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

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

Results of Operations

Introduction

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

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

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

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

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

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Executive Summary

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



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

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

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



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

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

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



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

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

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

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

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

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


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

•

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


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

•

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


•	Investment contribution – We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year total return of the S&P 500 Index.


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


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

◦

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

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

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

Corporate Financial Highlights

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

Balance Sheet Data



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

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

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

Income Statement and Per Share Data



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

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

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

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

Contribution from Insurance Operations



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Consolidated property casualty data:
Net written premiums	$	5,030		$	4,840		$	4,580		4		6
Earned premiums	4,920			4,722			4,482			4		5
Underwriting profit	186			128			242			45		(47	)

										Pt. Change		Pt. Change
GAAP combined ratio	96.4		%	97.5		%	94.8		%	(1.1	)	2.7
Statutory combined ratio	96.0			97.2			94.5			(1.2	)	2.7
Written premium to statutory surplus	1.0			1.0			1.0			0.0		0.0

Property casualty net written premiums and earned premiums each grew 4 percent in 2018, reflecting average renewal price increases, a higher level of insured exposures and premium growth initiatives. Premium growth rates in 2018 were less than in 2017. Trends and related factors are discussed in Commercial Lines, Personal Lines and Excess and Surplus Lines Insurance Results, respectively.

Our property casualty insurance operations generated underwriting profits for each of the three years ending in 2018. The $58 million improvement in 2018, compared with 2017, included a $7 million increase in losses from natural catastrophe events and and $48 million more benefit from net favorable reserve development on prior accident years. The $114 million decrease in 2017, compared with 2016, included a $4 million increase in losses from natural catastrophe events and less benefit from net favorable reserve development on prior accident years.

We measure property casualty underwriting profitability primarily by the combined ratio. Our combined ratio measures the percentage of each earned premium dollar spent on claims plus all expenses related to our property casualty operations, all on a pretax basis. A lower ratio indicates more favorable results and better underlying performance. A ratio below 100 percent represents an underwriting profit. Initiatives to improve our combined ratio are discussed in Item 1, Our Business and Our Strategy, Strategic Initiatives. In 2018, 2017 and 2016, favorable development on reserves for claims that occurred in prior accident years helped offset other incurred losses and loss expenses. Reserve development is discussed further in Property Casualty Loss and Loss Expense Obligations and Reserves. Losses from weather-related catastrophes are another important item influencing the combined ratio and are discussed along with other factors in Financial Results for our property casualty business and related segments.

Our life insurance segment reported an $8 million profit in 2018 and a $1 million loss in 2017. We discuss results for the segment in Life Insurance Results. Most of this segment’s investment income is included in our investments segment results. In addition to investment income, investment gains from the life insurance investment portfolio are also included in our investments segment results.

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Strategic Initiatives Overview

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


•	Manage insurance profitability – Implementation of these initiatives is intended to enhance underwriting expertise and knowledge, thereby increasing our ability to manage our business while also gaining efficiency. Better profit margins can arise from additional information and more focused action on underperforming product lines, plus pricing capabilities we are expanding through the use of technology and analytics. In addition to enhancing company efficiency, improving internal processes also supports the ability of the independent agencies that represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage agency expenses.

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Manage insurance profitability – Implementation of these initiatives is intended to enhance underwriting expertise and knowledge, thereby increasing our ability to manage our business while also gaining efficiency. Better profit margins can arise from additional information and more focused action on underperforming product lines, plus pricing capabilities we are expanding through the use of technology and analytics. In addition to enhancing company efficiency, improving internal processes also supports the ability of the independent agencies that represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage agency expenses.


•	Drive premium growth – Implementation of these initiatives is intended to further penetrate each market we serve through our independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Premium growth initiatives also include expansion of Cincinnati Re. Diversified growth also may reduce variability of losses from weather-related catastrophes.

•

Drive premium growth – Implementation of these initiatives is intended to further penetrate each market we serve through our independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Premium growth initiatives also include expansion of Cincinnati Re. Diversified growth also may reduce variability of losses from weather-related catastrophes.

Detailed discussion of recent-year financial performance influenced by our strategic initiatives appears below in Financial Results and Liquidity and Capital Resources.

Factors Influencing Our Future Performance

Our view of the shareholder value we can create over the next five years relies largely on three assumptions – each highly dependent on the external environment. First, we anticipate our property casualty average insurance prices will increase in proportion to, or in excess of, our loss cost trends. Second, we assume that the economy can maintain a long-term growth track. Third, we assume that valuations of our marketable securities will vary within a typical range over time, based on historical trends. If those assumptions prove to be inaccurate, we may not be able to achieve our performance targets even if we accomplish our strategic objectives.

Other factors that could influence our ability to achieve our targets include:


•	We expect the insurance marketplace to remain competitive, which is likely to cause carriers to pursue strategies that they believe could lead to economies of scale, market share gains or the potential for an improved competitive posture.


•	We expect the independent insurance agency system to remain strong, with continued agency consolidation. If soft insurance market conditions return in the near term, it will create additional risk for agencies.


•	A return of soft insurance market pricing could significantly affect growth rates and earned premium levels for some time into the future. If the economy falters, we may experience low or no premium growth for our property casualty segments. Premium growth also may lag as some of our growth initiatives require more time to reach their full contribution. In addition, economic factors, including inflation, may increase our claims and settlement expenses related to medical care, litigation and construction.

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A return of soft insurance market pricing could significantly affect growth rates and earned premium levels for some time into the future. If the economy falters, we may experience low or no premium growth for our property casualty segments. Premium growth also may lag as some of our growth initiatives require more time to reach their full contribution. In addition, economic factors, including inflation, may increase our claims and settlement expenses related to medical care, litigation and construction.


•	Financial markets continued to display volatility in recent years, and some predict more turbulence in the future from effects such as changes in government policy, growth challenges for emerging country economies or other geopolitical events that could also affect the U.S. economy and markets. Should financial markets decline temporarily, which could occur as part of typical market volatility patterns, the related book value component of our value creation ratio could also register a weak or negative result.

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Financial markets continued to display volatility in recent years, and some predict more turbulence in the future from effects such as changes in government policy, growth challenges for emerging country economies or other geopolitical events that could also affect the U.S. economy and markets. Should financial markets decline temporarily, which could occur as part of typical market volatility patterns, the related book value component of our value creation ratio could also register a weak or negative result.

We discuss in Item 1A, Risk Factors, many potential risks to our business and our ability to achieve our qualitative and quantitative objectives. These are real risks, but their probability of occurring may not be high. We also believe that our risk management programs generally could mitigate their potential effects, in the event they would occur.

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Critical Accounting Estimates

Cincinnati Financial Corporation’s financial statements are prepared using U.S. GAAP. These principles require management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates.

The significant accounting policies used in the preparation of the financial statements are discussed in Item 8, Note 1 of the Consolidated Financial Statements. In conjunction with that discussion, material implications of uncertainties associated with the methods, assumptions and estimates underlying the company’s critical accounting policies are discussed below. The audit committee of the board of directors reviews the annual financial statements with management and the independent registered public accounting firm. These discussions cover the quality of earnings, review of reserves and accruals, reconsideration of the suitability of accounting principles, review of highly judgmental areas including critical accounting estimates, audit adjustments and such other inquiries as may be appropriate.

Property Casualty Insurance Loss and Loss Expense Reserves

We establish loss and loss expense reserves for our property casualty insurance business as balance sheet liabilities. Unpaid loss and loss expenses are the estimated amounts necessary to pay for and settle all outstanding insured claims, including incurred but not reported (IBNR) claims. These reserves account for unpaid loss and loss expenses as of a financial statement date.

For some lines of business that we write, a considerable and uncertain amount of time can elapse between the occurrence, reporting and payment of insured claims. The amount we will actually have to pay for such claims also can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. Gross loss and loss expense reserves were $5.646 billion at year-end 2018 compared with $5.219 billion at year-end 2017.

How Reserves Are Established

Our field claims representatives establish case reserves when claims are reported to the company to provide for our unpaid loss and loss expense obligation associated with known claims. Field claims managers supervise and review all claims with case reserves less than $100,000. Additionally, a headquarters supervisor and regional claims manager review all claims under $100,000 if litigation or a certain specialty claim is involved. All claims with case reserves of $100,000 or greater are reviewed and approved by an experienced headquarters supervisor and regional claims manager. Upper-level headquarters claims managers also review case reserves of $175,000 or more.

Our claims representatives base their case reserve estimates primarily upon case-by-case evaluations that consider:


•	type of claim involved


•	circumstances surrounding each claim


•	policy provisions pertaining to each claim


•	potential for subrogation or salvage recoverable


•	general insurance reserving practices

Case reserves of all sizes are subject to review on a 90-day cycle, or more frequently if new information about a loss becomes available. As part of the review process, we monitor industry trends, cost trends, relevant court cases, legislative activity and other current events in an effort to ascertain new or additional loss exposures.

We also establish IBNR reserves to provide for all unpaid loss and loss expenses not accounted for by case reserves:


•	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 IBNR claim count and an estimated average claim amount for each event. Once case reserves are established for a catastrophe event, we reduce the IBNR reserves. Our claims department management coordinates the assessment of these events and prepares the related IBNR reserve estimates. Such an assessment involves a comprehensive analysis of the nature of the event, of policyholder exposures within the affected geographic area and of available claims intelligence.

•

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 IBNR claim count and an estimated average claim amount for each event. Once case reserves are established for a catastrophe event, we reduce the IBNR reserves. Our claims department management coordinates the assessment of these events and prepares the related IBNR reserve estimates. Such an assessment involves a comprehensive analysis of the nature of the event, of policyholder exposures within the affected geographic area and of available claims intelligence.

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Depending on the nature of the event, available claims intelligence could include surveys of field claims associates within the affected geographic area, feedback from a catastrophe claims team sent into the area, as well as data on claims reported as of the financial statement date. To determine whether an event is designated as a catastrophe, we generally use the catastrophe definition provided by Property Claims Service (PCS), a division of Insurance Services Office. PCS defines a catastrophe as an event that causes countrywide damage of $25 million or more in insured property losses and affects a significant number of policyholders and insureds.


•	For events designated as natural catastrophes resulting in losses incurred related to our reinsurance assumed operations, Cincinnati Re, we calculate IBNR reserves for losses incurred separately from losses related to direct premiums. That process begins with a review of our occurrence and aggregate in-force reinsurance limits for our portfolio of ceding companies likely to be affected by such events. Using third party catastrophe models combined with our own proprietary adjustments, we model a range of stochastic and scenario events for each ceding company to make an initial estimate of potential losses. Consideration of industry loss estimates promulgated by a variety of third parties provides a base to perform a market share loss analysis for each ceding company. We obtain loss estimates from ceding companies based on their view of losses, which includes their claim reports, actual claim payments and reserve estimates. Based on these data points, we estimate ultimate losses that we reinsure for each ceding company. We then benchmark individual ceding company reports against what we expected and use this information across our portfolio to refine our ultimate loss estimates. Once known payments and reserves are reported by individual ceding companies, we establish case reserves by reinsurance treaty. IBNR reserves are then calculated as the difference between the estimate of the ultimate loss and loss expenses incurred for each catastrophe event, reduced by the sum of total loss and loss expense payments and total case reserves. Incurred losses from catastrophe events for Cincinnati Re can include non-U.S. experience reported by the ceding companies, in addition to events designated as catastrophes by PCS.

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For events designated as natural catastrophes resulting in losses incurred related to our reinsurance assumed operations, Cincinnati Re, we calculate IBNR reserves for losses incurred separately from losses related to direct premiums. That process begins with a review of our occurrence and aggregate in-force reinsurance limits for our portfolio of ceding companies likely to be affected by such events. Using third party catastrophe models combined with our own proprietary adjustments, we model a range of stochastic and scenario events for each ceding company to make an initial estimate of potential losses. Consideration of industry loss estimates promulgated by a variety of third parties provides a base to perform a market share loss analysis for each ceding company. We obtain loss estimates from ceding companies based on their view of losses, which includes their claim reports, actual claim payments and reserve estimates. Based on these data points, we estimate ultimate losses that we reinsure for each ceding company. We then benchmark individual ceding company reports against what we expected and use this information across our portfolio to refine our ultimate loss estimates. Once known payments and reserves are reported by individual ceding companies, we establish case reserves by reinsurance treaty. IBNR reserves are then calculated as the difference between the estimate of the ultimate loss and loss expenses incurred for each catastrophe event, reduced by the sum of total loss and loss expense payments and total case reserves. Incurred losses from catastrophe events for Cincinnati Re can include non-U.S. experience reported by the ceding companies, in addition to events designated as catastrophes by PCS.


•	For asbestos and environmental claims, we calculate IBNR reserves by deriving an actuarially-based estimate of total unpaid loss and loss expenses. We then reduce the estimate by total case reserves. We discuss the reserve analysis that applies to asbestos and environmental reserves in Liquidity and Capital Resources, Asbestos and Environmental Loss and Loss Expense Reserves.


•	For loss expenses that pertain primarily to salaries and other costs related to our claims department associates, also referred to as adjusting and other expense or AOE, we calculate reserves based on an analysis of the relationship between paid losses and paid AOE. Reserves for AOE are allocated to company, line of business and accident year based on a claim count algorithm. Claim counts reported and used in the reserving process are primarily measured by insurance coverages that are triggered when a loss occurs and a reserve is established. 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.

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For loss expenses that pertain primarily to salaries and other costs related to our claims department associates, also referred to as adjusting and other expense or AOE, we calculate reserves based on an analysis of the relationship between paid losses and paid AOE. Reserves for AOE are allocated to company, line of business and accident year based on a claim count algorithm. Claim counts reported and used in the reserving process are primarily measured by insurance coverages that are triggered when a loss occurs and a reserve is established. 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.


•	For all other claims and events, including reinsurance assumed or ceded, IBNR reserves are calculated as the difference between an actuarial estimate of the ultimate cost of total loss and loss expenses incurred reduced by the sum of total loss and loss expense payments and total case reserves estimated for individual claims. Reserve amounts for those other claims and events are significant, and represent the majority of amounts shown as IBNR reserves and loss expense reserves in the table included in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves. We discuss below the development of actuarially based estimates of the ultimate cost of total loss and loss expenses incurred.

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For all other claims and events, including reinsurance assumed or ceded, IBNR reserves are calculated as the difference between an actuarial estimate of the ultimate cost of total loss and loss expenses incurred reduced by the sum of total loss and loss expense payments and total case reserves estimated for individual claims. Reserve amounts for those other claims and events are significant, and represent the majority of amounts shown as IBNR reserves and loss expense reserves in the table included in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves. We discuss below the development of actuarially based estimates of the ultimate cost of total loss and loss expenses incurred.

Our actuarial staff applies significant judgment in selecting models and estimating model parameters when preparing reserve analyses. Unpaid loss and loss expenses are inherently uncertain as to timing and amount. Uncertainties relating to model appropriateness, parameter estimates and actual loss and loss expense amounts are referred to as model, parameter and process uncertainty, respectively. Our management and actuarial staff address these uncertainties in the reserving process in a variety of ways.

Our actuarial staff bases its IBNR reserve estimates for these losses primarily on the indications of methods and models that analyze accident year data. Accident year is the year in which an insured claim, loss or loss expense occurred. The specific methods and models that our actuaries have used for the past several years are:


•	paid and reported loss development methods


•	paid and reported loss Bornhuetter-Ferguson methods


•	individual and multiple probabilistic trend family models

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Our actuarial staff uses diagnostics provided by stochastic reserving software to evaluate the appropriateness of the models and methods listed above. The software’s diagnostics have indicated that the appropriateness of these models and methods for estimating IBNR reserves for our lines of business tends to depend on a line’s tail. Tail refers to the time interval between a typical claim’s occurrence and its settlement. For our long-tail lines such as workers’ compensation and commercial casualty, models from the probabilistic trend family tend to provide superior fits and to validate well compared with models underlying the loss development and Bornhuetter-Ferguson methods. The loss development and Bornhuetter-Ferguson methods, particularly the reported loss variations, tend to produce the more appropriate IBNR reserve estimates for our short-tail lines such as homeowner and commercial property. For our mid-tail lines such as personal and commercial auto liability, all models and methods provide useful insights.

Our actuarial staff also devotes significant time and effort to the estimation of model and method parameters. The loss development and Bornhuetter-Ferguson methods require the estimation of numerous loss development factors. The Bornhuetter-Ferguson methods also involve the estimation of numerous expected loss ratios by accident year. Models from the probabilistic trend family require the estimation of development trends, calendar year inflation trends and exposure levels. Consequently, our actuarial staff monitors a number of trends and measures to gain key business insights necessary for exercising appropriate judgment when estimating the parameters mentioned, such as:


•	company and industry pricing


•	company and industry exposure


•	company and industry loss frequency and severity


•	past large loss events


•	company and industry premium


•	company in-force policy count

These trends and measures also support the estimation of expected accident year loss ratios needed for applying the Bornhuetter-Ferguson methods and for assessing the reasonability of all IBNR reserve estimates computed. Our actuarial staff reviews these trends and measures quarterly, updating parameters derived from them as necessary.

Quarterly, our actuarial staff summarizes their reserve analysis by preparing an actuarial best estimate and a range of reasonable IBNR reserves intended to reflect the uncertainty of the estimate. An inter-departmental committee that includes our actuarial management team reviews the results of each quarterly reserve analysis. The committee establishes management’s best estimate of IBNR reserves, which is the amount that is included in each period’s financial statements. In addition to the information provided by actuarial staff, the committee also considers factors such as:


•	large loss activity and trends in large losses


•	new business activity


•	judicial decisions


•	general economic trends such as inflation


•	trends in litigiousness and legal expenses


•	product and underwriting changes


•	changes in claims practices

The determination of management’s best estimate, like the preparation of the reserve analysis that supports it, involves considerable judgment. Changes in reserving data or the trends and factors that influence reserving data may signal fundamental shifts or may simply reflect single-period anomalies. Even if a change reflects a fundamental shift, the full extent of the change may not become evident until years later. Moreover, since our methods and models do not explicitly relate many of the factors we consider directly to reserve levels, we typically cannot quantify the precise impact of such factors on the adequacy of reserves prospectively or retrospectively.

Due to the uncertainties described above, our ultimate loss experience could prove better or worse than our carried reserves reflect. To the extent that reserves are inadequate and increased, the amount of the increase is a charge in the period that the deficiency is recognized, raising our loss and loss expense ratio and reducing earnings. To the

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extent that reserves are redundant and released, the amount of the release is a credit in the period that the redundancy is recognized, reducing our loss and loss expense ratio and increasing earnings.

Key Assumptions – Loss Reserving

Our actuarial staff makes a number of key assumptions when using their methods and models to derive IBNR reserve estimates. Appropriate reliance on these key assumptions essentially entails determinations of the likelihood that statistically significant patterns in historical data may extend into the future. The four most significant of the key assumptions used by our actuarial staff and approved by management are:


•	Emergence of loss and defense and cost containment expenses, also referred to as DCCE, on an accident year basis. Historical paid loss, reported loss and paid DCCE data for the business lines we analyze contain patterns that reflect how unpaid losses, unreported losses and unpaid DCCE as of a financial statement date will emerge in the future. Unless our actuarial staff or management identifies reasons or factors that invalidate the extension of historical patterns into the future, these patterns can be used to make projections necessary for estimating IBNR reserves. Our actuaries significantly rely on this assumption in the application of all methods and models mentioned above.

