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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 (Mark one)
☑       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the quarterly period ended June 30, 2019.
☐       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the transition period from _____________________ to _____________________.
Commission file number 0-4604
CINCINNATI FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Ohio
 
31-0746871
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
 
6200 S. Gilmore Road,
Fairfield,
Ohio
 
45014-5141
(Address of principal executive offices)
 
(Zip code)
Registrant's telephone number, including area code: (513) 870-2000
N/A
(Former name or former address, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock
 
CINF
 
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
☑Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☑Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☑ Large accelerated filer ☐ Accelerated filer ☐ Nonaccelerated filer ☐ Smaller reporting company
☐ Emerging growth company
☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
☐Yes ☑ No
As of July 24, 2019, there were 163,336,240 shares of common stock outstanding.



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



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


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

 
 

Investments
 
 

 
 

Fixed maturities, at fair value (amortized cost: 2019—$10,832; 2018—$10,643)
 
$
11,320

 
$
10,689

Equity securities, at fair value (cost: 2019—$3,471; 2018—$3,368)
 
7,012

 
5,920

Other invested assets
 
271

 
123

Total investments
 
18,603

 
16,732

Cash and cash equivalents
 
803

 
784

Investment income receivable
 
130

 
132

Finance receivable
 
76

 
71

Premiums receivable
 
1,913

 
1,644

Reinsurance recoverable
 
515

 
484

Prepaid reinsurance premiums
 
70

 
44

Deferred policy acquisition costs
 
786

 
738

Land, building and equipment, net, for company use (accumulated depreciation:
   2019—$267; 2018—$265)
 
207

 
195

Other assets
 
375

 
308

Separate accounts
 
859

 
803

Total assets
 
$
24,337

 
$
21,935

 
 
 
 
 
Liabilities
 
 

 
 

Insurance reserves
 
 

 
 

Loss and loss expense reserves
 
$
6,009

 
$
5,707

Life policy and investment contract reserves
 
2,798

 
2,779

Unearned premiums
 
2,896

 
2,516

Other liabilities
 
828

 
804

Deferred income tax
 
932

 
627

Note payable
 
37

 
32

Long-term debt and lease obligations
 
847

 
834

Separate accounts
 
859

 
803

Total liabilities
 
15,206

 
14,102

 
 
 
 
 
Commitments and contingent liabilities (Note 12)
 


 


 
 
 
 
 
Shareholders' Equity
 
 

 
 

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

 
397

Paid-in capital
 
1,286

 
1,281

Retained earnings
 
8,566

 
7,625

Accumulated other comprehensive income
 
364

 
22

Treasury stock at cost (2019—35.0 million shares and 2018—35.5 million shares)
 
(1,482
)
 
(1,492
)
Total shareholders' equity
 
9,131

 
7,833

Total liabilities and shareholders' equity
 
$
24,337

 
$
21,935

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

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


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

 
 

 
 

 
 

Earned premiums
$
1,384

 
$
1,294

 
$
2,717

 
$
2,554

Investment income, net of expenses
160

 
154

 
317

 
304

Investment gains and losses, net
364

 
105

 
1,027

 
(86
)
Fee revenues
3

 
4

 
7

 
8

Other revenues
2

 
1

 
4

 
2

Total revenues
1,913

 
1,558

 
4,072

 
2,782

Benefits and Expenses
 

 
 

 
 

 
 

Insurance losses and contract holders' benefits
936

 
883

 
1,796

 
1,737

Underwriting, acquisition and insurance expenses
430

 
395

 
841

 
798

Interest expense
13

 
13

 
26

 
26

Other operating expenses
4

 
3

 
12

 
7

 Total benefits and expenses
1,383

 
1,294

 
2,675

 
2,568

Income Before Income Taxes
530

 
264

 
1,397

 
214

Provision (Benefit) for Income Taxes
 

 
 

 
 

 
 

Current
28

 
33

 
56

 
61

Deferred
74

 
14

 
218

 
(33
)
Total provision for income taxes
102

 
47

 
274

 
28

Net Income
$
428

 
$
217

 
$
1,123

 
$
186

Per Common Share
 

 
 

 
 

 
 

Net income—basic
$
2.62

 
$
1.33

 
$
6.89

 
$
1.13

Net income—diluted
2.59

 
1.32

 
6.81

 
1.12

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

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


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Net Income
 
$
428

 
$
217

 
$
1,123

 
$
186

Other Comprehensive Income (Loss)
 
 

 
 

 
 

 
 

Change in unrealized gains on investments, net of tax (benefit) of $43, ($18), $93 and ($64), respectively
 
157

 
(62
)
 
349

 
(237
)
Amortization of pension actuarial loss and prior service cost, net of tax of $0, $0, $0 and $0, respectively
 
1

 
1

 
1

 
1

Change in life deferred acquisition costs, life policy reserves and other, net of tax (benefit) of ($1), $1, ($2) and $2, respectively
 
(4
)
 
1

 
(8
)
 
6

Other comprehensive income (loss)
 
154

 
(60
)
 
342

 
(230
)
Comprehensive Income (Loss)
 
$
582

 
$
157

 
$
1,465

 
$
(44
)
 
 
 
 
 
 
 
 
 
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.


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


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

2018
Common Stock
 
 
 
 
 
 
 
 
   Beginning of period
 
$
397

 
$
397

 
$
397

 
$
397

   Share-based awards
 
—

 
—

 
—

 
—

   End of period
 
397

 
397

 
397

 
397

 
 
 
 
 
 
 
 
 
Paid-In Capital
 
 
 
 
 
 
 
 
   Beginning of period
 
1,277

 
1,258

 
1,281

 
1,265

   Share-based awards
 
1

 
—

 
(13
)
 
(17
)
   Share-based compensation
 
7

 
7

 
16

 
16

   Other
 
1

 
1

 
2

 
2

   End of period
 
1,286

 
1,266

 
1,286

 
1,266

 
 
 
 
 
 
 
 
 
Retained Earnings
 
 
 
 
 
 
 
 
   Beginning of period
 
8,229

 
7,565

 
7,625

 
5,180

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

 
—

 
—

 
2,503

Adjusted beginning of year
 
8,229

 
7,565

 
7,625

 
7,683

   Net income
 
428

 
217

 
1,123

 
186

Dividends declared (per share of $0.56, $0.53, $1.12 and
$1.06, respectively)
 
(91
)
 
(86
)
 
(182
)
 
(173
)
   End of period
 
8,566

 
7,696

 
8,566

 
7,696

 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
   Beginning of period
 
210

 
115

 
22

 
2,788

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

 
—

 
—

 
(2,503
)
Adjusted beginning of year
 
210

 
115

 
22

 
285

   Other comprehensive income (loss)
 
154

 
(60
)
 
342

 
(230
)
   End of period
 
364

 
55

 
364

 
55

 
 
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
 
 
 
   Beginning of period
 
(1,483
)
 
(1,389
)
 
(1,492
)
 
(1,387
)
   Share-based awards
 
3

 
2

 
16

 
16

   Shares acquired - share repurchase authorization
 
—

 
(110
)
 
—

 
(125
)
   Shares acquired - share-based compensation plans
 
(2
)
 
(1
)
 
(7
)
 
(3
)
   Other
 
—

 
—

 
1

 
1

   End of period
 
(1,482
)
 
(1,498
)
 
(1,482
)
 
(1,498
)
 
 

 

 
 
 
 
      Total Shareholders' Equity
 
$
9,131

 
$
7,916

 
$
9,131

 
$
7,916

 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
Common Stock - Shares Outstanding
 
 
 
 
 
 
 
 
   Beginning of period
 
163.2

 
164.1

 
162.8

 
163.9

   Share-based awards
 
0.1

 
0.1

 
0.5

 
0.5

   Shares acquired - share repurchase authorization
 
—

 
(1.6
)
 
—

 
(1.8
)
   End of period
 
163.3

 
162.6

 
163.3

 
162.6

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

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


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

 
 

Net income
 
$
1,123

 
$
186

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

 
 

Depreciation and amortization
 
36

 
32

Investment gains and losses, net
 
(1,022
)
 
90

Share-based compensation
 
16

 
16

Interest credited to contract holders'
 
21

 
23

Deferred income tax expense
 
218

 
(33
)
Changes in:
 
 

 
 

Investment income receivable
 
2

 
4

Premiums and reinsurance receivable
 
(231
)
 
(129
)
Deferred policy acquisition costs
 
(68
)
 
(41
)
Other assets
 
(47
)
 
(14
)
Loss and loss expense reserves
 
25

 
195

Life policy and investment contract reserves
 
52

 
47

Unearned premiums
 
292

 
174

Other liabilities
 
(8
)
 
(85
)
Current income tax receivable/payable
 
67

 
(1
)
Net cash provided by operating activities
 
476

 
464

Cash Flows From Investing Activities
 
 

 
 

Sale of fixed maturities
 
52

 
5

Call or maturity of fixed maturities
 
625

 
674

Sale of equity securities
 
142

 
134

Purchase of fixed maturities
 
(765
)
 
(905
)
Purchase of equity securities
 
(212
)
 
(149
)
Investment in finance receivables
 
(17
)
 
(16
)
Collection of finance receivables
 
13

 
12

Investment in buildings and equipment
 
(13
)
 
(9
)
Change in other invested assets, net
 
(41
)
 
(11
)
Net cash used in investing activities
 
(216
)
 
(265
)
Cash Flows From Financing Activities
 
 

 
 

Payment of cash dividends to shareholders
 
(175
)
 
(166
)
Shares acquired - share repurchase authorization
 
—

 
(125
)
Changes in note payable
 
5

 
37

Proceeds from stock options exercised
 
7

 
5

Contract holders' funds deposited
 
44

 
43

Contract holders' funds withdrawn
 
(93
)
 
(88
)
Other
 
(29
)
 
(41
)
Net cash used in financing activities
 
(241
)
 
(335
)
Net change in cash and cash equivalents
 
19

 
(136
)
Cash and cash equivalents at beginning of year
 
784

 
657

Cash and cash equivalents at end of period
 
$
803

 
$
521

Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Interest paid
 
$
27

 
$
26

Income taxes received (paid)
 
13

 
(60
)
Noncash Activities
 
 

 
 

Conversion of securities
 
$
—

 
$
3

Equipment acquired under capital lease obligations
 
7

 
8

Cashless exercise of stock options
 
7

 
3

Other assets and other liabilities
 
28

 
28

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

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


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

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

The company adopted this ASU effective January 1, 2019, and it did not have a material impact on our company's consolidated financial position, cash flows or results of operations. As of June 30, 2019, this ASU resulted in recognizing a right-of-use asset and lease liability each for $15 million recorded in other assets and long-term debt and lease obligations line items, respectively, on our condensed consolidated balance sheets. The company has elected the practical expedient package for carrying forward historical lease classifications, not re-evaluating for embedded leases and not reassessing initial direct costs. The company also elected additional practical expedients to not recognize short-term leases on the balance sheet and to only combine lease and nonlease components for certain asset classes. We also elected not to restate prior periods. In support of our insurance operations, the company leases real estate properties which qualify as operating leases and also leases equipment and autos which qualify as finance leases. The lease term for real estate properties is typically five years while the term for equipment and autos is three to six years.

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

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



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

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

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

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


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


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; however, it is not expected to have a material impact on our company's consolidated financial position, cash flows or results of operations.


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


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

 
 

 
 

 
 

Corporate
 
$
5,815

 
$
269

 
$
13

 
$
6,071

States, municipalities and political subdivisions
 
4,331

 
218

 
—

 
4,549

Commercial mortgage-backed
 
289

 
12

 
—

 
301

Government-sponsored enterprises
 
283

 
—

 
1

 
282

United States government
 
97

 
3

 
—

 
100

Foreign government
 
17

 
—

 
—

 
17

Total
 
$
10,832

 
$
502

 
$
14

 
$
11,320

At December 31, 2018
 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,712

 
$
85

 
$
87

 
$
5,710

States, municipalities and political subdivisions
 
4,251

 
84

 
31

 
4,304

Commercial mortgage-backed
 
287

 
3

 
2

 
288

Government-sponsored enterprises
 
316

 
1

 
7

 
310

United States government
 
67

 
1

 
1

 
67

Foreign government
 
10

 
—

 
—

 
10

Total
 
$
10,643

 
$
174

 
$
128

 
$
10,689

 
 
 
 
 
 
 
 
 

 
The net unrealized investment gains in our fixed-maturity portfolio at June 30, 2019, 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 June 30, 2019, and December 31, 2018. At June 30, 2019, Microsoft Corporation (Nasdaq:MSFT) was our largest single equity holding with a fair value of
$336 million, which was 4.9% of our publicly traded common equities portfolio and 1.8% of the total investment portfolio.


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


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

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
78

 
$
2

 
$
294

 
$
11

 
$
372

 
$
13

States, municipalities and political subdivisions
 
13

 
—

 
21

 
—

 
34

 
—

Commercial mortgage-backed
 
—

 
—

 
5

 
—

 
5

 
—

Government-sponsored enterprises
 
7

 
—

 
117

 
1

 
124

 
1

United States government
 
5

 
—

 
4

 
—

 
9

 
—

Foreign government
 
1

 
—

 
—

 
—

 
1

 
—

Total
 
$
104

 
$
2

 
$
441

 
$
12

 
$
545

 
$
14

At December 31, 2018
 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
2,082

 
$
51

 
$
501

 
$
36

 
$
2,583

 
$
87

States, municipalities and political subdivisions
 
823

 
18

 
340

 
13

 
1,163

 
31

Commercial mortgage-backed
 
77

 
—

 
64

 
2

 
141

 
2

Government-sponsored enterprises
 
49

 
1

 
211

 
6

 
260

 
7

United States government
 
—

 
—

 
33

 
1

 
33

 
1

Total
 
$
3,031

 
$
70

 
$
1,149

 
$
58

 
$
4,180

 
$
128

 
 
 
 
 
 
 
 
 
 
 
 
 


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

 
 

 
 

Due in one year or less
 
$
491

 
$
496

 
4.4
%
Due after one year through five years
 
3,004

 
3,097

 
27.4

Due after five years through ten years
 
3,750

 
3,929

 
34.7

Due after ten years
 
3,587

 
3,798

 
33.5

Total
 
$
10,832

 
$
11,320

 
100.0
%
 
 
 
 
 
 
 


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

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


The following table provides investment income and investment gains and losses, net:
(Dollars in millions)
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Investment income:
 
 
 
 
 
 
 
Interest
$
111

 
$
112

 
$
222

 
$
222

Dividends
50

 
44

 
96

 
86

Other
2

 
1

 
5

 
2

Total
163

 
157

 
323

 
310

Less investment expenses
3

 
3

 
6

 
6

Total
$
160

 
$
154

 
$
317

 
$
304

 
 
 
 
 
 
 
 
Investment gains and losses, net:
 

 
 

 
 

 
 

Equity securities:
 

 
 

 
 

 
 

Investment gains and losses on securities sold, net
$
11

 
$
4

 
$
23

 
$
7

Unrealized gains and losses on securities still held, net
355

 
101

 
999

 
(97
)
Subtotal
366

 
105

 
1,022

 
(90
)
Fixed maturities:
 

 
 

 
 

 
 

Gross realized gains
1

 
3

 
3

 
7

Gross realized losses
(2
)
 
(1
)
 
(2
)
 
(1
)
Subtotal
(1
)
 
2

 
1

 
6

 
 
 
 
 
 
 
 
Other
(1
)
 
(2
)
 
4

 
(2
)
Total
$
364

 
$
105

 
$
1,027

 
$
(86
)
 
 
 
 
 
 
 
 

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

At June 30, 2019, 100 fixed-maturity securities with a total unrealized loss of $12 million had been in an unrealized loss position for 12 months or more. Of that total, one fixed-maturity security had a fair value below 70% of amortized cost. At December 31, 2018, 400 fixed-maturity securities with a total unrealized loss of $58 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity securities had fair values below 70% of amortized cost.
 
NOTE 3 – Fair Value Measurements
In accordance with accounting guidance for fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for the valuation technique used, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2018, and ultimately management determines fair value. See our 2018 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 141, for information on characteristics and valuation techniques used in determining fair value.


