consolidated property casualty loss and loss expense reserves:

(Dollars in millions)		Years ended December 31,
		2017				2016				2015
Gross loss and loss expense reserves, January 1		$	5,035			$	4,660			$	4,438
Less reinsurance recoverable		298				281				282
Net loss and loss expense reserves, January 1		4,737				4,379				4,156
Net incurred loss and loss expenses related to:
Current accident year		3,257				3,029				2,756
Prior accident years		(119		)		(168		)		(184		)
Total incurred		3,138				2,861				2,572
Net paid loss and loss expenses related to:
Current accident year		1,404				1,260				1,152
Prior accident years		1,439				1,243				1,197
Total paid		2,843				2,503				2,349
Net loss and loss expense reserves, December 31		5,032				4,737				4,379
Plus reinsurance recoverable		187				298				281
Gross loss and loss expense reserves, December 31		$	5,219			$	5,035			$	4,660

In 2017, 2016 and 2015, the reserve for loss and loss expense in the consolidated balance sheets also included $54 million, $50 million and $58 million, respectively, for certain life and health loss and loss expense reserves. Additional disclosures for reserves related to these health claims are not material and therefore not provided.

During 2017, we experienced $119 million of favorable development on prior accident years including $73 million of favorable development in commercial lines, $14 million of favorable development in personal lines, $29 million of favorable development in excess and surplus lines and $3 million of favorable development in our reinsurance assumed operations. We recognized favorable development of $54 million for the workers' compensation line,

$33 million for the commercial property line and $30 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss expense for these lines. This illustrates the potential for revisions inherent in estimating reserves, especially for long-tail lines such as workers’ compensation. We recognized unfavorable reserve development of $33 million for the commercial auto line 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. Commercial casualty developed unfavorably by $11 million due to paid losses or re-estimates of case reserves at higher than expected levels.

During 2016, we experienced $168 million of favorable development on prior accident years including $129 million of favorable development in commercial lines, $4 million of favorable development in personal lines, $34 million of favorable development in excess and surplus lines and $1 million of favorable development in our reinsurance assumed operations. We recognized favorable development of $69 million for the workers' compensation line,

$29 million for the commercial property line, $20 million for commercial casualty line and $42 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss expense for these lines. We recognized unfavorable reserve development of $31 million for the commercial auto line and $18 million for the

Cincinnati Financial Corporation - 2017 10-K - Page 137

personal auto line. Both lines developed unfavorable 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.

During 2015, we experienced $184 million of favorable development on prior accident years including $154 million of favorable development in commercial lines, $5 million of adverse development in personal lines and

$35 million of favorable development in excess and surplus lines. We recognized favorable development of

$93 million for the workers’ compensation line, largely due to more favorable 2015 workers' compensation trends for estimated payments to be made in future calendar years that were down slightly from 2014. We recognized favorable development of $63 million for the commercial casualty line. Development for products liability was favorable for most prior accident years and development of prior years for commercial umbrella coverage improved slightly better than expected. Therefore, estimated ultimate losses were lowered. Our commercial auto line experienced $31 million of adverse development 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.

Included in our lines of business are asbestos and environmental claims. We carried $84 million and $85 million of net loss and loss expense reserves for asbestos and environmental claims at December 31, 2017 and 2016, respectively. The asbestos and environmental claims amounts for each respective year constituted less than

2.0 percent of total net loss and loss expense reserves at these year-end dates. We believe our exposure to asbestos and environmental claims is limited, largely because our reinsurance retention was $500,000 or below prior to 1987. We also were predominantly a personal lines company in the 1960s and 1970s. During the 1980s and early 1990s, commercial lines grew as a percentage of our overall business and our exposure to asbestos and environmental claims grew accordingly. Over that period, we included an asbestos and environmental exclusion in almost all policies or endorsed the exclusion to the policies. We have not engaged in any mergers or acquisitions through which such a liability could have been assumed. We continue to monitor our claims for evidence of material exposure to other mass tort classes but have found no such credible evidence to date.

The following table provides a reconciliation of the property casualty incurred losses and allocated loss adjustment expenses (ALAE) development and paid losses and ALAE development information at December 31, 2017.

(Dollars in millions)		Cumulative incurred losses and ALAE as reported within the triangles, net of reinsurance				Cumulative paid losses and ALAE as reported within the triangles, net of reinsurance				Liabilities for loss and ALAE for accident years not presented in the triangles, net of reinsurance				Total liabilities for loss and ALAE, net of reinsurance				Reinsurance recoverable on unpaid losses				Total liabilities for gross loss and loss expense reserves
Commercial casualty		$	4,434			$	2,573			$	83			$	1,944			$	43			$	1,987
Workers' compensation		2,259				1,598				267				928				64				992
Commercial auto		1,955				1,380				16				591				4				595
Commercial property		2,353				2,095				12				270				7				277
Personal auto		1,774				1,503				5				276				31				307
Homeowner		1,466				1,358				3				111				3				114
Excess and surplus		441				195				94				340				3				343
Other lines																						315
Total liabilities for loss and ALAE reserves																						4,930
Unallocated loss adjustment expense reserves																						289
Gross loss and loss expense reserves																						$	5,219

For all lines of business, the claim counts reported are primarily measured by insurance coverages that are triggered when a loss occurs and a reserve is established. For this purpose, coverages are defined as unique combinations of certain attributes such as line of business and cause of loss. Claims that are opened and closed without payment are included in the reported claim counts. Claim counts are presented on a direct basis only and do not reflect any assumed or ceded reinsurance.

In the following tables, commercial casualty and workers' compensation each disclose 10 accident years of loss and ALAE reserves and nine accident years of the cumulative number of reported claims. In 2009, we refined our claim count logic such that the definition of an open claim, a closed claim and a claim that closes without payment

Cincinnati Financial Corporation - 2017 10-K - Page 138

was uniform amongst all of our systems, including legacy systems. Therefore, consistent definitions are only available for accident year 2009 and forward. We will increase the commercial casualty and workers’ compensation cumulative number of reported claims by one year in future periods, not to exceed 10 years. Commercial auto, commercial property, personal auto and homeowner each disclose five accident years of loss and ALAE reserves and cumulative number of reported claims as each of these lines have five year cumulative average annual percentage payouts of approximately 95 percent or higher. The excess and surplus lines began operations in 2008 with earned premiums and loss and ALAE reserves being immaterial prior to 2011. Accordingly, we disclosed seven accident years of loss and ALAE reserves and cumulative number of reported claims for the excess and surplus lines, and will disclose additional accident years in subsequent annual filings, not to exceed 10 years.