•

Emergence of loss and defense and cost containment expenses, also referred to as DCCE, on an accident year basis. Historical paid loss, reported loss and paid DCCE data for the business lines we analyze contain patterns that reflect how unpaid losses, unreported losses and unpaid DCCE as of a financial statement date will emerge in the future. Unless our actuarial staff or management identifies reasons or factors that invalidate the extension of historical patterns into the future, these patterns can be used to make projections necessary for estimating IBNR reserves. Our actuaries significantly rely on this assumption in the application of all methods and models mentioned above.


•	Calendar year inflation. For long-tail and mid-tail business lines, calendar year inflation trends for future paid losses and paid DCCE do not vary significantly from a stable, long-term average. Our actuaries base reserve estimates derived from probabilistic trend family models on this assumption.


•	Exposure levels. Historical earned premiums, when adjusted to reflect common levels of product pricing and loss cost inflation, can serve as a proxy for historical exposures. Our actuaries require this assumption to estimate expected loss ratios and expected DCCE ratios used by the Bornhuetter-Ferguson reserving methods. They may also use this assumption to establish exposure levels for recent accident years, characterized by “green” or immature data, when working with probabilistic trend family models.

•

Exposure levels. Historical earned premiums, when adjusted to reflect common levels of product pricing and loss cost inflation, can serve as a proxy for historical exposures. Our actuaries require this assumption to estimate expected loss ratios and expected DCCE ratios used by the Bornhuetter-Ferguson reserving methods. They may also use this assumption to establish exposure levels for recent accident years, characterized by “green” or immature data, when working with probabilistic trend family models.


•	Claims having atypical emergence patterns. Characteristics of certain subsets of claims, such as high frequency, high severity, or mass tort claims, have the potential to distort patterns contained in historical paid loss, reported loss and paid DCCE data. When testing indicates this to be the case for a particular subset of claims, our actuaries segregate these claims from the data and analyze them separately. Subsets of claims that could fall into this category include hurricane claims or claims for other weather events where total losses we incurred were very large, individual large claims and asbestos and environmental claims.

•

Claims having atypical emergence patterns. Characteristics of certain subsets of claims, such as high frequency, high severity, or mass tort claims, have the potential to distort patterns contained in historical paid loss, reported loss and paid DCCE data. When testing indicates this to be the case for a particular subset of claims, our actuaries segregate these claims from the data and analyze them separately. Subsets of claims that could fall into this category include hurricane claims or claims for other weather events where total losses we incurred were very large, individual large claims and asbestos and environmental claims.

These key assumptions have not changed since 2005, when our actuarial staff began using probabilistic trend family models to estimate IBNR reserves.

Paid losses, reported losses and paid DCCE are subject to random as well as systematic influences. As a result, actual paid losses, reported losses and paid DCCE are virtually certain to differ from projections. Such differences are consistent with what specific models for our business lines predict and with the related patterns in the historical data used to develop these models. As a result, management does not closely monitor statistically insignificant differences between actual and projected data.

Reserve Estimate Variability

Management believes that the standard error of a reserve estimate, a measure of the estimate’s variability, provides the most appropriate measure of the estimate’s sensitivity. The reserves we establish depend on the models we use and the related parameters we estimate in the course of conducting reserve analyses. However, the actual amount required to settle all outstanding insured claims, including IBNR claims, as of a financial statement date depends on stochastic, or random, elements as well as the systematic elements captured by our models and estimated model parameters. For the lines of business we write, process uncertainty – the inherent variability of loss and loss expense payments – typically contributes more to the imprecision of a reserve estimate than parameter uncertainty.

Consequently, a sensitivity measure that ignores process uncertainty would provide an incomplete picture of the reserve estimate’s sensitivity. Since a reserve estimate’s standard error accounts for both process and parameter uncertainty, it reflects the estimate’s full sensitivity to a range of reasonably likely scenarios.

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The table below provides standard errors and reserve ranges by major property casualty lines of business and in total for net loss and loss expense reserves as well as the potential effects on our net income, assuming a 21 percent federal tax rate. Standard errors and reserve ranges for assorted groupings of these lines of business cannot be computed by simply adding the standard errors and reserve ranges of the component lines of business, since such an approach would ignore the effects of product diversification. See Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves, Range of Reasonable Reserves, for more details on our total reserve range. While the table reflects our assessment of the most likely range within which each line’s actual unpaid loss and loss expenses may fall, one or more lines’ actual unpaid loss and loss expenses could nonetheless fall outside of the indicated ranges.



(Dollars in millions)	Net loss and loss expense range of reserves
	Carried reserves		Low point		High point		Standard error		Net income effect

At December 31, 2018
Total	$	5,408	$	5,037	$	5,481	$	222	$	175

Commercial casualty	$	2,181	$	1,876	$	2,358	$	241	$	190
Commercial property	342		317		364		24		19
Commercial auto	690		649		714		32		25
Workers' compensation	959		812		995		91		72
Personal auto	329		298		329		15		12
Homeowners	169		161		178		8		6

Life Policy and Investment Contract Reserves

We establish the reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates 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 and morbidity. We use our own experience and historical trends for setting our assumptions for expected withdrawal rates and expenses. We base our assumptions for expected investment income on our own experience adjusted for current and future expected economic conditions.

We establish reserves for our universal life, deferred annuity and investment contracts equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals. Some of our universal life insurance 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.

Asset Impairment

Our investment portfolio is our largest asset. We monitor the fixed-maturity portfolio and all other assets for signs of other-than-temporary or permanent impairment. We monitor decreases in the fair value of invested assets; an accumulation of company costs in excess of the amount originally expected to acquire or construct an asset; uncollectability of all receivable assets; or other factors such as bankruptcy, deterioration of creditworthiness, failure to pay interest; signs indicating that the receivable carrying amount may not be recoverable; and changes in legal factors or in the business climate.

The application of our impairment policy resulted in other-than-temporary impairment (OTTI) charges that reduced our income before income taxes by $5 million in 2018, $9 million in 2017 and $2 million in 2016. OTTI losses represent noncash charges to income and are reported as investment losses.

Our internal investment portfolio managers monitor their assigned portfolios. If a fixed-maturity security is valued below amortized cost, the portfolio managers undertake additional reviews. Such declines often occur in conjunction with events taking place in the overall economy and market, combined with events specific to the industry or operations of the issuing organization. Managers review quantitative measurements such as a declining trend in fair value, the extent of the fair value decline and the length of time the value of the security has been depressed, as well as qualitative measures such as pending events, credit ratings and issuer liquidity. We are even more proactive

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when these declines in valuation are greater than might be anticipated when viewed in the context of overall economic and market conditions. We provide information about valuations of our invested assets in Item 8, Note 2 of the Consolidated Financial Statements.

All fixed-maturity securities valued below 100 percent of amortized cost are reported to the asset impairment committee for evaluation. When evaluating for OTTI, the committee considers the company’s intent and ability to retain a security for a period adequate to recover its cost.

Fixed-security securities that have previously been other-than-temporarily impaired are evaluated based on their adjusted cost or amortized cost and further written down if deemed appropriate. We provide detailed information about fixed-maturity securities fair valued in a continuous loss position at year-end 2018 in Item 7A, Application of Asset Impairment Policy.

Impairment charges are recorded for other-than-temporary declines in value if fair value is below cost or amortized cost and, in the asset impairment committee’s judgment, the fair value is not expected to be recouped within a designated recovery period. When determining OTTI charges for our fixed-maturity portfolio, management places significant emphasis on whether issuers of debt are current on contractual payments and whether future contractual amounts are likely to be paid. Our invested asset impairment policy states that fixed maturities with fair values 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 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.

Fixed-maturity securities considered to have a temporary decline would be expected to recover their amortized cost, which may be at maturity. Under the same accounting treatment as fair value gains, temporary declines (changes in the fair value of these fixed-maturity securities) are reflected in shareholders’ equity on our Consolidated Balance Sheets in accumulated other comprehensive income (AOCI), net of tax, and have no impact on net income.

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Fair Value Measurements

Valuation of Financial Instruments

Accounting Standards Codification (ASC) 820-10, Fair Value Measurements and Disclosures, defines fair value 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 must, whenever possible, rely upon observable market data.

We have categorized our financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level that is significant to the fair value measurement of the instrument. While we consider pricing data from outside services, we ultimately determine whether the data or inputs used by these outside services are observable or unobservable.

Financial assets and liabilities recorded in the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as described in Item 8, Note 3 of the Consolidated Financial Statements.

Level 1 and Level 2 Valuation Techniques

Over 99 percent of the $16.609 billion of securities in our investment portfolio at year-end 2018, measured at fair value, are classified as Level 1 or Level 2. Financial assets that fall within Level 1 and Level 2 are priced according to observable data from identical or similar securities that have traded in the marketplace. Also within Level 2 are securities that are valued by outside services or brokers where we have evaluated and verified the pricing methodology and determined that the inputs are observable.

Level 3 Valuation Techniques

At December 31, 2018, total Level 3 assets were less than 1 percent of our investment portfolio measured at fair value. Financial assets that fall within the Level 3 hierarchy are valued based upon unobservable market inputs, normally because they are not actively traded on a public market. Pricing for each Level 3 security is based upon inputs that are market driven, including quotes from brokers or other external sources. We placed in the Level 3 hierarchy securities for which we were unable to obtain the pricing methodology or we could not consider the price provided as binding. Pricing for securities classified as Level 3 could not be corroborated by similar securities priced using observable inputs.

Management ultimately determined the pricing for each Level 3 security that we considered to be the best exit price valuation. Broker quotes are obtained for thinly traded securities that subsequently fall within the Level 3 hierarchy. We have generally obtained and evaluated two nonbinding quotes from brokers; our investment professionals determine our best estimate of fair value.

Employee Benefit Pension Plan

We have a defined benefit pension plan that was modified during 2008; refer to Item 8, Note 13 of the Consolidated Financial Statements, for additional information. Contributions and pension costs are developed from annual actuarial valuations. These valuations involve key assumptions including discount rates, expected return on plan assets and compensation increase rates, which are updated annually. Any adjustments to these assumptions are based on considerations of current market conditions. Therefore, changes in the related pension costs or credits may occur in the future due to changes in assumptions.

Key assumptions used in developing the benefit obligation at year-end 2018 for our qualified plan were a 4.34 percent discount rate and rates of compensation increases ranging from 2.25 percent to 3.25 percent. To determine the discount rate, 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 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.

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Key assumptions used in developing the 2018 net pension expense for our qualified plan were a 3.73 percent discount rate, a 7.25 percent expected return on plan assets and rates of compensation increases ranging from 2.75 percent to 3.25 percent.

In 2018, the net pension expense was $5 million. In 2019, we expect the net pension expense to be approximately $3 million.

Holding all other assumptions constant, a 0.5 percentage-point decrease in the discount rate would increase our 2019 income before income taxes by less than $1 million. A 0.5 percentage-point decrease in the expected return on plan assets would decrease our 2019 income before income taxes by approximately $1 million.

The fair value of the plan assets exceeded the accumulated benefit obligation by $21 million and $23 million at year-end 2018 and 2017, respectively. The fair value of the plan assets equaled the projected plan benefit obligation at year-end 2018 and was $6 million less than the projected plan benefit obligation at year-end 2017, respectively. Market conditions and interest rates significantly affect future assets and liabilities of the pension plan.

Deferred Policy Acquisition Costs

We establish a deferred asset for expenses associated with successfully acquiring property casualty and life insurance policies, primarily commissions, premium taxes and underwriting costs. Underlying assumptions are updated periodically to reflect actual experience, and we evaluate our deferred acquisition cost recoverability.

For property casualty insurance policies, deferred acquisition costs are amortized over the terms of the policies. These costs are principally agent commissions, premium taxes and certain underwriting costs related to successful contract acquisition, which are deferred and amortized into net income as premiums are earned. We assess recoverability of deferred acquisition costs at a level consistent with the way we acquire, service and manage insurance policies and measure profitability. Deferred acquisition costs track with the change in premiums.

For life insurance policies, acquisition costs are amortized into income in proportion to premium revenue, benefit base or in accordance with the recognition of gross profit from the contract, depending on the policy type. These costs are principally agent commissions and underwriting costs related to successful contract acquisition. We analyze our acquisition cost assumptions periodically to reflect actual experience; we evaluate our deferred acquisition cost for recoverability; and we regularly conduct reviews for potential premium deficiencies or loss recognition. Changes in the amounts or timing of estimated future profits could result in adjustments to the accumulated amortization of these costs.

Recent Accounting Pronouncements

Information about recent accounting pronouncements is provided in Item 8, Note 1 of the Consolidated Financial Statements.

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Financial Results

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


•	Commercial lines insurance


•	Personal lines insurance


•	Excess and surplus lines insurance


•	Life insurance


•	Investments

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

We measure profit or loss for our commercial lines, personal lines, excess and surplus lines and life insurance segments based upon underwriting results (profit or loss), which represent net earned premium less loss and loss expenses, or contract holders’ benefits incurred, and underwriting expenses on a pretax basis. We also evaluate results for our consolidated property casualty insurance operations. That is the total of our standard market segments (commercial lines and personal lines), our excess and surplus lines insurance segment and our reinsurance assumed operations. For analysis of our consolidated property casualty insurance results, it is important to include our reinsurance assumed operations earned premiums, loss and loss expenses and also underwriting expenses reported as Other. Underwriting results and segment pretax operating income are not substitutes for net income determined in accordance with GAAP.

For our consolidated property casualty insurance operations as well as the insurance segments, statutory accounting data and ratios are key performance indicators that we use to assess business trends and to make comparisons to industry results, since GAAP-based industry data generally is not as readily available.

Investments held by the parent company and the investment portfolios for the insurance subsidiaries are managed and reported as the investments segment, separate from our underwriting business. Net investment income and net investment gains and losses for our investment portfolios are discussed in the Investments Results.

The calculations of segment data are described in more detail in Item 8, Note 18, of the Consolidated Financial Statements. The following sections provide analysis and discussion of results of operations for each of the five segments.

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Consolidated Property Casualty Insurance Results

Earned and net written premiums for our consolidated property casualty operations grew in 2018, reflecting average renewal price increases, a higher level of insured exposures and strategic initiatives for targeted growth. A key measure of property casualty profitability is underwriting profit or loss. Our 2018 underwriting profit of $186 million was $58 million more than in 2017, despite a $7 million unfavorable effect from a higher amount of natural catastrophe losses, mostly caused by severe weather. Prior accident year loss experience before catastrophes during 2018 was more favorable than in 2017, and was responsible for much of the 2018 underwriting profit increase. Improved profitability also included other factors, such as higher pricing, and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices. Underwriting profit trends are discussed further below.

The table below highlights property casualty results, with analysis and discussion in the sections that follow. That analysis and discussion includes sections by segment.

Overview – Three-Year Highlights



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Earned premiums	$	4,920		$	4,722		$	4,482		4		5
Fee revenues	11			11			10			0		10
Total revenues	4,931			4,733			4,492			4		5
Loss and loss expenses from:
Current accident year before catastrophe losses	3,026			2,889			2,684			5		8
Current accident year catastrophe losses	364			368			345			(1	)	7
Prior accident years before catastrophe losses	(150		)	(91		)	(159		)	(65	)	43
Prior accident years catastrophe losses	(17		)	(28		)	(9		)	39		(211	)
Loss and loss expenses	3,223			3,138			2,861			3		10
Underwriting expenses	1,522			1,467			1,389			4		6
Underwriting profit	$	186		$	128		$	242		45		(47	)

Ratios as a percent of earned premiums:										Pt. Change		Pt. Change
Current accident year before catastrophe losses	61.5		%	61.1		%	59.8		%	0.4		1.3
Current accident year catastrophe losses	7.4			7.8			7.7			(0.4	)	0.1
Prior accident years before catastrophe losses	(3.1		)	(1.9		)	(3.5		)	(1.2	)	1.6
Prior accident years catastrophe losses	(0.3		)	(0.6		)	(0.2		)	0.3		(0.4	)
Loss and loss expenses	65.5			66.4			63.8			(0.9	)	2.6
Underwriting expenses	30.9			31.1			31.0			(0.2	)	0.1
Combined ratio	96.4		%	97.5		%	94.8		%	(1.1	)	2.7

Combined ratio:	96.4		%	97.5		%	94.8		%	(1.1	)	2.7
Contribution from catastrophe losses and prior years reserve development	4.0			5.3			4.0			(1.3	)	1.3
Combined ratio before catastrophe losses and prior years reserve development	92.4		%	92.2		%	90.8		%	0.2		1.4

Performance highlights for consolidated property casualty operations include:

•

Premiums – Agency renewal written premiums rose $160 million in 2018 and represented approximately 80 percent of the growth in earned premiums and net written premiums that rose in each of our property casualty segments. The renewal premium increase was largely due to average renewal price increases and a higher level of insured exposures. Price increases with enhanced precision continue to benefit operating results.

New business written premiums produced through agencies increased $26 million in 2018, compared with 2017. Agents appointed during 2018 or 2017 produced a 2018 increase in standard lines new business of $44 million. Growth initiatives also favorably affect growth in subsequent years, particularly as newer agency relationships mature over time.

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Net written premiums increased $33 million in 2018 from expansion of reinsurance assumed operations, known as Cincinnati ReSM. Cincinnati Re assumes risks through reinsurance treaties and in some cases cedes part of the risk and related premiums to one or more unaffiliated reinsurance companies through transactions known as retrocessions. In 2018, earned premiums for Cincinnati Re totaled $132 million.

Other written premiums consist primarily of premiums ceded to reinsurers as part of our ceded reinsurance program and in total contributed $29 million less in 2018 to net written premiums than in 2017. An increase in ceded premiums, other than Cincinnati Re premiums, reduced net written premium growth by $8 million in 2018, compared with 2017.

The table below analyzes premium revenue components and trends.



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Agency renewal written premiums	$	4,358		$	4,198		$	4,072		4		3
Agency new business written premiums	652			626			551			4		14
Cincinnati Re net written premiums	158			125			71			26		76
Other written premiums	(138		)	(109		)	(114		)	(27	)	4
Net written premiums	5,030			4,840			4,580			4		6
Unearned premium change	(110		)	(118		)	(98		)	7		(20	)
Earned premiums	$	4,920		$	4,722		$	4,482		4		5

•

Combined ratio – The 2018 combined ratio improved by 1.1 percentage points compared with 2017, including a 0.1 percentage-point decrease in the ratio for natural catastrophe losses. The 2018 ratio for current accident year losses and loss expenses before catastrophes increased by 0.4 percentage points, in part due to an increase in commercial lines large losses for new losses above $1 million described below, and partially offset what we believe are improvements to some of our loss experience due to recent-year initiatives to improve pricing precision and claims and loss control practices. The remainder of the 2018 combined ratio decrease included 1.2 percentage-points more benefit in the ratio for prior accident year losses and loss expenses before catastrophes. We further discuss ratios related to reserve development in the sections that follow the Catastrophe Losses Incurred table below.

Our statutory combined ratio was 96.0 percent in 2018 compared with 97.2 percent in 2017 and 94.5 percent in 2016. The estimated statutory combined ratio for the property casualty industry, with the industry’s ratio excluding its mortgage and financial guaranty lines of business and based on industry data reported through the first nine months of 2018, was 97.6 percent in 2018, 105.1 percent in 2017 and 100.9 percent in 2016. The contribution of catastrophe losses to our statutory combined ratio was 7.1 percentage points in 2018, 7.2 percentage points in 2017 and 7.5 percentage points in 2016, compared with industry estimates of 5.1, 8.8 and 4.7 percentage points, respectively, with 2018 representing industry data reported through the first nine months of 2018. Components of the combined ratio are discussed below.