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


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

 
 

 
 

 
 

Corporate
 
$
—

 
$
6,070

 
$
1

 
$
6,071

States, municipalities and political subdivisions
 
—

 
4,545

 
4

 
4,549

Commercial mortgage-backed
 
—

 
301

 
—

 
301

Government-sponsored enterprises
 
—

 
282

 
—

 
282

United States government
 
100

 
—

 
—

 
100

Foreign government
 
—

 
17

 
—

 
17

Subtotal
 
100

 
11,215

 
5

 
11,320

Common equities
 
6,821

 
—

 
—

 
6,821

Nonredeemable preferred equities
 
—

 
191

 
—

 
191

Separate accounts taxable fixed maturities
 
—

 
848

 
—

 
848

Top Hat savings plan mutual funds and common
equity (included in Other assets)
 
43

 
—

 
—

 
43

Total
 
$
6,964

 
$
12,254

 
$
5

 
$
19,223

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

 
 

 
 

 
 

Corporate
 
$
—

 
$
5,709

 
$
1

 
$
5,710

States, municipalities and political subdivisions
 
—

 
4,300

 
4

 
4,304

Commercial mortgage-backed
 
—

 
288

 
—

 
288

Government-sponsored enterprises
 
—

 
310

 
—

 
310

United States government
 
67

 
—

 
—

 
67

Foreign government
 
—

 
10

 
—

 
10

Subtotal
 
67

 
10,617

 
5

 
10,689

Common equities
 
5,742

 
—

 
—

 
5,742

Nonredeemable preferred equities
 
—

 
178

 
—

 
178

Separate accounts taxable fixed maturities
 
—

 
791

 
—

 
791

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

 
—

 
—

 
34

Total
 
$
5,843

 
$
11,586

 
$
5

 
$
17,434

 
 
 
 
 
 
 
 
 
 
Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value as of June 30, 2019. Total Level 3 assets continue to be less than 1% of financial assets measured at fair value in the condensed consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.

There were no changes in Level 3 assets for the three months ended June 30.
 
 
 
 
 
 
 

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


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

 
$
4

 
$
5

Total gains or losses (realized/unrealized):
 
 
 
 

 
 

Included in net income
 
—

 
—

 
—

Included in other comprehensive income
 
—

 
—

 
—

Purchases
 
—

 
—

 
—

Sales
 
—

 
—

 
—

Transfers into Level 3
 
—

 
—

 
—

Transfers out of Level 3
 
—

 
—

 
—

Ending balance, June 30, 2019
 
$
1

 
$
4

 
$
5

 
 
 
 
 
 
 
Beginning balance, January 1, 2018
 
$
1

 
$
5

 
$
6

Total gains or losses (realized/unrealized):
 
 
 
 

 
 
Included in net income (loss)
 
—

 
—

 
—

Included in other comprehensive income (loss)
 
—

 
(1
)
 
(1
)
Purchases
 
—

 
—

 
—

Sales
 
—

 
—

 
—

Transfers into Level 3
 
—

 
—

 
—

Transfers out of Level 3
 
—

 
—

 
—

Ending balance, June 30, 2018
 
$
1

 
$
4

 
$
5

 
 
 
 
 
 
 


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

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

 
$
27

 
$
28

 
$
28

6.920
%
 
2005
 
Senior debentures, due 2028
 
391

 
391

 
391

 
391

6.125
%
 
2004
 
Senior notes, due 2034
 
370

 
370

 
374

 
374

 

 
 
 
Total
 
$
788

 
$
788

 
$
793

 
$
793

 
 
 
 
 
 
 
 
 
 
 
 
 

 

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


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 June 30, 2019
 
 
 
 
Note payable
 
$
—

 
$
37

 
$
—

 
$
37

6.900% senior debentures, due 2028
 
—

 
34

 
—

 
34

6.920% senior debentures, due 2028
 
—

 
502

 
—

 
502

6.125% senior notes, due 2034
 
—

 
476

 
—

 
476

Total
 
$
—

 
$
1,049

 
$
—

 
$
1,049

 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
 
Note payable
 
$
—

 
$
32

 
$
—

 
$
32

6.900% senior debentures, due 2028
 
—

 
32

 
—

 
32

6.920% senior debentures, due 2028
 
—

 
471

 
—

 
471

6.125% senior notes, due 2034
 
—

 
440

 
—

 
440

Total
 
$
—

 
$
975

 
$
—

 
$
975

 
 
 
 
 
 
 
 
 

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

 
$
—

 
$
42

 
$
42

 
 
 
 
 
 
 
 
 
Deferred annuities
 
—

 
—

 
778

 
778

Structured settlements
 
—

 
205

 
—

 
205

Total
 
$
—

 
$
205

 
$
778

 
$
983

 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
 
Life policy loans
 
$
—

 
$
—

 
$
40

 
$
40

 
 
 
 
 
 
 
 
 
Deferred annuities
 
—

 
—

 
742

 
742

Structured settlements
 
—

 
185

 
—

 
185

Total
 
$
—

 
$
185

 
$
742

 
$
927

 
 
 
 
 
 
 
 
 

 
Outstanding principal and interest for these life policy loans totaled $33 million at June 30, 2019 and
December 31, 2018, respectively.
 
Recorded reserves for the deferred annuities were $771 million and $787 million at June 30, 2019 and December 31, 2018, respectively. Recorded reserves for the structured settlements were $152 million and $156 million at June 30, 2019 and December 31, 2018, respectively.



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


NOTE 4 – Property Casualty Loss and Loss Expenses
This table summarizes activity for our consolidated property casualty loss and loss expense reserves:
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Gross loss and loss expense reserves, beginning
   of period
 
$
5,886

 
$
5,293

 
$
5,646

 
$
5,219

Less reinsurance recoverable
 
266

 
184

 
238

 
187

Net loss and loss expense reserves, beginning
   of period
 
5,620

 
5,109

 
5,408

 
5,032

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

 
—

 
246

 
—

 
 
 
 
 
 
 
 
 
Net incurred loss and loss expenses related to:
 
 

 
 

 
 

 
 

Current accident year
 
947

 
852

 
1,804

 
1,691

Prior accident years
 
(84
)
 
(31
)
 
(151
)
 
(79
)
Total incurred
 
863

 
821

 
1,653

 
1,612

Net paid loss and loss expenses related to:
 
 

 
 

 
 

 
 

Current accident year
 
361

 
341

 
538

 
536

Prior accident years
 
437

 
354

 
1,084

 
873

Total paid
 
798

 
695

 
1,622

 
1,409

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

 
5,235

 
5,685

 
5,235

Plus reinsurance recoverable
 
269

 
188

 
269

 
188

Gross loss and loss expense reserves, end of
   period
 
$
5,954

 
$
5,423

 
$
5,954

 
$
5,423

 
 
 
 
 
 
 
 
 

 
We use actuarial methods, models and judgment to estimate, as of a financial statement date, the property casualty loss and loss expense reserves required to pay for and settle all outstanding insured claims, including incurred but not reported (IBNR) claims, as of that date. The actuarial estimate is subject to review and adjustment by an inter-departmental committee that includes actuarial, claims, underwriting, loss prevention and accounting management. This committee is familiar with relevant company and industry business, claims and underwriting trends, as well as general economic and legal trends that could affect future loss and loss expense payments. The amount we will actually have to pay for claims can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. The reserve for loss and loss expenses in the condensed consolidated balance sheets also included $55 million at June 30, 2019, and $45 million at June 30, 2018, for certain life and health loss and loss expense reserves.

For the three months ended June 30, 2019, we experienced $84 million of favorable development on prior accident years, including $58 million of favorable development in commercial lines, $14 million of favorable development in personal lines and $5 million of favorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $27 million for the workers' compensation line, $25 million for the commercial casualty line and $6 million for the commercial property line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Within personal lines, we recognized favorable reserve development of $15 million in personal auto.
 


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


For the six months ended June 30, 2019, we experienced $151 million of favorable development on prior accident years, including $120 million of favorable development in commercial lines, $11 million of favorable development in personal lines and $7 million of favorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $56 million for the commercial casualty line, $42 million for the workers' compensation line, $9 million for the commercial auto line and $8 million for the commercial property line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Within personal lines, we recognized favorable reserve development of $20 million in personal auto. We recognized unfavorable reserve development of $15 million for the homeowner line of business due primarily to higher-than-anticipated loss development on known claims.

For the three months ended June 30, 2018, we experienced $31 million of favorable development on prior accident years, including $42 million of favorable development in commercial lines, $17 million of unfavorable development in personal lines and $4 million of favorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $18 million for the workers' compensation line, $14 million for the commercial casualty line, $7 million for the commercial property line and $8 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. This was partially offset by unfavorable reserve development of $5 million for the commercial auto line. Within personal lines, we recognized unfavorable reserve development of $14 million for the homeowner line of business due primarily to higher-than-anticipated loss emergence on known claims.

For the six months ended June 30, 2018, we experienced $79 million of favorable development on prior accident years, including $77 million of favorable development in commercial lines, $16 million of unfavorable development in personal lines and $14 million of favorable development in excess and surplus lines. This included $7 million from favorable development of catastrophe losses. Within commercial lines, we recognized favorable reserve development of $31 million for the workers' compensation line, $28 million for the commercial property line, $10 million for the commercial casualty line and $12 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. This was partially offset by unfavorable reserve development of $4 million for the commercial auto line. Within personal lines, we recognized unfavorable reserve development of $17 million for the homeowner line of business due primarily to higher-than-anticipated loss emergence on known claims.

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


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


This table summarizes our life policy and investment contract reserves:
(Dollars in millions)
 
June 30,
2019
 
December 31, 2018
Life policy reserves:
 
 
 
 
Ordinary/traditional life
 
$
1,187

 
$
1,149

Other
 
49

 
48

Subtotal
 
1,236

 
1,197

Investment contract reserves:
 
 
 
 
Deferred annuities
 
771

 
787

Universal life
 
633

 
632

Structured settlements
 
152

 
156

Other
 
6

 
7

Subtotal
 
1,562

 
1,582

Total life policy and investment contract reserves
 
$
2,798

 
$
2,779

 
 
 
 
 



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

2019
 
2018
 
2019
 
2018
Property casualty:
 
 
 
 
 
 
 
Deferred policy acquisition costs asset, beginning of period
$
485

 
$
446

 
$
464

 
$
438

Capitalized deferred policy acquisition costs
280

 
251

 
534

 
483

Amortized deferred policy acquisition costs
(239
)
 
(225
)
 
(472
)
 
(449
)
Deferred policy acquisition costs asset, end of period
$
526

 
$
472

 
$
526

 
$
472

 
 
 
 
 
 
 
 
Life:
 
 
 
 
 
 
 
Deferred policy acquisition costs asset, beginning of period
$
266

 
$
245

 
$
274

 
$
232

Capitalized deferred policy acquisition costs
15

 
15

 
31

 
28

Amortized deferred policy acquisition costs
(12
)
 
(11
)
 
(25
)
 
(21
)
Shadow deferred policy acquisition costs
(9
)
 
7

 
(20
)
 
17

Deferred policy acquisition costs asset, end of period
$
260

 
$
256

 
$
260

 
$
256

 
 
 
 
 
 
 
 
Consolidated:
 
 
 
 
 
 
 
Deferred policy acquisition costs asset, beginning of period
$
751

 
$
691

 
$
738

 
$
670

Capitalized deferred policy acquisition costs
295

 
266

 
565

 
511

Amortized deferred policy acquisition costs
(251
)
 
(236
)
 
(497
)
 
(470
)
Shadow deferred policy acquisition costs
(9
)
 
7

 
(20
)
 
17

Deferred policy acquisition costs asset, end of period
$
786

 
$
728

 
$
786

 
$
728

 
 
 
 
 
 
 
 

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

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


NOTE 7 – Accumulated Other Comprehensive Income
Accumulated other comprehensive income (AOCI) includes changes in unrealized gains and losses on investments, changes in pension obligations and changes in life deferred acquisition costs, life policy reserves and other as follows:
(Dollars in millions)
 
Three months ended June 30,
 
 
2019
 
 
2018
 
 
Before tax
 
Income tax
 
Net
 
 
Before tax
 
Income tax
 
Net
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
288

 
$
59

 
$
229

 
 
$
164

 
$
35

 
$
129

OCI before investment gains and losses, net, recognized in net income
 
199

 
43

 
156

 
 
(78
)
 
(18
)
 
(60
)
Investment gains and losses, net, recognized in net income
 
1

 
—

 
1

 
 
(2
)
 
—

 
(2
)
OCI
 
200

 
43

 
157

 
 
(80
)
 
(18
)
 
(62
)
AOCI, end of period
 
$
488

 
$
102

 
$
386

 
 
$
84

 
$
17

 
$
67

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

 
—

 
—

 
 
—

 
—

 
—

Amortization recognized in net income
 
1

 
—

 
1

 
 
1

 
—

 
1

OCI
 
1

 
—

 
1

 
 
1

 
—

 
1

AOCI, end of period
 
$
(15
)
 
$
(2
)
 
$
(13
)
 
 
$
(11
)
 
$
(1
)
 
$
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life deferred acquisition costs, life policy reserves and other:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
(6
)
 
$
(1
)
 
$
(5
)
 
 
$
(4
)
 
$
(1
)
 
$
(3
)
OCI before investment gains and losses, net, recognized in net income
 
(6
)
 
(1
)
 
(5
)
 
 
—

 
—

 
—

Investment gains and losses, net, recognized in net income
 
1

 
—

 
1

 
 
2

 
1

 
1

OCI
 
(5
)
 
(1
)
 
(4
)
 
 
2

 
1

 
1

AOCI, end of period
 
$
(11
)
 
$
(2
)
 
$
(9
)
 
 
$
(2
)
 
$
—

 
$
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Summary of AOCI:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
266

 
$
56

 
$
210

 
 
$
148

 
$
33

 
$
115

Investments OCI
 
200

 
43

 
157

 
 
(80
)
 
(18
)
 
(62
)
Pension obligations OCI
 
1

 
—

 
1

 
 
1

 
—

 
1

Life deferred acquisition costs, life policy reserves and other OCI
 
(5
)
 
(1
)
 
(4
)
 
 
2

 
1

 
1

Total OCI
 
196

 
42

 
154

 
 
(77
)
 
(17
)
 
(60
)
AOCI, end of period
 
$
462

 
$
98

 
$
364

 
 
$
71

 
$
16

 
$
55

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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


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

 
$
9

 
$
37

 
 
$
3,540

 
$
733

 
$
2,807

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

 
—

 
—

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

 
9

 
37

 
 
385

 
81

 
304

OCI before investment gains and losses, net, recognized in net income
 
443

 
93

 
350

 
 
(295
)
 
(63
)
 
(232
)
Investment gains and losses, net, recognized in net income
 
(1
)
 
—

 
(1
)
 
 
(6
)
 
(1
)
 
(5
)
OCI
 
442

 
93

 
349

 
 
(301
)
 
(64
)
 
(237
)
AOCI, end of period
 
$
488

 
$
102

 
$
386

 
 
$
84

 
$
17

 
$
67

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

 
—

 
—

 
 
—

 
—

 
—

Amortization recognized in net income
 
1

 
—

 
1

 
 
1

 
—

 
1

OCI
 
1

 
—

 
1

 
 
1

 
—

 
1

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

 
$
(1
)
 
 
$
(10
)
 
$
(2
)
 
$
(8
)
OCI before investment gains and losses, net, recognized in net income
 
(6
)
 
(1
)
 
(5
)
 
 
6

 
1

 
5

Investment gains and losses, net, recognized in net income
 
(4
)
 
(1
)
 
(3
)
 
 
2

 
1

 
1

OCI
 
(10
)
 
(2
)
 
(8
)
 
 
8

 
2

 
6

AOCI, end of period
 
$
(11
)
 
$
(2
)
 
$
(9
)
 
 
$
(2
)
 
$
—

 
$
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Summary of AOCI:
 
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
 
$
29

 
$
7

 
$
22

 
 
$
3,518

 
$
730

 
$
2,788

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

 
—

 
—

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

 
7

 
22

 
 
363

 
78

 
285

Investments OCI
 
442

 
93

 
349

 
 
(301
)
 
(64
)
 
(237
)
Pension obligations OCI
 
1

 
—

 
1

 
 
1

 
—

 
1

Life deferred acquisition costs, life policy reserves and other OCI
 
(10
)
 
(2
)
 
(8
)
 
 
8

 
2

 
6

Total OCI
 
433

 
91

 
342

 
 
(292
)
 
(62
)
 
(230
)
AOCI, end of period
 
$
462

 
$
98

 
$
364

 
 
$
71

 
$
16

 
$
55

 
 
 
 
 
 
 
 
 
 
 
 
 
 

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


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


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

The table below summarizes our consolidated property casualty insurance net written premiums, earned premiums and incurred loss and loss expenses:
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Direct written premiums
 
$
1,472

 
$
1,336

 
$
2,807

 
$
2,583

Assumed written premiums
 
75

 
52

 
162

 
101

Ceded written premiums
 
(71
)
 
(39
)
 
(112
)
 
(77
)
Net written premiums
 
$
1,476

 
$
1,349

 
$
2,857

 
$
2,607

 
 
 
 
 
 
 
 
 
Direct earned premiums
 
$
1,319

 
$
1,235

 
$
2,585

 
$
2,442

Assumed earned premiums
 
50

 
36

 
93

 
69

Ceded earned premiums
 
(52
)
 
(41
)
 
(94
)
 
(81
)
Earned premiums
 
$
1,317

 
$
1,230

 
$
2,584

 
$
2,430

 
 
 
 
 
 
 
 
 
Direct incurred loss and loss expenses
 
$
866

 
$
821

 
$
1,653

 
$
1,602

Assumed incurred loss and loss expenses
 
25

 
13

 
50

 
29

Ceded incurred loss and loss expenses
 
(28
)
 
(13
)
 
(50
)
 
(19
)
Incurred loss and loss expenses
 
$
863

 
$
821

 
$
1,653

 
$
1,612

 
 
 
 
 
 
 
 
 


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

The table below summarizes our consolidated life insurance earned premiums and contract holders' benefits incurred:
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Direct earned premiums
 
$
86

 
$
81

 
$
169

 
$
158

Ceded earned premiums
 
(19
)
 
(17
)
 
(36
)
 
(34
)
Earned premiums
 
$
67

 
$
64

 
$
133

 
$
124

 
 
 
 
 
 
 
 
 
Direct contract holders' benefits incurred
 
87

 
70

 
172

 
146

Ceded contract holders' benefits incurred
 
(14
)
 
(8
)
 
(29
)
 
(21
)
Contract holders' benefits incurred
 
$
73

 
$
62

 
$
143

 
$
125

 
 
 
 
 
 
 
 
 

 
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 Second-Quarter 2019 10-Q
Page 22


NOTE 9 – Income Taxes
The differences between the 21% statutory federal income tax rate and our effective income tax rate were as follows:
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Tax at statutory rate:
 
$
111

 
21.0
 %
 
$
56

 
21.0
 %
 
$
293

 
21.0
 %
 
$
45

 
21.0
 %
Increase (decrease) resulting from:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Tax-exempt income from municipal bonds
 
(4
)
 
(0.8
)
 
(5
)
 
(1.9
)
 
(9
)
 
(0.6
)
 
(10
)
 
(4.7
)
Dividend received exclusion
 
(4
)
 
(0.8
)
 
(5
)
 
(1.5
)
 
(8
)
 
(0.6
)
 
(8
)
 
(3.7
)
Other
 
(1
)
 
(0.2
)
 
1

 
0.2

 
(2
)
 
(0.2
)
 
1

 
0.5

Provision for income taxes
 
$
102

 
19.2
 %
 
$
47

 
17.8
 %
 
$
274

 
19.6
 %
 
$
28

 
13.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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

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

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

The purchase price allocation to our Cincinnati Global deferred tax assets and corresponding valuation allowance is subject to further post-closing adjustments based on the actual net asset value (NAV) of Cincinnati Global and its subsidiaries at closing, pursuant to the procedures set forth in the sale and purchase agreement.

