Item 8. Financial Statements and Supplementary Data

Responsibility for Financial Statements

We have prepared the consolidated financial statements of Cincinnati Financial Corporation and our subsidiaries for the year ended December 31, 2018, in accordance with accounting principles generally accepted in the United States of America (GAAP).

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

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

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

Deloitte & Touche LLP, our independent registered public accounting firm, audited the consolidated financial statements of Cincinnati Financial Corporation and subsidiaries for the year ended December 31, 2018. Deloitte & Touche LLP met with our audit committee to discuss the results of its examination. They have the opportunity to discuss the adequacy of internal controls and the quality of financial reporting without management present.

Cincinnati Financial Corporation - 2018 10-K - Page 119

Management’s Annual Report on Internal Control Over Financial Reporting

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

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

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

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

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

The company’s management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2018, as required by Section 404 of the Sarbanes Oxley Act of 2002. Management’s assessment was based on the criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and was designed to provide reasonable assurance that the company maintained effective internal control over financial reporting as of December 31, 2018. The assessment led management to conclude that, as of December 31, 2018, the company’s internal control over financial reporting was effective based on those criteria.

The company’s independent registered public accounting firm has issued an audit report on our internal control over financial reporting as of December 31, 2018.

/S/ Steven J. Johnston

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

President and Chief Executive Officer

/S/ Michael J. Sewell

Michael J. Sewell, CPA

Chief Financial Officer, Senior Vice President and Treasurer

(Principal Accounting Officer)

February 22, 2019

Cincinnati Financial Corporation - 2018 10-K - Page 120

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Cincinnati Financial Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Cincinnati Financial Corporation and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the schedules listed in the Index at Item 15(c) (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company adopted Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Liabilities, using the modified retrospective approach on January 1, 2018.

Basis for Opinions

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

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

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

Cincinnati Financial Corporation - 2018 10-K - Page 121

Definition and Limitations of Internal Control over Financial Reporting

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

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

/S/ DELOITTE & TOUCHE LLP

Cincinnati, Ohio

February 22, 2019

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

Cincinnati Financial Corporation - 2018 10-K - Page 122

Cincinnati Financial Corporation and Subsidiaries

Consolidated Balance Sheets

(Dollars in millions, except per share data)		December 31,				December 31,
		2018				2017
Assets
Investments
Fixed maturities, at fair value (amortized cost: 2018—$10,643; 2017—$10,314)		$	10,689			$	10,699
Equity securities, at fair value (cost: 2018—$3,368; 2017—$3,094)		5,920				6,249
Other invested assets		123				103
Total investments		16,732				17,051
Cash and cash equivalents		784				657
Investment income receivable		132				134
Finance receivable		71				61
Premiums receivable		1,644				1,589
Reinsurance recoverable		484				432
Prepaid reinsurance premiums		44				42
Deferred policy acquisition costs		738				670
Land, building and equipment, net, for company use (accumulated depreciation: 2018—$265; 2017—$253)		195				185
Other assets		308				216
Separate accounts		803				806
Total assets		$	21,935			$	21,843
Liabilities
Insurance reserves
Loss and loss expense reserves		$	5,707			$	5,273
Life policy and investment contract reserves		2,779				2,729
Unearned premiums		2,516				2,404
Other liabilities		804				792
Deferred income tax		627				745
Note payable		32				24
Long-term debt and capital lease obligations		834				827
Separate accounts		803				806
Total liabilities		14,102				13,600
Commitments and contingent liabilities (Note 16)		—				—
Shareholders' Equity
Common stock, par value—$2 per share; (authorized: 2018 and 2017—500 million shares; issued: 2018 and 2017—198.3 million shares)		397				397
Paid-in capital		1,281				1,265
Retained earnings		7,625				5,180
Accumulated other comprehensive income		22				2,788
Treasury stock at cost (2018—35.5 million shares and 2017—34.4 million shares)		(1,492		)		(1,387		)
Total shareholders' equity		7,833				8,243
Total liabilities and shareholders' equity		$	21,935			$	21,843

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

Cincinnati Financial Corporation - 2018 10-K - Page 123

Cincinnati Financial Corporation and Subsidiaries

Consolidated Statements of Income

(Dollars in millions, except per share data)		Years ended December 31,
		2018				2017				2016
Revenues
Earned premiums		$	5,170			$	4,954			$	4,710
Investment income, net of expenses		619				609				595
Investment gains and losses, net		(402		)		148				124
Fee revenues		15				16				15
Other revenues		5				5				5
Total revenues		5,407				5,732				5,449
Benefits and Expenses
Insurance losses and contract holders' benefits		3,490				3,390				3,107
Underwriting, acquisition and insurance expenses		1,597				1,546				1,465
Interest expense		53				53				53
Other operating expenses		16				13				12
Total benefits and expenses		5,156				5,002				4,637
Income Before Income Taxes		251				730				812
Provision (Benefit) for Income Taxes
Current		11				129				183
Deferred		(47		)		(444		)		38
Total provision (benefit) for income taxes		(36		)		(315		)		221
Net Income		$	287			$	1,045			$	591
Per Common Share
Net income—basic		$	1.76			$	6.36			$	3.59
Net income—diluted		1.75				6.29				3.55

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

Cincinnati Financial Corporation - 2018 10-K - Page 124

Cincinnati Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Dollars in millions)		Years ended December 31,
		2018				2017				2016
Net Income		$	287			$	1,045			$	591
Other Comprehensive Income (Loss)
Change in unrealized gains and losses on investments, net of tax (benefit) of $(72), $317 and $186, respectively		(267		)		598				345
Amortization of pension actuarial gains and losses and prior service cost, net of tax (benefit) of $(1), $7 and $6, respectively		(3		)		7				10
Change in life deferred acquisition costs, life policy reserves and other, net of tax (benefit) of $2, $1 and $(4), respectively		7				(2		)		(6		)
Other comprehensive income (loss)		(263		)		603				349
Comprehensive Income		$	24			$	1,648			$	940

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

Cincinnati Financial Corporation - 2018 10-K - Page 125

Cincinnati Financial Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(Dollars in millions)	Years ended December 31,
	2018				2017				2016
Common Stock
Beginning of year	$	397			$	397			$	397
Share-based awards	—				—				—
End of year	397				397				397
Paid-In Capital
Beginning of year	1,265				1,252				1,232
Share-based awards	(17		)		(18		)		(8		)
Share-based compensation	28				26				23
Other	5				5				5
End of year	1,281				1,265				1,252
Retained Earnings
Beginning of year	5,180				5,037				4,762
Cumulative effect of change in accounting for equity securities as of January 1, 2018	2,503				—				—
Adjusted beginning of year	7,683				5,037				4,762
Net income	287				1,045				591
Dividends declared	(345		)		(410		)		(316		)
Reclassification of certain tax effects from accumulated other comprehensive income	—				(492		)		—
End of year	7,625				5,180				5,037
Accumulated Other Comprehensive Income
Beginning of year	2,788				1,693				1,344
Cumulative effect of change in accounting for equity securities as of January 1, 2018	(2,503		)		—				—
Adjusted beginning of year	285				1,693				1,344
Other comprehensive income (loss)	(263		)		603				349
Reclassification of certain tax effects to retained earnings	—				492				—
End of year	22				2,788				1,693
Treasury Stock
Beginning of year	(1,387		)		(1,319		)		(1,308		)
Share-based awards	21				26				36
Shares acquired - share repurchase authorization	(125		)		(92		)		(39		)
Shares acquired - share-based compensation plans	(5		)		(7		)		(13		)
Other	4				5				5
End of year	(1,492		)		(1,387		)		(1,319		)
Total Shareholders' Equity	$	7,833			$	8,243			$	7,060
(In millions)
Common Stock - Shares Outstanding
Beginning of year	163.9				164.4				163.9
Share-based awards	0.7				0.8				1.0
Shares acquired - share repurchase authorization	(1.8		)		(1.3		)		(0.5		)
Shares acquired - share-based compensation plans	—				(0.1		)		(0.2		)
Other	—				0.1				0.2
End of year	162.8				163.9				164.4

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

Cincinnati Financial Corporation - 2018 10-K - Page 126

Cincinnati Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in millions)	Years ended December 31,
	2018				2017				2016
Cash Flows From Operating Activities
Net income	$	287			$	1,045			$	591
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	63				55				48
Investment gains and losses, net	408				(148		)		(124		)
Share-based compensation	28				26				23
Interest credited to contract holders'	47				48				48
Deferred income tax expense	(47		)		(444		)		38
Changes in:
Investment income receivable	2				—				(5		)
Premiums and reinsurance receivable	(109		)		77				(113		)
Deferred policy acquisition costs	(48		)		(36		)		(26		)
Other assets	(1		)		(43		)		34
Loss and loss expense reserves	434				188				367
Life policy and investment contract reserves	96				96				102
Unearned premiums	112				97				106
Other liabilities	—				24				61
Current income tax receivable/payable	(91		)		67				(35		)
Net cash provided by operating activities	1,181				1,052				1,115
Cash Flows From Investing Activities
Sale of fixed maturities	36				23				15
Call or maturity of fixed maturities	1,127				1,172				1,511
Sale of equity securities	403				523				465
Purchase of fixed maturities	(1,510		)		(1,723		)		(1,994		)
Purchase of equity securities	(441		)		(513		)		(439		)
Investment in finance receivables	(33		)		(32		)		(17		)
Collection of finance receivables	25				23				30
Investment in buildings and equipment	(20		)		(16		)		(13		)
Change in other invested assets, net	(38		)		(15		)		(14		)
Net cash used in investing activities	(451		)		(558		)		(456		)
Cash Flows From Financing Activities
Payment of cash dividends to shareholders	(336		)		(400		)		(306		)
Shares acquired - share repurchase authorization	(125		)		(92		)		(39		)
Changes in note payable	8				4				(15		)
Proceeds from stock options exercised	9				13				21
Contract holders' funds deposited	84				79				95
Contract holders' funds withdrawn	(183		)		(164		)		(155		)
Excess tax benefits on share-based compensation	—				—				5
Other	(60		)		(54		)		(32		)
Net cash used in financing activities	(603		)		(614		)		(426		)
Net change in cash and cash equivalents	127				(120		)		233
Cash and cash equivalents at beginning of year	657				777				544
Cash and cash equivalents at end of year	$	784			$	657			$	777
Supplemental Disclosures of Cash Flow Information
Interest paid	$	53			$	52			$	52
Income taxes paid	98				60				213
Noncash Activities
Conversion of securities	$	—			$	5			$	4
Equipment acquired under capital lease obligations	21				14				20
Cashless exercise of stock options	5				7				13
Other assets and other liabilities	48				75				53

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

Cincinnati Financial Corporation - 2018 10-K - Page 127

Notes to Consolidated Financial Statements

NOTE 1 – Summary of Significant Accounting Policies

Nature of Operations

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

The Cincinnati Insurance Company leads our insurance group that also includes two subsidiaries: The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This group markets a broad range of standard market commercial and personal policies. The group focuses on delivery of quality customer service to our select group of 1,757 independent insurance agencies with 2,344 reporting locations across 42 states. Other subsidiaries of The Cincinnati Insurance Company include The Cincinnati Life Insurance Company, which markets life insurance and fixed annuities, and The Cincinnati Specialty Underwriters Insurance Company, which offers excess and surplus lines property casualty insurance products. The Cincinnati Insurance Company also conducts the business of our reinsurance assumed operations, Cincinnati ReSM.