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Commercial Casualty

The following table shows the commercial casualty incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:

(Dollars in millions, reported claims in thousands)																																									As of December 31, 2017
Incurred losses and ALAE, net of reinsurance																																										Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
		Years ended December 31,
Accident		2008				2009				2010				2011				2012				2013				2014				2015				2016
Year		Unaudited																																				2017
2008		$	516			$	458			$	409			$	387			$	362			$	359			$	357			$	357			$	355			$	366			$	11			—
2009						484				409				412				360				370				365				357				357				353				10				20
2010										495				394				378				349				347				348				349				343				19				20
2011														466				404				377				377				375				380				366				17				19
2012																		466				414				417				394				394				404				43				18
2013																						448				443				431				416				413				64				19
2014																										503				496				479				476				82				21
2015																														533				526				529				170				20
2016																																		563				574				247				19
2017																																						610				381				15
Total																																						$	4,434
Cumulative paid losses and ALAE, net of reinsurance
2008		$	31			$	93			$	158			$	212			$	262			$	293			$	315			$	325			$	331			$	339
2009						27				75				151				213				267				295				310				322				328
2010										33				92				159				203				256				285				300				314
2011														27				93				149				227				266				298				315
2012																		27				88				170				232				288				330
2013																						35				90				159				232				286
2014																										34				97				172				287
2015																														38				108				200
2016																																		46				126
2017																																						48
Total																																						2,573
All outstanding liabilities before 2008, net of reinsurance																																						83
Liabilities for loss and ALAE, net of reinsurance																																						$	1,944

The following table shows the average annual percentage payout of incurred losses for the commercial casualty line of business:

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5		6		7		8		9		10
Average annual percentage payout		7.9%		14.9%		18.0%		17.7%		13.7%		8.8%		4.8%		3.5%		1.6%		1.8%

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Workers’ Compensation

The following table shows the workers’ compensation incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:

(Dollars in millions, reported claims in thousands)																																									As of December 31, 2017
Incurred losses and ALAE, net of reinsurance																																										Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
		Years ended December 31,
Accident		2008				2009				2010				2011				2012				2013				2014				2015				2016
Year		Unaudited																																				2017
2008		$	298			$	305			$	310			$	302			$	299			$	299			$	297			$	296			$	296			$	293			$	28			—
2009						307				278				263				238				238				235				234				234				232				18				27
2010										283				274				248				242				240				239				240				237				22				26
2011														284				251				246				242				239				236				231				22				24
2012																		265				245				234				220				213				211				26				21
2013																						264				246				221				212				208				28				20
2014																										261				233				214				203				31				19
2015																														246				220				208				60				17
2016																																		230				218				72				16
2017																																						218				89				13
Total																																						$	2,259
Cumulative paid losses and ALAE, net of reinsurance
2008		$	72			$	155			$	195			$	217			$	233			$	242			$	247			$	251			$	254			$	256
2009						65				132				163				179				188				193				198				201				202
2010										67				134				164				181				192				198				202				204
2011														65				131				161				177				186				190				192
2012																		62				121				147				162				171				175
2013																						61				119				144				157				164
2014																										56				110				134				148
2015																														47				93				115
2016																																		46				97
2017																																						45
Total																																						1,598
All outstanding liabilities before 2008, net of reinsurance																																						267
Liabilities for loss and ALAE, net of reinsurance																																						$	928

The following table shows the average annual percentage payout of incurred losses for the workers’ compensation line of business:

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5		6		7		8		9		10
Average annual percentage payout		25.9%		26.9%		12.4%		7.0%		4.2%		2.4%		1.5%		1.4%		0.8%		0.5%

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Commercial Auto

The following table shows the commercial auto incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:

(Dollars in millions, reported claims in thousands)																					As of December 31, 2017
Incurred losses and ALAE, net of reinsurance																						Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
	Years ended December 31,
Accident		2013				2014				2015				2016
Year		Unaudited																2017
2013		$	292			$	305			$	315			$	322			$	322			$	5			46
2014						333				346				351				358				8				51
2015										374				384				394				15				51
2016														417				430				36				53
2017																		451				127				47
Total																		$	1,955
Cumulative paid losses and ALAE, net of reinsurance
2013		$	141			$	199			$	246			$	285			$	307
2014						159				223				273				310
2015										173				244				303
2016														184				273
2017																		187
Total																		1,380
All outstanding liabilities before 2013, net of reinsurance																		16
Liabilities for loss and ALAE, net of reinsurance																		$	591

The following table shows the average annual percentage payout of incurred losses for the commercial auto line of business. Commercial auto includes both physical damage and liability losses. A majority of the incurred losses paid after year 2 are the result of liability losses.

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5
Average annual percentage payout		43.3%		18.7%		14.5%		11.2%		6.7%

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Commercial Property

The following table shows the commercial property incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:

(Dollars in millions, reported claims in thousands)																					As of December 31, 2017
Incurred losses and ALAE, net of reinsurance																						Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
	Years ended December 31,
Accident		2013				2014				2015				2016
Year		Unaudited																2017
2013		$	389			$	359			$	352			$	356			$	357			$	1			14
2014						452				444				441				442				2				17
2015										454				414				416				2				17
2016														590				551				7				17
2017																		587				24				16
Total																		$	2,353
Cumulative paid losses and ALAE, net of reinsurance
2013		$	227			$	330			$	344			$	349			$	352
2014						297				412				432				437
2015										279				388				407
2016														358				504
2017																		395
Total																		2,095
All outstanding liabilities before 2013, net of reinsurance																		12
Liabilities for loss and ALAE, net of reinsurance																		$	270

The following table shows the average annual percentage payout of incurred losses for the commercial property line of business:

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5
Average annual percentage payout		66.0%		26.9%		4.4%		1.1%		0.9%

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Personal Auto

The following table shows the personal auto incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:

(Dollars in millions, reported claims in thousands)																					As of December 31, 2017
Incurred losses and ALAE, net of reinsurance																						Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
	Years ended December 31,
Accident		2013				2014				2015				2016
Year		Unaudited																2017
2013		$	280			$	280			$	293			$	298			$	298			$	—			96
2014						317				317				325				324				—				105
2015										343				356				356				—				108
2016														383				384				8				110
2017																		412				55				102
Total																		$	1,774
Cumulative paid losses and ALAE, net of reinsurance
2013		$	190			$	245			$	272			$	287			$	293
2014						210				267				298				313
2015										229				292				325
2016														243				316
2017																		256
Total																		1,503
All outstanding liabilities before 2013 net of reinsurance																		5
Liabilities for loss and ALAE, net of reinsurance																		$	276

The following table shows the average annual percentage payout of incurred losses for the personal auto line of business. Personal auto includes both physical damage and liability losses. A majority of the incurred losses paid after year 2 are the result of liability losses.