Catastrophe loss trends are an important factor in assessing trends for overall underwriting results. Our 10-year historical annual average contribution of catastrophe losses to the combined ratio was 6.8 percentage points at December 31, 2018. Our five-year average was 6.2 percentage points.

For our property catastrophe occurrence and aggregate excess of loss treaty that became effective in July 2018, we can recover catastrophe loss amounts up to $50 million in excess of net $125 million per occurrence for combined business written on a direct basis and by Cincinnati Re, $25 million in excess of $32 million for the aggregation of Cincinnati Re catastrophe occurrences subject to certain deductibles, $50 million in excess of $10 million for business written on a direct basis for the loss perils of earthquake, brushfire and wildfire in certain western states, or various combinations of occurrences with coverage up to the $50 million aggregate limit. The aggregate limit is $25 million if covered losses pertain only to Cincinnati Re. The aggregate recovery from reinsurers providing this coverage totaled $36 million for incurred losses in 2018, after considering all applicable deductibles. The Cincinnati Re portion of the aggregate recovery totaled $21 million. The aggregate recovery was from two events during 2018, both wildfires in California.

The following table shows catastrophe losses incurred for the past two calendar years, net of reinsurance, as well as the effect of loss development on prior period catastrophe reserves. We individually list declared catastrophe events for which our incurred losses reached or exceeded $10 million.

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Catastrophe Losses Incurred



(Dollars in millions, net of reinsurance)									Excess
			Commercial			Personal			and surplus		Cincinnati
Dates	Events	Regions	lines			lines			lines		Re			Total
2018
Jan. 8-10	Flood, Wind	West	$	—		$	10		$	—	$	—		$	10
Mar. 1-3	Freezing, Ice, Snow, Wind	Northeast, South	5			5			—		—			10
Mar. 18-21	Flood, Hail, Wind	South	19			7			1		—			27
Apr. 13-17	Flood, Hail, Wind	Midwest, Northeast, South	20			7			—		—			27
Jul. 19-22	Flood, Hail, Wind	Midwest, South	9			8			—		—			17
Aug. 27 - Sep. 7	Flood, Wind	International	—			—			—		15			15
Sep. 13-19	Flood, Hail, Wind	South	72			8			—		1			81
Oct. 10-12	Flood, Hail, Wind	South	30			18			—		15			63
Nov. 8-21	Wildfire	West	—			10			—		—			10
Nov. 29 - Dec. 2	Flood, Hail, Wind	Midwest, South, West	5			5			—		—			10
All other 2018 catastrophes			48			43			1		2			94
Development on 2017 and prior catastrophes			(21		)	4			—		—			(17		)
Calendar year incurred total			$	187		$	125		$	2	$	33		$	347

2017
Feb. 28-Mar. 1	Flood, hail, wind	Midwest, South	$	20		$	23		$	—	$	—		$	43
Mar. 6-9	Flood, hail, wind	Midwest, Northeast, South	26			11			—		—			37
Mar. 21-22	Flood, hail, wind	South	19			9			—		—			28
Apr. 4-6	Flood, hail, wind	Midwest, South	8			15			—		—			23
May 8-11	Flood, hail, wind	Midwest, South, West	14			1					—			15
May 15-18	Flood, hail, wind	Midwest, Northeast, South	3			10			—		—			13
Jun. 11	Flood, hail, wind	Midwest	4			15			—		—			19
Jun. 16-19	Flood, hail, wind	Midwest, Northeast, South	7			3			—		—			10
Jun. 27-29	Flood, hail, wind	Midwest	18			1			—		—			19
Aug. 25-Sep. 1	Flood, hail, wind	South	5			2			—		10			17
Sep. 6-12	Flood, hail, wind	South	14			18			1		19			52
Nov. 5-6	Flood, hail, wind	Midwest	6			4			—		—			10
All other 2017 catastrophes			38			27			1		16			82
Development on 2016 and prior catastrophes			(23		)	(4		)	—		(1		)	(28		)
Calendar year incurred total			$	159		$	135		$	2	$	44		$	340

Cincinnati Financial Corporation - 2018 10-K - Page 65

Consolidated Property Casualty Insurance Loss and Loss Expenses

Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. For all property casualty lines of business in aggregate, net loss and loss expense reserves at December 31, 2018, were $376 million higher than at year-end 2017, including $233 million for incurred but not reported (IBNR) reserves. The $376 million reserve increase raised year-end 2017 net loss and loss expense reserves by 7 percent, compared with a 4 percent increase in 2018 earned premiums.

Most of the incurred losses and loss expenses shown in the consolidated property casualty insurance results three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than half of our consolidated property casualty current accident year incurred losses and loss expenses represents net paid amounts, the majority represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 68.9 percent accident year 2017 loss and loss expense ratio reported as of December 31, 2017, developed favorably by 1.3 percentage points to 67.6 percent due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2018. Accident years 2017 and 2016 have both developed favorably, as indicated by the progression over time for the ratios in the table.



(Dollars in millions)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident year:	2018		2017		2016		2018		2017		2016
as of December 31, 2018	$	3,390	$	3,194	$	2,941	68.9	%	67.6	%	65.6	%
as of December 31, 2017			3,257		2,979				68.9		66.5
as of December 31, 2016					3,029						67.5

Catastrophe loss trends, discussed above, accounted for some of the movement in the current accident year loss and loss expense ratio for 2018, compared with 2017. Catastrophe losses added 7.4 percentage points in 2018, 7.8 points in 2017 and 7.7 points in 2016 to the respective consolidated property casualty current accident year loss and loss expense ratios in the table above.

The 61.5 percent ratio for current accident year loss and loss expenses before catastrophe losses for 2018 increased 0.4 percentage points compared with the 61.1 percent accident year 2017 ratio measured as of December 31, 2017. Contributors to the increase included 0.3 points from our commercial casualty line of business, which experienced a 2018 increase of $41 million, compared with 2017, despite its earned premiums rising by only $3 million in 2018.

Reserve development on prior accident years continued to net to a favorable amount in 2018, and was primarily due to less-than-anticipated loss emergence on known claims. We recognized $167 million of favorable development in 2018, compared with $119 million in 2017 and $168 million in 2016. Of the $48 million increase in 2018, compared with 2017, $58 million was attributable to our commercial casualty line of business. Approximately 91 percent of our net favorable reserve development on prior accident years recognized during 2018 occurred in our commercial casualty, commercial property and workers’ compensation lines of business. In 2017, our commercial property and workers' compensation lines of business were responsible for approximately 73 percent of the favorable reserve development. As discussed in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves, Property Casualty Insurance Development of Estimated Reserves by Accident Year, commercial casualty and workers' compensation are considered long-tail lines with the potential for revisions inherent in estimating reserves. Favorable development recognized during 2016 was primarily from our commercial casualty, commercial property and workers’ compensation lines of business. Development by accident year is further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.

Cincinnati Financial Corporation - 2018 10-K - Page 66

Consolidated Property Casualty Insurance Losses by Size



(Dollars in millions, net of reinsurance)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Current accident year losses greater than $5,000,000	$	43		$	45		$	26		(4	)	73
Current accident year losses $1,000,000-$5,000,000	218			212			185			3		15
Large loss prior accident year reserve development	69			51			(6		)	35		nm
Total large losses incurred	330			308			205			7		50
Losses incurred but not reported	110			54			164			104		(67	)
Other losses excluding catastrophe losses	1,886			1,903			1,699			(1	)	12
Catastrophe losses	334			327			327			2		0
Total losses incurred	$	2,660		$	2,592		$	2,395		3		8

Ratios as a percent of earned premiums:										Pt. Change		Pt. Change
Current accident year losses greater than $5,000,000	0.9		%	1.0		%	0.6		%	(0.1	)	0.4
Current accident year losses $1,000,000-$5,000,000	4.4			4.5			4.1			(0.1	)	0.4
Large loss prior accident year reserve development	1.4			1.0			(0.1		)	0.4		1.1
Total large loss ratio	6.7			6.5			4.6			0.2		1.9
Losses incurred but not reported	2.2			1.1			3.7			1.1		(2.6	)
Other losses excluding catastrophe losses	38.4			40.3			37.8			(1.9	)	2.5
Catastrophe losses	6.8			7.0			7.3			(0.2	)	(0.3	)
Total loss ratio	54.1		%	54.9		%	53.4		%	(0.8	)	1.5

In 2018, total large losses incurred increased by $22 million, or 7 percent, net of reinsurance, primarily due to an increase for our commercial lines insurance segment. The corresponding ratio increased 0.2 percentage points. Our analysis of large losses incurred indicated no unexpected concentration of these losses and reserve increases by geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.

Cincinnati Financial Corporation - 2018 10-K - Page 67

Consolidated Property Casualty Insurance Underwriting Expenses



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Commission expenses	$	911		$	866		$	819		5		6
Other underwriting expenses	599			587			555			2		6
Policyholder dividends	12			14			15			(14	)	(7	)
Total underwriting expenses	$	1,522		$	1,467		$	1,389		4		6

Ratios as a percent of earned premiums:										Pt. Change		Pt. Change
Commission expenses	18.5		%	18.3		%	18.3		%	0.2		0.0
Other underwriting expenses	12.1			12.5			12.4			(0.4	)	0.1
Policyholder dividends	0.3			0.3			0.3			0.0		0.0
Total underwriting expense ratio	30.9		%	31.1		%	31.0		%	(0.2	)	0.1

Consolidated property casualty commission expenses rose $45 million, or 5 percent, in 2018, with profit-sharing commissions for agencies increasing by $4 million. The 2018 ratio of commission expenses as a percent of earned premiums increased by 0.2 percentage points, compared with 2017. The 2018 ratio for other underwriting expenses decreased by 0.4 percentage-points compared with 2017, as earned premiums rose at a faster pace than other underwriting expenses. During 2018, we continued to carefully manage expenses while also making strategic investments that include enhancement of underwriting expertise.

Commission expenses include our profit-sharing commissions, which are primarily based on one-year and three-year profitability of an agency’s business. The aggregate profit trend for agencies that earn these profit-based commissions can differ from the aggregate profit trend for all agencies reflected in our consolidated property casualty results.

Salaries, benefits and payroll taxes for our associates account for approximately half of our property casualty other underwriting expenses. Most of our associates either provide direct service to the property casualty portion of our agencies’ businesses or provide support to those associates.

Discussions below of our property casualty insurance segments provide additional details about our results.

Cincinnati Financial Corporation - 2018 10-K - Page 68

Commercial Lines Insurance Results

Overview – Three-Year Highlights



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Earned premiums	$	3,218		$	3,165		$	3,089		2		2
Fee revenues	5			5			5			0		0
Total revenues	3,223			3,170			3,094			2		2
Loss and loss expenses from:
Current accident year before catastrophe losses	1,998			1,933			1,831			3		6
Current accident year catastrophe losses	208			182			226			14		(19	)
Prior accident years before catastrophe losses	(136		)	(50		)	(124		)	(172	)	60
Prior accident years catastrophe losses	(21		)	(23		)	(5		)	9		(360	)
Loss and loss expenses	2,049			2,042			1,928			0		6
Underwriting expenses	1,023			1,009			982			1		3
Underwriting profit	$	151		$	119		$	184		27		(35	)
Ratios as a percent of earned premiums:										Pt. Change		Pt. Change
Current accident year before catastrophe losses	62.1		%	61.1		%	59.3		%	1.0		1.8
Current accident year catastrophe losses	6.5			5.7			7.3			0.8		(1.6	)
Prior accident years before catastrophe losses	(4.2		)	(1.6		)	(4.0		)	(2.6	)	2.4
Prior accident years catastrophe losses	(0.7		)	(0.7		)	(0.2		)	0.0		(0.5	)
Loss and loss expenses	63.7			64.5			62.4			(0.8	)	2.1
Underwriting expenses	31.7			31.9			31.8			(0.2	)	0.1
Combined ratio	95.4		%	96.4		%	94.2		%	(1.0	)	2.2

Combined ratio:	95.4		%	96.4		%	94.2		%	(1.0	)	2.2
Contribution from catastrophe losses and prior years reserve development	1.6			3.4			3.1			(1.8	)	0.3
Combined ratio before catastrophe losses and prior years reserve development	93.8		%	93.0		%	91.1		%	0.8		1.9

Performance highlights for the commercial lines insurance segment include:


•	Premiums – Earned premiums and net written premiums rose in 2018, primarily due to a $45 million increase in renewal written premiums that continued to include higher average pricing. New business written premiums in 2018 increased $20 million, or 5 percent, compared with 2017. The increase was driven by production from agencies appointed since the beginning of 2017.

•

Combined ratio – The 2018 combined ratio improved by 1.0 percentage point compared with 2017, despite a 0.8 percentage-point increase in the ratio component for natural catastrophe losses. The 2018 ratio for current accident year losses and loss expenses before catastrophes increased by 1.0 percentage point, including 0.3 points from more current accident year losses of $1 million or more per claim, shown in the table below. Development on prior accident years’ loss and loss expense reserves before catastrophes during 2018 was 2.6 percentage points more favorable than in 2017.

As discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, stable historical paid loss patterns are a key assumption used to make projections necessary for estimating IBNR reserves. During 2017, we observed paid losses or re-estimates of case reserves emerging at levels higher than expected for commercial casualty. Considering that new data at December 31, 2017, we estimated commercial casualty IBNR reserves for accident year 2017 at levels more likely to be adequate. During 2018, commercial casualty reserve development on prior accident years was favorable, as discussed below, but we estimated commercial casualty IBNR reserves for accident year 2018 at a prudent level, contributing an increase of 0.5 percentage points to the 2018 ratio for current accident year losses and loss expenses before catastrophes, compared with its contribution to accident year 2017 as of December 31, 2017.

Cincinnati Financial Corporation - 2018 10-K - Page 69

Commercial auto, representing 21 percent of 2018 earned premiums for our commercial lines insurance segment, was the only major line of business in that segment with a 2018 total loss and loss expense ratio significantly higher than we desired. During 2018, our commercial auto policies experienced average renewal price percentage increases estimated in the high-single-digit range, which we believe will help improve future profitability. We also continued to improve premium rate classification and use of other rating variables in risk selection and pricing.

Pricing precision and other initiatives to improve commercial lines underwriting profitability complement our business practices that continue to leverage the local presence of our field associates. Field marketing representatives meet with local agencies to assess each risk, determine limits of insurance and establish appropriate terms and conditions. They underwrite new business while field loss control, machinery and equipment and claims representatives conduct on-site inspections. Field claims representatives also assist underwriters by preparing full reports on their first-hand observations of risk quality.

Our commercial lines statutory combined ratio was 95.1 percent in 2018, compared with 96.2 percent in 2017 and 93.9 percent in 2016. The contribution of catastrophe losses to our commercial lines statutory combined ratio was 5.8 percentage points in 2018, 5.0 percentage points in 2017 and 7.1 percentage points in 2016.

Commercial Lines Insurance Premiums



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Agency renewal written premiums	$	2,925		$	2,880		$	2,832		2		2
Agency new business written premiums	417			397			372			5		7
Other written premiums	(97		)	(75		)	(82		)	(29	)	9
Net written premiums	3,245			3,202			3,122			1		3
Unearned premium change	(27		)	(37		)	(33		)	27		(12	)
Earned premiums	$	3,218		$	3,165		$	3,089		2		2

We continue to refine our use of predictive analytics tools to improve pricing precision as we further segment commercial lines policies, emphasizing identification and retention of policies we believe have relatively stronger price adequacy. These tools better align individual insurance policy pricing to risk attributes, providing our underwriters with enhanced abilities to target profitability and to discuss pricing impacts with agency personnel. We also continue to leverage our local relationships with agents through the efforts of our teams that work closely with them. We believe our field focus is unique and has several advantages, including providing us with quality intelligence on local market conditions. We seek to maintain appropriate pricing discipline for both new and renewal business as management continues to emphasize the importance of our agencies and underwriters assessing account quality to make careful decisions on a case-by-case basis whether to write or renew a policy. Premium rate credits may be used to retain renewals of quality business and to earn new business, but we do so selectively in order to avoid commercial accounts that we believe have insufficient profit margins.

Our 2 percent increase in 2018 agency renewal written premiums included higher average pricing. We measure average changes in commercial lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies. In 2018, our standard commercial lines policies averaged an estimated pricing change at a percentage in the low-single-digit range, slightly higher than in 2017. Our average commercial lines pricing change includes the flat pricing effect of certain coverages within package policies written for a three-year term that were in force but did not expire during the period being measured. Therefore, the average commercial lines pricing change we report reflects a blend of policies that did not expire and other policies that did expire during the measurement period.

For only those commercial lines policies that did expire and were then renewed during 2018, we estimate that the average price increase was near the low end of the mid-single-digit range, slightly higher than full-year 2017. During 2018, we continued to further segment our commercial lines policies, emphasizing identification and retention of policies we believed had relatively stronger price adequacy. Conversely, we continued to seek more aggressive renewal terms and conditions on policies we believed had relatively weaker pricing, in turn retaining fewer of those policies.

Cincinnati Financial Corporation - 2018 10-K - Page 70

Changes in the economy can affect insured exposures that directly relate to premium amounts charged for some policies. For commercial accounts, we usually calculate initial estimates for general liability premiums based on estimated sales or payroll volume, while we calculate workers’ compensation premiums based on estimated payroll volume. A change in sales or payroll volume generally indicates a change in demand for a business’s goods or services, as well as a change in its exposure to risk. Policyholders who experience sales or payroll volume changes due to economic factors may also have other exposures requiring insurance, such as commercial auto or commercial property. Premium levels for these other types of coverages generally are not linked directly to sales or payroll volumes.

Premiums resulting from audits of actual sales or payrolls that confirmed or adjusted initial premium estimates have had a mixed effect on premium trends in recent years. On an earned premium basis for our commercial lines insurance segment, audits contributed $1 million to the $53 million earned premiums increase in 2018, negative $7 million to the $77 million earned premiums increase in 2017 and negative $5 million to the $93 million earned premiums increase in 2016. On a net written premium basis, audits contributed a negative amount of less than $1 million to the $43 million net written premiums increase in 2018, negative $5 million to the $81 million net written premiums increase in 2017 and negative $1 million to the $97 million net written premiums increase in 2016. These net written premium amounts are included with agency renewal written premiums in the Commercial Lines Insurance Premiums table above.

In 2018, our commercial lines new business premiums written by our agencies increased $20 million, or 5 percent, compared with 2017. New business premium volume in recent years has been significantly influenced by new agency appointments. Agencies appointed since the beginning of 2017 produced commercial lines new business written premiums of $40 million, in aggregate, during 2018, up $25 million from what they produced during 2017. All other agencies contributed the remaining $377 million, down $5 million from the $382 million they produced in 2017.

For new business, our field associates are frequently in our agents’ offices to: help judge the quality of each account; emphasize the Cincinnati value proposition; call on sales prospects with those agents; carefully evaluate risk exposure; and provide their best quotes. Some of our new business comes from accounts that are not new to the agent. We believe these seasoned accounts tend to be priced more accurately than business that is new to us and the agency. As we appoint new agencies who choose to move accounts to us, we report these accounts as new business to us.