As a result of the first half year operations, there were immaterial changes to the Cincinnati Global valuation allowance as of June 30, 2019.

As of June 30, 2019, Cincinnati Global had operating loss carryforwards of $178 million which are subject to certain limitations. These Cincinnati Global losses can only be utilized within the Cincinnati Global group and cannot offset the income of our CFC group. Other than the Cincinnati Global loss carryforwards, we had no other operating or capital loss carryforwards as of June 30, 2019.


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


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

 
 

 
 

 
 

Net income—basic and diluted
 
$
428

 
$
217

 
$
1,123

 
$
186

Denominator:
 
 

 
 

 
 

 
 

Basic weighted-average common shares outstanding
 
163.3

 
163.2

 
163.1

 
163.6

Effect of share-based awards:
 
 

 
 

 
 

 
 

Stock options
 
1.2

 
0.8

 
1.1

 
0.9

Nonvested shares
 
0.7

 
0.5

 
0.7

 
0.5

Diluted weighted-average shares
 
165.2

 
164.5

 
164.9

 
165.0

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
2.62

 
$
1.33

 
$
6.89

 
$
1.13

Diluted
 
$
2.59

 
$
1.32

 
$
6.81

 
$
1.12

Number of anti-dilutive share-based awards
 
0.4

 
1.3

 
0.7

 
1.3

 
 
 
 
 
 
 
 
 


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

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

 
$
2

 
$
4

 
$
5

Non-service costs (benefit):
 
 
 
 
 
 
 
 
Interest cost
 
3

 
3

 
6

 
6

Expected return on plan assets
 
(5
)
 
(6
)
 
(10
)
 
(11
)
Amortization of actuarial loss and prior service cost
 
1

 
1

 
1

 
1

Other
 
—

 
—

 
1

 
—

 Total non-service benefit
 
(1
)
 
(2
)
 
(2
)
 
(4
)
Net periodic benefit cost
 
$
1

 
$
—

 
$
2

 
$
1

 
 
 
 
 
 
 
 
 


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


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


We made matching contributions totaling $4 million to our 401(k) and Top Hat savings plans during both the second quarters of 2019 and 2018 and contributions of $9 million and $10 million for the first half of 2019 and 2018, respectively.

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

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

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

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


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


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

 
 

 
 

 
 

Commercial lines insurance
 
 

 
 

 
 

 
 

Commercial casualty
 
$
277

 
$
272

 
$
545

 
$
537

Commercial property
 
234

 
231

 
468

 
459

Commercial auto
 
175

 
166

 
345

 
327

Workers' compensation
 
74

 
85

 
151

 
165

Other commercial
 
63

 
58

 
124

 
114

Commercial lines insurance premiums
 
823

 
812

 
1,633

 
1,602

Fee revenues
 
1

 
—

 
2

 
2

Total commercial lines insurance
 
824

 
812

 
1,635

 
1,604

 
 
 
 
 
 
 
 
 
Personal lines insurance
 
 

 
 

 
 

 
 

Personal auto
 
155

 
153

 
310

 
304

Homeowner
 
149

 
139

 
296

 
275

Other personal
 
44

 
39

 
86

 
77

Personal lines insurance premiums
 
348

 
331

 
692

 
656

Fee revenues
 
1

 
2

 
2

 
3

Total personal lines insurance
 
349

 
333

 
694

 
659

 
 
 
 
 
 
 
 
 
Excess and surplus lines insurance
 
67

 
57

 
130

 
113

Fee revenues
 
—

 
1

 
1

 
1

Total excess and surplus lines insurance
 
67

 
58

 
131

 
114

 
 
 
 
 
 
 
 
 
Life insurance premiums
 
67

 
64

 
133

 
124

Fee revenues
 
1

 
1

 
2

 
2

Total life insurance
 
68

 
65

 
135

 
126

 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
    Investment income, net of expenses
 
160

 
154

 
317

 
304

    Investment gains and losses, net
 
364

 
105

 
1,027

 
(86
)
Total investment revenue
 
524

 
259

 
1,344

 
218

 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
Earned premiums
 
79

 
30

 
129

 
59

Other
 
2

 
1

 
4

 
2

Total other revenues
 
81

 
31

 
133

 
61

Total revenues
 
$
1,913

 
$
1,558

 
$
4,072

 
$
2,782

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes:
 
 

 
 

 
 

 
 

Insurance underwriting results
 
 

 
 

 
 

 
 

Commercial lines insurance
 
$
12

 
$
47

 
$
88

 
$
62

Personal lines insurance
 
5

 
(32
)
 
1

 
(41
)
Excess and surplus lines insurance
 
17

 
13

 
28

 
31

Life insurance
 
(2
)
 
8

 
(3
)
 
10

Investments
 
499

 
235

 
1,295

 
170

Other
 
(1
)
 
(7
)
 
(12
)
 
(18
)
Total income before income taxes
 
$
530

 
$
264

 
$
1,397

 
$
214

Identifiable assets:
 
June 30,
2019
 
December 31, 2018
Property casualty insurance
 
$
3,441

 
$
3,285

Life insurance
 
1,536

 
1,424

Investments
 
18,464

 
16,741

Other
 
896

 
485

Total
 
$
24,337

 
$
21,935

 
 
 
 
 


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


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

As aggregate consideration for the purchase of the share capital of Cincinnati Global and its subsidiaries, the company paid £48 million, or $64 million, in cash to Munich Re at the closing of the acquisition. The amount paid at closing was calculated as the difference between the target NAV set forth in the SPA and the estimated NAV of Cincinnati Global and its subsidiaries at the closing date. The purchase price is subject to further post-closing adjustments based on the actual NAV of Cincinnati Global and its subsidiaries at closing, pursuant to the procedures set forth in the SPA.

The allocation of the purchase price is based on information included in Cincinnati Global's financial statements at the closing date, which is subject to negotiation per the SPA. The purchase price allocation is subject to change if additional information becomes available within the measurement period, which cannot exceed 12 months from the acquisition date. The fair values of the assets acquired and liabilities assumed may be subject to adjustments, which may impact the amounts recorded for the assets acquired and liabilities assumed as well as the goodwill.


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


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

Cash and cash equivalents
 
64

Premiums receivable
 
45

Reinsurance recoverable
 
42

Other assets
 
23

Total assets acquired
 
$
372

 
 
 
Liabilities
 
 
Loss and loss expense reserves
 
$
277

Unearned premiums
 
88

Other liabilities
 
24

Total liabilities assumed
 
$
389

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

Syndicate broker relationships - definite lived
 
12

Value of business acquired - definite lived
 
4

Internally developed technology - definite lived
 
3

Total fair value of identifiable intangible assets
 
$
50

 
 
 
Total purchase price paid
 
$
64

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

Total liabilities assumed
 
389

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

 
 
 
Excess of purchase price paid over fair value of net assets acquired assigned to goodwill
 
$
31

 
 
 


Identifiable intangible assets and goodwill are included in other assets in the condensed consolidated balance sheets. The goodwill arose as the fair value of the consideration transferred exceeded the fair value of the net identifiable assets acquired at the acquisition date. The broker relationships and internally developed technology will be amortized straight-line over five and 15 years, respectively. Value of business acquired will be amortized over the remaining coverage period of the underlying insurance contracts. Goodwill and intangibles are tested for impairment on an annual basis or more frequently if events or circumstances indicate the assets might be impaired. The company will perform its annual impairment test on goodwill and intangibles on September 30 of each year.

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

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




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


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

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


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



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


CORPORATE FINANCIAL HIGHLIGHTS
 
Net Income and Comprehensive Income Data
(Dollars in millions, except per share data)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Earned premiums
 
$
1,384

 
$
1,294

 
7
 
$
2,717

 
$
2,554

 
6

Investment income, net of expenses (pretax)
 
160

 
154

 
4
 
317

 
304

 
4

Investment gains and losses, net (pretax)
 
364

 
105

 
247
 
1,027

 
(86
)
 
nm

Total revenues
 
1,913

 
1,558

 
23
 
4,072

 
2,782

 
46

Net income
 
428

 
217

 
97
 
1,123

 
186

 
504

Comprehensive income (loss)
 
582

 
157

 
271
 
1,465

 
(44
)
 
nm

Net income per share—diluted
 
2.59

 
1.32

 
96
 
6.81

 
1.12

 
508

Cash dividends declared per share
 
0.56

 
0.53

 
6
 
1.12

 
1.06

 
6

Diluted weighted average shares outstanding
 
165.2

 
164.5

 
0
 
164.9

 
165.0

 
0

 
 
 
 
 
 
 
 
 
 
 
 
 

Total revenues rose 23% for the second quarter of 2019, compared with second-quarter 2018, primarily due to increases in earned premiums and net investment gains. For the first six months of 2019, compared with the first six months of 2018, total revenues increased 46%, also reflecting higher earned premiums and significant net investment gains. Premium and investment revenue trends are discussed further in the respective sections of Financial Results.

Investment gains and losses are recognized on the sales of investments, on certain changes in fair values of securities even though we continue to hold the securities or as otherwise required by GAAP. We have substantial discretion in the timing of investment sales, and that timing generally is independent of the insurance underwriting process. The change in fair value of securities is also generally independent of the insurance underwriting process.
 
Net income for the second quarter of 2019, compared with the same period of 2018, increased $211 million, including increases of $204 million in after-tax net investment gains and losses, $9 million in after-tax property casualty underwriting income and $4 million in after-tax investment income. Second-quarter 2019 catastrophe losses, mostly weather related, were $34 million more after taxes and unfavorably affected both net income and property casualty underwriting income. Life insurance segment results on a pretax basis for the second quarter of 2019 decreased $10 million compared with the second quarter of 2018.

For the first six months of 2019, net income rose $937 million, compared with the 2018 period, including increases of $878 million in after-tax investment gains and losses, $58 million in after-tax property casualty underwriting income and $10 million in after-tax investment income. The property casualty underwriting income improvement included an unfavorable $51 million after-tax effect from higher catastrophe losses. Life insurance segment results decreased by $13 million on a pretax basis.

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


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


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

Balance Sheet Data and Performance Measures
(Dollars in millions, except share data)
 
At June 30,
 
At December 31,
 
 
2019
 
2018
Total investments
 
$
18,603

 
$
16,732

Total assets
 
24,337

 
21,935

Short-term debt
 
37

 
32

Long-term debt
 
788

 
788

Shareholders' equity
 
9,131

 
7,833

Book value per share
 
55.92

 
48.10

Debt-to-total-capital ratio
 
8.3
%
 
9.5
%
 
 
 
 
 

Total assets at June 30, 2019, increased 11% compared with year-end 2018, and included an 11% increase in total investments that reflected a combination of net purchases and higher fair values for many securities in our portfolio. Shareholders' equity increased 17%, and book value per share increased 16% during the first six months of 2019. Our debt-to-total-capital ratio (capital is the sum of debt plus shareholders' equity) decreased compared with year-end 2018.

Our value creation ratio is our primary performance metric. That ratio was 18.6% for the first six months of 2019, more than the same period in 2018 primarily due to a higher amount of overall net gains from our investment portfolio. The $7.82 increase in book value per share during the first six months of 2019 contributed 16.3 percentage points to the value creation ratio, while dividends declared at $1.12 per share contributed 2.3 points. Value creation ratios for comparable periods by major components and in total, along with calculations from per-share amounts, are shown in the tables below.
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Value creation ratio major components:
 
 

 
 

 
 

 
 

Net income before investment gains
 
1.6
%
 
1.7
 %
 
4.0
 %
 
3.1
 %
Change in fixed-maturity securities, realized and unrealized gains
 
1.8

 
(0.8
)
 
4.4

 
(2.8
)
Change in equity securities, investment gains
 
3.4

 
1.0

 
10.3

 
(0.9
)
Other
 
0.0

 
(0.3
)
 
(0.1
)
 
(0.5
)
     Value creation ratio
 
6.8
%
 
1.6
 %
 
18.6
 %
 
(1.1
)%
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 

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


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

 
 

 
 

 
 

End of period book value*
 
$
55.92

 
$
48.68

 
$
55.92

 
$
48.68

Less beginning of period book value
 
52.88

 
48.42

 
48.10

 
50.29

Change in book value
 
3.04

 
0.26

 
7.82

 
(1.61
)
Dividend declared to shareholders
 
0.56

 
0.53

 
1.12

 
1.06

Total value creation
 
$
3.60

 
$
0.79

 
$
8.94

 
$
(0.55
)
 
 
 
 
 
 
 
 
 
Value creation ratio from change in book value**
 
5.7
%
 
0.5
%
 
16.3
%
 
(3.2
)%
Value creation ratio from dividends declared to shareholders***
 
1.1

 
1.1

 
2.3

 
2.1

Value creation ratio
 
6.8
%
 
1.6
%
 
18.6
%
 
(1.1
)%
 
 
 
 
 
 
 
 
 
    * Book value per share is calculated by dividing end of period total shareholders' equity by end of period shares outstanding
 
 
  ** Change in book value divided by the beginning of period book value
 
 
*** Dividend declared to shareholders divided by beginning of period book value
 
 

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

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

•
Premium growth – We believe our agency relationships and initiatives can lead to a property casualty written premium growth rate over any five-year period that exceeds the industry average. For the first six months of 2019, our consolidated property casualty net written premium year-over-year growth was 10%. As of February 2019, A.M. Best projected the industry's full-year 2019 written premium growth at approximately 4%. For the five-year period 2014 through 2018, our growth rate slightly exceeded that of the industry. The industry's growth rate excludes its mortgage and financial guaranty lines of business.
•
Combined ratio – We believe our underwriting philosophy and initiatives can generate a GAAP combined ratio over any five-year period that is consistently within the range of 95% to 100%. For the first six months of 2019, our GAAP combined ratio was 94.8%, including 8.4 percentage points of current accident year catastrophe losses partially offset by 5.9 percentage points of favorable loss reserve development on prior accident years. Our statutory combined ratio was 93.3% for the first six months of 2019. As of February 2019, A.M. Best projected the industry's full-year 2019 statutory combined ratio at approximately 101%, including approximately 5 percentage points of catastrophe losses and a favorable effect of approximately 1.5 percentage points of loss reserve development on prior accident years. The industry's ratio again excludes its mortgage and financial guaranty lines of business.
•
Investment contribution – We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year return of the Standard & Poor's 500 Index. For the first six months of 2019, pretax investment income was $317 million, up 4% compared with the same period in 2018. We believe our investment portfolio mix provides an appropriate balance of income stability and growth with capital appreciation potential.