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5
Average annual percentage payout		63.7%		18.1%		9.4%		4.8%		1.9%

Cincinnati Financial Corporation - 2017 10-K - Page 144

Homeowner

The following table shows the homeowner incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:

(Dollars in millions, reported claims in thousands)																					As of December 31, 2017
Incurred losses and ALAE, net of reinsurance																						Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
	Years ended December 31,
Accident		2013				2014				2015				2016
Year		Unaudited																2017
2013		$	252			$	246			$	247			$	247			$	246			$	—			25
2014						297				283				286				285				1				26
2015										284				275				275				1				24
2016														315				304				3				23
2017																		356				8				24
Total																		$	1,466
Cumulative paid losses and ALAE, net of reinsurance
2013		$	180			$	236			$	242			$	244			$	246
2014						224				273				281				283
2015										203				260				269
2016														208				283
2017																		277
Total																		1,358
All outstanding liabilities before 2013, net of reinsurance																		3
Liabilities for loss and ALAE, net of reinsurance																		$	111

The following table shows the average annual percentage payout of incurred losses for the homeowner line of business:

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5
Average annual percentage payout		74.4%		21.3%		3.0%		0.7%		0.4%

Cincinnati Financial Corporation - 2017 10-K - Page 145

Excess and Surplus Lines

The following table shows the excess and surplus lines incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:

(Dollars in millions, reported claims in thousands)																													As of December 31, 2017
Incurred losses and ALAE, net of reinsurance																														Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
	Years ended December 31,
Accident		2011				2012				2013				2014				2015				2016
Year		Unaudited																								2017
2011		$	48			$	47			$	44			$	38			$	36			$	35			$	35			$	1			1
2012						67				56				49				40				37				36				1				1
2013										74				64				54				45				42				4				2
2014														95				82				75				64				16				2
2015																		96				81				73				22				2
2016																						93				87				34				2
2017																										104				64				2
Total																										$	441
Cumulative paid losses and ALAE, net of reinsurance
2011		$	8			$	14			$	23			$	27			$	30			$	32			$	34
2012						9				15				19				25				29				31
2013										7				12				20				27				32
2014														9				17				27				37
2015																		8				19				29
2016																						10				21
2017																										11
Total																										195
All outstanding liabilities before 2011, net of reinsurance																										94
Liabilities for loss and ALAE, net of reinsurance																										$	340

The following table shows the average annual percentage payout of incurred losses for the excess and surplus lines insurance segment. Excess and surplus lines consist mostly of commercial casualty and commercial property coverages. A majority of the incurred losses paid after year 2 are the result of commercial casualty losses.

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5		6		7
Average annual percentage payout		16.0%		14.1%		17.5%		14.7%		10.7%		7.2%		1.1%

Cincinnati Financial Corporation - 2017 10-K - Page 146

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 universal life, deferred annuity 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)		At December 31,
		2017				2016
Life policy reserves:
Ordinary/traditional life		$	1,080			$	1,011
Other		47				45
Subtotal		1,127				1,056
Investment contract reserves:
Deferred annuities		835				861
Universal life		601				578
Structured settlements		160				170
Other		6				6
Subtotal		1,602				1,615
Total life policy and investment contract reserves		$	2,729			$	2,671

Cincinnati Financial Corporation - 2017 10-K - Page 147

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)		Years ended December 31,
		2017				2016				2015
Property casualty:
Deferred policy acquisition costs asset, January 1		$	408			$	388			$	379
Capitalized deferred policy acquisition costs		897				840				801
Amortized deferred policy acquisition costs		(867		)		(820		)		(792		)
Deferred policy acquisition costs asset, December 31		$	438			$	408			$	388
Life:
Deferred policy acquisition costs asset, January 1		$	229			$	228			$	199
Capitalized deferred policy acquisition costs		51				49				45
Amortized deferred policy acquisition costs		(46		)		(43		)		(37		)
Amortized shadow deferred policy acquisition costs		(2		)		(5		)		21
Deferred policy acquisition costs asset, December 31		$	232			$	229			$	228
Consolidated:
Deferred policy acquisition costs asset, January 1		$	637			$	616			$	578
Capitalized deferred policy acquisition costs		948				889				846
Amortized deferred policy acquisition costs		(913		)		(863		)		(829		)
Amortized shadow deferred policy acquisition costs		(2		)		(5		)		21
Deferred policy acquisition costs asset, December 31		$	670			$	637			$	616

No premium deficiencies were recorded in the consolidated statements of income in 2017, 2016 and 2015, 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 - 2017 10-K - Page 148

NOTE 7 – Note Payable

We have one line of credit through multiple commercial banks with a borrowing capacity of $225 million and an additional $50 million accordion feature. Our unsecured revolving credit facility has a term of five years that expires May 13, 2019. We had no compensating balance requirements on short-term debt for either 2017 or 2016. At December 31, 2017 and 2016, $24 million and $20 million was drawn on the line of credit, respectively. The interest rate charged on our borrowings on this credit agreement ranged from 1.65 percent to 2.45 percent during 2017 and ranged from 1.31 percent to 1.49 percent during 2016.

NOTE 8 – Long-Term Debt and Capital Lease Obligations

This table summarizes the principal amounts of our long-term debt excluding unamortized discounts, none of which are encumbered by rating triggers:

(Dollars in millions)						Book value								Principal amount
Interest rate		Year of issue				At December 31,								At December 31,
				2017				2016				2017				2016
6.900%		1998		Senior debentures, due 2028		$	26			$	26			$	28			$	28
6.920%		2005		Senior debentures, due 2028		391				391				391				391
6.125%		2004		Senior notes, due 2034		370				370				374				374
				Total		$	787			$	787			$	793			$	793

Capital lease obligations, excluding an insignificant amount of interest, totaled $40 million and $39 million in 2017 and 2016, respectively. Below are the expected capital lease obligations that we expect to pay over the next six years:

(Dollars in millions)	Years ended December 31,
	2018				2019				2020				2021				2022			2023
Capital lease obligations	$	12			$	10			$	7			$	5			$	4		$	2

NOTE 9 – Shareholders’ Equity and Dividend Restrictions

Declared cash dividends per share were $2.50, $1.92 and $2.30 for the years ended December 31, 2017, 2016 and 2015, respectively.

Our insurance subsidiary declared dividends to the parent company of $465 million in 2017, $475 million in 2016 and $447 million in 2015. State regulatory requirements restrict the dividends insurance subsidiaries can pay. Generally, the most our insurance subsidiary can pay without prior regulatory approval is the greater of 10 percent of statutory capital and surplus or 100 percent of statutory net income for the prior calendar year. Dividends exceeding these limitations may be paid only with approval of the insurance department of the domiciliary state. During 2018, the total that our insurance subsidiary, which is the parent of all other insurance subsidiaries, may declare in dividends is approximately $509 million.

Accumulated Other Comprehensive Income

The table below shows beginning and end of year accumulated other comprehensive income (AOCI) for investments, pension obligations, life deferred acquisition costs, life policy reserves and other. The changes from the beginning of year to the end of year are the result of changes to other comprehensive income or loss (OCI).

Additionally, as a result of the early adoption of ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, included in the table below is the reclassification of $492 million which increased AOCI and decreased retained earnings. See Note 1, Summary of Significant Accounting Policies for further explanation of this ASU.