Other written premiums primarily consist of premiums that are ceded to reinsurers and lower our net written premiums. An increase in ceded premiums reduced net written premium growth by $6 million for 2018, compared with 2017.

Commercial Lines Insurance Loss and Loss Expenses

Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. Most of the incurred losses and loss expenses shown in the commercial lines insurance segment three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than half of our commercial lines insurance segment current accident year incurred losses and loss expenses represents net paid amounts, the majority represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 66.8 percent accident year 2017 loss and loss expense ratio reported as of December 31, 2017, developed favorably by 2.2 percentage points to 64.6 percent due to claims settling for less than previously estimated, or due to updates to reserve estimates for unpaid claims, as of December 31, 2018. Accident years 2017 and 2016 for the commercial lines insurance segment have both developed favorably, as indicated by the progression over time of the ratios in the table.



(Dollars in millions)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident year:	2018		2017		2016		2018		2017		2016
as of December 31, 2018	$	2,206	$	2,047	$	1,988	68.6	%	64.6	%	64.4	%
as of December 31, 2017			2,115		2,023				66.8		65.5
as of December 31, 2016					2,057						66.6

Cincinnati Financial Corporation - 2018 10-K - Page 71

Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain some of the movement in the current accident year loss and loss expense ratio for accident year 2018, compared with 2017. Catastrophe losses added 6.5 percentage points in 2018, 5.7 points in 2017 and 7.3 points in 2016 to the respective commercial lines current accident year loss and loss expense ratios in the table above.

The 62.1 percent ratio for current accident year loss and loss expenses before catastrophe losses for 2018 increased 1.0 percentage point compared with the 61.1 percent accident year 2017 ratio measured as of December 31, 2017. Contributors to the increase included 0.9 points from our commercial casualty line of business, which experienced a 2018 increase of $41 million, compared with 2017, despite its earned premiums rising by only $3 million in 2018. Large losses, described below, and the corresponding ratios for new losses above $1 million, contributed a 0.3 percentage-point increase to the 2018 ratio. Those unfavorable contributions offset the favorable effects from various initiatives, such as those to improve pricing precision and loss experience related to claims and loss control practices.

Commercial lines reserve development on prior accident years of $157 million in 2018 continued to net to a favorable amount and provided a larger benefit than the $73 million recognized in 2017. The $84 million net increase in 2018 included $58 million from our commercial casualty line of business. Most of our commercial lines net favorable reserve development on prior accident years recognized during 2018 occurred in our commercial casualty, commercial property and workers’ compensation lines of business. Favorable development recognized during 2017 was mostly from our commercial property and workers’ compensation lines of business. Favorable development recognized during 2016 was mostly from our commercial casualty, commercial property and workers’ compensation lines of business. Development by accident year and other trends for commercial lines loss and loss expenses and the related ratios are further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.

Commercial Lines Insurance Losses by Size



(Dollars in millions, net of reinsurance)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Current accident year losses greater than $5,000,000	$	37		$	39		$	26		(5	)	50
Current accident year losses $1,000,000-$5,000,000	182			166			162			10		2
Large loss prior accident year reserve development	65			47			2			38		nm
Total large losses incurred	284			252			190			13		33
Losses incurred but not reported	64			61			125			5		(51	)
Other losses excluding catastrophe losses	1,122			1,184			1,055			(5	)	12
Catastrophe losses	180			150			214			20		(30	)
Total losses incurred	$	1,650		$	1,647		$	1,584		0		4

Ratios as a percent of earned premiums:										Pt. Change		Pt. Change
Current accident year losses greater than $5,000,000	1.2		%	1.2		%	0.8		%	0.0		0.4
Current accident year losses $1,000,000-$5,000,000	5.6			5.3			5.3			0.3		0.0
Large loss prior accident year reserve development	2.0			1.5			0.1			0.5		1.4
Total large loss ratio	8.8			8.0			6.2			0.8		1.8
Losses incurred but not reported	2.0			1.9			4.0			0.1		(2.1	)
Other losses excluding catastrophe losses	34.9			37.4			34.2			(2.5	)	3.2
Catastrophe losses	5.6			4.7			6.9			0.9		(2.2	)
Total loss ratio	51.3		%	52.0		%	51.3		%	(0.7	)	0.7

In 2018, total large losses incurred increased by $32 million, or 13 percent, net of reinsurance. The corresponding ratio increased 0.8 percentage points. The 2018 increases on both a dollar and ratio basis were primarily due to higher amounts for our commercial casualty and commercial property lines of business. In 2017, total large losses incurred and the corresponding ratio were higher than in 2016, also largely due to higher amounts of large losses for our commercial casualty and commercial property lines of business. Our analysis indicated no unexpected concentration of these losses and reserve increases by geographic region, policy inception, agency or field

Cincinnati Financial Corporation - 2018 10-K - Page 72

marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.

Commercial Lines Insurance Underwriting Expenses



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Commission expenses	$	592		$	577		$	565		3		2
Other underwriting expenses	419			418			402			0		4
Policyholder dividends	12			14			15			(14	)	(7	)
Total underwriting expenses	$	1,023		$	1,009		$	982		1		3
Ratios as a percent of earned premiums:										Pt. Change		Pt. Change
Commission expenses	18.4		%	18.2		%	18.3		%	0.2		(0.1	)
Other underwriting expenses	12.9			13.3			13.0			(0.4	)	0.3
Policyholder dividends	0.4			0.4			0.5			0.0		(0.1	)
Total underwriting expense ratio	31.7		%	31.9		%	31.8		%	(0.2	)	0.1

Commercial lines commission expenses as a percent of earned premiums increased in 2018, compared with 2017, reflecting an increase in the ratio for agency commissions other than profit-sharing. The ratio for 2017 decreased slightly compared with 2016, reflecting a decrease in the ratio for agency commissions other than profit-sharing. In 2018, other underwriting expenses as a percent of earned premiums decreased compared with 2017, as earned premiums rose at a faster pace than other underwriting expenses. In 2017, the ratio rose, compared with 2016 as strategic investments that include enhancement of underwriting expertise offset the favorable effects of higher earned premiums and ongoing expense management efforts.

Commercial Lines Insurance Outlook

Renewal and new business pricing for commercial risks continues to experience significant competitive pressure, reinforcing the need for enhanced pricing analytics and careful risk selection. Commentary regarding the commercial lines market within the property casualty insurance industry indicates commercial lines pricing in 2019 may be generally similar to 2018. Despite challenging market conditions from strong competition, we believe we can manage our business and execute strategic initiatives to offset market pressures to some extent and profitably grow our commercial lines insurance segment.

We intend to keep marketing our products to a broad range of business classes with a package approach, while also continuing to improve our pricing precision and further segmenting among commercial lines policies. We intend to maintain our underwriting selectivity and carefully manage our rate levels as well as our programs that seek to accurately match exposures with appropriate premiums. We will continue to evaluate each risk individually and to make decisions about rates, the use of three-year commercial policies and other policy conditions on a case-by-case basis, even in lines and classes of business that are under competitive pressure. For our commercial auto line of business, we will continue to improve premium rate classification and the use of other rating variables in risk selection and pricing. We believe that our initiatives to improve pricing precision and lower loss costs will continue to benefit commercial lines profitability during 2019, and that recent-year premium growth initiatives will continue to grow commercial lines premiums at a healthy pace.

Cincinnati Financial Corporation - 2018 10-K - Page 73

Personal Lines Insurance Results

Overview – Three-Year Highlights



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Earned premiums	$	1,336		$	1,241		$	1,161		8		7
Fee revenues	5			5			4			0		25
Total revenues	1,341			1,246			1,165			8		7
Loss and loss expenses from:
Current accident year before catastrophe losses	838			793			731			6		8
Current accident year catastrophe losses	121			139			113			(13	)	23
Prior accident years before catastrophe losses	9			(10		)	—			nm		nm
Prior accident years catastrophe losses	4			(4		)	(4		)	nm		0
Loss and loss expenses	972			918			840			6		9
Underwriting expenses	389			360			337			8		7
Underwriting loss	$	(20	)	$	(32	)	$	(12	)	38		(167	)

Ratios as a percent of earned premiums:										Pt. Change		Pt. Change
Current accident year before catastrophe losses	62.8		%	64.0		%	63.0		%	(1.2	)	1.0
Current accident year catastrophe losses	9.1			11.2			9.7			(2.1	)	1.5
Prior accident years before catastrophe losses	0.6			(0.9		)	0.0			1.5		(0.9	)
Prior accident years catastrophe losses	0.3			(0.3		)	(0.3		)	0.6		0.0
Loss and loss expenses	72.8			74.0			72.4			(1.2	)	1.6
Underwriting expenses	29.1			29.0			29.0			0.1		0.0
Combined ratio	101.9		%	103.0		%	101.4		%	(1.1	)	1.6

Combined ratio:	101.9		%	103.0		%	101.4		%	(1.1	)	1.6
Contribution from catastrophe losses and prior years reserve development	10.0			10.0			9.4			0.0		0.6
Combined ratio before catastrophe losses and prior years reserve development	91.9		%	93.0		%	92.0		%	(1.1	)	1.0

Performance highlights for the personal lines insurance segment include:


•	Premiums – Earned premiums and net written premiums continued to grow in 2018, primarily due to increases in renewal written premiums that reflected higher average pricing. Renewal written premiums rose $85 million, or 7 percent, in 2018, compared with 2017.

•

Combined ratio – The 2018 combined ratio improved 1.1 percentage points, compared with 2017, largely due to a 1.5 percentage-point decrease in the ratio for 2018 natural catastrophe losses. The total large loss ratio for losses of $1 million or more per claim, shown in the table below, decreased by 1.0 percentage point, reflecting lower losses for personal umbrella claims related to auto accidents.

Personal auto, representing 46 percent of 2018 earned premiums for our personal lines insurance segment, was the only major line of business in that segment with a 2018 total loss and loss expense ratio significantly higher than we desired. During 2018, our personal auto policies experienced estimated premium rate increases averaging in the high-single-digit range. We believe the rate increases and other actions to improve pricing precision and reduce loss costs will improve future profitability.

For our homeowner line of business, the 2018 total loss and loss expense ratio was unsatisfactory but improved significantly in the second half of the year with a ratio below 67 percent, indicating an underwriting profit once underwriting expenses are considered.

We have increased our pricing precision and implemented numerous rate increases in recent years to improve our personal lines insurance segment results. In addition, we have made greater use of higher minimum loss deductibles and enhanced our property inspection processes to verify condition and insurance to value. We have

Cincinnati Financial Corporation - 2018 10-K - Page 74

worked to improve our geographic diversification by expanding our personal lines operation to several states less prone to catastrophes.

Our personal lines statutory combined ratio was 101.2 percent in 2018, compared with 102.4 percent in 2017 and 100.8 percent in 2016. The contribution of catastrophe losses to our personal lines statutory combined ratio was 9.4 percentage points in 2018, 10.9 percentage points in 2017 and 9.4 percentage points in 2016.

Personal Lines Insurance Premiums



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Agency renewal written premiums	$	1,241		$	1,156		$	1,099		7		5
Agency new business written premiums	165			161			122			2		32
Other written premiums	(28		)	(23		)	(23		)	(22	)	0
Net written premiums	1,378			1,294			1,198			6		8
Unearned premium change	(42		)	(53		)	(37		)	21		(43	)
Earned premiums	$	1,336		$	1,241		$	1,161		8		7

Personal lines insurance is a strategic component of our overall relationship with most of our agencies and is an important component of our agencies’ relationships with their clients. We believe agents recommend our personal insurance products to their clients who seek to balance quality and price and who are attracted by our superior claims service and the benefits of our package approach. We also believe our continuing efforts to improve pricing precision are helping us attract and retain more of our agencies’ preferred business, while also obtaining higher rates for more thinly priced business. Our progress toward broader geographic diversification is reflected in part through premium growth trends. Personal lines earned premiums in our five highest volume states increased in aggregate by 1 percent in 2018, while premiums for the remaining states, including our newer areas of operation, increased 14 percent in aggregate.

The 7 percent increase in agency renewal written premiums in 2018 largely reflected various rate changes. We estimate that premium rates for our personal auto line of business increased at average percentages in the high-single-digit range during 2018, with some individual policies experiencing lower or higher rate changes based on enhanced pricing precision enabled by predictive models that consider characteristics of specific risks. For our homeowner line of business, we estimate that rate increases during 2018 averaged in the mid-single-digit range. Similar to our personal auto line of business, that average varied widely by state, and some individual policies experienced lower or higher rate changes based on pricing precision and current rate level indications that helped determine appropriate premium rates.

Personal lines new business written premiums grew $4 million, or 2 percent, during 2018, compared with 2017. That growth was driven by policies from high net worth clients of our agencies. Personal lines new business written premiums from our high net worth policies totaled approximately $71 million for 2018, compared with approximately $58 million for 2017, an increase of $13 million. New business written premiums for the part of our personal lines segment we sometimes refer to as middle market business decreased $9 million in 2018, reflecting underwriting discipline. Some of what we report as new business came from accounts that were not new to our agents. We believe our agents’ seasoned accounts tend to be priced more accurately than business that may be less familiar to them.

Cincinnati Financial Corporation - 2018 10-K - Page 75

Personal Lines Insurance Loss and Loss Expenses

Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. Most of the incurred losses and loss expenses shown in the personal lines insurance segment three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since approximately two-thirds of our personal lines current accident year incurred losses and loss expenses represent net paid amounts, the remaining one-third represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 75.2 percent accident year 2017 loss and loss expense ratio reported as of December 31, 2017, developed unfavorably by 0.8 percentage points to 76.0 percent due to claims settling for more than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2018. Accident year 2016 for the personal lines insurance segment developed favorably during 2017 and then developed unfavorably by a relatively small amount during 2018, as indicated by the progression over time for the ratios in the table.



(Dollars in millions)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident year:	2018		2017		2016		2018		2017		2016
as of December 31, 2018	$	959	$	943	$	837	71.9	%	76.0	%	72.2	%
as of December 31, 2017			932		835				75.2		72.0
as of December 31, 2016					844						72.7

Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain much of the movement in the current accident year loss and loss expense ratio for accident year 2018, compared with accident year 2017. Catastrophe losses added 9.1 percentage points in 2018, 11.2 points in 2017 and 9.7 points in 2016 to the respective personal lines current accident year loss and loss expense ratios in the table above. Personal lines catastrophe losses for 2018 resulted in a ratio below our 11.4 percent 10-year annual average for personal lines that included 22.8 percent for 2011. Our personal lines catastrophe loss ratios for 2018 and 2016 reflect an average closer to our 10.4 percent average over the same 10-year period, excluding the unusually high ratio for 2011. Personal lines catastrophe losses are inherently volatile, as discussed above and in Consolidated Property Casualty Insurance Results.

The 62.8 percent ratio for current accident year loss and loss expenses before catastrophe losses for 2018 improved 1.2 percentage points compared with the 64.0 percent accident year 2017 ratio measured as of December 31, 2017. The improvement included a 1.1 percentage-point decrease in the ratio for current accident year losses of $1 million or more per claim, shown in the table below, that were primarily for personal umbrella claims related to auto accidents.

Personal lines loss and loss expense reserve development on prior accident years recognized in 2018 was unfavorable by $13 million, in aggregate, compared with $14 million of favorable reserve development in 2017. The 2018 net unfavorable reserve development included $24 million for our homeowner line of business, primarily for accident year 2017, and was partially offset by $14 million of favorable reserve development for personal auto. In 2017, our homeowner line of business prior accident year net reserve development was favorable by $11 million and offset a small amount of unfavorable reserve development for personal auto. Development by accident year and other trends for personal lines loss and loss expenses and the related ratios are further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.

Cincinnati Financial Corporation - 2018 10-K - Page 76

Personal Lines Insurance Losses by Size



(Dollars in millions, net of reinsurance)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Current accident year losses greater than $5,000,000	$	6		$	6		$	—		0		nm
Current accident year losses $1,000,000-$5,000,000	32			43			19			(26	)	126
Large loss prior accident year reserve development	4			3			(7		)	33		nm
Total large losses incurred	42			52			12			(19	)	333
Losses incurred but not reported	38			(9		)	35			nm		nm
Other losses excluding catastrophe losses	650			629			592			3		6
Catastrophe losses	122			132			107			(8	)	23
Total losses incurred	$	852		$	804		$	746		6		8

Ratios as a percent of earned premiums:										Pt. Change		Pt. Change
Current accident year losses greater than $5,000,000	0.4		%	0.5		%	0.0		%	(0.1	)	0.5
Current accident year losses $1,000,000-$5,000,000	2.4			3.4			1.7			(1.0	)	1.7
Large loss prior accident year reserve development	0.4			0.3			(0.6		)	0.1		0.9
Total large loss ratio	3.2			4.2			1.1			(1.0	)	3.1
Losses incurred but not reported	2.8			(0.7		)	3.0			3.5		(3.7	)
Other losses excluding catastrophe losses	48.7			50.7			51.0			(2.0	)	(0.3	)
Catastrophe losses	9.1			10.6			9.2			(1.5	)	1.4
Total loss ratio	63.8		%	64.8		%	64.3		%	(1.0	)	0.5

In 2018, personal lines total large losses incurred decreased by $10 million, or 19 percent, net of reinsurance. The ratio for 2018 large losses as a percent of earned premiums decreased 1.0 percentage point. The 2018 decreases on both a dollar and ratio basis were largely due to lower amounts for personal umbrella claims related to auto accidents. In 2017, total large losses increased, compared with 2016, primarily due to higher amounts of homeowner claims and personal umbrella claims related to auto accidents. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.

Cincinnati Financial Corporation - 2018 10-K - Page 77

Personal Lines Insurance Underwriting Expenses



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Commission expenses	$	243		$	223		$	209		9		7
Other underwriting expenses	146			137			128			7		7
Total underwriting expenses	$	389		$	360		$	337		8		7
Ratios as a percent of earned premiums:										Pt. Change		Pt. Change
Commission expenses	18.2		%	18.0		%	18.0		%	0.2		0.0
Other underwriting expenses	10.9			11.0			11.0			(0.1	)	0.0
Total underwriting expense ratio	29.1		%	29.0		%	29.0		%	0.1		0.0

Personal lines commission expense as a percent of earned premiums increased slightly in 2018, compared with 2017. In 2018, other underwriting expenses as a percent of earned premiums decreased compared with 2017, as strategic investments that include enhancement of underwriting expertise were offset by the favorable effects of higher earned premiums and ongoing expense management efforts. Underwriting expenses as a percent of earned premiums in 2017 matched 2016.

Personal Lines Insurance Outlook

We believe our personal lines premium growth rate will likely be higher than the industry projection for 2019, driven by our rate increases, new state entry, accelerated pace of new agency appointments in recent years and increased focus on the high net worth personal lines market.

Our high net worth initiative, along with various other actions to improve performance in our personal lines insurance segment, is discussed in greater detail in Personal Lines Insurance Results and also in Item 1, Our Business and Our Strategy, Strategic Initiatives and Our Segments, Personal Lines Insurance Segment. Our personal lines pricing trends need to exceed loss trends to improve personal lines insurance segment profitability, thereby helping to achieve our corporate performance objectives.