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


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

•
Manage insurance profitability – Implementation of these initiatives is intended to enhance underwriting expertise and knowledge, thereby increasing our ability to manage our business while also gaining efficiency. Better profit margins can arise from additional information and more focused action on underperforming product lines, plus pricing capabilities we are expanding through the use of technology and analytics. In addition to enhancing company efficiency, improving internal processes also supports the ability of the independent agencies that represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage agency expenses.
We continue to enhance our property casualty underwriting expertise and to effectively and efficiently underwrite individual policies and process transactions. Ongoing initiatives supporting this work include expanding our pricing and segmentation capabilities through experience and use of predictive analytics and additional data. Our segmentation efforts emphasize identification and retention of insurance policies we believe have relatively stronger pricing, while seeking more aggressive renewal terms and conditions on policies we believe have relatively weaker pricing. In 2019, we continue to improve underwriting and rate adequacy for our commercial auto and personal auto lines of business. Our commercial auto policies that renewed during the first six months of 2019 experienced an estimated average price increase at percentages in the high-single-digit range, and our personal auto policies that renewed during that period also averaged an estimated price increase at percentages in the high-single-digit range.
•
Drive premium growth – Implementation of these initiatives is intended to further penetrate each market we serve through our independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Premium growth initiatives also include expansion of Cincinnati ReSM, our reinsurance assumed operation, and successful integration of Cincinnati Global. Diversified growth also may reduce variability of losses from weather-related catastrophes.
We continue to appoint new agencies to develop additional points of distribution. In 2019, we are planning approximately 100 appointments of independent agencies that offer most or all of our property casualty insurance products. During the first six months of 2019, we appointed 55 new agencies that meet that criteria.
We also plan to appoint additional agencies that focus on high net worth personal lines clients. In 2019, we are targeting the appointment of approximately 80 agencies that market only personal lines products for us. During the first six months of 2019, we appointed 37 new agencies that meet that criteria.
As of June 30, 2019, a total of 1,784 agency relationships market our property casualty insurance products from 2,409 reporting locations. The totals do not include Lloyd's brokers or coverholders that source business for Cincinnati Global.
We also continue to grow premiums through the disciplined expansion of Cincinnati Re and the acquisition of Cincinnati Global. During the first six months of 2019, Cincinnati Re contributed $63 million of growth in consolidated property casualty insurance net written premiums while Cincinnati Global contributed $65 million. We also believe Cincinnati Global over time will provide opportunities to support business produced by our independent agencies in new geographies and lines of business.
 
Financial Strength
An important part of our long-term strategy is financial strength, which is described in our 2018 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Financial Strength, Page 8. One aspect of our financial strength is prudent use of reinsurance ceded to help manage financial performance variability due to catastrophe loss experience. A description of how we use reinsurance ceded is included in our 2018 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, 2019 Reinsurance Ceded Programs, Page 105. Another aspect of our financial strength is our investment portfolio, which remains well-diversified as discussed in this quarterly report in Item 3, Quantitative and Qualitative Disclosures About Market Risk. Our strong parent-company liquidity and financial strength increase our flexibility to maintain a cash dividend through all periods and to continue to invest in and expand our insurance operations.

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



At June 30, 2019, we held $3.026 billion of our cash and invested assets at the parent-company level, of which $2.730 billion, or 90.2%, was invested in common stocks, and $174 million, or 5.8%, was cash or cash equivalents. Our debt-to-total-capital ratio was 8.3% at June 30, 2019. Another important indicator of financial strength is our ratio of property casualty net written premiums to statutory surplus, which was 1.0-to-1 for the 12 months ended June 30, 2019, matching year-end 2018.

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

At July 29, 2019, our insurance subsidiaries continued to be highly rated.
Insurer Financial Strength Ratings
Rating
agency
Standard market property casualty insurance subsidiaries
Life insurance
 subsidiary
Excess and surplus lines insurance subsidiary
Outlook
 
 
 
Rating
tier
 
 
Rating
tier
 
 
Rating
tier
 
A.M. Best Co.
 ambest.com
A+
Superior
2 of 16
A
Excellent
3 of 16
A+
Superior
2 of 16
Stable/ Positive/ Stable
Fitch Ratings
 fitchratings.com
A+
Strong
5 of 21
A+
Strong
5 of 21
-
-
-
Stable
Moody's Investors  Service
 moodys.com
A1
Good
5 of 21
-
-
-
-
-
-
Stable
S&P Global  Ratings
 spratings.com
A+
Strong
5 of 21
A+
Strong
5 of 21
-
-
-
Stable
 

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


CONSOLIDATED PROPERTY CASUALTY INSURANCE HIGHLIGHTS
Consolidated property casualty insurance results include premiums and expenses for our standard market insurance segments (commercial lines and personal lines), our excess and surplus lines segment, Cincinnati Re and our London-based global specialty underwriter known as Cincinnati Global.
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Earned premiums
 
$
1,317

 
$
1,230

 
7

 
$
2,584

 
$
2,430

 
6

Fee revenues
 
2

 
3

 
(33
)
 
5

 
6

 
(17
)
Total revenues
 
1,319

 
1,233

 
7

 
2,589

 
2,436

 
6

Loss and loss expenses from:
 
 

 
 

 
 

 
 

 
 

 
 

Current accident year before catastrophe losses
 
802

 
765

 
5

 
1,588

 
1,544

 
3

Current accident year catastrophe losses
 
145

 
87

 
67

 
216

 
147

 
47

Prior accident years before catastrophe losses
 
(69
)
 
(31
)
 
(123
)
 
(139
)
 
(72
)
 
(93
)
Prior accident years catastrophe losses
 
(15
)
 
—

 
nm

 
(12
)
 
(7
)
 
(71
)
Loss and loss expenses
 
863

 
821

 
5

 
1,653

 
1,612

 
3

Underwriting expenses
 
408

 
376

 
9

 
797

 
759

 
5

Underwriting profit
 
$
48

 
$
36

 
33

 
$
139

 
$
65

 
114

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 

 
 

 
Pt. Change

 
 

 
 

 
Pt. Change
    Current accident year before catastrophe losses
 
60.9
 %
 
62.2
 %
 
(1.3
)
 
61.5
 %
 
63.5
 %
 
(2.0
)
    Current accident year catastrophe losses
 
11.1

 
7.1

 
4.0

 
8.4

 
6.1

 
2.3

    Prior accident years before catastrophe losses
 
(5.3
)
 
(2.6
)
 
(2.7
)
 
(5.4
)
 
(3.0
)
 
(2.4
)
    Prior accident years catastrophe losses
 
(1.1
)
 
0.0

 
(1.1
)
 
(0.5
)
 
(0.3
)
 
(0.2
)
Loss and loss expenses
 
65.6

 
66.7

 
(1.1
)
 
64.0

 
66.3

 
(2.3
)
Underwriting expenses
 
30.9

 
30.5

 
0.4

 
30.8

 
31.2

 
(0.4
)
Combined ratio
 
96.5
 %
 
97.2
 %
 
(0.7
)
 
94.8
 %
 
97.5
 %
 
(2.7
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
96.5
 %
 
97.2
 %
 
(0.7
)
 
94.8
 %
 
97.5
 %
 
(2.7
)
Contribution from catastrophe losses and prior
  years reserve development
 
4.7

 
4.5

 
0.2

 
2.5

 
2.8

 
(0.3
)
Combined ratio before catastrophe losses and
  prior years reserve development
 
91.8
 %
 
92.7
 %
 
(0.9
)
 
92.3
 %
 
94.7
 %
 
(2.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our consolidated property casualty insurance operations generated an underwriting profit of $48 million for the second quarter of 2019 and $139 million for the first six months of 2019. The second-quarter improvement of $12 million, compared with the same period of 2018, was partially offset by an increase of $43 million in losses from natural catastrophes, mostly caused by severe weather. The six-month underwriting profit improved $74 million, compared with the first six months of 2018, despite the unfavorable effect of an increase of $64 million in losses from natural catastrophes. We believe future property casualty underwriting results will continue to benefit from price increases and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices.
For all property casualty lines of business in aggregate, excluding Cincinnati Global reserves as of the February 28, 2019, acquisition date, net loss and loss expense reserves at June 30, 2019, were $31 million higher than at year-end 2018, including an increase of $51 million for the incurred but not reported (IBNR) portion. The $31 million reserve increase raised year-end 2018 net loss and loss expense reserves by less than 1%.

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

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



Our consolidated property casualty combined ratio for the second quarter of 2019 improved by 0.7 percentage points, compared with the same period of 2018, despite an increase of 2.9 points from higher catastrophe losses and loss expenses. For the first six months of 2019, compared with the same period of 2018, our consolidated property casualty combined ratio improved by 2.7 percentage points, despite an increase of 2.1 points from higher
catastrophe losses and loss expenses.
 
The combined ratio can be affected significantly by natural catastrophe losses and other large losses as discussed in detail below. The combined ratio can also be affected by updated estimates of loss and loss expense reserves established for claims that occurred in prior periods, referred to as prior accident years. Net favorable development on prior accident year reserves, including reserves for catastrophe losses, benefited the combined ratio by 5.9 percentage points in the first six months of 2019, compared with 3.3 percentage points in the same period of 2018. Net favorable development is discussed in further detail in Financial Results by property casualty insurance segment.
 
The ratio for current accident year loss and loss expenses before catastrophe losses improved in the first six months of 2019. That 61.5% ratio was 2.0 percentage points lower, compared with the 63.5% accident year 2018 ratio measured as of June 30, 2018, including a decrease of 0.7 points in the ratio for large losses of $1 million or more per claim, discussed below. The effects of lower noncatastrophe weather-related losses for the first six months of 2019 contributed approximately 0.6 points to the overall decrease in the current accident year ratio. We consider weather-related losses not identified as part of designated catastrophe events for the property casualty industry to be noncatastrophe weather losses.
 
The underwriting expense ratio increased for the second quarter and decreased for the first six months of 2019, compared with the same periods a year ago. The current year periods reflect ratios generally in line with our longer-term historical average, as well as ongoing expense management efforts and higher earned premiums. The ratio for both 2019 periods is within 0.2 percentage points of the average of full-year ratios during 2016 through 2018.

Consolidated Property Casualty Insurance Premiums
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,

 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Agency renewal written premiums
 
$
1,186

 
$
1,150

 
3

 
$
2,316

 
$
2,233

 
4

Agency new business written premiums
 
212

 
181

 
17

 
393

 
340

 
16

Other written premiums
 
78

 
18

 
333

 
148

 
34

 
335

Net written premiums
 
1,476

 
1,349

 
9

 
2,857

 
2,607

 
10

Unearned premium change
 
(159
)
 
(119
)
 
(34
)
 
(273
)
 
(177
)
 
(54
)
Earned premiums
 
$
1,317

 
$
1,230

 
7

 
$
2,584

 
$
2,430

 
6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
The trends in net written premiums and earned premiums summarized in the table above include the effects of price increases. Price change trends that heavily influence renewal written premium increases or decreases, along with other premium growth drivers for 2019, are discussed in more detail by segment below in Financial Results.
 
Consolidated property casualty net written premiums for the three and six months ended June 30, 2019, grew $127 million and $250 million compared with the same periods of 2018. Our premium growth initiatives from prior years have provided an ongoing favorable effect on growth during the current year, particularly as newer agency relationships mature over time.

Consolidated property casualty agency new business written premiums increased by $31 million and $53 million for the second quarter and first six months of 2019, compared with the same periods of 2018. The increase for both 2019 periods was primarily from our commercial lines and excess and surplus lines insurance segments. New agency appointments during 2018 and 2019 produced a $20 million increase in standard lines new business for the first six months of 2019 compared with the same period of 2018. As we appoint new agencies that choose to move accounts to us, we report these accounts as new business. While this business is new to us, in many cases it is not new to the agent. We believe these seasoned accounts tend to be priced more accurately than business that may be less familiar to our agent upon obtaining it from a competing agent.

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



Net written premiums for Cincinnati Re, included in other written premiums, increased $24 million and $63 million for the three and six months ended June 30, 2019, compared with the same periods of 2018, to $72 million and $157 million, respectively. Cincinnati Re assumes risks through reinsurance treaties and in some cases cedes part of the risk and related premiums to one or more unaffiliated reinsurance companies through transactions known as retrocessions. Cincinnati Re earned premiums were $47 million and $86 million for the second quarter and first six months of 2019, compared with $30 million and $59 million for the same periods a year ago.
 
Cincinnati Global also contributed to the increase in other written premiums, following its acquisition on February 28, 2019. Net written premiums were $45 million for the second quarter of 2019 and $65 million since the acquisition, while earned premiums were $32 million and $43 million for those respective periods.
 
Other written premiums also include premiums ceded to reinsurers as part of our reinsurance ceded program. An increase in ceded premiums, including $6 million of reinstatement premiums for our property catastrophe treaty, reduced net written premiums by $9 million and $12 million for the second quarter and first six months of 2019, compared with the same periods of 2018.

Catastrophe losses and loss expenses typically have a material effect on property casualty results and can vary significantly from period to period. Losses from natural catastrophes contributed 10.0 and 7.9 percentage points to the combined ratio in the second quarter and first six months of 2019, compared with 7.1 and 5.8 percentage points in the same period of 2018. Some of those losses were applicable to annual loss deductible provisions of our collateralized reinsurance funded through catastrophe bonds. For our collateralized reinsurance arrangement that became effective in January 2017, we can recover catastrophe bond funds if aggregate losses, after the $8 million per occurrence deductible, exceed $190 million during an annual coverage period. There were six events between January 1 and June 30, 2019, that met the requirements for recovery, such as occurrences within the specific geographic locations included in the severe convective storm portion of our coverage with losses exceeding our per occurrence deductible. Aggregate losses from those events totaled $141 million, after our per occurrence deductible.

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

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


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


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

 
Comm.
 
Pers.
 
E&S
 
 
 
 

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


 


 


 
 
 


 
 
 
 
 
 
 
 
 
Jan. 29-Feb. 1
Midwest, Northeast
$
(3
)
 
$
(1
)
 
$
—

 
$
1

 
$
(3
)

$
11

 
$
10

 
$
—

 
$
1

 
$
22

Feb. 23-26
Midwest, Northeast, South
—

 
(2
)
 
—

 
—

 
(2
)

11

 
10

 
—

 
—

 
21

Mar. 12-17
Midwest, Northeast, West, South
1

 
(1
)
 
—

 
2

 
2


5

 
6

 
—

 
2

 
13

May. 16-17
Midwest
6

 
6

 
—

 
—

 
12


6

 
6

 
—

 
—

 
12

May. 26-28
Midwest, Northeast, West, South
78

 
24

 
—

 
—

 
102


78

 
24

 
—

 
—

 
102

All other 2019 catastrophes
22

 
12

 
—

 
—

 
34


26

 
20

 
—

 
—

 
46

Development on 2018 and prior catastrophes
(8
)
 
(3
)
 
—

 
(4
)
 
(15
)

(14
)
 
5

 
—

 
(3
)
 
(12
)
Calendar year incurred total
$
96

 
$
35

 
$
—

 
$
(1
)
 
$
130


$
123

 
$
81

 
$
—

 
$
—

 
$
204


 






 
 


 
 
 
 
 
 
 
 
 
2018
 
 

 

 

 
 
 

 
 
 
 
 
 
 
 
 
Jan. 8-10
West
$
—


$
(1
)

$
—


$
—

 
$
(1
)

$
—

 
$
10

 
$
—

 
$
—

 
$
10

Mar. 1-3
Northeast, South
—


—


—


—

 
—


6

 
6

 
—

 
—

 
12

Mar. 18-21
South
4


1


—


—

 
5


21

 
7

 
1

 
—

 
29

Apr. 13-17
Midwest, Northeast, South
22


7


—


—

 
29


22

 
7

 
—

 
—

 
29

All other 2018 catastrophes
29


25


—


—

 
54


36

 
31

 
—

 
—

 
67

Development on 2017 and prior catastrophes
(2
)

2


—


—

 
—


(9
)
 
2

 
—

 
—

 
(7
)
Calendar year incurred total
$
53


$
34


$
—


$
—

 
$
87


$
76

 
$
63

 
$
1

 
$
—

 
$
140

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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


The following table includes data for losses incurred of $1 million or more per claim, net of reinsurance.
 