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

Basis of Presentation

Our consolidated financial statements include the accounts of the parent and its wholly owned subsidiaries and are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.

The preparation of the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. Our actual results could differ from those estimates.

Investments

Our portfolio investments are primarily in publicly traded fixed-maturity and equity security investments. Fixed-maturity investments (taxable bonds, tax-exempt bonds, redeemable preferred equities and commercial mortgage- backed securities) classified as available for sale and equity investments (common and nonredeemable preferred equities) are recorded at fair value in the consolidated financial statements. Beginning January 1, 2018, changes in fair value of equity securities are now reported in net income instead of other comprehensive income as stated below under 'Adopted Accounting Updates'. The number of fixed-maturity securities with fair value below 100 percent of amortized cost can be expected to fluctuate as interest rates rise or fall. Because of our strong capital and long-term investment horizon, our general intent is to hold fixed-maturity investments until maturity, regardless of short-term fluctuations in fair values.

Impairment charges for fixed maturities are recorded for other-than-temporary declines in value if fair value is below amortized cost and, in the asset impairment committee’s judgment, the fair value is not expected to be recouped within a designated recovery period. Our invested asset impairment policy also states that fixed maturities below their amortized cost that the company (1) intends to sell or (2) more likely than not will be required to sell before recovery of their amortized cost basis are deemed to be other-than-temporarily impaired (OTTI). The amortized cost of any such securities is reduced to fair value as the new cost basis, and a realized loss is recorded in the period in which it is recognized. When these two criteria are not met, and the company believes that full collection of interest and/or principal is not likely, we determine the net present value of future cash flows by using the effective interest rate implicit in the security at the date of acquisition as the discount rate and compare that amount with the amortized cost and fair value of the security. The difference between the net present value of the expected future cash flows and amortized cost of the security is considered a credit loss and recognized as a realized loss in the period in which it occurred. The difference between the fair value and the net present value of the cash flows of the security, the noncredit loss, is recognized in other comprehensive income as an unrealized loss. We had no fixed-maturity securities with a noncredit loss for the years ended 2018, 2017 and 2016.

Cincinnati Financial Corporation - 2018 10-K - Page 128

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

Included within our other invested assets were $33 million and $31 million of life policy loans, $60 million and $35 million of private equity investments and $30 million and $37 million of real estate through direct property ownership and development projects in the United States at December 31, 2018 and 2017, respectively. Life policy loans are carried at the receivable value. The private equity investments provide their financial statements to us and generally report investments on their balance sheets at fair value. We use the equity method of accounting for private equity and real estate development investments.

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

Fair Value Disclosures

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

For the purpose of ASC 825 disclosure, we estimate the fair value of our long-term senior notes on market pricing of similar debt instruments that are actively trading. We estimate the fair value of our note payable on the year-end outstanding balance because it is short term and tied to a variable interest rate. We estimate the fair value of liabilities for investment contracts and annuities using discounted cash flow calculations across a wide range of economic interest rate scenarios with a provision for our nonperformance risk. We estimate the fair value for policyholder loans on insurance contracts using a discounted cash flow model. Determination of fair value for structured settlements assumes the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2018, to account for nonperformance risk. See Note 3, Fair Value Measurements, for further details.

Cash and Cash Equivalents

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

Cincinnati Financial Corporation - 2018 10-K - Page 129

Property Casualty Insurance

The consolidated property casualty companies actively write property casualty insurance through independent agencies in 42 states. Our 10 largest states generated 58.4 percent and 59.7 percent of total earned premiums in 2018 and 2017, respectively. Ohio, our largest state, accounted for 15.9 percent and 16.2 percent of total earned premiums in 2018 and 2017, respectively. Illinois, Georgia, Indiana, North Carolina and Pennsylvania each accounted for between 5 percent and 6 percent of total earned premiums in 2018. Our largest single agency relationship accounted for approximately 0.8 percent of our total property casualty earned premiums in 2018. No aggregate agency relationship locations under a single ownership structure accounted for more than 4 percent of our total property casualty earned premiums in 2018. We record revenues for installment charges as fee revenues in the consolidated statements of income.

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

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

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

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

Policyholder Dividends

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

Life Insurance

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

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

We establish a liability for traditional long-duration contracts as we receive premiums. The amount of this liability is the present value of future expenses and benefits less the present value of future net premiums. Net premium is the portion of gross premium required to provide for all expenses and benefits. We estimate future expenses and benefits and net premium using assumptions for expected expenses, mortality, morbidity, withdrawal rates and

Cincinnati Financial Corporation - 2018 10-K - Page 130

investment income. We include a provision for deviation, meaning we allow for some uncertainty in making our assumptions. We establish our assumptions when the contract is issued, and we generally maintain those assumptions for the life of the contract. We use both our own experience and industry experience, adjusted for historical trends, in arriving at our assumptions for expected mortality, morbidity and withdrawal rates. We use our own experience and historical trends for setting our assumption for expected expenses. We base our assumption for expected investment income on our own experience, adjusted for current and future economic conditions.

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

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

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

Separate Accounts

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

We carry the assets of separate account BOLIs at fair value. The liabilities on separate account BOLIs primarily are the contract holders’ claims to the related assets and are carried at an amount equal to the contract holders’ account value. At December 31, 2018, the current fair value of the contract holders’ account value exceeded the current fair value of the BOLI invested assets and cash by approximately $3 million. At December 31, 2017, the current fair value of the BOLI invested assets and cash exceeded the current fair value of the contract holders' account value by approximately $29 million. If the BOLI projected fair value were to fall below the value we guaranteed, a liability would be established with a corresponding charge to the company’s earnings.

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

Cincinnati Financial Corporation - 2018 10-K - Page 131

Reinsurance

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

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

We establish known loss reserves when reported. We establish reserves for losses in excess of reported activity in the form of IBNR. Reserves are established using actuarial analysis, which includes models and methods traditionally used for the types of exposures written. We establish reserves for event specific occurrences using modeling data and company specific data when available.

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

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

Income Taxes

We calculate deferred income tax liabilities and assets using tax rates in effect when temporary differences in the consolidated financial statement income and taxable income are expected to reverse. We recognize deferred income taxes for numerous temporary differences between our taxable income and consolidated financial statement income and other changes in shareholders’ equity. Such temporary differences relate primarily to unrealized gains and losses on investments and differences in the recognition of deferred acquisition costs, unearned premiums, insurance reserves and basis differences in the carrying value of investments held. We charge deferred income taxes associated with balances that impact other comprehensive income, such as unrealized appreciation and depreciation of fixed-maturity investments, to shareholders’ equity in accumulated other comprehensive income (AOCI). We charge deferred taxes associated with other differences to income.

See Note 11, Income Taxes, for further detail on our uncertain tax positions and other income tax items. Although no Internal Revenue Service (IRS) penalties currently are accrued, if incurred, they would be recognized as a component of income tax expense.

Earnings per Share

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

Cincinnati Financial Corporation - 2018 10-K - Page 132

Land, Building and Equipment

We record land at cost, and record building and equipment at cost less accumulated depreciation. Equipment held under capital leases also is classified as property and equipment with the related lease obligations recorded as liabilities. We capitalize and amortize costs for internally developed computer software during the application development stage. These costs generally consist of external consulting, internal payroll and payroll-related costs. Our depreciation is based on estimated useful lives (ranging from three years to 39.5 years) using straight-line and accelerated methods. Depreciation expense was $31 million for 2018, $28 million for 2017 and $30 million for 2016. We review our accumulated depreciation for our building, equipment and software assets and write off fully depreciated assets for obsolesce and nonuse. We monitor land, building and equipment and software assets for potential impairments. Potential impairments may include a significant decrease in the fair values of the assets, considerable cost overruns on projects, a change in legal factors or business climate or other factors that indicate that the carrying amount may not be recoverable or useful. There were no recorded land, building and equipment impairments for 2018, 2017 or 2016.

Finance Receivables

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

Employee Benefit Pension Plan

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

Share-Based Compensation

We grant qualified and nonqualified share-based compensation under authorized plans. The stock options generally vest on a graded scale over three years following the date of grant and are exercisable over 10-year periods. We grant service-based restricted stock units that cliff vest three years after the date of grant as well as service-based restricted stock units that vest ratably over the three-year vesting term. We also grant performance-based restricted stock units that vest if certain market conditions are attained. In 2018, the CFC compensation committee approved share-based awards including incentive stock options, nonqualified stock options, service-based restricted and performance-based restricted stock units. See Note 17, Share-Based Associate Compensation Plans, for further details.

Subsequent Events

Related to the pending acquisition of MSP Underwriting Limited, on January 3, 2019, the company entered into a foreign exchange forward contract, which provides for an economic hedge between the agreed upon purchase price in GBP and currency fluctuations between the U.S. dollar and GBP during the period from that date through February 28, 2019. The acquisition is expected to close during the first quarter of 2019.

There were no subsequent events requiring adjustment to the consolidated financial statements and, with the exception of the above disclosure, no additional disclosures were required in the notes to our consolidated financial statements.

Cincinnati Financial Corporation - 2018 10-K - Page 133

Adopted Accounting Updates

ASU 2014-09 Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Insurance contracts do not fall within the scope of this ASU. The effective date of ASU 2014-09 was for interim and annual reporting periods beginning after December 15, 2017. The company adopted this ASU effective January 1, 2018, and it did not have a material impact on the company's consolidated financial position, cash flows or results of operations.

ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 revised the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The effective date of ASU 2016-01 was for interim and annual reporting periods beginning after December 15, 2017. The company adopted this ASU on January 1, 2018, and applied it on a modified retrospective basis without prior period amounts restated. As a result of the adoption, $2.503 billion of after-tax unrealized gains on equity securities was reclassified on January 1, 2018, from accumulated other comprehensive income to retained earnings. Results of operations were impacted as changes in fair value of equity securities are now reported in net income instead of reported in other comprehensive income. As a result of the adoption of this ASU, for the year ended December 31, 2018, the net investment loss of $402 million in the consolidated statements of income included a decrease of $404 million from the fair value change of equity securities.