Cincinnati Financial Corporation - 2018 10-K - Page 78

Excess and Surplus Lines Insurance Results

Overview – Three-Year Highlights



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Earned premiums	$	234		$	209		$	183		12		14
Fee revenues	1			1			1			0		0
Total revenues	235			210			184			12		14
Loss and loss expenses from:
Current accident year before catastrophe losses	126			113			99			12		14
Current accident year catastrophe losses	2			2			3			0		(33	)
Prior accident years before catastrophe losses	(24		)	(29		)	(34		)	17		15
Prior accident years catastrophe losses	—			—			—			0		0
Loss and loss expenses	104			86			68			21		26
Underwriting expenses	68			63			54			8		17
Underwriting profit	$	63		$	61		$	62		3		(2	)

Ratios as a percent of earned premiums:										Pt. Change		Pt. Change
Current accident year before catastrophe losses	53.9		%	54.0		%	54.4		%	(0.1	)	(0.4	)
Current accident year catastrophe losses	1.1			1.1			1.6			0.0		(0.5	)
Prior accident years before catastrophe losses	(10.6		)	(13.6		)	(18.3		)	3.0		4.7
Prior accident years catastrophe losses	0.0			(0.1		)	(0.1		)	0.1		0.0
Loss and loss expenses	44.4			41.4			37.6			3.0		3.8
Underwriting expenses	29.1			29.7			29.4			(0.6	)	0.3
Combined ratio	73.5		%	71.1		%	67.0		%	2.4		4.1

Combined ratio:	73.5		%	71.1		%	67.0		%	2.4		4.1
Contribution from catastrophe losses and prior years reserve development	(9.5		)	(12.6		)	(16.8		)	3.1		4.2
Combined ratio before catastrophe losses and prior years reserve development	83.0		%	83.7		%	83.8		%	(0.7	)	(0.1	)

Our excess and surplus lines insurance segment includes results of The Cincinnati Specialty Underwriters Insurance Company and CSU Producer Resources Inc. Performance highlights for this segment include:


•	Premiums – Earned premiums and net written premiums continued to grow during 2018, driven by higher renewal written premiums that included average renewal estimated price increases in the low-single-digit range. New business written premiums grew 3 percent in 2018, reflecting a highly competitive market.


•	Combined ratio – The combined ratio rose 2.4 percentage points in 2018, primarily due to less favorable reserve development on prior accident years.

Excess and Surplus Lines Insurance Premiums



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Agency renewal written premiums	$	192		$	162		$	141		19		15
Agency new business written premiums	70			68			57			3		19
Other written premiums	(13		)	(11		)	(9		)	(18	)	(22	)
Net written premiums	249			219			189			14		16
Unearned premium change	(15		)	(10		)	(6		)	(50	)	(67	)
Earned premiums	$	234		$	209		$	183		12		14

Cincinnati Financial Corporation - 2018 10-K - Page 79

The $30 million increase in 2018 renewal premiums reflected the opportunity to renew many policies for the first time as well as higher renewal pricing. Average renewal estimated price increases were in the low-single-digit range during 2018. We measure average changes in excess and surplus lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies.

New business written premiums rose $2 million, as additional marketing efforts offset the effects of a highly competitive market, particularly for larger policies. Other written premiums in 2018 reduced net written premium growth by $2 million more than in 2017. Other written premiums are primarily premiums that are ceded to reinsurers and lower our net written premiums.

Excess and Surplus Lines Loss and Loss Expenses

Loss and loss expenses include both net paid losses and reserve changes for unpaid losses, as well as the associated loss expenses. The majority of the total incurred losses and loss expenses shown above in the three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than 20 percent of our 2018 excess and surplus lines current accident year incurred losses and loss expenses represents net paid amounts, a large majority represents reserves for our estimate of unpaid losses and loss expenses. These reserves develop over time, and we update our estimates of previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 55.1 percent accident year 2017 loss and loss expense ratio reported as of December 31, 2017, developed favorably by 3.8 percentage points to 51.3 percent due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2018. Accident years 2017 and 2016 for this segment have both developed favorably, as indicated by the progression over time of the ratios in the table.



(Dollars in millions)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident year:	2018		2017		2016		2018		2017		2016
as of December 31, 2018	$	128	$	107	$	94	55.0	%	51.3	%	51.4	%
as of December 31, 2017			115		98				55.1		53.2
as of December 31, 2016					102						56.0

Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain some of the movement in the current accident year loss and loss expense ratio for accident year 2017, compared with 2016. Catastrophe losses added 1.1 percentage points in 2018, 1.1 percentage points in 2017 and 1.6 percentage points in 2016 to the respective excess and surplus lines current accident year loss and loss expense ratios in the table above.

The 53.9 percent ratio for current accident year loss and loss expenses before catastrophe losses for 2018 improved by 0.1 percentage point compared with the 54.0 percent accident year 2017 ratio measured as of December 31, 2017. The improvement was partially offset by a 0.3 percentage-point increase in the ratio for current accident year losses of $1 million or more per claim, shown in the table below.

Excess and surplus lines reserve development on prior accident years continued to net to a favorable amount in 2018 as $24 million was recognized, compared with $29 million in 2017. Approximately three-fourths of the 2018 favorable development was for accident years 2017, 2016 or 2015, in aggregate, and was primarily due to lower-than-anticipated loss emergence on known claims.

We believe the loss and loss expense reserves for our excess and surplus lines business are adequate. The amount of outstanding reserves for our excess and surplus lines operation can be seen in a table in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves. One indication of how long it takes for most of the outstanding reserves to be settled is to measure outstanding reserves by accident year at different points in time, using Item 8, Note 4 of the Consolidated Financial Statements. For example, for accident years 2013, 2012 and 2011, in aggregate, after subtracting cumulative paid amounts from incurred amounts at December 31, 2013, reserves for estimated unpaid losses, plus the portion of loss expenses known as ALAE, equaled $129 million. For those same accident years, at December 31, 2018, the reserve estimate for the remaining unpaid amount equaled $11 million. The inherent uncertainty in estimating reserves is discussed in

Cincinnati Financial Corporation - 2018 10-K - Page 80

Liquidity and Capital Resources, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves. Development trends by accident year are further discussed in Property Casualty Insurance Development of Estimated Reserves by Accident Year.

Excess and Surplus Lines Insurance Losses by Size



(Dollars in millions, net of reinsurance)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Current accident year losses greater than $5,000,000	$	—		$	—		$	—		nm		nm
Current accident year losses $1,000,000-$5,000,000	4			3			3			33		0
Large loss prior accident year reserve development	—			1			—			nm		nm
Total large losses incurred	4			4			3			0		33
Losses incurred but not reported	8			2			5			300		(60	)
Other losses excluding catastrophe losses	50			44			31			14		42
Catastrophe losses	2			2			3			0		(33	)
Total losses incurred	$	64		$	52		$	42		23		24

Ratios as a percent of earned premiums:										Pt. Change		Pt. Change
Current accident year losses greater than $5,000,000	0.0		%	0.0		%	0.0		%	0.0		0.0
Current accident year losses $1,000,000-$5,000,000	1.8			1.5			1.7			0.3		(0.2	)
Large loss prior accident year reserve development	(0.1		)	0.4			(0.3		)	(0.5	)	0.7
Total large loss ratio	1.7			1.9			1.4			(0.2	)	0.5
Losses incurred but not reported	3.6			0.8			2.9			2.8		(2.1	)
Other losses excluding catastrophe losses	21.1			21.6			16.8			(0.5	)	4.8
Catastrophe losses	1.0			0.8			1.5			0.2		(0.7	)
Total loss ratio	27.4		%	25.1		%	22.6		%	2.3		2.5

In 2018, total large losses incurred of $4 million, net of reinsurance, matched 2017. The ratio for 2018 large losses as a percent of earned premiums decreased by 0.2 percentage points. That ratio for 2017 increased by 0.5 points, compared with 2016. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.

Excess and Surplus Lines Insurance Underwriting Expenses



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Commission expenses	$	45		$	41		$	36		10		14
Other underwriting expenses	23			22			18			5		22
Total underwriting expenses	$	68		$	63		$	54		8		17
Ratios as a percent of earned premiums:										Pt. Change		Pt. Change
Commission expenses	19.3		%	19.2		%	19.4		%	0.1		(0.2	)
Other underwriting expenses	9.8			10.5			10.0			(0.7	)	0.5
Total underwriting expenses ratio	29.1		%	29.7		%	29.4		%	(0.6	)	0.3

Excess and surplus lines commission expense as a percent of earned premiums for 2018 increased slightly from 2017. The ratio for other underwriting expenses decreased in 2018, compared with 2017, reflecting higher earned premiums and ongoing expense management efforts. In 2017, the ratio rose, in part due to enhancements to systems used in billing excess and surplus lines insurance policies.

Cincinnati Financial Corporation - 2018 10-K - Page 81

Excess and Surplus Lines Outlook

The excess and surplus lines market is expected to see the magnitude of rate increases remain flat for risks that are casualty-driven. For property risks involving catastrophe exposures, premium rates in the foreseeable future are expected to become more firm. Competition is expected to remain strong, especially on large accounts, due primarily to standard market insurance companies insuring businesses that previously were written by excess and surplus lines insurers. Firming is expected to continue for specific classes of business where loss costs are exceeding rates, such as habitational for property coverages, liquor liability for general liability coverages and hired and non-owned for auto liability coverages.

Industry reports suggest that there are opportunities for profitability and growth through greater use of technology. Technology and data are also being used by excess and surplus lines insurance companies to identify new exposures in emerging businesses that need insurance protection or other value-added services.

Our strategy of providing superior service is expected to continue to grow our excess and surplus lines insurance segment and to achieve profitability despite challenging market conditions. We intend to keep carefully selecting and pricing risks, providing prompt delivery of insurance quotes and policies and giving outstanding claims and loss control service from local field representatives who also handle the standard lines business for their assigned agencies. These local representatives are supported by headquarters underwriters and claims managers who specialize in excess and surplus lines.

Cincinnati Financial Corporation - 2018 10-K - Page 82

Life Insurance Results

Overview – Three-Year Highlights



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Earned premiums	$	250		$	232		$	228		8		2
Fee revenues	4			5			5			(20	)	0
Total revenues	254			237			233			7		2
Contract holders' benefits incurred	267			252			246			6		2
Investment interest credited to contract holders	(96		)	(93		)	(90		)	(3	)	(3	)
Underwriting expenses incurred	75			79			76			(5	)	4
Total benefits and expenses	246			238			232			3		3
Life insurance segment (loss) profit	$	8		$	(1	)	$	1		nm		nm

Performance highlights for the life insurance segment include:


•	Revenues – Earned premiums rose 8 percent for the year 2018, as shown in the table below that includes details by major line of business. Our largest life insurance product line, term life insurance, rose 9 percent. Net in-force policy face amounts rose 8 percent to $66.142 billion at year-end 2018 from $61.177 billion at year-end 2017 and $56.808 billion at year-end 2016.

•

Profitability – The life insurance segment frequently reports only a small profit or loss because most of its investment income is included in the investments segment results. We include only investment income credited to contract holders (interest assumed in life insurance policy reserve calculations) in life insurance segment results. The segment reported a $8 million profit in 2018, following a loss of $1 million in 2017 and a profit of $1 million in 2016. It has averaged a profit of less than $1 million over the past five years.

Earned premiums rose $18 million in 2018, primarily due to growth in our term life insurance business, as shown in the table below. Growth in 2017 was also primarily due to term life insurance.



(Dollars in millions)	Years ended December 31,						2018-2017		2017-2016
	2018		2017		2016		Change %		Change %
Term life insurance	$	172	$	158	$	149	9		6
Universal life insurance	37		38		37		(3	)	3
Other life insurance and annuity products	41		36		42		14		(14	)
Net earned premiums	$	250	$	232	$	228	8		2

We market term, whole and universal life products and fixed annuities. In addition, we offer term and whole life insurance to employees at their worksite. These products provide our property casualty agency force with excellent cross-serving opportunities for both commercial and personal accounts.

Over the past several years, we have worked to maintain a portfolio of simple, yet competitive, products primarily under the LifeHorizons banner. Our product development efforts emphasize death benefit protection and guarantees. Distribution expansion within our property casualty insurance agencies remains a high priority. Our 35 life field marketing representatives work in partnership with our 142 property casualty field marketing representatives. Approximately 59 percent of our term and other life insurance product premiums were generated through our property casualty insurance agency relationships.

Life insurance segment expenses consist principally of:

•

Contract holders’ benefits incurred, related to traditional life and interest-sensitive products, accounted for 78.1 percent of 2018 total benefits and expenses compared with 76.1 percent in 2017 and 76.4 percent in 2016. Total contract holders’ benefits increased as net death claims were higher in 2018, compared with 2017. Net death claims increased in 2018 and were slightly above our mortality projections while remaining within our range of pricing expectations.

Cincinnati Financial Corporation - 2018 10-K - Page 83

•

Underwriting expenses incurred, net of deferred acquisition costs, accounted for 21.9 percent of 2018 total benefits and expenses compared with 23.9 percent in 2017 and 23.6 percent in 2016. Expenses in 2018 decreased 5 percent, compared with 8 percent growth in earned premiums. Expenses decreased in 2018 due to the impact of unlocking of actuarial assumptions for our universal life insurance contracts. In 2017, the percentage increase for expenses was 2 percentage points more than growth in earned premiums.

Life insurance segment profitability depends largely on premium levels, the adequacy of product pricing, underwriting skill and operating efficiencies. This segment’s results include only investment interest credited to contract holders (interest assumed in life insurance policy reserve calculations). The remaining investment income is reported in the investments segment results. The life investment portfolio is managed to earn target spreads between earned investment rates on general account assets and rates credited to policyholders. We consider the value of assets under management and investment income for the life investment portfolio as key performance indicators for the life insurance segment.

We seek to maintain a competitive advantage with respect to benefits paid and reserve increases by consistently achieving better than average claims experience due to skilled underwriting. Commissions paid by the life insurance operation are on par with industry averages.

We recognize that assets under management, capital appreciation and investment income are integral to evaluation of the success of the life insurance segment because of the long duration of life products. On a basis that includes investment income and investment gains or losses from life insurance-related invested assets, our life insurance subsidiary reported net income of $48 million in 2018, compared with net income of $155 million in 2017 and $48 million in 2016. Net income in 2017 included a nonrecurring item, a $111 million benefit from net deferred income tax liability revaluation due to U.S. tax reform. The life insurance subsidiary portfolio had an after-tax net investment loss of $4 million in 2018, compared with after-tax net investment gains of $4 million in 2017 and $5 million in 2016. Investment gains and losses are discussed under Investments Results. We exclude most of our life insurance company investment income from investments segment results.

Life Insurance Outlook

We believe the life insurance market remains attractive due to our quality agency force. As the market continues to evolve and companies begin to debate the wisdom of pursuing direct-to-consumer models on new digital platforms, we are convinced that our distribution will benefit over the long term. We believe that technology should be leveraged to support the agent and enhance the buying experience, and we have several initiatives underway in that regard.

Principle-based reserves had a noticeable impact on our statutory operating results and we look forward to the positive statutory results accelerating into 2019. Such results will allow us more options with respect to capital management.

We continue to view the new tax environment as very favorable. We look forward to competing in 2019, and beyond, on a more level playing field from a tax perspective, in what is still a very competitive term market.

Interest rates and regulatory action are the biggest sources of risk for our segment of the life insurance industry. The volatility in bond yields in the fourth quarter of 2018 highlight this risk. If rates revert to lower levels and remain there, companies will be motivated to look for higher premium to offset lower investment income. From a regulatory standpoint, there is a risk of overly aggressive suitability rules creeping over into the life insurance domain from the current focus on annuities. Such activity could be a significant headwind to future life insurance sales.

Cincinnati Financial Corporation - 2018 10-K - Page 84

Investments Results

Overview – Three-Year Highlights

Investments Results



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Total investment income, net of expenses	$	619		$	609		$	595		2		2
Investment interest credited to contract holders'	(96		)	(93		)	(90		)	(3	)	(3	)
Investment gains and losses, net	(402		)	148			124			nm		19
Investments profit, pretax	$	121		$	664		$	629		(82	)	6

The investments segment contributes investment income and investments gains and losses to results of operations. Investments provide our primary source of pretax and after-tax profits.

•

Investment income – Pretax investment income grew $10 million, or 2 percent, in 2018, primarily due to an increase from dividends. Dividend income reflected rising dividend rates and net purchases of equity securities from available funds. Interest income for 2018 matched 2017, as net purchases of fixed-maturity securities offset the continuing effects on bond yields of the low interest rate environment. Pretax investment income rose 2 percent in 2017, reflecting increases in both dividend income and interest income. Average yields in the investment income table below are based on the average invested asset and cash amounts indicated in the table using fixed-maturity securities valued at amortized cost and all other securities at fair value.

•

Investment gains and losses – We reported an investment loss in 2018, primarily due to unfavorable changes in fair values of equity securities even though we continue to hold the securities or as otherwise required by GAAP. For both 2017 and 2016, we reported investment gains largely due to investment sales that were discretionary in timing and amount. Those gains were reduced by other-than-temporary impairment (OTTI) charges.

We believe it is useful to analyze our overall investment performance by using total investment return over several years. Total investment return considers changes in unrealized gains and losses that are not included in net income, in addition to net investment income and investment gains and losses that are included in net income. Changes in unrealized gains and losses shown in the table below include other invested assets. Considering total investment gains and losses over several years helps evaluate performance since gains and losses may experience typical variability during shorter periods of time.

The table below shows total return based on assumptions that simplify cash flow timing that is commonly used in total return measures. This simplified calculation uses data shown in our consolidated financial statements or notes to those statements. Added to invested asset amounts from our consolidated balance sheets are 50 percent of annual amounts pertaining to invested asset categories included in net cash used in investing activities from our consolidated statements of cash flows. The cash flow amounts are reduced by net gains from investment portfolio securities sales or called bonds, with the net result reduced by 50 percent to represent estimated new cash invested during each respective year. All new cash is assumed to be invested at the midpoint of the year.

Cincinnati Financial Corporation - 2018 10-K - Page 85

Total investment return of negative 0.7 percent in 2018 was significantly less than in 2017. The 2018 contribution from the investment income component was offset by the net unfavorable effect of the investment gains and losses components. Comparing contributions for 2018 with 2017, investment income rose $10 million, investment gains decreased by $550 million and the invested assets net change in unrealized gains and losses decreased by $1.252 billion. The base component of the return calculation, annual average invested assets, was up 9 percent in 2018. For 2017 compared with 2016, total investment return rose 2.0 percentage points, reflecting an increase in the contributions of investment income, investment gains and the net change in unrealized gains and losses. The base component of the return calculation, annual average invested assets, increased 8 percent in 2017.



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Invested assets beginning balance:
Fixed maturities	$	10,699		$	10,085		$	9,650		6		5
Equity securities	6,249			5,334			4,706			17		13
Other invested assets	103			81			67			27		21
Invested assets beginning balance	17,051			15,500			14,423			10		7
Average acquisitions (dispositions), net	215			341			291			(37	)	17
Annual average invested assets	$	17,266		$	15,841		$	14,714		9		8

Total investment return:
Investment income, net of expenses	$	619		$	609		$	595		2		2
Investment gains and losses, net	(402		)	148			124			nm		19
Total invested assets change in unrealized gains and losses	(339		)	913			525			nm		74
Total	$	(122	)	$	1,670		$	1,244		nm		34

Total return on invested assets, pretax	(0.7		)%	10.5		%	8.5		%

Investment Income

The primary drivers of investment income are highlighted below, followed by investments results additional details.