Consolidated Property Casualty Insurance Losses Incurred by Size
(Dollars in millions, net of reinsurance)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Current accident year losses greater than $5 million
 
$
14

 
$
6

 
133

 
$
14

 
$
21

 
(33
)
Current accident year losses $1 million - $5 million
 
53

 
62

 
(15
)
 
90

 
94

 
(4
)
Large loss prior accident year reserve development
 
5

 
4

 
25

 
21

 
38

 
(45
)
Total large losses incurred
 
72

 
72

 
—

 
125

 
153

 
(18
)
Losses incurred but not reported
 
(14
)
 
87

 
nm

 
33

 
97

 
(66
)
Other losses excluding catastrophe losses
 
547

 
433

 
26

 
1,039

 
953

 
9

Catastrophe losses
 
128

 
83

 
54

 
198

 
134

 
48

Total losses incurred
 
$
733

 
$
675

 
9

 
$
1,395

 
$
1,337

 
4

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year losses greater than $5 million
 
1.1
 %
 
0.4
%
 
0.7

 
0.5
%
 
0.8
%
 
(0.3
)
Current accident year losses $1 million - $5 million
 
4.0

 
5.1

 
(1.1
)
 
3.5

 
3.9

 
(0.4
)
Large loss prior accident year reserve development
 
0.4

 
0.3

 
0.1

 
0.8

 
1.6

 
(0.8
)
Total large loss ratio
 
5.5

 
5.8

 
(0.3
)
 
4.8

 
6.3

 
(1.5
)
Losses incurred but not reported
 
(1.1
)
 
7.1

 
(8.2
)
 
1.3

 
4.0

 
(2.7
)
Other losses excluding catastrophe losses
 
41.6

 
35.1

 
6.5

 
40.2

 
39.2

 
1.0

Catastrophe losses
 
9.7

 
6.8

 
2.9

 
7.7

 
5.5

 
2.2

Total loss ratio
 
55.7
 %
 
54.8
%
 
0.9

 
54.0
%
 
55.0
%
 
(1.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
We believe the inherent variability of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the variability in addition to general inflationary trends in loss costs. Our analysis continues to indicate no unexpected concentration of large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The second-quarter 2019 property casualty total large losses incurred of $72 million, net of reinsurance, were lower than the $83 million quarterly average during full-year 2018 and matched the $72 million experienced for the second quarter of 2018. The ratio for these large losses was 0.3 percentage points lower compared with last year's second quarter. The second-quarter 2019 amount of total large losses incurred helped contribute to the decrease in the six-month 2019 total large loss ratio, compared with 2018, in addition to a first-quarter 2019 ratio that was 2.7 points lower than the first quarter of 2018. We believe results for the three- and six-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million. Losses by size are discussed in further detail in results of operations by property casualty insurance segment.
 

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


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


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


COMMERCIAL LINES INSURANCE RESULTS
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,

 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Earned premiums
 
$
823

 
$
812

 
1

 
$
1,633

 
$
1,602

 
2

Fee revenues
 
1

 
—

 
nm

 
2

 
2

 
0

Total revenues
 
824

 
812

 
1

 
1,635

 
1,604

 
2

Loss and loss expenses from:
 
 

 
 

 
 

 
 

 
 

 
 

Current accident year before catastrophe losses
 
504

 
497

 
1

 
1,014

 
1,021

 
(1
)
Current accident year catastrophe losses
 
104

 
55

 
89

 
137

 
85

 
61

Prior accident years before catastrophe losses
 
(50
)
 
(40
)
 
(25
)
 
(106
)
 
(68
)
 
(56
)
Prior accident years catastrophe losses
 
(8
)
 
(2
)
 
(300
)
 
(14
)
 
(9
)
 
(56
)
Loss and loss expenses
 
550

 
510

 
8

 
1,031

 
1,029

 
0

Underwriting expenses
 
262

 
255

 
3

 
516

 
513

 
1

Underwriting profit
 
$
12

 
$
47

 
(74
)
 
$
88

 
$
62

 
42

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year before catastrophe losses
 
61.2
 %
 
61.3
 %
 
(0.1
)
 
62.1
 %
 
63.7
 %
 
(1.6
)
Current accident year catastrophe losses
 
12.7

 
6.8

 
5.9

 
8.4

 
5.3

 
3.1

Prior accident years before catastrophe losses
 
(6.1
)
 
(4.9
)
 
(1.2
)
 
(6.5
)
 
(4.2
)
 
(2.3
)
Prior accident years catastrophe losses
 
(1.0
)
 
(0.3
)
 
(0.7
)
 
(0.9
)
 
(0.6
)
 
(0.3
)
Loss and loss expenses
 
66.8

 
62.9

 
3.9

 
63.1

 
64.2

 
(1.1
)
Underwriting expenses
 
31.8

 
31.3

 
0.5

 
31.6

 
32.0

 
(0.4
)
Combined ratio
 
98.6
 %
 
94.2
 %
 
4.4

 
94.7
 %
 
96.2
 %
 
(1.5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
98.6
 %
 
94.2
 %
 
4.4

 
94.7
 %
 
96.2
 %
 
(1.5
)
Contribution from catastrophe losses and prior
  years reserve development
 
5.6

 
1.6

 
4.0

 
1.0

 
0.5

 
0.5

Combined ratio before catastrophe losses and
  prior years reserve development
 
93.0
 %
 
92.6
 %
 
0.4

 
93.7
 %
 
95.7
 %
 
(2.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Overview
Performance highlights for the commercial lines segment include:
•
Premiums – Earned premiums and net written premiums for the commercial lines segment grew during the second quarter and first six months of 2019, compared with the same periods a year ago, reflecting higher new business premiums and renewal written premium growth that continued to include higher average pricing. The table below analyzes the primary components of premiums. We continue to use predictive analytics tools to improve pricing precision and segmentation while leveraging our local relationships with agents through the efforts of our teams that work closely with them. We seek to maintain appropriate pricing discipline for both new and renewal business as our agents and underwriters assess account quality to make careful decisions on a case-by-case basis whether to write or renew a policy.
Agency renewal written premiums increased by 1% during the second quarter and 2% during the first six months of 2019, compared with the same periods of 2018. During the second quarter of 2019, our overall standard commercial lines policies averaged estimated renewal price increases at percentages in the low-single-digit range, slightly higher than the first quarter of 2019. We continue to segment commercial lines policies, emphasizing identification and retention of policies we believe have relatively stronger pricing. Conversely, we have been seeking stricter renewal terms and conditions on policies we believe have relatively weaker pricing, thus retaining fewer of those policies. We measure average changes in commercial lines renewal pricing as the percentage rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for the respective policies.
Our average overall commercial lines renewal pricing change includes the impact of flat pricing for certain coverages within package policies written for a three-year term that were in force but did not expire during the

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


period being measured. Therefore, our reported change in average commercial lines renewal pricing reflects a blend of three-year policies that did not expire and other policies that did expire during the measurement period. For commercial lines policies that did expire and were then renewed during the second quarter of 2019, we estimate that our average percentage price increase for commercial auto continued in the high-single-digit range. The estimated average percentage price change for our commercial property line of business was an increase in the mid-single-digit range and for commercial casualty it was an increase in the low-single-digit range. The estimated average percentage price change for workers' compensation was a decrease in the mid-single-digit range.
Renewal premiums for certain policies, primarily our commercial casualty and workers' compensation lines of business, include the results of policy audits that adjust initial premium amounts based on differences between estimated and actual sales or payroll related to a specific policy. Audits completed during the first six months of 2019 contributed $37 million to net written premiums.
New business written premiums for commercial lines increased $19 million and $35 million during the second quarter and first six months of 2019, compared with the same periods of 2018. The increase reflected growth for each major line of business in our commercial lines insurance segment. Trend analysis for year-over-year comparisons of individual quarters is more difficult to assess for commercial lines new business written premiums, due to inherent variability. That variability is often driven by larger policies with annual premiums greater than $100,000.
Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. For our commercial lines insurance segment, an increase in ceded premiums reduced net written premiums by $5 million and $7 million for the second quarter and first six months of 2019, compared with the same periods of 2018.

Commercial Lines Insurance Premiums
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Agency renewal written premiums
 
$
767

 
$
758

 
1

 
$
1,566

 
$
1,529

 
2

Agency new business written premiums
 
137

 
118

 
16

 
257

 
222

 
16

Other written premiums
 
(25
)
 
(20
)
 
(25
)
 
(48
)
 
(41
)
 
(17
)
Net written premiums
 
879

 
856

 
3

 
1,775

 
1,710

 
4

Unearned premium change
 
(56
)
 
(44
)
 
(27
)
 
(142
)
 
(108
)
 
(31
)
Earned premiums
 
$
823

 
$
812

 
1

 
$
1,633

 
$
1,602

 
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
•
Combined ratio – The commercial lines second-quarter 2019 combined ratio rose by 4.4 percentage points, compared with the same period a year ago, reflecting an increase of 5.2 points in losses from natural catastrophes. For the first six months of 2019, the combined ratio decreased by 1.5 percentage points, compared with the same period a year ago, despite an increase of 2.8 points in losses from natural catastrophes. Underwriting results for both periods included a higher level of favorable reserve development on prior accident years in addition to better loss experience for the current accident year.
The current accident year loss and loss expenses before catastrophe losses ratio for commercial lines improved in the first six months of 2019. That 62.1% ratio was 1.6 percentage points lower, compared with the 63.7% accident year 2018 ratio measured as of June 30, 2018, including a decrease of 0.9 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
Catastrophe losses and loss expenses accounted for 11.7 and 7.5 percentage points of the combined ratio for the second quarter and first six months of 2019, compared with 6.5 and 4.7 percentage points for the same periods a year ago. Through 2018, the 10-year annual average for that catastrophe measure for the commercial lines segment was 5.4 percentage points, and the five-year annual average was 5.1 percentage points.
The net effect of reserve development on prior accident years during the second quarter and first six months of 2019 was favorable for commercial lines overall by $58 million and $120 million, compared with $42 million and $77 million for the same periods in 2018. For the first six months of 2019, our commercial casualty and workers' compensation lines of business were the largest contributors to the total commercial lines net favorable reserve development on prior accident years, representing approximately 80% of the total. The net favorable reserve development recognized during the first six months of 2019 for our commercial lines insurance segment was

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


largely for accident years 2016 through 2018 and was primarily due to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2018 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 54.
The commercial lines underwriting expense ratio increased for the second quarter and decreased for the first six months of 2019, compared with the same periods a year ago. The ratios for both 2019 periods are within 0.1 percentage points of our full-year 2018 ratio, and reflect ongoing expense management efforts and higher earned premiums.

Commercial Lines Insurance Losses Incurred by Size
(Dollars in millions, net of reinsurance)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Current accident year losses greater than $5 million
 
$
14

 
$
6

 
133

 
$
14

 
$
21

 
(33
)
Current accident year losses $1 million - $5 million
 
41

 
51

 
(20
)
 
68

 
73

 
(7
)
Large loss prior accident year reserve development
 
3

 
1

 
200

 
16

 
30

 
(47
)
Total large losses incurred
 
58

 
58

 
—

 
98

 
124

 
(21
)
Losses incurred but not reported
 
(7
)
 
53

 
nm

 
36

 
69

 
(48
)
Other losses excluding catastrophe losses
 
320

 
247

 
30

 
605

 
572

 
6

Catastrophe losses
 
94

 
51

 
84

 
119

 
73

 
63

Total losses incurred
 
$
465

 
$
409

 
14

 
$
858

 
$
838

 
2

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year losses greater than $5 million
 
1.7
 %
 
0.7
%
 
1.0

 
0.9
%
 
1.3
%
 
(0.4
)
Current accident year losses $1 million - $5 million
 
5.0

 
6.2

 
(1.2
)
 
4.1

 
4.6

 
(0.5
)
Large loss prior accident year reserve development
 
0.4

 
0.2

 
0.2

 
1.0

 
1.8

 
(0.8
)
Total large loss ratio
 
7.1

 
7.1

 
0.0

 
6.0

 
7.7

 
(1.7
)
Losses incurred but not reported
 
(0.9
)
 
6.5

 
(7.4
)
 
2.2

 
4.3

 
(2.1
)
Other losses excluding catastrophe losses
 
38.9

 
30.4

 
8.5

 
37.0

 
35.7

 
1.3

Catastrophe losses
 
11.4

 
6.3

 
5.1

 
7.3

 
4.6

 
2.7

Total loss ratio
 
56.5
 %
 
50.3
%
 
6.2

 
52.5
%
 
52.3
%
 
0.2

 
 
 
 
 
 
 
 
 
 
 
 
 

We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The second-quarter 2019 commercial lines total large losses incurred of $58 million, net of reinsurance, were lower than the quarterly average of $71 million during full-year 2018 and matched the $58 million total large losses incurred for the second quarter of 2018. The decrease in commercial lines large losses for the first six months of 2019 was primarily due to our commercial casualty line of business. The second-quarter 2019 ratio for commercial lines total large losses matched last year's second-quarter ratio. The second-quarter 2019 amount of total large losses incurred helped contribute to the decrease in the six-month 2019 total large loss ratio, compared with 2018, in addition to a first-quarter 2019 ratio that was 3.5 points lower than the first quarter of 2018. We believe results for the three- and six-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.


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


PERSONAL LINES INSURANCE RESULTS
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Earned premiums
 
$
348

 
$
331

 
5

 
$
692

 
$
656

 
5

Fee revenues
 
1

 
2

 
(50
)
 
2

 
3

 
(33
)
Total revenues
 
349

 
333

 
5

 
694

 
659

 
5

Loss and loss expenses from:
 
 

 
 

 
 

 
 

 
 

 
 

Current accident year before catastrophe losses
 
216

 
220

 
(2
)
 
425

 
430

 
(1
)
Current accident year catastrophe losses
 
38

 
32

 
19

 
76

 
61

 
25

Prior accident years before catastrophe losses
 
(11
)
 
15

 
nm

 
(16
)
 
14

 
nm

Prior accident years catastrophe losses
 
(3
)
 
2

 
nm

 
5

 
2

 
150

Loss and loss expenses
 
240

 
269

 
(11
)
 
490

 
507

 
(3
)
Underwriting expenses
 
104

 
96

 
8

 
203

 
193

 
5

Underwriting profit (loss)
 
$
5

 
$
(32
)
 
nm

 
$
1

 
$
(41
)
 
nm

 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year before catastrophe losses
 
62.1
 %
 
66.6
%
 
(4.5
)
 
61.4
 %
 
65.5
%
 
(4.1
)
Current accident year catastrophe losses
 
11.0

 
9.6

 
1.4

 
10.9

 
9.3

 
1.6

Prior accident years before catastrophe losses
 
(3.2
)
 
4.3

 
(7.5
)
 
(2.3
)
 
2.1

 
(4.4
)
Prior accident years catastrophe losses
 
(1.0
)
 
0.6

 
(1.6
)
 
0.7

 
0.3

 
0.4

Loss and loss expenses
 
68.9

 
81.1

 
(12.2
)
 
70.7

 
77.2

 
(6.5
)
Underwriting expenses
 
30.0

 
29.0

 
1.0

 
29.4

 
29.5

 
(0.1
)
Combined ratio
 
98.9
 %
 
110.1
%
 
(11.2
)
 
100.1
 %
 
106.7
%
 
(6.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
98.9
 %
 
110.1
%
 
(11.2
)
 
100.1
 %
 
106.7
%
 
(6.6
)
Contribution from catastrophe losses and prior
  years reserve development
 
6.8

 
14.5

 
(7.7
)
 
9.3

 
11.7

 
(2.4
)
Combined ratio before catastrophe losses and
  prior years reserve development
 
92.1
 %
 
95.6
%
 
(3.5
)
 
90.8
 %
 
95.0
%
 
(4.2
)
 
 
 
 
 
 
 
 
 
 
 
 
 

Overview
Performance highlights for the personal lines segment include:
•
Premiums – Personal lines earned premiums and net written premiums continued to grow during the second quarter and first six months of 2019, primarily due to increases in agency renewal written premiums reflecting higher average pricing. Personal lines net written premiums from high net worth policies totaled approximately $116 million and $193 million for the second quarter and first six months of 2019, compared with $86 million and $150 million for the same periods of 2018. The table below analyzes the primary components of premiums.
Agency renewal written premiums increased 7% for both the second quarter and first six months of 2019, largely due to rate increases in select states. We estimate that premium rates for our personal auto line of business increased at average percentages in the high-single-digit range during the first six months of 2019. For our homeowner line of business, we estimate that premium rates for the first six months of 2019 increased at average percentages in the mid-single-digit range. For both our personal auto and homeowner lines of business, some individual policies experienced lower or higher rate changes based on each risk's specific characteristics and enhanced pricing precision enabled by predictive models.
Personal lines new business written premiums increased by 2% during the second quarter of 2019 and decreased by 4% during the first six months of 2019, compared with the same periods of 2018, reflecting pricing discipline, particularly in select states.
Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. For our personal lines insurance segment, an increase in ceded premiums reduced net written premiums by $3 million and $5 million for the second quarter and first six months of 2019, compared with the same periods of 2018.

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


We continue to implement strategies discussed in our 2018 Annual Report on Form 10-K, Item 1, Strategic Initiatives, Page 14, to enhance our responsiveness to marketplace changes and to help achieve our long-term objectives for personal lines growth and profitability. These strategies include initiatives to more profitably underwrite personal auto policies.
 