Cincinnati Financial Corporation - 2017 10-K - Page 149

(Dollars in millions)		2017													2016													2015
		Before tax				Income tax				Net					Before tax				Income tax				Net					Before tax				Income tax				Net
Investments:
AOCI, January 1		$	2,625			$	908			$	1,717				$	2,094			$	722			$	1,372				$	2,719			$	942			$	1,777
OCI before realized gains recognized in net income		1,054				366				688					653				229				424					(556		)		(196		)		(360		)
Realized gains recognized in net income		(139		)		(49		)		(90		)			(122		)		(43		)		(79		)			(69		)		(24		)		(45		)
OCI		915				317				598					531				186				345					(625		)		(220		)		(405		)
Adjustment to reclassify certain tax effects from AOCI		—				(492		)		492					—				—				—					—				—				—
AOCI, December 31		$	3,540			$	733			$	2,807				$	2,625			$	908			$	1,717				$	2,094			$	722			$	1,372
Pension obligations:
AOCI, January 1		$	(26	)		$	(8	)		$	(18	)			$	(42	)		$	(14	)		$	(28	)			$	(36	)		$	(12	)		$	(24	)
OCI excluding amortization recognized in net income		12				6				6					13				5				8					(12		)		(5		)		(7		)
Amortization recognized in net income		2				1				1					3				1				2					6				3				3
OCI		14				7				7					16				6				10					(6		)		(2		)		(4		)
AOCI, December 31		$	(12	)		$	(1	)		$	(11	)			$	(26	)		$	(8	)		$	(18	)			$	(42	)		$	(14	)		$	(28	)
Life deferred acquisition costs, life policy reserves and other:
AOCI, January 1		$	(9	)		$	(3	)		$	(6	)			$	1			$	1			$	—				$	(12	)		$	(3	)		$	(9	)
OCI before realized gains recognized in net income		8				5				3					(8		)		(3		)		(5		)			14				5				9
Realized gains recognized in net income		(9		)		(4		)		(5		)			(2		)		(1		)		(1		)			(1		)		(1		)		—
OCI		(1		)		1				(2		)			(10		)		(4		)		(6		)			13				4				9
AOCI, December 31		$	(10	)		$	(2	)		$	(8	)			$	(9	)		$	(3	)		$	(6	)			$	1			$	1			$	—
Summary of AOCI:
AOCI, January 1		$	2,590			$	897			$	1,693				$	2,053			$	709			$	1,344				$	2,671			$	927			$	1,744
Investments OCI		915				317				598					531				186				345					(625		)		(220		)		(405		)
Pension obligations OCI		14				7				7					16				6				10					(6		)		(2		)		(4		)
Life deferred acquisition costs, life policy reserves and other OCI		(1		)		1				(2		)			(10		)		(4		)		(6		)			13				4				9
Total OCI		928				325				603					537				188				349					(618		)		(218		)		(400		)
Adjustment to reclassify certain tax effects from AOCI		—				(492		)		492					—				—				—					—				—				—
AOCI, December 31		$	3,518			$	730			$	2,788				$	2,590			$	897			$	1,693				$	2,053			$	709			$	1,344

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

Cincinnati Financial Corporation - 2017 10-K - Page 150

NOTE 10 – Reinsurance

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

The tables below summarize our consolidated property casualty insurance net written premiums, earned premiums and incurred loss and loss expenses:

(Dollars in millions)		Years ended December 31,
		2017				2016				2015
Direct written premiums		$	4,854			$	4,646			$	4,461
Assumed written premiums		125				103				77
Ceded written premiums		(139		)		(169		)		(177		)
Net written premiums		$	4,840			$	4,580			$	4,361

(Dollars in millions)		Years ended December 31,
		2017				2016				2015
Direct earned premiums		$	4,752			$	4,567			$	4,396
Assumed earned premiums		132				77				29
Ceded earned premiums		(162		)		(162		)		(154		)
Earned premiums		$	4,722			$	4,482			$	4,271

(Dollars in millions)		Years ended December 31,
		2017				2016				2015
Direct incurred loss and loss expenses		$	2,961			$	2,874			$	2,596
Assumed incurred loss and loss expenses		113				43				12
Ceded incurred loss and loss expenses		64				(56		)		(36		)
Incurred loss and loss expenses		$	3,138			$	2,861			$	2,572

Our changes in direct incurred and ceded incurred compared to prior years resulted primarily from a large settlement paid by USAIG, a joint underwriting association of individual insurance companies that collectively functions as a worldwide aviation insurance market. This settlement resulted in offsetting amounts to direct incurred and ceded incurred with no change to our net incurred loss and loss expenses. We terminated our participation in the USAIG pool after policy year 2002.

Our life insurance company purchases reinsurance for protection of a portion of 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.

Cincinnati Financial Corporation - 2017 10-K - Page 151

The tables below summarize our consolidated life insurance earned premiums and contract holders' benefits incurred:

(Dollars in millions)		Years ended December 31,
		2017				2016				2015
Direct earned premiums		$	300			$	290			$	271
Ceded earned premiums		(68		)		(62		)		(62		)
Earned premiums		$	232			$	228			$	209

(Dollars in millions)		Years ended December 31,
		2017				2016				2015
Direct contract holders' benefits incurred		$	319			$	303			$	292
Ceded contract holders' benefits incurred		(67		)		(57		)		(56		)
Contract holders' benefits incurred		$	252			$	246			$	236

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 - 2017 10-K - Page 152

NOTE 11 – Income Taxes

The significant components of deferred tax assets and liabilities included in the consolidated balance sheets at December 31 were as follows:

(Dollars in millions)		At December 31,
		2017				2016
Deferred tax assets:
Loss and loss expense reserves		$	123			$	199
Unearned premiums		100				158
Investments		—				5
Other		27				52
Total gross deferred tax assets		250				414
Deferred tax liabilities:
Unrealized investment gains and other, net		740				907
Deferred acquisition costs		123				195
Life policy reserves		111				162
Investments		10				—
Other		11				15
Total gross deferred tax liabilities		995				1,279
Net deferred income tax liability		$	745			$	865

Deferred tax assets and liabilities reflect temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount recognized for tax purposes.

Deferred tax assets are 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 of taxable income in the carryback and carryforward periods as permitted by law, we believe it is more likely than not that all of the deferred tax asset will be realized. As a result, we have no valuation allowance as of December 31, 2017 and 2016.

The differences between the 35 percent statutory federal income tax rate and our effective income tax rate were as follows:

(Dollars in millions)		Years ended December 31,
		2017							2016							2015
Tax at statutory rate:		$	256			35.0	%		$	284			35.0	%		$	308			35.0	%
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds		(36		)		(4.9	)		(34		)		(4.2	)		(33		)		(3.7	)
Dividend received exclusion		(34		)		(4.7	)		(33		)		(4.1	)		(32		)		(3.6	)
Deferred tax benefit due to tax rate change		(495		)		(67.8	)		—				—			—				—
Other		(6		)		(0.8	)		4				0.5			4				0.3
Provision for income taxes		$	(315	)		(43.2	)%		$	221			27.2	%		$	247			28.0	%

Cincinnati Financial Corporation - 2017 10-K - Page 153

The Tax Act was enacted on December 22, 2017, and represented one of the most comprehensive changes in U.S. corporate income taxation since 1986. The Tax Act revises the U.S. corporate income tax by lowering the corporate income tax rate from a top marginal rate of 35 percent to a flat rate of 21 percent. In addition to lowering tax rates, changes were made to the amount of the dividends received deduction and the required proration addback for qualified dividend income and tax exempt municipal interest. The Tax Act is effective January 1, 2018. The reduction in corporate income tax rate decreased our net deferred tax liability as of December 22, 2017, by $495 million. The effect of the rate change was recorded as a one-time noncash benefit to income tax expense in our consolidated statements of income for the year ended December 31, 2017, with an effective tax rate benefit of 67.8 percent. This benefit results from re-measuring our net deferred tax liability at the newly enacted corporate income tax rate of 21 percent (the rate at which the deferred items are expected to be reversed) versus the 35 percent rate at which the net deferred tax benefits were previously carried. Of this $495 million benefit, $492 million relates to net unrealized gains on investments and other AOCI amounts. The remainder relates to differences in the recognition of deferred acquisition costs, unearned premiums, insurance reserves and basis differences in the carrying value of investments held. We expect to complete determination of the effects of the Tax Act on our deferred tax assets and liabilities as part of the annual income tax return filing process which is expected to be completed in the fourth quarter of 2018.

The provision for federal income taxes is based upon filing a consolidated income tax return for the company and its subsidiaries. Included in Other above is the current year tax benefit under ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which decreased both the provision for income taxes and the effective income tax rate by $7 million and 1 percent, respectively. As of December 31, 2017, 2016 and 2015, we had no operating or capital loss carryforwards.

Unrecognized Tax Benefits

As a result of positions either taken in our 2014 through 2016 federal tax returns filed with the IRS or expected to be taken in the 2017 filing, we believe it is more likely than not that our tax liability will be sustained upon examination by the IRS. We therefore carry no amount for unrecognized tax benefits for the years ended 2014 through 2017.

The statute of limitations for federal tax purposes has closed for tax years 2013 and earlier. There are no federal returns under examination and we have not been notified of any upcoming IRS examinations.

Income taxes paid in our consolidated statements of cash flows are shown net of refunds received of $18 million in 2017, $2 million in 2016 and an immaterial amount in 2015.

In addition to our IRS filings, we file income tax returns with immaterial amounts in various state jurisdictions. The statute of limitations for state income tax purposes has closed for tax years 2013 and earlier. There are no state income returns under examination and we have not been notified of any upcoming state examinations.

Cincinnati Financial Corporation - 2017 10-K - Page 154

NOTE 12 – 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)		Years ended December 31,
	2017				2016				2015
Numerator:
Net income—basic and diluted		$	1,045			$	591			$	634
Denominator:
Basic weighted-average common shares outstanding		164.2				164.5				164.0
Effect of share-based awards:
Stock options		1.1				1.1				1.0
Nonvested shares		0.7				0.9				0.6
Diluted weighted-average shares		166.0				166.5				165.6
Earnings per share:
Basic		$	6.36			$	3.59			$	3.87
Diluted		6.29				3.55				3.83
Number of anti-dilutive share-based awards		0.7				0.3				0.4

The current sources of dilution of our common shares are certain equity-based awards as discussed in Note 17, Share-Based Associate Compensation Plans. The above table includes the number of anti-dilutive share-based awards at year-end 2017, 2016 and 2015. We did not include these share-based awards in the computation of net income per common share (diluted) because their exercise would have anti-dilutive effects. Our 2017 net income and basic and diluted earnings per share were impacted by the Tax Act as discussed in Note 11, Income Taxes.

Cincinnati Financial Corporation - 2017 10-K - Page 155

NOTE 13 – Employee Retirement Benefits

We sponsor a qualified defined benefit pension plan that we closed entry into for new associates as of June 30, 2008, and only participants 40 years of age or older as of August 31, 2008, could elect to continue to participate. During 2008, we changed the form of retirement benefit we offer some associates to a company match on contributions to a 401(k) plan as further explained below. For participants remaining in the pension plan, we continue to fund future benefit obligations. Benefits for the defined benefit pension plan are based on years of credited service and compensation level. Contributions are based on the prescribed method defined in the Pension Protection Act. Our net periodic benefit cost is based on certain actuarial assumptions and also is composed of several components that are determined using the projected unit credit actuarial cost method. The qualified plan has been amended to allow for distribution of vested balances to terminated participants.

We sponsor a defined contribution plan (401(k) plan) with matching company contributions totaling $16 million,

$14 million and $12 million during the years 2017, 2016 and 2015, respectively. Associates who are not accruing benefits under the pension plan are eligible to receive the company match of up to 6 percent of cash compensation. Participants vest in the company match for the 401(k) plan after three years of eligible service.

We maintain a supplemental executive retirement plan (SERP) with a benefit obligation of $9 million at

year-end 2017 and $15 million at year-end 2016, which is included in the projected benefit obligation. The company also makes available to a select group of associates the CFC Top Hat Savings Plan, a nonqualified deferred compensation plan, which had a fair value of $31 million and $24 million at December 31, 2017 and 2016, respectively. Company matching contributions to the CFC Top Hat Savings Plan totaled $1 million for the year 2017 and less than $1 million for both years 2016 and 2015.

Defined Benefit Pension Plan Assumptions

We evaluate our pension plan assumptions annually and update them as necessary. This is a summary of the weighted-average assumptions used to determine our benefit obligations at December 31 for the plans:

		Qualified Pension Plan						SERP
		2017			2016			2017			2016
Discount rate		3.73	%		4.30	%		3.61	%		4.10	%
Rate of compensation increase		2.75-3.25			2.75-3.25			2.75-3.25			2.75-3.25

To determine the discount rate for each plan, a theoretical settlement portfolio of high-quality rated corporate bonds was chosen to provide payments approximately matching the plan’s projected benefit payments. A single interest rate for each plan was determined resulting in a discounted value of the plan's benefit payments that equates to the market value of the selected bonds. The discount rate is reflective of current market interest rate conditions and our plan's liability characteristics. Based on this analysis, we decreased the rate from the prior year by 0.57 percentage points for the qualified pension plan and by 0.49 percentage points for the SERP. Compensation increase assumptions reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases. The mortality assumption is updated annually to reflect the updated scale. The RP-2014 Employee Mortality Tables and RP-2014 Annuitant Mortality Tables for males and females projected generationally with Scale MP-2017, Scale MP-2016 and Scale MP-2015 were used for the years 2017, 2016 and 2015, respectively. The updated mortality table did not have a significant impact on our consolidated financial statements as our qualified plan assumes the majority of benefits will be paid in the form of lump sums.

This is a summary of the weighted-average assumptions used to determine our net periodic benefit cost for the plans:

		Qualified Pension Plan									SERP
		2017			2016			2015			2017			2016			2015
Discount rate		4.30	%		4.55	%		4.25	%		4.10	%		4.30	%		4.05	%
Expected return on plan assets		7.25			7.25			7.25			n/a			n/a			n/a
Rate of compensation increase		2.75-3.25			2.75-3.25			2.75-3.25			2.75-3.25			2.75-3.25			2.75-3.25

Cincinnati Financial Corporation - 2017 10-K - Page 156

The discount rate was decreased by 0.25 percentage points for the qualified pension plan and 0.20 percentage points for the SERP due to market interest rate conditions at the beginning of 2017. The discount rate assumptions for our benefit obligation generally track with high-quality rated corporate bond yields chosen in our theoretical settlement portfolio, and yearly adjustments reflect any changes to those bond yields. We believe the expected return on plan assets is representative of the expected long-term rate of return on these assets, which is consistent with 2017 expectations of interest rates and based partially on the fact that the plan’s common stock holdings pay dividends. We review historical actual return on plan assets when determining our expected long-term rate of return. Total portfolio return for 2017 was 17.4 percent and for 2016 was 16.6 percent. Our compensation increase assumptions in 2017 reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases.

Benefit obligation activity using an actuarial measurement date for our qualified pension plan and SERP at December 31 follows:

(Dollars in millions)		At December 31,
		2017				2016
Change in projected benefit obligation:
Benefit obligation, January 1		$	340			$	323
Service cost		11				11
Interest cost		14				14
Actuarial loss		20				13
Benefits paid		(34		)		(21		)
Projected benefit obligation, December 31		$	351			$	340
Change in plan assets:
Fair value of plan assets, January 1		$	315			$	278
Actual return on plan assets		52				45
Employer contribution		12				13
Benefits paid		(34		)		(21		)
Fair value of plan assets, December 31		$	345			$	315
Funded status, December 31		$	(6	)		$	(25	)
Accumulated benefit obligation		$	322			$	309

Our unfunded status improved for 2017 primarily due to better-than-expected return on plan assets partially offset by actuarial losses resulting largely from decreases in discount rate and assumed lump sum rates.

A reconciliation follows of the funded status for our qualified plan and SERP at the end of the measurement period to the amounts recognized in the consolidated balance sheets at December 31:

(Dollars in millions)		At December 31,
		2017				2016
Pension amounts recognized in the consolidated balance sheets:
Other liabilities		$	(6	)		$	(25	)
Total		$	(6	)		$	(25	)
Pension amounts recognized in accumulated other comprehensive income:
Net actuarial loss		$	12			$	26
Prior service cost		—				—
Total		$	12			$	26

Cincinnati Financial Corporation - 2017 10-K - Page 157

Below are the components of our net periodic benefit cost, as well as other changes in plan assets and benefit obligations recognized in other comprehensive income for our qualified plan and SERP at December 31:

(Dollars in millions)		Years ended December 31,
		2017				2016				2015
Net periodic benefit cost:
Service cost		$	11			$	11			$	12
Interest cost		14				14				14
Expected return on plan assets		(21		)		(19		)		(18		)
Amortization of actuarial loss and prior service cost		2				3				6
Other		1				—				1
Net periodic benefit cost		$	7			$	9			$	15
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial (gain) loss		$	(11	)		$	(13	)		$	13
Amortization of actuarial loss		(3		)		(2		)		(6		)
Amortization of prior service cost		—				(1		)		(1		)
Total recognized in other comprehensive (income) loss		$	(14	)		$	(16	)		$	6
Total recognized in net periodic benefit cost and other comprehensive (income) loss		$	(7	)		$	(7	)		$	21

The 2017 amount recognized in net periodic benefit cost and other comprehensive income remained unchanged from 2016. The 2016 change in the amount recognized in other comprehensive income from 2015 is largely due to better-than-expected investment return partially offset with decreases in discount and assumed lump sum rates. The estimated costs to be amortized from AOCI into net periodic benefit cost over the next year for our plans are

$1 million in actuarial loss and less than $1 million in prior service cost.

Defined Benefit Pension Plan Assets

The pension plan assets are managed to maximize total return over the long term while providing sufficient liquidity and current return to satisfy the cash flow requirements of the plan. The plan’s day-to-day investment decisions are managed by our internal investment department; however, overall investment strategies are discussed with our employee benefits committee. Our investment strategy, currently driven by the low interest rate environment, is to weight our portfolio towards large-cap, high-quality, dividend-growing equities that we have historically favored. As our plan matures and interest rates normalize, we expect a greater allocation to fixed-income securities to better align asset and liability market risks. Our fixed-maturity bond portfolio is investment grade. The plan does not engage in derivative transactions.

Excluding cash, during 2017 we held approximately 80 percent of our pension portfolio in domestic common equity investments. The remainder of the portfolio consisted of 9 percent in states, municipalities and taxable political subdivisions fixed-maturity investments and 11 percent in domestic corporate fixed-maturity investments. Our common equity portfolio consisted of 22 percent in both the the information technology sector and financial sector, 15 percent in the healthcare sector, 13 percent in the consumer discretionary sector and 12 percent in the industrial sector at year-end 2017. No additional sectors accounted for 10 percent or more of our common equity portfolio balance at year-end 2017.

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Investments in securities are valued based on the fair value hierarchy outlined in Note 3, Fair Value Measurements. The pension plan did not have any liabilities carried at fair value during the years ended December 31, 2017 and 2016. There have been no transfers between Level 1 and Level 2 for the years ended December 31, 2017 and 2016. The following table shows the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2017 and 2016. Excluded from the table below is cash on hand of $18 million and $11 million at December 31, 2017 and 2016, respectively.

(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 December 31, 2017
Fixed maturities, available for sale:
States, municipalities and political subdivisions		$	—			$	31			$	—			$	31
Corporate		—				34				—				34
Total fixed maturities, available for sale		—				65				—				65
Common equities, available for sale		262				—				—				262
Total		$	262			$	65			$	—			$	327
At December 31, 2016
Fixed maturities, available for sale:
States, municipalities and political subdivisions		$	—			$	31			$	—			$	31
Corporate		—				20				—				20
Total fixed maturities, available for sale		—				51				—				51
Common equities, available for sale		253				—				—				253
Total		$	253			$	51			$	—			$	304

Our pension plan assets included 232,113 shares of the company’s common stock at both December 31, 2017 and 2016, which had a fair value of $17 million and $18 million at December 31, 2017 and 2016, respectively. The defined benefit pension plan did not purchase any shares of our common stock during 2017 and 2016. No shares of our common stock were sold during 2017. During 2016, the pension plan sold 35,000 shares of the company’s common stock. The company paid $1 million in 2017 and less than $1 million in 2016 in cash dividends on our common stock to the pension plan.

We contributed $5 million to our qualified plan during the first quarter of 2018 and estimate $5 million of benefit payments from the SERP during 2018. We expect to make the following benefit payments for our qualified plan and SERP, reflecting expected future service:

(Dollars in millions)		Years ended December 31,
		2018				2019				2020				2021				2022				2023 - 2027
Expected future benefit payments		$	26			$	24			$	25			$	29			$	26			$	146

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NOTE 14 – Statutory Accounting Information

Insurance companies’ statutory financial statements are presented on the basis of accounting practices prescribed or permitted by applicable state insurance departments of domicile. Insurance companies use statutory accounting practices (SAP) as recognized by various states. We have adopted the National Association of Insurance Commissioners’ (NAIC) Accounting Practices and Procedures manual, version effective January 1, 2001, and updates through the current year as a component of prescribed or permitted practices by laws of the state of domicile. The primary differences between SAP and GAAP include the valuation of unrealized investment gains and losses, expensing of policy acquisition costs, actuarial assumptions for life insurance reserves and deferred income taxes based on differences in statutory and taxable income.

Statutory net income (loss) and capital and surplus are determined in accordance with SAP prescribed or permitted by insurance regulatory authorities for five legal entities, our insurance subsidiary and its four insurance subsidiaries. Statutory capital and surplus for our insurance subsidiary, The Cincinnati Insurance Company, includes capital and surplus of its four insurance subsidiaries. All capital and surplus amounts exceed statutory risk-based capital requirements. The statutory net income (loss) and statutory capital and surplus are presented below:

(Dollars in millions)		Net income (loss)												Capital and surplus
		Years ended December 31,												At December 31,
		2017				2016				2015				2017				2016
The Cincinnati Insurance Company		$	401			$	434			$	534			$	5,094			$	4,686
The Cincinnati Casualty Company		21				11				12				392				360
The Cincinnati Indemnity Company		4				4				3				100				93
The Cincinnati Specialty Underwriters Insurance Company		58				57				49				436				372
The Cincinnati Life Insurance Company		12				2				(11		)		195				200

NOTE 15 – Transactions With Affiliated Parties

We paid certain officers and directors, or insurance agencies of which they are shareholders, commissions of

$7 million in 2017, 2016 and 2015, on premium volume of $45 million, $44 million and $42 million for 2017, 2016 and 2015, respectively.

NOTE 16 – 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

Cincinnati Financial Corporation - 2017 10-K - Page 160

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 17 – Share-Based Associate Compensation Plans

Four equity compensation plans currently permit us to grant various types of equity awards. We currently grant incentive stock options, nonqualified stock options, service-based restricted stock units and performance-based restricted stock units to associates, including some with market-based performance objectives under our shareholder-approved plans. We also have a Holiday Stock Plan that permits annual awards of one share of common stock to each full-time associate for each full calendar year of service up to a maximum of 10 shares. One of our equity compensation plans permits us to grant stock to our outside directors as a component of their annual compensation. We used treasury shares for share-based compensation award issues or exercises during 2017 and 2016.

Share-based compensation cost after tax was $17 million, $15 million and $14 million for the years ended

December 31, 2017, 2016 and 2015, respectively. The related income tax benefit recognized was $9 million,

$8 million, and $6 million for the years ended December 31, 2017, 2016 and 2015, respectively. Options exercised during the years ended December 31, 2017, 2016 and 2015, had intrinsic value of $19 million, $25 million and $15 million, respectively. Intrinsic value is the market price less the exercise price. Options vested during the years ended December 31, 2017, 2016 and 2015, had total intrinsic value of $8 million, $11 million and $7 million, respectively.

As of December 31, 2017, we had $28 million of unrecognized total compensation cost related to nonvested stock options and restricted stock unit awards. That cost will be recognized over a weighted-average period of 1.7 years.

Stock Options

Stock options are granted to associates at an exercise price equal to the fair value as determined by the average high and low sales price reported on the Nasdaq Global Select Market for the grant date and are exercisable over 10-year periods. The stock options generally vest ratably over a three-year period. In determining the share-based compensation amounts, we estimate the fair value of each option granted on the date of grant using a binomial option-pricing model. We make the following assumptions to develop the binomial option-pricing model as follows:

•	Weighted-average expected term is based on historical experience of similar awards with consideration for current exercise trends.

•	Expected volatility is based on our stock price over a historical period that approximates the expected term.

•	Dividend yield is determined by dividing the annualized per share dividend by the stock price on the date of grant.

•	Risk-free rates are the implied yield currently available on zero-coupon U.S. Treasury issues with a remaining term approximating the expected term.

The following weighted average assumptions were used in determining fair value for option grants issued:

		2017		2016		2015
Weighted-average expected term		8 years		8 years		8-9 years
Expected volatility		16.95%		24.88-25.75%		25.04-26.15%
Dividend yield		2.83%		2.58-3.12%		3.52%
Risk-free rates		2.33%		1.44-1.60%		1.94-2.01%
Weighted-average fair value of options granted during the period		$10.79		$13.21		$11.15

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Below is a summary of option information for the year 2017:

(Dollars in millions, except exercise price. Shares in thousands)		Shares			Weighted- average exercise price				Aggregate intrinsic value				Weighted-average remaining contractual life
Outstanding option shares at January 1, 2017		3,012			$	42.12
Granted		706			70.70
Exercised		(527	)		38.33
Forfeited or expired		(125	)		47.07
Outstanding option shares at December 31, 2017		3,066			49.14				$	79			5.61 years
Options exercisable at end of period		2,072			$	40.69			$	71			4.13 years

Cash received from the exercise of options was $13 million, $21 million and $24 million for the years ended December 31, 2017, 2016 and 2015, respectively. We acquired 96,030, 186,097 and 292,414 shares totaling

$7 million, $13 million and $16 million, respectively, from associates in consideration for option exercises during 2017, 2016 and 2015. The weighted-average remaining contractual life for options expected to vest as of December 31, 2017, was 8.69 years.

Under all active shareholder approved plans, a total of 17.3 million shares were authorized to be granted. At December 31, 2017, 11.3 million shares remained available for future issuance under the plans. During 2017, we granted 15,040 shares of common stock to our directors for 2016 board service fees.

Restricted Stock Units

Service-based restricted stock units granted to associates are valued at fair value of the shares on the date of grant less the present value of the dividends that holders of restricted stock units do not receive on the shares underlying the restricted stock units during the vesting period. Service-based restricted stock units generally cliff vest three years after the date of grant. We also grant restricted stock units which vest on a three year ratable vesting schedule. Service-based restricted stock units vested during the year had an intrinsic value of $23 million, $23 million and $26 million for the years ended December 31, 2017, 2016 and 2015, respectively.

We have performance-based awards that vest on the first day of March after a three-calendar-year performance period. These awards vest according to the level of three-year total shareholder return achieved compared with a peer group over a three-year performance period with payouts ranging from 0 to 200 percent for awards granted in 2015, 2016 and 2017. Three-year total shareholder return is calculated by using annualized total return of a stock to an investor due to capital gain appreciation plus reinvestment of all dividends.

For the three-year performance period ended December 31, 2017, our total shareholder return exceeded five of our nine peers. We expect payout of these shares at the target level to occur in March of 2018. During 2017, we issued 87,228 shares of performance-based restricted stock units at the target-level performance hurdle for the three-year performance period ended December 31, 2016, as our total shareholder return exceeded five of nine peers in our 2014 peer group. We issued 25,461 shares of performance-based restricted stock units during 2016 at the threshold-level performance hurdle for the three-year performance period ended December 31, 2015, as we achieved a three-year total shareholder return that exceeded four of 10 peers in our 2013 peer group. Performance-based awards vested during the year had an intrinsic value of $7 million for the year ended December 31, 2017 and $6 million for both years ended 2016 and 2015.

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These performance-based awards are valued using a Monte-Carlo valuation on the date of grant, which uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the volatility of each peer and the pairwise correlations of each peer being modeled. Compensation cost is recognized regardless of whether the market-based performance objective has been satisfied. We make assumptions to develop the Monte-Carlo model as follows:

•	Correlation coefficients are based upon the stock price data used to calculate the historical volatilities. The correlation coefficients are used to model the way the price of each entity's stock tends to move in relation to each other.

•	Expected volatility is based on each company's historical volatility using daily stock price observations with the period commensurate with the performance measurement period.

•	Dividend yield has been modeled assuming dividends are reinvested in additional shares of the issuing entity on the ex-dividend date during the performance period.

•	Risk-free rates are equal to the yield, as of the measurement date, of the zero-coupon U.S. Treasury bill that is commensurate with the performance measurement period.

The following assumptions were used in determining fair value for performance-based grants issued:

		2017		2016		2015
Expected term		2.89 years		2.44-2.88 years		2.88 years
Expected volatility		15.75-28.35%		15.42-33.64%		13.78-34.69%
Dividend yield		2.83%		2.58-3.12%		3.52%
Risk-free rates		1.44%		0.77-0.87%		0.99%

Below is a summary of service-based and performance-based share information, assuming a target payout for performance-based shares, for the year 2017:

(Shares in thousands)		Service-based shares			Weighted- average grant date fair value				Performance-based shares			Weighted- average grant date fair value
Nonvested at January 1, 2017		888			$	48.59			236			$	49.64
Granted		292			65.16				57			43.26
Vested		(311	)		43.05				(87	)		36.73
Forfeited or canceled		(26	)		55.59				—			—
Nonvested at December 31, 2017		843			56.16				206			53.35

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NOTE 18 – Segment Information

We operate primarily in two industries, property casualty insurance and life insurance. Our chief operating decision maker regularly reviews our reporting segments to make decisions about allocating resources and assessing performance. Our reporting segments are:

•	Commercial lines insurance

•	Personal lines insurance

•	Excess and surplus lines insurance

•	Life insurance

•	Investments

We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company and Cincinnati Re, our reinsurance assumed operations.

Revenues come primarily from unaffiliated customers:

•	All four insurance segments record revenues from insurance premiums earned.

•	Fee revenues for the commercial, personal and excess and surplus insurance segments primarily represent installment fees. Fee revenues for the life insurance segment represent separate account investment management fees.

•	Our investments’ revenues consist of pretax net investment income and realized investment gains and losses.

•	Other revenues are primarily finance income and earned premiums of Cincinnati Re.

Income or loss before income taxes for each segment is reported based on the nature of that business area’s operations:

•	Income before income taxes for the insurance segments is defined as underwriting profit or loss.

◦	For commercial lines, personal lines and excess and surplus lines insurance segments, we calculate underwriting profit or loss as premiums earned and fee revenue minus loss and loss expenses and underwriting expenses incurred.

◦	For the life insurance segment, we calculate underwriting profit or loss as premiums earned and fee revenue, minus contract holders’ benefits and expenses incurred, plus investment interest credited to contract holders.

•	Income before income taxes for the investments segment is net investment income plus realized investment gains and losses for investments of the entire company, minus investment interest credited to contract holders of the life insurance segment.

•	Loss before income taxes for the Other category is primarily due to interest expense from debt of the parent company, operating expenses of our headquarters and premiums earned minus loss and loss expenses and underwriting expenses of Cincinnati Re.

Identifiable assets are used by each segment in its operations. We do not separately report the identifiable assets for the commercial, personal or excess and surplus lines segments because we do not use that measure to analyze the segments. We include all investment assets, regardless of ownership, in the investments segment.

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Segment information is summarized in the following table:

(Dollars in millions)		Years ended December 31,
		2017				2016				2015
Revenues:
Commercial lines insurance
Commercial casualty		$	1,072			$	1,050			$	1,010
Commercial property		903				867				815
Commercial auto		634				594				561
Workers' compensation		335				354				367
Other commercial		221				224				243
Commercial lines insurance premiums		3,165				3,089				2,996
Fee revenues		5				5				4
Total commercial lines insurance		3,170				3,094				3,000
Personal lines insurance
Personal auto		582				543				506
Homeowner		518				486				463
Other personal		141				132				128
Personal lines insurance premiums		1,241				1,161				1,097
Fee revenues		5				4				3
Total personal lines insurance		1,246				1,165				1,100
Excess and surplus lines insurance		209				183				168
Fee revenues		1				1				1
Total excess and surplus lines insurance		210				184				169
Life insurance premiums		232				228				209
Fee revenues		5				5				5
Total life insurance		237				233				214
Investments
Investment income, net of expenses		609				595				572
Realized investment gains, net		148				124				70
Total investment revenue		757				719				642
Other
Cincinnati Re insurance premiums		107				49				10
Other		5				5				7
Total other revenue		112				54				17
Total revenues		$	5,732			$	5,449			$	5,142
Income (loss) before income taxes:
Insurance underwriting results
Commercial lines insurance		$	119			$	184			$	345
Personal lines insurance		(32		)		(12		)		(12		)
Excess and surplus lines insurance		61				62				51
Life insurance		(1		)		1				(2		)
Investments		664				629				556
Other		(81		)		(52		)		(57		)
Total income before income taxes		$	730			$	812			$	881
		December 31,				December 31,
Identifiable assets:		2017				2016
Property casualty insurance		$	2,863			$	2,967
Life insurance		1,409				1,366
Investments		17,112				15,569
Other		459				484
Total		$	21,843			$	20,386

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NOTE 19 – Quarterly Supplementary Data

This table includes unaudited quarterly financial information for the years ended December 31, 2017 and 2016:

(Dollars in millions, except per share data)		Quarter
		1st				2nd				3rd				4th				Full year
2017
Revenues		$	1,523			$	1,386			$	1,412			$	1,411			$	5,732
Income before income taxes		276				128				129				197				730
Net income		201				100				102				642				1,045
Net income per common share—basic		1.22				0.61				0.62				3.92				6.36
Net income per common share—diluted		1.21				0.60				0.61				3.88				6.29
2016
Revenues		$	1,364			$	1,371			$	1,402			$	1,312			$	5,449
Income before income taxes		265				166				253				128				812
Net income		188				123				180				100				591
Net income per common share—basic		1.14				0.75				1.09				0.61				3.59
Net income per common share—diluted		1.13				0.74				1.08				0.60				3.55

The sum of the quarterly reported per share amounts may not equal the full year as each is computed independently. Revenues including realized investment gains and losses, which are integral to our financial results over the long term, may cause this value to fluctuate substantially because we have substantial discretion in the timing of investment sales. Also, applicable accounting standards require us to recognize gains and losses from certain changes in fair values of securities and embedded derivatives without actual realization of those gains and losses.

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