•

Interest income of $445 million in 2018 matched 2017. The average fixed-maturity pretax yield declined by approximately 17 basis points but was offset by a larger average fixed-maturity portfolio that rose 4 percent on an amortized cost basis. Interest income increased 1 percent in 2017 when that yield declined by approximately 18 basis points while the portfolio rose 5 percent on an amortized cost basis.


•	Dividend income rose $11 million, or 6 percent, in 2018, after also rising 6 percent in 2017. Increases in dividend payment rates for most of the holdings in our common stock portfolio during both 2018 and 2017 drove the increases in dividend income. An increase in funds invested in that portfolio during 2018, and a small net decrease in 2017, also affected dividend income.

Cincinnati Financial Corporation - 2018 10-K - Page 86



(Dollars in millions)	Years ended December 31,									2018-2017		2017-2016
	2018			2017			2016			Change %		Change %
Investment income:
Interest	$	445		$	445		$	440		—		1
Dividends	181			170			161			6		6
Other	5			4			3			25		33
Less investment expenses	12			10			9			20		11
Investment income, pretax	619			609			595			2		2
Less income taxes	95			142			141			(33	)	1
Total investment income, after-tax	$	524		$	467		$	454		12		3

Investment returns:
Average invested assets plus cash and cash equivalents	$	17,397		$	16,657		$	15,316
Average yield pretax	3.56		%	3.66		%	3.88		%
Average yield after-tax	3.01			2.80			2.96
Effective tax rate	15.4			23.4			23.8

Fixed-maturity returns:
Average amortized cost	$	10,479		$	10,057		$	9,562
Average yield pretax	4.25		%	4.42		%	4.60		%
Average yield after-tax	3.55			3.24			3.35
Effective tax rate	16.4			26.7			27.3

In 2018, we continued to invest available cash flow in both fixed income and equity securities in a manner that we believe balances current income needs with longer-term invested asset growth goals. While our bond portfolio more than covers our insurance reserve liabilities, we believe our diversified common stock portfolio of mainly blue chip, dividend-paying companies represents one of our best investment opportunities for the long term. We position our portfolio with consideration to both the challenges presented by the current low interest rate environment and the risks presented by potential future inflation. As bonds in our generally laddered portfolio mature or are called over the near term, we will be challenged to replace their current yield. The table below summarizes pretax yield to amortized costs excluding any book value adjustments due to impairment for bonds in our fixed-maturity portfolio by various maturity periods.



At December 31, 2018	% Yield		Principal redemptions
Fixed-maturity yield profile:
Expected to mature during 2019	5.92	%	$	588
Expected to mature during 2020	4.75		656
Expected to mature during 2021	4.40		971
Average yield and total expected redemptions from 2019 through 2021	4.91		$	2,215

Cincinnati Financial Corporation - 2018 10-K - Page 87

The average pretax yield of 4.38 percent for fixed-maturity securities acquired during 2018, shown in the table below, was higher than the 4.20 percent average yield-to-amortized cost of the fixed-maturity securities portfolio at the end of 2018.



	Years ended December 31,
	2018		2017
Average pretax yield-to-amortized cost on new fixed-maturities:
Acquired taxable fixed-maturities	4.48	%	3.88	%
Acquired tax-exempt fixed-maturities	3.69		3.29
Average total fixed-maturities acquired	4.38		3.61

We discussed our portfolio strategies in Item 1, Investments Segment. We discuss risks related to our investment income and our fixed-maturity and equity investment portfolios in Item 7a, Quantitative and Qualitative Disclosures About Market Risk.

Total Investment Gains and Losses

Investment gains and losses are recognized on the sales of investments, for certain changes in fair values of securities even though we continue to hold the securities or as otherwise required by GAAP. New accounting requirements adopted in 2018 resulted in reporting, through net income, the change in fair value for equity securities still held, as disclosed in Note 1, Summary of Significant Accounting Policies, and Note 2, Investments. Net investment gains and losses included $404 million of losses in 2018, from the recognition of fair value changes of equity securities still held that prior to 2018 would have been reported in other comprehensive income instead of net income. Change in unrealized gains or losses for fixed-maturity securities are included as a component of other comprehensive income (OCI). Accounting requirements for OTTI charges for the fixed-maturity portfolio are disclosed in Item 8, Note 1, Summary of Significant Accounting Policies. The factors we consider when evaluating impairments are also discussed in Critical Accounting Estimates, Asset Impairment.

The timing of gains or losses from sales can have a material effect on results in any given period. However, such gains or losses usually have little, if any, effect on total shareholders’ equity because most equity and fixed-maturity investments are carried at fair value.

As appropriate, we buy, hold or sell both fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We generally purchase fixed-maturity securities with the intention to hold until maturity. If they no longer meet our investment criteria, they are divested. Sales of fixed-maturity securities are usually due to a change in credit fundamentals. Pretax net investment losses in 2018 were primarily due to unfavorable changes in fair values of equity securities even though we continue to hold the securities, and net gains in both 2017 and 2016 were largely due to rising fair values or sales of equity holdings. Additional information about investment gains or losses is included in Item 8, Note 2 of the Consolidated Financial Statements.

Cincinnati Financial Corporation - 2018 10-K - Page 88

The table below summarizes total investment gains and losses, before taxes.



(Dollars in millions)	Years ended December 31,
	2018			2017			2016
Investment gains and losses
Equity securities:
Investment gains and losses on securities sold, net	$	9		$	—		$	—
Unrealized gains and losses on securities still held, net	(404		)	—			—
Gross realized gains	—			195			152
Gross realized losses	—			(72		)	(53		)
Other-than-temporary impairments	—			(3		)	—
Subtotal	(395		)	120			99
Fixed maturities:
Gross realized gains	12			25			26
Gross realized losses	(2		)	—			(1		)
Other-than-temporary impairments	(5		)	(6		)	(2		)
Subtotal	$	5		$	19		$	23
Other	(12		)	9			2
Total investment gains and losses reported in net income	(402		)	148			124
Change in unrealized investment gains and losses
Fixed maturities	(339		)	99			(40		)
Equity securities	—			816			571
Total realized investment gains and losses reported in OCI	(339		)	915			531
Total	$	(741	)	$	1,063		$	655

Cincinnati Financial Corporation - 2018 10-K - Page 89

OTTI charges from the investment portfolio by the asset classes we described in Item 1, Our Segments, Investments Segment, are summarized below:



(Dollars in millions)	Years ended December 31,
	2018			2017			2016
Taxable fixed maturities:
Impairment amount	$	5		$	6		$	2
New amortized cost	$	8		$	—		$	1
Percent to total amortized cost owned	—		%	—		%	—		%
Number of securities other-than-temporarily impaired	1			1			2
Percent to number of securities owned	—		%	—		%	—		%

Tax-exempt fixed maturities:
Impairment amount	$	—		$	—		$	—
New amortized cost	$	—		$	—		$	1
Percent to total amortized cost owned	—		%	—		%	—		%
Number of securities other-than-temporarily impaired	—			—			2
Percent to number of securities owned	—		%	—		%	—		%

Common equities:
Impairment amount	$	—		$	3		$	—
New cost	$	—		$	19		$	—
Percent to total cost owned	—		%	1		%	—		%
Number of securities other-than-temporarily impaired	—			5			—
Percent to number of securities owned	—		%	7		%	—		%

Totals:
Impairment amount	$	5		$	9		$	2
New cost or amortized cost	$	8		$	19		$	2
Percent to total cost or amortized cost owned	—		%	—		%	—		%
Number of securities other-than-temporarily impaired	1			6			4
Percent to number of securities owned	—		%	—		%	—		%

OTTI charges from the investment portfolio by industry are summarized as follows:



(Dollars in millions)	Years ended December 31,
	2018		2017		2016
Fixed maturities:
Energy	$	5	$	—	$	—
Banks	—		6		—
Utilities	—		—		2
Total fixed maturities	5		6		2

Common equities:
Energy	—		3		—
Total common equities	—		3		—

Total	$	5	$	9	$	2

Cincinnati Financial Corporation - 2018 10-K - Page 90

Investments Outlook

Bond prices were under pressure in 2018 as interest rates rose and corporate credit spreads widened. While in recent quarters we have been able to purchase fixed income securities at yields exceeding the average of the existing portfolio, we continue to experience redemptions of higher coupon bonds purchased during and shortly after the financial crisis that we cannot replace in the current market with similar quality and coupon levels.

We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth. In 2019, we expect to continue to allocate a portion of cash available for investment to equity securities, taking into consideration corporate liquidity and income requirements, as well as insurance department regulations and rating agency comments. We discuss our portfolio strategies in Item 1, Our Segments, Investments Segment.

We believe that a reversal of the slow but steady improvement in economic conditions could heighten the risk of renewed pressure on securities markets, which could lead to additional OTTI charges. Our asset impairment committee continues to monitor the investment portfolio. The current asset impairment policy is described in Critical Accounting Estimates, Asset Impairment.

Cincinnati Financial Corporation - 2018 10-K - Page 91

Other

Total revenues in 2018 for our Other operations increased, compared with 2017, primarily due to earned premiums of Cincinnati Re, our reinsurance assumed operation. Other also includes noninvestment operations of the parent company and its commercial leasing and financial services subsidiary, CFC Investment Company. Total expenses for Other also increased in 2018, primarily due to losses and loss expenses and underwriting expenses from Cincinnati Re.

Other loss in the table below represents losses before income taxes. For each year shown, Other loss was largely driven by interest expense from debt of the parent company. Net results of Cincinnati Re were an underwriting loss of approximately $8 million in 2018 and an underwriting loss of approximately $20 million in 2017, reflecting significant amounts of natural catastrophe losses, following a 2016 underwriting profit of approximately $8 million.



(Dollars in millions)	Years ended December 31,									2018-2017	2017-2016
	2018			2017			2016			Change %	Change %
Interest and fees on loans and leases	$	4		$	4		$	4		0	0
Earned premiums	132			107			49			23	118
Other revenues	1			1			1			0	0
Total revenues	137			112			54			22	107
Interest expense	53			53			53			0	0
Loss and loss expenses	98			92			25			7	268
Underwriting expenses	42			35			16			20	119
Operating expenses	16			13			12			23	8
Total expenses	209			193			106			8	82
Other loss	$	(72	)	$	(81	)	$	(52	)	11	(56	)

Cincinnati Financial Corporation - 2018 10-K - Page 92

Taxes

We had a $36 million income tax benefit in 2018 compared with a $315 million income tax benefit in 2017 and $221 million of income tax expense in 2016. Our corporate effective tax rate for 2018 was negative 14.3 percent compared with negative 43.2 percent in 2017 and 27.2 percent in 2016.

The change in our effective tax rate between years is largely driven by the significant non-recurring income tax benefit recorded during 2017 as a result of enactment of the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017. The 2017 effective tax rate was reduced as a result of the revaluation of our net deferred tax liability to account for the decrease in the federal tax rate from 35 percent to 21 percent. In addition, as a result of adoption of ASU 2016-01 in 2018, the change in our effective tax rate was impacted due to large net unrealized losses included in 2018 income versus only net realized gains included in income for the prior-year periods. Finally, our change in the effective tax rate for the current year included a reduction of 19.9 percent as a result of Internal Revenue Service (“IRS”) approved changes to our tax accounting methods, primarily related to the valuation of our tax base unpaid losses.

Historically, we have pursued a strategy of investing some portion of cash flow in tax-advantaged, fixed-maturity and equity securities to minimize our overall tax liability and maximize after-tax earnings. See Item 1, Our Segments, Fixed-Maturity Security Investments, for further discussion on municipal bond purchases in our fixed-maturity investment portfolio. For tax years 2017 and earlier, for our property casualty insurance subsidiaries, approximately 85 percent of interest from tax-advantaged fixed-maturity investments and approximately 60 percent of dividends from qualified equities were exempt from federal tax after applying proration from the 1986 Tax Reform Act. Our noninsurance companies own an immaterial amount of tax-advantaged, fixed-maturity investments. For our noninsurance companies, the dividend received deduction exempted 70 percent of dividends from qualified equities. Our life insurance company does not own tax-advantaged, fixed maturity investments or equities subject to the dividend received deduction.

The Tax Act, which took effect on January 1, 2018, lowered the U.S. corporate income tax rate from a top marginal rate of 35 percent to a flat rate of 21 percent and changed the amount of dividends received deduction and proration. For tax years after 2017, for our property casualty insurance subsidiaries, approximately 75 percent of interest from tax-advantaged, fixed-maturity investments and approximately 40 percent of dividends from qualified equities are exempt from federal tax after applying proration. For our noninsurance companies, the dividend received deduction exempts 50 percent of dividends from qualified equities.

Our effective tax rate reconciliation is found in Item 8, Note 11 of the Consolidated Financial Statements.

Cincinnati Financial Corporation - 2018 10-K - Page 93

Liquidity and Capital Resources

We seek to maintain prudent levels of liquidity and financial strength for the protection of our policyholders, creditors and shareholders. We manage liquidity at two levels to meet the short- and long-term cash requirements of business obligations and growth needs. The first is the liquidity of the parent company. The second is the liquidity of our insurance subsidiary. Management of liquidity at both levels is essential because each has different funding needs and sources, and each is subject to certain regulatory guidelines and requirements.

Parent Company Liquidity

At December 31, 2018, the parent company had $2.478 billion in cash and marketable securities, providing strong liquidity to fund cash outflows, as needed. The payment of dividends to shareholders is largely based upon receiving subsidiary dividends. Alternatively, we could sell investments or use our line of credit to support the dividend payment.

The parent company’s primary sources of cash inflows are dividends from our insurance subsidiary, investment income and sale proceeds from investments. The parent company’s cash outflows are primarily interest and principal payments on long- and short-term debt, dividends to shareholders, common stock repurchases and general operating expenses. The table below shows a summary, by the direct cash flow method, of the major sources and uses of cash flow of the parent company.



(Dollars in millions)	Years ended December 31,
	2018		2017		2016
Sources of liquidity:
Insurance subsidiary dividends received	$	500	$	465	$	475
Investment income received	65		62		56
Proceeds from stock options exercised	9		13		21
Uses of liquidity:
Shareholders' dividend payments	$	336	$	400	$	306
Debt interest payments	52		52		52
Share repurchases	125		92		39
Pension contribution	15		12		13

Dividends received from the subsidiary in 2018 were $35 million more than 2017 while shareholder’s dividend payments decreased by $64 million, largely as a result of a special dividend declared and paid in 2017. We expect 2019 parent company sources of cash flow to be similar to 2018. Use of liquidity for share repurchases are discretionary depending on cash availability and capital management decisions. The majority of expenditures for the parent company have been fairly consistent during the last three years, and we expect future expenditures to remain consistent except for the acquisition of MSP Underwriting Limited (MSP) as disclosed in Item 8, Note 1 of the Consolidated Financial Statements. We entered into a foreign exchange forward contract that provides for an economic hedge for the agreed upon purchase price. The acquisition transaction is expected to close during the first quarter of 2019.

Cincinnati Financial Corporation - 2018 10-K - Page 94

Insurance Subsidiary Liquidity

The parent company’s insurance subsidiary is largely the operations of the property casualty segments. The primary sources of cash inflows are collection of premiums, investment income, maturity of fixed-income securities and sale proceeds from investments. Property casualty insurance premiums generally are received before losses are paid under the policies purchased with those premiums. Cash outflows are primarily loss and loss expenses, commissions, salaries, taxes, operating expenses and investment purchases. Over the three-year period ended December 31, 2018, premium receipts and investment income have been more than sufficient to pay claims and operating expenses. Excess cash flows were partially used to pay dividends to the parent company. We are not aware of any known trends that would materially change historical cash flow results other than fluctuations in catastrophe claims and other large losses either individually or in aggregate.

The table below shows a summary of operating cash flow for property casualty insurance (direct method). Historically, annual variation in operating cash flow has been largely related to changes in amounts of catastrophe losses.



(Dollars in millions)	Years ended December 31,
	2018			2017			2016
Premiums collected	$	5,028		$	4,846		$	4,466
Loss and loss expenses paid	(2,847		)	(2,843		)	(2,503		)
Commissions and other underwriting expenses paid	(1,549		)	(1,471		)	(1,375		)
Cash flow from underwriting	632			532			588
Investment income received	428			411			397
Cash flow from operations	$	1,060		$	943		$	985

Other Sources of Liquidity

Cash in excess of operating requirements is invested in fixed-maturity and equity securities. Cash generated from investment income provides an important investment contribution to cash flow and liquidity. The sale of investments could provide an additional source of liquidity at either the parent company or insurance subsidiary level, if required. In addition to possible sales of investments, proceeds of call or maturities of fixed-maturity securities also can provide liquidity. During the five-year period beginning in 2019, fair value of $3.504 billion, or 32.8 percent, of our fixed-maturity portfolio is scheduled to mature. At December 31, 2018, we had $5.742 billion of common stock securities, with $2.233 billion, or 38.9 percent, held by the parent company.

Financial resources of the parent company also could be made available to our insurance subsidiaries, if circumstances required it. This flexibility would include our ability to access the capital markets and short-term bank borrowings. We generally have minimized our reliance on debt financing, although we may use the line of credit to fund short-term cash needs.

Long-Term Debt

We provide details of our three long-term notes in Item 8, Note 8 of the Consolidated Financial Statements. None of the notes are encumbered by rating triggers. The total principal amount of our long-term debt at December 31, 2018, was $793 million and included:


•	$28 million aggregate principal amount of 6.900% senior debentures due 2028.


•	$391 million aggregate principal amount of 6.920% senior debentures due 2028.


•	$374 million aggregate principal amount of 6.125% senior debentures due 2034.

The company’s senior debt is rated investment grade by independent rating firms. None of the four rating agencies made changes to our debt ratings in 2018. Our debt ratings at February 21, 2019, were: a- from A.M. Best, A- from Fitch, A3 from Moody’s and BBB+ from S&P.

Cincinnati Financial Corporation - 2018 10-K - Page 95

Note Payable

At December 31, 2018, we had a $225 million line of credit with commercial banks, with $32 million borrowed. That line of credit had a $24 million balance at December 31, 2017. During 2018, we borrowed a net $8 million as part of routine cash management. That line of credit was due to expire on May 13, 2019. Effective February 4, 2019, we amended our unsecured revolving line of credit to $300 million with an accordion feature giving us the option to double that amount under the same terms and conditions. The agreement was extended for five years, amending the expiration to February 4, 2024, with the option of two one-year extensions. Terms and conditions are similar to the former agreement except the net worth covenant has been eliminated and debt-to-total capital maximum is now 35 percent.

We are in compliance with all covenants under the credit agreement and believe we will remain in compliance. The credit agreement provides alternative interest charges based on the type of borrowing and our debt rating. The interest rate charged is adjusted LIBOR plus an applicable margin.

Capital Resources

Capital resources consisting of shareholders’ equity and total debt represent our overall financial strength to support current obligations and growth in our insurance businesses. At December 31, 2018, we had total capital of $8.653 billion. Shareholders’ equity was $7.833 billion, a decrease of $410 million, or 5 percent, from the prior year. Our total debt was $820 million, up $9 million from a year ago. We seek to maintain a solid financial position and provide capital flexibility by keeping our ratio of debt to total capital moderate. At year-end 2018, the ratio was 9.5 percent, compared with 9.0 percent at year-end 2017.

At the discretion of the board of directors, the company can return capital directly to shareholders as discussed below.