Personal Lines Insurance Premiums
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Agency renewal written premiums
 
$
365

 
$
342

 
7

 
$
647

 
$
606

 
7

Agency new business written premiums
 
47

 
46

 
2

 
82

 
85

 
(4
)
Other written premiums
 
(10
)
 
(7
)
 
(43
)
 
(18
)
 
(13
)
 
(38
)
Net written premiums
 
402

 
381

 
6

 
711

 
678

 
5

Unearned premium change
 
(54
)
 
(50
)
 
(8
)
 
(19
)
 
(22
)
 
14

Earned premiums
 
$
348

 
$
331

 
5

 
$
692

 
$
656

 
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
•
Combined ratio – Our personal lines combined ratio improved for the second quarter and first six months of 2019, compared with the same periods a year ago. The improvement was primarily due to better experience in the ratio for current accident year loss and loss expenses before catastrophe losses and favorable reserve development on prior accident years. That improvement offset a ratio for weather-related natural catastrophe losses and loss expenses that was 2.0 percentage points worse for the first six months of 2019.
The current accident year loss and loss expenses before catastrophe losses ratio for personal lines improved in the first six months of 2019. That 61.4% ratio was 4.1 percentage points lower, compared with the 65.5% accident year 2018 ratio measured as of June 30, 2018, including a decrease of 0.4 percentage point in the ratio for large losses of $1 million or more per claim, discussed below.
Catastrophe losses and loss expenses accounted for 10.0 and 11.6 percentage points of the combined ratio for the second quarter and first six months of 2019, compared with 10.2 and 9.6 percentage points for the same periods of last year. Through 2018, the 10-year annual average catastrophe loss ratio for the personal lines segment was 10.9 percentage points, and the five-year annual average was 8.9 percentage points.
In addition to the average rate increases discussed above, we continue to refine our pricing to better match premiums to the risk of loss on individual policies. Improved pricing precision and broad-based rate increases are expected to help position the combined ratio at a profitable level over the long term. In addition, greater geographic diversification is expected to reduce the volatility of homeowner loss ratios attributable to weather-related catastrophe losses over time.
Our homeowner line of business, representing 42% of our 2018 personal lines earned premiums, was the only major line in this segment with a six-month 2019 total loss and loss expense ratio before catastrophe losses significantly higher than we desired, although it improved compared with the prior-year period. Its catastrophe loss experience has been elevated in recent quarters, in part due to wildfire losses that have affected much of the property casualty industry. In recent quarters, our homeowner policies have experienced average renewal price increases at percentages near the high end of the mid-single-digit range. We believe rate increases and other actions to improve pricing precision and reduce loss costs will improve future profitability.
The net effect of reserve development on prior accident years during the second quarter and first six months of 2019 was favorable for personal lines overall by $14 million and $11 million, compared with unfavorable net reserve development of $17 million and $16 million for the same periods of 2018. Our personal auto line of business was the largest contributor to the 2019 total personal lines net favorable reserve development on prior accident years, partially offset by net unfavorable reserve development for our homeowner line of business. The net favorable reserve development was primarily due to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2018 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 54.
The underwriting expense ratio increased for the second quarter and decreased for the first six months of 2019, compared with the same periods a year ago. The ratio for both periods reflects ongoing expense management efforts and higher earned premiums. The six-month 2019 ratio is within 0.3 percentage points of our full-year 2018 ratio.

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


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

 
$
—

 
nm

 
$
—

 
$
—

 
nm

Current accident year losses $1 million - $5 million
 
10

 
11

 
(9
)
 
19

 
21

 
(10
)
Large loss prior accident year reserve development
 
1

 
3

 
(67
)
 
3

 
8

 
(63
)
Total large losses incurred
 
11

 
14

 
(21
)
 
22

 
29

 
(24
)
Losses incurred but not reported
 
(4
)
 
31

 
nm

 
—

 
30

 
(100
)
Other losses excluding catastrophe losses
 
167

 
157

 
6

 
330

 
324

 
2

Catastrophe losses
 
34

 
33

 
3

 
79

 
62

 
27

Total losses incurred
 
$
208

 
$
235

 
(11
)
 
$
431

 
$
445

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

 
—
 %
 
—
%
 
0.0

Current accident year losses $1 million - $5 million
 
2.8

 
3.5

 
(0.7
)
 
2.8

 
3.2

 
(0.4
)
Large loss prior accident year reserve development
 
0.3

 
0.8

 
(0.5
)
 
0.4

 
1.2

 
(0.8
)
Total large loss ratio
 
3.1

 
4.3

 
(1.2
)
 
3.2

 
4.4

 
(1.2
)
Losses incurred but not reported
 
(1.1
)
 
9.4

 
(10.5
)
 
(0.1
)
 
4.6

 
(4.7
)
Other losses excluding catastrophe losses
 
48.0

 
47.3

 
0.7

 
47.8

 
49.4

 
(1.6
)
Catastrophe losses
 
9.7

 
10.0

 
(0.3
)
 
11.4

 
9.4

 
2.0

Total loss ratio
 
59.7
 %
 
71.0
%
 
(11.3
)
 
62.3
 %
 
67.8
%
 
(5.5
)
 
 
 
 
 
 
 
 
 
 
 
 
 

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


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


EXCESS AND SURPLUS LINES INSURANCE RESULTS
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Earned premiums
 
$
67

 
$
57

 
18

 
$
130

 
$
113

 
15

Fee revenues
 
—

 
1

 
nm

 
1

 
1

 
0

Total revenues
 
67

 
58

 
16

 
131

 
114

 
15

 
 
 
 
 
 
 
 
 
 
 
 
 
Loss and loss expenses from:
 
 

 
 

 
 

 
 

 
 

 
 

Current accident year before catastrophe losses
 
34

 
33

 
3

 
69

 
63

 
10

Current accident year catastrophe losses
 
—

 
—

 
0

 
—

 
1

 
nm

Prior accident years before catastrophe losses
 
(5
)
 
(4
)
 
(25
)
 
(7
)
 
(14
)
 
50

Prior accident years catastrophe losses
 
—

 
—

 
0

 
—

 
—

 
0

Loss and loss expenses
 
29

 
29

 
0

 
62

 
50

 
24

Underwriting expenses
 
21

 
16

 
31

 
41

 
33

 
24

Underwriting profit
 
$
17

 
$
13

 
31

 
$
28

 
$
31

 
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios as a percent of earned premiums:
 
 
 
 
 
Pt. Change
 
 
 
 
 
Pt. Change
Current accident year before catastrophe losses
 
50.8
 %
 
56.9
 %
 
(6.1
)
 
53.1
 %
 
55.8
 %
 
(2.7
)
Current accident year catastrophe losses
 
0.7

 
1.0

 
(0.3
)
 
0.5

 
1.4

 
(0.9
)
Prior accident years before catastrophe losses
 
(6.2
)
 
(9.6
)
 
3.4

 
(5.2
)
 
(13.3
)
 
8.1

Prior accident years catastrophe losses
 
(0.2
)
 
0.2

 
(0.4
)
 
(0.1
)
 
0.1

 
(0.2
)
Loss and loss expenses
 
45.1

 
48.5

 
(3.4
)
 
48.3

 
44.0

 
4.3

Underwriting expenses
 
31.0

 
29.1

 
1.9

 
31.4

 
29.3

 
2.1

Combined ratio
 
76.1
 %
 
77.6
 %
 
(1.5
)
 
79.7
 %
 
73.3
 %
 
6.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
76.1
 %
 
77.6
 %
 
(1.5
)
 
79.7
 %
 
73.3
 %
 
6.4

Contribution from catastrophe losses and prior
  years reserve development
 
(5.7
)
 
(8.4
)
 
2.7

 
(4.8
)
 
(11.8
)
 
7.0

Combined ratio before catastrophe losses and
  prior years reserve development
 
81.8
 %
 
86.0
 %
 
(4.2
)
 
84.5
 %
 
85.1
 %
 
(0.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Overview
Performance highlights for the excess and surplus lines segment include:
•
Premiums – Excess and surplus lines net written premiums continued to grow during the second quarter and first six months of 2019, compared with the same periods a year ago, primarily due to an increase in new business written premiums. Agency renewal written premiums also grew. For the first six months of 2019, excess and surplus lines policy renewals experienced estimated average price increases at percentages in the low-single-digit range. We measure average changes in excess and surplus lines renewal pricing as the percentage rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies.
New business written premiums produced by agencies increased by $11 million for the second quarter and $21 million for the first six months of 2019, compared with the same periods of 2018. We believe the unusually large increases reflect more opportunities in the marketplace for insurance companies to obtain higher premium rates, plus our additional marketing efforts. Some of what we report as new business came from accounts that were not new to our agents. We believe our agents' seasoned accounts tend to be priced more accurately than business that may be less familiar to them.
 

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


Excess and Surplus Lines Insurance Premiums
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Agency renewal written premiums
 
$
54

 
$
50

 
8

 
$
103

 
$
98

 
5

Agency new business written premiums
 
28

 
17

 
65

 
54

 
33

 
64

Other written premiums
 
(4
)
 
(3
)
 
(33
)
 
(8
)
 
(6
)
 
(33
)
Net written premiums
 
78

 
64

 
22

 
149

 
125

 
19

Unearned premium change
 
(11
)
 
(7
)
 
(57
)
 
(19
)
 
(12
)
 
(58
)
Earned premiums
 
$
67

 
$
57

 
18

 
$
130

 
$
113

 
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
•
Combined ratio – The excess and surplus lines combined ratio decreased by 1.5 percentage points for the second quarter of 2019 and increased by 6.4 points for the first six months, compared with the same periods of 2018. The six-month 2019 increase was primarily due to less favorable reserve development on prior accident years.
The current accident year loss and loss expenses before catastrophe losses ratio for excess and surplus lines improved in the first six months of 2019. That 53.1% ratio was 2.7 percentage points lower, compared with the 55.8% accident year 2018 ratio measured as of June 30, 2018, despite an increase of 2.4 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
Excess and surplus lines net favorable reserve development on prior accident years, as a ratio to earned premiums, was 6.4% and 5.3% for the second quarter and first six months of 2019, compared with 9.4% and 13.2% for the same periods of 2018. The net favorable reserve development recognized during the first six months of 2019 was primarily attributable to accident year 2018 and primarily due to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2018 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 54.
The excess and surplus lines underwriting expense ratio for the second quarter and first six months of 2019 increased, compared with the same periods of 2018, primarily due to higher internal expense allocations that offset higher earned premiums and ongoing expense management efforts.
 

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


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

 
$
—

 
nm

 
$
—

 
$
—

 
nm

Current accident year losses $1 million - $5 million
 
2

 
—

 
nm

 
3

 
—

 
nm

Large loss prior accident year reserve development
 
1

 
—

 
nm

 
2

 
—

 
nm

Total large losses incurred
 
3

 
—

 
nm

 
5

 
—

 
nm

Losses incurred but not reported
 
(3
)
 
3

 
nm

 
(3
)
 
(2
)
 
(50
)
Other losses excluding catastrophe losses
 
18

 
17

 
6

 
36

 
31

 
16

Catastrophe losses
 
—

 
—

 
nm

 
1

 
1

 
—

Total losses incurred
 
$
18

 
$
20

 
(10
)
 
$
39

 
$
30

 
30

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

 
—
 %
 
—
 %
 
0.0

Current accident year losses $1 million - $5 million
 
3.0

 
—

 
3.0

 
2.4

 
—

 
2.4

Large loss prior accident year reserve development
 
1.5

 
(0.2
)
 
1.7

 
1.3

 
(0.3
)
 
1.6

Total large loss ratio
 
4.5

 
(0.2
)
 
4.7

 
3.7

 
(0.3
)
 
4.0

Losses incurred but not reported
 
(4.5
)
 
4.5

 
(9.0
)
 
(1.9
)
 
(2.1
)
 
0.2

Other losses excluding catastrophe losses
 
26.7

 
28.6

 
(1.9
)
 
27.9

 
27.4

 
0.5

Catastrophe losses
 
0.5

 
1.0

 
(0.5
)
 
0.3

 
1.4

 
(1.1
)
Total loss ratio
 
27.2
 %
 
33.9
 %
 
(6.7
)
 
30.0
 %
 
26.4
 %
 
3.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the second quarter of 2019, the excess and surplus lines total ratio for large losses, net of reinsurance, was 4.7 percentage points higher than last year's second quarter. The second-quarter 2019 amount of total large losses incurred helped contribute to the increase in the six-month 2019 total large loss ratio, compared with 2018, in addition to the effect of a first-quarter 2019 ratio that was 3.2 points higher than the first quarter of 2018. We believe results for the three- and six-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.
 


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


LIFE INSURANCE RESULTS
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Earned premiums
 
$
67

 
$
64

 
5

 
$
133

 
$
124

 
7

Fee revenues
 
1

 
1

 
0

 
2

 
2

 
0

Total revenues
 
68

 
65

 
5

 
135

 
126

 
7

Contract holders' benefits incurred
 
73

 
62

 
18

 
143

 
125

 
14

Investment interest credited to contract holders'
 
(25
)
 
(24
)
 
(4
)
 
(49
)
 
(48
)
 
(2
)
Underwriting expenses incurred
 
22

 
19

 
16

 
44

 
39

 
13

Total benefits and expenses
 
70

 
57

 
23

 
138

 
116

 
19

Life insurance segment profit (loss)
 
$
(2
)
 
$
8

 
nm

 
$
(3
)
 
$
10

 
nm

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Overview
Performance highlights for the life insurance segment include:
•
Revenues – Revenues increased for the six months ended June 30, 2019, compared with the same period a year ago, primarily due to higher earned premiums from term life insurance, our largest life insurance product line.
Net in-force life insurance policy face amounts increased to $68.311 billion at June 30, 2019, from $66.142 billion at year-end 2018.
Fixed annuity deposits received for the three and six months ended June 30, 2019, were $13 million and $20 million, compared with $9 million and $16 million for the same periods of 2018. Fixed annuity deposits have a minimal impact to earned premiums because deposits received are initially recorded as liabilities. Profit is earned over time by way of interest-rate spreads. We do not write variable or equity-indexed annuities.
 
Life Insurance Premiums
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,

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

 
$
44

 
7

 
$
92

 
$
85

 
8
Universal life insurance
 
10

 
9

 
11

 
20

 
18

 
11
Other life insurance and annuity products
 
10

 
11

 
(9
)
 
21

 
21

 
0
Net earned premiums
 
$
67

 
$
64

 
5

 
$
133

 
$
124

 
7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
•
Profitability – Our life insurance segment typically reports a small profit or loss on a GAAP basis because profits from investment income spreads are included in our investment segment results. We include only investment income credited to contract holders (including interest assumed in life insurance policy reserve calculations) in our life insurance segment results. A loss of $3 million for our life insurance segment in the first six months of 2019, compared with a gain of $10 million for the same period of 2018, was primarily due to increased mortality expense and less favorable effects from the unlocking of actuarial assumptions.
Life insurance segment benefits and expenses consist principally of contract holders' (policyholders') benefits incurred related to traditional life and interest-sensitive products and operating expenses incurred, net of deferred acquisition costs. Total benefits increased in the first six months of 2019. Life policy and investment contract reserves increased with continued growth in net in-force life insurance policy face amounts. Mortality results increased, compared with the same period of 2018, and were higher than our 2019 projections.
Underwriting expenses for the first six months of 2019 increased compared with the same period a year ago. For the first six months of 2019, unlocking of interest rate actuarial assumptions decreased the amount of expenses deferred to future periods, increasing underwriting expenses more than occurred in the same period a year ago.

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


We recognize that assets under management, capital appreciation and investment income are integral to evaluating the success of the life insurance segment because of the long duration of life products. On a basis that includes investment income and investment gains or losses from life-insurance-related invested assets, the life insurance company reported net income of $8 million and $18 million for the three and six months ended June 30, 2019, compared with net income of $17 million and $30 million for the same periods of 2018. The life insurance company portfolio had net after-tax investment losses of less than $1 million and $1 million for the three and six months ended June 30, 2019, compared with less than $1 million of net after-tax investment losses for the three and six months ended June 30, 2018.