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

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

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

In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Postretirement Benefit Costs. ASU 2017-07 provides guidance on how to present the components of net periodic benefit costs in the income statement for pension plans and other post-retirement benefit plans and allows only the service cost component of net benefit cost to be eligible for capitalization when applicable. The effective date of ASU 2017-07 is for interim and annual reporting periods beginning after December 15, 2017. The company adopted this ASU effective January 1, 2018, and disclosed the line items used in the statements of income to present the service and non-service components of net periodic benefit costs in Note 13, Employee Retirement Benefits, to these consolidated financial statements. The adoption did not have a material impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The effective date of ASU 2017-09 was for interim and annual reporting periods, beginning after December 15, 2017, and was applied prospectively. The company adopted this ASU effective January 1, 2018, and it did not have a material impact on our company's consolidated financial position, cash flows or results of operations.

Cincinnati Financial Corporation - 2018 10-K - Page 134

Pending Accounting Updates

ASU 2016-02, Leases (Topic 842)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main provision of ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The effective date of ASU 2016-02 is for interim and annual reporting periods beginning after December 15, 2018, and will be applied prospectively. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 and ASU 2018-11,Targeted Improvements to Topic 842. ASU 2018-10 makes narrow-scope amendments to certain aspects of the new leasing standard while ASU 2018-11 provides relief from costs of implementing certain aspects of the new leasing standard. These ASU's have not yet been adopted and will not have a material impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends previous guidance on the impairment of financial instruments by adding an impairment model that allows an entity to recognize expected credit losses as an allowance rather than impairing as they are incurred. The new guidance is intended to reduce complexity of credit impairment models and result in a more timely recognition of expected credit losses. The effective date of ASU 2016-13 is for interim and annual reporting periods beginning after December 15, 2019. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326. ASU 2018-19 makes narrow-scope amendments to certain aspects of the credit losses standard. These ASU's have not yet been adopted. Management is currently evaluating the impact on our company's consolidated financial position, cash flows and results of operations.

ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities

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

ASU 2018-07, Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting

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

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts

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

Cincinnati Financial Corporation - 2018 10-K - Page 135

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

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

ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans

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

ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

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

Cincinnati Financial Corporation - 2018 10-K - Page 136

NOTE 2 – Investments

On January 1, 2018, we adopted ASU 2016-01, which resulted in changes in the fair value of equity securities still held being reported in net income instead of being reported in other comprehensive income. See Note 1, Summary of Significant Accounting Policies, for additional discussion.

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

(Dollars in millions)		Cost or amortized cost				Gross unrealized								Fair value
At December 31, 2018			gains				losses
Fixed-maturity securities:
Corporate		$	5,712			$	85			$	87			$	5,710
States, municipalities and political subdivisions		4,251				84				31				4,304
Commercial mortgage-backed		287				3				2				288
Government-sponsored enterprises		316				1				7				310
United States government		67				1				1				67
Foreign government		10				—				—				10
Total		$	10,643			$	174			$	128			$	10,689
At December 31, 2017
Fixed-maturity securities:
Corporate		$	5,420			$	246			$	13			$	5,653
States, municipalities and political subdivisions		4,316				155				6				4,465
Commercial mortgage-backed		280				7				1				286
Government-sponsored enterprises		257				1				4				254
United States government		31				—				—				31
Foreign government		10				—				—				10
Subtotal		10,314				409				24				10,699
Equity securities:
Common equities		2,918				3,135				14				6,039
Nonredeemable preferred equities		176				34				—				210
Subtotal		3,094				3,169				14				6,249
Total		$	13,408			$	3,578			$	38			$	16,948

The net unrealized investment gains in our fixed-maturity portfolio at December 31, 2018, are primarily the result of the continued low interest rate environment that increased the fair value of our fixed-maturity portfolio. Our commercial mortgage-backed securities had an average rating of Aa1/AA at December 31, 2018 and 2017. At December 31, 2018, Microsoft Corporation (Nasdaq:MSFT) was our largest single equity holding with a fair value of $255 million, which was 4.4 percent of our publicly traded common equities portfolio and 1.5 percent of the total investment portfolio.

Cincinnati Financial Corporation - 2018 10-K - Page 137

The table below provides fair values and unrealized losses by investment category and by the duration of the securities’ continuous unrealized loss positions:

(Dollars in millions)		Less than 12 months								12 months or more								Total
At December 31, 2018		Fair value				Unrealized losses				Fair value				Unrealized losses				Fair value				Unrealized losses
Fixed-maturity securities:
Corporate		$	2,082			$	51			$	501			$	36			$	2,583			$	87
States, municipalities and political subdivisions		823				18				340				13				1,163				31
Commercial mortgage-backed		77				—				64				2				141				2
Government-sponsored enterprises		49				1				211				6				260				7
United States government		—				—				33				1				33				1
Total		$	3,031			$	70			$	1,149			$	58			$	4,180			$	128
At December 31, 2017
Fixed-maturity securities:
Corporate		$	330			$	4			$	252			$	9			$	582			$	13
States, municipalities and political subdivisions		88				1				264				5				352				6
Commercial mortgage-backed		33				—				36				1				69				1
Government-sponsored enterprises		96				1				124				3				220				4
Foreign government		10				—				—				—				10				—
United States government		23				—				6				—				29				—
Subtotal		580				6				682				18				1,262				24
Equity securities:
Common equities		229				14				—				—				229				14
Subtotal		229				14				—				—				229				14
Total		$	809			$	20			$	682			$	18			$	1,491			$	38

Cincinnati Financial Corporation - 2018 10-K - Page 138

Contractual maturity dates for fixed-maturity investments were:

(Dollars in millions)		Amortized cost				Fair value				% of fair value
At December 31, 2018
Maturity dates:
Due in one year or less		$	586			$	592			5.5	%
Due after one year through five years		2,894				2,912				27.3
Due after five years through ten years		3,663				3,653				34.2
Due after ten years		3,500				3,532				33.0
Total		$	10,643			$	10,689			100.0	%

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

At December 31, 2018 and 2017, the company had fixed-maturity investments with a fair value of $112 million and $101 million, respectively, on deposit with various states in compliance with regulatory requirements. In addition, cash and fixed-maturity investments deposited with third parties used as collateral to secure liabilities on behalf of insureds, cedants and other creditors had a fair value of $75 million and $57 million at December 31, 2018 and 2017, respectively. In the normal course of investing activities, the company enters into investments in limited partnerships, including private equity and real estate investments, and asset-backed securities issued by third-parties. The company’s maximum exposure to loss with respect to these investments is limited to the investment carrying values included in the company’s consolidated balance sheets and any unfunded commitments.

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

(Dollars in millions)		Years ended December 31,
		2018				2017				2016
Investment income:
Interest		$	445			$	445			$	440
Dividends		181				170				161
Other		5				4				3
Total		631				619				604
Less investment expenses		12				10				9
Total		$	619			$	609			$	595
Investment gains and losses, net:
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		(402		)		148				124

Cincinnati Financial Corporation - 2018 10-K - Page 139

For the years ended December 31, 2018, 2017 and 2016, there were no credit losses on fixed-maturity securities for which a portion of OTTI has been recognized in other comprehensive income.

During 2018, we other-than-temporarily impaired one security. At December 31, 2018, 400 fixed-maturity investments with a total unrealized loss of $58 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below 70 percent of amortized cost.

During 2017, we other-than-temporarily impaired six securities. At December 31, 2017, 249 fixed-maturity investments with a total unrealized loss of $18 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below 70 percent of amortized cost. There were no equity security investments in an unrealized loss position for 12 months or more as of December 31, 2017.

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

Cincinnati Financial Corporation - 2018 10-K - Page 140

NOTE 3 – Fair Value Measurements

Fair Value Hierarchy

The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2017, and ultimately management determines fair value. Financial instruments reported at fair value in our consolidated financial statements are categorized based upon the following characteristics or inputs to the valuation techniques:

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

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

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

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

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

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

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

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

Cincinnati Financial Corporation - 2018 10-K - Page 141

The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2018 and 2017. We do not have any liabilities carried at fair value. There were no transfers between Level 1 and Level 2.

(Dollars in millions)		Quoted prices in active markets for identical assets (Level 1)								Significant unobservable inputs (Level 3)
At December 31, 2018			Significant other observable inputs (Level 2)					Total
Fixed maturities, available for sale:
Corporate		$	—			$	5,709			$	1			$	5,710
States, municipalities and political subdivisions		—				4,300				4				4,304
Commercial mortgage-backed		—				288				—				288
Government-sponsored enterprises		—				310				—				310
United States Government		67				—				—				67
Foreign government		—				10				—				10
Subtotal		67				10,617				5				10,689
Common equities		5,742				—				—				5,742
Nonredeemable preferred equities		—				178				—				178
Separate accounts taxable fixed maturities		—				791				—				791
Top Hat savings plan mutual funds and common equity (included in Other assets)		34				—				—				34
Total		$	5,843			$	11,586			$	5			$	17,434
At December 31, 2017
Fixed maturities, available for sale:
Corporate		$	—			$	5,652			$	1			$	5,653
States, municipalities and political subdivisions		—				4,460				5				4,465
Commercial mortgage-backed		—				286				—				286
Government-sponsored enterprises		—				254				—				254
United States Government		31				—				—				31
Foreign government		—				10				—				10
Subtotal		31				10,662				6				10,699
Common equities, available for sale		6,039				—				—				6,039
Nonredeemable preferred equities, available for sale		—				210				—				210
Separate accounts taxable fixed maturities		—				795				—				795
Top Hat savings plan mutual funds and common equity (included in Other assets)		31				—				—				31
Total		$	6,101			$	11,667			$	6			$	17,774

Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value for the years ended December 31, 2018 and 2017. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. Transfers into Level 3 included situations where a fair value quote was not provided by the company's nationally recognized pricing vendor and as a result the price was stale or had been replaced with a broker quote where the inputs had not been corroborated to be market observable resulting in the security being classified as Level 3. Transfers out of Level 3 included situations where a broker quote was used without observable inputs or data that could not be corroborated by our pricing vendors in the prior period and significant observable inputs were identified in the current period.

Cincinnati Financial Corporation - 2018 10-K - Page 142

The following table provides the change in Level 3 assets during 2018 and 2017:

(Dollars in millions)	Asset fair value measurements using significant unobservable inputs
		Corporate fixed maturities				States, municipalities and political subdivisions fixed maturities				Total
Beginning balance, January 1, 2018		$	1			$	5			$	6
Total gains or losses (realized/unrealized):
Included in net income		—				—				—
Included in other comprehensive income		—				(1		)		(1		)
Purchases		—				—				—
Sales		—				—				—
Transfers into Level 3		—				—				—
Transfers out of Level 3		—				—				—
Ending balance, December 31, 2018		$	1			$	4			$	5
Beginning balance, January 1, 2017		$	78			$	—			$	78
Total gains or losses (realized/unrealized):
Included in net income		—				—				—
Included in other comprehensive income		—				—				—
Purchases		—				5				5
Sales		—				—				—
Transfers into Level 3		—				—				—
Transfers out of Level 3		(77		)		—				(77		)
Ending balance, December 31, 2017		$	1			$	5			$	6

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

Cincinnati Financial Corporation - 2018 10-K - Page 143

Fair Value Disclosure for Assets and Liabilities Not Carried at Fair Value

The disclosures below are presented to provide information about the effects of current market conditions on financial instruments that are not reported at fair value in our consolidated financial statements.

The following table shows fair values of our note payable and long-term debt:

(Dollars in millions)		Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
At December 31, 2018
Note payable		$	—			$	32			$	—			$	32
6.900% senior debentures, due 2028		—				32				—				32
6.920% senior debentures, due 2028		—				471				—				471
6.125% senior notes, due 2034		—				440				—				440
Total		$	—			$	975			$	—			$	975
At December 31, 2017
Note payable		$	—			$	24			$	—			$	24
6.900% senior debentures, due 2028		—				34				—				34
6.920% senior debentures, due 2028		—				505				—				505
6.125% senior notes, due 2034		—				477				—				477
Total		$	—			$	1,040			$	—			$	1,040

Fair value of the note payable was determined based upon the outstanding balance at December 31, 2018 and 2017, because it is short term and tied to a variable interest rate. Fair value of the long-term debt was determined under the fair value measurements and disclosure accounting rules based on market pricing of similar debt instruments that are actively trading. We determine fair value for our debt the same way that we value corporate fixed maturities in our investment portfolio. Fair value can vary with macroeconomic conditions. Regardless of the fluctuations in fair value, the outstanding principal amount of our long-term debt is $793 million at both December 31, 2018 and 2017. None of the long-term debt is encumbered by rating triggers. The note payable and long-term debt were classified as Level 2 as an active market does not exist, but fair value is determined based on observable inputs.

The following table shows the fair value of our life policy loans, included in other invested assets:

(Dollars in millions)		Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
At December 31, 2018
Life policy loans		$	—			$	—			$	40			$	40
At December 31, 2017
Life policy loans		$	—			$	—			$	41			$	41

Outstanding principal and interest for these life policy loans totaled $33 million and $31 million at December 31, 2018 and 2017, respectively. To determine the fair value, we make the following significant assumptions: (1) the discount rates used to calculate the present value of expected payments are the risk-free spot rates, as nonperformance risk is minimal; and (2) the loan repayment rate by which policyholders pay off their loan balances is in line with past experience.

Cincinnati Financial Corporation - 2018 10-K - Page 144

The following table shows fair value of our deferred annuities and structured settlements included in life policy and investment contract reserves:

(Dollars in millions)		Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
At December 31, 2018
Deferred annuities		$	—			$	—			$	742			$	742
Structured settlements		—				185				—				185
Total		$	—			$	185			$	742			$	927
At December 31, 2017
Deferred annuities		$	—			$	—			$	834			$	834
Structured settlements		—				210				—				210
Total		$	—			$	210			$	834			$	1,044

Recorded reserves for the deferred annuities were $787 million and $835 million at December 31, 2018 and 2017, respectively. Recorded reserves for the structured settlements were $156 million and $161 million at December 31, 2018 and 2017, respectively.

Fair values for deferred annuities were calculated based upon internally developed models because active markets and observable inputs do not exist. To determine the fair value, we made the following significant assumptions: (1) the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2018 and 2017, to account for nonperformance risk; (2) the rate of interest credited to policyholders is the portfolio net earned interest rate less a spread for expenses and profit; and (3) additional lapses occur when the credited interest rate is exceeded by an assumed competitor credited rate, which is a function of the risk-free rate of the economic scenario being modeled.

Fair values for structured settlements were calculated based on internally developed models which assume the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2018 and 2017, to account for nonperformance risk. The structured settlements were classified as Level 2 as an active market does not exist, but fair value is based on observable inputs.

Cincinnati Financial Corporation - 2018 10-K - Page 145

NOTE 4 – Property Casualty Loss and Loss Expenses

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

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

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

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

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

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

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

(Dollars in millions)		Years ended December 31,
		2018				2017				2016
Gross loss and loss expense reserves, January 1		$	5,219			$	5,035			$	4,660
Less reinsurance recoverable		187				298				281
Net loss and loss expense reserves, January 1		5,032				4,737				4,379
Net incurred loss and loss expenses related to:
Current accident year		3,390				3,257				3,029
Prior accident years		(167		)		(119		)		(168		)
Total incurred		3,223				3,138				2,861
Net paid loss and loss expenses related to:
Current accident year		1,391				1,404				1,260
Prior accident years		1,456				1,439				1,243
Total paid		2,847				2,843				2,503
Net loss and loss expense reserves, December 31		5,408				5,032				4,737
Plus reinsurance recoverable		238				187				298
Gross loss and loss expense reserves, December 31		$	5,646			$	5,219			$	5,035

Cincinnati Financial Corporation - 2018 10-K - Page 146

In 2018, 2017 and 2016, the reserve for loss and loss expense in the consolidated balance sheets also included $61 million, $54 million and $50 million, respectively, for certain life and health loss and loss expense reserves. Additional disclosures for reserves related to these health claims are not material and therefore not provided.

During 2018, we experienced $167 million of favorable development on prior accident years including $157 million of favorable development in commercial lines, $13 million of adverse development in personal lines, $24 million of favorable development in excess and surplus lines and $1 million of adverse development in our reinsurance assumed operations. We recognized favorable development of $58 million for the workers' compensation line and

$47 million for both the commercial property line and commercial casualty line due to reduced uncertainty of prior accident year loss and loss expense for these lines. This illustrates the potential for revisions inherent in estimating reserves, especially for long-tail lines such as workers’ compensation.

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

$33 million for the commercial property line and $30 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss expense for these lines. We recognized unfavorable reserve development of $33 million for the commercial auto line due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled. Commercial casualty developed unfavorably by $11 million due to paid losses or re-estimates of case reserves at higher than expected levels.

During 2016, we experienced $168 million of favorable development on prior accident years including $129 million of favorable development in commercial lines, $4 million of favorable development in personal lines, $34 million of favorable development in excess and surplus lines and $1 million of favorable development in our reinsurance assumed operations. We recognized favorable development of $69 million for the workers’ compensation line, $29 million for the commercial property line, $20 million for the commercial casualty line and $42 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss expense for these lines. We recognized unfavorable reserve development of $31 million for the commercial auto line and $18 million for the personal auto line. Both lines developed unfavorable due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled.

Included in our lines of business are asbestos and environmental claims. We carried $89 million and $84 million of net loss and loss expense reserves for asbestos and environmental claims at December 31, 2018 and 2017, respectively. The asbestos and environmental claims amounts for each respective year constituted less than

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

Cincinnati Financial Corporation - 2018 10-K - Page 147

The following table provides a reconciliation of the property casualty incurred losses and allocated loss adjustment expenses (ALAE) development and paid losses and ALAE development information at December 31, 2018.

(Dollars in millions)		Cumulative incurred losses and ALAE as reported within the triangles, net of reinsurance				Cumulative paid losses and ALAE as reported within the triangles, net of reinsurance				Liabilities for loss and ALAE for accident years not presented in the triangles, net of reinsurance				Total liabilities for loss and ALAE, net of reinsurance				Reinsurance recoverable on unpaid losses				Total liabilities for gross loss and loss expense reserves
Commercial casualty		$	4,671			$	2,658			$	94			$	2,107			$	51			$	2,158
Workers' compensation		2,142				1,493				283				932				59				991
Commercial auto		2,104				1,486				14				632				5				637
Commercial property		2,588				2,287				13				314				—				314
Personal auto		1,889				1,603				4				290				34				324
Homeowner		1,614				1,474				3				143				32				175
Excess and surplus		532				256				1				277				7				284
Other lines																						483
Total liabilities for loss and ALAE reserves																						5,366
Unallocated loss adjustment expense reserves																						280
Gross loss and loss expense reserves																						$	5,646

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

In the following tables, commercial casualty and workers' compensation each disclose 10 accident years of loss and ALAE reserves and cumulative number of reported claims. Commercial auto, commercial property, personal auto and homeowner each disclose five accident years of loss and ALAE reserves and cumulative number of reported claims as each of these lines have five year cumulative average annual percentage payouts of approximately 95 percent or higher. The excess and surplus lines began operations in 2008 with earned premiums and loss and ALAE reserves being immaterial prior to 2011. Accordingly, we disclosed eight accident years of loss and ALAE reserves and cumulative number of reported claims for the excess and surplus lines, and will disclose additional accident years in subsequent annual filings, not to exceed 10 years.

Cincinnati Financial Corporation - 2018 10-K - Page 148

Commercial Casualty

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

(Dollars in millions, reported claims in thousands)																																									As of December 31, 2018
Incurred losses and ALAE, net of reinsurance																																										Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
		Years ended December 31,
Accident		2009				2010				2011				2012				2013				2014				2015				2016				2017
Year		Unaudited																																				2018
2009		$	484			$	409			$	412			$	360			$	370			$	365			$	357			$	357			$	353			$	360			$	13			20
2010						495				394				378				349				347				348				349				343				341				16				20
2011										466				404				377				377				375				380				366				365				13				19
2012														466				414				417				394				394				404				399				29				18
2013																		448				443				431				416				413				407				53				19
2014																						503				496				479				476				479				66				21
2015																										533				526				529				516				105				21
2016																														563				574				557				152				21
2017																																		610				597				262				19
2018																																						650				406				16
Total																																						$	4,671
Cumulative paid losses and ALAE, net of reinsurance
2009		$	27			$	75			$	151			$	213			$	267			$	295			$	310			$	322			$	328			$	338
2010						33				92				159				203				256				285				300				314				318
2011										27				93				149				227				266				298				315				325
2012														27				88				170				232				288				330				346
2013																		35				90				159				232				286				312
2014																						34				97				172				287				338
2015																										38				108				200				287
2016																														46				126				228
2017																																		48				122
2018																																						44
Total																																						2,658
All outstanding liabilities before 2009, net of reinsurance																																						94
Liabilities for loss and ALAE, net of reinsurance																																						$	2,107

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

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5		6		7		8		9		10
Average annual percentage payout		7.8%		14.5%		18.2%		18.0%		13.2%		8.4%		4.3%		3.5%		1.4%		2.7%

Cincinnati Financial Corporation - 2018 10-K - Page 149

Workers’ Compensation

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

(Dollars in millions, reported claims in thousands)																																									As of December 31, 2018
Incurred losses and ALAE, net of reinsurance																																										Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
		Years ended December 31,
Accident		2009				2010				2011				2012				2013				2014				2015				2016				2017
Year		Unaudited																																				2018
2009		$	307			$	278			$	263			$	238			$	238			$	235			$	234			$	234			$	232			$	231			$	17			27
2010						283				274				248				242				240				239				240				237				236				20				26
2011										284				251				246				242				239				236				231				229				20				24
2012														265				245				234				220				213				211				209				22				21
2013																		264				246				221				212				208				205				23				20
2014																						261				233				214				203				201				20				19
2015																										246				220				208				195				46				17
2016																														230				218				206				51				16
2017																																		218				208				74				15
2018																																						222				99				13
Total																																						$	2,142
Cumulative paid losses and ALAE, net of reinsurance
2009		$	65			$	132			$	163			$	179			$	188			$	193			$	198			$	201			$	202			$	204
2010						67				134				164				181				192				198				202				204				207
2011										65				131				161				177				186				190				192				195
2012														62				121				147				162				171				175				178
2013																		61				119				144				157				164				168
2014																						56				110				134				148				157
2015																										47				93				115				129
2016																														46				97				119
2017																																		45				88
2018																																						48
Total																																						1,493
All outstanding liabilities before 2009, net of reinsurance																																						283
Liabilities for loss and ALAE, net of reinsurance																																						$	932

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

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5		6		7		8		9		10
Average annual percentage payout		26.2%		26.6%		12.2%		6.9%		4.1%		2.1%		1.4%		1.2%		0.9%		0.9%

Cincinnati Financial Corporation - 2018 10-K - Page 150

Commercial Auto

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

(Dollars in millions, reported claims in thousands)																					As of December 31, 2018
Incurred losses and ALAE, net of reinsurance																						Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
	Years ended December 31,
Accident		2014				2015				2016				2017
Year		Unaudited																2018
2014		$	333			$	346			$	351			$	358			$	359			$	2			51
2015						374				384				394				401				10				51
2016										417				430				450				17				53
2017														451				441				65				51
2018																		453				138				46
Total																		$	2,104
Cumulative paid losses and ALAE, net of reinsurance
2014		$	159			$	223			$	273			$	310			$	337
2015						173				244				303				349
2016										184				273				350
2017														187				266
2018																		184
Total																		1,486
All outstanding liabilities before 2014, net of reinsurance																		14
Liabilities for loss and ALAE, net of reinsurance																		$	632

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

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5
Average annual percentage payout		42.3%		18.3%		15.2%		10.8%		7.5%

Cincinnati Financial Corporation - 2018 10-K - Page 151

Commercial Property

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

(Dollars in millions, reported claims in thousands)																					As of December 31, 2018
Incurred losses and ALAE, net of reinsurance																						Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
	Years ended December 31,
Accident		2014				2015				2016				2017
Year		Unaudited																2018
2014		$	452			$	444			$	441			$	442			$	442			$	1			17
2015						454				414				416				415				4				17
2016										590				551				541				4				17
2017														587				560				12				18
2018																		630				13				16
Total																		$	2,588
Cumulative paid losses and ALAE, net of reinsurance
2014		$	297			$	412			$	432			$	437			$	440
2015						279				388				407				411
2016										358				504				528
2017														395				522
2018																		386
Total																		2,287
All outstanding liabilities before 2014, net of reinsurance																		13
Liabilities for loss and ALAE, net of reinsurance																		$	314

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

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5
Average annual percentage payout		66.4%		25.5%		4.6%		1.0%		0.7%

Cincinnati Financial Corporation - 2018 10-K - Page 152

Personal Auto

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

(Dollars in millions, reported claims in thousands)																					As of December 31, 2018
Incurred losses and ALAE, net of reinsurance																						Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
	Years ended December 31,
Accident		2014				2015				2016				2017
Year		Unaudited																2018
2014		$	317			$	317			$	325			$	324			$	325			$	—			105
2015						343				356				356				360				—				108
2016										383				384				386				3				110
2017														412				394				14				109
2018																		424				64				104
Total																		$	1,889
Cumulative paid losses and ALAE, net of reinsurance
2014		$	210			$	267			$	298			$	313			$	320
2015						229				292				325				346
2016										243				316				351
2017														256				324
2018																		262
Total																		1,603
All outstanding liabilities before 2014 net of reinsurance																		4
Liabilities for loss and ALAE, net of reinsurance																		$	290

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

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5
Average annual percentage payout		63.6%		17.7%		9.3%		5.2%		2.1%

Cincinnati Financial Corporation - 2018 10-K - Page 153

Homeowner

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

(Dollars in millions, reported claims in thousands)																					As of December 31, 2018
Incurred losses and ALAE, net of reinsurance																						Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
	Years ended December 31,
Accident		2014				2015				2016				2017
Year		Unaudited																2018
2014		$	297			$	283			$	286			$	285			$	284			$	—			26
2015						284				275				275				274				—				24
2016										315				304				303				1				23
2017														356				383				3				26
2018																		370				15				21
Total																		$	1,614
Cumulative paid losses and ALAE, net of reinsurance
2014		$	224			$	273			$	281			$	283			$	283
2015						203				260				269				272
2016										208				283				295
2017														277				356
2018																		268
Total																		1,474
All outstanding liabilities before 2014, net of reinsurance																		3
Liabilities for loss and ALAE, net of reinsurance																		$	143

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

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5
Average annual percentage payout		73.2%		20.9%		3.4%		0.8%		0.2%

Cincinnati Financial Corporation - 2018 10-K - Page 154

Excess and Surplus Lines

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

(Dollars in millions, reported claims in thousands)																																	As of December 31, 2018
Incurred losses and ALAE, net of reinsurance																																		Total of incurred but not reported liabilities plus expected development on reported losses				Cumulative number of reported claims
	Years ended December 31,
Accident		2011				2012				2013				2014				2015				2016				2017
Year		Unaudited																												2018
2011		$	48			$	47			$	44			$	38			$	36			$	35			$	35			$	34			$	—			1
2012						67				56				49				40				37				36				35				1				1
2013										74				64				54				45				42				41				3				2
2014														95				82				75				64				60				10				2
2015																		96				81				73				67				13				2
2016																						93				87				84				22				2
2017																										104				95				43				2
2018																														116				71				2
Total																														$	532
Cumulative paid losses and ALAE, net of reinsurance
2011		$	8			$	14			$	23			$	27			$	30			$	32			$	34			$	33
2012						9				15				19				25				29				31				32
2013										7				12				20				27				32				34
2014														9				17				27				37				43
2015																		8				19				29				41
2016																						10				21				39
2017																										11				23
2018																														11
Total																														256
All outstanding liabilities before 2011, net of reinsurance																														1
Liabilities for loss and ALAE, net of reinsurance																														$	277

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

Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years		1		2		3		4		5		6		7		8
Average annual percentage payout		15.8%		14.4%		18.8%		15.6%		10.5%		6.8%		2.0%		0.5%

Cincinnati Financial Corporation - 2018 10-K - Page 155

NOTE 5 – Life Policy and Investment Contract Reserves

We establish the reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates, timing of claim presentation and investment yields, including a provision for uncertainty. Once these assumptions are established, they generally are maintained throughout the lives of the contracts. We use both our own experience and industry experience, adjusted for historical trends, in arriving at our assumptions for expected mortality, morbidity and withdrawal rates as well as for expected expenses. We base our assumptions for expected investment income on our own experience adjusted for current and future economic conditions.

We establish reserves for the company’s universal life, deferred annuity and structured settlement policies equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals. Some of our universal life policies contain no-lapse guarantee provisions. For these policies, we establish a reserve in addition to the account balance, based on expected no-lapse guarantee benefits and expected policy assessments.

This table summarizes our life policy and investment contract reserves:

(Dollars in millions)		At December 31,
		2018				2017
Life policy reserves:
Ordinary/traditional life		$	1,149			$	1,080
Other		48				47
Subtotal		1,197				1,127
Investment contract reserves:
Deferred annuities		787				835
Universal life		632				601
Structured settlements		156				160
Other		7				6
Subtotal		1,582				1,602
Total life policy and investment contract reserves		$	2,779			$	2,729

Cincinnati Financial Corporation - 2018 10-K - Page 156

NOTE 6 – Deferred Policy Acquisition Costs

Expenses directly related to successfully acquired insurance policies – primarily commissions, premium taxes and underwriting costs – are deferred and amortized over the terms of the policies. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate the costs for recoverability. The table below shows the deferred policy acquisition costs and asset reconciliation:

(Dollars in millions)		Years ended December 31,
		2018				2017				2016
Property casualty:
Deferred policy acquisition costs asset, January 1		$	438			$	408			$	388
Capitalized deferred policy acquisition costs		933				897				840
Amortized deferred policy acquisition costs		(907		)		(867		)		(820		)
Deferred policy acquisition costs asset, December 31		$	464			$	438			$	408
Life:
Deferred policy acquisition costs asset, January 1		$	232			$	229			$	228
Capitalized deferred policy acquisition costs		60				51				49
Amortized deferred policy acquisition costs		(39		)		(46		)		(43		)
Shadow deferred policy acquisition costs		21				(2		)		(5		)
Deferred policy acquisition costs asset, December 31		$	274			$	232			$	229
Consolidated:
Deferred policy acquisition costs asset, January 1		$	670			$	637			$	616
Capitalized deferred policy acquisition costs		993				948				889
Amortized deferred policy acquisition costs		(946		)		(913		)		(863		)
Shadow deferred policy acquisition costs		21				(2		)		(5		)
Deferred policy acquisition costs asset, December 31		$	738			$	670			$	637

No premium deficiencies were recorded in the consolidated statements of income in 2018, 2017 and 2016, as the sum of the anticipated loss and loss expenses, policyholder dividends and unamortized deferred acquisition expenses did not exceed the related unearned premiums and anticipated investment income.

Cincinnati Financial Corporation - 2018 10-K - Page 157

NOTE 7 – Note Payable

We had one line of credit through multiple commercial banks with a borrowing capacity of $225 million and an additional $50 million accordion feature. Our unsecured revolving credit facility had a term of five years that was due to expire May 13, 2019. We had no compensating balance requirements on short-term debt for either 2018 or 2017. At December 31, 2018 and 2017, $32 million and $24 million was drawn on the line of credit, respectively. The interest rate charged on our borrowings on this credit agreement ranged from 2.45 percent to 4.75 percent during 2018 and ranged from 1.65 percent to 2.45 percent during 2017.

Effective February 4, 2019, we amended our unsecured revolving line of credit to $300 million with an accordion feature of an additional $300 million. 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 the debt-to-total capital maximum shall not exceed 35 percent.

NOTE 8 – Long-Term Debt and Capital Lease Obligations

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

(Dollars in millions)						Book value								Principal amount
Interest rate		Year of issue				At December 31,								At December 31,
				2018				2017				2018				2017
6.900%		1998		Senior debentures, due 2028		$	27			$	26			$	28			$	28
6.920%		2005		Senior debentures, due 2028		391				391				391				391
6.125%		2004		Senior notes, due 2034		370				370				374				374
				Total		$	788			$	787			$	793			$	793

Capital lease obligations totaled $46 million and $40 million in 2018 and 2017, respectively. Below are the expected capital lease obligations, which includes $3 million of interest, that we expect to pay over the next six years:

(Dollars in millions)	Years ended December 31,
	2019				2020				2021				2022				2023			2024
Capital lease obligations	$	16			$	12			$	9			$	6			$	4		$	2

NOTE 9 – Shareholders’ Equity and Dividend Restrictions

Declared cash dividends per share were $2.12, $2.50 and $1.92 for the years ended December 31, 2018, 2017 and 2016, respectively.

Our insurance subsidiary declared dividends to the parent company of $500 million in 2018, $465 million in 2017 and $475 million in 2016. State regulatory requirements restrict the dividends insurance subsidiaries can pay. Generally, the most our insurance subsidiary can pay without prior regulatory approval is the greater of 10 percent of statutory capital and surplus or 100 percent of statutory net income for the prior calendar year. Dividends exceeding these limitations may be paid only with approval of the insurance department of the domiciliary state. During 2019, the total that our insurance subsidiary, which is the parent of all other insurance subsidiaries, may declare in dividends is approximately $626 million.

Accumulated Other Comprehensive Income

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

Cincinnati Financial Corporation - 2018 10-K - Page 158

(Dollars in millions)		2018													2017													2016
		Before tax				Income tax				Net					Before tax				Income tax				Net					Before tax				Income tax				Net
Investments:
AOCI, January 1		$	3,540			$	733			$	2,807				$	2,625			$	908			$	1,717				$	2,094			$	722			$	1,372
Cumulative effect of change in accounting for equity securities as of January 1, 2018		(3,155		)		(652		)		(2,503		)			—				—				—					—				—				—
Adjusted AOCI, beginning of period		385				81				304					2,625				908				1,717					2,094				722				1,372
OCI before investment gains and losses, net, recognized in net income		(334		)		(71		)		(263		)			1,054				366				688					653				229				424
Investment gains and losses, net, recognized in net income		(5		)		(1		)		(4		)			(139		)		(49		)		(90		)			(122		)		(43		)		(79		)
OCI		(339		)		(72		)		(267		)			915				317				598					531				186				345
Adjustment to reclassify certain tax effects from AOCI		—				—				—					—				(492		)		492					—				—				—
AOCI, December 31		$	46			$	9			$	37				$	3,540			$	733			$	2,807				$	2,625			$	908			$	1,717
Pension obligations:
AOCI, January 1		$	(12	)		$	(1	)		$	(11	)			$	(26	)		$	(8	)		$	(18	)			$	(42	)		$	(14	)		$	(28	)
OCI excluding amortization recognized in net income		(5		)		(1		)		(4		)			12				6				6					13				5				8
Amortization recognized in net income		1				—				1					2				1				1					3				1				2
OCI		(4		)		(1		)		(3		)			14				7				7					16				6				10
AOCI, December 31		$	(16	)		$	(2	)		$	(14	)			$	(12	)		$	(1	)		$	(11	)			$	(26	)		$	(8	)		$	(18	)
Life deferred acquisition costs, life policy reserves and other:
AOCI, January 1		$	(10	)		$	(2	)		$	(8	)			$	(9	)		$	(3	)		$	(6	)			$	1			$	1			$	—
OCI before investment gains and losses, net, recognized in net income		(3		)		(1		)		(2		)			8				5				3					(8		)		(3		)		(5		)
Investment gains and losses, net, recognized in net income		12				3				9					(9		)		(4		)		(5		)			(2		)		(1		)		(1		)
OCI		9				2				7					(1		)		1				(2		)			(10		)		(4		)		(6		)
AOCI, December 31		$	(1	)		$	—			$	(1	)			$	(10	)		$	(2	)		$	(8	)			$	(9	)		$	(3	)		$	(6	)
Summary of AOCI:
AOCI, January 1		$	3,518			$	730			$	2,788				$	2,590			$	897			$	1,693				$	2,053			$	709			$	1,344
Cumulative effect of change in accounting for equity securities as of January 1, 2018		(3,155		)		(652		)		(2,503		)			—				—				—					—				—				—
Adjusted AOCI, beginning of period		363				78				285					2,590				897				1,693					2,053				709				1,344
Investments OCI		(339		)		(72		)		(267		)			915				317				598					531				186				345
Pension obligations OCI		(4		)		(1		)		(3		)			14				7				7					16				6				10
Life deferred acquisition costs, life policy reserves and other OCI		9				2				7					(1		)		1				(2		)			(10		)		(4		)		(6		)
Total OCI		(334		)		(71		)		(263		)			928				325				603					537				188				349
Adjustment to reclassify certain tax effects from AOCI		—				—				—					—				(492		)		492					—				—				—
AOCI, December 31		$	29			$	7			$	22				$	3,518			$	730			$	2,788				$	2,590			$	897			$	1,693

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

Cincinnati Financial Corporation - 2018 10-K - Page 159

NOTE 10 – Reinsurance

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

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

(Dollars in millions)		Years ended December 31,
		2018				2017				2016
Direct written premiums		$	5,018			$	4,854			$	4,646
Assumed written premiums		173				125				103
Ceded written premiums		(161		)		(139		)		(169		)
Net written premiums		$	5,030			$	4,840			$	4,580
Direct earned premiums		$	4,931			$	4,752			$	4,567
Assumed earned premiums		149				132				77
Ceded earned premiums		(160		)		(162		)		(162		)
Earned premiums		$	4,920			$	4,722			$	4,482
Direct incurred loss and loss expenses		$	3,188			$	2,961			$	2,874
Assumed incurred loss and loss expenses		125				113				43
Ceded incurred loss and loss expenses		(90		)		64				(56		)
Incurred loss and loss expenses		$	3,223			$	3,138			$	2,861

Our changes in 2017 direct incurred and ceded incurred compared to 2016 resulted primarily from a large settlement paid by USAIG, a joint underwriting association of individual insurance companies that collectively functions as a worldwide aviation insurance market. This settlement resulted in offsetting amounts to direct incurred and ceded incurred with no change to our net incurred loss and loss expense. We terminated our participation in the USAIG pool after policy year 2002.

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

Cincinnati Financial Corporation - 2018 10-K - Page 160

The table below summarizes our consolidated life insurance earned premiums and contract holders' benefits incurred:

(Dollars in millions)		Years ended December 31,
		2018				2017				2016
Direct earned premiums		$	320			$	300			$	290
Ceded earned premiums		(70		)		(68		)		(62		)
Earned premiums		$	250			$	232			$	228
Direct contract holders' benefits incurred		$	328			$	319			$	303
Ceded contract holders' benefits incurred		(61		)		(67		)		(57		)
Contract holders' benefits incurred		$	267			$	252			$	246

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

Cincinnati Financial Corporation - 2018 10-K - Page 161

NOTE 11 – Income Taxes

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

(Dollars in millions)		At December 31,
		2018				2017
Deferred tax assets:
Loss and loss expense reserves		$	60			$	123
Unearned premiums		105				100
Other		33				27
Total gross deferred tax assets		198				250
Deferred tax liabilities:
Investment gains and other, net		542				740
Deferred acquisition costs		131				123
Life policy reserves		117				111
Investments		18				10
Other		17				11
Total gross deferred tax liabilities		825				995
Net deferred income tax liability		$	627			$	745

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

Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred tax assets will not be realized. After considering all positive and negative evidence of taxable income in the carryback and carryforward periods as permitted by law, we believe it is more likely than not that all of the deferred tax asset will be realized. As a result, we have no valuation allowance as of December 31, 2018 and 2017.

The differences between the 21 percent and 35 percent statutory federal income tax rate and our effective income tax rate were as follows:

(Dollars in millions)		Years ended December 31,
		2018							2017							2016
Tax at statutory rate:		$	53			21.0	%		$	256			35.0	%		$	284			35.0	%
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds		(20		)		(8.0	)		(36		)		(4.9	)		(34		)		(4.2	)
Dividend received exclusion		(15		)		(6.0	)		(34		)		(4.7	)		(33		)		(4.1	)
Tax accounting method changes		(50		)		(19.9	)		—				—			—				—
Deferred tax benefit due to tax rate change		—				—			(495		)		(67.8	)		—				—
Other		(4		)		(1.4	)		(6		)		(0.8	)		4				0.5
Provision for income taxes		$	(36	)		(14.3	)%		$	(315	)		(43.2	)%		$	221			27.2	%

Cincinnati Financial Corporation - 2018 10-K - Page 162

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

In 2018, we received approval from the IRS to change our method of tax accounting for certain items applicable for the 2017 tax year and tax return, primarily related to the valuation of our tax base unpaid losses. Accounting guidance does not allow recognition of the impact of certain tax accounting method changes until approved by the IRS. As a result, we recognized a $50 million income tax benefit in 2018 for the difference between the current tax rate and the 2017 tax rate for the related items. This reduced our effective tax rate by 19.9 percent for the twelve months ended December 31, 2018.

Our accounting for all elements of the Tax Act is now complete, consistent with the closing of the SAB 118 measurement period on December 22, 2018. As a result of guidance released by the IRS during the measurement period, we have adjusted our deferred tax balances related to property casualty tax base loss and loss expense reserve liabilities, tax base life policy reserve liabilities, and the transition liability associated with both property-casualty and life reserves. The recorded adjustments resulted in no impact on our recorded net deferred income tax liability. The recorded adjustments had no impact on our effective tax rate.

The provision for federal income taxes is based upon filing a consolidated income tax return for the company and its subsidiaries. As of December 31, 2018, 2017 and 2016, we have less than one million of life group operating loss carryforwards which we expect to receive benefit from in our 2018 tax return which will be filed in 2019. For the years ended December 31, 2018, 2017 and 2016, we have no capital loss carryforwards.

Unrecognized Tax Benefits

As of December 31, 2018, we had a gross unrecognized tax benefit of $34 million. We carry no amounts for unrecognized tax benefits for the years 2017 and 2016. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits.

(Dollars in millions)		Years ended December 31,
		2018				2017				2016
Gross unrecognized tax benefits at January 1		$	—			$	—			$	—
Gross increase in prior year positions		—				—				—
Gross decrease in prior year positions		—				—				—
Gross increase in current year positions		34				—				—
Settlements with tax authorities		—				—				—
Lapse of statute of limitations		—				—				—
Gross unrecognized tax benefits at December 31		$	34			$	—			$	—

The unrecognized tax benefit liability is carried in other liabilities in the consolidated balance sheets. Included in the unrecognized tax benefit liability as of December 31, 2018 is $34 million, if recognized, would affect the effective tax rate. Although no interest and penalties currently are accrued, if incurred, they would be recognized as a component of income tax expense. When the IRS processes our income tax return filing for the 2018 tax year, it is possible that a decrease for the full amount of our $34 million of unrecognized tax benefits, all of which relates to our property-casualty tax base insurance claims and reserve deduction, may be necessary within the coming year.

Cincinnati Financial Corporation - 2018 10-K - Page 163

The statute of limitations for federal tax purposes has closed for tax years 2014 and earlier. There are no federal returns under examination and we have not been notified of any upcoming IRS examinations. In addition to our IRS filings, we file income tax returns with immaterial amounts in various state jurisdictions. The statute of limitations for state income tax purposes has closed for tax years 2014 and earlier. There are no state income returns under examination and we have not been notified of any upcoming state examinations.

Income taxes paid in our consolidated statements of cash flows are shown net of refunds received. We received no refunds in 2018, $18 million in 2017 and $2 million in 2016.

Cincinnati Financial Corporation - 2018 10-K - Page 164

NOTE 12 – Net Income Per Common Share

Basic earnings per share are computed based on the weighted average number of common shares outstanding. Diluted earnings per share are computed based on the weighted average number of common and dilutive potential common shares outstanding using the treasury stock method. The table shows calculations for basic and diluted earnings per share:

(In millions, except per share data)		Years ended December 31,
	2018				2017				2016
Numerator:
Net income—basic and diluted		$	287			$	1,045			$	591
Denominator:
Basic weighted-average common shares outstanding		163.2				164.2				164.5
Effect of share-based awards:
Stock options		0.8				1.1				1.1
Nonvested shares		0.5				0.7				0.9
Diluted weighted-average shares		164.5				166.0				166.5
Earnings per share:
Basic		$	1.76			$	6.36			$	3.59
Diluted		1.75				6.29				3.55
Number of anti-dilutive share-based awards		1.3				0.7				0.3

The sources of dilution of our common shares are certain equity-based awards as discussed in Note 17, Share-Based Associate Compensation Plans. The above table includes the number of anti-dilutive share-based awards at year-end 2018, 2017 and 2016. We did not include these share-based awards in the computation of net income per common share (diluted) because their exercise would have anti-dilutive effects. Our 2017 net income and basic and diluted earnings per share were impacted by the Tax Act as discussed in Note 11, Income Taxes.

Cincinnati Financial Corporation - 2018 10-K - Page 165

NOTE 13 – Employee Retirement Benefits

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

We sponsor a defined contribution plan (401(k) plan) with matching company contributions totaling $18 million,

$16 million and $14 million during the years 2018, 2017 and 2016, respectively. Associates who are not accruing benefits under the pension plan are eligible to receive the company match of up to 6 percent of cash compensation. Participants vest in the company match for the 401(k) plan after three years of eligible service.

We maintain a supplemental executive retirement plan (SERP) with a benefit obligation of $10 million at

year-end 2018 and $9 million at year-end 2017, which is included in the projected benefit obligation. The company also makes available to a select group of associates the CFC Top Hat Savings Plan, a nonqualified deferred compensation plan, which had a fair value of $34 million and $31 million at December 31, 2018 and 2017, respectively. Company matching contributions to the CFC Top Hat Savings Plan totaled $1 million for the years 2018 and 2017 and less than $1 million for the year 2016.

Defined Benefit Pension Plan Assumptions

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

		Qualified Pension Plan						SERP
		2018			2017			2018			2017
Discount rate		4.34	%		3.73	%		4.25	%		3.61	%
Rate of compensation increase		2.25-3.25			2.75-3.25			2.25-3.25			2.75-3.25

To determine the discount rate for each plan, a theoretical settlement portfolio of high-quality rated corporate bonds was chosen to provide payments approximately matching the plan’s projected benefit payments. A single interest rate for each plan was determined resulting in a discounted value of the plan's benefit payments that equates to the market value of the selected bonds. The discount rate is reflective of current market interest rate conditions and our plan's liability characteristics. Based on this analysis, we increased the rate from the prior year by 0.61 percentage points for the qualified pension plan and by 0.64 percentage points for the SERP. Compensation increase assumptions reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases. The mortality assumption is updated annually to reflect the updated scale. The RP-2014 Employee Mortality Tables and RP-2014 Annuitant Mortality Tables for males and females projected generationally with Scale MP-2018, Scale MP-2017 and Scale MP-2016 were used for the years 2018, 2017 and 2016, respectively. The updated mortality table did not have a significant impact on our consolidated financial statements as our qualified plan assumes the majority of benefits will be paid in the form of lump sums.

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

		Qualified Pension Plan									SERP
		2018			2017			2016			2018			2017			2016
Discount rate		3.73	%		4.30	%		4.55	%		3.61	%		4.10	%		4.30	%
Expected return on plan assets		7.25			7.25			7.25			n/a			n/a			n/a
Rate of compensation increase		2.75-3.25			2.75-3.25			2.75-3.25			2.75-3.25			2.75-3.25			2.75-3.25

Cincinnati Financial Corporation - 2018 10-K - Page 166

The discount rate was decreased by 0.57 percentage points for the qualified pension plan and 0.49 percentage points for the SERP due to market interest rate conditions at the beginning of 2018. The discount rate assumptions for our benefit obligation generally track with high-quality rated corporate bond yields chosen in our theoretical settlement portfolio, and yearly adjustments reflect any changes to those bond yields. We believe the expected return on plan assets is representative of the expected long-term rate of return on these assets, which is consistent with 2018 expectations of interest rates and based partially on the fact that the plan’s common stock holdings pay dividends. We review historical actual return on plan assets when determining our expected long-term rate of return. Total portfolio return for 2018 was negative 1.7 percent and for 2017 was 17.4 percent. Our compensation increase assumptions in 2018 reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases.

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

(Dollars in millions)		At December 31,
		2018				2017
Change in projected benefit obligation:
Benefit obligation, January 1		$	351			$	340
Service cost		11				11
Interest cost		13				14
Actuarial (gain) loss		(19		)		20
Benefits paid		(38		)		(34		)
Projected benefit obligation, December 31		$	318			$	351
Change in plan assets:
Fair value of plan assets, January 1		$	345			$	315
Actual return on plan assets		(4		)		52
Employer contribution		15				12
Benefits paid		(38		)		(34		)
Fair value of plan assets, December 31		$	318			$	345
Funded status, December 31		$	—			$	(6	)
Accumulated benefit obligation		$	297			$	322

Our funded status improved for 2018 primarily due to actuarial gains from increases in discount rates and assumed lump sum rates partially offset by lower returns on plan assets.

Cincinnati Financial Corporation - 2018 10-K - Page 167

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

(Dollars in millions)		At December 31,
		2018				2017
Pension amounts recognized in the consolidated balance sheets:
Other liabilities		$	—			$	(6	)
Total		$	—			$	(6	)
Pension amounts recognized in accumulated other comprehensive income:
Net actuarial loss		$	16			$	12
Prior service cost		—				—
Total		$	16			$	12

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

(Dollars in millions)		Years ended December 31,
		2018				2017				2016
Net periodic benefit cost:
Service cost		$	11			$	11			$	11
Non-service costs (benefit):
Interest cost		13				14				14
Expected return on plan assets		(22		)		(21		)		(19		)
Amortization of actuarial loss and prior service cost		1				2				3
Other		2				1				—
Net periodic benefit cost		$	5			$	7			$	9
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial (gain) loss		$	7			$	(11	)		$	(13	)
Amortization of actuarial loss		(3		)		(3		)		(2		)
Amortization of prior service cost		—				—				(1		)
Total recognized in other comprehensive (income) loss		$	4			$	(14	)		$	(16	)
Total recognized in net periodic benefit cost and other comprehensive (income) loss		$	9			$	(7	)		$	(7	)

The 2018 amount recognized in net periodic benefit cost and other comprehensive income increased from 2017. The 2018 change in the amount recognized in other comprehensive income from 2017 is largely due to changes in the actuarial loss resulting from decreases in discount and assumed lump sum rates. The estimated costs to be amortized from AOCI into net periodic benefit cost over the next year for our plans are $1 million in actuarial loss and less than $1 million in prior service cost.

Service costs and non-service costs (benefit) are allocated in the same proportion primarily to underwriting, acquisition and insurance expenses line item with the remainder allocated to the insurance losses and contract holders' benefits line item on the consolidated statements of income for 2018, 2017 and 2016.

Cincinnati Financial Corporation - 2018 10-K - Page 168

Defined Benefit Pension Plan Assets

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

Excluding cash, during 2018 we held approximately 75 percent of our pension portfolio in domestic common equity investments. The remainder of the portfolio consisted of 10 percent in states, municipalities and taxable political subdivisions fixed-maturity investments, 13 percent in domestic corporate fixed-maturity investments and 2 percent in United States government. Our common equity portfolio consisted of 21 percent in the financial sector, 20 percent in the information technology sector, 14 percent in the healthcare sector, 11 percent in the industrial sector and 10 percent in the consumer discretionary industrial sector at year-end 2018. No additional sectors accounted for 10 percent or more of our common equity portfolio balance at year-end 2018.

Investments in securities are valued based on the fair value hierarchy outlined in Note 3, Fair Value Measurements. The pension plan did not have any liabilities carried at fair value during the years ended December 31, 2018 and 2017. There have been no transfers between Level 1 and Level 2 for the years ended December 31, 2018 and 2017. The following table shows the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2018 and 2017. Excluded from the table below is cash on hand of $32 million and $18 million at December 31, 2018 and 2017, respectively.

(Dollars in millions)		Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
At December 31, 2018
Fixed maturities, available for sale:
States, municipalities and political subdivisions		$	—			$	29			$	—			$	29
Corporate		—				37				—				37
United States Government		5				—				—				5
Total fixed maturities, available for sale		5				66				—				71
Common equities		215				—				—				215
Total		$	220			$	66			$	—			$	286
At December 31, 2017
Fixed maturities, available for sale:
States, municipalities and political subdivisions		$	—			$	31			$	—			$	31
Corporate		—				34				—				34
Total fixed maturities, available for sale		—				65				—				65
Common equities, available for sale		262				—				—				262
Total		$	262			$	65			$	—			$	327

Cincinnati Financial Corporation - 2018 10-K - Page 169

Our pension plan assets included 232,113 shares of the company’s common stock at both December 31, 2018 and 2017, which had a fair value of $18 million and $17 million at December 31, 2018 and 2017, respectively. The defined benefit pension plan did not purchase or sell any shares of our common stock during 2018 and 2017. The company paid less than $1 million in 2018 and $1 million in 2017 in cash dividends on our common stock to the pension plan.

We estimate $4 million of benefit payments from the SERP during 2019. We expect to make the following benefit payments for our qualified plan and SERP, reflecting expected future service:

(Dollars in millions)		Years ended December 31,
		2019				2020				2021				2022				2023				2024 - 2028
Expected future benefit payments		$	43			$	23			$	22			$	21			$	22			$	140

Cincinnati Financial Corporation - 2018 10-K - Page 170

NOTE 14 – Statutory Accounting Information

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

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

(Dollars in millions)		Net income												Capital and surplus
		Years ended December 31,												At December 31,
		2018				2017				2016				2018				2017
The Cincinnati Insurance Company		$	626			$	401			$	434			$	4,919			$	5,094
The Cincinnati Casualty Company		16				21				11				398				392
The Cincinnati Indemnity Company		5				4				4				102				100
The Cincinnati Specialty Underwriters Insurance Company		69				58				57				479				436
The Cincinnati Life Insurance Company		—				12				2				191				195

NOTE 15 – Transactions With Affiliated Parties

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

$7 million in 2018, 2017 and 2016, on premium volume of $45 million for 2018 and 2017 and $44 million for 2016.

Cincinnati Financial Corporation - 2018 10-K - Page 171

NOTE 16 – Commitments and Contingent Liabilities

In the ordinary course of conducting business, the company and its subsidiaries are named as defendants in various legal proceedings. Most of these proceedings are claims litigation involving the company's insurance subsidiaries in which the company is either defending or providing indemnity for third-party claims brought against insureds or litigating first-party coverage claims. The company accounts for such activity through the establishment of unpaid loss and loss expense reserves. We believe that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, is immaterial to our consolidated financial condition, results of operations and cash flows.

The company and its subsidiaries also are occasionally involved in other legal and regulatory proceedings, some of which assert claims for substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national class. Such proceedings have alleged, for example, breach of an alleged duty to search national databases to ascertain unreported deaths of insureds under life insurance policies. The company's insurance subsidiaries also are occasionally parties to individual actions in which extra-contractual damages, punitive damages or penalties are sought, such as claims alleging bad faith handling of insurance claims or writing unauthorized coverage or claims alleging discrimination by former or current associates.

On a quarterly basis, we review these outstanding matters. Under current accounting guidance, we establish accruals when it is probable that a loss has been incurred and we can reasonably estimate its potential exposure. The company accounts for such probable and estimable losses, if any, through the establishment of legal expense reserves. Based on our quarterly review, we believe that our accruals for probable and estimable losses are reasonable and that the amounts accrued do not have a material effect on our consolidated financial condition or results of operations. However, if any one or more of these matters results in a judgment against us or settlement for an amount that is significantly greater than the amount accrued, the resulting liability could have a material effect on the company's consolidated results of operations or cash flows. Based on our most recent review, our estimate for any other matters for which the risk of loss is not probable, but more than remote, is immaterial.

Cincinnati Financial Corporation - 2018 10-K - Page 172

NOTE 17 – Share-Based Associate Compensation Plans

Four equity compensation plans currently permit us to grant various types of equity awards. We currently grant incentive stock options, nonqualified stock options, service-based restricted stock units and performance-based restricted stock units to associates, including some with market-based performance objectives under our shareholder-approved plans. We also have a Holiday Stock Plan that permits annual awards of one share of common stock to each full-time associate for each full calendar year of service up to a maximum of 10 shares. One of our equity compensation plans permits us to grant stock to our outside directors as a component of their annual compensation. We used treasury shares for share-based compensation award issues or exercises during 2018 and 2017.

Share-based compensation cost after tax was $23 million, $17 million and $15 million for the years ended

December 31, 2018, 2017 and 2016, respectively. The related income tax benefit recognized was $5 million,

$9 million, and $8 million for the years ended December 31, 2018, 2017 and 2016, respectively. Options exercised during the years ended December 31, 2018, 2017 and 2016, had intrinsic value of $15 million, $19 million and $25 million, respectively. Intrinsic value is the market price less the exercise price. Options vested during the years ended December 31, 2018, 2017 and 2016, had total intrinsic value of $6 million, $8 million and $11 million, respectively.

As of December 31, 2018, we had $30 million of unrecognized total compensation cost related to nonvested stock options and restricted stock unit awards. That cost will be recognized over a weighted-average period of 1.7 years.

Stock Options

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

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

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

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

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

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

		2018		2017		2016
Weighted-average expected term		7-8 years		8 years		8 years
Expected volatility		15.04-15.10%		16.95%		24.88-25.75%
Dividend yield		2.98%		2.83%		2.58-3.12%
Risk-free rates		2.77-2.83%		2.33%		1.44-1.60%
Weighted-average fair value of options granted during the period		$9.87		$10.79		$13.21

Cincinnati Financial Corporation - 2018 10-K - Page 173

Below is a summary of option information for the year 2018:

(Dollars in millions, except exercise price. Shares in thousands)		Shares			Weighted- average exercise price				Aggregate intrinsic value				Weighted-average remaining contractual life
Outstanding option shares at January 1, 2018		3,066			$	49.14
Granted		757			71.19
Exercised		(384	)		37.00
Forfeited or expired		(165	)		40.90
Outstanding option shares at December 31, 2018		3,274			56.08				$	68			6.08 years
Options exercisable at end of period		2,004			$	47.09			$	60			4.47 years

Cash received from the exercise of options was $9 million, $13 million and $21 million for the years ended December 31, 2018, 2017 and 2016, respectively. We acquired 69,649, 96,030 and 186,097 shares totaling

$5 million, $7 million and $13 million, respectively, from associates in consideration for option exercises during 2018, 2017 and 2016. The weighted-average remaining contractual life for options expected to vest as of December 31, 2018, was 8.62 years.

Under all active shareholder approved plans, a total of 17.3 million shares were authorized to be granted. At December 31, 2018, 9.7 million shares remained available for future issuance under the plans. During 2018, we granted 14,600 shares of common stock to our directors for 2017 board service fees.

Restricted Stock Units

Service-based restricted stock units granted to associates are valued at fair value of the shares on the date of grant less the present value of the dividends that holders of restricted stock units do not receive on the shares underlying the restricted stock units during the vesting period. Service-based restricted stock units generally cliff vest three years after the date of grant. We also grant restricted stock units which vest on a three year ratable vesting schedule. Service-based restricted stock units vested during the year had an intrinsic value of $24 million for 2018 and $23 million for the years 2017 and 2016.

We have performance-based awards that vest on the first day of March after a three-calendar-year performance period. These awards vest according to the level of three-year total shareholder return achieved compared with a peer group over a three-year performance period with payouts ranging from 0 to 200 percent for awards granted in 2018, 2017 and 2016. Three-year total shareholder return is calculated by using annualized total return of a stock to an investor due to capital gain appreciation plus reinvestment of all dividends.

For the three-year performance period ended December 31, 2018, our total shareholder return exceeded four of our nine peers. We expect payout of these shares at the threshold level to occur in March of 2019. During 2018, we issued 80,666 shares of performance-based restricted stock units at the target-level performance hurdle for the three-year performance period ended December 31, 2017, as our total shareholder return exceeded five of nine peers in our 2015 peer group. We issued 87,228 shares of performance-based restricted stock units during 2017 at the target-level performance hurdle for the three-year performance period ended December 31, 2016, as we achieved a three-year total shareholder return that exceeded five of nine peers in our 2014 peer group. Performance-based awards vested during the year had an intrinsic value of $6 million, $7 million and $6 million for the years ended December 31, 2018, 2017 and 2016, respectively.

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

Cincinnati Financial Corporation - 2018 10-K - Page 174

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

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

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

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

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

		2018		2017		2016
Expected term		2.89 years		2.89 years		2.44-2.88 years
Expected volatility		16.01-26.32%		15.75-28.35%		15.42-33.64%
Dividend yield		2.81%		2.83%		2.58-3.12%
Risk-free rates		2.22%		1.44%		0.77-0.87%

Below is a summary of service-based and performance-based share information, assuming a target payout for performance-based shares, for the year 2018:

(Shares in thousands)		Service-based shares			Weighted- average grant date fair value				Performance-based shares			Weighted- average grant date fair value
Nonvested at January 1, 2018		843			$	56.16			206			$	53.35
Granted		314			65.31				57			63.29
Vested		(323	)		49.23				(81	)		45.73
Forfeited or canceled		(21	)		61.44				—			—
Nonvested at December 31, 2018		813			62.31				182			59.83

Cincinnati Financial Corporation - 2018 10-K - Page 175

NOTE 18 – Segment Information

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

•	Commercial lines insurance

•	Personal lines insurance

•	Excess and surplus lines insurance

•	Life insurance

•	Investments

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

Revenues come primarily from unaffiliated customers:

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

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

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

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

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

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

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

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

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

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

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

Cincinnati Financial Corporation - 2018 10-K - Page 176

Segment information is summarized in the following table:

(Dollars in millions)		Years ended December 31,
		2018				2017				2016
Revenues:
Commercial lines insurance
Commercial casualty		$	1,075			$	1,072			$	1,050
Commercial property		920				903				867
Commercial auto		664				634				594
Workers' compensation		324				335				354
Other commercial		235				221				224
Commercial lines insurance premiums		3,218				3,165				3,089
Fee revenues		5				5				5
Total commercial lines insurance		3,223				3,170				3,094
Personal lines insurance
Personal auto		614				582				543
Homeowner		563				518				486
Other personal		159				141				132
Personal lines insurance premiums		1,336				1,241				1,161
Fee revenues		5				5				4
Total personal lines insurance		1,341				1,246				1,165
Excess and surplus lines insurance		234				209				183
Fee revenues		1				1				1
Total excess and surplus lines insurance		235				210				184
Life insurance premiums		250				232				228
Fee revenues		4				5				5
Total life insurance		254				237				233
Investments
Investment income, net of expenses		619				609				595
Investment gains and losses, net		(402		)		148				124
Total investment revenue		217				757				719
Other
Cincinnati Re insurance premiums		132				107				49
Other		5				5				5
Total other revenue		137				112				54
Total revenues		$	5,407			$	5,732			$	5,449
Income (loss) before income taxes:
Insurance underwriting results
Commercial lines insurance		$	151			$	119			$	184
Personal lines insurance		(20		)		(32		)		(12		)
Excess and surplus lines insurance		63				61				62
Life insurance		8				(1		)		1
Investments		121				664				629
Other		(72		)		(81		)		(52		)
Total income before income taxes		$	251			$	730			$	812
		December 31,				December 31,
Identifiable assets:		2018				2017
Property casualty insurance		$	3,285			$	2,863
Life insurance		1,424				1,409
Investments		16,741				17,112
Other		485				459
Total		$	21,935			$	21,843

Cincinnati Financial Corporation - 2018 10-K - Page 177

NOTE 19 – Quarterly Supplementary Data

This table includes unaudited quarterly financial information for the years ended December 31, 2018 and 2017:

(Dollars in millions, except per share data)		Quarter
		1st				2nd				3rd				4th				Full year
2018
Revenues		$	1,224			$	1,558			$	1,915			$	710			$	5,407
Income (loss) before income taxes		(50		)		264				618				(581		)		251
Net income (loss)		(31		)		217				553				(452		)		287
Net income (loss) per common share—basic		(0.19		)		1.33				3.40				(2.78		)		1.76
Net income (loss) per common share—diluted		(0.19		)		1.32				3.38				(2.78		)		1.75
2017
Revenues		$	1,523			$	1,386			$	1,412			$	1,411			$	5,732
Income before income taxes		276				128				129				197				730
Net income		201				100				102				642				1,045
Net income per common share—basic		1.22				0.61				0.62				3.92				6.36
Net income per common share—diluted		1.21				0.60				0.61				3.88				6.29

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

Cincinnati Financial Corporation - 2018 10-K - Page 178