•

Dividends to shareholders – The ability of our company to continue paying cash dividends is subject to factors the board of directors deem relevant. While the board and management believe there is merit to sustaining the company’s long record of dividend increases, our first priority is the company’s financial strength. Over the past 10 years, the company has paid an average of 73 percent of net income as dividends. Through 2018, the board had increased our cash dividend for 58 consecutive years. The board decision in February 2019 to increase the dividend demonstrated confidence in the company’s strong capital, liquidity, financial flexibility and initiatives to grow earnings.

•

Common stock repurchase – Generally, our board believes that share repurchases can help fulfill our commitment to enhancing shareholder value. Consequently, the board has authorized the repurchase of outstanding shares, giving management discretion to purchase shares at reasonable prices in light of circumstances at the time of purchase. Our approach has been to hold capital adequate to support future growth of our insurance operations and repurchase shares at management's discretion. Repurchases are intended to offset the issuance of shares through equity compensation plans, primarily due to vesting of service-based restricted stock units of equity awards granted in the past. The amount of future repurchases may be more, or less, than the past, depending on circumstances and discretion exercised by management. Our corporate Code of Conduct restricts repurchases during certain time periods. The details of the repurchase authorizations and activity are described in Item 5, Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Cincinnati Financial Corporation - 2018 10-K - Page 96

Obligations

We pay obligations to customers, suppliers and associates in the normal course of our business operations. Some are contractual obligations that define the amount, circumstances and/or timing of payments. We have other commitments for business expenditures; however, the amount, circumstances and/or timing of our other commitments are not dictated by contractual arrangements.

Contractual Obligations

At December 31, 2018, we estimated our future contractual obligations as follows:



(Dollars in millions)	Year		Years		Years		There-
Payment due by period	2019		2020-2021		2022-2023		after		Total
Gross property casualty loss and loss expense payments	$	1,910	$	1,981	$	809	$	946	$	5,646
Gross life policyholder obligations	133		166		208		5,080		5,587
Interest on long-term debt	52		104		104		371		631
Long-term debt	—		—		—		793		793
Short-term debt	32		—		—		—		32
Profit-sharing commissions	140		—		—		—		140
Capital lease obligations	16		21		10		2		49
Other liabilities	104		17		5		10		136
Total	$	2,387	$	2,289	$	1,136	$	7,202	$	13,014

Other Commitments

At December 31, 2018, we believe our most significant other commitments were:


•	Commissions – We expect commission payments to generally track with written premiums.

•

Other operating expenses – Many of our operating expenses are not contractual obligations but reflect the ongoing expenses of our business. For example, we anticipate capitalizing development costs for approximately $7 million in spending for key technology initiatives in 2019, compared with actual capitalization totaling $7 million in 2018 and $7 million in 2017. These activities are conducted at our discretion, and we have no material contractual obligations for activities planned as part of these projects.


•	Other invested assets – We expect to fund approximately $71 million for our private equity and real estate investments over the next several years.

Liquidity and Capital Resources Outlook

At December 31, 2018, we had $784 million in cash and cash equivalents. During 2019, our insurance subsidiary can declare $626 million in dividends to our parent company without regulatory approval. That strong liquidity and our consistent cash flows give us the flexibility to meet current obligations and commitments while building value by prudently investing where we see potential for both current income and long-term return. Our cash and cash equivalents provide adequate financial cushion when short-term operating results do not meet our objectives.

A long-term perspective governs our liquidity and capital resources decisions, with the goal of benefiting our policyholders, agents, shareholders and associates over time. Our underwriting philosophy and initiatives can drive performance to achieve our underwriting profitability target of a GAAP combined ratio over any five-year period that consistently averages within the range of 95 percent to 100 percent. Our GAAP combined ratio averaged 95.1 percent over the five-year period 2014 through 2018, resulting in strong underwriting profits.

In any year, we consider the most likely source of pressure on liquidity would be an unusually high level of catastrophe loss payments within a short period of time. There could be additional obligations for our insurance operations due to increasing severity or frequency of noncatastrophe claims. To address the risk of unusually large insurance loss obligations including catastrophe events, we maintain property casualty reinsurance contracts with highly rated reinsurers, as discussed under 2019 Reinsurance Ceded Programs. We also monitor the financial condition of our reinsurers because their insolvency could jeopardize a portion of our $484 million reinsurance recoverable asset at December 31, 2018. Parent-company liquidity could also be constrained by Ohio regulatory requirements that restrict the dividends insurance subsidiaries can pay.

Cincinnati Financial Corporation - 2018 10-K - Page 97

Economic weakness also has the potential to affect our liquidity and capital resources in a number of different ways, including delinquent payments from agencies, defaults on interest payments by fixed-maturity holdings in our portfolio, dividend reductions by holdings in our equity portfolio or declines in the market value of holdings in our portfolio.

Off-Balance-Sheet Arrangements

We do not use any special-purpose financing vehicles or have any undisclosed off-balance-sheet arrangements (as that term is defined in applicable SEC rules) that are reasonably likely to have a current or future material effect on the company’s financial condition, results of operation, liquidity, capital expenditures or capital resources.

Property Casualty Loss and Loss Expense Obligations and Reserves

Our estimate of future gross property casualty loss and loss expense payments of $5.646 billion is lower than loss and loss expense reserves of $5.707 billion reported on our balance sheet at December 31, 2018. The $61 million difference is due to certain life and health loss reserves. Reserving practices are discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves.

For the business lines in the commercial and personal lines insurance segments, and in total for the excess and surplus lines insurance segment, the following table details gross reserves among case, IBNR and loss expense reserves, net of salvage and subrogation. The $427 million increase in total gross reserves was primarily due to a $180 million increase in case loss reserves and a $174 million increase in IBNR loss reserves. Total gross reserves for our commercial casualty line of business rose $161 million, for Cincinnati Re they rose $71 million, for our homeowner line of business they rose $65 million and for our commercial auto line of business they rose $50 million.

Cincinnati Financial Corporation - 2018 10-K - Page 98

Property Casualty Gross Loss and Loss Expense Reserves



(Dollars in millions)	Loss reserves				Loss expense reserves			Total gross reserves
	Case reserves		IBNR reserves				Percent of total

At December 31, 2018
Commercial lines insurance:
Commercial casualty	$	981	$	647	$	604		$	2,232	39.5	%
Commercial property	270		12		60			342		6.1
Commercial auto	402		152		141			695		12.3
Workers' compensation	384		542		92			1,018		18.0
Other commercial	99		7		73			179		3.2
Subtotal	2,136		1,360		970			4,466		79.1
Personal lines insurance:
Personal auto	240		50		72			362		6.3
Homeowner	152		9		40			201		3.6
Other personal	46		65		5			116		2.1
Subtotal	438		124		117			679		12.0
Excess and surplus lines	118		96		84			298		5.3
Cincinnati Re	32		169		2			203		3.6
Total	$	2,724	$	1,749	$	1,173		$	5,646	100.0	%

At December 31, 2017
Commercial lines insurance:
Commercial casualty	$	890	$	611	$	570		$	2,071	39.7	%
Commercial property	232		18		65			315		6.0
Commercial auto	401		119		125			645		12.4
Workers' compensation	393		533		96			1,022		19.5
Other commercial	108		14		61			183		3.5
Subtotal	2,024		1,295		917			4,236		81.2
Personal lines insurance:
Personal auto	240		35		70			345		6.6
Homeowner	101		2		33			136		2.6
Other personal	55		46		5			106		2.1
Subtotal	396		83		108			587		11.2
Excess and surplus lines	104		87		73			264		5.1
Cincinnati Re	20		110		2			132		2.5
Total	$	2,544	$	1,575	$	1,100		$	5,219	100.0	%

Cincinnati Financial Corporation - 2018 10-K - Page 99

Asbestos and Environmental Loss and Loss Expense Reserves

We carried $89 million of net loss and loss expense reserves for asbestos and environmental claims and $44 million of reserves for mold claims at year-end 2018, compared with $84 million and $45 million, respectively, for such claims at year-end 2017. The asbestos and environmental claims amounts for each respective year constituted 1.6 percent and 1.7 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, when asbestos and pollution exclusions were not widely used by commercial lines insurers. 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 endorsed to or included in most policies an asbestos and environmental exclusion.

Additionally, since 2002, we have revised policy terms where permitted by state regulation to limit our exposure to mold claims prospectively and further reduce our exposure to other environmental claims generally. Finally, 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 we have found no such credible evidence to date.

Reserving data for asbestos and environmental claims has characteristics that limit the usefulness of the methods and models used to analyze loss and loss expense reserves for other claims. Specifically, asbestos and environmental loss and loss expenses for different accident years do not emerge independently of one another as loss development and Bornhuetter-Ferguson methods assume. In addition, asbestos and environmental loss and loss expense data available to date did not reflect a well-defined tail, greatly complicating the identification of an appropriate probabilistic trend family model. At year-end 2018, we used a weighted average of a paid survival ratio method and report year method to estimate reserves for IBNR asbestos and environmental claims. Our exposure to such claims is limited; we believe a weighted average of both methods produces a sufficient level of reserves.

Gross Property Casualty Loss and Loss Expense Payments

While we believe that historical performance of property casualty and life loss payment patterns is a reasonable source for projecting future claim payments, there is inherent uncertainty in this estimate of contractual obligations. We believe that we could meet our obligations under a significant and unexpected change in the timing of these payments because of the liquidity of our invested assets, strong financial position and access to lines of credit.

Our estimates of gross property casualty loss and loss expense payments do not include reinsurance receivables or ceded losses. As discussed in 2019 Reinsurance Ceded Programs, we purchase reinsurance to mitigate our property casualty risk exposure. Ceded property casualty reinsurance unpaid receivables of $238 million at year-end 2018 are an offset to our gross property casualty loss and loss expense obligations. Our reinsurance program mitigates the liquidity risk of a single large loss or an unexpected rise in claim severity or frequency due to a catastrophic event. Reinsurance does not relieve us of our obligation to pay covered claims. The financial strength of our reinsurers is important because our ability to recover losses under our reinsurance agreements depends on the financial viability of the reinsurers.

We direct our associates and agencies to settle claims and pay losses as quickly as is practical, and we made $2.847 billion of net claim payments during 2018. At year-end 2018, total net property casualty reserves of $5.408 billion reflected $2.578 billion in unpaid amounts on reported claims (case reserves), $1.161 billion in loss expense reserves and $1.669 billion in estimates of claims that were incurred but had not yet been reported (IBNR). The specific amounts and timing of obligations related to case reserves and associated loss expenses are not set contractually. The amounts and timing of obligations for IBNR claims and related loss expenses are unknown. We discuss our methods of establishing loss and loss expense reserves and our belief that reserves are adequate in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves.

Cincinnati Financial Corporation - 2018 10-K - Page 100

The historical pattern of using premium receipts for the payment of loss and loss expenses has enabled us to extend slightly the maturities of our investment portfolio beyond the estimated settlement date of the loss reserves. The effective duration of our consolidated property casualty fixed-maturity portfolio was 5.2 years at year-end 2018. By contrast, the duration of our loss and loss expense reserves was approximately 3.8 years. We believe this difference in duration does not affect our ability to meet current obligations because cash flow from operations is sufficient to meet these obligations. In addition, investment holdings could be sold, if necessary, to meet higher than anticipated loss and loss expenses.

Range of Reasonable Reserves

The company established a reasonably likely range for net loss and loss expense reserves of $5.037 billion to $5.481 billion at year-end 2018, with the company carrying net reserves of $5.408 billion. The likely range was $4.709 billion to $5.155 billion at year-end 2017, with the company carrying net reserves of $5.032 billion. Our loss and loss expense reserves are not discounted for the time-value of money, but we have reduced the reserves by an estimate of the amount of salvage and subrogation payments we expect to recover.

The low point of each year’s range corresponds to approximately one standard error below each year’s mean reserve estimate, while the high point corresponds to approximately one standard error above each year’s mean reserve estimate. We discussed management’s reasons for basing reasonably likely reserve ranges on standard errors in Critical Accounting Estimates, Reserve Estimate Variability.

The ranges reflect our assessment of the most likely unpaid loss and loss expenses at year-end 2018 and 2017. However, actual unpaid loss and loss expenses could nonetheless fall outside of the indicated ranges.

Management’s best estimate of total loss and loss expense reserves as of year-end 2018 and 2017 was consistent with the corresponding actuarial best estimate.

Cincinnati Financial Corporation - 2018 10-K - Page 101

Property Casualty Insurance Development of Estimated Reserves by Accident Year

The following table shows net reserve changes at year-end 2018, 2017 and 2016 by property casualty segment and accident year:



(Dollars in millions)	Commercial			Personal			E&S			Cincinnati
	lines			lines			lines			Re			Totals
As of December 31, 2018
2017 accident year	$	(68	)	$	11		$	(8	)	$	3		$	(62	)
2016 accident year	(34		)	2			(3		)	(2		)	(37		)
2015 accident year	(31		)	3			(7		)	—			(35		)
2014 accident year	(3		)	(1		)	(5		)	—			(9		)
2013 accident year	(9		)	—			—			—			(9		)
2012 accident year	(10		)	(1		)	(1		)	—			(12		)
2011 and prior accident years	(2		)	(1		)	—			—			(3		)
(Favorable)/unfavorable	$	(157	)	$	13		$	(24	)	$	1		$	(167	)

As of December 31, 2017
2016 accident year	$	(35	)	$	(8	)	$	(5	)	$	(3	)	$	(51	)
2015 accident year	(4		)	2			(8		)	—			(10		)
2014 accident year	(10		)	(2		)	(11		)	—			(23		)
2013 accident year	(12		)	(5		)	(4		)	—			(21		)
2012 accident year	11			1			(1		)	—			11
2011 accident year	(20		)	—			—			—			(20		)
2010 and prior accident years	(3		)	(2		)	—			—			(5		)
(Favorable)/unfavorable	$	(73	)	$	(14	)	$	(29	)	$	(3	)	$	(119	)

As of December 31, 2016
2015 accident year	$	(64	)	$	(12	)	$	(15	)	$	(1	)	$	(92	)
2014 accident year	(41		)	7			(7		)	—			(41		)
2013 accident year	(21		)	2			(9		)	—			(28		)
2012 accident year	(2		)	(1		)	(2		)	—			(5		)
2011 accident year	(4		)	1			(1		)	—			(4		)
2010 accident year	(2		)	1			—			—			(1		)
2009 and prior accident years	5			(2		)	—			—			3
(Favorable)/unfavorable	$	(129	)	$	(4	)	$	(34	)	$	(1	)	$	(168	)

Overall favorable development for consolidated property casualty reserves of $167 million in 2018 illustrated the potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty and workers’ compensation. As noted in Critical Accounting Estimates, Key Assumptions Loss Reserving, our models predict that actual loss and loss expense emergence will differ from projections, and we do not attempt to monitor or identify such normal variations. The table in Property Casualty Loss and Loss Expense Obligations and Reserves shows reserves by segment and lines of business and the components of gross reserves among case, IBNR and loss expense reserves.

Cincinnati Financial Corporation - 2018 10-K - Page 102

Favorable reserve development of $58 million for our workers’ compensation line accounted for approximately 37 percent of our commercial lines insurance segment net total in 2018, while favorable reserve development was $47 million for our commercial casualty line of business and $47 million for our commercial property line of business. Our homeowner line of business experienced $24 million of unfavorable reserve development on prior accident years recorded during 2018, and that 2018 measure for our commercial auto line of business was also unfavorable at $14 million. Drivers of significant reserve development typically reflect loss emergence on known claims that was more favorable or less favorable than previously anticipated for various lines of business and are discussed below.


•	Commercial casualty – During 2018, we experienced favorable development on prior accident years after seeing adverse development in 2017 for this line of business. We continue to watch this line so we can detect unfavorable trends should they reoccur.


•	Workers’ compensation – We continue to see favorable reserve development, for all prior accident years in aggregate. During 2018, the trend for estimated payments to be made in future calendar years was stable compared to 2017. However, we continue to monitor this line closely, as a sudden increase in trend for future payments has a highly leveraged effect.

•

Commercial auto – Loss emergence continued to develop unfavorably during calendar year 2018. This line of business has been troublesome for the industry as a whole in recent years. As part of the U.S. economic recession of a few years ago, slowing business activity influenced our estimates of reserves for ultimate losses and loss expenses during that period. As the economy slowly recovered, we believe we were slow to recognize some of the higher loss cost effects in current accident year reserve estimates for at least part of that period. As claims that occurred during that period have become more mature, paid and reported loss cost trends resulted in us increasing our estimated ultimate losses. Initiatives to improve profitability of our commercial auto line of business are discussed in Commercial Lines Insurance Results.


•	Personal auto – Loss emergence continued to develop unfavorably during calendar year 2018, for several older accident years. This line of business is subject to many of the same cost pressures related to the economic slowdown as commercial auto. Initiatives to improve profitability of our personal auto line of business are discussed in Personal Lines Insurance Results.

In consideration of the data’s credibility, we analyze commercial and personal umbrella liability reserves together and then allocate the derived total reserve estimate to the commercial and personal coverages. Consequently, all of the umbrella factors that contributed to commercial lines reserve development also contributed to personal lines reserve development through the other personal line, of which personal umbrella coverages are a part.

For the excess and surplus lines insurance segment, the table showing reserves by segment and lines of business in Property Casualty Loss and Loss Expense Obligations and Reserves, shows the components of gross reserves among case, IBNR and loss expense reserves. Total gross reserves were up $34 million from year-end 2017 primarily due to the increase in premiums and exposures for this segment, as we discussed in Excess and Surplus Lines Insurance Results. Favorable development during 2018 of $24 million for excess and surplus lines insurance segment reserves, shown in the table above, illustrates the potential for revisions inherent in estimating reserves.

Cincinnati Financial Corporation - 2018 10-K - Page 103

Life Insurance Policyholder Obligations and Reserves

Gross Life Insurance Policyholder Obligations

Our estimates of life, annuity and disability policyholder obligations reflect future estimated cash payments to be made to policyholders for future policy benefits, policyholders’ account balances and separate account liabilities. These estimates include death and disability income claims, policy surrenders, policy maturities, annuity payments, minimum guarantees on separate account products, commissions and premium taxes offset by expected future deposits and premiums on in-force contracts. Further, these estimates are based on mortality, morbidity and lapse assumptions reflective of our recent experience and expectations of future payment obligations.

Our estimates of gross life, annuity and disability obligations do not reflect net recoveries from reinsurance agreements. Ceded life reinsurance receivables were $240 million at year-end 2018. As discussed in 2018 Reinsurance Programs, we purchase reinsurance to mitigate our life insurance risk exposure. At year-end 2018, ceded death benefits represented approximately 36.8 percent of our total gross policy face amounts in force.

These estimated cash outflows are undiscounted with respect to interest. As a result, the sum of the cash outflows for all years of $5.587 billion (total of life insurance obligations) exceeds the liabilities recorded in life policy and investment contract reserves and separate accounts for future policy benefits and claims of $3.576 billion (total of life insurance policy reserves and separate account policy reserves). A significant portion of the difference can be attributed to time value of money and changes in mortality, morbidity and lapse assumptions between the date the liabilities were originally established and the current date.

We have made significant assumptions to determine the estimated undiscounted cash flows of these policies and contracts that include mortality, morbidity, timing of claims, future lapse rates and interest crediting rates. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results.

Life Insurance Reserves

Gross life policy reserves were $2.779 billion at year-end 2018, compared with $2.729 billion at year-end 2017. The increase was primarily due to reserves for traditional life insurance contracts. We establish reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates 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 and morbidity. We use our own experience and historical trends for setting our assumptions for expected withdrawal rates and expenses. We base our assumptions for expected investment income on our own experience adjusted for current and future expected economic conditions.