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

Investments Results
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,

 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Total investment income, net of expenses
 
$
160

 
$
154

 
4

 
$
317

 
$
304

 
4

Investment interest credited to contract holders'
 
(25
)
 
(24
)
 
(4
)
 
(49
)
 
(48
)
 
(2
)
Investment gains and losses, net
 
364

 
105

 
247

 
1,027

 
(86
)
 
nm

Investments profit, pretax
 
$
499

 
$
235

 
112

 
$
1,295

 
$
170

 
nm

 
 
 
 
 
 
 
 
 
 
 
 
 

We continue to position our portfolio considering both the challenges presented by the current low interest rate environment and the risks presented by potential future inflation. As bonds in our generally laddered portfolio mature or are called over the near term, we will be challenged to replace their current yield. The table below shows the average pretax yield-to-amortized cost associated with expected principal redemptions for our fixed-maturity portfolio. The expected principal redemptions are based on par amounts and include dated maturities, calls and prefunded municipal bonds that we expect will be called during each respective time period.
(Dollars in millions)
% Yield
 
Principal redemptions
At June 30, 2019
 
Fixed-maturity pretax yield profile:
 
 
 
Expected to mature during the remainder of 2019
5.15
 
$
260

Expected to mature during 2020
4.61
 
634

Expected to mature during 2021
4.33
 
991

Average yield and total expected maturities from the remainder of 2019 through 2021
4.54
 
$
1,885

 
 
 
 


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


The table below shows the average pretax yield-to-amortized cost for fixed-maturity securities acquired during the periods indicated. The average yield for total fixed-maturity securities acquired during the first six months of 2019 was higher than the 4.20% average yield-to-amortized cost of the fixed-maturity securities portfolio at the end of 2018. Our fixed-maturity portfolio's average yield of 4.13% for the first six months of 2019, from the investment income table below, was lower than that yield for the year-end 2018 fixed-maturities portfolio.
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Average pretax yield-to-amortized cost on new fixed-maturities:
 
 
 
 
 
 
 
Acquired taxable fixed-maturities
4.56
%
 
4.68
%
 
4.70
%
 
4.40
%
Acquired tax-exempt fixed-maturities
3.13

 
3.72

 
3.22

 
3.51

Average total fixed-maturities acquired
4.14

 
4.59

 
4.36

 
4.30

 
 
 
 
 
 
 
 

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

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

2018
 
% Change
Investment income:
 
 

 
 

 
 

 
 

 
 

 
 
Interest
 
$
111

 
$
112

 
(1
)
 
$
222

 
$
222

 
0
Dividends
 
50

 
44

 
14

 
96

 
86

 
12
Other
 
2

 
1

 
100

 
5

 
2

 
150
Less investment expenses
 
3

 
3

 
0

 
6

 
6

 
0
Investment income, pretax
 
160

 
154

 
4

 
317

 
304

 
4
Less income taxes
 
25

 
23

 
9

 
49

 
46

 
7
Total investment income, after-tax
 
$
135

 
$
131

 
3

 
$
268

 
$
258

 
4
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment returns:
 
 
 
 
 
 
 
 
 
 
 
 
Average invested assets plus cash and cash equivalents
 
$
18,648

 
$
17,271

 
 
 
$
18,194

 
$
17,352

 
 
Average yield pretax
 
3.43
%
 
3.57
%
 
 
 
3.48
%
 
3.50
%
 
 
Average yield after-tax
 
2.90

 
3.03

 
 
 
2.95

 
2.97

 
 
Effective tax rate
 
15.6

 
15.2

 
 
 
15.6

 
15.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-maturity returns:
 
 
 
 
 
 
 
 
 
 
 
 
Average amortized cost
 
$
10,783

 
$
10,458

 
 
 
$
10,738

 
$
10,433

 
 
Average yield pretax
 
4.12
%
 
4.28
%
 
 
 
4.13
%
 
4.26
%
 
 
Average yield after-tax
 
3.43

 
3.58

 
 
 
3.45

 
3.56

 
 
Effective tax rate
 
16.6

 
16.3

 
 
 
16.6

 
16.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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


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

2018
Investment gains and losses:
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Investment gains and losses on securities sold, net
 
$
11

 
$
4

 
$
23

 
$
7

Unrealized gains and losses on securities still held, net
 
355

 
101

 
999

 
(97
)
Subtotal
 
366

 
105

 
1,022

 
(90
)
Fixed maturities:
 
 
 
 
 
 
 
 
Gross realized gains
 
1

 
3

 
3

 
7

Gross realized losses
 
(2
)
 
(1
)
 
(2
)
 
(1
)
Subtotal
 
$
(1
)
 
2

 
1

 
6

Other
 
(1
)
 
(2
)
 
4

 
(2
)
Total investment gains and losses reported in net income
 
364

 
105

 
1,027

 
(86
)
Change in unrealized investment gains and losses:
 
 
 
 
 
 
 
 
Fixed maturities
 
200

 
(80
)
 
442

 
(301
)
Total
 
$
564

 
$
25

 
$
1,469

 
$
(387
)
 
 
 
 
 
 
 
 
 

Of the 3,828 fixed-maturity securities in the portfolio, one security was trading below 70% of amortized cost at June 30, 2019, with a fair value of $5 million and an unrealized loss of $2 million. Our asset impairment committee regularly monitors the portfolio, including a quarterly review of the entire portfolio for potential OTTI charges. We believe that if liquidity in the markets were to significantly deteriorate or economic conditions were to significantly weaken, we could experience declines in portfolio values and possibly additional OTTI charges.

We had no OTTI charges for either the first six months of 2019 or the first six months of 2018.
 
 
 
 
 
 

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


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

Total revenues for the first six months of 2019 for our Other operations increased, compared with the same period of 2018, primarily due to earned premiums from Cincinnati Re and Cincinnati Global, with increases of $27 million and $43 million, respectively. Total expenses for Other increased for the first six months of 2019, primarily due to more losses and loss expenses from Cincinnati Re and Cincinnati Global.

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

 
$
1

 
0
 
$
3

 
$
2

 
50
Earned premiums
 
79

 
30

 
163
 
129

 
59

 
119
Other revenues
 
1

 
—

 
nm
 
1

 
—

 
nm
Total revenues
 
81

 
31

 
161
 
133

 
61

 
118
Interest expense
 
13

 
13

 
0
 
26

 
26

 
0
Loss and loss expenses
 
44

 
13

 
238
 
70

 
26

 
169
Underwriting expenses
 
21

 
9

 
133
 
37

 
20

 
85
Operating expenses
 
4

 
3

 
33
 
12

 
7

 
71
Total expenses
 
82

 
38

 
116
 
145

 
79

 
84
Other loss
 
$
(1
)
 
$
(7
)
 
86
 
$
(12
)
 
$
(18
)
 
33
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TAXES
We had $102 million and $274 million of income tax expense for the three and six months ended June 30, 2019, compared with $47 million and $28 million for the same periods of 2018. The effective tax rate for the three and six months ended June 30, 2019, was 19.2% and 19.6% compared with 17.8% and 13.1% for the same periods last year. The change in our effective tax rate between periods was primarily due to changes in our net investment gains and losses as well as changes in our underwriting income. For the three and six months ended June 30, 2019, there was no material impact to our effective tax rate as a result of our Cincinnati Global acquisition.

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


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


LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2019, shareholders' equity was $9.131 billion, compared with $7.833 billion at December 31, 2018. Total debt was $825 million at June 30, 2019, up $5 million from December 31, 2018. At June 30, 2019, cash and cash equivalents totaled $803 million, compared with $784 million at December 31, 2018.

SOURCES OF LIQUIDITY
 
Subsidiary Dividends
Our lead insurance subsidiary declared dividends of $300 million to the parent company in the first six months of 2019, compared with $200 million for the same period of 2018. For full-year 2018, subsidiary dividends declared totaled $500 million. State of Ohio regulatory requirements restrict the dividends our insurance subsidiary can pay. For full-year 2019, total dividends that our insurance subsidiary could pay to our parent company without regulatory approval are approximately $626 million.
 
Investing Activities
Investment income is a source of liquidity for both the parent company and its insurance subsidiary. We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth.
 
Parent company obligations can be funded with income on investments held at the parent-company level or through sales of securities in that portfolio, although our investment philosophy seeks to compound cash flows over the long term. These sources of capital can help minimize subsidiary dividends to the parent company, protecting insurance subsidiary capital.

For a discussion of our historic investment strategy, portfolio allocation and quality, see our 2018 Annual Report on Form 10-K, Item 1, Investments Segment, Page 26.
 
Insurance Underwriting
Our property casualty and life insurance underwriting operations provide liquidity because we generally receive premiums before paying losses under the policies purchased with those premiums. After satisfying our cash requirements, we use excess cash flows for investment, increasing future investment income.
 
Historically, cash receipts from property casualty and life insurance premiums, along with investment income, have been more than sufficient to pay claims, operating expenses and dividends to the parent company.
 
The table below shows a summary of operating cash flow for property casualty insurance (direct method):
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Premiums collected
 
$
1,443

 
$
1,310

 
10

 
$
2,792

 
$
2,579

 
8

Loss and loss expenses paid
 
(798
)
 
(695
)
 
(15
)
 
(1,622
)
 
(1,409
)
 
(15
)
Commissions and other underwriting expenses paid
 
(383
)
 
(352
)
 
(9
)
 
(897
)
 
(871
)
 
(3
)
Cash flow from underwriting
 
262

 
263

 
—

 
273

 
299

 
(9
)
Investment income received
 
107

 
103

 
4

 
220

 
211

 
4

Cash flow from operations
 
$
369

 
$
366

 
1

 
$
493

 
$
510

 
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collected premiums for property casualty insurance rose $213 million during the first six months of 2019, compared with the same period in 2018. Loss and loss expenses paid for the 2019 period increased $213 million. Commissions and other underwriting expenses paid increased $26 million, primarily due to higher commissions paid to agencies, reflecting the increase in collected premiums.
 
We discuss our future obligations for claims payments and for underwriting expenses in our 2018 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 97, and Other Commitments also on Page 97.
 

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


Capital Resources
At June 30, 2019, our debt-to-total-capital ratio was 8.3%, with $788 million in long-term debt and $37 million in borrowing on our revolving short-term line of credit. That line of credit had a $32 million balance at December 31, 2018. At June 30, 2019, $263 million was available for future cash management needs as part of the general provisions of the line of credit agreement, with another $300 million available as part of an accordion feature. Based on our capital requirements at June 30, 2019, we do not anticipate a material increase in debt levels exceeding the available line of credit amount during the remainder of the year. As a result, we expect changes in our debt-to-total-capital ratio to continue to be largely a function of the contribution of unrealized investment gains or losses to shareholders' equity. As part of our Cincinnati Global acquisition, on February 25, 2019, we entered into an unsecured letter of credit agreement to provide a portion of the capital needed to support its obligations at Lloyd's. The amount of this unsecured letter of credit agreement was $234 million at June 30, 2019.
 
We provide details of our three long-term notes in this quarterly report Item 1, Note 3 – Fair Value Measurements. None of the notes are encumbered by rating triggers.
 
Four independent ratings firms award insurer financial strength ratings to our property casualty insurance companies and three firms rate our life insurance company. Those firms made no changes to our parent company debt ratings during the first six months of 2019. Our debt ratings are discussed in our 2018 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, Other Sources of Liquidity, Page 95.
 
Off-Balance Sheet Arrangements
We do not use any special-purpose financing vehicles or have any undisclosed off-balance sheet arrangements (as that term is defined in applicable SEC rules) that are reasonably likely to have a current or future material effect on the company's financial condition, results of operation, liquidity, capital expenditures or capital resources. Similarly, the company holds no fair-value contracts for which a lack of marketplace quotations would necessitate the use of fair-value techniques.
 
USES OF LIQUIDITY
Our parent company and insurance subsidiary have contractual obligations and other commitments. In addition, one of our primary uses of cash is to enhance shareholder return.
 
Contractual Obligations
We estimated our future contractual obligations as of December 31, 2018, in our 2018 Annual Report on Form
10-K, Item 7, Contractual Obligations, Page 97. There have been no material changes to our estimates of future contractual obligations since our 2018 Annual Report on Form 10-K.

Other Commitments
In addition to our contractual obligations, we have other property casualty operational commitments.
•
Commissions – Commissions paid were $582 million in the first six months of 2019. Commission payments generally track with written premiums, except for annual profit-sharing commissions typically paid during the first quarter of the year.
•
Other underwriting expenses – Many of our underwriting expenses are not contractual obligations, but reflect the ongoing expenses of our business. Noncommission underwriting expenses paid were $315 million in the first six months of 2019.
•
Technology costs – In addition to contractual obligations for hardware and software, we anticipate capitalizing up to $7 million in spending for key technology initiatives in 2019. Capitalized development costs related to key technology initiatives were $4 million in the first six months of 2019. These activities are conducted at our discretion, and we have no material contractual obligations for activities planned as part of these projects.
•
Funds at Lloyd's – From time to time, we may be required to meet certain cash funding requirements on behalf of Cincinnati Global. During the first half of 2019, the parent company paid $50 million to Lloyd's. 

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

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


Investing Activities
After fulfilling operating requirements, we invest cash flows from underwriting, investment and other corporate activities in fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We discuss our investment strategy and certain portfolio attributes in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk.
 
Uses of Capital
Uses of cash to enhance shareholder return include dividends to shareholders. In February 2019, the board of directors declared regular quarterly cash dividends of 56 cents per share for an indicated annual rate of $2.24 per share. During the first six months of 2019, we used $175 million to pay cash dividends to shareholders.

PROPERTY CASUALTY INSURANCE LOSS AND LOSS EXPENSE RESERVES
For the business lines in the commercial and personal lines insurance segments, and in total for the excess and surplus lines insurance segment and other property casualty insurance operations, the following table details gross reserves among case, IBNR (incurred but not reported) and loss expense reserves, net of salvage and subrogation reserves. Reserving practices are discussed in our 2018 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves, Page 98.
 
Total gross reserves at June 30, 2019, increased $308 million compared with December 31, 2018. Case loss reserves for losses increased $161 million, IBNR loss reserves increased by $140 million and loss expense reserves increased by $7 million. The total gross increase was primarily due to the inclusion of reserves for recently acquired Cincinnati Global.


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


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

 
 

 
 

 
 

 
 

Commercial casualty
 
$
911

 
$
676

 
$
605

 
$
2,192

 
36.8
%
Commercial property
 
295

 
55

 
63

 
413

 
6.9

Commercial auto
 
390

 
175

 
139

 
704

 
11.8

Workers' compensation
 
393

 
520

 
92

 
1,005

 
16.9

Other commercial
 
108

 
6

 
67

 
181

 
3.0

Subtotal
 
2,097

 
1,432

 
966

 
4,495

 
75.4

Personal lines insurance:
 
 

 
 

 
 

 
 

 
 

Personal auto
 
228

 
57

 
75

 
360

 
6.1

Homeowner
 
158

 
21

 
37

 
216

 
3.6

Other personal
 
47

 
61

 
5

 
113

 
1.9

Subtotal
 
433

 
139

 
117

 
689

 
11.6

Excess and surplus lines insurance
 
133

 
93

 
93

 
319

 
5.4

Cincinnati Re
 
45

 
168

 
2

 
215

 
3.6

Cincinnati Global
 
177

 
57

 
2

 
236

 
4.0

Total
 
$
2,885

 
$
1,889

 
$
1,180

 
$
5,954

 
100.0
%
At December 31, 2018
 
 

 
 

 
 

 
 

 
 

Commercial lines insurance:
 
 

 
 

 
 

 
 

 
 

Commercial casualty
 
$
981

 
$
647

 
$
604

 
$
2,232

 
39.5
%
Commercial property
 
270

 
12

 
60

 
342

 
6.1

Commercial auto
 
402

 
152

 
141

 
695

 
12.3

Workers' compensation
 
384

 
542

 
92

 
1,018

 
18.0

Other commercial
 
99

 
7

 
73

 
179

 
3.2

Subtotal
 
2,136

 
1,360

 
970

 
4,466

 
79.1

Personal lines insurance:
 
 

 
 

 
 

 
 

 
 

Personal auto
 
240

 
50

 
72

 
362

 
6.3

Homeowner
 
152

 
9

 
40

 
201

 
3.6

Other personal
 
46

 
65

 
5

 
116

 
2.1

Subtotal
 
438

 
124

 
117

 
679

 
12.0

Excess and surplus lines insurance
 
118

 
96

 
84

 
298

 
5.3

Cincinnati Re
 
32

 
169

 
2

 
203

 
3.6

Total
 
$
2,724

 
$
1,749

 
$
1,173

 
$
5,646

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
LIFE POLICY AND INVESTMENT CONTRACT RESERVES
Gross life policy and investment contract reserves were $2.798 billion at June 30, 2019, compared with $2.779 billion at year-end 2018, reflecting continued growth in life insurance policies in force. We discuss our life insurance reserving practices in our 2018 Annual Report on Form 10-K, Item 7, Life Insurance Policyholder Obligations and Reserves, Page 104.

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


OTHER MATTERS
 
SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are discussed in our 2018 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 128, and updated in this quarterly report Item 1, Note 1, Accounting Policies.
 
In conjunction with those discussions, in the Management's Discussion and Analysis in the 2018 Annual Report on Form 10-K, management reviewed the estimates and assumptions used to develop reported amounts related to the most significant policies. Management discussed the development and selection of those accounting estimates with the audit committee of the board of directors.
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
Our greatest exposure to market risk is through our investment portfolio. Market risk is the potential for a decrease in securities' fair value resulting from broad yet uncontrollable forces such as: inflation, economic growth or recession, interest rates, world political conditions or other widespread unpredictable events. It is comprised of many individual risks that, when combined, create a macroeconomic impact.
 
Our view of potential risks and our sensitivity to such risks is discussed in our 2018 Annual Report on Form 10-K, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Page 113.
 
The fair value of our investment portfolio was $18.332 billion at June 30, 2019, up $1.723 billion from year-end 2018, including a $631 million increase in the fixed-maturity portfolio and a $1.092 billion increase in the equity portfolio.
(Dollars in millions)
At June 30, 2019
 
At December 31, 2018
 
Cost or 
amortized cost
Percent 
of total
 
Fair value
Percent 
of total
 
Cost or 
amortized cost
Percent 
of total
 
Fair value
Percent 
of total
Taxable fixed maturities
$
7,032

49.1
%
 
$
7,331

40.0
%
 
$
6,920

49.4
%
 
$
6,926

41.7
%
Tax-exempt fixed maturities
3,800

26.6

 
3,989

21.8

 
3,723

26.6

 
3,763

22.6

Common equities
3,298

23.1

 
6,821

37.2

 
3,195

22.8

 
5,742

34.6

Nonredeemable preferred
  equities
173

1.2

 
191

1.0

 
173

1.2

 
178

1.1

Total
$
14,303

100.0
%
 
$
18,332

100.0
%
 
$
14,011

100.0
%
 
$
16,609

100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2019, our consolidated investment portfolio included $5 million of assets for which values are based on prices or valuation techniques that require significant management judgment (Level 3 assets). This represented less than 1% of investment portfolio assets measured at fair value. See Item 1, Note 3, Fair Value Measurements, for additional discussion of our valuation techniques. We have generally obtained and evaluated two nonbinding quotes from brokers; then, our investment professionals determined our best estimate of fair value. These investments include private placements, small issues and various thinly traded securities.
 
In addition to our investment portfolio, the total investments amount reported in our condensed consolidated balance sheets includes Other invested assets. Other invested assets included $33 million of life policy loans, $145 million in Lloyd's deposits, $63 million of private equity investments and $30 million of real estate through direct property ownership and development projects in the United States at June 30, 2019.
 

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


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

In the first six months of 2019, the increase in fair value of our fixed-maturity portfolio reflected both net purchases of securities and an increase in net unrealized gains, primarily due to a decrease in interest rates and a narrowing of corporate credit spreads. At June 30, 2019, our fixed-maturity portfolio with an average rating of A2/A was valued at 104.5% of its amortized cost, compared with 100.4% at December 31, 2018.
 
At June 30, 2019, our investment-grade and noninvestment-grade fixed-maturity securities represented 86.2% and 2.5% of the portfolio, respectively. The remaining 11.3% represented fixed-maturity securities that were not rated by Moody's or S&P Global Ratings.

Attributes of the fixed-maturity portfolio include:
 
 
At June 30, 2019
 
At December 31, 2018
Weighted average yield-to-amortized cost
 
4.13
%
 
4.20
%
Weighted average maturity
 
7.8
yrs
 
7.6
yrs
Effective duration
 
5.0
yrs
 
5.2
yrs
 
 
 
 
 
 
 
 
We discuss maturities of our fixed-maturity portfolio in our 2018 Annual Report on Form 10-K, Item 8, Note 2, Investments, Page 137, and in this quarterly report Item 2, Investments Results.
 


Cincinnati Financial Corporation Second-Quarter 2019 10-Q
Page 61


TAXABLE FIXED MATURITIES
Our taxable fixed-maturity portfolio, with a fair value of $7.331 billion at June 30, 2019, included:
(Dollars in millions)
 
At June 30, 2019
 
At December 31, 2018
Investment-grade corporate
 
$
5,799

 
$
5,464

States, municipalities and political subdivisions
 
560

 
541

Commercial mortgage backed
 
301

 
288

Government sponsored enterprises
 
282

 
310

Noninvestment-grade corporate
 
272

 
246

United States government
 
100

 
67

Foreign government
 
17

 
10

Total
 
$
7,331

 
$
6,926

 
 
 
 
 
 
Our strategy is to buy, and typically hold, fixed-maturity investments to maturity, but we monitor credit profiles and fair value movements when determining holding periods for individual securities. With the exception of United States agency issues that include government-sponsored enterprises, no individual issuer's securities accounted for more than 1.1% of the taxable fixed-maturity portfolio at June 30, 2019. Our investment-grade corporate bonds had an average rating of Baa2 by Moody's or BBB by S&P Global Ratings and represented 79.1% of the taxable fixed-maturity portfolio's fair value at June 30, 2019, compared with 78.9% at year-end 2018.
 
The heaviest concentration in our investment-grade corporate bond portfolio, based on fair value at
June 30, 2019, was the financial sector. It represented 45.8% of our investment-grade corporate bond portfolio, compared with 47.1% at year-end 2018. No other sector exceeded 10% of our investment-grade corporate bond portfolio.

Our taxable fixed-maturity portfolio at June 30, 2019, included $301 million of commercial mortgage-backed securities with an average rating of Aa1/AA.
 
TAX-EXEMPT FIXED MATURITIES
At June 30, 2019, we had $3.989 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody's and S&P Global Ratings. We traditionally have purchased municipal bonds focusing on general obligation and essential services issues, such as water, waste disposal or others. The portfolio is well diversified among approximately 1,450 municipal bond issuers. No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at June 30, 2019.

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

Cincinnati Financial Corporation Second-Quarter 2019 10-Q
Page 62


The table below summarizes the effect of hypothetical changes in interest rates on the fair value of the fixed-maturity portfolio:
(Dollars in millions)
 
Effect from interest rate change in basis points
 
 
-200
 
 -100
 
-
 
100
 
200
At June 30, 2019
 
$
12,444

 
$
11,875

 
$
11,320

 
$
10,743

 
$
10,168

At December 31, 2018
 
$
11,793

 
$
11,245

 
$
10,689

 
$
10,121

 
$
9,576

 
 
 
 
 
 
 
 
 
 
 
 
The effective duration of the fixed-maturity portfolio as of June 30, 2019, was 5.0 years, down from 5.2 years at year-end 2018. The above table is a theoretical presentation showing that an instantaneous, parallel shift in the yield curve of 100 basis points could produce an approximately 5.0% change in the fair value of the fixed-maturity portfolio. Generally speaking, the higher a bond is rated, the more directly correlated movements in its fair value are to changes in the general level of interest rates, exclusive of call features. The fair values of average- to lower-rated corporate bonds are additionally influenced by the expansion or contraction of credit spreads.
 
In our dynamic financial planning model, the selected interest rate change of 100 to 200 basis points represents our view of a shift in rates that is quite possible over a one-year period. The rates modeled should not be considered a prediction of future events as interest rates may be much more volatile in the future. The analysis is not intended to provide a precise forecast of the effect of changes in rates on our results or financial condition, nor does it take into account any actions that we might take to reduce exposure to such risks.


EQUITY INVESTMENTS
Our equity investments, with a fair value totaling $7.012 billion at June 30, 2019, included $6.821 billion of common stock securities of companies generally with strong indications of paying and growing their dividends. Other criteria we evaluate include increasing sales and earnings, proven management and a favorable outlook. We believe our equity investment style is an appropriate long-term strategy. While our long-term financial position would be affected by prolonged changes in the market valuation of our investments, we believe our strong surplus position and cash flow provide a cushion against short-term fluctuations in valuation. Continued payment of cash dividends by the issuers of our common equity holdings can provide a floor to their valuation.

The table below summarizes the effect of hypothetical changes in market prices on fair value of our equity portfolio.
(Dollars in millions)
Effect from market price change in percent
 
 
-30%
 
-20%
 
-10%
 
—
 
10%
 
20%
 
30%
At June 30, 2019
 
$
4,908

 
$
5,610

 
$
6,311

 
$
7,012

 
$
7,713

 
$
8,414

 
$
9,116

At December 31, 2018
 
$
4,144

 
$
4,736

 
$
5,328

 
$
5,920

 
$
6,512

 
$
7,104

 
$
7,696

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

At June 30, 2019, Microsoft Corporation (Nasdaq:MSFT) was our largest single common stock holding with a fair value of $336 million, or 4.9% of our publicly traded common stock portfolio and 1.8% of the total investment portfolio. Thirty-eight holdings among nine different sectors each had a fair value greater than $100 million.
 

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

 
 

 
 

 
 

Information technology
22.5
%
 
21.5
%
 
20.9
%
 
20.1
%
Financial
15.4

 
13.0

 
15.6

 
13.3

Industrials
13.0

 
9.4

 
12.5

 
9.2

Healthcare
12.8

 
14.2

 
14.9

 
15.6

Consumer discretionary
10.3

 
10.2

 
10.5

 
10.0

Energy
6.9

 
5.1

 
6.7

 
5.3

Consumer staples
5.8

 
7.3

 
5.6

 
7.4

Materials
4.8

 
2.8

 
4.9

 
2.7

Telecomm services
3.5

 
10.2

 
3.5

 
10.1

Utilities
2.5

 
3.3

 
2.7

 
3.3

Real Estate
2.5

 
3.0

 
2.2

 
3.0

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
 
UNREALIZED INVESTMENT GAINS AND LOSSES
At June 30, 2019, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $502 million and unrealized investment losses amounted to $14 million before taxes.
 
The $488 million net unrealized gain position in our fixed-maturity portfolio at June 30, 2019, increased in the first six months of 2019, primarily due to a decrease in interest rates and a narrowing of corporate credit spreads. The net gain position for our current fixed-maturity holdings will naturally decline over time as individual securities mature. In addition, changes in interest rates can cause rapid, significant changes in fair values of fixed-maturity securities and the net gain position, as discussed in Quantitative and Qualitative Disclosures About Market Risk.

For federal income tax purposes, taxes on gains from appreciated investments generally are not due until securities are sold. We believe that the appreciated value of equity securities, compared with the cost of securities that is generally used as a tax basis, is a useful measure to help evaluate how fair value can change over time. On this basis, the net unrealized investment gains at June 30, 2019, consisted of a net gain position in our equity portfolio of $3.541 billion. Events or factors such as economic growth or recession can affect the fair value and unrealized investment gains of our equity securities. The five largest holdings in our common stock portfolio were Microsoft Corporation (Nasdaq:MSFT), Apple Inc. (Nasdaq:AAPL), JP Morgan Chase & Co. (NYSE:JPM), BlackRock Inc. (NYSE:BLK) and Cisco Systems (Nasdaq:SCO), which had a combined fair value of $1.285 billion.

Unrealized Investment Losses
We expect the number of fixed-maturity securities trading below amortized cost to fluctuate as interest rates rise or fall and credit spreads expand or contract due to prevailing economic conditions. Further, amortized costs for some securities are revised through OTTI recognized in prior periods. At June 30, 2019, 136 of the 3,828 fixed-maturity securities we owned had fair values below amortized cost, compared with 1,262 of the 3,606 securities we owned at year-end 2018. The 136 holdings with fair values below cost or amortized cost at June 30, 2019, represented 4.8% of the fair value of our fixed-maturity investment portfolio and $14 million in unrealized losses.
•
129 of the 136 holdings had fair value between 90% and 100% of amortized cost at June 30, 2019. These primarily consist of securities whose current valuation is largely the result of interest rate factors. The fair value of these 129 securities was $516 million, and they accounted for $7 million in unrealized losses.
•
6 of the 136 fixed-maturity holdings had fair value between 70% and 90% of amortized cost at June 30, 2019. We believe the six fixed-maturity securities will continue to pay interest and ultimately pay principal upon maturity. The issuers of these six securities have strong cash flow to service their debt and meet their

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contractual obligation to make principal payments. The fair value of these securities was $24 million, and they accounted for $5 million in unrealized losses.
•
1 of the 136 fixed-maturity holdings had fair value below 70% of amortized cost at June 30, 2019. We believe the fixed-maturity security will continue to pay interest and ultimately pay principal upon maturity. The fair value of this security was $5 million, and it accounted for $2 million in unrealized losses.

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

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
78

 
$
2

 
$
294

 
$
11

 
$
372

 
$
13

States, municipalities and political subdivisions
 
13

 
—

 
21

 
—

 
34

 
—

Commercial mortgage-backed
 
—

 
—

 
5

 
—

 
5

 
—

Government-sponsored enterprises
 
7

 
—

 
117

 
1

 
124

 
1

United States government
 
5

 
—

 
4

 
—

 
9

 
—

Foreign government
 
1

 
—

 
—

 
—

 
1

 
—

Total
 
$
104

 
$
2

 
$
441

 
$
12

 
$
545

 
$
14

At December 31, 2018
 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 
 
 

 
 

 
 

 
 

 
 

Corporate
 
$
2,082

 
$
51

 
$
501

 
$
36

 
$
2,583

 
$
87

States, municipalities and political subdivisions
 
823

 
18

 
340

 
13

 
1,163

 
31

Commercial mortgage-backed
 
77

 
—

 
64

 
2

 
141

 
2

Government-sponsored enterprises
 
49

 
1

 
211

 
6

 
260

 
7

United States government
 
—

 
—

 
33

 
1

 
33

 
1

Total
 
$
3,031

 
$
70

 
$
1,149

 
$
58

 
$
4,180

 
$
128

 
 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2019, 100 fixed-maturity securities with a total unrealized loss of $12 million had been in an unrealized loss position for 12 months or more. Of that total, one fixed-maturity security had a fair value below 70% of amortized cost and accounted for $2 million in unrealized losses; five fixed-maturity securities with a fair value of $21 million had a fair value from 70% to less than 90% of amortized cost and accounted for $4 million in unrealized losses; and 94 fixed-maturity securities with a fair value of $415 million had fair values from 90% to less than 100% of amortized cost and accounted for $6 million in unrealized losses.

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

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


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The following table summarizes the investment portfolio by severity of decline:
(Dollars in millions)
 
Number
of issues
 
Cost or 
amortized
cost
 
Fair value
 
Gross 
unrealized 
gain (loss)
 
Gross investment income
At June 30, 2019
 
 
 
 
 
Taxable fixed maturities:
 
 
 
 
 
 
 
 
 
 
Fair valued below 70% of amortized cost
 
1

 
$
7

 
$
5

 
$
(2
)
 
$
—

Fair valued at 70% to less than 100% of amortized cost
 
123

 
532

 
520

 
(12
)
 
9

Fair valued at 100% and above of amortized cost
 
1,631

 
6,493

 
6,806

 
313

 
145

Investment income on securities sold in current year
 
—

 
—

 
—

 
—

 
8

Total
 
1,755

 
7,032

 
7,331

 
299

 
162

Tax-exempt fixed maturities:
 
 

 
 

 
 

 
 

 
 

Fair valued below 70% of amortized cost
 
—

 
—

 
—

 
—

 
—

Fair valued at 70% to less than 100% of amortized cost
 
12

 
20

 
20

 
—

 
—

Fair valued at 100% and above of amortized cost
 
2,061

 
3,780

 
3,969

 
189

 
59

Investment income on securities sold in current year
 
—

 
—

 
—

 
—

 
1

Total
 
2,073

 
3,800

 
3,989

 
189

 
60

Fixed-maturities summary:
 
 

 
 

 
 

 
 

 
 

Fair valued below 70% of cost or amortized cost
 
1

 
7

 
5

 
(2
)
 
—

Fair valued at 70% to less than 100% of cost or amortized cost
 
135

 
552

 
540

 
(12
)
 
9

Fair valued at 100% and above of cost or amortized cost
 
3,692

 
10,273

 
10,775

 
502

 
204

Investment income on securities sold in current year
 
—

 
—

 
—

 
—

 
9

Total
 
3,828

 
$
10,832

 
$
11,320

 
$
488

 
$
222

 
 
 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 

 
 

 
 

 
 

 
 

Fixed-maturities summary:
 
 

 
 

 
 

 
 

 
 

Fair valued below 70% of cost or amortized cost
 
—

 
$
—

 
$
—

 
$
—

 
$
—

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

 
4,308

 
4,180

 
(128
)
 
147

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

 
6,335

 
6,509

 
174

 
269

Investment income on securities sold in current year
 
—

 
—

 
—

 
—

 
28

Total
 
3,606

 
$
10,643

 
$
10,689

 
$
46

 
$
444

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

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

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Changes in Internal Control over Financial Reporting – During the three months ended June 30, 2019, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. On February 28, 2019, we completed the acquisition of MSP, rebranded as Cincinnati Global effective May 1, 2019. Cincinnati Global's existing disclosure controls and procedures supported our financial reporting as of June 30, 2019. In conducting our evaluation of the effectiveness of our internal control over financial reporting, we have elected to exclude Cincinnati Global from our evaluation as permitted under SEC rules. We are currently in the process of evaluating and integrating Cincinnati Global's internal controls over financial reporting with ours. We expect to complete this integration by December 31, 2019.
 
Part II – Other Information
Item 1.    Legal Proceedings
Neither the company nor any of our subsidiaries are involved in any litigation believed to be material other than ordinary, routine litigation incidental to the nature of our business.
 
Item 1A.    Risk Factors
Our risk factors have not changed materially since they were described in our 2018 Annual Report on Form 10-K filed February 22, 2019, and are incorporated herein by reference, except we no longer have risks or uncertainties associated with the timely or successful completion of the acquisition of MSP. This transaction was completed as reported on Form 8-K filed February 28, 2019.


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Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any of our shares that were not registered under the Securities Act during the first six months of 2019. Our repurchase program was expanded on October 22, 2007, to increase our repurchase authorization to approximately 13 million shares. Our repurchase program does not have an expiration date. On January 26, 2018, an additional 15 million shares were authorized, resulting in 15,476,785 shares available for purchase under our programs at June 30, 2019.
Period
 
Total number
 of shares
 purchased
 
Average
 price paid
 per share
 
Total number of shares 
purchased as part of
publicly announced
plans or programs
 
Maximum number of
shares that may yet be
purchased under the
plans or programs
April 1-30, 2019
 
—

 
$
—

 
—

 
15,476,785

May 1-31, 2019
 
—

 
—

 
—

 
15,476,785

June 1-30, 2019
 
—

 
—

 
—

 
15,476,785

Totals
 
—

 
—

 
—

 
 

 
 
 
 
 
 
 
 
 

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

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CINCINNATI FINANCIAL CORPORATION
Date: July 30, 2019
 
/S/ Michael J. Sewell
Michael J. Sewell, CPA
Chief Financial Officer, Senior Vice President and Treasurer
(Principal Accounting Officer)


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