We regularly review our life insurance business to ensure that any deferred acquisition cost associated with the business is recoverable and that our actuarial liabilities (life insurance segment reserves) make sufficient provision for future benefits and related expenses.

Cincinnati Financial Corporation - 2018 10-K - Page 104

2019 Reinsurance Ceded Programs

A single large loss or an unexpected rise in claims severity or frequency due to a catastrophic event is a risk to the company's liquidity and financial strength. In an effort to control such losses, we limit marketing property casualty insurance in specific geographic areas and monitor our exposure in certain coastal regions. An example of this is the reduction in recent years of our homeowner policies in the southeastern U.S. coastal region. Loss exposures in that area had been identified as a major contributor to our catastrophe probable maximum loss estimates shown in the table below. Those estimates were subsequently reduced, in large part due to less exposure from southeastern U.S. homeowner policies. We also continually review aggregate exposures to huge disasters and purchase reinsurance protection to cover these exposures. For business other than Cincinnati Re, we use the Risk Management Solutions (RMS) and Applied Insurance Research (AIR) models to evaluate exposures to a once-in-a-100-year and a once-in-a-250-year event to help determine appropriate reinsurance coverage programs. In conjunction with these activities, we also continue to evaluate information provided by our reinsurance broker. Examples include deterministic modeling of probable maximum loss contribution from growth in new geographic territories.

To help determine appropriate reinsurance coverage for hurricane, earthquake and tornado/hail exposures, for business other than Cincinnati Re we use the RMS and AIR models to estimate the probable maximum loss from a single event or multiple events occurring in a one-year period. The models are proprietary in nature, and the vendors that provide them periodically update the models, sometimes resulting in significant changes to their estimate of probable maximum loss. As of the end of 2018, both models indicated that a hurricane event represents our largest amount of exposure to losses. The table below summarizes estimated probabilities and the corresponding probable maximum loss from a single hurricane event occurring in a one-year period, for business other than Cincinnati Re, and indicates the effect of such losses on consolidated shareholders’ equity at December 31, 2018. Net losses are net of reinsurance and income taxes, assuming a 21 percent federal tax rate, and assume our 2019 reinsurance programs apply.



(Dollars in millions)	RMS Model						AIR Model
					Percent						Percent
	Gross		Net		of total		Gross		Net		of total
Probability at December 31, 2018	losses		losses		equity		losses		losses		equity
2.0% (1 in 50 year event)	$	349	$	89	1.1	%	$	361	$	89	1.1	%
1.0% (1 in 100 year event)	558		97		1.2		524		95		1.2
0.4% (1 in 250 year event)	932		350		4.5		814		252		3.2
0.2% (1 in 500 year event)	1,291		632		8.1		1,076		451		5.8

The modeled losses according to RMS in the table are based on its RiskLink version 18.0 catastrophe model and use a long-term storm catalog methodology. The modeled losses according to AIR in the table are based on its AIR Touchstone® version 6.0 catastrophe model and use a long-term methodology. The AIR and RMS storm catalogs include decades of documented weather events used in simulations for probable maximum loss projections.

Reinsurance mitigates the risk of highly uncertain exposures and limits the maximum net loss that can arise from large risks or risks concentrated in areas of exposure. Management’s decisions about the appropriate structure of reinsurance protection and level of risk retention are affected by various factors, including changes in our underwriting practices, capacity to retain risks and reinsurance market conditions.

Reinsurance does not relieve us of our obligation to pay covered claims. The financial strength of our reinsurers is important because our ability to recover for losses covered under any reinsurance agreement depends on the financial viability of the reinsurer.

Cincinnati Financial Corporation - 2018 10-K - Page 105

For 2019, the primary participants on our standard market property and casualty per-risk and per-occurrence reinsurance ceded programs include Hannover Reinsurance Company, Munich Reinsurance America, Partner Reinsurance Company of the U.S. and Swiss Reinsurance America Corporation, all of which had A.M. Best insurer financial strength ratings of A (Excellent) or better as of December 31, 2018. Our property catastrophe program is subscribed through a broker by reinsurers from the United States, Bermuda, London and the European markets. The largest participant in our property catastrophe program, representing approximately 47 percent of total participation, is the Lloyd's of London placement that features numerous syndicates, with AXA XL and Liberty taking the largest participations. Other primary participants in our property catastrophe program include Amlin Underwriting Limited, Axis and Fidelis.

The following table shows our five largest property casualty reinsurance receivable amounts by reinsurer at year-end 2018 and 2017. Michigan Catastrophic Claims Association is a mandatory nonprofit association which runs a reinsurance program funded by an annual premium assessment per vehicle. This assessment covers Michigan’s automobile no-fault policies which provide unlimited lifetime coverage for medical expenses resulting from auto accidents. Third Point Reinsurance is one of several reinsurers that Cincinnati Re transacts business with to cede part of its risk to unaffiliated reinsurance companies through retrocessions. The A.M. Best insurer financial strength ratings as of the end of the two most recent years are also shown for each of those reinsurers that are rated by Best.



(Dollars in millions)	2018			2017
Name of reinsurer	Total receivable		A.M. Best Rating	Total receivable		A.M. Best Rating
Michigan Catastrophic Claims Association	$	44	NA	$	40	NA
Swiss Reinsurance America Corporation	42		A+	36		A+
General Reinsurance Corporation	31		A++	30		A++
Munich Reinsurance America	27		A+	21		A+
Third Point Reinsurance	25		A-	34		A-

Cincinnati Financial Corporation - 2018 10-K - Page 106

Primary components of the 2019 property and casualty reinsurance program are summarized below. The premium estimates below occurred near the beginning of each respective year, when direct written premiums that were subject to applicable reinsurance treaties were also estimated.

•

Property per risk treaty – The primary purpose of the property treaty is to provide capacity up to $50 million, adequate for the majority of the risks we write. It also includes protection for extra-contractual liability coverage losses. We retain the first $10 million of each loss. Losses between $10 million and $50 million are reinsured at 100 percent. The 2019 ceded premium estimate was $28 million, compared with $26 million for the 2018 estimate.


•	Property excess treaty – We purchased a property reinsurance treaty that provides an additional $50 million in protection for property losses. This treaty, along with the property per risk treaty, provides a total of $100 million of protection. The 2019 ceded premium estimate was approximately $2 million, essentially unchanged from the 2018 estimate.

•

Casualty per occurrence treaty – The casualty treaty provides capacity up to $25 million. Similar to the property treaty, it provides sufficient capacity to cover the vast majority of casualty accounts we insure and also includes protection for extra-contractual liability coverage losses. We retain the first $10 million of each loss. Losses between $10 million and $25 million are reinsured at 100 percent. The 2019 ceded premium estimate was $12 million, essentially unchanged from the 2018 estimate.

•

Casualty excess treaty – We purchase a casualty reinsurance treaty that provides an additional $45 million in protection for certain casualty losses. This treaty, along with the casualty per occurrence treaty, provides a total of $70 million of protection for workers’ compensation, extra-contractual liability coverage and clash coverage losses, which would apply when a single occurrence involves multiple policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The 2019 ceded premium estimate was approximately $3 million, essentially unchanged from the 2018 estimate.

•

Property catastrophe treaty – To protect against catastrophic events such as wind and hail, hurricanes or earthquakes, we purchased property catastrophe reinsurance with a limit up to $600 million. Losses from the same occurrence can now be aggregated into one limit over a 120-hour period and applied to the treaty towards recovery. The treaty contains one reinstatement provision. The 2019 ceded premium estimate was $43 million, essentially unchanged from the 2018 estimate. We retain the first $100 million of any loss, and a share of losses up to $600 million, as indicated below:


◦	5.0 percent of losses between $100 million and $200 million


◦	5.0 percent of losses between $200 million and $300 million


◦	5.0 percent of losses between $300 million and $400 million


◦	5.0 percent of losses between $400 million and $600 million

Cincinnati Financial Corporation - 2018 10-K - Page 107

•

Beginning in 2018, effective July 1, we added a new component to our property casualty reinsurance program, a property catastrophe occurrence and aggregate excess of loss treaty providing coverage not to exceed $50 million in aggregate. Key coverages include $50 million in excess of net $125 million per occurrence combining business written on a direct basis and by Cincinnati Re, $25 million in excess of $32 million for the aggregation of Cincinnati Re catastrophe occurrences subject to certain deductibles, $50 million in excess of $10 million for business written on a direct basis for the loss perils of earthquake, brushfire and wildfire in certain western states, or various combinations of occurrences with coverage up to the $50 million aggregate limit. The aggregate limit is $25 million if covered losses pertain only to Cincinnati Re. Ceded premiums for the first year of coverage from this treaty are estimated to be approximately $7 million.

•

Beginning in 2013 we added an alternative reinsurance structure to protect against certain catastrophic events, and a similar structure is in place for 2017 through 2019. For certain exposures in the United States, we arranged for the purchase of collateralized reinsurance funded through the issuance of collateralized risk-linked securities, known as catastrophe bonds with Skyline Re Ltd ("Skyline"). The catastrophe bond arrangements generally provide reinsurance coverage for specific types of losses in specific geographic locations. They are generally designed to supplement coverage provided under the property catastrophe treaty. Effective January 2017, we have a catastrophe bond arrangement providing up to $200 million in earthquake reinsurance protection or $80 million in severe convective storm coverage or various combinations of those coverages. It expires in January 2020 and meets the requirements to be accounted for as reinsurance in accordance with the guidance for reinsurance contracts. The earthquake coverage is countrywide, excluding California, and the severe convective storm coverage territory is also countrywide, excluding Florida. The storm coverage provides loss recovery when storm losses for all events in aggregate exceed $190 million, after an $8 million deductible per event.

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After reinsurance, and before any applicable benefit from our catastrophe bond, our maximum exposure to a catastrophic event that causes $600 million in covered losses in 2019 would be $125 million, matching our retention for 2018. The largest catastrophe loss event in our history occurred during 2011 from a May 20-27 storm system that included a tornado in Joplin, Missouri, and also significant losses from hail in the Dayton, Ohio, area. Our losses from that storm were estimated at December 31, 2017, to be $226 million before reinsurance.

Individual risks with insured values in excess of $100 million, as identified in the policy, are handled through a different reinsurance mechanism. We typically reinsure property coverage for individual risks with insured values between $100 million and $200 million under an automatic facultative agreement. For risks with property values exceeding $200 million, we negotiate the purchase of facultative coverage on an individual certificate basis. For casualty coverage on individual risks with limits exceeding $25 million, facultative reinsurance coverage is placed on an individual certificate basis. For risks with casualty limits that are between $25 million and $27 million, we sometimes forego facultative reinsurance and retain an additional $2 million of loss exposure.

Terrorism coverage at various levels has been secured in most of our reinsurance agreements. The broadest coverage for this peril is found in the property and casualty working treaties, the property per risk treaty and the casualty per occurrence treaty, which provide coverage for commercial and personal risks. Our property catastrophe treaty provides terrorism coverage for personal risks, and coverage for commercial risks with total insured values of $15 million or less. For insured values between $15 million and $100 million, there also may be coverage in the property working treaty.

A form of reinsurance is also provided through The Terrorism Risk Insurance Act of 2002 (TRIA). TRIA was originally signed into law on November 26, 2002, and extended on several occasions, including the most recent extension on January 12, 2015. TRIA provides a temporary federal backstop for losses related to the writing of the terrorism peril in property casualty insurance policies. Under regulations promulgated under this statute, insurers are required to offer terrorism coverage for certain lines of property casualty insurance, including property, commercial multi-peril, fire, ocean marine, inland marine, liability, aircraft and workers’ compensation. In the event of a terrorism event defined by TRIA, the federal government would reimburse terrorism claim payments subject to the insurer’s deductible. The deductible is calculated as a percentage of subject written premiums for the preceding calendar year. Our deductible in 2018 was $541 million (20 percent of 2017 subject premiums), and we estimate it is $551 million (20 percent of 2018 subject premiums) for 2019.

Reinsurance protection for the company’s surety business is covered under a separate treaty with many of the same reinsurers that write the property casualty working treaties.

The Cincinnati Specialty Underwriters Insurance Company has separate property and casualty reinsurance treaties for 2018 through its parent, The Cincinnati Insurance Company. Primary components of the treaties include:

•

Property per risk treaty – The property treaty provides limits up to $5 million, which is adequate capacity for the risk profile we insure. It also includes protection for extra-contractual liability coverage losses. Cincinnati Specialty Underwriters retains the first $1 million of any policy loss. Losses between $1 million and $5 million are reinsured at 100 percent by The Cincinnati Insurance Company.

•

Casualty treaties – The casualty treaty is written on an excess of loss basis and provide limits up to $6 million, which is adequate capacity for the risk profile we insure. A second treaty layer of $5 million excess of $6 million is written to provide coverage for extra contractual obligations or clash exposures. The maximum retention for any one casualty loss is $1 million by Cincinnati Specialty Underwriters. Losses between $1 million and $6 million are reinsured at 100 percent by The Cincinnati Insurance Company.


•	Basket retention – Cincinnati Specialty Underwriters has purchased this coverage to limit our retention to $1 million in the event that the same occurrence results in both a property and a casualty loss.


•	Property catastrophe treaty – As a subsidiary of The Cincinnati Insurance Company, Cincinnati Specialty Underwriters is a named insured under our corporate property catastrophe treaty, and for our collateralized reinsurance funded through the issuance of catastrophe bonds. All terms and conditions of this reinsurance coverage apply to policies underwritten by Cincinnati Specialty Underwriters.

For property risks with limits exceeding $5 million or casualty risks with limits exceeding $6 million, underwriters place facultative reinsurance coverage on an individual certificate basis.

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Cincinnati Life, our life insurance subsidiary, purchases reinsurance under separate treaties with many of the same reinsurers that write the property casualty working treaties. Our corporate retention is $1 million on a single life. For most of our core term life insurance line of business, we retain no more than a $500,000 exposure on a single policy, ceding the balance using excess over retention mortality coverage, and retaining the policy reserve. Because of the conservative nature of statutory reserving principles, retaining the policy reserve unduly depresses our statutory earnings and requires a large commitment of our capital. Effective November 1, 2015, we increased our retention to $1 million for issue ages up to 61 years on new term life insurance sales. For issue ages 61 years or older, our retention remains $500,000. For term life insurance business written prior to 2005, we retain 10 percent to 25 percent of each term policy, not to exceed $500,000, ceding the balance of mortality risk and policy reserve.

We also have catastrophe reinsurance coverage on our life insurance operations that reimburses us for covered net losses in excess of $12 million. Our recovery is capped at $75 million for losses involving our associates.

The following table shows our five largest life reinsurance receivable amounts by reinsurer at year-end 2018 and 2017. The A.M. Best insurer financial strength ratings are also shown.



(Dollars in millions)	2018			2017
Name of reinsurer	Total receivable		A.M. Best Rating	Total receivable		A.M. Best Rating
Swiss Re Life & Health America, Inc.	$	83	A+	$	80	A+
General Re Life Corporation	38		A++	35		A++
Lincoln National Life Insurance Company	37		A+	38		A+
Security Life of Denver Insurance Company	27		A	27		A u
Pacific Life Insurance Company	14		A+	14		A+

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Safe Harbor Statement

This is our “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in Item 1A, Risk Factors.

Factors that could cause or contribute to such differences include, but are not limited to:


•	The fact that the consummation of the transaction to acquire MSP Underwriting Ltd. and its subsidiaries is subject to closing conditions, one or more of which may not be satisfied, or that the transaction is not consummated for any other reason


•	Our inability to integrate MSP and its subsidiaries into our on-going operations, or disruptions to our on-going operations due to such integration


•	Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes


•	Increased frequency and/or severity of claims or development of claims that are unforeseen at the time of policy issuance


•	Inadequate estimates, assumptions or reliance on third-party data used for critical accounting estimates


•	Declines in overall stock market values negatively affecting the company’s equity portfolio and book value


•	Prolonged low interest rate environment or other factors that limit the company’s ability to generate growth in investment income or interest rate fluctuations that result in declining values of fixed-maturity investments, including declines in accounts in which we hold bank-owned life insurance contract assets


•	Domestic and global events resulting in capital market or credit market uncertainty, followed by prolonged periods of economic instability or recession, that lead to:


◦	Significant or prolonged decline in the fair value of a particular security or group of securities and impairment of the asset(s)


◦	Significant decline in investment income due to reduced or eliminated dividend payouts from a particular security or group of securities


◦	Significant rise in losses from surety and director and officer policies written for financial institutions or other insured entities


•	Recession or other economic conditions resulting in lower demand for insurance products or increased payment delinquencies


•	Difficulties with technology or data security breaches, including cyberattacks, that could negatively affect our ability to conduct business; disrupt our relationships with agents, policyholders and others; cause reputational damage, mitigation expenses and data loss and expose us to liability under federal and state laws


•	Disruption of the insurance market caused by technology innovations such as driverless cars that could decrease consumer demand for insurance products


•	Delays, inadequate data developed internally or from third parties, or performance inadequacies from ongoing development and implementation of underwriting and pricing methods, including telematics and other usage-based insurance methods, or technology projects and enhancements expected to increase our pricing accuracy, underwriting profit and competitiveness


•	Increased competition that could result in a significant reduction in the company’s premium volume


•	Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could alter our competitive advantages


•	Inability to obtain adequate ceded reinsurance on acceptable terms, amount of reinsurance coverage purchased, financial strength of reinsurers and the potential for nonpayment or delay in payment by reinsurers


•	Inability to defer policy acquisition costs for any business segment if pricing and loss trends would lead management to conclude that segment could not achieve sustainable profitability

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•	Inability of our subsidiaries to pay dividends consistent with current or past levels


•	Events or conditions that could weaken or harm the company’s relationships with its independent agencies and hamper opportunities to add new agencies, resulting in limitations on the company’s opportunities for growth, such as:


◦	Downgrades of the company’s financial strength ratings


◦	Concerns that doing business with the company is too difficult


◦	Perceptions that the company’s level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace


◦	Inability or unwillingness to nimbly develop and introduce coverage product updates and innovations that our competitors offer and consumers expect to find in the marketplace


•	Actions of insurance departments, state attorneys general or other regulatory agencies, including a change to a federal system of regulation from a state-based system, that:


◦	Impose new obligations on us that increase our expenses or change the assumptions underlying our critical accounting estimates


◦	Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations


◦	Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business


◦	Add assessments for guaranty funds, other insurance‑related assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes


◦	Increase our provision for federal income taxes due to changes in tax law


◦	Increase our other expenses


◦	Limit our ability to set fair, adequate and reasonable rates


◦	Place us at a disadvantage in the marketplace


◦	Restrict our ability to execute our business model, including the way we compensate agents


•	Adverse outcomes from litigation or administrative proceedings


•	Events or actions, including unauthorized intentional circumvention of controls, that reduce the company’s future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002


•	Unforeseen departure of certain executive officers or other key employees due to retirement, health or other causes that could interrupt progress toward important strategic goals or diminish the effectiveness of certain longstanding relationships with insurance agents and others


•	Events, such as an epidemic, natural catastrophe or terrorism, that could hamper our ability to assemble our workforce at our headquarters location

Further, the company’s insurance businesses are subject to the effects of changing social, global, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock, such as measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.

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Previous: Item 6. Selected Financial Data · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk