United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2011.

2014.
¨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)

Ohio31-0746871
(State of incorporation)(I.R.S. Employer Identification No.)

6200 S. Gilmore Road
Fairfield, Ohio 45014-5141
(Address of principal executive offices) (Zip Code)
(513) 870-2000
(Registrant’s telephone number, including area code)

6200 S. Gilmore Road

Fairfield, Ohio 45014-5141

(Address of principal executive offices) (Zip Code)

(513) 870-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

$2.00 par, common stock

(Title of Class)

6.125% Senior Notes due 2034

(Title of Class)

6.9% Senior Debentures due 2028

(Title of Class)

6.92% Senior Debentures due 2028

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ      No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨      No þ

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 þ No ¨


Cincinnati Financial Corporation - 2014 10-K - Page 1


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 if Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ      No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer,” “accelerated filer" and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filerþ Accelerated filer¨ Non-accelerated filer¨ Smaller reporting company¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

The aggregate market value of voting stock held by nonaffiliates of the Registrant was $4,302,914,402$7,129,857,801 as of June 30, 2011.

2014.

As of February 24, 2012,20, 2015, there were 162,281,098164,166,327 shares of common stock outstanding.

Document Incorporated by Reference

Portions of the definitive Proxy Statement for Cincinnati Financial Corporation’s Annual Meeting of Shareholders to be held on April 28, 2012,May 2, 2015, are incorporated by reference into Part III of this Form 10-K.


Cincinnati Financial Corporation - 2014 10-K - Page 2


2014 ANNUAL REPORTON FORM 10-K
TABLEOF CONTENTS

2011 Annual Report on Form 10-K

Table of Contents

Part I 3
4
Item 1.Business3
4
 Cincinnati Financial Corporation – Introduction3
4
 Our Business and Our Strategy3
5
 Our Segments12
16
 Other23
29
 Regulation23
30
Item 1A.Risk Factors26
33
Item 1B.Unresolved Staff Comments33
40
Item 2.Properties33
40
Item 3.Legal Proceedings33
40
Item 4.Mine Safety Disclosures33
40
Part II 34
41
Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities34
41
Item 6.6Selected Financial Data37
44
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations38
45
 Introduction38
45
 Executive Summary38
45
 Critical Accounting Estimates42
51
 Recent Accounting Pronouncements49
58
 Financial Results of Operations50
59
 Liquidity and Capital Resources85
95
 Safe Harbor Statement101
111
Item 7A.Quantitative and Qualitative Disclosures About Market Risk102
Introduction102
Fixed-Maturity Investments103
Equity Investments104
Application of Asset Impairment Policy104
113
Item 8.Financial Statements and Supplementary Data107
119
 Responsibility for Financial Statements107
119
 Management’s Annual Report on Internal Control Over Financial Reporting108
120
 Report of Independent Registered Public Accounting Firm109
121
 Consolidated Balance Sheets110
123
 Consolidated Statements of Income111
124
Consolidated Statements of Comprehensive Income
125
 Consolidated Statements of Shareholders’ Equity112
126
 Consolidated Statements of Cash Flows113
127
 Notes to Consolidated Financial Statements114
128
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure140
160
Item 9A.Controls and Procedures140
160
Item 9B.Other Information140
160
Part III 141
161
Item 10.Directors, Executive Officers and Corporate Governance141
161
Item 11.Executive Compensation143
163
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters143
163
Item 13.Certain Relationships and Related Transactions, and Director Independence143
163
Item 14.Principal Accounting Fees and Services143
163
Part IV 143
164
Item 15.Exhibits, Financial Statement Schedules143
Index of Exhibits155

Cincinnati Financial Corporation – 2011 10-K - 2164



Cincinnati Financial Corporation - 2014 10-K - Page 3


Part I

Item 1.Business


ITEM 1.    Business

Cincinnati Financial Corporation – Introduction

We are an Ohio corporation formed in 1968. Our lead subsidiary, The Cincinnati Insurance Company, was founded in 1950. Our main business is property casualty insurance marketed through independent insurance agencies in 39 states. Our headquarters is in Fairfield, Ohio. At year-end 2011,2014, we employed 4,0674,305 associates, with 2,811including 2,954 headquarters associates providingwho provide support to 1,2561,351 field associates.

Cincinnati Financial Corporation owns 100 percent of three subsidiaries: The Cincinnati Insurance Company, CSU Producer Resources Inc., and CFC Investment Company. In addition, the parent company has an investment portfolio, owns the headquarters property and is responsible for corporate borrowings and shareholder dividends.

The Cincinnati Insurance Company owns 100 percent of our four additional insurance subsidiaries. Our standard market property casualty insurance group includes two of those subsidiaries – The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This group writes a broad range of business, homeowner and auto policies. Other subsidiaries of The Cincinnati Insurance Company include The Cincinnati Life Insurance Company, which provides life insurance, disability income policies and fixed annuities, and The Cincinnati Specialty Underwriters Insurance Company, which began offeringoffers excess and surplus lines insurance products in January 2008.

products.

The two non-insurancenoninsurance subsidiaries of Cincinnati Financial Corporation are CSU Producer Resources, which offers insurance brokerage services to our independent agencies so their clients can access our excess and surplus lines insurance products; and CFC Investment Company, which offers commercial leasing and financing services to our agencies, their clients and other customers.

Our filings with the U.S. Securities and Exchange Commission (SEC) are available free of charge, on our website,www.cinfin.com/cinfin.com/investors, as soon as possible after they have been filed with the SEC. These filings include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. In the following pages we reference various websites. These websites, including our own, are not incorporated by reference in this Annual Report on Form 10-K.

Periodically, we refer to estimated industry data so that we can give information about our performance versus the overall insurance industry. Unless otherwise noted, the industry data is prepared by A.M. Best Co., a leading insurance industry statistical, analytical and insurer financial strength and credit rating organization. Information from A.M. Best is presented on a statutory accounting basis. When we provide our results on a comparable statutory accounting basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP).


Cincinnati Financial Corporation - 2014 10-K - Page 4


Our Business and Our Strategy

Introduction

The Cincinnati Insurance Company was founded overmore than 60 years ago by four independent insurance agents. They established the mission that continues to guide all of the companies in the Cincinnati Financial Corporation family – to grow profitably and enhance the ability of local independent insurance agents to deliver quality financial protection to the people and businesses they serve by:

·providing insurance market stability through financial strength

·producing competitive, up-to-date products and services

·developing associates committed to superior service

providing insurance market stability through financial strength
producing competitive, up-to-date products and services
developing associates committed to superior service

A select group of independent agencies in 39 states actively markets our property casualty insurance within their communities. At year-end 2011,2014, standard market commercial lines and excess and surplus lines policies were marketed in all of those states, while personal lines policies were marketed in 2931 of those states. Within thisour select group of agencies, we also seek to become the life insurance carrier of choice and to help agents and their clients – our policyholders – by offering leasing and financing services.

Three competitive advantages distinguish our company, positioning us to build shareholder value and to be successful overall:

·Commitment to our network of professional independent insurance agencies and to their continued success

·Financial strength that lets us be a consistent market for our agents’ business, supporting stability and confidence

Cincinnati Financial Corporation – 2011 10-K - 3
Commitment to our professional independent insurance agencies and to their continued success

·Operating structure that supports local decision making, showcasing our claims excellence and allowing us to balance growth with underwriting discipline

Financial strength to fulfill our promises and be a consistent market for our agents’ business, supporting stability and confidence
Operating structure that supports local decision making, showcasing our claims excellence and allowing us to balance growth with underwriting discipline

The primary sources of our company’s net income are summarized below. We discuss the contribution to net income from each source in Item 7, Corporate Financial Highlights of Management’s Discussion and Analysis.
Underwriting profit (loss) – Includes revenues from earned premiums from insurance policies sold, reduced by losses and loss expenses from insurance coverages provided by those policies. Those revenues are further reduced by underwriting expenses from marketing policies or related administration of our insurance operation. The net result represents an underwriting profit when revenues exceed losses and expenses.
Investment income – Is generated primarily from investing the premiums collected from insurance policies, until funds from cash or invested assets are needed to pay losses for insurance claims or other expenses. Interest income from bond investments or dividend income from stock investments are the main categories of our investment income.
Realized investment gains (losses) – Occur from appreciation or depreciation of invested assets over time. Gains or losses are generally recognized when invested assets are sold or become impaired.

Independent Insurance Agency Marketplace

The U.S. property casualty insurance industry is a highly competitive marketplace with more than 2,000 stock and mutual companies operating independently or in groups. No single company or group dominates across all product lines and states. Standard market insurance companies (carriers) can market a broad array of products nationally or:

·choose to sell a limited product line or only one type of insurance (monoline carrier)

·target a certain segment of the market (for example, personal insurance)

·focus on one or more states or regions (regional carrier)

choose to sell a limited product line or only one type of insurance (monoline carrier)
target a certain segment of the market (for example, personal insurance)
focus on one or more states or regions (regional carrier)


Cincinnati Financial Corporation - 2014 10-K - Page 5


Standard market property casualty insurers generally offer insurance products through one or more distribution channels:

·independent agents, who represent multiple carriers

·captive agents, who represent one carrier exclusively, or

·direct marketing to consumers

independent agents, who represent multiple carriers
captive agents, who represent one carrier exclusively
direct marketing to consumers

For the most part, we compete with standard market insurance companies that market through independent insurance agents. Agencies marketing our commercial lines products typically represent six to 12 standard market insurance carriers for commercial lines products, including both national and regional carriers, most of which are mutual companies. Our agencies typically represent four to six standard personal lines carriers, and wecarriers. We also compete with carriers that market personal lines products through captive agents and direct writers. Distribution through independent insurance agents or brokers represents nearly 60 percent of overall U.S. property casualty insurance premiums and approximately 80 percent of commercial property casualty insurance premiums, according to studies by the Independent Insurance Agents and Brokers of America.

We are committed exclusively to the independent agency channel. The independent agencies that we choose to market our standard lines insurance products share our philosophies. They do business person to person; offer broad, value-added services; maintain sound balance sheets; and manage their agencies professionally, targeting long-term success. We develop our relationships with agencies that are active in their local communities, providing important knowledge of local market trends, opportunities and challenges.

In addition to providing


We help our agencies meet the broader needs of their clients and increase and diversify their revenues and profitability by offering insurance solutions beyond our standard market property casualty insurance products. We market life insurance products we openedthrough the agencies that offer our property casualty products and through other independent life agencies that represent The Cincinnati Life Insurance Company without also representing our other subsidiaries. We operate our own excess and surplus lines insurance brokerage firm and insurance carrier so that we couldcan offer our excess and surplus lines products exclusively to the independent agencies who market our other property casualty insurance products. We also market life insurance products through the agencies that market our property casualty products and through other independent agencies that represent The Cincinnati Life Insurance Company without also representing our other subsidiaries. Offering insurance solutions beyond our standard market property casualty insurance products helps our agencies meet the broader needs of their clients, and also serves to increase and diversify agency revenues and profitability.

The excess and surplus lines market exists due to a regulatory distinction. Generally, excess and surplus lines insurance carriers provide insurance that is unavailable in the standard market due to market conditions or characteristics of the insured personpersons or organizationorganizations that are caused by nature, the insured'stheir claim history or the characteristics of their business. Insurers operating in the excess and surplus lines marketplace generally market business through excess and surplus lines insurance brokers, whether they are small specialty insurers or specialized divisions of larger insurance organizations. We established an excess and surplus lines operation in response to requests to help meet the needs of agency clients when insurance is unavailable in the standard market. By providing superior service, we can help our agencies grow while also profitably growing our property casualty business.

At year-end 2011,2014, our 1,3121,466 property casualty agency relationships were marketing our standard market insurance products from 1,6481,884 reporting locations. An increasing number of agencies have multiple, separately identifiable locations, reflecting their growth and consolidation of ownership within the independent agency marketplace. The number of reporting agency locations indicates our agents’ regional scope and the extent of our presence within our 39 active states. At year-end 2010,2013, our 1,2451,450 agency relationships had 1,5441,823 reporting locations. At year-end 2009,2012, our 1,1801,408 agency relationships had 1,4631,758 reporting locations.

We made 133, 9399, 96 and 87140 new agency appointments in 2011, 20102014, 2013 and 2009,2012, respectively. Of these new appointments, 93, 7063, 59 and 65,109, respectively, were new relationships. The remainder included new branch offices opened by existing Cincinnati agencies and appointment of agencies that merged with a Cincinnati agency. These new appointments and other changes in agency structures or appointment status led to a net increase in agency relationships of 67, 6516, 42 and 4796 and a net increase in reporting agency locations of 104, 8161, 65 and 76110 in 2011, 20102014, 2013 and 2009,2012, respectively.

Cincinnati Financial Corporation – 2011 10-K - 4

On average, we have a 13.112.8 percent share of the standard lines property casualty insurance purchased through our reporting agency locations.locations, according to 2013 data from agency surveys. Our share is 17.6 percent in reporting agency locations that have represented us for more than 10 years; 8.58.9 percent in agencies that have represented us for six to 10 years; 4.55.4 percent in agencies that have represented us for two to five years; and 0.9 percent in agencies that have represented us for one to five years; and 2.3 percent in agencies that have represented us for less than one year.

year or less.


Cincinnati Financial Corporation - 2014 10-K - Page 6


Our largest single agency relationship accounted for approximately 1.20.8 percent of our total property casualty earned premiums in 2011.2014. No aggregate locations under a single ownership structure accounted for more than 2.1 percent of our earned premiums in 2011.

2014.

Financial Strength

We believe that our financial strength and strong capital and surplus position, reflected in our insurer financial strength ratings, are clear, competitive advantages in the segments of the insurance marketplace that we serve. This strength supports the consistent, predictable performance that our policyholders, agents, associates and shareholders have always expected and received, helping us withstand significant challenges.

While the potential exists for short-term financial performance variability due to our exposures to potential catastrophes or significant capital market losses, the rating agencies consistently have asserted that we have built appropriate financial strength and flexibility to manage that variability. We remain committed to strategies that emphasize being a consistent, stable market for our agents’ business overrather than seeking short-term benefits that might accrue by quick, opportunistic reaction to changes in market conditions.

We use various principles and practices such as diversification and enterprise risk management to maintain strong capital. This includes maintainingFor example, we maintain a diversified investment portfolio by reviewing and applying diversification parameters and tolerances.

·Our $8.779 billion fixed-maturity portfolio is diversified and exceeds total insurance reserves. The portfolio had an average rating of A2/A, and its fair value exceeded total insurance reserve liability by approximately 35 percent. At December 31, 2011, no corporate bond exposure accounted for more than 0.6 percent of our fixed-maturity portfolio and no municipal exposure accounted for more than 0.2 percent.

·The strength of our fixed-maturity portfolio provides an opportunity to invest for potential capital appreciation by purchasing equity securities. Our $2.956 billion equity portfolio minimizes concentrations in single stocks or industries. At December 31, 2011, no single security accounted for more than 4.7 percent of our portfolio of publicly traded common stocks, and no single sector accounted for more than 17 percent.

Our $9.460 billion fixed-maturity portfolio is diversified and exceeds total insurance reserves. The portfolio had an average rating of A2/A, and its fair value exceeded total insurance reserve liabilities by approximately 35 percent at December 31, 2014. No corporate bond exposure accounted for more than 0.7 percent of our fixed-maturity portfolio, and no municipal exposure accounted for more than 0.3 percent.
The strength of our fixed-maturity portfolio provides an opportunity to invest for potential capital appreciation by purchasing equity securities. Our $4.858 billion equity portfolio minimizes concentrations in single stocks or industries. At December 31, 2014, no single security accounted for more than 3.3 percent of our portfolio of publicly traded common stocks, and no single sector accounted for more than 17.3 percent.
Strong liquidity increases our flexibility through all periods to maintain our cash dividend and to continue to invest in and expand our insurance operations. At December 31, 2011,2014, we held $1.051$1.821 billion of our cash and invested assets at the parent company level, of which $806 million,$1.639 billion, or 76.790.0 percent, was invested in common stocks, and $20$72 million, or 1.94.0 percent, was cash orand cash equivalents.

We minimize reliance on debt as a source of capital, maintaining thea debt-to-total-capital ratio of debt-to-total-capital below 20 percent. At December 31, 2011,2014, this ratio at 15.011.3 percent was well below the target limit as capital remained strong while debt levels increased a relatively small amount,were reduced by $55 million from year-end 2010.2013. Long-term debt at year-end 20112014 totaled $790$791 million and our short-term debt was $104$49 million. The long-term debt consists of three non-convertible, non-callablenonconvertible, noncallable debentures, two due in 2028 and one in 2034. Ratings for our long-term debt are discussed in Item 7, Liquidity and Capital Resources, Additional Sources of Liquidity, Page 86.

Liquidity.

At year-end 20112014 and 2010,2013, risk-based capital (RBC) for our standard andmarket property casualty insurance, excess and surplus lines property casualty operationsinsurance and life operationsinsurance subsidiaries was very strong, far exceeding regulatory requirements.

·We ended 2011 with a 0.8-to-1 ratio of property casualty premiums to surplus, a key measure of property casualty insurance company capacity and security. A lower ratio indicates more security for policyholders and greater capacity for growth by an insurer. Our low ratio, compared with historical averages, gives us ample flexibility to diversify risk by expanding our operations into new geographies and product areas. The estimated industry average ratio was 0.8-to-1 at year-end 2011.

·We ended 2011 with an 11.8 percent ratio of life statutory adjusted risk-based surplus to liabilities, a key measure of life insurance company capital strength. The estimated industry average ratio was 11.2 percent at year-end 2011. A higher ratio indicates an insurer’s stronger security for policyholders and capacity to support business growth.

Cincinnati Financial Corporation – 2011 10-K - 5
We ended 2014 with a 0.9-to-1 ratio of property casualty premiums to surplus, a key measure of property casualty insurance company capacity and security. A lower ratio indicates more security for policyholders and greater capacity for growth by an insurer. We believe our ratio provides ample flexibility to diversify risk by expanding our operations into new geographies and product areas. The estimated industry average ratio was 0.7-to-1 at year-end 2014.

(Dollars in millions)                                                       Statutory Information At December 31, 
  2011  2010 
       
Standard market property casualty insurance subsidiary        
Statutory surplus $3,747  $3,777 
Risk-based capital (RBC)  3,754   3,793 
Authorized control level risk-based capital  474   450 
Ratio of risk-based capital to authorized control level risk-based capital  7.9   8.4 
Written premium to surplus ratio  0.8   0.8 
         
Life insurance subsidiary        
Statutory surplus $281  $303 
Risk-based capital (RBC)  288   318 
Authorized control level risk-based capital  36   35 
Ratio of risk-based capital to authorized control level risk-based capital  7.9   9.1 
Total liabilities excluding separate account business  2,454   2,266 
Life statutory risk-based adjusted surplus to liabilities ratio  11.8   14.1 
         
Excess and surplus insurance subsidiary        
Statutory surplus $186  $172 
Risk-based capital (RBC)  186   172 
Authorized control level risk-based capital  13   10 
Ratio of risk-based capital to authorized control level risk-based capital  13.9   16.6 
Written premium to surplus ratio  0.4   0.3 

We ended 2014 with an 8.1 percent ratio of life statutory adjusted risk-based surplus to liabilities, a key measure of life insurance company capital strength. The estimated industry average ratio was 12.1 percent at year-end 2014. A higher ratio indicates an insurer’s stronger security for policyholders and capacity to support business growth.


Cincinnati Financial Corporation - 2014 10-K - Page 7


(Dollars in millions) Statutory Information
 At December 31,
  2014 2013
Standard market property casualty insurance subsidiary  
  
   Statutory capital and surplus $4,472
 $4,326
   Risk-based capital (RBC) 4,490
 4,343
   Authorized control level risk-based capital 563
 534
     
   Risk-based capital to authorized control level risk-based capital ratio 8.0
 8.1
   Written premium to surplus ratio 0.9
 0.9
Life insurance subsidiary  
  
   Statutory capital and surplus $223
 $247
   Risk-based capital (RBC) 241
 264
   Authorized control level risk-based capital 33
 31
   Total liabilities excluding separate account business 2,978
 2,807
     
   Risk-based capital to authorized control level risk-based capital ratio 7.3
 8.1
   Life statutory risk-based adjusted surplus to liabilities ratio 8.1
 9.5
Excess and surplus lines insurance subsidiary  
  
   Statutory capital and surplus $266
 $228
   Risk-based capital (RBC) 266
 228
   Authorized control level risk-based capital 32
 25
     
   Risk-based capital to authorized control level risk-based capital ratio 8.4
 9.2
   Written premium to surplus ratio 0.6
 0.6
     
The consolidated property casualty insurance group’s ratio of investments in common stock, at fair value, to statutory capital and surplus was 54.567.7 percent at year-end 20112014 compared with 55.365.7 percent at year-end 2010.

2013.

Cincinnati Financial Corporation’s senior debt is rated by four independent rating firms. In addition, the rating firms award our property casualty and life operations insurance financial strength ratings based on their quantitative and qualitative analyses. These ratings 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 shareholders. Ratings may be subject to revision or withdrawal at any time by the ratings agency, and each rating should be evaluated independently of any other rating.

All of our insurance subsidiaries continue to be highly rated. During 2011, each2014, three of the four ratings firms affirmed our insurance financial strength ratings, and threeratings. Two of the ratings firmsfour continued their stable outlook on the ratings.

ratings and one revised its outlook to positive from stable.


Cincinnati Financial Corporation - 2014 10-K - Page 8


As of February 24, 2012,25, 2015, our insurance financial strength ratings were:

 Insurer Financial Strength Ratings 
Rating
Agency
agency
Standard market property
casualty insurance subsidiary

Standard Market Property

Casualty Insurance Subsidiary

Life insurance
subsidiary
Life Insurance
Subsidiary
Excess and Surplus
Insurance Subsidiarysurplus lines
insurance subsidiary

Date of Most Recent

Affirmationmost recent

affirmation or Action

action
   
Rating
Tier

��
Rating

Tier

  

Rating

Tier

Rating
Tier		 
A. M. Best Co.
ambest.com
A+Superior2 of 16AExcellent3 of 16AExcellent3 of 16AExcellent 3 of 16Stable outlook (12/23/11)12/14)
Fitch Ratings
fitchratings.com
A+Strong5 of 21A+Strong5 of 21---Stable outlook (11/14/11)18/14)
Moody's Investors
  Service
moodys.com
A1Good5 of 21-------NegativeStable outlook (10/21/11)(4/30/13)
Standard & Poor's
  Ratings Services
spratings.com
AStrong6 of 21AStrong6 of 21---StablePositive outlook (8/4/11)(6/18/14)

On December 23, 2011,12, 2014, A.M. Best affirmed our financial strength ratings that it had assigned in February 2010,December 2008, continuing its stable outlook. A.M. Best cited our superior risk-adjusted capitalization, conservative loss reserving standards, and successfulstrong distribution network within our targeted regional markets.markets and historically strong operating performance that has improved in recent years. Concerns noted included geographic concentrationvariability in earnings, primarily due to significant catastrophe-related losses, and deterioration of underwriting results, primarily from above-average catastrophe-related losses.historically elevated common stock leverage. A.M. Best acknowledged theseveral reasons for our strong franchise value of our insurance subsidiaries and therelationships with independent agencies along with financial flexibility of thethrough our holding company.


On June 10, 2014, and on November 14, 2011,18, 2014, Fitch Ratings affirmed the ratings that it had assigned to us in August 2009, continuing its stable outlook. Fitch said our insuranceratings strengths included very strong capitalization, our holding company's sizeable position in cash and marketable securities and our moderate financial strengthleverage ratio. Fitch noted our reserve adequacy and benefits from our implementation of claims and risk management tools in addition to pricing actions. Fitch said its rating could be unfavorably affected by a combined ratio exceeding 105 percent on a sustained basis, evidence of deteriorating profitability on recent growth or by material and sustained deterioration in capitalization.

On June 18, 2014, Standard & Poor’s Ratings Services affirmed the ratings that it had assigned in September July2010, and affirmed on May 2, 2011, continuing its stable outlook. Fitch cited ratings strengths including our conservative operating subsidiary capitalization supported by strong holding company cash and marketable securities position and moderate holding company leverage, adequate and well-managed reserves and strong agency distribution system contributing to success in the highly competitive property casualty insurance industry. Fitch’s ratings concerns principally related to challenges from competitive market conditions and exposure to regional natural catastrophes and other weather-related losses. Fitch noted that our technology implementations, including use of predictive modeling tools, are anticipated to improve weakened loss ratios over time.

Cincinnati Financial Corporation – 2011 10-K - 6

On October 21, 2011, Moody’s Investors Service affirmed our insurance financial strength ratings that it had assigned in September 2008, changingrevising its outlook to negative. Moody's noted that its rating is supported by our strong regional franchise, solid risk-adjusted capital position, consistent reserve strength, strong financial flexibility and significant holding company liquidity. However, Moody’s expects that operating results may continue to reflect weak underwriting profitability with high weather-related losses.

On August 4, 2011, Standard & Poor’s Ratings Services affirmed our insurer financial strength ratings that it had assigned in July 2010, continuing its stable outlook.positive from stable. S&P said its rating was based onreflected our strong competitive position, which is reinforced by a loyalfavorable geographical footprint and productive agency forceextremely strong capital. With the positive outlook, it acknowledged our general underwriting improvement in recent years and a low-cost infrastructure. S&P also cited our very strong capitalizationtrack record of mitigating potential capital and high degree of financial flexibility.earnings volatility. S&P noted thatits rating could come under pressure if our strengths are partially offset by deteriorating property casualty underwriting results dueoverall operating performance or capital adequacy deteriorated significantly or upon perceived adverse changes to above-average weather-related losses and weak results in our workers’ compensation line of business.

competitive position.


Our debt ratings are discussed in Item 7, Liquidity and Capital Resources, Additional Sources of Liquidity, Page 86.

Liquidity.

Operating Structure

We offer our broad array of insurance products through the independent agency distribution channel. We recognize that locally based independent agencies have relationships in their communities and local marketplace intelligence that can lead to policyholder satisfaction, loyalty and profitable business. Several of our strategic initiatives are intended to not only to help us compete but also to enhance support of agencies that represent us, thereby contributing to agency success. We seek to be a consistent and predictable property casualty carrier that agencies can rely on to serve their clients. For our standard market business, field and headquarters underwriters make risk-specific decisions about both new business and renewals.

In our 10 highest volume states for consolidated property casualty premiums, 9921,091 reporting agency locations wrote 66.562.8 percent of our 20112014 consolidated property casualty earned premium volume compared with 9561,067 locations and 67.163.8 percent in 2010.

Consolidated Property Casualty Insurance Earned Premiums by State

(Dollars in millions) Earned
premiums		  % of total
earned		  Agency
locations		  Average
premium per
location		 
Year ended December 31, 2011                
Ohio $591   19.5%  233  $2.5 
Illinois  250   8.3   124   2.0 
Indiana  208   6.9   107   1.9 
Pennsylvania  184   6.1   85   2.2 
Georgia  154   5.1   80   1.9 
North Carolina  149   4.9   85   1.8 
Michigan  134   4.4   118   1.1 
Virginia  123   4.1   66   1.9 
Kentucky  114   3.8   43   2.7 
Wisconsin  103   3.4   51   2.0 
Year ended December 31, 2010                
Ohio $599   20.5%  224  $2.7 
Illinois  243   8.3   122   2.0 
Indiana  197   6.8   105   1.9 
Pennsylvania  176   6.0   83   2.1 
Georgia  149   5.1   77   1.9 
North Carolina  143   4.9   80   1.8 
Michigan  126   4.3   116   1.1 
Virginia  121   4.1   60   2.0 
Kentucky  106   3.6   41   2.6 
Tennessee  102   3.5   48   2.1 

2013. We continue efforts to geographically diversify our property casualty risks.


Cincinnati Financial Corporation - 2014 10-K - Page 9


Our 10 highest premium volume property casualty lines states are shown in the table below.
(Dollars in millions)
Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
Year ended December 31, 2014 
 
 
 
Ohio$715
17.7%246
$2.9
Illinois288
7.1
136
2.1
Indiana261
6.4
111
2.4
Pennsylvania222
5.5
99
2.2
Georgia216
5.3
95
2.3
Michigan204
5.0
138
1.5
North Carolina201
5.0
95
2.1
Tennessee155
3.8
60
2.6
Virginia146
3.6
65
2.2
Alabama139
3.4
46
3.0
     
Field Focus

We rely on our force of 1,2561,351 field associates to provide service and be accountable to our agencies for decisions we make at the local level. These associates live in the communities our agents serve, working from offices in their homes and providing 24/7 availability to our agents.agents and policyholders. Headquarters associates support agencies and field associates with underwriting, accounting, technology assistance, and training and other services. Company executives and headquarters underwriters and special teamsassociates regularly travel to visit agencies, strengthening the personal relationships we have with these organizations. Agents have opportunities for direct, personal conversations with our senior management team, and headquarters associates have opportunities to refresh their knowledge of marketplace conditions and field activities.

The field team is coordinated by field marketing representatives responsible for underwriting new commercial lines business. They are joined by field representatives specializing in claims, loss control, personal lines, excess and surplus lines, machinery and equipment, bond, premium audit and life insurance and leasing.insurance. The field team provides many services for agencies and policyholders; for example, our loss control field representatives and others specializing in machinery and equipment risks perform inspections and recommend specific actions to improve the safety of the policyholder’s operations and the quality of the agent’s account.

Cincinnati Financial Corporation – 2011 10-K - 7

Agents work with us to carefully select risks and help assure pricing adequacy. They appreciate the time our associates invest in creating solutions for their clients while protecting profitability, whether that means working on an individual case or customizing policy terms and conditions that preserve flexibility, choice and other sales advantages. We seek to develop long-term relationships by understanding the unique needs of their clients, who are also our policyholders.

We also are responsive to agent needs for well designedwell-designed property casualty products. Our commercial lines products are structured to allow flexible combinations of property and liability coverages in a single package with a single expiration date and several payment options. This approach brings policyholders convenience, discounts and a reduced risk of coverage gaps or disputes. At the same time, it increases account retention and saves time and expense for the agency and our company.

We seek to employ technology solutions and business process improvements that:

·allow our field and headquarters associates to collaborate with each other and with agencies more efficiently

·provide our agencies the ability to access our systems and client data to process business transactions from their offices

·allow policyholders to directly access pertinent policy information online in order to further improve efficiency for our agencies

·automate our internal processes so our associates can spend more time serving agents and policyholders, and

·reduce duplicated effort or friction points in technology processes, introducing more efficiency that reduces company and agency costs

allow our field and headquarters associates to collaborate with each other and with agencies more efficiently
provide our agencies the ability to access our systems and data from their agency management systems to process business transactions from their offices
allow policyholders to directly access, from their systems and mobile devices, pertinent policy information online in order to further improve efficiency for our agencies
automate our internal processes so our associates can spend more time serving agents and policyholders
reduce duplicated effort or friction points in technology processes, introducing more efficiency that reduces company and agency costs

Cincinnati Financial Corporation - 2014 10-K - Page 10



Agencies access our systems and other electronic services via their agency management systems or CinciLink®, our secure agency-only website. CinciLink provides an array of web-basedWeb-based services and content that makes doing business with us easier, such as commercial and personal lines rating and processing systems, policy loss information, educational courses about our products and services, accounting services, and electronic libraries for property and casualty coverage forms, state rating manuals and marketing materials.

Superior Claims Service

Our claims philosophy reflects our belief that we prosper as a company by responding to claims person to person, paying covered claims promptly, preventing false claims from unfairly adding to overall premiums and building financial strength to meet future obligations.

Our 763807 locally based field claims associates work from their homes, assigned to specific agencies. They respond personally to policyholders and claimants, typically within 24 hours of receiving an agency’s claim report. We believe we have a competitive advantage because of the person-to-person approach and the resulting high level of service that our field claims representatives provide. We also help our agencies provide prompt service to policyholders by giving most agencies authority to immediately pay most first-party claims under standard market policies up to $2,500. We believe this same local approach to handling claims is a competitive advantage for our agents providing excess and surplus lines coverage in their communities. Handling of these claims includes guidance from headquarters-based excess and surplus lines claims managers.

Our property casualty claims operation uses CMS, our claims management system (CMS) to streamline processes and achieve operational efficiencies. CMS allows field and headquarters claims associates to collaborate on reported claims through a virtual claim file. Our field claims representatives use tablet computers to view and enter information into CMS from any location, including an insured’sa policyholder’s home or an agent’s office, and to print claim checks using portable printers. Agencies also can access selected CMS information such as activity notes on open claims.

Catastrophe response teams are comprised of volunteers from our experienced field claims staff and we give themwho have the authority they need to do their jobs. In times of widespread loss, our field claims representatives confidently and quickly resolve claims, often writing checks on the same day they inspect the loss. CMS introduced new efficiencies that are especially evident during catastrophes. Electronic claim files allow for fast initial contact ofwith policyholders and easy sharing of information and data by rotating storm teams, headquarters staff and local field claims representatives. When hurricanes or other weather events are predicted, we can identify through mapping technologies the expected number of our policyholders that may be impacted by the event and choose to have catastrophe response team members travel to strategic locations near the expected impact area. They are then in position to quickly get to the affected area, set up temporary offices and start calling on policyholders.

Cincinnati Financial Corporation – 2011 10-K - 8

Our claims associates work to control costs where appropriate. They use vendor resources that provide negotiated pricing to our insuredspolicyholders and claimants. Our field claims representatives also are educated continuously on new techniques and repair trends.trends for vehicles. They can leverage their local knowledge and experience with area body shops, which helps them negotiate the right price with any facility the policyholder chooses.

We staff a Special Investigations Unit (SIU) with former law enforcement and claims professionals whose qualifications make them uniquelywell suited to gathering facts to uncover potential fraud. While we believe our job is to pay what is due under each policy contract, we also want to prevent false claims from unfairly increasing overall premiums. Our SIU also operates a computer forensics lab, using sophisticated software to recover data and mitigate the cost of computer-related claims for business interruption and loss of records.

Insurance Products

We actively market property casualty insurance in 39 states through a select group of independent insurance agencies. For most agencies that represent us, we believe we offer insurance solutions for approximately 75 percent of the typical insurable risks of their clients. Our standard market commercial lines products and our excess and surplus lines are marketed in all 39 states while our standard market personal lines products are marketed in 29. 31. We offer insurance coverage that includes business property and liability, automobile and homeowner as well as umbrella liability.


Cincinnati Financial Corporation - 2014 10-K - Page 11


The following table shows net written premiums by segment and business line at year-end 2014, 2013 and 2012:
(Dollars in millions) 2014 2013 2012 Percent of total 2014
Segment:  
  
  
  
Commercial lines insurance $2,922
 $2,760
 $2,459
 66.5%
Personal lines insurance 1,068
 1,005
 918
 24.3
Excess and surplus lines insurance 153
 128
 105
 3.5
Life insurance 250
 241
 249
 5.7
Total $4,393
 $4,134
 $3,731
 100.0%
   
  
  
  
Business line:  
  
  
  
Commercial lines insurance        
Commercial casualty $969
 $897
 $793
 22.0%
Commercial property 776
 673
 573
 17.7
Commercial auto 548
 507
 444
 12.5
Workers' compensation 365
 374
 341
 8.3
Other commercial 264
 309
 308
 6.0
Total commercial lines insurance 2,922
 2,760
 2,459
 66.5
         
Personal lines insurance  
  
  
  
Personal auto 489
 460
 425
 11.1
Homeowner 456
 428
 378
 10.4
Other personal 123
 117
 115
 2.8
Total personal lines insurance 1,068
 1,005
 918
 24.3
         
Excess and surplus lines insurance 153
 128
 105
 3.5
         
Life insurance        
Term life insurance 138
 129
 124
 3.2
Universal life insurance 41
 41
 45
 0.9
Other life insurance, annuity and disability income products 71
 71
 80
 1.6
Subtotal 250
 241
 249
 5.7
Total $4,393
 $4,134
 $3,731
 100.0%
         

We discuss our commercial lines, personal lines and excess and surplus lines insurance operations and products in Commercial Lines Property Casualty Insurance Segment, Page 12, Personal Lines Property Casualty Insurance Segment, Page 15, and Excess and Surplus Lines Property Casualty Insurance Segment, Page 16.

The Segment.

Cincinnati Specialty Underwriters Insurance Company began excess and surplus lines insurance operations in January 2008. We structured this operation to exclusively serve the needs of the independent agencies that currently market our standard market insurance policies. When all or a portion of a current or potential client’s insurance program requires excess and surplus lines coverages, those agencies can write the whole account with Cincinnati, gaining benefits not often found in the broader excess and surplus lines market. Agencies have access to The Cincinnati Specialty Underwriters Insurance Company’sUnderwriters' product line through CSU Producer Resources, the wholly owned insurance brokerage subsidiary of parent-company Cincinnati Financial Corporation.

We also support the independent agencies affiliated with our property casualty operations in their programsefforts to sell life insurance. The life insurance, disability and fixed annuity products offered by our life insurance subsidiary round out and protect accounts and improve account persistency. At the same time, our life operation increases diversification of revenue and profitability sources for both the agency and our company.


Cincinnati Financial Corporation - 2014 10-K - Page 12


Our property casualty agencies make up the main distribution system for our life insurance products. To help build scale, we also develop life insurance business from other independent life insurance agencies in geographic markets underserved through our property casualty agencies. We are careful to solicit business from these other agencies in a manner that does not compete with the life insurance marketing and sales efforts of our property casualty agencies. Our life insurance operation emphasizes up-to-date products, responsive underwriting, high qualityhigh-quality service and competitive pricing.

Other Services to Agencies

We complement theour insurance operations by providing products and services that help attract and retain high-quality independent insurance agencies. When we appoint agencies, we look for organizations with knowledgeable, professional staffs. In turn, we make an exceptionally strong commitment to assist them in keeping their knowledge up to date and educating new people they bring on board as they grow. Numerous activities fulfill this commitment at our headquarters, online and in regional and agency locations and online.

locations.

Except for travel-related expenses to classes held at our headquarters, most programs are offered at no cost to our agencies. While that approach may be extraordinary in our industry today, the result is quality service for our policyholders and increased success for our independent agencies.

In addition to broad education and training support, we make available non-insurancenoninsurance financial services. CFC Investment Company offers equipment and vehicle leases and loans for independent insurance agencies, their commercial clients and other businesses. We also provide commercial real estate loans or other financial assistance to help agencies operate, expand and perpetuate their businesses. We believe that providing these services enhances agency relationships with the company and their clients, increasing loyalty while diversifying the agency’s revenues.

Cincinnati Financial Corporation – 2011 10-K - 9

Our goal is to support agents with tools and resources that help communicate the value of a Cincinnati policy to their clients and prospective clients. We’ll build on our 2013 and 2014 marketing efforts with a modest national advertising campaign in 2015. Our intent is to increase the visibility of our company, supporting our agents' efforts as they recommend Cincinnati Insurance policies. We also continue to build our social media presence, focusing on providing content that agents can share on their own sites.

Strategic Initiatives

Management has identified strategies that can position us for long-term success. The board of directors and management expect execution of our strategic plan to create significant value for shareholders over time. We broadly group these strategies into two areas of focus – improving insurance profitability and driving premium growth – correlating with important ways we measure our progress toward our long-term financialobjectives. A primary profitability long-term target is to produce a GAAP combined ratio over any five-year period that is consistently averages within the range of 95 percent to 100percent. A primary premium growth long-term target, established in late 2011, is to profitably grow to reach $5 billion of property casualty and life insurance annual direct written premiums by the end of 2015.


Effective capital management is an important part of creating shareholder value, serving as a foundation to support other strategies focused on profitable growth of our insurance business, with the overall objective of long-term benefit for shareholders. Our capital management philosophy is intended to preserve and build our capital while maintaining appropriate liquidity. A strong capital position provides the capacity to support premium growth, and liquidity provides for our investment in the people and infrastructure needed to implement our other strategic initiatives. Our strong capital and liquidity also provide financial flexibility for shareholder dividends or other capital management actions.


Our strategies seek to position us to compete successfully in the markets we have targeted while optimizing the balance of risk and returns. We believe successful implementation of key initiatives that support our strategies will help us better serve our agent customers, reduce volatility in our financial results and achieve our long-term objectives despite shorter-term effects of difficult economic, market or pricing cycles. We describe our expectations for the results of these initiatives in Item 7, Executive Summary of the Management’s Discussion and Analysis,Analysis.

Cincinnati Financial Corporation - 2014 10-K - Page 38.

13



Improve Insurance Profitability

Implementation of the initiatives described below is intended to improve pricing capabilitiesenhance underwriting expertise and knowledge for our property casualty business, improving our ability to manage our business while also enhancing ourproviding greater efficiency. By improving pricingour capabilities through the use of analytics tools that alignto determine individual insurance policy pricing with better alignment to more risk attributes, we can better manageincrease our effectiveness in managing profit margins. By improving internal processes and further developing performance metrics, we can be more efficientcontinue improving efficiency and effective.effectiveness. These initiatives also support the ability of the agencies that represent us to grow profitably by allowing them to more efficiently serve clients faster and more efficiently manage expenses. Important initiatives for 20122015 to improve insurance profitability include:

·Improve pricing precision using predictive analytics – We continue efforts to expand our pricing capabilities by using predictive analytics and expect cumulative benefits of these efforts to improve loss ratios over time. Expanded capabilities include streamlining and optimizing data to improve accuracy, timeliness and ease of use. Development of additional business data to support accurate underwriting, pricing and other business decisions also continues. A phased project that will continue over the next several years will deploy a full data management program, including a data warehouse for our property casualty and life insurance operations, providing enhanced granularity of pricing data.

Enhance underwriting expertise and knowledge – We continue to increase our use of information and develop our skills for better underwriting performance, focusing on areas that will benefit most from additional effort. We also continue to expand our pricing and segmentation capabilities by using predictive analytics, expecting cumulative benefits of these efforts to improve loss ratios over time. Expanded capabilities include streamlining and optimizing data to increase accuracy, timeliness and ease of use. Development and use of additional business data to support more accurate underwriting, more granular pricing and other business decision-making also continues through a multi-year, phased project. Project deliverables include enhancing our data management program in phases, including further developing the data warehouse used in our insurance operations, helping us achieve our strategic objectives.
Initiatives for 2012 to improve or expand commercial lines2015 include expanding pricing precision include developing the next version of our workers’ compensation predictive modeling tool and further integrating it with policy administration systems. We began using the current version of our workers’ compensation predictive modeling tool in the second half of 2009. By late 2011, we were using predictive modeling tools for our commercial autoby line of business and also for general liabilityby state or territory with ongoing enhancement of analytics and commercial property coverages in commercial package accounts. Further integrationpredictive modeling tools. These tools better align individual insurance policy pricing to risk attributes, helping us to further segment policies. Our segmentation efforts emphasize identification and retention of thesepolicies we believe have relatively stronger pricing, while seeking more aggressive renewal terms and conditions on policies we believe have relatively weaker pricing. We continue to further integrate such tools with our policy administration systems is planned for 2012, enhancing the ability ofunderwriters using these tools to help our underwriting associates better target profitability and to discuss pricing impacts with agency personnel. Development
For commercial autos we insure, pricing precision is an ongoing focus through actions such as improving premium rate classification and using other rating variables in risk selection and pricing, plus further automating collection of similarkey rating variables. For our personal auto line of business, our rate changes for each respective state will continue to apply pricing precision features.
During 2015, we plan to introduce, in select states, predictive modeling for dwelling fire policies. In late 2014, we introduced a by-peril rating plan for homeowners in select states, and plan to expand it to other states in 2015. By-peril rating helps improve pricing precision by separately pricing for the risk of losses from distinct perils, such as wind versus fire.
As part of our ongoing effort to more profitably underwrite property coverages, we'll continue a robust level of inspections of insured property or other loss control activities that provide enhanced underwriting knowledge. We'll also continue to refine our use of deductibles or other policy terms and conditions.
Improve internal processes – Improved processes support our strategic goals, helping to deploy improved products and pricing more quickly. They also help reduce internal costs and allow us to focus more resources on agency services. Improved workflow tools should increase our efficiency, providing additional operational reporting metrics and making it easier for agencies to do business with us.
During 2015, we'll continue to ramp up operations for our customer care center for small commercial business policies, written throughalso making things easier for agents. Our customer care center was piloted and implemented for a small number of select agencies during 2014, and by expanding that we expect nearly 10 percent of our product known as CinciPakTM was completed late in 2011 and is expectedagencies to be rolled out for use in eight statestaking advantage of it by the end of 2012.

In our personal lines business, we began2015. Our services include various policy administration functions routinely provided by agencies, allowing agency personnel to use predictive modeling tools for our homeowner line of business priorfocus more on marketing efforts and on providing additional service to 2010, and in late 2010 we began using similar analytics for personal auto. We believe we are successfully attracting more of our agents’ preferred business, based on the average quality of our book of business. Quality has improvedtheir clients as measured by the mix of business by insurance score. During 2012, we willneeded. We'll continue to enhance our personal lines model attributesseek other ways to improve policyholder satisfaction through identification and expand our pricing points to add more precision. This will allow us to ensure we are competitive on the most desirable business and to adapt more rapidly to changes in market conditions.

Cincinnati Financial Corporation – 2011 10-K - 10
deployment of user-friendly services.

·Improve internal processes – Improved processes support our strategic goals, reducing internal costs and allowing us to focus more resources on providing agency services. Important process improvement efforts include ongoing simplification of new business processes for easier interaction between company and agency management systems, such as reduction of data entry by leveraging existing internal and external data and routing of complex work items to the most appropriate associate for optimal service. Completion of development for additional coverages in our commercial lines policy administration system is expected to facilitate important internal process improvement initiatives for 2012. Some process improvements will extend beyond 2012 for completion. An example is developing business rules and parameters to allow processing of some small commercial lines business without intervention by an underwriter, for risks that meet qualifying underwriting criteria. Development of this streamlined processing for certain personal lines policies is nearing completion and will be implemented in phases beginning in 2012. The objective is to streamline processing for our agents and associates, permitting more time for risks that need additional service or attention.

Enhanced performance management processes developed during 2011 should improve our overall effectiveness. Every associate has 2012 goals, with emphasis on alignment to corporate objectives and use of measurements to track progress and accountability. We also are developing additional talent management capabilities to further develop and improve the effectiveness of all associates.

We measure the overall success of our strategy to improve insurance profitability primarily through our GAAP combined ratio for property casualty results, which we believe can be consistently average within the range of 95 percent to 100 100 percent for any five-yearperiod. We also compare our statutory combined ratio to the industry average to gauge our progress.

In addition, we


We expect these initiatives to contribute to our rankposition as the No. 1 or No. 2 carrier based on premium volume in agencies that have represented us for at least five years. In 2011, weWe again earnedhit that rankmark in approximatelynearly 75percent of thesuch agencies that have represented Cincinnati Insurance for more than five years, based on 20102013 premiums. We are working to increase thepercentage of agencies where we achieve that rank.


Cincinnati Financial Corporation - 2014 10-K - Page 14


Drive Premium Growth

Implementation of the operational initiatives below is intended to further penetrate each market we serve through our independent agency network.agencies. We expect strategies aimed at specific market opportunities, along with service enhancements, to helpencourage our agents to grow and to increase our share of their business. Our strategy includes new initiativesevaluating general business statistics, historical profitability trends and execution of prior year growth initiatives, includinguse of profitability and growth models or plans at an agency levelhistorical catastrophe trends to facilitate coordination and decision-making. In addition to estimating plannedestimate premium growth from existing agencies these plans help projectand to make careful projections about the number of additional agencies needed to achieve premium targets.Our focus remains on the key components of agent satisfaction based on factors that agents tell us are most important. Significant 20122015 initiatives to drive premium growth include:

·Expansion of our marketing capabilities – We continue to enhance our generalist approach to allow our appointed agencies to better compete in the marketplace by providing services agent’s clients want and need. During 2012, wewill add field marketing representatives for additional agency support in targeted areas, including some specializing in personal lines or excess and surplus lines. Expansion of our personal lines operation is planned for three additional states where we currently do not offer personal lines products. Wealso continue to develop and coordinate targeted marketing, including cross-selling opportunities, through our Target Markets department. This area focuses on commercial product development, including identification and promotional support for promising classes of business. We offered nine target markets programs to our agencies at the end of 2011, and we plan to launch four additional programs during 2012.

·New agency appointments – We continue to appoint new agencies to develop additional points of distribution, focusing on markets where our market share is less than 1 percent while also considering economic and catastrophe risk factors. In 2012, we are targeting approximately 130 appointments of independent agencies, some in the five states we entered since late 2008 but the majority in our more established states of operation. We seek to build a close, long-term relationship with each agency we appoint. We carefully evaluate the marketing reach of each new appointment to ensure the territory can support both current and new agencies. In counting new agency appointments, we include appointment of new agency relationships with The Cincinnati Insurance Companies. For those that we believe will produce a meaningful amount of new business premiums, we also count appointments of agencies that merge with a Cincinnati agency and new branch offices opened by existing Cincinnati agencies. We made 133, 93 and 87 new appointments in 2011, 2010 and 2009, respectively, with 93, 70 and 65 representing new relationships. Nearly one-quarter of the agencies appointed during 2011 were in the five states we entered since late 2008: Texas, Colorado, Wyoming, Connecticut and Oregon. The contribution of those states to our property casualty premium growth should occur over several years as time is required to fully realize the benefits of our agency relationships. We generally earn a 10 percent share of an agency’s business within 10 years of its appointment. We also help our agents grow their business by attracting more clients in their communities through unique Cincinnati-style service.

Expansion of our marketing and service capabilities – We continue to enhance our generalist approach to allow our appointed agencies to better compete in the marketplace by providing services an agent’s clients want and need. During 2015, we willcontinue to develop and coordinate targeted marketing, including cross-selling opportunities. That includes working to further develop and market programs through our Target Markets department, which offered 17 programs at the end of 2014. We continue to migrate these programs to our enhanced policy administration platform and will make improvements to our programs during this migration. An early 2015 initiative aims to provide a platform for our agents to target group business such as professional and trade associations and franchises. We are also working with risk purchasing groups to provide liability coverages for homogeneous classes of business.
As part of our long-term plans, we expect to significantly expand marketing and enhance our products and services to independent agents serving high net worth personal lines clients. We expect that expansion will include, over the next five years, these states that were not part of our personal lines marketing area at the end of 2014: California, Massachusetts, New Jersey and Texas. Our Executive Classic™ homeowner product offers flexibility and broad coverages. We can also include coverages for automobiles, personal umbrella liability, watercraft and valuable articles sought by these clients. At year-end 2014, our appointed agencies produced for us more than $100 million in annual premiums from high net worth policyholders and we plan to continue to enhance our product line to remain competitive. In the second half of 2015, we plan to offer through agents in the state of New York a new suite of insurance products serving the unique needs of high net worth personal lines clients. Executive Capstone™ will offer higher coverage limits and new options for home, automobile, personal umbrella, watercraft and valuable article products. These improvements will be rolled out to all states over the next several years. While we don't expect expanded high net worth products and services to significantly contribute to growth for our personal lines insurance segment until 2016 and subsequent years, further development of our products and services should position us to be the carrier of choice for this portion of our agent’s accounts.
We will also continue to add field marketing representatives where needed for additional agency support in targeted areas, including some specializing in personal lines or excess and surplus lines. Associates in our life insurance segment plan to increase opportunities for agencies to cross-sell to their clients by providing updated products and services that aim to meet their life insurance needs.
New agency appointments – We continue to appoint new agencies to develop additional points of distribution, focusing on areas where our property casualty insurance market share is less than 1percent while also considering economic and catastrophe risk factors. In 2015, we are planning approximately 100appointments of independent agencies that write in aggregate $1 billion or more in property casualty business annuallywith various insurance carriers. We generally appoint those agencies in order to have them represent us to sell life insurance, as well as our property casualty insurance, to their clients. We plan to appoint approximately 50 additional independent life agencies to offer only our life insurance products and service. Our excess and surplus lines marketing will focus on selected areas and work to increase penetration with recently appointed agencies.
We seek to build a close, long-term relationship with each agency we appoint. The contribution of new agencies to our property casualty premium growth should occur over several years, as time is required to fully realize the benefits of our agency relationships. We generally earn a 10percent share of an agency’s business within 10 years of its appointment. We also help our agents grow their business by attracting more clients in their communities through unique Cincinnati-style service. We carefully evaluate the marketing reach of each new appointment to ensure the territory can support both current and new agencies. In counting new agency appointments, we include appointment of new agency relationships with property casualty insurance group subsidiaries of The Cincinnati Insurance Company. For those that we believe will produce a meaningful amount of newbusiness premiums, we also count appointments of agencies that merge with an existing Cincinnati agency and new branch offices opened by current Cincinnati agencies. Wemade 99, 96 and 140new appointments in 2014, 2013 and 2012, respectively, with 63,59and 109representing new relationships.

Cincinnati Financial Corporation - 2014 10-K - Page 15



We measure the overall success of our strategy to drive premium growth primarily through changes in net written premiums. In additionOther important indicators that we are successfully executing initiatives to drive premium growth include tracking our progress toward our yearyear-end 2015 direct written premiums target, wetarget. We believe we can grow premiums faster than the industry average over any five-year period.

Cincinnati Financial Corporation – 2011 10-K - 11
period, while also achieving our long-term objective for underwriting profitability.

Our Segments

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

·Commercial lines property casualty insurance

·Personal lines property casualty insurance

·Excess and surplus lines property casualty insurance

·Life insurance

·Investments

Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Life insurance
Investments
We also evaluate results for our consolidated property casualty operations, which is the total of our commercial lines, personal lines and excess and surplus lines insurance results.

Revenues, income before income taxes and identifiable assets for each segment are shown in a table in Item 8, Note 18 of the Consolidated Financial Statements, Page 136.Statements. Some of that information also is discussed in this section of this report, where we explain the business operations of each segment. The financial performance of each segment is discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, which begins on Page 38.

Operations.

Commercial Lines Property Casualty Insurance Segment

The

In 2014, the commercial lines property casualty insurance segment contributed net earned premiums of $2.197$2.856 billion, to consolidated total revenues, orrepresenting 57.8 percent of thatconsolidated total andrevenues. This segment reported a lossprofit before income taxes of $101 million in 2011.$146 million. Commercial lines net earned premiums rose 28 percent in 2011, following declines of 22014 and 11 percent in 2010 and 5 percent in 2009.

2013.

Approximately 95 percent of our commercial lines premiums are written to provide accounts with coverages from more than one of our business lines. As a result, we believe that our commercial lines business is best measured and evaluated on a segment basis. However, we provide line of business data to summarize growth and profitability trends separately for our business lines. The sevenfive commercial business lines are:

Commercial casualty – Provides coverage to businesses against third-party liability from accidents occurring on their premises or arising out of their operations, including liability coverage for injuries sustained from products sold as well as coverage for professional services, such as dentistry. Specialized casualty policies may include liability coverage for excess insurance and umbrella liability, including personal umbrella liability written as an endorsement to commercial umbrella coverages, and employment practices liability (EPLI), which protects businesses against claims by employees that their legal rights as employees of the company have been violated, and against other acts or failures to act under specified circumstances. The commercial casualty business line includes liability coverage written as part of commercial package policies.
Commercial property – Provides coverage for loss or damage to buildings, inventory and equipment caused by covered causes of loss such as fire, wind, hail, water, theft and vandalism, as well as business interruption resulting from a covered loss. Commercial property also includes crime insurance, which provides coverage for losses such as embezzlement or misappropriation of funds by an employee, among others; and inland marine insurance, which provides coverage for builder’s risk, cargo, electronic data processing equipment and a variety of mobile equipment, such as contractor’s equipment. Various property coverages can be written as stand-alone policies or can be added to a commercial package policy.
Commercial auto – Protects businesses against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicles, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists.
Workers’ compensation – Covers employers for specified benefits payable under state or federal law for workplace injuries to employees. We write workers’ compensation coverage in all of our active states except

Cincinnati Financial Corporation - 2014 10-K - Page 16


North Dakota, Ohio, Washington and Wyoming, where coverage is provided solely by the state instead of by private insurers.
Other commercial lines – This includes the variety of other types of insurance products we offer to businesses. The main coverages offered are summarized below.
·
◦Commercial casualtyManagement liability and surety (formerly surety and executive risk) – Provides coverage to businesses against third-party liability from accidents occurring on their premises or arising out of their operations, including liability coverage for injuries sustained from products sold as well as coverage for professional services, such as dentistry. Specialized casualty policies may include liability coverage for employment practices liability (EPLI), which protects businesses against claims by employees that their legal rights as employees ofThis includes the company have been violated, and against other acts or failures to act under specified circumstances; and excess insurance and umbrella liability, including personal umbrella liability written as an endorsement to commercial umbrella coverages. The commercial casualty business line includes liability coverage written on both a discounted and nondiscounted basis as part of commercial package policies.following:

Director and officer (D&O) liability insurance, which covers liability for actual or alleged errors in judgment, breaches of duty or other wrongful acts related to activities of for-profit or nonprofit organizations. Our director and officer liability policy can optionally include EPLI coverage, trustee and fiduciary coverage and Internet liability services coverage. We market primarily to nonprofit organizations and they represent approximately half of the premium volume in force for our 2014 director and officer liability business. The for-profit portion includes approximately 250 bank or savings and loan financial institutions, with only 11 having assets of $1 million or more.
Contract and commercial surety bonds, which guarantee a payment or reimbursement for financial losses resulting from dishonesty, failure to perform and other acts.
Fidelity bonds, which cover losses that policyholders incur as a result of fraudulent acts by specified individuals or dishonest acts by employees. 
·Commercial property – Provides coverage for loss or damage to buildings, inventory and equipment caused by covered causes of loss such as fire, wind, hail, water, theft and vandalism, as well as business interruption resulting from a covered loss. Commercial property also includes crime insurance, which provides coverage for losses such as embezzlement or misappropriation of funds by an employee, among others; and inland marine insurance, which provides coverage for builder’s risk, cargo, electronic data processing equipment and a variety of mobile equipment, such as contractor’s equipment. Various property coverages can be written as stand-alone policies or can be added to a package policy. The commercial property business line includes property coverage written on both a nondiscounted and discounted basis as part of commercial package policies.

·Commercial auto – Protects businesses against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicles, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists.

·Workers’ compensation – Protects employers against specified benefits payable under state or federal law for workplace injuries to employees. We write workers’ compensation coverage in all of our active states except North Dakota, Ohio, Washington and Wyoming, where coverage is provided solely by the state instead of by private insurers.

·◦Specialty packages – Includes coverages for property, liability and business interruption tailored to meet the needs of specific industry classes such as artisan contractors, dentists, garage operators, financial institutions, metalworkers, printers, religious institutions or smaller main street businesses. Businessowners policies, which combine property, liability and business interruption coverages for small businesses, are included in specialty packages.

Cincinnati Financial Corporation – 2011 10-K - 12

·Surety and executive risk – This business line includes:
oContract and commercial surety bonds, which guarantee a payment or reimbursement for financial losses resulting from dishonesty, failure to perform and other acts.

oFidelity bonds, which cover losses that policyholders incur as a result of fraudulent acts by specified individuals or dishonest acts by employees.

oDirector and officer (D&O) liability insurance, which covers liability for actual or alleged errors in judgment, breaches of duty or other wrongful acts related to activities of for-profit or nonprofit organizations. Approximately 65 percent of new D&O policies and approximately 30 percent of director and officer new business premiums written in 2011 were for nonprofit entities. Our director and officer liability policy can optionally include EPLI coverage.

·◦Machinery and equipment – Specialized coverage provides protection for loss or damage to boilers and machinery, including production and computer equipment and business interruption, due to sudden and accidental mechanical breakdown, steam explosion or artificially generated electrical current.


Our emphasis is on products that agents can market to small to midsized businesses in their communities. Of our 1,6481,884 reporting agency locations, 1720 market only our suretymanagement liability and executive risksurety products and 1833 market only our personal lines products. The remaining 1,6131,831 locations, located in all states in which we actively market, offer some or all of our standard market commercial insurance products.

In 2011,2014, our 10 highest volume commercial lines states generated 63.360.1 percent of our earned premiums compared with 64.361.1 percent in 20102013 and 65.362.3 percent in 20092012 as we continued efforts to geographically diversify our property casualty risks. Earned premiums in the 10 highest volume states increased 17 percent in 20112014 and increased 411 percent in the remaining 29 states. The aggregate number of reporting agency locations in our 10 highest volume states increased to 9851,086 in 20112014 from 9541,064 in 2010.

Commercial Lines Earned Premiums by State

(Dollars in millions) Earned
premiums		  % of total
earned		  Agency
locations		  Average
premium per
location		 
Year ended December 31, 2011                
Ohio $341   15.5%  232  $1.5 
Illinois  189   8.6   123   1.5 
Pennsylvania  163   7.4   85   1.9 
Indiana  138   6.3   106   1.3 
North Carolina  118   5.4   82   1.4 
Virginia  101   4.6   66   1.5 
Michigan  99   4.5   115   0.9 
Georgia  83   3.8   75   1.1 
Wisconsin  82   3.7   51   1.6 
Tennessee  77   3.5   50   1.5 
Year ended December 31, 2010                
Ohio $347   16.1%  223  $1.6 
Illinois  187   8.7   120   1.6 
Pennsylvania  157   7.3   83   1.9 
Indiana  133   6.2   104   1.3 
North Carolina  120   5.6   78   1.5 
Virginia  100   4.6   60   1.7 
Michigan  96   4.5   115   0.8 
Georgia  82   3.8   75   1.1 
Wisconsin  81   3.8   48   1.7 
Tennessee  79   3.7   48   1.6 

2013.


Our 10 highest premium volume commercial lines states are shown in the table below.
(Dollars in millions)
Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
Year ended December 31, 2014 
 
 
 
Ohio$413
14.5%243
$1.7
Illinois209
7.3
136
1.5
Pennsylvania191
6.7
99
1.9
Indiana172
6.0
109
1.6
North Carolina141
4.9
93
1.5
Michigan133
4.7
134
1.0
Georgia122
4.3
89
1.4
Virginia118
4.1
64
1.8
Tennessee111
3.9
59
1.9
Wisconsin105
3.7
60
1.8
     

Cincinnati Financial Corporation - 2014 10-K - Page 17


For new commercial lines business, case-by-case underwriting and pricing is coordinated by our locally based field marketing representatives. Our agents and our field marketing, claims, loss control, premium audit, bond and machinery and equipment representatives get to know the people and businesses in their communities and can make informed decisions about each risk. These fieldField marketing representatives also are responsible for selecting new independent agencies, coordinating field teams of specialized company representatives and promoting all of the company’s products within the agencies they serve.

Commercial lines policy renewals are managed by headquarters underwriters who are assigned to specific agencies and consult with local field staff as needed. As part of our team approach, headquarters underwriters also help oversee agency growth and profitability. They are responsible for formal issuance of all new business and renewal policies as well as policy endorsements. Further, the headquarters underwriters provide day-to-day customer service to agencies and our field marketing representatives by offering product training, answering underwriting questions, helping to determine underwriting eligibility and assisting with the mechanics of premium determination.

Cincinnati Financial Corporation – 2011 10-K - 13

Our emphasis on small to midsized businesses is reflected in the mix of our commercial lines premium volume by policy size. Nearly 90Approximately 80 percent of our commercial in-force policies have annual premiums of $10,000 or less, accounting in total for approximately one-thirdone-quarter of our 20112014 commercial lines premium volume. The remainder of policies have annual premiums greater than $10,000, including in-force policies with annual premiums greater than $100,000 that account for slightly less than 15approximately 17 percent of our 20112014 commercial lines premium volume.

Our commercial lines packages typically are offered on a three-year policy term for most insurance coverages – a key competitive advantage. In our experience, multi-year packages appeal to the quality-conscious insurance buyers who we believe are typical clients of our independent agents. Customized insurance programs on a three-year term complement the long-term relationships these policyholders typically have with their agents and with the company. By reducing annual administrative efforts, multi-year policies lower expenses for our company and for our agents. The commitment we make to policyholders encourages long-term relationships and reduces their need to annually re-evaluate their insurance carrier or agency. We believe that the advantages of three-year policies in terms of improved policyholder convenience, increased account retention and reduced administrative costs outweigh the potential disadvantage of these policies, even in periods of rising rates.

Although we offer three-year policy terms, premiums for some coverages within those policies are adjustable at anniversary for the next annual period, and policies may be canceled at any time at the discretion of the policyholder. Contract terms often provide that rates for property, general liability, inland marine and crime coverages, as well as policy terms and conditions, are fixed for the term of the policy. However, the exposure we insure is reviewed annually, near the policy anniversary date, and the amount of premiums may be adjusted based on changes to that exposure.
The general liability exposure basis may be audited annually. Commercial auto, workers’ compensation, professional liability and most umbrella liability coverages within multi-year packages are rated at each of the policy's annual anniversaries for the next one-year period. The annual pricing could incorporate rate changes approved by state insurance regulatory authorities between the date the policy was written and its annual anniversary date, as well as changes in risk exposures and premium credits or debits relating to loss experience and other underwriting judgment factors. We estimate that approximately 75 percent of 20112014 commercial premiums were subject to annual rating or were written on a one-year policy term.

We believe our commercial lines insurance segment premiums reflect a higher concentration, relative to industry commercial lines premiums, in contractor-related businesses. Since economic activity related to construction, which can heavily influence insured exposures of contractors, working in the construction industry, may experience cycles that vary significantly with the economy as a whole, our commercial lines premium trends could vary from commercial lines premium trends for the property casualty insurance industry. In 2011,2014, we estimated that policyholders with a contractor-related Insurance Services Office (ISO) general liability code accounted for approximately 3336 percent of our general liability premiums, which are included in the commercial casualty line of business, and that policyholders with a contractor-related National Council on Compensation Insurance Inc. (NCCI) workers’ compensation code accounted for approximately 4550 percent of our workers’ compensation premiums.

Staying abreast of

Understanding evolving market conditions is a critical function for our success, accomplished in both an informal commentary and a formal manner. Informally, our field marketing representatives, underwriters and Target Markets department associates are in continuous receipt ofroutinely receive market intelligence from a variety of channels, including from the agencies

Cincinnati Financial Corporation - 2014 10-K - Page 18


with which they work. Our commercial lines product management group and field marketing representatives obtain competitive intelligence through various means. This market information helps identify the top competitors by line of business or specialty program and also identifies our market strengths and weaknesses. The information obtained encompasses pricing, breadth of coverage and underwriting/eligibility issues.

In addition to reviewing our competitive position, our product management group and our underwriting audit group review compliance with our underwriting standards as well as the pricing adequacy of our commercial insurance programs and coverages. Further, our Target Markets department analyzes opportunities and develops new products and services, new coverage options and improvements to existing insurance products.

We support our commercial lines operations with a variety of technology tools. At the end of 2014, e-CLAS® CPP for commercial package and auto coverages now has rolled outwas available to all of our appointed agencies in 34 states.36 states, and in 14 states for workers' compensation that represent approximately 75 percent of our workers' compensation premium volume. It is being developed for additional coverages and remaining states that will be deployed over time. Since the initial deployment of e-CLAS in late 2009, approximately 60 percent of our non-workers’ compensation commercial lines policies in force at the end of 2011 have been processed through e-CLAS. Due to the three-year policy term for much of our commercial lines business, some policies are not due for renewal processing in e-CLAS until 2012. In addition to increasing efficiency for our associates, the system allows our agencies options to quote and printproduce commercial package policies in paper or electronic format from their offices increasingand to bill policies through their agencies or through us. These features increase their ease of doing business with us. The e-CLAS platform also makes use of our real-time agency interface, CinciBridge®, which allows the automated movement of key underwriting data from an agency’s management system to e-CLAS. This reduces agents’ data entry tasks and allows seamless quoting, rating and issuance capability.

Cincinnati Financial Corporation – 2011 10-K - 14

Personal Lines Property Casualty Insurance Segment

The personal lines property casualty insurance segment contributed net earned premiums of $762 million$1.041 billion to consolidated total revenues, or 20.021.1 percent of the total, and reported a lossprofit before income taxes of $181$10 million in 2011.2014. Personal lines net earned premiums grew 6rose 8 percent in 20112014 and 511 percent in 2010, after declining less than 1 percent in 2009.

2013.

We prefer to write personal lines coverage in accounts that include both auto and homeowner coverages as well as coverages that are part of our other personal business line. At the end of 2014, for example, 81 percent of our homeowner policies were accompanied by a personal auto policy in the same account. As a result of our account-based approach, we believe that our personal lines business is best measured and evaluated on a segment basis. However, we provide line of business data to summarize growth and profitability trends separately for three business lines:

·Personal auto – Protects against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicle, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists. In addition, many states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage.

·Homeowners – Protects against losses to dwellings and contents from a wide variety of perils, as well as liability arising out of personal activities both on and off the covered premises. The company also offers coverage for condominium unit owners and renters.

·Other personal lines – This includes the variety of other types of insurance products we offer to individuals such as dwelling fire, inland marine, personal umbrella liability and watercraft coverages.

Personal auto – Protects against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicle, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists. In addition, many states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage.
Homeowner – Protects against losses to dwellings and contents from a wide variety of perils, as well as liability arising out of personal activities both on and off the covered premises. We also offer coverage for condominium unit owners and renters.
Other personal lines – This includes the variety of other types of insurance products we offer to individuals such as dwelling fire, inland marine, personal umbrella liability and watercraft coverages.

At year-end, we marketed personal lines insurance products through 1,1951,391 or approximately 7375 percent of our 1,6481,884 reporting agency locations. The 1,1951,391 personal lines agency locations are in 2931 of the 39 states in which we offer standard market commercial lines insurance and represent nearly 80 percent of the reporting agency locations in the 29 states. During 2010, we largely completed an initiative that began in 2008 to appoint forinsurance. Those agencies produced over 1.1 million personal lines existing agencies marketing only our commercial lines insurance products.policies in force for The Cincinnati Insurance companies, representing approximately 450,000 policyholders. We continue to evaluate opportunities to expand our marketing of personal lines to other states. Primary factors considered in the evaluation of a potential new state include market opportunity or potential, weather-related catastrophe history and the legal climate.


As discussed in Strategic Initiatives, we are also expanding the marketing of our personal lines insurance segment through independent agencies to profitably grow our premiums for products and services to their high net worth personal lines clients. At year-end 2014, our appointed agencies produced for us more than $100 million in annual premiums of policyholders with insured home values of $1 million or more. We estimate those policyholders represent approximately 3 percent of our total personal lines policyholders. Our plans to further develop products and services for high net worth policyholders are discussed in Strategic Initiatives.

Cincinnati Financial Corporation - 2014 10-K - Page 19


In 2011,2014, our 10 highest volume personal lines states generated 80.779.1 percent of our earned premiums compared with 82.279.6 percent in 20102013 and 84.180.6 percent in 2009.2012. Earned premiums in the 10four highest volume states increased 4 percent in 20112014 while increasing 13 percent in the remaining states, reflecting progress toward our long-term objective of geographic diversification through new states for our personal lines operation. The aggregate number of reporting agency locations in our 10 highest volume states increased 7 percent to 798at 875 in 2011 from 7492014 essentially matched the 874 in 2010.

Personal Lines Earned Premiums by State

(Dollars in millions) Earned
premiums		  % of total
earned		  Agency
locations		  Average
premium per
location		 
Year ended December 31, 2011                
Ohio $242   31.7%  207  $1.2 
Georgia  66   8.6   71   0.9 
Indiana  64   8.4   85   0.8 
Illinois  56   7.4   90   0.6 
Kentucky  44   5.7   38   1.2 
Alabama  42   5.5   41   1.0 
Michigan  32   4.2   97   0.3 
North Carolina  28   3.7   77   0.4 
Tennessee  22   2.8   45   0.5 
Virginia  20   2.7   47   0.4 
Year ended December 31, 2010                
Ohio $246   34.1%  199  $1.2 
Georgia  63   8.8   69   0.9 
Indiana  59   8.2   82   0.7 
Illinois  52   7.2   86   0.6 
Alabama  42   5.9   38   1.1 
Kentucky  40   5.5   37   1.1 
Michigan  28   3.8   90   0.3 
Tennessee  22   3.1   43   0.5 
North Carolina  20   2.8   67   0.3 
Virginia  20   2.8   38   0.5 

Cincinnati Financial Corporation – 2011 10-K - 15
2013.

Our 10 highest premium volume personal lines states are shown in the table below.
(Dollars in millions)
Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
Year ended December 31, 2014 
 
 
 
Ohio$288
27.6%219
$1.3
Georgia84
8.1
84
1.0
Indiana77
7.4
90
0.9
Illinois69
6.6
97
0.7
Michigan65
6.2
114
0.6
Alabama56
5.4
44
1.3
North Carolina55
5.3
82
0.7
Kentucky52
5.0
38
1.4
Tennessee41
3.9
53
0.8
Minnesota37
3.6
54
0.7
     
New and renewal personal lines business reflects our risk-specific underwriting philosophy. Each agency selects personal lines business primarily from within the geographic territory that it serves, based in part on the agent’sagency staff’s knowledge of the risks in those communities or familiarity with the policyholder. Personal lines activities are supported by headquarters associates assigned to individual agencies. At year-end 2011,2014, we had eightnine full-time personal lines field marketing representatives who have underwriting authority and visit agencies on a regular basis. They focus primarily on key states targeted for growth, reinforcing the advantages of our personal lines products and offering training in the use of our processing system.

All of our personal lines policies are written for a one-year term. Competitive advantages of our personal lines operation include broad coverage forms, flexible underwriting, superior claims service and customizable endorsements allowing customization of coverage for both the personal auto and homeowner policies. Our personal lines products are processed through Diamond, our web-basedWeb-based, real-time personal lines policy processing system that supports and allows streamlined processing. Diamond incorporates features frequently requested by our agencies such as pre-fillingprefilling of selected data for improved efficiency, easy-to-use screens,navigation, local and headquarters policy printing options, data transfer to and from popular agency management systems and real-time integration with third-party data such as insurance scores, motor vehicle reports and address verification.


Cincinnati Financial Corporation - 2014 10-K - Page 20


Excess and Surplus Lines Property Casualty Insurance Segment

The excess and surplus lines property casualty segment contributed net earned premiums of $70$148 million to consolidated total revenues, or 1.83.0 percent of the total, and reported profit before income taxes of $6$30 million in 2011,2014, its fourthseventh year of operation. Excess and surplus lines net earned premium increased 4328 percent in 20112014 and 8125 percent in 2010.

2013.

Our excess and surplus lines policies typically cover business risks with unique characteristics, such as the nature of the business or its claim history, that are difficult to profitably insure in the standard commercial lines market. Excess and surplus lines insurers have more flexibility in coverage terms and rates compared with standard lines companies, generally resulting in policies with higher rates and terms and conditions customized for specific risks, including restricted coverage where appropriate. We target small to midsized risks, seeking to avoid those we consider exotic in nature. Our average excess and surplus lines policy size is approximately $5,000$6,000 in annual premiums, and policyholders in many cases also have standard market insurance with one of The Cincinnati Insurance Companies.our other subsidiaries. All of our excess and surplus lines policies are written for a maximum term of one year. Approximately 8087 percent of our 20112014 premium volume for the excess and surplus lines insurance segment provided commercial casualty coverages and about 2013 percent provided commercial property coverages. Those coverages are described below.

·Commercial casualty – Covers businesses for third-party liability from accidents occurring on their premises or arising out of their operations, including products and completed operations. The majority of these policies have coverage limits of $1 million or less. Miscellaneous errors and omissions and professional coverage for liability from actual or alleged errors in judgment, breaches of duty or other wrongful acts related to activities of insured businesses is also available, as is excess liability coverage that adds another layer of protection to the insured’s other liability insurance policies. Typical businesses covered include contractors, consultants, bars or taverns, and manufacturers. Policies covering liability at special events are also available.

·Commercial property – Insures loss or damage to buildings, inventory, equipment and business income from causes of loss such as fire, wind, hail, water, theft and vandalism. Examples of property we commonly insure with excess and surplus lines policies include temporarily vacant buildings, restaurants and relatively higher-hazard manufacturing classes.

Commercial casualty – Covers businesses for third-party liability from accidents occurring on their premises or arising out of their operations, including products and completed operations. The majority of these policies have coverage limits of $1 million or less. Miscellaneous errors and omissions and professional coverage for liability from actual or alleged errors in judgment, breaches of duty or other wrongful acts related to activities of insured businesses is also available, as is excess liability coverage that adds another layer of protection to the insured’s other liability insurance policies. Typical businesses covered include contractors, manufacturers, real estate owners and managers, retail, consultants, and bars or taverns. Policies covering liability at special events are also available.
Commercial property – Insures buildings, inventory, equipment and business income from loss or damage due to causes such as fire, wind, hail, water, theft and vandalism. Examples of property we commonly insure with excess and surplus lines policies include temporarily vacant buildings, habitational, restaurants and relatively higher-hazard manufacturing classes.

At the end of 2011,2014, we marketed excess and surplus lines insurance products in each of the 39 states in which we offer standard market commercial lines insurance. Offering excess and surplus lines helps agencies representing The Cincinnati Insurance Companies meet the insurance needs of their clients when coverage is unavailable in the standard market. By providing outstanding service, we can help agencies grow and prosper while also profitably growing our property casualty business.

In 2011,2014, our 10 highest volume excess and surplus lines states generated 62.860.5 percent of our earned premiums compared with 65.161.9 percent in 2013 and 62.2 percent in 2012.
Our 10 highest premium volume excess and surplus lines states are shown in the prior year.

Cincinnati Financial Corporation – 2011 10-K - 16
table below.

Excess and Surplus Lines Earned Premiums by State

(Dollars in millions) Earned
premiums		  % of total
earned		 
Year ended December 31, 2011        
Ohio $9   12.4%
Indiana  7   9.7 
Illinois  5   6.8 
Georgia  5   6.6 
Texas  4   6.3 
Missouri  4   5.4 
Pennsylvania  3   4.2 
Michigan  3   4.0 
Kentucky  3   3.7 
North Carolina  3   3.7 
Year ended December 31, 2010        
Ohio $7   13.2%
Indiana  5   11.0 
Illinois  4   8.3 
Georgia  4   7.3 
Missouri  2   4.7 
Michigan  2   4.7 
Pennsylvania  2   4.2 
North Carolina  2   4.1 
Texas  2   3.9 
Kentucky  2   3.7 

(Dollars in millions)
Earned
premiums
% of total
earned
Year ended December 31, 2014 
 
Ohio$14
9.5%
Texas13
8.7
Indiana11
7.5
Illinois10
6.8
Georgia10
6.6
Alabama8
5.2
Missouri7
4.6
Michigan6
4.1
North Carolina6
4.0
Pennsylvania5
3.5
   

Cincinnati Financial Corporation - 2014 10-K - Page 21


Agencies representing The Cincinnati Insurance Companies write over $2produce approximately $3 billion in annual premiums for all carriers writing excess and surplus lines carriers in total that they represent.policies for their clients. We estimate that approximately half of that premium volume matches the targeted business types and coverages we offer through our excess and surplus lines insurance segment. We structured the operations of this segment to meet the needs of these agencies and to market exclusively through them.

Agencies have access to The Cincinnati Specialty Underwriters Insurance Company’sUnderwriters' product line through CSU Producer Resources, the wholly owned insurance brokerage subsidiary of parent-company Cincinnati Financial Corporation. CSU Producer Resources has binding authority on all classes of business written through The Cincinnati Specialty Underwriters Insurance Company and maintains appropriate agent and surplus lines licenses to process non-admittednonadmitted business.

We seek to earn a share of each agency’s best excess and surplus lines accounts by offering several unique benefits. Agency producers have direct access through CSU Producer Resources to a group of our underwriters who focus exclusively on excess and surplus lines business. Those underwriters can tap into agencies’ broader Cincinnati relationshipsservices to bring theirprovide policyholders services such asadditional value and help agents build the relationship through experienced and responsive loss control services and claims handling. CSU Producer Resources gives extra support to our independent agency producers by remitting surplus lines taxes and stamping fees and retaining admitted market diligent search affidavits, where required. Agencies marketing through CSU Producer Resources instead of a competing brokerage generally receive a higher commission because use of our internal brokerage subsidiary eliminates some of the intermediary costs. This business is also factored in their profit-sharing agreement with The Cincinnati Insurance Companies.


We use a web-basedWeb-based excess and surplus lines policy administration system to quote, bind, issue and deliver policies electronically to agents. This system provides integration to existing document management and data management systems, allowing for real-timeexpedited processing of policies and billing. It provides a specimen policy detailing coverages when a policy is quoted and delivers electronic copies of policies to independent agency producers within minutes of underwriting approval and policy issue. In 2011,2014, more than 95 percent of policies were issued within 24 hours of a request to bind a policy.

Cincinnati Financial Corporation – 2011 10-K - 17

Life Insurance Segment

The life insurance segment contributed $165$198 million of net earned premiums, representing 4.34.0 percent of consolidated total revenues, and negative $3$5 million of income before income taxes in 2011. Life insurance segment profitability is discussed in detail in Item 7, Life Insurance Results of Operations, Page 79.2014. Life insurance net earned premiums grew 45 percent in 2011, 102014 and 6 percent in 2010 and 13 percent in 2009.

2013.

The Cincinnati Life Insurance Company supports our agency-centered business model. Cincinnati Life helps meet the needs of our agencies, including increasing and diversifying agency revenues. We primarily focus on life products that feature a steady stream of premium payments and that have the potential for generating revenue growth through increasing demand. By diversifying revenue and profitability for both the agency and our company, this strategy enhances the already strong relationship built by the combination of the property casualty and life companies.

Life Insurance Business Lines

Four lines of business – term life insurance, universal life insurance, worksite products and whole life insurance – account for 96.295.3 percent of the life insurance segment’s revenues:

·Term insurance – policies under which a death benefit is payable only if the insured dies during a specific period of time. For policies without a return of premium provision, no benefit is payable if the insured person survives to the end of the term. For policies in force with a return of premium provision, a benefit equal to the sum of all paid base premiums is payable if the insured person survives to the end of the term. Premiums are fixed and they must be paid as scheduled. The policies are fully underwritten.

·Universal life insurance – long-duration life insurance policies. Contract premiums are neither fixed nor guaranteed; however, the contract does specify a minimum interest crediting rate and a maximum cost of insurance charge and expense charge. Premiums are not fixed and may be varied by the contract owner. The cash values, available as a loan collateralized by the cash surrender value, are not guaranteed and depend on the amount and timing of actual premium payments and the amount of actual contract assessments. The policies are fully underwritten. Contracts with death benefit guarantees are available for individuals as well as for two lives on contracts called survivor universal life.

·Worksite products – term insurance, return of premium term insurance, whole life insurance, universal life and disability insurance offered to employees through their employer. Premiums are collected by the employer using payroll deduction. Policies are issued using a simplified underwriting approach and on a guaranteed issue basis. Worksite insurance products provide our property casualty agency force with excellent cross-serving opportunities for both commercial and personal accounts. Agents report that offering worksite marketing to employees of their commercial accounts provides a benefit to the employees at no cost to the employer. Worksite marketing also connects agents with new customers who may not have previously benefited from receiving the services of a professional independent insurance agent.

·Whole life insurance – policies that provide life insurance for the entire lifetime of the insured. The death benefit is guaranteed never to decrease and premiums are guaranteed never to increase. While premiums are fixed, they must be paid as scheduled. These policies provide guaranteed cash values that are available as loans collateralized by the cash surrender value. The policies are fully underwritten.

Term life insurance – Policies under which a death benefit is payable only if the insured dies during a specific period of time. For policies without a return of premium provision, no benefit is payable if the insured person survives to the end of the term. For policies in force with a return of premium provision, a benefit equal to the sum of all paid base premiums is payable if the insured person survives to the end of the term. Premiums are fixed, and they must be paid as scheduled. The policies are fully underwritten.
Universal life insurance – Long-duration life insurance policies. Contract premiums are neither fixed nor guaranteed; however, the contract does specify a minimum interest crediting rate and a maximum cost of insurance charge and expense charge. Premiums may be varied by the contract owner. The cash values, available as a loan collateralized by the cash surrender value, are not guaranteed and depend on the amount and timing of actual premium payments and the amount of actual contract assessments. The policies are fully underwritten.

Cincinnati Financial Corporation - 2014 10-K - Page 22


Worksite products – Term life insurance, return of premium term life insurance, whole life insurance, universal life and disability insurance offered to employees through their employer. Premiums are collected by the employer using payroll deduction. Policies are issued using a simplified underwriting approach and on a guaranteed issue basis. Worksite insurance products provide our property casualty agency force with excellent cross-serving opportunities for both commercial and personal accounts. Agents report that offering worksite marketing to employees of their commercial accounts provides a benefit to the employees at no cost to the employer. Worksite marketing also connects agents with new customers who may not have previously benefited from receiving the services of a professional independent insurance agent.
Whole life insurance – Policies that provide life insurance for the entire lifetime of the insured. The death benefit is guaranteed never to decrease and premiums are guaranteed never to increase. While premiums are fixed, they must be paid as scheduled. These policies provide guaranteed cash values that are available as loans collateralized by the cash surrender value. The policies are fully underwritten.

In addition, Cincinnati Life markets:

·Disability income insurance that provides monthly benefits to offset the loss of income when the insured person is unable to work due to accident or illness.

·Deferred annuities that provide regular income payments that commence after the end of a specified period or when the annuitant attains a specified age. During the deferral period, any payments made under the contract accumulate at the crediting rate declared by the company but not less than a contract-specified guaranteed minimum interest rate. A deferred annuity may be surrendered during the deferral period for a cash value equal to the accumulated payments plus interest less the surrender charge, if any.

·Immediate annuities that provide some combination of regular income and lump sum payments in exchange for a single premium.

Cincinnati Financial Corporation – 2011 10-K - 18
Disability income insurance that provides monthly benefits to offset the loss of income when the insured person is unable to work due to accident or illness.

Deferred annuities that provide regular income payments that commence after the end of a specified period or when the annuitant attains a specified age. During the deferral period, any payments made under the contract accumulate at the crediting rate declared by the company but not less than a contract-specified guaranteed minimum interest rate. A deferred annuity may be surrendered during the deferral period for a cash value equal to the accumulated payments plus interest less the surrender charge, if any.
Immediate annuities that provide some combination of regular income and lump-sum payments in exchange for a single premium.

Life Insurance Distribution

Cincinnati Life seeks to become the

Our life insurance carriersubsidiary is licensed in 49 states and the District of choice for the independent agencies that work with our property casualty operations. We emphasize up-to-date products, responsive underwriting and high quality service as well as competitive commissions.Columbia. At year-end 2011,2014, almost 8588 percent of our 1,6481,844 property casualty agency reporting agency locations offered Cincinnati Life’sLife products to their clients. We also develop life business from approximately 560620 other independent life insurance agencies. We are careful to solicit business from these other agencies in a manner that does not conflict with or compete with the marketing and sales efforts of our property casualty agencies.

When marketing through our property casualty agencies, we have specific competitive advantages:

·Because our property casualty operations are held in high regard, property casualty agency management is predisposed to consider selling our life products.

·Marketing efforts for both our property casualty and life insurance businesses are directed by our field marketing department, which assures consistency of communication and operations. Life field marketing representatives are available to meet face-to-face with agency personnel and their clients as well.

·Our life headquarters underwriters and other associates are available to the agents and field team to assist in the placement of business. Fewer and fewer of our competitors provide direct, personal support between the agent and the insurance carrier.

Because our property casualty operations are held in high regard, property casualty agency management is predisposed to consider selling our life products.
Marketing efforts for both our property casualty and life insurance businesses are directed by our field marketing department, which assures consistency of communication and operations. Life field marketing representatives are available to meet face-to-face with agency personnel and their clients as well.
Our life headquarters underwriters and other associates are available to the agents and field team to assist in the placement of business. Fewer and fewer of our competitors provide direct, personal support between the agent and the insurance carrier.


Cincinnati Financial Corporation - 2014 10-K - Page 23


We continue to emphasize the cross-serving opportunities of our life insurance, including term and worksite products, for the property casualty agency’s personal and commercial accounts. In both the property casualty and independent life agency distribution systems, we enjoy the advantages of offering competitive, up-to-date products, providing close personal attention in combination with financial strength and stability.

·We primarily offer products addressing the needs of businesses with key person and buy-sell coverages. We offer personal and commercial clients of our agencies quality, personal life insurance coverage.

·Term insurance is our largest life insurance product line. We continue to introduce new term products with features our agents indicate are important, such as a return of premium benefit, and we have restructured our underwriting classifications to better meet the needs of their clients.

Term life insurance is our largest life insurance product line. We continue to introduce new term products with features our agents indicate are important, such as a return of premium benefit.
We also offer products addressing the needs of businesses with key person and buy-sell coverages. We offer quality, personal life insurance coverage to personal and commercial clients of our agencies.
Because of our strong capital position, we can offer a competitive product portfolio including guaranteed products, giving our agents a marketing edge. Our life insurance company maintains strong insurer financial strength ratings: A.M. Best, – A (Excellent),; Fitch, – A+ (Strong); and Standard & Poor’s – A (Strong),; as discussed in Financial Strength, Page 5.Strength. Our life insurance company has chosen not to establish a Moody’s rating.

Cincinnati Financial Corporation – 2011 10-K - 19

In 2014, our five highest volume states for life insurance premiums, based on information contained in statements filed with state insurance departments, are reflected in the table below.
(Dollars in millions)

Premiums
% of total
earned
Year ended December 31, 2014 
 
Ohio$48
18.6%
Pennsylvania19
7.2
Indiana17
6.5
Illinois16
6.4
Georgia13
5.1
   


Cincinnati Financial Corporation - 2014 10-K - Page 24


Investments Segment

Revenues of the investmentinvestments segment are primarily from net investment income and from realized investment gains and losses from investment portfolios managed for the holding company and each of the operating subsidiaries.

Our investment department operates under guidelines set forth in our investment policy statement along with oversight of the investment committee of our board of directors. These guidelines set parameters for risk tolerances governing, among other items, the allocation of the portfolio as well as security and sector concentrations. These parameters are part of an integrated corporate risk management program.

The fair value of our investment portfolio was $11.735$14.318 billion and $11.424$13.496 billion at year-end 20112014 and 2010, respectively.2013, respectively, as shown in the table below. The overall portfolio remained in an unrealized gain position as broad equity and fixed income markets experienced totalsolid returns ranging from modestin 2014, and the gain position for our fixed-maturity investments rose modestly due to strong.

a general decline in interest rates.

(Dollars in millions)At December 31, 2014 At December 31, 2013
 Cost or amortized costPercent of total  Percent of total Cost or amortized costPercent of total  Percent of total
  Fair value  Fair value
Taxable fixed maturities$5,882
50.7% $6,330
44.2% $5,814
52.1% $6,211
46.0%
Tax-exempt fixed maturities2,989
25.8
 3,130
21.9% 2,824
25.3
 2,910
21.6
Common equity securities2,583
22.3
 4,679
32.7% 2,396
21.5
 4,213
31.2
Nonredeemable preferred
  equity securities
145
1.2
 179
1.2% 127
1.1
 162
1.2
Total$11,599
100.0% $14,318
100.0% $11,161
100.0% $13,496
100.0%
            
The cash we generate from insurance operations historically has been invested in two broad categories of investments:

·Fixed-maturity investments – Includes taxable and tax-exempt bonds and redeemable preferred stocks. During 2011 and 2010, purchases and market value gains served to more than offset sales and calls.
·Equity investments – Includes common and nonredeemable preferred stocks. During 2011, purchases and fair value gains partially offset sales. During 2010, purchases and fair value gains more than offset sales.

  At December 31, 2011  At December 31, 2010 
  Cost or  Percent     Percent  Cost or  Percent     Percent 
(In millions) amortized cost  of total  Fair value  of total  amortized cost  of total  Fair value  of total 
Taxable fixed maturities $5,369   52.4% $5,847   49.8% $5,139   50.5% $5,533   48.4%
Tax-exempt fixed maturities  2,715   26.5   2,932   25.0   2,749   27.0   2,850   25.0 
Common equities  2,088   20.4   2,854   24.3   2,211   21.7   2,940   25.7 
Preferred equities  74   0.7   102   0.9   75   0.8   101   0.9 
Total $10,246   100.0% $11,735   100.0% $10,174   100.0% $11,424   100.0%

Fixed-maturity investments – Includes taxable and tax-exempt bonds and redeemable preferred stocks. During 2014, purchases and market value gains offset sales and calls. During 2013, purchases were largely offset by redemptions and fair value declines.
Equity investments – Includes common and nonredeemable preferred stocks. During both 2014 and 2013, purchases and fair value gains offset sales by relatively large amounts.

When allocating cash to various asset classes, we consider market basedmarket-based factors such as risk adjusted after taxafter-tax yields as well as internal measures based in part on regulatoryinsurance department regulations and rating agency guidance. In 2011, we hadDuring 2014, approximately one-fifth of net dispositionspurchases were equity securities. We monitor a variety of metrics, including after-tax yields, the ratio of investments in all asset classes exceptcommon stocks to statutory capital and surplus for the property casualty insurance operations, and the parent company’s ratio of investment grade corporate bonds. The primary driver of this was routine portfolio management as well as less new cash available for investment as a result of our unusual level of catastrophe activity.

assets to total assets.

At year-end 2011,2014, less than 1 percent of the value of our investment portfolio was made up of securities that are classified as Level 3 assets and that require management’s judgment to develop pricing or valuation techniques. We generally obtain at least two outside valuations for these assets and generally use the more conservative estimate. These investments include private placements, small issues and various thinly traded securities. See Item 7, Critical Accounting Estimates, Fair Value Measurements, Page 47, and Item 8, Note 3 of the Consolidated Financial Statements, Page 123, for additional discussion of our valuation techniques.

In addition to securities held in our investment portfolio, at year-end 2011,2014, other invested assets included $37$31 million of life policy loans and $29$37 million of venture capital fundprivate equity investments.


Our investment portfolio is further described below. Additional information about the composition of investments is included in Item 8, Note 2 of the Consolidated Financial Statements. A detailed listing of our portfolio is updated on our website, cinfin.com/investors, each quarter when we report our quarterly financial results.


Cincinnati Financial Corporation - 2014 10-K - Page 25


Fixed-Maturity Securities Investments

By maintaining a well diversifiedwell-diversified fixed-maturity portfolio, we attempt to manage overall interest rate, reinvestment, credit and liquidity risk. We pursue a buy-and-hold strategy and do not attempt to make large-scale changes to the portfolio in anticipation of rate movements. By investing new money on a regular basis and analyzing risk-adjusted after-tax yields, we work to achieve a laddering effect to our portfolio that may mitigate some of the effects of adverse interest rate movements.

Cincinnati Financial Corporation – 2011 10-K - 20

Fixed-Maturity Portfolio Ratings

At year-end 2011,2014, this portfolio’s fair value was 108.6106.6 percent of amortized cost, up from last105.6 percent a year ago as a significantresult of a general decline in the level of interest rates more than offset a general widening of corporate credit spreads.

rates.

The portfolio grewportfolio's fair value rose in 2011 due2014 as an interest-rate driven increase in bond prices added to a combination of market performance andnet purchases that were most heavily concentrated in the investment grade corporate sector. The majority of our non-rated securities are tax-exempt municipal bonds fromand commercial mortgage backed securities. Our nonrated securities include smaller municipalities that chosemunicipal issues and private placement corporate securities. Many of these, although not to pursuerated by Moody’s or Standard & Poor’s, are rated by the NAIC’s Securities’ Valuation Office. Also included in this category are smaller public corporate securities, many of which carry a credit rating.rating by an agency other than Moody’s or S&P, such as Fitch or Kroll. Credit ratings at year-end 20112014 and 20102013 for the fixed-maturity portfolio were:

  At December 31, 2011  At December 31, 2010 
  Fair  Percent  Fair  Percent 
(In millions) value  of total  value  of total 
Moody's Ratings and Standard & Poor's Ratings combined:                
Aaa, Aa, A, AAA, AA, A $5,507   62.7% $5,216   62.2%
Baa, BBB  2,842   32.4   2,656   31.7 
Ba, BB  195   2.2   241   2.9 
B, B  33   0.4   42   0.5 
Caa, CCC  5   0.1   19   0.2 
Ca, CC  0   0.0   0   0.0 
Daa, Da, D  2   0.0   1   0.0 
Non-rated  195   2.2   208   2.5 
Total $8,779   100.0% $8,383   100.0%

Our

(Dollars in millions)At December 31, 2014 At December 31, 2013
 Fair
value		 Percent
of total		 Fair
value		 Percent
of total
Combined ratings from Moody's and Standard & Poor's: 
  
  
  
Aaa, Aa, A, AAA, AA, A$5,686
 60.1% $5,468
 59.9%
Baa, BBB3,198
 33.8
 3,197
 35.1
Ba, BB305
 3.2
 231
 2.5
B, B15
 0.2
 16
 0.2
Caa, CCC3
 0.0
 4
 0.0
Nonrated253
 2.7
 205
 2.3
Total$9,460
 100.0% $9,121
 100.0%
        
Other selected attributes of the fixed-maturity portfolio as of December 31, 2011, included approximate maturing amounts with pretax average yields-to-book value as follows: 4.9 percent maturingare shown in 2012 with a 5.3 percent yield, 8.0 percent in 2013 with a 4.7 percent yield, and 8.7 in 2014 percent with a 5.3 percent yield.the table below. Additional maturity periods and other information for our fixed-maturity portfolio are shown in Item 8, Note 2 of the Consolidated Financial Statements,Statements.
 At December 31,
 2014 2013 
Weighted average yield-to-amortized cost4.76
%4.86
%
Weighted average maturity6.4
yrs6.2
yrs
Effective duration4.4
yrs4.5
yrs
     

Cincinnati Financial Corporation - 2014 10-K - Page 120. Attributes of the fixed-maturity portfolio include:

  At December 31, 
  2011 2010
Weighted average yield-to-amortized cost  5.3%  5.5%
Weighted average maturity  6.7 yrs  6.8 yrs
Effective duration  4.4 yrs  5.0 yrs

26



Taxable Fixed Maturities

The fair values of our taxable fixed-maturity securities portfolio forat the end of the last two years were:

 At December 31, 
(In millions) 2011  2010 
Investment-grade corporate $5,100  $4,695 
States, municipalities and political subdivisions  320   293 
Below investment-grade corporate  198   268 
Government sponsored enterprises  160   200 
Convertibles and bonds with warrants attached  59   69 
United States government  7   5 
Foreign government  3   3 
Total $5,847  $5,533 

(Dollars in millions)At December 31,
 2014 2013
Investment-grade corporate$5,208
 $5,293
States, municipalities and political subdivisions313
 301
Below investment-grade corporate318
 240
Commercial mortgage backed259
 143
Government sponsored enterprises208
 200
Foreign government10
 10
Convertibles and bonds with warrants attached7
 17
United States government7
 7
Total$6,330
 $6,211
    
While our strategy typically is to buy and hold fixed-maturity investments to maturity, we monitor credit profiles and fair value movements when determining holding periods for individual securities. With the exception of U.S. agency issues, no individual issuer's securities accounted for more than 0.91.0 percent of the taxable fixed-maturity portfolio at year-end 2011.2014. Investment grade corporate bonds had an average rating of Baa1 by Moody’s or BBB+ by Standard & Poor’s and represented 87.282.3 percent of the taxable fixed-maturity portfolio’s fair value at year end 2011,2014, compared with 84.885.2 percent in 2010.

2013.

The investment-grade corporate bond portfolio is most heavily concentrated in the financial-related sectors, including banking, financial services and insurance. The financial sectors represented 29.336.9 percent of fair value of this portfolio at year-end 2011,2014, compared with 28.932.8 percent, at year-end 2010.2013. Although the financial-related sectors make up our largest group of investment-grade corporate bonds, we believe our concentration is below the average for the corporate bond market as a whole. The real estate sector, including commercial mortgage back securities, accounted for 13.5 percent. No other sector exceeded 10 percent of our investment-grade corporate bond portfolio at year-end 2011.

2014.

Most of the $320$313 million of securities issued by states, municipalities and political subdivisions securities included in our taxable fixed-maturity portfolio at the end of 20112014 were Build America Bonds.


Cincinnati Financial Corporation - 2014 10-K - Page 27


Tax-Exempt Fixed Maturities

Our tax-exempt fixed-maturity securities portfolio’s fair value was $2.932$3.130 billion at December 31, 2011. We traditionally have purchased municipal bonds focusing on general obligation and essential services, such as sewer, water or others.2014. The portfolio is well diversified among approximately 1,000more than 1,500 municipal bond issuers.issues. No single municipal issuer accounted for more than 0.70.8 percent of the tax-exempt fixed-maturity portfolio at year-end 2011. Municipal2014. Our largest municipal bond holdings were in our larger states were:

Cincinnati Financial Corporation – 2011 10-K - 21
these states:

(In millions) State issued general
obligation bonds		  Local issued general 
obligation bonds		  Special revenue
bonds		  Total  Percent of
total		 
At December 31, 2011                
Texas $-  $425  $99  $524   17.9%
Indiana  -   16   316   332   11.3 
Michigan  -   257   12   269   9.2 
Illinois  -   226   23   249   8.5 
Ohio  -   132   107   239   8.2 
Washington  3   174   39   216   7.4 
Wisconsin  2   115   25   142   4.8 
Pennsylvania  -   76   8   84   2.9 
Florida  -   21   61   82   2.8 
Arizona  -   51   27   78   2.7 
Colorado  -   40   15   55   1.9 
Kansas  -   27   20   47   1.6 
New Jersey  -   30   17   47   1.6 
New York  -   18   24   42   1.4 
Utah  -   21   19   40   1.4 
All other states  1   264   221   486   16.4 
Total $6  $1,893  $1,033  $2,932   100.0%
                     
At December 31, 2010                    
Texas $-  $425  $107  $532   18.7%
Indiana  -   21   328   349   12.2 
Michigan  -   245   12   257   9.0 
Illinois  -   219   23   242   8.5 
Ohio  -   131   107   238   8.4 
Washington  -   166   32   198   6.9 
Wisconsin  -   116   19   135   4.7 
Florida  -   19   67   86   3.0 
Pennsylvania  -   67   9   76   2.7 
Arizona  -   46   30   76   2.7 
Colorado  -   37   15   52   1.8 
New Jersey  -   28   17   45   1.6 
Kansas  -   24   20   44   1.5 
New York  3   15   21   39   1.4 
Utah  -   20   17   37   1.3 
All other states  -   233   211   444   15.6 
Total $3  $1,812  $1,035  $2,850   100.0%

(Dollars in millions)Local issued general Special revenue State issued general Fair value Percent of
At December 31, 2014obligation bonds bonds obligation bonds total total
Texas$368
 $71
 $—
 $439
 14.0%
Indiana2
 244
 —
 246
 7.9
Ohio120
 78
 9
 207
 6.6
Michigan194
 8
 —
 202
 6.5
Washington127
 30
 7
 164
 5.2
Illinois146
 18
 —
 164
 5.2
Arizona78
 47
 —
 125
 4.0
Wisconsin87
 30
 2
 119
 3.8
Pennsylvania83
 15
 10
 108
 3.5
Florida26
 74
 —
 100
 3.2
New York59
 36
 4
 99
 3.2
New Jersey55
 15
 2
 72
 2.3
Kansas51
 21
 —
 72
 2.3
Colorado44
 25
 —
 69
 2.2
California40
 19
 3
 62
 2.0
All other states493
 337
 52
 882
 28.1
Total$1,973
 $1,068
 $89
 $3,130
 100.0%
          
At December 31, 2013         
Texas$385
 $66
 $—
 $451
 15.5%
Michigan238
 9
 —
 247
 8.5
Indiana8
 232
 —
 240
 8.2
Ohio119
 87
 6
 212
 7.3
Illinois184
 19
 —
 203
 7.0
Washington150
 32
 5
 187
 6.4
Wisconsin108
 32
 2
 142
 4.9
Pennsylvania93
 9
 9
 111
 3.8
Arizona55
 31
 —
 86
 3.0
Florida24
 62
 —
 86
 3.0
New York48
 31
 4
 83
 2.9
Colorado45
 17
 —
 62
 2.1
New Jersey44
 17
 —
 61
 2.1
Minnesota42
 7
 2
 51
 1.8
Utah31
 19
 —
 50
 1.7
All other states338
 270
 30
 638
 21.8
Total$1,912
 $940
 $58
 $2,910
 100.0%
          
At year-end 2011,2014, our tax-exempt fixed-maturity portfolio with a fair value of $2.932 billion, had an average rating of Aa2/AA. Almost 75Over 43 percent or $2.153$1.368 billion of the portfolio is insured, and approximately 95.598 percent of the insured portion carriedportfolio has an underlying rating of at least A3 or A- by Moody’s or Standard & Poor’s at year-end.year end. We strongly prefer general obligation or essential services bonds, which we believe provide a superior risk profile. The top three revenue resources of the $1.033$1.068 billion in special revenue bonds owned at year-end 20112014 were 3633 percent from leasing, 2125 percent from water and sewer and 98 percent from higher education.


Cincinnati Financial Corporation - 2014 10-K - Page 28


Equity Securities Investments

After covering both our intermediate and long-range insurance obligations with fixed-maturity investments, we historically have used available cash flow to invest in equity securities. Investment in equity securities has played an important role in achieving our portfolio objectives and has contributed to portfolio appreciation. We remain committed to our long-term equity focus, which we believe is key to our company’s long-term growth and stability.

Common Stocks

Our cash allocation for common stock purchases is implemented only after we ensure that our insurance reserves are adequately covered by our fixed-maturity investments. We believe our strategy of primarily investing in a diversified selection of larger capitalization, high quality,larger-capitalization, high-quality, dividend-increasing companies generally results in reduced volatility relative to the broader equity markets.

At December 31, 2011,year-end 2014 and 2013, no holding had a fair value equal to or greater than 53.3 percent of our publicly traded common stock portfolio compared with one holding at that level at year-end 2010. Pepsicoportfolio. Apple Inc. (NYSE:PEP)(Nasdaq:AAPL) was our largest single common stock investment at year end 2014, comprising 4.73.3 percent of the publicly traded common stock portfolio and 1.1 percent of the entire investment portfolio.

At year-end 2011, 28.32014, 35.0 percent of our common stock holdings (measured by fair value) were held at the parentparent- company level.

Cincinnati Financial Corporation – 2011 10-K - 22
The distribution of the portfolio among industry sectors is shown in the table below.

Common Stock Portfolio Industry Sector Distribution

  Percent of Publicly Traded Common Stock Portfolio 
  At December 31, 2011  At December 31, 2010 
  Cincinnati
 Financial		  S&P 500 Industry
Weightings		  Cincinnati
Financial		  S&P 500 Industry
Weightings		 
Sector:                
Information technology  16.9%  19.0%  13.0%  18.7%
Energy  14.0   12.3   12.9   12.0 
Consumer staples  12.3   11.5   15.4   10.6 
Healthcare  12.0   11.8   14.1   10.9 
Industrials  11.8   10.7   11.7   11.0 
Consumer discretionary  9.4   10.7   8.3   10.6 
Financial  8.5   13.4   11.7   16.1 
Materials  5.7   3.5   5.2   3.7 
Utilities  5.5   3.9   4.2   3.3 
Telecomm services  3.9   3.2   3.5   3.1 
Total  100.0%  100.0%  100.0%  100.0%

 Percent of publicly traded common stock portfolio
 At December 31, 2014 At December 31, 2013
 Cincinnati
Financial		 S&P 500 Industry
Weightings		 Cincinnati
Financial		 S&P 500 Industry
Weightings
Sector: 
  
  
  
Information technology17.3% 19.8% 18.7% 18.6%
Industrials14.3
 10.3
 14.0
 10.9
Financial13.8
 16.3
 12.0
 16.2
Healthcare11.9
 14.7
 11.5
 13.0
Energy10.5
 8.0
 10.5
 10.3
Consumer staples10.5
 10.0
 10.5
 9.8
Consumer discretionary10.2
 12.1
 9.8
 12.5
Materials5.5
 3.2
 5.7
 3.5
Utilities3.7
 3.3
 4.2
 2.9
Telecomm services2.3
 2.3
 3.1
 2.3
Total100.0% 100.0% 100.0% 100.0%
        
Nonredeemable Preferred Stocks

We evaluate nonredeemable preferred stocks in a manner similar to our evaluation of fixed-maturity investments, seeking attractive relative yields. We generally focus on investment-grade nonredeemable preferred stocks issued by companies with strong histories of paying common dividends, providing us with another layer of protection. When possible, we seek out nonredeemable preferred stocks that offer a dividend received deduction for income tax purposes. We made no purchases or sales forpurchased $20 million and sold $2 million in this portfolio during 2010 or 2011.

Additional information about the composition of investments is included in Item 8, Note 2 of the Consolidated Financial Statements, Page 120. A detailed listing of our portfolio is updated on our website,www.cinfin.com/investors, each quarter when2014. During 2013, we report our quarterly financial results.

purchased $48 million and sold $23 million.

Other

We report as Other the non-investmentnoninvestment operations of the parent company and its noninsurer subsidiary CFC Investment Company. This subsidiary offers commercial leasing and financing services to our agencies, their clients and other customers. As ofAt year-end 2011,2014, CFC Investment Company had 2,2172,141 accounts and $76$75 million in receivables, compared with 2,2272,516 accounts and $73$85 million in receivables at year-end 2010.

2013.



Cincinnati Financial Corporation - 2014 10-K - Page 29


Regulation

The business of insurance primarily is regulated by state law. All of our insurance company subsidiaries are domiciled in the state of Ohio except The Cincinnati Specialty Underwriters Insurance Company, which is domiciled in Delaware. Each insurance subsidiary is governed by the insurance laws and regulations in its respective state of domicile. We also are subject to state regulatory authorities of all states in which we write insurance. The state laws and regulations that have the most significant effect on our insurance operations and financial reporting are discussed below.

·Insurance Holding Company Regulation – We are regulated as an insurance holding company system in the respective states of domicile of our primary standard market property casualty company subsidiary and its surplus lines and life insurance subsidiaries. These regulations require that we annually furnish financial and other information about the operations of the individual companies within the holding company system. All transactions within a holding company affecting insurers must be fair and equitable. Notice to the state insurance commissioner is required prior to the consummation of transactions affecting the ownership or control of an insurer and prior to certain material transactions between an insurer and any person or entity in its holding company group. In addition, some of those transactions cannot be consummated without the commissioner’s prior approval.

·Subsidiary Dividends – The Cincinnati Insurance Company is 100 percent owned by Cincinnati Financial Corporation. The dividend-paying capacity of The Cincinnati Insurance Company and its 100 percent owned subsidiaries is regulated by the laws of the applicable state of domicile. Under these laws, our insurance subsidiaries must provide a 10-day advance informational notice to the insurance commissioner for the domiciliary state prior to payment of any dividend or distribution to its shareholders. Generally, the most our insurance subsidiary can pay without prior regulatory approval is the greater of 10 percent of policyholder surplus or 100 percent of statutory net income for the prior calendar year. Dividends exceeding these limitations may be paid only with approval of the insurance department of the domiciliary state.

Insurance Holding Company Regulation – We are regulated as an insurance holding company system in the respective states of domicile of our primary standard market property casualty company subsidiary and its surplus lines and life insurance subsidiaries. These regulations require that we annually furnish financial and other information about the operations of the individual companies within the holding company system. All transactions within a holding company affecting insurers must be fair and equitable. Notice to the state insurance commissioner is required prior to the consummation of transactions affecting the ownership or control of an insurer and prior to certain material transactions between an insurer and any person or entity in its holding company group. In addition, some of those transactions cannot be consummated without the commissioner’s prior approval. Recent amendments to the Model Insurance Holding Company System Regulatory Act and Regulation, adopted by the National Association of Insurance Commissioners (NAIC) and passed by a number of state legislatures, require insurance holding company systems to provide regulators with more information about the risks posed by any noninsurance company subsidiaries in the holding company system.
Subsidiary Dividends – The Cincinnati Insurance Company is 100 percent owned by Cincinnati Financial Corporation. The dividend-paying capacity of The Cincinnati Insurance Company and its 100 percent owned subsidiaries is regulated by the laws of the applicable state of domicile. Under these laws, our insurance subsidiaries must provide a 10-day advance informational notice to the insurance commissioner for the domiciliary state prior to payment of any dividend or distribution to its shareholders. Generally, the most our insurance subsidiary can pay without prior regulatory approval is the greater of 10 percent of statutory capital and surplus or 100 percent of statutory net income for the prior calendar year.
The insurance company subsidiaries must give 30 days’ notice to and obtain prior approval from the state insurance commissioner before the payment of an extraordinary dividend as defined by the state’s insurance code. You can find information about the dividends paid by our insurance subsidiary in 20112014 in Item 8, Note 9 of the Consolidated Financial Statements, Page 127.

Cincinnati Financial Corporation – 2011 10-K - 23
Statements.

·Insurance Operations – All of our insurance subsidiaries are subject to licensing and supervision by departments of insurance in the states in which they do business. The nature and extent of such regulations vary, but generally are rooted in statutes that delegate regulatory, supervisory and administrative powers to state insurance departments. Such regulations, supervision and administration of the insurance subsidiaries include, among others, the standards of solvency that must be met and maintained; the licensing of insurers and their agents and brokers; the nature and limitations on investments; deposits of securities for the benefit of policyholders; regulation of standard market policy forms and premium rates; policy cancellations and non-renewals; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; requirements regarding reserves for unearned premiums, losses and other matters; the nature of and limitations on dividends to policyholders and shareholders; the nature and extent of required participation in insurance guaranty funds; the involuntary assumption of hard-to-place or high-risk insurance business, primarily workers’ compensation insurance; and the collection, remittance and reporting of certain taxes and fees. In 2010, our primary insurance regulators adopted the Model Audit Rule for annual statutory financial reporting. This regulation closely mirrors the Sarbanes-Oxley Act on matters such as auditor independence, corporate governance and internal controls over financial reporting. The regulation permits the audit committee of Cincinnati Financial Corporation’s board of directors to also serve as the audit committee of each of our insurance subsidiaries for purposes of this regulation.

The legislative and regulatory climate in Florida continues to create uncertainty for the benefit of policyholders; regulation of standard market policy forms and premium rates; policy cancellations and nonrenewals; periodic examination of the affairs of insurance industry. In February 2007, wecompanies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; requirements regarding reserves for unearned premiums, losses and other matters; the nature of and limitations on dividends to policyholders and shareholders; the nature and extent of required participation in insurance guaranty funds; the involuntary assumption of hard-to-place or high-risk insurance business, primarily workers’ compensation insurance; and the collection, remittance and reporting of certain taxes and fees. Our primary insurance regulators have adopted a marketing stancethe Model Audit Rule for annual statutory financial reporting. This regulation closely mirrors the Sarbanes-Oxley Act on matters such as auditor independence, corporate governance and internal controls over financial reporting. The regulation permits the audit committee of continuingCincinnati Financial Corporation’s board of directors to service existing accounts while writing no newalso serve as the audit committee of each of our insurance subsidiaries for purposes of this regulation.

Insurance Guaranty Associations – Each state has insurance guaranty association laws under which the associations may assess life and property casualty insurers doing business relationships in Florida. This remained our stance through 2009, except in the linesstate for certain obligations of directorsinsolvent insurance companies to policyholders and officers, surety, machineryclaimants. Typically, states assess each member insurer in an amount related to the insurer’s proportionate share of business written by all member insurers in the state. Our insurance companies received a savings of less than $1 million from guaranty association refunds in both 2014 and equipment2013. We cannot predict the amount and timing of any future assessments or refunds on our insurance subsidiaries under these laws.
Shared Market and Joint Underwriting Plans – State insurance regulation requires insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms that

Cincinnati Financial Corporation - 2014 10-K - Page 30


generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. Such mechanisms are most commonly instituted for automobile and workers’ compensation insurance, but many states also mandate participation in FAIR Plans or Windstorm Plans, which provide basic property coverages. Participation is based upon the amount of a company’s voluntary market share in a particular state for the classes of insurance involved. Underwriting results related to these organizations could be adverse to our company.
Statutory Accounting – For public reporting, insurance companies prepare financial statements in accordance with GAAP. However, certain data also must be calculated according to statutory accounting rules as defined in the NAIC’s Accounting Practices and Procedures Manual. While not a substitute for any GAAP measure of performance, statutory data frequently is used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies.
Insurance Reserves – State insurance laws require that property casualty and life insurance, which we resumed writinginsurers annually analyze the adequacy of reserves. Our appointed actuaries must submit an opinion that reserves are adequate for policy claims-paying obligations and related expenses.
Investment Regulation – Insurance company investments must comply with laws and regulations pertaining to the type, quality and concentration of investments. Such laws and regulations permit investments in June 2007,federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to existing guidelines. In 2009, we cautiously resumed writing additional commercial lines new business while working to more actively managespecified limits and other qualifications. At December 31, 2014, the associated catastrophe risk, carefully underwriting new commercial submissionscompany believes it was in compliance with these laws and non-renewing commercial and personal lines policies that present the most risk of loss because of their age, construction and geographic characteristics. In 2011, ourregulations in all material respects.
Risk-Based Capital Requirements – The NAIC’s risk-based capital (RBC) requirements for property casualty net written premiums from Florida agencies were 1.7 percent of net written premiums, matchingand life insurers serve as an early warning tool for the percentage in 2010.

On August 24, 2007, the company received administrative subpoenas from the Florida Office of Insurance Regulation seeking documentsNAIC and testimony concerningstate regulators to identify companies that may be undercapitalized and may merit further regulatory action. The NAIC has a standard formula for annually assessing RBC. The formula for calculating RBC for property casualty companies takes into account asset and credit risks but places more emphasis on underwriting factors for reserving and pricing. The formula for calculating RBC for life insurance for residential risks located in Floridacompanies takes into account factors relating to insurance, business, asset and communications with reinsurers, risk modeling companies, rating agencies and insurance trade associations. We produced documents to respond to the subpoenas. Although inactive, these subpoenas remain outstanding as of December 31, 2011. We continue to assess the changing insurance environment in Florida.

·Insurance Guaranty Associations – Each state has insurance guaranty association laws under which the associations may assess life and property casualty insurers doing business in the state for certain obligations of insolvent insurance companies to policyholders and claimants. Typically, states assess each member insurer in an amount related to the insurer’s proportionate share of business written by all member insurers in the state. Our insurance companies received a savings of less than $1 million from guaranty association refunds in 2011 and a savings of less than $3 million in 2010. We cannot predict the amount and timing of any future assessments or refunds on our insurance subsidiaries under these laws.

·Shared Market and Joint Underwriting Plans – State insurance regulation requires insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms that generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. Such mechanisms are most commonly instituted for automobile and workers’ compensation insurance, but many states also mandate participation in FAIR Plans or Windstorm Plans, which provide basic property coverages. Participation is based upon the amount of a company’s voluntary market share in a particular state for the classes of insurance involved. Underwriting results related to these organizations could be adverse to our company.

·Statutory Accounting – For public reporting, insurance companies prepare financial statements in accordance with GAAP. However, certain data also must be calculated according to statutory accounting rules as defined in the National Association of Insurance Commissioners’ (NAIC) Accounting Practices and Procedures Manual. While not a substitute for any GAAP measure of performance, statutory data frequently is used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies.

Cincinnati Financial Corporation – 2011 10-K - 24
interest-rate risks.

·Insurance Reserves – State insurance laws require that property casualty and life insurers annually analyze the adequacy of reserves. Our appointed actuaries must submit an opinion that reserves are adequate for policy claims-paying obligations and related expenses.

·Risk-Based Capital Requirements – The NAIC’s risk-based capital (RBC) requirements for property casualty and life insurers serve as an early warning tool for the NAIC and state regulators to identify companies that may be undercapitalized and may merit further regulatory action. The NAIC has a standard formula for annually assessing RBC. The formula for calculating RBC for property casualty companies takes into account asset and credit risks but places more emphasis on underwriting factors for reserving and pricing. The formula for calculating RBC for life insurance companies takes into account factors relating to insurance, business, asset and interest rate risks.

Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal legislation and administrative rules adopted to implement them do affect our business. Privacy laws, such as the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act and the Health Insurance Portability and Accounting Act (HIPAA) are the federal laws that most affect our day-to-day operations. These apply to us because we gather and use personal non-publicnonpublic information to underwrite insurance and process claims. We also are subject to other federal laws, such as the Terrorism Risk Insurance Act (TRIA), anti-money laundering statute (AML), the Nonadmitted and Reinsurance Reform Act (NRRA), and the rules and regulations of the Office of Foreign Assets Control (OFAC).

Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) created the Federal Insurance Office to monitor the insurance industry and gather information to identify issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry of the United States financial system, and to recommend to the Financial Stability Oversight counselCouncil that it designate an insurer as a systemically significant entity requiring additional supervision by the Federal Reserve Board. We do not expect Dodd-Frank to result in federal oversight of our operations as a systemically significant entity.

We do not expect to have any material effects on our expenditures, earnings or competitive position as a result of compliance with any federal, state or local provisions enacted or adopted relating to the protection of the environment. We currently do not have any material estimated capital expenditures for environmental control facilities.

Cincinnati Financial Corporation – 2011 10-K - 25

Item 1A.Risk Factors

Enterprise Risk Management
We manage enterprise risk through formal risk management programs overseen by our chief risk officer, an executive officer of the company. Our ERM framework includes an enterprise risk management committee, which is responsible for overseeing risk activities and is comprised of senior executive-level risk owners from across the enterprise. The risk committee's activities are supported by a team of representatives from business areas that focus on identifying, evaluating and developing risk plans for emerging risks. A comprehensive report is provided quarterly to our chairman, our president and chief executive officer, our board of directors and our senior executive team, as appropriate, on the status of risk metrics relative to identified tolerances and limits, risk assessments and risk plans. Our use of operational audits, strategic plans and departmental business plans, as well as our culture of

Cincinnati Financial Corporation - 2014 10-K - Page 31


open communications and our fundamental respect for our Code of Conduct, continue to help us manage risks on an ongoing basis.

Our risk management programs include a formalized risk appetite element and a risk identification and quantification process. The overall enterprise objective is to appropriately balance risk and reward to achieve an appropriate return on risk capital. The company’s key risks are discussed in Item 1A, Risk Factors, including risks related to natural catastrophes, investments and operations.

We continue to study emerging risks, including climate change risk and its potential financial effects on our results of operation and on those we insure. These effects include deterioration in credit quality of our municipal or corporate bond portfolios and increased losses without sufficient corresponding increases in premiums. As with any risk, we seek to identify the extent of the risk exposure and possible actions to mitigate potential negative effects of risk, at an enterprise level.


Cincinnati Financial Corporation - 2014 10-K - Page 32


ITEM 1A.   Risk Factors
Our business involves various risks and uncertainties that may affect achievement of our business objectives. Many of the risks could have ramifications across our organization. For example, while risks related to setting insurance rates and establishing and adjusting loss reserves are insurance activities, errors in these areas could have an impact on our investment activities, growth and overall results.

The following discussion should be viewed as a starting point for understanding the significant risks we face. It is not a definitive summary of their potential impacts or of our strategies to manage and control the risks. Please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Page 38, for a discussion of those strategies.

If any risks or uncertainties discussed here develop into actual events, they could have a material adverse effect on our business, financial condition or results of operations. In that case, the market price of our common stock could decline materially.

The failure of our risk management strategies could have a material adverse impact on our financial condition and/or results of operations.

Readers should carefully consider this information together with the other information we have provided in this report and in other reports and materials we file periodically with the Securities and Exchange Commission as well as news releases and other information we disseminate publicly.

We rely exclusively on independent insurance agents to distribute our products.

We market our products through independent, non-exclusivenonexclusive insurance agents. These agents are not obligated to promote our products and can and do sell our competitors’ products. We must offer insurance products that meet the needs of these agencies and their clients. We need to maintain good relationships with the agencies that market our products. If we do not, these agencies may market our competitors’ products instead of ours, which may lead to us having a less desirable mix of business and could affect our results of operations.

Certain events or conditions could diminish our agents’ desire to produce business for us and the competitive advantage that our independent agencies enjoy, including:

·Downgrade of the financial strength ratings of our insurance subsidiaries. We believe our strong insurer financial strength ratings, in particular the A+ (Superior) ratings from A.M. Best for our standard market property casualty insurance group and each subsidiary, are an important competitive advantage. See Item 1, Financial Strength, Pages 5 through 7, for additional discussion of our financial strength ratings.

Downgrade of the financial strength ratings of our insurance subsidiaries. We believe our strong insurer financial strength ratings, in particular, the A+ (Superior) ratings from A.M. Best for our standard market property casualty insurance group and each subsidiary in that group, are an important competitive advantage. See Item 1, Our Business and Our Strategy, Financial Strength, for additional discussion of our financial strength ratings.
Concerns that doing business with us is difficult or not profitable, perceptions that our level of service is no longer a distinguishing characteristic in the marketplace, perceptions that our products do not meet the needs of our agents’ clients or perceptions that our business practices are not compatible with agents’ business models.
Mergers and acquisitions could result in a concentration of a significant amount of premium in one agency.
Delays in the development, implementation, performance and benefits of technology systems and enhancements or independent agent perceptions that our technology solutions do not match their needs.

·Concerns that doing business with us is difficult or not profitable, perceptions that our level of service is no longer a distinguishing characteristic in the marketplace, perceptions that our products do not meet the needs of our agents’ clients or perceptions that our business practices are not compatible with agents’ business models.


·Delays in the development, implementation, performance and benefits of technology systems and enhancements or independent agent perceptions that our technology solutions do not match their needs.

A reduction in the number of independent agencies marketing our products, the failure of agencies to successfully market our products or pay their accounts to us, changes in the strategy or operations of agencies or the choice of agencies to reduce their writings of our products could affect our results of operations if we were unable to replace them with agencies that produce adequate and profitable premiums.

Further, policyholders may choose a competitor’s product rather than our own because of real or perceived differences in price, terms and conditions, coverage or service. If the quality of the independent agencies with which we do business were to decline, that also might cause policyholders to purchase their insurance through different agencies or channels. Consumers, especially in the personal insurance segments,industry segment, may increasingly choose to purchase insurance from distribution channels other than independent insurance agents, such as direct marketers.

Increased advertising by insurers, especially direct marketers, could cause consumers to shift their buying habits, bypassing independent agents altogether.

Our credit ratings or financial strength ratings of our insurance subsidiaries could be downgraded.

A downgrade in one or more of our company’s credit or debt ratings could adversely impact our borrowing costs or limit our access to capital. Financial strength ratings reflect a rating agency’s opinion of our insurance subsidiaries’

Cincinnati Financial Corporation - 2014 10-K - Page 33


financial strength, operating performance, strategic position and ability to meet obligations to policyholders. Our ratings are subject to periodic review and there is no assurance that our ratings will not be changed. Ratings agencies could change or expand their requirements or could find that our insurance subsidiaries no longer meet the criteria established for current ratings. If our property casualty insurer financial strength ratings were to be downgraded, our agents might find it more difficult to market our products or might choose to emphasize the products of other carriers. See Item 7, Liquidity and Capital Resources, Additional Sources of Liquidity, Page 86, for additional discussion of ratings for our long-term debt.

Cincinnati Financial Corporation – 2011 10-K - 26

We could experience an unusually high level of losses due to catastrophic, terrorism or pandemic events or risk concentrations.

In the normal course of our business, we provide coverage against perils for which estimates of losses are highly uncertain, in particular catastrophic and terrorism events. Catastrophes can be caused by a number of events, including hurricanes, tornadoes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and fires. Due to the nature of these events, we are unable to predict precisely the frequency or potential cost of catastrophe occurrences. Various scientists and other experts believe that changing climate conditions have added to the unpredictability, frequency and severity of such natural disasters in certain parts of the world and have created additional uncertainty as to future trends and exposures. We cannot predict the impact that changing climate conditions may have on our results of operations nor can we predict how any legal, regulatory or social responses to concerns about climate change may impact our business.

Additionally, man-made events, such as hydraulic fracturing, could cause damage from earth movement or create environmental and/or health hazards.

The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Our ability to appropriately manage catastrophe risk depends partially on catastrophe models, the accuracy of which may be affected by inaccurate or incomplete data, the uncertainty of the frequency and severity of future events and the uncertain impact of climate change. Additionally, these models are recalibrated and changed over time, with more data availability and changing opinions regarding the effect of current or emerging loss patterns and conditions. Please see Item 7, 2012Liquidity and Capital Resources, 2015 Reinsurance Programs, Page 98, for a discussion of modeled losses considered in evaluating our reinsurance strategy.

The geographic regions in which we market insurance are exposed to numerous natural catastrophes, such as:

·Hurricanes in the gulf, eastern and southeastern coastal regions.

·Earthquakes in the New Madrid fault zone, which lies within the central Mississippi valley, extending from northeast Arkansas through southeast Missouri, western Tennessee and western Kentucky to southern Illinois, southern Indiana and parts of Ohio.

·Tornado, wind and hail in the Midwest, South, Southeast, Southwest and the mid-Atlantic.

Hurricanes in the gulf, eastern and southeastern coastal regions.
Earthquakes in many regions, most particularly in the New Madrid fault zone, which lies within the central Mississippi valley, extending from northeast Arkansas through southeast Missouri, western Tennessee and western Kentucky to southern Illinois, southern Indiana and parts of Ohio.
Tornado, wind and hail in the Midwest, South, Southeast, Southwest and the mid-Atlantic.
Wildfires in the West.

The occurrence of terrorist attacks in the geographic areas we serve could result in substantially higher claims under our insurance policies than we have anticipated. While we do insure terrorism risk in all areas we serve, we have identified our major terrorism exposure geographically as general commercial risks in the Tier 1 cities of metropolitan Chicago area, and to a much lesser degree, Washington D.C., Houston and Los Angeles. We have a greater amount of business in less hazardous Tier 2 cities such as Atlanta, Phoenix-Mesa, Minneapolis, Cleveland, St. Louis, Denver, Tampa-St. Petersburg, Pittsburgh and Cincinnati. We have exposure to small co-op utilities, water utilities, wholesale fuel distributors, small shopping malls and small colleges throughout our 39 active states and, because of the number of associates located there, our Fairfield, Ohio, headquarters. Additionally, our life insurance subsidiary could be adversely affected in the event of a terrorist event or an epidemic such as the avian or swine flu, particularly if the epidemic were to affect a broad range of the population beyond just the very young or the very old. Our associate health plan is self-funded and could similarly be affected.

Our results of operations would be adversely affected if the level of losses we experience over a period of time were to exceed our actuarially determined expectations. In addition, our financial condition may be adversely affected if we were required to sell securities prior to maturity or at unfavorable prices to pay an unusually high level of loss and loss expenses. Securities pricing might be even less favorable if a number of insurance or other companies and other investors needed to sell securities during a short period of time because of unusually high losses from catastrophic events.


Cincinnati Financial Corporation - 2014 10-K - Page 34


Our geographic concentration ties our performance to business, economic, environmental and regulatory conditions in certain states. We market our standard market property casualty insurance products in 39 states, but our business is concentrated in the Midwest and Southeast. We also have exposure in states where we do not actively market insurance when clients of our independent agencies have businesses or properties in multiple states.

The Cincinnati Insurance Company also participates in certain assumed reinsurance treaties with reinsurers that spread the risk of very large catastrophe losses among many insurers. At the beginning of 2012,2015, two surplus share treaties were in effect with the largest treaty representing exposure for us of up to $3$2 million of assumed losses from a single catastrophic event. If there is a high frequency of very large catastrophe events during a coverage period of the treaty, our financial position and results of operations could be materially affected. Please see Item 7, 2012Liquidity and Capital Resources, 2015 Reinsurance Programs, Page 98, for a discussion of our reinsurance treaties.

In the event of a severe catastrophic event or terrorist attack elsewhere in the world, our insurance losses may be immaterial. However, the companies in which we invest in might be severely affected, which could affect our financial condition and results of operations. Our reinsurers might experience significant losses, potentially jeopardizing their ability to pay losses we cede to them. It could also reduce the availability of reinsurance. If we cannot obtain adequate coverage at a reasonable cost, it could constrain where we can write business or reduce the amount of business we can write in certain areas. We also may be exposed to state guaranty fund assessments if other carriers in a state cannot meet their obligations to policyholders. A catastrophe or epidemic event also could affect our operations by damaging our headquarters facility, injuring associates and visitors at our Fairfield, Ohio, headquarters or disrupting our associates’ ability to perform their assigned tasks.

Cincinnati Financial Corporation – 2011 10-K - 27

Our ability to achieve our performance objectives could be affected by changes in the financial, credit and capital markets or the general economy.

We invest premiums received from policyholders and other available cash to generate investment income and capital appreciation, while also maintaining sufficient liquidity to pay covered claims and operating expenses, service our debt obligations and pay dividends. The value of our invested assets is an important component of shareholders’ equity, also known as book value. Changes in the valuation of invested assets can significantly affect changes in book value per share, a key performance objective as discussed in Item 7, Executive Summary of the Management’s Discussion and Analysis, Page 38.

Analysis.

For fixed-maturity investments such as bonds, which represented approximately 7565.8 percent of the fair value of our invested assets at the end of 2011,2014, the inverse relationship between interest rates and bond prices leads to falling bond values during periods of increasing interest rates. A significant increase in the general level of interest rates could have an adverse effect on our shareholders’ equity and our policyholders’ surplus.

equity.

Investment income is an important component of our revenues and net income. The ability to increase investment income and generate longer-term growth in book value is affected by factors beyond our control, such as inflation;as: inflation, economic growth;growth, interest rates;rates, world political conditions;conditions, changes in laws and regulations;regulations, terrorism attacks or threats;threats, adverse events affecting other companies in our industry or the industries in which we invest;invest, market events leading to credit constriction;constriction, and other widespread unpredictable events. These events may adversely affect the economy generally and could cause our investment income or the value of securities we own to decrease. A significant decline in our investment income could have an adverse effect on our net income, and thereby on our shareholders’ equity and our policyholders’statutory capital and surplus. For example, a significant increase in the general level of interest rates could lead to falling bond values. For a more detailed discussion of risks associated with our investments, please refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Page 102.

Risk.

We issue life contracts with guaranteed minimum returns, referred to as bank-owned life insurance contracts (BOLIs). BOLI investment assets must meet certain criteria established by the regulatory authorities in the jurisdiction for which the group contract holder is subject. Therefore, sales of investments may be mandated to maintain compliance with these regulations, possibly requiring gains or losses to be recorded. We could experience losses if the assets in the accounts were less than liabilities at the time of maturity or termination.

Our investment performance also could suffer because of the types of investments, industry groups and/or individual securities in which we choose to invest. Market value changes related to these choices could cause a material change in our financial condition or results of operations.


Cincinnati Financial Corporation - 2014 10-K - Page 35


At year-end 2011,2014, common stock holdings made up 24.232.7 percent of our invested assets.investment portfolio. Adverse news or events affecting the global or U.S. economy or the equity markets could affect our net income, book value and overall results, as well as our ability to pay our common stock dividend. See Item 7, Investments Results, of Operations, Page 81, and Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Page 102, for a discussion of our investment activities.

Deterioration in the banking sector or in banks with which we have relationships could affect our results of operations. Our ability to maintain or obtain short-term lines of credit could be affected if the banks from which we obtain these lines are acquired, fail or are otherwise negatively affected. We may lose premium revenue if a bank that owns appointed agencies were to change its strategies. We could experience increased losses in our director and officer liability line of business if claims were made against insured financial institutions.

A deterioration of credit and market conditions could also impair our ability to access credit markets and could affect existing or future lending arrangements.

Our overall results could be affected if a significant portion of our commercial lines policyholders, including those purchasing surety bonds, are adversely affected by marked or prolonged economic downturns and events such as a downturn in construction and related sectors, tightening credit markets and higher fuel costs. Such events could make it more difficult for policyholders to finance new projects, complete projects or expand their businesses, leading to lower premiums from reduced payrolls and sales and lower purchases of equipment and vehicles. These events could also cause claims, including surety claims, to increase due to a policyholder’s inability to secure necessary financing to complete projects or to collect on underlying lines of credit in the claims process. Such economic downturns and events could have a greater impact in the construction sector where we have a concentration of risks and in geographic areas that are hardest hit by economic downturns.

Cincinnati Financial Corporation – 2011 10-K - 28

Deteriorating economic conditions could also increase the degree of credit risk associated with amounts due from independent agents who collect premiums for payment to us and could hamper our ability to recover amounts due from reinsurers.

Our ability to properly underwrite and price risks and increased competition could adversely affect our results.

Our financial condition, cash flow and results of operations depend on our ability to underwrite and set rates accurately for a full spectrum of risks. We establish our pricing based on assumptions about the level of losses that may occur within classes of business, geographic regions and other criteria.

To properly price our products, we must collect, properly analyze and use data to make decisions and take appropriate action; the data must be sufficient, reliable and accessible; we need to develop appropriate rating methodologies and formulae; and we may need to identify and respond to trends quickly. We may overestimate or underestimate loss cost trends or these trends may unexpectedly change, leading to losing business by pricing risks above our competitors or charging rates too low to maintain profitability. Inflation trends, especially outside of historical norms, may make it more difficult to determine adequate pricing. If rates are not accurate, we may not generate enough premiums to offset losses and expenses or we may not be competitive in the marketplace.

Our ability to set appropriate rates could be hampered if a state or states where we write business refuses to allow rate increases that we believe are necessary to cover the risks insured. At least one state requires us to purchase reinsurance from a mandatory reinsurance fund. Such reinsurance funds can create a credit risk for insurers if not adequately funded by the state and, in some cases, the existence of a reinsurance fund could affect the prices charged for our policies. The effect of these and similar arrangements could reduce our profitability in any given period or limit our ability to grow our business.

The insurance industry is cyclical and intensely competitive. From time to time, the insurance industry goes through prolonged periods of intense competition during which it is more difficult to attract new business, retain existing business and maintain profitability. Competition in our insurance business is based on many factors, including:

·Competitiveness of premiums charged

·Relationships among carriers, agents, brokers and policyholders

·Underwriting and pricing methodologies that allow insurers to identify and flexibly price risks

·Compensation provided to agents

·Underwriting discipline

·Terms and conditions of insurance coverage

·Speed with which products are brought to market

·Product and marketing innovations, including advertising

·Technological competence and innovation

·Ability to control expenses

·Adequacy of financial strength ratings by independent ratings agencies such as A.M. Best

·Quality of services and tools provided to agents and policyholders

·Claims satisfaction and reputation

Competitiveness of premiums charged
Relationships among carriers, agents, brokers and policyholders
Underwriting and pricing methodologies that allow insurers to identify and flexibly price risks
Compensation provided to agents
Underwriting discipline

Cincinnati Financial Corporation - 2014 10-K - Page 36


Terms and conditions of insurance coverage
Speed with which products are brought to market
Product and marketing innovations, including advertising
Technological competence and innovation
Ability to control expenses
Adequacy of financial strength ratings by independent ratings agencies such as A.M. Best
Quality of services and tools provided to agents and policyholders
Claims satisfaction and reputation

If our pricing were incorrect or we were unable to compete effectively because of one or more of these factors, our premium writings could decline and our results of operations and financial condition could be materially adversely affected.

Large competitors could intentionally disrupt the market by targeting certain lines or underpricing the market.

Please see the discussion of our Commercial Lines, Personal Lines, Excess and Surplus Lines and Life Insurance Segments in Item 1, Page 12, Page 15 and Page 16,Our Segments, for a discussion of our competitive position in the insurance marketplace.

Our pricing and capital models could be flawed.  

We use various predictive pricing models, stochastic models and/or forecasting techniques to help us to understand our business, analyze risk and estimate future trends. The output of these models is used to assist us in making underwriting, pricing, reinsurance, reserving and capital decisions and helps us set our strategic direction. These models contain numerous assumptions, including the assumption that the data used is sufficient and accurate, and are subject to uncertainties and limitations inherent in any statistical analysis. Actual results might differ from modeled output, resulting in pricing our products incorrectly, overestimating or underestimating reserves, or inaccurately forecasting the impact of modeled events on our results. This could materially adversely impact the results of our operations.

Cincinnati Financial Corporation – 2011 10-K - 29

Our loss reserves, our largest liability, are based on estimates and could be inadequate to cover our actual losses.

Our consolidated financial statements are prepared using GAAP. These principles require us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates. For a discussion of the significant accounting policies we use to prepare our financial statements, and the material implications of uncertainties associated with the methods, assumptions and estimates underlying our critical accounting policies and the process used to determine our loss reserves, please refer to Item 8, Note 1 of the Consolidated Financial Statements, Page 114, and Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves and Life Insurance Policy Reserves, Page 42 and Page 46.

Reserves.

Our most critical accounting estimate is loss reserves. Loss reserves are the amounts we expect to pay for covered claims and expenses we incur to settle those claims. The loss reserves we establish in our financial statements represent an estimate of amounts needed to pay and administer claims arising from insured events that have already occurred, including events that have not yet been reported to us. Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability. Inflationary scenarios, especially scenarios outside of historical norms or regulatory changes that affect the assumptions underlying our critical accounting estimates, may make it more difficult to estimate loss reserves. Accordingly, our loss reserves for past periods could prove to be inadequate to cover our actual losses and related expenses. Any changes in these estimates are reflected in our results of operations during the period in which the changes are made. An increase in our loss reserves would decrease earnings, while a decrease in our loss reserves would increase earnings.

The process used to determine our loss reserves is discussed in Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves and Life Insurance Policy Reserves, Page 42 and Page 46.

Unforeseen losses, the type and magnitude of which we cannot predict, may emerge in the future. These additional losses could arise from changes in the legal environment, laws and regulations, climate change, catastrophic events, increases in loss severity or frequency, environmental claims, mass torts or other causes. Such future losses could be substantial. Inflationary scenarios may cause the cost of claims, especially medical claims, to rise, impacting reserve adequacy and our results of operations.


Cincinnati Financial Corporation - 2014 10-K - Page 37


Our ability to obtain or collect on our reinsurance protection could affect our business, financial condition, results of operations and cash flows.

We buy property casualty and life reinsurance coverage to mitigate the liquidity risk and earnings volatility risk of an unexpected rise in claims severity or frequency from catastrophic events or a single large loss. The availability, amount and cost of reinsurance depend on market conditions and may vary significantly. If we were unable to obtain reinsurance on acceptable terms and in appropriate amounts, our business and financial condition could be adversely affected.

In addition, we are subject to credit risk with respect to our reinsurers. Although we purchase reinsurance to manage our risks and exposures to losses, this reinsurance does not discharge our direct obligations under the policies we write. We would remain liable to our policyholders even if we were unable to recover what we believe we are entitled to receive under our reinsurance contracts. Reinsurers might refuse or fail to pay losses that we cede to them, or they might delay payment. For long-tail claims, the creditworthiness of our reinsurers may change before we can recover amounts to which we are entitled. A reinsurer’s insolvency, inability or unwillingness to make payments under the terms of its reinsurance agreement with our insurance subsidiaries could have a material adverse effect on our financial position, results of operations and cash flows.

We participated in USAIG, a joint underwriting association of individual insurance companies that collectively functions as a worldwide insurance market for all types of aviation and aerospace accounts. Our participation was terminated after policy year 2002. At year-end 2011, a substantial portion of our total reinsurance receivables were related to USAIG, primarily for events of September 11, 2001. If the pool participants and reinsurers were unable to fulfill their financial obligations and all security collateral that supports the participants’ obligations were to become worthless, we could be liable for an additional pool liability and our financial position and results of operations could be materially affected. At year-end 2011, all pool participants and reinsurers were financially solvent.

Please see Item 7, 2012Liquidity and Capital Resources, 2015 Reinsurance Programs, Page 98, for a discussion of selected reinsurance transactions.

Cincinnati Financial Corporation – 2011 10-K - 30

Our business depends on the uninterrupted operation of our facilities, systems and business functions.

Our business depends on our associates’ ability to perform necessary business functions, such as processing new and renewal policies and claims. We increasingly rely on technology and systems to accomplish these business functions in an efficient and uninterrupted fashion. Our inability to access our headquarters facilities or a failure of technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis or affect the accuracy of transactions. If sustained or repeated, such a business interruption or system failure could result in a deterioration of our ability to write and process new and renewal business, serve our agents and policyholders, pay claims in a timely manner, collect receivables or perform other necessary business functions. If our disaster recovery and business continuity plans did not sufficiently consider, address or reverse the circumstances of an interruption or failure, this could result in a materially adverse effect on our operating results and financial condition. This risk is exacerbated because approximately 7069 percent of our associates work at our Fairfield, Ohio, headquarters.

Our ability to successfully execute business functions also depends on hiring and retaining qualified associates,associates. Competition for high-quality executives and other key associates occurs within the insurance industry and from other industries. We also must effectively develop and manage associates, including providing training and resources. Such tools and information can allow them to effectively perform critical business functions and adapt to changing business needs. If we were unable to attract and retain certain associates, or if we fail to provide adequate training or resources, we could limit the success of executing our strategic plans and vital business functions.

The effects of changes in industry practices, laws and regulations on our business are uncertain.

As industry practices and legal, judicial, legislative, regulatory, political, social and other environmental conditions change, unexpected and unintended issues related to insurance pricing, claims and coverage may emerge. These issues may adversely affect our business by impeding our ability to obtain adequate rates for covered risks, extending coverage beyond our underwriting intent, by increasing the number or size of claims, or by varying assumptions underlying our critical accounting estimates.estimates or by increasing duties owed to policyholders beyond contractual obligations. In some instances, unforeseeable emerging and latent claim and coverage issues may not become apparent until sometime after we have issued the insurance policies that could be affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a policy is issued and our pricing and reserve estimates may not accurately reflect its effect.

We are required to adopt new or revised accounting standards issued by recognized authoritative organizations, including the Financial Accounting Standards Board (FASB) and the SEC. Future changes required to be adopted could change the current accounting treatment that we apply and could result in material adverse effects on our results of operations and financial condition.


Cincinnati Financial Corporation - 2014 10-K - Page 38


Our investment income benefits from tax rate preferences for municipal bond interest and dividend income from equity securities. Market valuations for these securities also benefit from the tax-preference aspect of current tax laws, affecting the value of our investment portfolio and also shareholders’ equity. Future changes in tax laws could result in material adverse effects on our results of operations and financial condition.

The NAIC, state insurance regulators and state legislators continually re-examine existing laws and regulations governing insurance companies and insurance holding companies, specifically focusing on modifications to statutory accounting principles, interpretations of existing laws, regulations relating to product forms and pricing methodologies and the development of new laws and regulations that affect a variety of financial and nonfinancial components of our business. Any proposed or future legislation, regulation or NAIC initiatives, if adopted, may be more restrictive on our ability to conduct business than current regulatory requirements or may result in higher costs.

The loss or significant restriction on the use of a particular variable, such as credit, in pricing and underwriting our products could lead to future unprofitability and increased costs.

Federal laws and regulations, including those that may be enacted in the wake of the financial and credit crises, may have adverse affectseffects on our business, potentially including a change from a state-based system of regulation to a system of federal regulation, the repeal of the McCarran Ferguson Act, and/or measures under the Dodd-Frank Act that establish the Federal Insurance Office and provide for a determination that a non-banknonbank financial company presents systemic risk and therefore should be subject to heightened supervision by the Federal Reserve Board. It is not known how this federal office will coordinate and interact with the NAIC and state insurance regulators. Adoption or implementation of any of these measures may restrict our ability to conduct our insurance business, govern our corporate affairs or increase our cost of doing business.

Implementation of the Affordable Care Act (ACA) may affect the ability of the company to grow profitably.

The effects of such changes could adversely affect our results of operations. Please see Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves and Life Insurance Policy Reserves, Page 42 and Page 46, for a discussion of our reserving practices.

Managing technology initiatives and meeting data security requirements are significant challenges.

While technology can streamline many business processes and ultimately reduce the cost of operations, technology initiatives present short-term cost, and also have implementation and operational risks. In addition, we may have inaccurate expense projections, implementation schedules or expectations regarding the effectiveness and user acceptance of the end product. These issues could escalate over time. If we were unable to find and retain associates with key technical knowledge, our ability to develop and deploy key technology solutions could be hampered.

Cincinnati Financial Corporation – 2011 10-K - 31

We necessarily collect, use and hold data concerning individuals and businesses with whom we have a relationship. Threats to data security, including unauthorized access and cyber attacks,cyberattacks, rapidly emerge and change, exposing us to additional costs for protection or remediation and competing time constraints to secure our data in accordance with customer expectations and statutory and regulatory requirements.

While we take allcommercially reasonable measures to keep our systems and data secure, it is difficult or impossible to defend against every risk being posed by changing technologies as well as criminals’ intent on committing cyber-crime.cybercrime. Increasing sophistication of cyber-criminalscyber criminals and terrorists make keeping up with new threats difficult and could result in a breach. Patching and other measures to protect existing systems and servers could be inadequate, especially on systems that are being retired. Controls employed by our U.S., off-shore and cloud vendors could prove inadequate. We could also experience a breach by intentional or negligent conduct on the part of associates or other internal sources. Our systems and those of our third-party vendors may become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses and malware.

A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs and reputational damage.


Cincinnati Financial Corporation - 2014 10-K - Page 39


Our status as an insurance holding company with no direct operations could affect our ability to pay dividends in the future.

Cincinnati Financial Corporation is a holding company that transacts substantially all of its business through its subsidiaries. Our primary assets are the stock in our operating subsidiaries and our investments. Consequently, our cash flow to pay cash dividends and interest on our long-term debt depends on dividends we receive from our operating subsidiaries and income earned on investments held at the parent-company level.

Dividends paid to our parent company by our insurance subsidiary are restricted by the insurance laws of Ohio, its domiciliary state. These laws establish minimum solvency and liquidity thresholds and limits. At year-end 2011,In 2015, the maximum dividend that may be paid without prior regulatory approval wasis limited to the greater of 10 percent of statutory capital and surplus or 100 percent of statutory net income for the prior calendar year, up to the amount of statutory unassigned capital and surplus as of the end of the prior calendar year. Dividends exceeding these limitations may be paid only with prior approval of the Ohio Department of Insurance. Consequently, at times, we might not be able to receive dividends from our insurance subsidiary, or we might not receive dividends in the amounts necessary to meet our debt obligations or to pay dividends on our common stock without liquidating securities. This could affect our financial position.

Please see Item 1, Regulation, Page 23, and Item 8, Note 9 of the Consolidated Financial Statements, Page 127, for a discussion of insurance holding company dividend regulations.

Cincinnati Financial Corporation – 2011 10-K - 32

Item 1B.Unresolved Staff Comments


ITEM 1B.    Unresolved Staff Comments
None

Item 2.Properties

ITEM 2.    Properties
Cincinnati Financial Corporation owns our headquarters building located on 100 acres of land in Fairfield, Ohio. This building has approximately 1,508,200 total square feet of availabletotal space. The property, including land, is carried in our financial statements at $150$137 million as of December 31, 2011,2014, and is classified as land, building and equipment, net, for company use. John J. & Thomas R. Schiff & Co. Inc., a related party, occupies approximately 6,750 square feet (less than 1 percent). This property is used by all segments reported in the Consolidated Financial Statements and accompanying Notes.

Cincinnati Financial Corporation also owns Gilmore Pointe, formerly known as the Fairfield Executive Center, which is located on the northwest corner of our headquarters property. This four-story office building has approximately 124,000 square feet of availabletotal space. The property is carried in the financial statements at $8$7 million as of December 31, 2011,2014, and is classified as land, building and equipment, net, for company use. Unaffiliated tenants occupy approximately 56 percent. This property is used by all segments reported in the Consolidated Financial Statements and accompanying Notes.

The Cincinnati Insurance Company owns a buildingthe CFC Winton Center used for business continuity, with approximately 48,000 square feet of availabletotal space, located approximately six miles from our headquarters. The property, including land, is carried on our financial statements at $10 million as of December 31, 2011,2014, and is classified as land, building and equipment, net, for company use. This property is used by all segments reported in the Consolidated Financial Statements and accompanying Notes.

Item 3.Legal Proceedings

ITEM 3.    Legal Proceedings
Neither the company nor any of our subsidiaries is involved in any material litigation other than ordinary, routine litigation incidental to the nature of its business.

Item 4.Mine Safety Disclosures

ITEM 4.    Mine Safety Disclosures
This item is not applicable to the company. The title has been changed to conform to Section 1503


Cincinnati Financial Corporation - 2014 10-K - Page 40


Part II
ITEM 5.    Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of the Dodd-Frank Act.

Cincinnati Financial Corporation – 2011 10-K - 33
Equity Securities

Part II

Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Cincinnati Financial Corporation had approximately 13,00070,000 shareholders of record as of December 31, 2011. This number does not represent2014. While approximately 13,000 shareholders are registered, the total numbermajority of shareholders because someare beneficial owners whose shares are beneficially held in “street name” by brokers and others on behalf of individual owners of our shares. Manyinstitutional accounts. We believe many of our independent agent representatives and most of the 4,0674,305 associates of our subsidiaries own the company’s common stock.

Our common shares are traded under the symbol CINF on the Nasdaq Global Select Market.

(Source: Nasdaq Global Select Market) 2011  2010 
Quarter:  1st  2nd  3rd  4th  1st  2nd  3rd  4th
High $34.33  $33.55  $29.54  $30.79  $29.65  $30.38  $29.39  $32.27 
Low  31.43   27.80   23.65   24.66   25.50   25.65   25.25   28.68 
Period-end close  32.79   29.18   26.33   30.46   28.91   25.87   28.82   31.69 
Cash dividends declared  0.40   0.40   0.4025   0.4025   0.395   0.395   0.40   0.40 

(Source: Nasdaq Global Select Market) 2014 2013
Quarter: 
1st
 
2nd
 
3rd
 
4th
 
1st
 
2nd
 
3rd
 
4th
High $52.19
 $49.73
 $48.86
 $55.35
 $47.35
 $50.60
 $50.01
 $53.74
Low 44.90
 47.00
 45.69
 45.09
 39.60
 44.53
 43.62
 46.61
Period-end close 48.66
 48.04
 47.05
 51.83
 47.22
 45.92
 47.16
 52.37
Cash dividends declared 0.44
 0.44
 0.44
 0.44
 0.4075
 0.4075
 0.42
 0.42
                 
We discuss the factors that affect our ability to pay cash dividends and repurchase shares in Item 7, Liquidity and Capital Resources, Page 85. One factor we address is regulatoryResources. Regulatory restrictions on the dividends our insurance subsidiary can pay to the parent company which also isare discussed in Item 8, Note 9 of the Consolidated Financial Statements, Page 127.

Statements.

The following summarizes securities authorized for issuance under our equity compensation plans as of December 31, 2011:

Plan category Number of securities  to be
issued upon exercise of
outstanding options,
warrants and rights at
December 31, 2011		  Weighted-average exercise
price of outstanding
options, warrants and rights		  Number of securities remaining
available for future issuance under
equity compensation plan (excluding
securities reflected in column (a)) at
December 31, 2011		 
  (a)  (b)  (c) 
Equity compensation plans approved by security holders  9,357,108  $36.71   4,427,698 
Equity compensation plans not approved by security holders  -   -   - 
Total  9,357,108  $36.71   4,427,698 

2014:

Plan category 
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights at
December 31, 2014
 
Weighted-average exercise
price of outstanding
options, warrants and rights
 
Number of securities remaining
available for future issuance under
equity compensation plan (excluding
securities reflected in column (a)) at
December 31, 2014
  (a) (b) (c)
Equity compensation plans
    approved by security holders
 4,958,191
 $39.10
 6,199,048
Equity compensation plans not
    approved by security holders
 —
 —
 —
    Total 4,958,191
 $39.10
 6,199,048
       
The number of securities remaining available for future issuance includes: 4,007,5085,503,974 shares available for issuance under the Cincinnati Financial Corporation 2012 Stock Compensation Plan (the 2012 Plan), 517,117 shares available for issuance under the Cincinnati Financial Corporation 2006 Stock Compensation Plan (the 2006 Plan), which can be issued asand 177,957 shares available for issuance of share grants under the Director’s Stock Plan of 2009. Both the 2012 Plan and 2006 Plan allow for issuance of stock options, service-based, or performance-based restricted stock units, stock appreciation rights or other equity-based grants; 175,992 shares of stock options available for issuance under the Cincinnati Financial Corporation Stock Option Plan VII; and 244,198 shares available for issuance of share grants under the Director’s Stock Plan of 2009.grants. Awards other than stock options and stock appreciation rights granted from the 2012 and 2006 Planplans are counted as three shares against the plan for each one share of common stock actually issued. Additional information about stock-based associate compensation granted under our equity compensation plans is available in Item 8, Note 17 of the Consolidated Financial Statements,Statements.


Cincinnati Financial Corporation - 2014 10-K - Page 134.

41
Cincinnati Financial Corporation – 2011 10-K - 34


The following summarizes shares purchased under our repurchase programs:

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		 
January 1-31, 2011  0  $0.00   0   8,666,349 
February 1-28, 2011  0   0.00   0   8,666,349 
March 1-31, 2011  0   0.00   0   8,666,349 
April 1-30, 2011  0   0.00   0   8,666,349 
May 1-31, 2011  0   0.00   0   8,666,349 
June 1-30, 2011  0   0.00   0   8,666,349 
July 1-31, 2011  0   0.00   0   8,666,349 
August 1-31, 2011  1,152,587   26.03   1,152,587   7,513,762 
September 1-30, 2011  0   0.00   0   7,513,762 
October 1-31, 2011  0   0.00   0   7,513,762 
November 1-30, 2011  0   0.00   0   7,513,762 
December 1-31, 2011  75,000   28.88   75,000   7,438,762 
  Totals  1,227,587   26.20   1,227,587     

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
January 1-31, 2014 —
 —
 —
 5,549,493
February 1-28, 2014 —
 —
 —
 5,549,493
March 1-31, 2014 150,000
 $47.69
 150,000
 5,399,493
April 1-30, 2014 —
 —
 —
 5,399,493
May 1-31, 2014 —
 —
 —
 5,399,493
June 1-30, 2014 —
 —
 —
 5,399,493
July 1-31, 2014 100,000
 46.07
 100,000
 5,299,493
August 1-31, 2014 200,000
 46.11
 200,000
 5,099,493
September 1-30, 2014 —
 —
 —
 5,099,493
October 1-31, 2014 —
 —
 —
 5,099,493
November 1-30, 2014 —
 —
 —
 5,099,493
December 1-31, 2014 —
 —
 —
 5,099,493
Totals 450,000
 46.63
 450,000
  
         
We did not sell any of our shares that were not registered under the Securities Act during 2011.2014. The board of directors has authorized share repurchases since 1996. Purchases are expected to be made generally through open market transactions. During December 2011, we purchased 75,000 shares at fair market value from the qualified pension plan. The board gives management discretion to purchase shares at reasonable prices in light of circumstances at the time of purchase, subject to SEC regulations. During 2011, we repurchased 1,227,587We have 5,099,493 shares available for purchase under our programs at an average cost of $26.20 per share.

December 31, 2014.

On October 24, 2007, the board of directors expanded the existing repurchase authorization to approximately 13 million shares. The prior repurchase program for 10 million shares was announced in 2005, replacing a program that had been in effect since 1999. No repurchase program has expired during the period covered by the above table. Neither the 2005 nor 1999 program had an expiration date, but no further repurchases will occur under the 1999 program.

Cincinnati Financial Corporation – 2011 10-K - 35

Cumulative Total Return

As depicted in the graph below, the five-year total return on a $100 investment made December 31, 2006,2009, assuming the reinvestment of all dividends, was a negative 12.9146.7 percent for Cincinnati Financial Corporation’s common stock compared with a negative 22.5109.3 percent for the Standard & Poor’s Composite 1500 Property & Casualty Insurance Index and a negative 1.2105.1 percent for the Standard & Poor’s 500 Index.

The Standard & Poor’s Composite 1500 Property & Casualty Insurance Index includes 27 companies:included 26 companies at year-end 2014: Ace Limited.,Limited, The Allstate Corporation, Amerisafe Inc., Aspen Insurance Holdings Limited.,Limited, W. R. Berkley Corporation, Berkshire Hathaway Inc., The Chubb Corporation, Cincinnati Financial Corporation, Employers Holdings Inc., Fidelity National Financial Inc., First American Financial Corporation, The Hanover Insurance Group Inc., HCI Group Inc., Infinity Property and Casualty Corporation, Meadowbrook Insurance Group Inc., Mercury General Corporation, The Navigators Group Inc., Old Republic International Corporation, ProAssurance Corporation, The Progressive Corporation, RLI Corp., Safety Insurance Group Inc., Selective Insurance Group Inc., Stewart Information Services Corporation, Tower Group Inc., The Travelers Companies Inc., United Fire & Casualty Company, Universal Insurance Holdings Inc. and XL Group Public Limited Company.

The Standard & Poor’s 500 Index includes a representative sample of 500 leading companies in a cross section of industries of the U.S. economy. Although this index focuses on the large capitalization segment of the market, it is widely viewed as a proxy for the total market.






Cincinnati Financial Corporation - 2014 10-K - Page 42




Comparison of Five-Year Cumulative Total Return*
 

*$100 invested on 12/31/06December 31, 2009, in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.

Cincinnati Financial Corporation – 2011 10-K - 36

Item 6.Selected Financial Data

 Years ended December 31,    
(In millions except per share data)  2011  2010  2009  2008  2007 
Consolidated Income Statement Data               
Earned premiums $3,194  $3,082  $3,054  $3,136  $3,250 
Investment income, net of expenses  525   518   501   537   608 
Realized investment gains and losses*  70   159   336   138   382 
Total revenues  3,803   3,772   3,903   3,824   4,259 
Net income  166   377   432   429   855 
Net income per common share:                    
Basic $1.02  $2.32  $2.66  $2.63  $5.01 
Diluted  1.02   2.31   2.65   2.62   4.97 
Cash dividends per common share:                    
Declared  1.605   1.59   1.57   1.56   1.42 
Paid  1.6025   1.585   1.565   1.525   1.40 
Shares Outstanding                    
Weighted average, diluted  163   163   163   163   172 
Consolidated Balance Sheet Data                    
Invested assets $11,801  $11,508  $10,643  $8,890  $12,261 
Deferred policy acquisition costs  510   488   481   509   461 
Total assets  15,668   15,095   14,440   13,369   16,637 
Gross loss and loss expense reserves  4,339   4,200   4,142   4,086   3,967 
Life policy reserves  2,214   2,034   1,783   1,551   1,478 
Long-term debt  790   790   790   791   791 
Shareholders' equity  5,055   5,032   4,760   4,182   5,929 
Book value per share  31.16   30.91   29.25   25.75   35.70 
Value creation ratio  6.0%  11.1%  19.7%  (23.5)%  (5.7)%
Consolidated Property Casualty Operations                    
Earned premiums $3,029  $2,924  $2,911  $3,010  $3,125 
Unearned premiums  1,631   1,551   1,507   1,542   1,562 
Gross loss and loss expense reserves  4,280   4,137   4,096   4,040   3,925 
Investment income, net of expenses  350   348   336   350   393 
Loss ratio  64.4%  56.5%  58.6%  57.7%  46.6%
Loss expense ratio  12.6   12.4   13.1   10.6   12.0 
Underwriting expense ratio  32.2   32.8   32.8   32.3   31.7 
Combined ratio  109.2%  101.7%  104.5%  100.6%  90.3%

Per share data adjusted



Cincinnati Financial Corporation - 2014 10-K - Page 43


ITEM 6.    Selected Financial Data
(In millions except per share data) Years ended December 31,
  2014 2013 2012 2011 2010
Consolidated Income Statement Data  
  
  
  
  
Earned premiums $4,243
 $3,902
 $3,522
 $3,194
 $3,082
Investment income, net of expenses 549
 529
 531
 525
 518
Realized investment gains, net* 133
 83
 42
 70
 159
Total revenues 4,945
 4,531
 4,111
 3,803
 3,772
Net income 525
 517
 421
 164
 375
Net income per common share:  
        
Basic $3.21
 $3.16
 $2.59
 $1.01
 $2.30
Diluted 3.18
 3.12
 2.57
 1.01
 2.30
Cash dividends per common share:          
Declared 1.76
 1.655
 1.62
 1.605
 1.59
Paid 1.74
 1.6425
 1.615
 1.6025
 1.585
Diluted weighted average shares outstanding 165.1
 165.4
 163.7
 163.3
 163.3
Consolidated Balance Sheet Data          
Total investments $14,386
 $13,564
 $12,534
 $11,801
 $11,508
Net unrealized investment gains 2,719
 2,335
 1,875
 1,489
 1,250
Deferred policy acquisition costs 578
 565
 470
 477
 458
Total assets 18,753
 17,662
 16,548
 15,635
 15,065
Gross loss and loss expense reserves 4,485
 4,311
 4,230
 4,339
 4,200
Life policy reserves 2,497
 2,390
 2,295
 2,214
 2,034
Long-term debt 791
 790
 790
 790
 790
Shareholders' equity 6,573
 6,070
 5,453
 5,033
 5,012
Book value per share 40.14
 37.21
 33.48
 31.03
 30.79
Shares outstanding 163.7
 163.1
 162.9
 162.2
 162.8
Value creation ratio 12.6% 16.1% 12.6% 6.0% 11.1%
Consolidated Property Casualty Operations Data          
Earned premiums $4,045
 $3,713
 $3,344
 $3,029
 $2,924
Unearned premiums 2,081
 1,970
 1,790
 1,631
 1,551
Gross loss and loss expense reserves 4,438
 4,241
 4,169
 4,280
 4,137
Investment income, net of expenses 358
 348
 351
 350
 348
Loss and loss expense ratio 65.0% 61.9% 63.9% 77.0% 68.9%
Underwriting expense ratio 30.6
 31.9
 32.2
 32.3
 32.9
Combined ratio 95.6% 93.8% 96.1% 109.3% 101.8%
           
On January 1, 2012, we retrospectively adopted ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. All prior years’ information has been restated.
* Realized investment gains and losses are integral to reflect all stock splitsour financial results over the long term, but our substantial discretion in the timing of investment sales may cause this value to fluctuate substantially. Also, applicable accounting standards require us to recognize gains and dividends prior to December 31, 2011.

*Realized investment gains and losses are integral to our financial results over the long term, but our substantial discretion in the timing of investment sales may cause this value to fluctuate substantially. Also, applicable accounting standards require us to recognize gains and losses from certain changes in fair values of securities and embedded derivatives without actual realization of those gains and losses. We discuss realized investment gains for the past three years in Item 7, Investments Results of Operations, Page 81.

Cincinnati Financial Corporation – 2011 10-K - 37
losses from certain changes in fair values of securities and embedded derivatives without actual realization of those gains and losses. We discuss realized investment gains for the past three years in Item 7, Investments Results.

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


Cincinnati Financial Corporation - 2014 10-K - Page 44


ITEM 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction

The purpose of Management’s Discussion and Analysis is to provide an understanding of Cincinnati Financial Corporation’s consolidated results of operations and financial condition. Our Management’s Discussion and Analysis should be read in conjunction with Item 6, Selected Financial Data, Pages 37, and Item 8, Consolidated Financial Statements and related Notes, beginning on Page 114.Notes. We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and stock dividends.

We begin with an executive summary of our results of operations, andfollowed by other highlights, an overview of our strategy, an outlook as well asfor future performance and details on critical accounting policies and estimates. Periodically,In several instances, we refer to estimated industry data so that we can giveprovide information on our performance within the context of the overall insurance industry. 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 accounting basis. When we provide our results on a comparable statutory accounting basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP).

Executive Summary


Through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on 2010net written premium volume for the first nine months of 2014, among approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies in 39 states as discussed in Item 1, Our Business and Our Strategy, Page 3.

Although recent years have been difficult for ourStrategy.

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

To measure our progress, we have defined a measure of value creation that we believe captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders. We refer to this measure as our value creation ratio, or VCR, and it is made up of two primary components: (1) our rate of growth in book value per share plus (2) the ratio of dividends declared per share to beginning book value per share. This measure, intended to be all-inclusive regarding changes in book value per share, uses originally reported book value per share in cases where book value per share has been adjusted, such as after the adoption of Accounting Standards Updates with a cumulative effect of a change in accounting.
Executive Summary
Our value creation ratio, defined above, is our primary performance target. VCR trends are shown in the table below.
  
One
year
 
Three-year
% average
 
Five-year
% average
Value creation ratio:  
  
  
As of December 31, 2014 12.6% 13.8% 11.7%
As of December 31, 2013 16.1
 11.6
 13.1
As of December 31, 2012 12.6
 9.9
 5.2
       
For the period 20102013 through 2014,2017, we are targeting an annual value creation ratio averaging 10 percent to 13 percent. We were within that range for 2014, and for the five-year period that ended in 2014. For the period 2009 through 2012, our annual value creation ratio averaged 12.4 percent, within the 12 percent to 15 percent five-year target range established in early 2009, soon after the U.S. credit crisis. For several years following the credit crisis, interest rates generally declined and credit spreads tightened, increasing the contribution of valuation gains from our fixed-maturity securities to the VCR. Those gains contributed between 2 percent and 3 percent annually to VCR during 2010 through 2012. While that contribution is not expected to occur in the

Cincinnati Financial Corporation - 2014 10-K - Page 45


subsequent five-year period, as indicated by a significant negative effect in 2013, management believes the company will continue to produce strong underwriting results.

The next two tables show the primary components of our value creation ratio, first on a percentage basis and then on a per-outstanding-share basis. Analysis of the components aids understanding of our financial performance. Our financial results are further analyzed in the Corporate Financial Highlights section below.
  Years ended December 31,
  2014 2013 2012
Value creation ratio major components:      
Net income before net realized gains 7.2 % 8.5 % 7.7 %
Change in realized and unrealized gains, fixed-maturity securities 1.2
 (4.5) 2.7
Change in realized and unrealized gains, equity securities 4.3
 10.9
 2.8
Other (0.1) 1.2
 (0.6)
Value creation ratio 12.6 % 16.1 % 12.6 %
       
The 2014 value creation ratio included operating results as its primary performance target. Management believes thiscontributor, with higher valuation for our equity securities investment portfolio also contributing significantly. A higher valuation for our fixed-maturity securities investment portfolio also contributed, reversing the unfavorable 2013 effect that reflected lower valuation. The 2014 contribution from operating results was 1.3 percentage points lower than in 2013, while the contribution from realized gains plus the change in unrealized gains from our investment portfolios was 0.9 points lower. The 2013 VCR also benefited from other items that affected book value per share, primarily a contribution from updated valuations and related assumptions for our employee benefit pension plan, while the 2014 effect was minimal. The 2012 value creation ratio had contribution amounts fairly similar to 2014.
(Dollars are per share) Years ended December 31,
  2014 2013 2012
Book value change per share:      
End of period book value $40.14
 $37.21
 $33.48
Less beginning of period book value 37.21
 33.48
 31.03
Change in book value $2.93
 $3.73
 $2.45
       
Change in book value:  
  
  
Net income before realized gains $2.69
 $2.84
 $2.41
Change in realized and unrealized gains, fixed-maturity securities 0.43
 (1.50) 0.84
Change in realized and unrealized gains, equity securities 1.61
 3.64
 0.86
Dividend declared to shareholders (1.76) (1.66) (1.62)
Other (0.04) 0.41
 (0.04)
Change in book value $2.93
 $3.73
 $2.45
       

We believe our value creation ratio, a non-GAAP measure, is a useful supplement to GAAP information. With the continuation of economic and market uncertainty since 2008, we believein recent years, the long-term nature of this ratio is an appropriate way to measure provides a meaningful measure of our long-term progress in creating shareholder value. VCR trends and aA reconciliation of thethis non-GAAP measure to comparable GAAP measures areis shown in the tablestable below.

  One  Three-year  Five-year 
  year  % average  % average 
Value creation ratio            
as of December 31, 2011  6.0%  12.3%  1.5%
as of December 31, 2010  11.1   2.4   3.7 
as of December 31, 2009  19.7   (3.2)  1.7 

  Years ended December 31, 
  2011  2010  2009 
Value creation ratio         
End of year book value $31.16  $30.91  $29.25 
Less beginning of year book value  30.91   29.25   25.75 
Change in book value  0.25   1.66   3.50 
Dividend declared to shareholders  1.605   1.59   1.57 
Total contribution to value creation ratio $1.86  $3.25  $5.07 
             
Contribution to value creation ratio from change in book value*  0.8%  5.7%  13.6%
Contribution to value creation ratio from dividends declared to shareholders**  5.2   5.4   6.1 
Value creation ratio  6.0%  11.1%  19.7%

In 2011, our


Cincinnati Financial Corporation - 2014 10-K - Page 46


(Dollars are per share) Years ended December 31,
  2014 2013 2012
Value creation ratio:  
  
  
End of year book value $40.14
 $37.21
 $33.48
Less beginning of year book value 37.21
 33.48
 31.16
Change in book value 2.93
 3.73
 2.32
Dividend declared to shareholders 1.76
 1.655
 1.62
Total value creation ratio $4.69
 $5.385
 $3.94
       
Value creation ratio from change in book value* 7.9% 11.1% 7.4%
Value creation ratio from dividends declared to shareholders** 4.7
 5.0
 5.2
Value creation ratio 12.6% 16.1% 12.6%
       
* Change in book value creation ratiodivided by the beginning of 6.0 percent was well below our target annual averageyear book value as originally reported
** Dividend declared to shareholders divided by beginning of 12 percent to 15 percent for the period 2010 through 2014. The three-year average at year-end 2011 was within the target range. In 2010, it was slightly below our target and the ratio exceeded our target in 2009,year book value as discussed in Corporate Financial Highlights below.

Cincinnati Financial Corporation – 2011 10-K - 38
originally reported

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

drivers for our value creation ratio: 
Premium growth – We believe over any five-year period our agency relationships and initiatives can lead to a property casualty written premium growth rate that exceeds the industry average. The compound annual growth rate of our net written premiums was 7.3 percent over the five-year period 2010 through 2014, approximately double the 3.4 percent estimated growth rate for the property casualty insurance industry. The industry’s growth rate excludes its mortgage and financial guaranty lines of business. Our long-term target for profitable premium growth, established in late 2011 for our property casualty and life insurance segments in aggregate, is to reach $5 billion of annual direct written premiums by the end of 2015. In 2014, our direct written premiums totaled $4.577 billion.
Combined ratio – We believe our underwriting philosophy and initiatives can drive performance to achieve our underwriting profitability target of a GAAP combined ratio over any five-year period that consistently averages within the range of 95 percent to 100 percent. Our GAAP combined ratio averaged 99.3 percent over the five-year period 2010 through 2014. Performance as measured by the combined ratio is discussed in Consolidated Property Casualty Insurance Results. Our statutory combined ratio averaged 98.8 percent over the five-year period 2010 through 2014 compared with an estimated 100.7 percent for the property casualty industry. The industry’s ratio again excludes its mortgage and financial guaranty lines of business.
Investment contribution – We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year total return of the Standard & Poor’s 500 Index.
·Premium growth – We believe over any five-year period our agency relationships and initiatives can lead to a property casualty written premium growth rate that exceeds the industry average. Our long-term target for profitable premium growth, for our property casualty and life insurance segments in aggregate, is to reach $5 billion of annual direct written premiums by the end of 2015. In 2011, our direct written premiums totaled $3.534 billion. The compound annual growth rate of our net written premiums was negative 0.5 percent over the five-year period 2007 through 2011, slightly lower than the negative 0.4 percent estimated growth rate for the property casualty insurance industry, excluding the mortgage and financial guaranty segments.

·Combined ratio – We believe our underwriting philosophy and initiatives can drive performance to achieve our underwriting profitability target of a GAAP combined ratio over any five-year period that is consistently within the range of 95 percent to 100 percent. Our GAAP combined ratio has averaged 101.3 percent over the five-year period 2007 through 2011. Our combined ratio was below 100 percent in 2007, but above 100 percent for 2008 through 2011, when our average catastrophe loss ratio of 7.7 percentage points was 3.8 points higher than the average for the 10-year period prior to 2008. Performance as measured by the combined ratio is discussed in Consolidated Property Casualty Insurance Results of Operations, Page 51. Our statutory combined ratio averaged 101.2 percent over the five-year period 2007 through 2011 compared with an estimated 100.8 percent for the property casualty industry, excluding the mortgage and financial guaranty segments.

·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.

o◦Investment income growth, on a before-taxpretax basis, had a compound annual growth rate of negative 1.61.8 percent over the five-year period 20072010 through 2011.2014. It grew in eachhas grown every year since 2009, except 2008 and 2009, when we experienced a dramatic reduction in dividend payouts by financial services companies held in our equity portfolio, a risk we addressed aggressively during 2008, completing that effort in early 2009.for 2013 with its slight decrease of less than 1 percent.

o
◦Over the five years ended December 31, 2011,2014, our equity portfolio compound annual equity portfoliototal return was a negative 4.714.1 percent compared with a compound annual total return of 0.315.4 percent for the Index. OurBy design, our equity portfolio underperformedis comprised of larger capitalization, high-quality dividend-growing stocks. Therefore we would generally expect its return to lag during the market for the five-year period primarily becausetype of the 2008 decline in the market value of our previously large holdings in the financial services sector.extended, lower-quality rally that has occurred since early 2009. For the year 2011,2014, our compound annual equity portfolio total return was 6.112.3 percent, compared with 2.113.7 percent for the Index, as the large-cap, dividend paying stocks that we prefer outpaced the broader equity market.Index.

The board of directors is committed to rewarding shareholders directly through cash dividends and through authorizing share repurchases.repurchase authorizations. The board also has periodically declared stock dividends and splits. Through 2011,2014, the company has increased the indicated annual cash dividend rate for 5154 consecutive years, a record we believe is matched by only nine other publicly traded companies. The board regularly evaluates relevant factors in dividend-related decisions, and the 2014 increase reflects confidence in our strong capital, liquidity and financial flexibility, as well as progress through our initiatives to improve earnings performance.performance while growing insurance premium revenues. We discuss our financial position in more detail in Liquidity and Capital Resources,Resources.

Cincinnati Financial Corporation - 2014 10-K - Page 85.

Strategic Initiatives Highlights

Management has worked to identify a strategy that can lead to long-term success, with concurrence by the board of directors. Our strategy is intended to position us to compete successfully in the markets we have targeted while appropriately managing risk. We discuss our long-term, proven strategy in Item 1, Our Business and Our Strategy, Page 3. 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.

·Improve insurance profitability – Implementation of these initiatives is intended to improve pricing capabilities for our property casualty business and increase our ability to manage our business while also enhancing our efficiency. Improved pricing capabilities through the use of technology and analytics can lead to better profit margins. Improved internal processes with additional performance metrics can help us be more efficient and effective. These initiatives also support the ability of the agencies that represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage agency expenses.

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

47
Cincinnati Financial Corporation – 2011 10-K - 39


We discuss these strategic initiatives, along with related metrics to assess progress, in Item 1, Strategic Initiatives, Page 10. Below is a review of highlights of our financial results for the past three years. Detailed discussion of these topics appears in Results of Operations, Page 50, and Liquidity and Capital Resources, Page 85.

Corporate Financial Highlights

The

In addition to the value creation ratio discusseddiscussion and analysis in the Executive Summary, Page 38, was 6.0 percentwe further analyze our financial results in 2011, 11.1 percent in 2010 and 19.7 percent in 2009. The book value per share growth component of the value creation ratio was 0.8sections below.
Balance Sheet Data
(Dollars in millions except share data) At December 31, At December 31,
  2014 2013
Balance sheet data:  
  
Total investments $14,386
 $13,564
Total assets 18,753
 17,662
Short-term debt 49
 104
Long-term debt 791
 790
Shareholders' equity 6,573
 6,070
Book value per share 40.14
 37.21
Debt-to-total-capital ratio 11.3% 12.8%
     
Total investments grew 6 percent during 2011 and 5.7 percent during 2010. The 2011 ratio was depressed primarily due to unusually high catastrophe losses that lowered the ratio by 3.3 percentage points compared with 2010, and also drove a 56 percent decline in net income. Higher valuations for our investment portfolio benefited the value creation ratio in addition to earnings. Realized capital gains plus the net change in unrealized capital gains contributed 3.8, 5.2 and 14.5 percentage points for the years 2011, 2010 and 2009, respectively. Net income declined 13 percent in 2010 after growing 1 percent in 2009, reflecting lower realized investment gains. Cash dividends declared per share rose approximately 1 percent during each of the years during 2009 through 2011.

Balance Sheet Data

 At December 31,  At December 31, 
(Dollars in millions except share data)  2011  2010 
Balance sheet data        
Invested assets $11,801  $11,508 
Total assets  15,668   15,095 
Short-term debt  104   49 
Long-term debt  790   790 
Shareholders' equity  5,055   5,032 
Book value per share  31.16   30.91 
Debt-to-total-capital ratio  15.0%  14.3%

Invested assets grew 3 percent during 20112014 on a fair value basis, with market gains slightly outpacing anthat added to the 4 percent increase in the cost basis of invested assets of approximately 1 percent.basis. Entering 2012,2015, we believe the portfolio continues to be well-diversified,well diversified and we believe it is well-positionedwell positioned to withstand short-term fluctuations. We discuss our investment strategy in Item 1, Investments Segment, Page 20, and results for the segment in Investment ResultsInvestments Results. Total assets rose 6 percent, primarily due to the increase in total investments. Shareholders’ equity and book value per share each rose 8 percent, for reasons discussed in the preceding Executive Summary.

The amount of Operations, Page 81.

Short-termour debt rose$55obligations decreased by $54 million primarily to fund share repurchases using our relatively low-cost source of borrowing.in 2014, compared with 2013. Our ratio of debt to total capital (debt plus shareholders’ equity) increased somewhatdecreased by 1.5 percentage points in 2011 but2014 and remains comfortably within our target range.

Income Statement and Per Share Data

 Twelve months ended December 31,  2011-2010  2010-2009 
(Dollars in millions except share data)  2011  2010  2009  Change %  Change % 
Income statement data                    
Earned premiums $3,194  $3,082  $3,054   4   1 
Investment income, net of expenses (pretax)  525   518   501   1   3 
Realized investment gains and losses (pretax)  70   159   336   (56)  (53)
Total revenues  3,803   3,772   3,903   1   (3)
Net income  166   377   432   (56)  (13)
Per share data                    
Net income - diluted $1.02  $2.31  $2.65   (56)  (13)
Cash dividends declared  1.605   1.59   1.57   1   1 
                     
Weighted average shares outstanding  163,259,222   163,274,491   162,866,863   0   0 

(Dollars in millions except per share data) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Net income and comprehensive income data:  
  
  
  
Earned premiums $4,243
 $3,902
 $3,522
 9
 11
Investment income, net of expenses (pretax) 549
 529
 531
 4
 0
Realized investment gains, net (pretax) 133
 83
 42
 60
 98
Total revenues 4,945
 4,531
 4,111
 9
 10
Net income 525
 517
 421
 2
 23
Comprehensive income 765
 892
 649
 (14) 37
Net income - diluted $3.18
 $3.12
 $2.57
 2
 21
Cash dividends declared 1.76
 1.655
 1.62
 6
 2
Diluted weighted average shares outstanding 165.1
 165.4
 163.7
 0
 1
           
Net income in 2011 declined $2112014 rose $8 million or 562 percent compared with 2010,2013, due primarily to the after-tax effects of propertynet realized investment gains that were $31 million higher and investment income that rose by $18 million. Property casualty underwriting results thatfor 2014, on an after-tax basis, were $149$31 million lower than in 2013, including $165$21 million from higher natural catastrophe losses and net realized investment gains that were $58$34 million lower. from higher noncatastrophe weather losses described below in Consolidated Property Casualty Insurance Results.

Net income decreased $55increased $96 million in 2010,2013, compared with 2012, reflecting the after-tax net effect of threetwo major contributing items: a $114$62 million declineimprovement in property casualty underwriting results, including $105 million from lower catastrophe losses, and a $26 million increase in net realized investment gains, partially offset by a $53 million improvement from property casualty underwriting results plus $9 million of growth in investment income.

gains.


Cincinnati Financial Corporation - 2014 10-K - Page 48


As discussed in InvestmentInvestments Results, sales of Operations, Page 81, security salessecurities that had appreciated in value led to realized investment gains in all three years. Realized and unrealized investment gains and losses are integral to our financial results over the long term. We have substantial discretion in the timing of investment sales and, therefore, the gains or losses that are recognized in any period. That discretion generally is independent of the insurance underwriting process. Also, applicable accounting standards require us to recognize gains and losses from certain changes
Dividend income rose 13 percent in fair values of securities and for securities with embedded derivatives without actual realization of those gains and losses.

Cincinnati Financial Corporation – 2011 10-K - 40

Higher dividend2014 while interest income was largely responsible forrose 1 percent, growthdriving a net increase in 2011 pretax investment income while higher interest income drove 3 percent growth in 2010. The primary reason for the 2011 increase inof $20 million, or 4 percent. In addition to a larger common stock portfolio generating more dividend income was ain both 2014 and 2013, both years also benefited from higher average dividend payment rates for common stocksrates. Our investment operation’s performance is discussed further in our equity portfolio.

Investments Results.

Contribution from Insurance Operations

(Dollars in millions) Years ended December 31,  2011-2010  2010-2009 
Consolidated property casualty highlights 2011  2010  2009  Change %  Change % 
Net written premiums $3,098  $2,963  $2,911   5   2 
Earned premiums  3,029   2,924   2,911   4   0 
Underwriting loss  (276)  (47)  (128)  nm   nm 

              Pt. Change  Pt. Change 
GAAP combined ratio  109.2%  101.7%  104.5%  7.5   (2.8)
Statutory combined ratio  108.9   101.8   104.4   7.1   (2.6)
Written premium to statutory surplus  0.8   0.8   0.8   0.0   0.0 

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Consolidated property casualty data:          
Net written premiums $4,143
 $3,893
 $3,482
 6
 12
Earned premiums 4,045
 3,713
 3,344
 9
 11
Underwriting profit 186
 233
 137
 (20) 70
           
       
      
      
 Pt. Change Pt. Change
GAAP combined ratio 95.6% 93.8% 96.1% 1.8
 (2.3)
Statutory combined ratio 95.1
 92.8
 95.4
 2.3
 (2.6)
Written premium to statutory surplus 0.9
 0.9
 0.9
 0.0
 0.0
           
Property casualty net written premiums grew 56 percent in 20112014 and earned premiums grew 49 percent, largely due to higher pricing and improving insured exposure-level comparatives frompremium growth initiatives. That growth lagged the slowly improving economy.trend experienced in 2013, largely due to pricing increases that were not as strong in 2014. Trends and related factors are discussed in Commercial Lines, Personal Lines and Excess and Surplus Lines Insurance Results, of Operations, beginning on Page 57, Page 69 and Page 75, respectively.

Our property casualty insurance operations reported angenerated underwriting loss inprofits for each of the last three years ending in 2014, following underwriting losses for each of the preceding four years. The $229$47 million change for 2011,decrease in 2014, compared with 2010, was driven by2013, included a $254$32 million riseincrease in losses from natural catastrophe events and $52 million increase in weather-related losses. The $96 million improvement for 2013, compared with 2012, included a $162 million decrease in losses from natural catastrophe events.
We measure property casualty underwriting profitability primarily by the combined ratio. Our combined ratio measures the percentage of each earned premium dollar spent on claims plus all expenses related to our property casualty operations.operations, all on a pretax basis. A lower ratio indicates more favorable results and better underlying performance. Our combinedA ratio was overbelow 100 percent in each of the last three years. Higher losses from natural catastrophes drove the 2011 ratio increase.represents an underwriting profit. Initiatives to improve our combined ratio are discussed in Item 1, Our Business and Our Strategy, Strategic Initiatives, Page 10.Initiatives. In 2011, 20102014, 2013 and 2009,2012, favorable development on reserves for claims that occurred in prior accident years helped offset other incurred losslosses and loss expenses. Reserve development is discussed further in Property Casualty Loss and Loss Expense Obligations and Reserves, beginning on Page 88.Reserves. Losses from weather-related catastrophes are another important item influencing the combined ratio and are discussed along with other factors in Commercial Lines, Personal LinesFinancial Results for our property casualty business and Excess and Surplus Lines Insurance Results of Operations, beginning on Page 57, Page 69 and Page 75, respectively.

related segments.

Our life insurance segment reported a smallmodest loss because mostin 2014 and a modest profit in 2013, netting to a $4 million profit for both years combined. We discuss results for the segment in Life Insurance Results. Most of itsthis segment’s investment income is included in our investments segment results. We discuss results for the segment in Life Insurance Results of Operations, Page 79. In addition to investment income, realized investment gains from the life insurance investment portfolio are also included in our investments segment results.


Cincinnati Financial Corporation - 2014 10-K - Page 49


Strategic Initiatives Overview
Management has worked to identify a strategy that can lead to long-term success, with concurrence by the board of directors. Our strategy is intended to position us to compete successfully in the markets we have targeted while appropriately managing risk. We discuss our long-term, proven strategy in Item 1, Our Business and Our Strategy. We believe successful implementation of initiatives that support our strategy will help us better serve our agent customers and reduce volatility in our financial results while we also grow earnings and book value over the long-term, successfully navigating challenging economic, market or industry pricing cycles.
Improve 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. Improved internal processes with additional performance metrics can help us be more efficient and effective. These initiatives also support the ability of the independent agencies that represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage agency expenses.
Drive premium growth – Implementation of these initiatives is intended to further penetrate each market we serve through our independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Diversified growth also may reduce variability of losses from weather-related catastrophes.

We discuss these strategic initiatives, along with related metrics to assess progress, in Item 1, Our Business and Our Strategy, Strategic Initiatives. Detailed discussion of related financial results appears below in Financial Results and Liquidity and Capital Resources.

Factors Influencing Our Future Performance

Our view of the shareholder value we can create over the next five years relies largely on twothree assumptions about– each highly dependent on the external environment. First, we anticipate continued firmingour average commercial and personal insurance prices will increase in excess of commercial insurance pricing throughout 2012.our loss cost trends. Second, we assume that the economy can maintain a growth track during 2012.2015. Third, we assume that valuations of our marketable securities will vary within a typical range, based on historical trends. If those assumptions prove to be inaccurate, we may not be able to achieve our performance targets even if we accomplish our strategic objectives.

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

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

·We expect the independent insurance agency system to remain strong, with continued agency consolidation. If soft insurance market conditions return in 2012, it will create additional risk for agencies.

·We expect initiatives that make it easier for agents to do business with us will continue to be a significant factor in agency relationships, with technology being a major driver. Policyholders will increasingly demand online services and access from agents or carriers.

We expect the insurance marketplace to remain competitive, which is likely to cause carriers to pursue strategies that they believe could lead to economies of scale, market share gains or the potential for an improved competitive posture.
We expect the independent insurance agency system to remain strong, with continued agency consolidation. If soft insurance market conditions return in 2015, it will create additional risk for agencies.
We expect initiatives that make it easier for agents to do business with us to continue to be a significant factor in agency relationships. Technology is a major driver, with policyholders increasingly demanding online services and access from agents or carriers.

We discuss in our Item 1A, Risk Factors, Page 26, many potential risks to our business and our ability to achieve our qualitative and quantitative objectives. These are real risks, but their probability of occurring may not be high. We also believe that our risk management programs generally could mitigate their potential effects, in the event they would occur. We continue to study emerging risks, including climate change risk and its potential financial effects on our results of operation and those we insure. These effects include deterioration in credit quality of our municipal or corporate bond portfolios and increased losses without sufficient corresponding increases in premiums. As with any risk, we seek to identify the extent of the risk exposure and possible actions to mitigate potential negative effects of risk, at an enterprise level.

Cincinnati Financial Corporation – 2011 10-K - 41

We have formal risk management programs overseen by an executive officer and supported by a team of representatives from business areas. The team provides reports to our chairman, our president and chief executive officer and our board of directors, as appropriate, on risk assessments, risk metrics and risk plans. Our use of operational audits, strategic plans and departmental business plans, as well as our culture of open communications and our fundamental respect for our Code of Conduct, continue to help us manage risks on an ongoing basis.

For the year 2012,2015, we believe our value creation ratio maycould be below our long-term target for several reasons.

·The rally in financial markets during 2009 and 2010 had a favorable impact on our value creation ratio, offsetting much of the unfavorable impact of the sharp decline in financial markets during 2008. Financial markets continued to display volatility during 2011, and some predict more turbulence in 2012 from effects of events such as the sovereign debt crisis in several European countries. Should financial markets decline during 2012, which could occur as part of typical market volatility patterns, the related component of our 2012 value creation ratio could also register a weak or negative result.

·Lingering effects of soft insurance market pricing in recent years could significantly affect growth rates and earned premium levels into 2012 and for some time into the future, depending on insurance market conditions. After several years of market conditions that weakened loss ratios and hampered near-term profitability, conditions affecting property casualty markets largely began to improve in the second half of 2011. In the future, economic factors, including inflation, may increase our claims and settlement expenses related to medical care, litigation and construction.

·The slowly recovering economy helped increase the value of business and personal insurable assets owned by policyholders in 2011. If the economy falters, we may experience low or no premium growth for the property casualty industry. Property casualty written premium growth also may lag as some of our growth initiatives require more time to reach their full contribution.

·We will incur the cost of continued investment in our business, including technology, recent entry in new states and process initiatives to create long-term value. In addition, we will not see the full advantage of some of these investments for several years.

The rally in financial markets during recent years had a favorable impact on our value creation ratio, offsetting the unfavorable impact of the sharp decline in financial markets during 2008. Financial markets continued to display volatility during 2014, and some predict more turbulence in 2015 from effects such as changes in government policy, growth challenges for emerging country economies or other geopolitical events that could also affect the U.S. economy and markets. Should financial markets decline during 2015, which could occur as part of typical market volatility patterns, the related book value component of our 2015 value creation ratio could also register a weak or negative result.

Cincinnati Financial Corporation - 2014 10-K - Page 50


A return of soft insurance market pricing could significantly affect growth rates and earned premium levels into 2015 and for some time into the future, depending on insurance market conditions. After several years of market conditions that weakened loss ratios and hampered near-term profitability, conditions affecting property casualty insurance markets have improved since late 2011. In the future, economic factors, including inflation, may increase our claims and settlement expenses related to medical care, litigation and construction.
The slowly recovering economy continued to help increase the value of business and personal insurable assets owned by policyholders in 2014. If the economy falters, we may experience low or no premium growth for the property casualty industry. Property casualty written premium growth also may lag as some of our growth initiatives require more time to reach their full contribution.
We will incur costs for continued investment in our business, including technology, geographic expansion and process initiatives to create long-term value. In addition, we will not see the full advantage of some of these investments for several years.
Critical Accounting Estimates

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

The significant accounting policies used in the preparation of the financial statements are discussed in Item 8, Note 1 of the Consolidated Financial Statements, Page 114Statements. In conjunction with that discussion, material implications of uncertainties associated with the methods, assumptions and estimates underlying the company’s critical accounting policies are discussed below. The audit committee of the board of directors reviews the annual financial statements with management and the independent registered public accounting firm. These discussions cover the quality of earnings, review of reserves and accruals, reconsideration of the suitability of accounting principles, review of highly judgmental areas including critical accounting policies,estimates, audit adjustments and such other inquiries as may be appropriate.

Property Casualty Insurance Loss and Loss Expense Reserves

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

For some lines of business that we write, a considerable and uncertain amount of time can elapse between the occurrence, reporting and payment of insured claims. The amount we will actually have to pay for such claims also can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. Gross loss and loss expense reserves were $4.280$4.438 billion at year-end 20112014 compared with $4.137$4.241 billion at year-end 2010.

2013.

How Reserves Are Established

Our field claims representatives establish case reserves when claims are reported to the company to provide for our unpaid loss and loss expense obligation associated with individual claims. Field claims managers supervise and review all claims with case reserves less than $35,000. Experienced$100,000. Additionally, a headquarters supervisor and regional manager review all claims supervisors review individualunder $100,000 if litigation or a certain specialty claim is involved. All claims with case reserves of $100,000 or greater thanare reviewed and approved by an experienced headquarters supervisor and regional claims manager, and that threshold amount was $35,000 that were established by field claims representatives. Headquartersfor several years prior to 2015. Upper-level headquarters claims managers also review case reserves greater than $100,000.

of $175,000 or more, a threshold amount that was $100,000 for several years prior to 2015.


Cincinnati Financial Corporation - 2014 10-K - Page 51


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

·type of claim involved

Cincinnati Financial Corporation – 2011 10-K - 42
type of claim involved

·circumstances surrounding each claim

·policy provisions pertaining to each claim

·potential for subrogation or salvage recoverable

·general insurance reserving practices

circumstances surrounding each claim
policy provisions pertaining to each claim
potential for subrogation or salvage recoverable
general insurance reserving practices

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

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

·For weather events designated as catastrophes, we calculate IBNR reserves directly as a result of an estimated IBNR claim count and an estimated average claim amount for each event. Once case reserves are established for a weather event, we reduce the IBNR reserves. Our claims department management coordinates the assessment of these events and prepares the related IBNR reserve estimates. Such an assessment involves a comprehensive analysis of the nature of the event, of policyholder exposures within the affected geographic area and of available claims intelligence. Depending on the nature of the event, available claims intelligence could include surveys of field claims associates within the affected geographic area, feedback from a catastrophe claims team sent into the area, as well as data on claims reported as of the financial statement date. To determine whether an event is designated as a catastrophe, we generally use the catastrophe definition provided by Property Claims Service (PCS), a division of Insurance Services Office (ISO). PCS defines a catastrophe as an event that causes countrywide damage of $25 million or more in insured property losses and affects a significant number of policyholders and insureds.

·For asbestos and environmental claims, we calculate IBNR reserves by deriving an actuarially based estimate of total unpaid loss and loss expenses. We then reduce the estimate by total case reserves. We discuss the reserve analysis that applies to asbestos and environmental reserves in Asbestos and Environmental Reserves, Page 89.

·For loss expenses that pertain primarily to salaries and other costs related to our claims department associates, also referred to as adjusting and other expense or AOE for statutory accounting purposes, we calculate reserves based on an analysis of the relationship between paid losses and paid AOE.

·For all other claims and events, IBNR reserves are calculated as the difference between an actuarial estimate of the ultimate cost of total loss and loss expenses incurred reduced by the sum of total loss and loss expense payments and total case reserves estimated for individual claims. We discuss below the development of actuarially based estimates of the ultimate cost of total loss and loss expenses incurred.

For events designated as natural catastrophes, we calculate bulk reserves directly as a result of an estimated IBNR claim count and an estimated average claim amount for each event. Once case reserves are established for a catastrophe event, we reduce the bulk reserves. Our claims department management coordinates the assessment of these events and prepares the related bulk reserve estimates. Such an assessment involves a comprehensive analysis of the nature of the event, of policyholder exposures within the affected geographic area and of available claims intelligence. Depending on the nature of the event, available claims intelligence could include surveys of field claims associates within the affected geographic area, feedback from a catastrophe claims team sent into the area, as well as data on claims reported as of the financial statement date. To determine whether an event is designated as a catastrophe, we generally use the catastrophe definition provided by Property Claims Service (PCS), a division of Insurance Services Office (ISO). PCS defines a catastrophe as an event that causes countrywide damage of $25 million or more in insured property losses and affects a significant number of policyholders and insureds.
For asbestos and environmental claims, we calculate IBNR reserves by deriving an actuarially-based estimate of total unpaid loss and loss expenses. We then reduce the estimate by total case reserves. We discuss the reserve analysis that applies to asbestos and environmental reserves in Liquidity and Capital Resources, Asbestos and Environmental Reserves.
For loss expenses that pertain primarily to salaries and other costs related to our claims department associates, also referred to as adjusting and other expense or AOE, we calculate reserves based on an analysis of the relationship between paid losses and paid AOE. Reserves for AOE are allocated to company, line of business and accident year based on a claim count algorithm.
For all other claims and events, IBNR reserves are calculated as the difference between an actuarial estimate of the ultimate cost of total loss and loss expenses incurred reduced by the sum of total loss and loss expense payments and total case reserves estimated for individual claims. We discuss below the development of actuarially based estimates of the ultimate cost of total loss and loss expenses incurred.

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

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

·paid and reported loss development methods

·paid and reported loss Bornhuetter-Ferguson methods

·individual and multiple probabilistic trend family models

paid and reported loss development methods
paid and reported loss Bornhuetter-Ferguson methods
individual and multiple probabilistic trend family models

Our actuarial staff uses diagnostics provided by stochastic reserving software to evaluate the appropriateness of the models and methods listed above. The software’s diagnostics have indicated that the appropriateness of these

Cincinnati Financial Corporation - 2014 10-K - Page 52


models and methods for estimating IBNR reserves for our lines of business tends to depend on a line'sline’s tail. Tail refers to the time interval between a typical claim'sclaim’s occurrence and its settlement. For our long-tail lines such as workers’ compensation and commercial casualty, models from the probabilistic trend family tend to provide superior fits and to validate well compared with models underlying the loss development and Bornhuetter-Ferguson methods. The loss development and Bornhuetter-Ferguson methods, particularly the reported loss variations, tend to produce the more appropriate IBNR reserve estimates for our short-tail lines such as homeowner and commercial property. For our mid-tail lines such as personal and commercial auto liability, all models and methods provide useful insights.

Cincinnati Financial Corporation – 2011 10-K - 43

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

These trendsmentioned, such as: 

company and measures include:

·company and industry pricing

·company and industry exposure

·company and industry loss frequency and severity

·past large loss events such as hurricanes

·company and industry premium

·company in-force policy count

industry pricing

company and industry exposure
company and industry loss frequency and severity
past large loss events such as hurricanes
company and industry premium
company in-force policy count
These trends and measures also support the estimation of ultimate accident year loss ratios needed for applying the Bornhuetter-Ferguson methods and for assessing the reasonability of all IBNR reserve estimates computed. Our actuarial staff reviews these trends and measures quarterly, updating parameters derived from them as necessary.

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

·large loss activity and trends in large losses

·new business activity

·judicial decisions

·general economic trends such as inflation

·trends in litigiousness and legal expenses

·product and underwriting changes

·changes in claims practices

inflation

trends in litigiousness and legal expenses
product and underwriting changes
changes in claims practices

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

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


Cincinnati Financial Corporation - 2014 10-K - Page 53


Key Assumptions -– Loss Reserving

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

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

Cincinnati Financial Corporation – 2011 10-K - 44
Emergence of loss and defense and cost containment expenses, also referred to as DCCE, on an accident year basis. Historical paid loss, reported loss and paid DCCE data for the business lines we analyze contain patterns that reflect how unpaid losses, unreported losses and unpaid DCCE as of a financial statement date will emerge in the future on an accident year basis. Unless our actuarial staff or management identifies reasons or factors that invalidate the extension of historical patterns into the future, these patterns can be used to make projections necessary for estimating IBNR reserves. Our actuaries significantly rely on this assumption in the application of all methods and models mentioned above.

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

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

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

Calendar year inflation. For long-tail and mid-tail business lines, calendar year inflation trends for future paid losses and paid DCCE do not vary significantly from a stable, long-term average. Our actuaries base reserve estimates derived from probabilistic trend family models on this assumption.
Exposure levels. Historical earned premiums, when adjusted to reflect common levels of product pricing and loss cost inflation, can serve as a proxy for historical exposures. Our actuaries require this assumption to estimate expected loss ratios and expected DCCE ratios used by the Bornhuetter-Ferguson reserving methods. They may also use this assumption to establish exposure levels for recent accident years, characterized by “green” or immature data, when working with probabilistic trend family models.
Claims having atypical emergence patterns. Characteristics of certain subsets of claims, such as high frequency, high severity, or mass tort claims, have the potential to distort patterns contained in historical paid loss, reported loss and paid DCCE data. When testing indicates this to be the case for a particular subset of claims, our actuaries segregate these claims from the data and analyze them separately. Subsets of claims that could fall into this category include hurricane claims or claims for other weather events where total losses we incurred were very large, individual large claims and asbestos and environmental claims.

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

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

Reserve Estimate Variability

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

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


Cincinnati Financial Corporation - 2014 10-K - Page 54


The table below provides standard errors and reserve ranges by major property casualty lines of business and in total for net loss and loss expense reserves as well as the potential effects on our net income, assuming a 35 percent federal tax rate. Standard errors and reserve ranges for assorted groupings of these lines of business cannot be computed by simply adding the standard errors and reserve ranges of the component lines of business, since such an approach would ignore the effects of product diversification. See Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves, Range of Reasonable Reserves, Page 90, for more details on our total reserve range. While the table reflects our assessment of the most likely range within which each line'sline’s actual unpaid loss and loss expenses may fall, one or more lines'lines’ actual unpaid loss and loss expenses could nonetheless fall outside of the indicated ranges.

Cincinnati Financial Corporation – 2011 10-K - 45

 Net loss and loss expense range of reserves    
  Carried  Low  High  Standard  Net income 
(In millions)  reserves  point  point  error  effect 
At December 31, 2011                    
Total $3,905  $3,677  $4,056         
                     
Commercial casualty $1,613  $1,432  $1,750  $159  $103 
Commercial property  209   175   229   27   18 
Commercial auto  349   333   365   16   10 
Workers' compensation  966   875   1,056   90   59 
Personal auto  176   168   184   8   5 
Homeowners  121   107   129   11   7 
                     
At December 31, 2010                    
Total $3,811  $3,571  $3,952         
                     
Commercial casualty $1,644  $1,455  $1,781  $163  $106 
Commercial property  155   136   176   20   13 
Commercial auto  356   336   376   20   13 
Workers' compensation  1,010   906   1,079   87   57 
Personal auto  153   145   161   8   5 
Homeowners  105   95   114   9   6 

If actual unpaid loss and loss expenses fall within these ranges, our cash flow and fixed-maturity investments should provide sufficient liquidity to make the subsequent payments. To date, our cash flow has covered our loss and loss expense payments, and we have never had to sell investments to make these payments. If this were to become necessary, however, our fixed-maturity investments should provide us with ample liquidity. At year-end 2011, consolidated fixed-maturity investments exceeded total insurance reserves (including life policy reserves) by $2.226 billion.

(Dollars in millions) Net loss and loss expense range of reserves  
  Carried reserves Low point High point Standard error 
Net income
effect
      
At December 31, 2014  
  
  
  
  
Total $4,156
 $3,922
 $4,296
  
  
           
Commercial casualty $1,647
 $1,477
 $1,779
 $151
 $98
Commercial property 230
 202
 244
 21
 14
Commercial auto 431
 411
 450
 19
 12
Workers' compensation 983
 873
 1,067
 97
 63
Personal auto 214
 204
 223
 9
 6
Homeowners 104
 95
 112
 8
 5
           
At December 31, 2013  
  
  
  
  
Total $3,942
 $3,727
 $4,078
  
  
           
Commercial casualty $1,532
 $1,368
 $1,643
 $138
 $90
Commercial property 241
 223
 260
 19
 12
Commercial auto 371
 352
 391
 19
 12
Workers' compensation 966
 873
 1,059
 93
 60
Personal auto 198
 189
 207
 9
 6
Homeowners 106
 98
 113
 7
 5
           
Life Insurance Policy Reserves

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

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

Asset Impairment

Our fixed-maturity and equity investment portfolios are our largest assets. The company’s asset impairment committee continually monitors the holdings in these portfolios and all other assets for signs of other-than-temporary or permanent impairment. The committee monitors decreases in the fair value of invested assets; an accumulation of company costs in excess of the amount originally expected to acquire or construct an asset; uncollectability of all receivable assets, or other factors such as bankruptcy, deterioration of creditworthiness, failure

Cincinnati Financial Corporation - 2014 10-K - Page 55


to pay interest or dividends; signs indicating that the receivable carrying amount may not be recoverable; and changes in legal factors or in the business climate.

The application of our impairment policy resulted inother-than-temporary impairment(OTTI) charges that reduced our income before income taxes by $57$24 million in 2011, $362014, $2 million in 20102013 and $131$33 million in 2009.2012. Impairment charges are recorded for other-than-temporary declines in value, if, in the asset impairment committee’s judgment, the value is not expected to be recouped within a designated recovery period. OTTI losses represent non-cashnoncash charges to income and are reported as realized investment losses.

Our internal investment portfolio managers monitor their assigned portfolios. If a security is valued below cost or amortized cost, the portfolio managers undertake additional reviews. Such declines often occur in conjunction with events taking place in the overall economy and market, combined with events specific to the industry or operations of the issuing organization. Managers review quantitative measurements such as a declining trend in fair value, the extent of the fair value decline and the length of time the value of the security has been depressed, as well as qualitative measures such as pending events, credit ratings and issuer liquidity. We are even more proactive when these declines in valuation are greater than might be anticipated when viewed in the context of overall economic and market conditions. We provide information about valuationvaluations of our invested assets in Item 8, Note 2 of the Consolidated Financial Statements, Page 120.

Cincinnati Financial Corporation – 2011 10-K - 46
Statements.

All securities valued below 100 percent of cost or amortized cost are reported to the asset impairment committee for evaluation. Securities valued between 95 percent and 100 percent of cost or amortized cost are reviewed but not monitored separately by the committee. When evaluating for OTTI, the committee considers the company’s intent and ability to retain a security for a period adequate to recover its cost. Because of the company'scompany’s financial strength and other factors discussed below, management may not impair certain securities even when they are fair valued below cost or amortized cost.

Securities that have previously been other-than-temporarily impaired are evaluated based on their adjusted cost or amortized cost and further written down, if deemed appropriate. We provide detailed information about securities fair valued in a continuous loss position at year-end 20112014 in Item 7A, Application of Asset Impairment Policy, Page 104. An other-than-temporary decline in the fair value of a security is recognized in net income as a realized investment loss.

Policy.

When determining OTTI charges for our fixed-maturity portfolio, management places significant emphasis on whether issuers of debt are current on contractual payments and whether future contractual amounts are likely to be paid. Our fixed-maturity invested asset impairment policy states that OTTI is considered to have occurred (1) if we intend to sell the impaired fixed-maturity security; (2) if it is more likely than not we will be required to sell the fixed-maturity security before recovery of its amortized cost basis; or (3) if the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. If we intend to sell or it is more likely than not we will be required to sell, the amortized cost of any such securities is reduced to fair value as the new amortized cost basis, and a realized loss is recorded in the quarter in which it is recognized. When we believe that full collection of interest and/or principal is not likely, we determine the net present value of future cash flows by using the effective interest rate implicit in the security at the date of acquisition as the discount rate and compare that amount to the amortized cost and fair value of the security. The difference between the net present value of the expected future cash flows and amortized cost of the security is considered a credit loss and recognized as a realized loss in the quarter in which it occurred.occurs. The difference between the fair value and the net present value of the cash flows of the security, the non-creditnoncredit loss, is recognized in other comprehensive income as an unrealized loss.

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

For each of our equity securities in an unrealized loss position at December 31, 2011,2014, we applied the objective quantitative and qualitative criteria of our invested asset impairment policy for OTTI. Our long-term equity investment philosophy, emphasizing companies with strong indications of paying and growing dividends, combined with our strong surplus, liquidity and cash flow, provide us the ability to hold these investments through what we believe to be slightly longer recovery periods occasioned by the recession and historic levels of market volatility. Based on the individual qualitative and quantitative factors, as discussed above, we evaluate and determine an expected recovery period for each security. A change in the condition of a security can warrant impairment before the expected recovery period. If the security has not recovered cost within the expected recovery period, the security is other-than-temporarily impaired.

Our long-term equity investment philosophy, emphasizing companies with strong indications of paying and growing dividends, combined with our strong statutory capital and surplus, liquidity and cash flow,


Cincinnati Financial Corporation - 2014 10-K - Page 56


provide us the ability to hold these investments through what we believe to be slightly longer recovery periods during times of historic levels of market volatility.
Securities considered to have a temporary decline would be expected to recover their cost or amortized cost, which may be at maturity. Under the same accounting treatment as fair value gains, temporary declines (changes in the fair value of these securities) are reflected in shareholders’ equity on our balance sheetConsolidated Balance Sheets in accumulated other comprehensive income (AOCI), net of tax, and have no impact on net income.

Fair Value Measurements

Valuation of Financial Instruments

Valuation of financial instruments, primarily securities held in our investment portfolio, is a critical component of our year-end financial statement preparation. Accounting Standards Codification (ASC) 820-10, Fair Value Measurements and Disclosures Accounting Standards Codification (ASC) 820-10,, defines fair value as the exit price or the amount that would be (1) received to sell an asset or (2) paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date. When determining an exit price, we must, whenever possible, rely upon observable market data.

In accordance with ASC 820-10, we

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

Cincinnati Financial Corporation – 2011 10-K - 47

Financial assets and liabilities recorded onin the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as described in Item 8, Note 3 Fair Value Measurements, Page 123.

of the Consolidated Financial Statements.

Level 1 and Level 2 Valuation Techniques

Over 99 percent of the $11.735$14.318 billion of securities in our investment portfolio, measured at fair value, are classified as Level 1 or Level 2. Financial assets that fall within Level 1 and Level 2 are priced according to observable data from identical or similar securities that have traded in the marketplace. Also within Level 2 are securities that are valued by outside services or brokers where we have evaluated and verified the pricing methodology and determined that the inputs are observable.

Level 3 Valuation Techniques

Financial assets that fall within the Level 3 hierarchy are valued based upon unobservable market inputs, normally because they are not actively traded on a public market. Pricing for each Level 3 security is based upon inputs that are market driven, including third-party reviews provided to the issuer or broker quotes. We placed in the Level 3 hierarchy securities for which we were unable to obtain the pricing methodology or we could not consider the price provided as binding. Pricing for securities classified as Level 3 could not be corroborated by similar securities priced using observable inputs.

Management ultimately determined the pricing for each Level 3 security that we considered to be the best exit price valuation. As of December 31, 2011,2014, total Level 3 assets were less than 1 percent of our investment portfolio measured at fair value. Broker quotes are obtained for thinly traded securities that subsequently fall within the Level 3 hierarchy. We have generally obtained and evaluated two non-bindingnonbinding quotes from brokers and, after evaluating,brokers; our investment professionals typically selected the lower quote as thedetermine our best estimate of fair value.

Employee Benefit Pension Plan

We have a defined benefit pension plan that was modified during 2008; refer to Item 8, Note 13 of the Consolidated Financial Statements, Page 130, for additional information. Contributions and pension costs are developed from annual actuarial valuations. These valuations involve key assumptions including discount rates, expected return on plan assets and compensation increase rates, which are updated annually. Any adjustments to these assumptions are based on considerations of current market conditions. Therefore, changes in the related pension costs or credits may occur in the future due to changes in assumptions.


Cincinnati Financial Corporation - 2014 10-K - Page 57


Key assumptions used in developing the 20112014 benefit obligation for our qualified plan were a 5.104.25 percent discount rate and rates of compensation increases ranging from 3.502.75 percent to 5.503.25 percent. To determine the discount rate, a hypothetical diversifiedtheoretical settlement portfolio of actual domestic Aahigh-quality, rated corporate bonds was chosen to provide payments approximately matching the plan’s expectedprojected benefit payments. A single interest rate was determined, based on the anticipated yieldresulting in a discounted value of the constructed portfolio.

plan's benefit payments that equates to the market value of the selected bonds. The discount rate is reflective of current market interest rate conditions and our plan's liability characteristics.

Key assumptions used in developing the 20112014 net pension expense for our qualified plan were a 5.855.15 percent discount rate, a 7.507.25 percent expected return on plan assets and rates of compensation increases ranging from 3.502.75 percent to 5.503.25 percent. See Note 13, Page 130 for additional information on assumptions.

In 2011,2014, the net pension expense was $13 million. In 2012,2015, we expect the net pension expense to be $18approximately $14 million.

Holding all other assumptions constant, a 0.5 percentage-point decrease in the discount rate would decrease our 20122015 income before income taxes by $1 million. A 0.5 percentage point decrease in the expected return on plan assets would decrease our 20122015 income before income taxes by $1 million.

The fair value of the plan assets exceeded the accumulated benefit obligation by $4 million and $23 million at year-end 2014 and 2013, respectively. The fair value of the plan assets was $20 million less than the accumulated benefit obligation at year-end 2011 and $30 million less at year-end 2010. The fair value of the plan assets was $65$31 million less than the projected plan benefit obligation at year-end 20112014 and $62$4 million less at year-end 2010.2013. Market conditions and interest rates significantly affect future assets and liabilities of the pension plan. On February 1, 2011,During the first quarter of 2015, we contributed $35$5 million to our qualified plan. We expect to contribute $14 million to our qualified plan during 2012.

Cincinnati Financial Corporation – 2011 10-K - 48

Deferred Policy Acquisition Costs

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

For property casualty insurance policies, deferred acquisition costs are amortized over the terms of the policies. These costs are principally agent commissions, premium taxes and certain underwriting costs related to successful contract acquisition, which are deferred and amortized into net income as premiums are earned. We assess recoverability of deferred acquisition costs at the segment level, consistent with the ways we acquire, service, manage and measure profitability. Deferred acquisition costs track with the change in premiums. Our property casualty insurance operations consist of three segments, commercial lines insurance, personal lines insurance and excess and surplus lines.

lines insurance.

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

Profit-Sharing Commission Accrual

We establish an accrual for property casualty profit-sharing commissions. We base the profit-sharing commission accrual estimate on property casualty underwriting results. Profit-sharing commissions are paid to agencies using a formula that takes into account agency profitability over one-year and three-year periods, premium volume and other factors, including allocations of various expenses. Due to the complexity of the calculation and the variety of allocation factors that can affect profit-sharing commissions for an individual agency, the amount accrued can differ from the actual profit-sharing commissions paid. The profit-sharing commission accrual of $68 million in 2011 contributed 2.3 percentage points to the property casualty combined ratio. If profit-sharing commissions paid were to vary from that amount by 5 percent, it would affect 2012 net income by $2 million (after tax), or 1 cent per share, and the combined ratio by approximately 0.1 percentage points.

Recent Accounting Pronouncements

Information about recent accounting pronouncements is provided in Item 8, Note 1 of the Consolidated Financial Statements, Page 114.Statements. We have determined that recent accounting pronouncements have not had, nor are they expected to have, any material impact on our consolidated financial statements.

Cincinnati Financial Corporation – 2011 10-K - 49



Cincinnati Financial Corporation - 2014 10-K - Page 58


Financial Results of Operations

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

·Commercial lines property casualty insurance

·Personal lines property casualty insurance

·Excess and surplus lines property casualty insurance

·Life insurance

·Investments

Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Life insurance
Investments

We report as Other the non-investmentnoninvestment operations of the parent company and its non-insurernoninsurer subsidiary, CFC Investment Company.

We measure profit or loss for our commercial lines, personal lines and excess and surplus property casualtylines and life insurance segments based upon underwriting results (profit or loss), which represent net earned premium less loss and loss expenses and underwriting expenses on a pretax basis. We also frequently evaluate results for our consolidated property casualty insurance operations, which is the total of our commercial, personal, and excess and surplus lines insurance results. Underwriting results and segment pretax operating income are not substitutes for net income determined in accordance with GAAP.

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

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

Investments Results.

The calculations of segment data are described in more detail in Item 8, Note 18, of the Consolidated Financial Statements, Page 136.Statements. The following sections reviewprovide analysis and discussion of results of operations for each of the five segments. Commercial Lines Insurance Results of Operations begins on

Cincinnati Financial Corporation - 2014 10-K - Page 57, Personal Lines Insurance Results of Operations begins on Page 69, Excess and Surplus Lines Insurance Results of Operations begins on Page 75, Life Insurance Results of Operations begins on Page 79, and Investment Results of Operations begins on Page 81. We begin with an overview of our consolidated property casualty operations.

59
Cincinnati Financial Corporation – 2011 10-K - 50


Consolidated Property Casualty Insurance Results of Operations

Earned and net written premiums for our consolidated property casualty operations grew in 2011,2014, reflecting improvinghigher pricing and strategic initiatives for targeted growth and the effects of slowly improving economic conditions.growth. A key measure of property casualty profitability is underwriting profit or loss. Our 2014 underwriting loss rose by $229profit of $186 million driven bywas $47 million less than in 2013. The decrease included a $254$32 million increase in natural catastrophe losses, mostly from severe weather. Underwriting resultsIt also included a $52 million increase from weather-related losses not identified as part of designated catastrophe events for the property casualty industry, typically referred to as noncatastrophe weather losses. The unfavorable effects of those higher weather-related losses in aggregate during 2014 offset the benefits of higher pricing and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices. Prior accident year loss experience before catastrophecatastrophes during 2014 was favorable but less so than in 2013. The less favorable experience was primarily due to re-estimates of losses improved, evidenceand loss expenses incurred but not reported (IBNR), particularly for our commercial casualty line of benefits from various recent-year profit improvement and premium growth initiatives.

business, as discussed in Commercial Lines Insurance Results.

The table below highlights property casualty results, of operations, with analysis and discussion in the sections that follow. Analysis and discussion by property casualty segment can be found in Commercial Lines, Personal Lines and Excess and Surplus Lines Insurance Results of Operations, beginning on Page 57, Page 69 and Page 75, respectively.

Overview – Three-Year Highlights

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Earned premiums $3,029  $2,924  $2,911   4   0 
Fee revenues  4   4   3   0   33 
Total revenues  3,033   2,928   2,914   4   0 
                     
Loss and loss expenses from:                    
Current accident year before catastrophe losses  2,213   2,154   2,102   3   2 
Current accident year catastrophe losses  407   165   172   147   (4)
Prior accident years before catastrophe losses  (280)  (287)  (181)  2   (59)
Prior accident years catastrophe losses  (5)  (17)  (7)  71   (143)
Total loss and loss expenses  2,335   2,015   2,086   16   (3)
Underwriting expenses  974   960   956   1   0 
Underwriting loss $(276) $(47) $(128)  nm   63 
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Current accident year before catastrophe losses  73.0%  73.6%  72.2%  (0.6)  1.4 
Current accident year catastrophe losses  13.4   5.6   5.9   7.8   (0.3)
Prior accident years before catastrophe losses  (9.3)  (9.8)  (6.2)  0.5   (3.6)
Prior accident years catastrophe losses  (0.1)  (0.5)  (0.2)  0.4   (0.3)
Total loss and loss expenses  77.0   68.9   71.7   8.1   (2.8)
Underwriting expenses  32.2   32.8   32.8   (0.6)  0.0 
Combined ratio  109.2%  101.7%  104.5%  7.5   (2.8)
                     
Combined ratio:  109.2%  101.7%  104.5%  7.5   (2.8)
Contribution from catastrophe losses and prior years reserve development  4.0   (4.7)  (0.5)  8.7   (4.2)
Combined ratio before catastrophe losses and prior years reserve development  105.2%  106.4%  105.0%  (1.2)  1.4 

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Earned premiums $4,045
 $3,713
 $3,344
 9
 11
Fee revenues 6
 4
 6
 50
 (33)
Total revenues 4,051
 3,717
 3,350
 9
 11
Loss and loss expenses from:  
  
  
  
  
Current accident year before catastrophe losses 2,495
 2,249
 2,160
 11
 4
Current accident year catastrophe losses 230
 199
 373
 16
 (47)
Prior accident years before catastrophe losses (72) (120) (357) 40
 66
Prior accident years catastrophe losses (26) (27) (39) 4
 31
Total loss and loss expenses 2,627
 2,301
 2,137
 14
 8
Underwriting expenses 1,238
 1,183
 1,076
 5
 10
Underwriting profit $186
 $233
 $137
 (20) 70
           
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Current accident year before catastrophe losses 61.7 % 60.6 % 64.6 % 1.1
 (4.0)
Current accident year catastrophe losses 5.7
 5.4
 11.1
 0.3
 (5.7)
Prior accident years before catastrophe losses (1.8) (3.3) (10.7) 1.5
 7.4
Prior accident years catastrophe losses (0.6) (0.8) (1.1) 0.2
 0.3
Total loss and loss expense 65.0
 61.9
 63.9
 3.1
 (2.0)
Underwriting expense 30.6
 31.9
 32.2
 (1.3) (0.3)
Combined ratio 95.6 % 93.8 % 96.1 % 1.8
 (2.3)
           
Combined ratio: 95.6 % 93.8 % 96.1 % 1.8
 (2.3)
Contribution from catastrophe losses and prior years
    reserve development
 3.3
 1.3
 (0.7) 2.0
 2.0
Combined ratio before catastrophe losses and prior years
    reserve development
 92.3 % 92.5 % 96.8 % (0.2) (4.3)
           
Performance highlights for consolidated property casualty operations include:

·Premiums – Solid growth in 2011 renewal and new business written premiums drove the increase in earned premiums and net written premiums, offsetting additional ceded premiums to reinstate coverage layers of our property catastrophe reinsurance treaty. The rate of growth for earned and net written premiums exceeded that of 2010 as each of our property casualty segments experienced significant increases in 2011 premiums. Improving pricing during 2011 occurred in each of those segments and is further discussed in the results of operations sections below by segment. A fourth straight year of higher new business premiums reflected our premium growth initiatives from recent years that continue to favorably affect current year growth, particularly as newer agency relationships mature over time. Agents appointed during 2010 or 2011 produced an increase in standard lines new business of $31 million during 2011, compared with 2010. Improving insured exposure-level comparatives from the slow economic recovery also favorably affected premium growth, primarily in our commercial lines segment. The contributions to premiums from audits, which are significantly affected by economic trends, are further discussed in Commercial Lines Insurance Results of Operations beginning on Page 57.
Other written premiums – primarily premiums ceded to our reinsurers as part of our reinsurance program – contributed negative $63 million to the $135 million of growth in 2011 net written premiums. The change in other written premiums was primarily due to $42 million of ceded premiums to reinstate coverage layers of our property catastrophe reinsurance treaty. During the second quarter of 2011, we purchased reinsurance to replenish coverage for certain layers of our property catastrophe treaty that were used by the first-half 2011 catastrophe events discussed below. This coverage, also known as third and fourth event cover, added $26 million of ceded premiums for 2011. There were no material ceded premium effects during 2010 or 2009 from unusual items such as reinstatement premiums or the third and fourth event cover.

Cincinnati Financial Corporation – 2011 10-K - 51
Premiums – Strong growth in renewal written premiums drove increases in earned premiums and net written premiums for both 2014 and 2013, rising in each of our property casualty segments. Higher and more precise pricing continues to benefit operating results and is further discussed by segment in the results sections below. New business written premiums in 2014 were down $40 million, compared with the record-high amount we reported in 2013. The year 2013 also represented the sixth straight year of higher new business premiums, reflecting our premium growth initiatives from recent years. Those initiatives also favorably affect growth in subsequent years, particularly as newer agency relationships mature over time. Agents appointed during 2014 or

The table below analyzes premium revenue components and trends. Premium trends by segment are further discussed beginning on Page 58, Page 69 and Page 75, for the respective property casualty segments.

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Agency renewal written premiums $2,867  $2,692  $2,665   7   1 
Agency new business written premiums  437   414   405   6   2 
Other written premiums  (206)  (143)  (159)  (44)  10 
Net written premiums  3,098   2,963   2,911   5   2 
Unearned premium change  (69)  (39)  0   (77)  nm 
Earned premiums $3,029  $2,924  $2,911   4   0 

·Combined ratio – The 2011 combined ratio rose 7.5 percentage points compared with 2010, primarily due to an 8.2 percentage-point increase in the ratio for catastrophe losses. The ratio effect of additional ceded premiums to reinstate coverage layers of our property catastrophe reinsurance treaty contributed 1.4 percentage points to the 7.5 point rise in the 2011 ratio.
The combined ratio before catastrophe losses and prior year reserve development improved in 2011, in part benefiting from recent-year initiatives to improve pricing precision and loss experience related to claims and loss control practices.
Our statutory combined ratio was 108.9 percent in 2011 compared with 101.8 percent in 2010 and 104.4 percent in 2009. The estimated property casualty industry, excluding mortgage and financial guaranty segments, was 107.5 percent in 2011, 101.0 percent in 2010 and 99.5 percent in 2009. The contribution of catastrophe losses to our statutory combined ratio was 13.3 percentage points in 2011, 5.1 percentage points in 2010 and 5.7 percentage points in 2009, compared with an estimated 10.1, 4.6 and 3.4 percentage points, respectively, for the industry. Components of the combined ratio are discussed below, followed by additional discussion by segment.
Catastrophe losses trends are an important factor in assessing trends for overall underwriting results. Incurred losses from a May 20-27, 2011, storm system that included Joplin, Missouri represent the single largest catastrophe event in our company’s history. The gross amount for that event is estimated at $239 million, including significant losses from hail in the Dayton, Ohio, area. The total gross amount of our losses incurred for all catastrophe events during the year 2011 is estimated at $658 million. Our 10-year historical annual average contribution of catastrophe losses to the combined ratio was 5.4 percentage points as of December 31, 2011.
The 2011 ratio of catastrophe losses included 0.4 percentage points from losses of $11 million for our participation in assumed reinsurance treaties that spread the risk of very high catastrophe losses among many insurers. The majority of the assumed reinsurance losses were for the first-quarter 2011 earthquake in Japan. The only assumed reinsurance treaty for which we had a material exposure has been reserved at the $7 million policy limit for the Japan earthquake event.


Cincinnati Financial Corporation – 2011 10-K - 52
Cincinnati Financial Corporation - 2014 10-K - Page 60


2013 produced an increase in standard lines new business of $20 million during 2014, compared with 2013. A higher level of insured exposures, reflecting improvement in some areas of the economy, also favorably affected growth in net written premiums, primarily in our commercial lines insurance segment. The contributions to commercial lines premiums from audits, which are significantly affected by economic trends, are further discussed in Commercial Lines Insurance Results.
Other written premiums – primarily premiums ceded to our reinsurers as part of our reinsurance program – in total reduced 2014 net written premiums by $11 million more than in 2013. A decrease in ceded premiums contributed $22 million to net written premium growth for 2014, compared with 2013. Other written premiums also included a less favorable adjustment for 2014, compared with 2013, for estimated direct written premiums of policies in effect but not yet processed in our commercial lines insurance segment. This written premium adjustment has an immaterial effect on earned premiums.

The table below analyzes premium revenue components and trends. Premium trends by segment are further discussed for the respective property casualty segments.
(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Agency renewal written premiums $3,794
 $3,493
 $3,138
 9
 11
Agency new business written premiums 503
 543
 501
 (7) 8
Other written premiums (154) (143) (157) (8) 9
Net written premiums 4,143
 3,893
 3,482
 6
 12
Unearned premium change (98) (180) (138) 46
 (30)
Earned premiums $4,045
 $3,713
 $3,344
 9
 11
           
Combined ratio – The 2014 combined ratio rose 1.8 percentage points compared with 2013, as higher weather-related losses largely offset our recent-year initiatives to improve pricing precision and loss experience related to claims and loss control practices. Compared with 2013, the 2014 ratio for natural catastrophe losses rose 0.5 points while the ratio for noncatastrophe weather losses rose 1.0 points. In addition, higher estimates of incurred but not reported (IBNR) losses and loss expenses for our commercial casualty line of business increased our 2014 consolidated property casualty combined ratio by 1.5 points, compared with 2013. We further discuss those ratios and ones related to reserve development in the sections that follow our discussion below in Catastrophe Losses Incurred.
Our statutory combined ratio was 95.1 percent in 2014 compared with 92.7 percent in 2013 and 95.4 percent in 2012. The estimated statutory combined ratio for the property casualty industry, with the industry’s ratio excluding its mortgage and financial guaranty lines of business, was 97.2 percent in 2014, 96.4 percent in 2013 and 102.5 percent in 2012. The contribution of catastrophe losses to our statutory combined ratio was 5.1 percentage points in 2014, 4.6 percentage points in 2013 and 10.0 percentage points in 2012, compared with an industry estimate of 4.4, 3.9 and 8.0 percentage points, respectively. Components of the combined ratio are discussed below, followed by additional discussion by segment.
Catastrophe loss trends are an important factor in assessing trends for overall underwriting results. Our 10-year historical annual average contribution of catastrophe losses to the combined ratio was 6.0 percentage points at December 31, 2014. Our five-year average was 7.4 percentage points.

Cincinnati Financial Corporation - 2014 10-K - Page 61


The following table shows catastrophe losses incurred, net of reinsurance, for the past three years, as well as the effect of loss development on prior period catastrophe reserves.

We individually list declared catastrophe events for which our incurred losses reached or exceeded $10 million.

Catastrophe Losses Incurred

(In millions, net of reinsurance)          Excess    
        Commercial  Personal  and surplus   
Dates  Event    Region   lines  lines  lines  Total 
2011                        
Jan. 31-Feb. 3  Freezing, wind   South, Midwest  $4  $3  $-  $7 
Feb. 21  Earthquake   New Zealand   4   -   -   4 
Feb. 27-28  Hail, wind, tornado   Midwest   3   6   -   9 
Mar. 11  Earthquake   Japan   7   -   -   7 
Mar. 26-28  Hail, wind   South   1   6   -   7 
Apr. 3-5  Hail, wind, tornado   South, Midwest   15   23   -   38 
Apr. 8-11  Hail, wind, tornado   South, Midwest   11   8   -   19 
Apr. 14-16  Hail, wind, tornado   South, Midwest   10   4   -   14 
Apr. 19-20  Hail, wind   South, Midwest   13   11   -   24 
Apr. 22-28  Hail, wind, tornado   South, Midwest   45   31   -   76 
May 20-27  Hail, wind, tornado   South, Midwest   42   51   -   93 
May 29-Jun. 1  Hail, wind, tornado   East, Midwest   2   1   -   3 
Jun. 16-22  Hail, wind, tornado   South, Midwest   7   6   -   13 
Jul. 1-4  Hail, wind, tornado   Midwest   3   2   -   5 
Jul. 10-14  Hail, wind, tornado   Midwest, West   4   6   -   10 
Aug. 18-19  Hail, wind, tornado   Midwest   9   1   -   10 
Aug. 26-28  Hurricane, wind, tornado   East   22   6   -   28 
Sep. 3-6  Tornado, wind   South   9   5   -   14 
All other 2011 catastrophes        14   11   1   26 
Development on 2010 and prior catastrophes        2   (7)  -   (5)
Calendar year incurred total       $227  $174  $1  $402 
                         
2010                        
Jan. 7-12  Freezing, wind   South, Midwest  $4  $1  $-  $5 
Feb. 9-11  Freezing, wind   East, Midwest   4   1   -   5 
Apr. 4-6  Hail, wind, tornado   South, Midwest   4   6   -   10 
Apr. 30 - May 3  Hail, wind, tornado   South   21   6   -   27 
May 7-8  Hail, wind, tornado   East, Midwest   2   12   -   14 
May 12-16  Hail, wind, tornado   South, Midwest   7   2   -   9 
Jun. 4-6  Hail, wind, tornado   Midwest   2   2   1   5 
Jun. 17-20  Hail, wind, tornado   Midwest, West   5   3   -   8 
Jun. 21-24  Hail, wind, tornado   Midwest   2   3   -   5 
Jun. 25-28  Hail, wind, tornado   Midwest   3   5   -   8 
Jun. 30 - Jul. 1  Hail, wind   West   4   4   -   8 
Jul. 20-23  Hail, wind, tornado   Midwest   12   4   -   16 
Oct. 4-6  Hail, wind   South   6   1   -   7 
Oct. 26-28  Hail, wind, tornado   Midwest   6   4   -   10 
All other 2010 catastrophes        19   9   -   28 
Development on 2009 and prior catastrophes        (12)  (5)  -   (17)
Calendar year incurred total       $89  $58  $1  $148 
                         
2009                        
Jan. 26-28  Freezing   South, Midwest  $5  $14  $-  $19 
Feb. 10-13  Hail, wind   South, Midwest   13   25   -   38 
Feb. 18-19  Hail, wind   South   1   8   -   9 
Apr. 9-11  Hail, wind   South, Midwest   13   21   -   34 
May 7-9  Hail, wind   South, Midwest   9   13   -   22 
Jun. 2-6  Hail, wind   South, Midwest   3   4   -   7 
Jun. 10-18  Hail, wind   South, Midwest   7   4   -   11 
Sep. 18-22  Hail, wind   South   3   4   -   7 
All other 2009 catastrophes        12   13   -   25 
Development on 2008 and prior catastrophes        (12)  5   -   (7)
Calendar year incurred total       $54  $111  $-  $165 

Cincinnati Financial Corporation – 2011 10-K - 53

(Dollars in millions, net of reinsurance)      Excess  
    Commercial Personal and surplus  
DatesEventsRegions lines lines lines Total
2014    
  
  
  
Jan. 5-8Freezing, ice, snow, windMidwest, Northeast, South $45
 $24
 $1
 $70
Apr. 27-May 1Flood, hail, windMidwest, Northeast, South 4
 9
 —
 13
May 10-13Flood, hail, windMidwest 6
 7
 —
 13
May 18-19Flood, hail, windMidwest, South, West 23
 19
 1
 43
Jun. 3-4Flood, hail, windMidwest 9
 1
 —
 10
All other 2014 catastrophes  48
 32
 1
 81
Development on 2013 and prior catastrophes (15) (11) —
 (26)
Calendar year incurred total  $120
 $81
 $3
 $204
           
2013    
  
  
  
Mar. 18-19Hail, windSouth $4
 $7
 $—
 $11
Apr. 7-11Hail, lightning, windMidwest, West 12
 10
 —
 22
Apr. 16-19Hail, lightning, windMidwest 5
 6
 —
 11
May. 18-20Hail, lightning, windMidwest, Northeast, South 9
 1
 —
 10
May. 28-29Hail, lightning, windSouth 8
 2
 1
 11
Jun. 24-26Hail, lightning, windMidwest, Northeast 5
 6
 —
 11
Jul. 9-11Hail, lightning, windMidwest, Northeast 5
 6
 —
 11
Jul. 23-24Hail, lightning, windMidwest, South 14
 4
 —
 18
Aug. 6-7Hail, lightning, windMidwest 6
 9
 —
 15
Nov. 17-18Hail, lightning, windMidwest, South 18
 17
 —
 35
All other 2013 catastrophes  28
 16
 —
 44
Development on 2012 and prior catastrophes  (17) (10) —
 (27)
Calendar year incurred total  $97
 $74
 $1
 $172
           
2012    
  
  
  
Feb. 28-29Hail, tornado, windMidwest $19
 $6
 $—
 $25
Mar. 2-3Hail, tornado, windMidwest, South 30
 48
 —
 78
Apr. 28-29Hail, lightning, windMidwest, South 53
 26
 1
 80
Jun. 28-Jul. 2Hail, lightning, windMidwest, Northeast, South 39
 42
 —
 81
Jul. 2-4Hail, lightning, windMidwest, Northeast 7
 5
 —
 12
Oct. 28-31SandyMidwest, Northeast, South 20
 10
 —
 30
All other 2012 catastrophes  43
 23
 1
 67
Development on 2011 and prior catastrophes  (17) (22) —
 (39)
Calendar year incurred total  $194
 $138
 $2
 $334
           

Cincinnati Financial Corporation - 2014 10-K - Page 62


Consolidated Property Casualty Insurance Loss and Loss Expenses

Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. Most of the incurred losses and loss expenses shown in the consolidated property casualty insurance results three-year highlights table on Page 51 are for the respective current accident years, andwith reserve development on prior accident years is shown separately. Since less than half of our consolidated property casualty current accident year incurred losses and loss expenses represents net paid losses,amounts, the majority represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 79.266.0 percent accident year 20102013 loss and loss expense ratio reported as of December 31, 2010,2013, developed favorably by 6.01.6 percentage points to 73.264.4 percent due to claims settling claims for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2011.2014. Accident years 20102013 and 20092012 have both developed favorably, as indicated by the progression over time for the ratios in the table.

(Dollars in millions)                  
Accident year loss and loss expenses incurred and ratios to earned premiums:            
Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $2,620  $2,140  $2,050   86.4%  73.2%  70.4%
as of December 31, 2010      2,319   2,084       79.2   71.6 
as of December 31, 2009          2,274           78.1 

(Dollars in millions)            
Accident year loss and loss expenses incurred and ratios to earned premiums:      
Accident year: 2014 2013 2012 2014 2013 2012
as of December 31, 2014 $2,725
 $2,391
 $2,416
 67.4% 64.4% 72.3%
as of December 31, 2013  
 2,448
 2,431
  
 66.0
 72.7
as of December 31, 2012  
  
 2,533
  
  
 75.7
             
Catastrophe loss trends, discussed above, droveaccount for much of the increasemovement in 2011 current accident year loss and loss expenses compared with 2010.expense ratios for years 2012 to 2013, while noncatastrophe weather and higher commercial casualty IBNR, noted above, account for most of the change between 2013 to 2014. Catastrophe losses added 13.45.7 percentage points for 2011, 5.6in 2014, 5.4 points for 2010in 2013 and 5.911.1 points for 2009in 2012 to the respective consolidated property casualty current accident year loss and loss expense ratios in the table above.

The trend for our current accident year loss and loss expense ratio before catastrophe losses over the past three years included unique items for 2011 discussed below, in addition to normal loss cost inflation and higher pricing.

The 73.061.7 percent ratio for current accident year loss and loss expenses before catastrophe losses for 2011 declined 0.62014 rose 1.1 percentage points compared with the 73.660.6 percent accident year 20102013 ratio measured as of December 31, 2010. The effect of2013. Noncatastrophe weather losses and higher commercial casualty IBNR, noted above, largely accounted for the $42 million ceded premiums to reinstate coverage layers of our property catastrophe reinsurance treaty increased the 2011 ratio by 1.0 percentage point. Large losses described belowincrease and the corresponding ratios for new losses above $250,000 caused a 1.5 percentage-point increase in the 2011 ratio. A refinement to our line of business allocation process for loss expenses reduced the 2011 accident year loss and loss expenses before catastrophes ratio by approximately 1.5 percentage points. We believe the remainder of the reduction is largely due tooffset favorable effects from initiatives to improve pricing precision and loss experience related to claims and loss control practices, somewhat offset by normal loss cost inflation. The refined allocation had no effect on earnings or consolidated property casualty ratios reported on a calendar year basis. The allocation refinement pertained to the portion of loss expenses referred to as AOE, and is discussed in Item 8, Note 18 of the Consolidated Financial Statements, Page 136. Discussion of AOE reserves is included in Critical Accounting Estimates, How Reserves Are Established, Page 42.

practices.

Reserve development on prior accident years continued to net to a favorable amount in 2011, as $2852014. We recognized $98million in favorable development in 2014, less benefit than $147 million in 2013 and $396 million in 2012. Of the $49 million decrease in 2014, compared with 2013, $74 million was recognized, 6 percent less than $304 million in 2010.attributable to our commercial casualty line of business. Approximately 8087 percent of our net favorable reserve development on prior accident years recognized during 20112014 occurred in our workers’ compensation and commercial property lines of business. In 2013, our commercial casualty and workers' compensation lines of business were responsible for approximately 57 percent of the favorable reserve development. As discussed in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves, Property Casualty Insurance Development of Estimated Reserves by Accident Year, commercial casualty and workers' compensation are considered long-tail lines with potential for revisions inherent in estimating reserves. Favorable development recognized during 2012 was also primarily from our commercial casualty and workers’ compensation lines of business. Development recognized during 2009 and 2010 was primarily from our commercial casualty line of business. Development by line of business is further analyzed in Commercial LinesProperty Casualty Insurance Segment Development of Estimated Reserves by Accident Year,Year.

Cincinnati Financial Corporation - 2014 10-K - Page 93, and in Personal Lines Insurance Segment Development of Estimated Reserves by Accident Year, Page 95.

63
Cincinnati Financial Corporation – 2011 10-K - 54


Consolidated Property Casualty Insurance Losses by Size

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
New losses greater than $4,000,000 $56  $49  $57   14   (14)
New losses $1,000,000-$4,000,000  173   142   147   22   (3)
New losses $250,000-$1,000,000  217   200   212   9   (6)
Case reserve development above $250,000  210   178   265   18   (33)
Total large losses incurred  656   569   681   15   (16)
Other losses excluding catastrophe losses  898   935   860   (4)  9 
Catastrophe losses  395   148   165   167   (10)
Total net losses incurred $1,949  $1,652  $1,706   18   (3)
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
New losses greater than $4,000,000  1.9%  1.7%  2.0%  0.2   (0.3)
New losses $1,000,000-$4,000,000  5.7   4.8   5.1   0.9   (0.3)
New losses $250,000-$1,000,000  7.2   6.8   7.3   0.4   (0.5)
Case reserve development above $250,000  6.9   6.1   9.0   0.8   (2.9)
Total large loss ratio  21.7   19.4   23.4   2.3   (4.0)
Other losses excluding catastrophe losses  29.6   32.0   29.5   (2.4)  2.5 
Catastrophe losses  13.1   5.1   5.7   8.0   (0.6)
Total net loss ratio  64.4%  56.5%  58.6%  7.9   (2.1)

(Dollars in millions, net of reinsurance) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Current accident year losses greater than $5,000,000 $30
 $23
 $22
 30
 5
Current accident year losses $1,000,000-$5,000,000 172
 167
 150
 3
 11
Large loss prior accident year reserve development 7
 44
 9
 (84) nm
Total large losses incurred 209
 234
 181
 (11) 29
Losses incurred but not reported 133
 123
 (14) 8
 nm
Other losses excluding catastrophe losses 1,660
 1,412
 1,311
 18
 8
Catastrophe losses 197
 166
 321
 19
 (48)
Total losses incurred $2,199
 $1,935
 $1,799
 14
 8
           
Ratios as a percent of earned premiums:  
  
  
 Pt. Change Pt. Change
Current accident year losses greater than $5,000,000 0.7% 0.6% 0.7 % 0.1
 (0.1)
Current accident year losses $1,000,000-$5,000,000 4.3
 4.5
 4.5
 (0.2) —
Large loss prior accident year reserve development 0.2
 1.2
 0.3
 (1.0) 0.9
Total large loss ratio 5.2
 6.3
 5.5
 (1.1) 0.8
Losses incurred but not reported 3.3
 3.3
 (0.4) —
 3.7
Other losses excluding catastrophe losses 41.0
 38.0
 39.1
 3.0
 (1.1)
Catastrophe losses 4.9
 4.5
 9.6
 0.4
 (5.1)
Total loss ratio 54.4% 52.1% 53.8 % 2.3
 (1.7)
           
In 2011,2014, total large losses incurred rosedecreased by $87$25 million or 1511 percent, net of reinsurance, helping to raise thereinsurance. The corresponding ratio by 2.3decreased 1.1 percentage points. Large loss trends are further analyzed in the segment discussion below.and analysis that follows discussion of consolidated property casualty results. Our analysis of large losses incurred indicated no unexpected concentration of these losses and reserve increases by geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.

Cincinnati Financial Corporation – 2011 10-K - 55

Consolidated Property Casualty Insurance Underwriting Expenses

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Commission expenses $565  $544  $550   4   (1)
Other underwriting expenses  393   402   389   (2)  3 
Policyholder dividends  16   14   17   14   (18)
Total underwriting expenses $974  $960  $956   1   0 
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Commission expenses  18.7%  18.6%  18.9%  0.1   (0.3)
Other underwriting expenses  13.0   13.7   13.3   (0.7)  0.4 
Policyholder dividends  0.5   0.5   0.6   0.0   (0.1)
Total underwriting expense ratio  32.2%  32.8%  32.8%  (0.6)  0.0 

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Commission expenses $744
 $705
 $635
 6
 11
Other underwriting expenses 478
 462
 425
 3
 9
Policyholder dividends 16
 16
 16
 0
 0
Total underwriting expenses $1,238
 $1,183
 $1,076
 5
 10
           
Ratios as a percent of earned premiums:  
  
  
 Pt. Change Pt. Change
Commission expense 18.4% 19.0% 19.0% (0.6) 0.0
Other underwriting expense 11.8
 12.5
 12.7
 (0.7) (0.2)
Policyholder dividends 0.4
 0.4
 0.5
 0.0
 (0.1)
Total underwriting expense ratio 30.6% 31.9% 32.2% (1.3) (0.3)
           
Consolidated property casualty commission expenses rose $39 million or 6 percent in 2014, with profit-sharing commissions for agencies rising by $10 million. Commission expenses as a percent of earned premiums resulted in a ratio that was 0.6 percentage points lower than in 2013, primarily due to lower commission rates for selected personal lines insurance products, beginning in March of 2014. The 2014 ratio for other underwriting expenses was 0.7 percentage-points lower than 2013, reflecting a 9 percent increase in earned premiums that was higher than the

Cincinnati Financial Corporation - 2014 10-K - Page 64


3 percent increase in those expenses. During 2014, we continued to carefully manage expenses by keeping growth of other underwriting expenses at a pace slower than premium growth.
Commission expenses include our profit-sharing commissions, which are primarily based on one-year and three-year profitability of an agency’s business. The aggregate profit trend for agencies that earn these profit-based commissions can differ from the aggregate profit trend for all agencies reflected in our consolidated property casualty results. In 2011, the ratio for property casualty profit-sharing commissions declined slightly while the ratio for total commissions rose slightly, netting to a small increase of 0.1 percentage point.

In 2011, other underwriting expenses were down $9 million or 2 percent, primarily due to a first-quarter 2010 provision for matters involving prior years and related to Note 16, Commitments and Contingent Liabilities, Page 134. The combined effects of a 4 percent increase in earned premiums and a 2 percent decrease in other underwriting expenses resulted in a ratio that was 0.7 percentage points lower.

Salaries, benefits and payroll taxes for our associates account for approximately half of our property casualty other underwriting expenses. Most of our associates either provide direct service to the property casualty portion of our agencies’ businessbusinesses or provide support to those associates. Since the end of 2009, the total number of associates, and contractors, on a consolidated basis, declined 4rose by 3 percent, reflecting careful management of our non-commission expenses.noncommission expenses during a period of significant premium growth. The total number of field associates providing direct service to agencies rose by 412 percent, reflecting our emphasis on providing excellent service.

service in addition to territory expansion.

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

Cincinnati Financial Corporation – 2011 10-K - 56



Cincinnati Financial Corporation - 2014 10-K - Page 65


Commercial Lines Insurance Results of Operations

Overview – Three-Year Highlights

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Earned premiums $2,197  $2,154  $2,199   2   (2)
Fee revenues  3   2   2   50   0 
Total revenues  2,200   2,156   2,201   2   (2)
                     
Loss and loss expenses from:                    
Current accident year before catastrophe losses  1,579   1,605   1,596   (2)  1 
Current accident year catastrophe losses  225   101   66   123   53 
Prior accident years before catastrophe losses  (236)  (257)  (135)  8   (90)
Prior accident years catastrophe losses  2   (12)  (12)  nm   0 
Total loss and loss expenses  1,570   1,437   1,515   9   (5)
Underwriting expenses  731   704   719   4   (2)
Underwriting profit (loss) $(101) $15  $(33)  nm   nm 
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Current accident year before catastrophe losses  71.8%  74.5%  72.5%  (2.7)  2.0 
Current accident year catastrophe losses  10.3   4.7   3.0   5.6   1.7 
Prior accident years before catastrophe losses  (10.8)  (11.9)  (6.1)  1.1   (5.8)
Prior accident years catastrophe losses  0.1   (0.6)  (0.5)  0.7   (0.1)
Total loss and loss expenses  71.4   66.7   68.9   4.7   (2.2)
Underwriting expenses  33.3   32.7   32.7   0.6   0.0 
Combined ratio  104.7%  99.4%  101.6%  5.3   (2.2)
                     
Combined ratio:  104.7%  99.4%  101.6%  5.3   (2.2)
Contribution from catastrophe losses and prior years reserve development  (0.4)  (7.8)  (3.6)  7.4   (4.2)
Combined ratio before catastrophe losses and prior years reserve development  105.1%  107.2%  105.2%  (2.1)  2.0 

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Earned premiums $2,856
 $2,636
 $2,383
 8
 11
Fee revenues 4
 3
 4
 33
 (25)
Total revenues 2,860
 2,639
 2,387
 8
 11
Loss and loss expenses from:  
  
  
  
  
Current accident year before catastrophe losses 1,734
 1,577
 1,501
 10
 5
Current accident year catastrophe losses 135
 114
 211
 18
 (46)
Prior accident years before catastrophe losses (42) (78) (275) 46
 72
Prior accident years catastrophe losses (15) (17) (17) 12
 0
Total loss and loss expenses 1,812
 1,596
 1,420
 14
 12
Underwriting expenses 902
 857
 786
 5
 9
Underwriting profit $146
 $186
 $181
 (22) 3
Ratios as a percent of earned premiums:  
  
  
 Pt. Change Pt. Change
Current accident year before catastrophe losses 60.7 % 59.8 % 62.9 % 0.9
 (3.1)
Current accident year catastrophe losses 4.8
 4.3
 8.9
 0.5
 (4.6)
Prior accident years before catastrophe losses (1.5) (3.0) (11.6) 1.5
 8.6
Prior accident years catastrophe losses (0.5) (0.6) (0.7) 0.1
 0.1
Total loss and loss expense 63.5
 60.5
 59.5
 3.0
 1.0
Underwriting expense 31.6
 32.5
 33.0
 (0.9) (0.5)
Combined ratio 95.1 % 93.0 % 92.5 % 2.1
 0.5
           
Combined ratio: 95.1 % 93.0 % 92.5 % 2.1
 0.5
Contribution from catastrophe losses and prior years
reserve development		 2.8
 0.7
 (3.4) 2.1
 4.1
Combined ratio before catastrophe losses and prior years
    reserve development
 92.3 % 92.3 % 95.9 % 0.0
 (3.6)
           
Performance highlights for the commercial lines insurance segment include:

·Premiums – Earned premiums and net written premiums rose in 2011, primarily due to an $85 million increase in renewal written premiums that reflected the effects of slowly improving economic conditions and improved pricing. Premium growth initiatives that helped new business written premiums grow $18 million in 2011 also contributed to earned and net written premium growth. Earned and net written premiums were up in 2011 despite the partially offsetting effect of $24 million for ceded premiums to reinstate coverage layers of our property catastrophe reinsurance treaty.
·Combined ratio – The 2011 combined ratio was 5.3 percentage points higher than in 2010, primarily due to a 6.3 percentage-point rise in the ratio for catastrophe losses. The ratio effect of additional ceded premiums to reinstate coverage layers of our property catastrophe reinsurance treaty essentially offset the favorable effect of a refined line of business allocation process for loss expenses.
The combined ratio before catastrophe losses and prior years reserve development improved in 2011, in part benefiting from recent-year initiatives to improve pricing precision and loss experience related to claims and loss control practices. Initiatives to improve commercial lines underwriting profitability complement our business practices that continue to leverage the local presence of our field staff, who meet with local agencies to assess each risk, determine limits of insurance and establish appropriate terms and conditions. Our field marketing representatives continue to underwrite new business while loss control, machinery and equipment and field claims representatives continue to conduct on-site inspections. Field claims representatives also assist underwriters by preparing full reports on their first-hand observations of risk quality.
Our commercial lines statutory combined ratio was 104.2 percent in 2011 compared with 99.6 percent in 2010 and 101.9 percent in 2009. The estimated commercial lines combined ratios for the industry were 108.2 percent in 2011, 102.7 percent in 2010 and 103.0 percent in 2009. Industry ratios reported for 2011 and 2010 excluded the mortgage and financial guaranty segments. The contribution of catastrophe losses to our commercial lines statutory combined ratio was 10.4 percentage points in 2011, 4.1 percent points in 2010 and 2.5 percentage points in 2009, compared with an estimated 8.5, 3.5 and 1.8 percentage points, respectively, for the industry.

Cincinnati Financial Corporation – 2011 10-K - 57
Premiums – Earned premiums and net written premiums each rose again in 2014, primarily due to a $207 million increase in renewal written premiums, which continued to reflect improved pricing. New business written premiums in 2014 were down $31 million, or 8 percent, compared with the record-high amount we reported in 2013.

Combined ratio – The 2014 combined ratio rose 2.1 percentage points compared with 2013, largely reflecting a 0.6 percentage-point increase in the ratio for natural catastrophe losses and a 1.0 point increase for noncatastrophe weather losses. Those unfavorable weather effects somewhat offset benefits from higher pricing and from recent-year initiatives to improve pricing precision and loss experience related to claims and loss control practices. Development on prior accident years’ loss and loss expense reserves before catastrophes during 2014 was 1.5 percentage points less favorable than in 2013, including 0.7 points from re-estimates of IBNR reserves for losses and loss expenses.
Our largest commercial line of business, commercial casualty, experienced an increase in its 2014 total loss and loss expense ratio. While that line was still profitable in 2014, its higher ratio had the effect of increasing our 2014 commercial lines insurance segment total loss and loss expense ratio by 4.2 percentage points, compared with 2013. As a percentage of its $938 million in 2014 earned premiums, our commercial casualty line of business experienced ratio increases of 1.6 points for paid losses and loss expenses for accident years three or more years ago in aggregate and 6.2 points for estimates of IBNR losses and loss expenses for all accident years in aggregate.

Cincinnati Financial Corporation - 2014 10-K - Page 66


As discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, stable historical paid loss patterns are a key assumption used to make projections necessary for estimating IBNR reserves. During 2014, paid losses for commercial casualty, especially related to a few umbrella liability claims, emerged at levels higher than we expected, particularly for accident years 2005 and 2007. Considering that new data, we estimated commercial casualty IBNR reserves for subsequent accident years at levels more likely to be adequate, compared with estimates at the end of 2013.
Pricing precision and other initiatives to improve commercial lines underwriting profitability complement our business practices that continue to leverage the local presence of our field staff. Field marketing representatives meet with local agencies to assess each risk, determine limits of insurance and establish appropriate terms and conditions. They continue to underwrite new business while field loss control, machinery and equipment and claims representatives continue to conduct on-site inspections. Field claims representatives also assist underwriters by preparing full reports on their first-hand observations of risk quality.
Our commercial lines statutory combined ratio was 94.3 percent in 2014 compared with 91.8 percent in 2013 and 92.1 percent in 2012. The estimated commercial lines combined ratios for the industry were 97.7 percent in 2014, 98.3 percent in 2013 and 104.4 percent in 2012. The industry’s ratios exclude its mortgage and financial guaranty lines of business. The contribution of catastrophe losses to our commercial lines statutory combined ratio was 4.3 percentage points in 2014, 3.7 percentage points in 2013 and 8.2 percentage points in 2012, compared with industry estimates of 3.5, 3.5 and 7.4 percentage points, respectively.

Commercial Lines Insurance Premiums

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Agency renewal written premiums $2,063  $1,978  $2,013   4   (2)
Agency new business written premiums  307   289   298   6   (3)
Other written premiums  (152)  (112)  (130)  (36)  14 
Net written premiums  2,218   2,155   2,181   3   (1)
Unearned premium change  (21)  (1)  18   nm   nm 
Earned premiums $2,197  $2,154  $2,199   2   (2)

Due

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Agency renewal written premiums $2,678
 $2,471
 $2,229
 8
 11
Agency new business written premiums 360
 391
 352
 (8) 11
Other written premiums (116) (102) (122) (14) 16
Net written premiums 2,922
 2,760
 2,459
 6
 12
Unearned premium change (66) (124) (76) 47
 (63)
Earned premiums $2,856
 $2,636
 $2,383
 8
 11
           
We continue to the highly competitive commercial lines markets during the past several years, we have focused on increasingrefine our use of predictive analytics tools to improve pricing precision whileas we further segment commercial lines policies, emphasizing identification and retention of policies we believe have relatively stronger price adequacy. These tools better align individual insurance policy pricing to risk attributes, providing our underwriters with enhanced abilities to target profitability and to discuss pricing impacts with agency personnel. We also leveragingcontinue to leverage our local relationships with agents through the efforts of our teams that work closely with them. We believe our field focus is unique and has several advantages, including providing us with quality intelligence on local market conditions. We seek to maintain appropriate pricing discipline for both new and renewal business as management emphasizes the importance of our agencies and underwriters assessing account quality to make careful decisions on a case-by-case basis whether to write or renew a policy. Rate credits may be used to retain renewals of quality business and to earn new business, but we do so selectively in order to avoid commercial accounts that we believe have insufficient profit margins.

We began in 2009 to use a predictive modeling tool for our workers’ compensation line of business, working to better align individual insurance policy pricing to risk attributes. We believe such tools are improving our pricing precision. For example, for the year 2011 we achieved average renewal pricing increases three to four times higher for workers’ compensation rating segments indicated as lower quality in our model compared with the higher quality rating segments. During 2011, our underwriters began full use of predictive modeling tools for our other major commercial lines of business: commercial auto, general liability and commercial property coverages in our commercial package accounts. Underwriters using these tools have enhanced abilities to target profitability and to discuss pricing impacts with agency personnel.

The 4

Our 8 percent increase in 20112014 agency renewal written premiums in partlargely reflected higher pricing and improving pricing trends compared with recent years.economic conditions. We measure average changes in commercial lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies. Our commercial lines pricing transitioned from having a negative effect on renewal written premiums in the first half of 2011 to having a positive effect in the last half. During the fourth quarter of 2011,In 2014, our standard commercial lines policies averaged an estimated pricepricing change that increased in a low- to mid-single-digitnear the high end of the low-single-digit range, an improvement compared with a mid-single-digit range in both 2013 and 2012. The average pricing change for policies renewed during 2011 was slightly positive, price change duringnear the third quarterlow end of 2011 and a first-half 2011 negative price change in the low-single-digit range. For policies renewed during both 2010 and 2009, the typical pricing change was a decline, on average, in the low-single-digit range, representing an improvement fromrange. Our average commercial lines pricing change includes the flat pricing effect of certain coverages within package policies written for a three-year term that were in force but did not expire during the period being measured. Therefore, the average commercial lines pricing change we report reflects a blend of policies that did not expire and other policies that did expire during the measurement period.


Cincinnati Financial Corporation - 2014 10-K - Page 67


For only those commercial lines policies that did expire and were then renewed during 2014, we estimate that the average price increase was in the mid-single-digit range, slightly lower than in 2013, with smaller commercial property policies again experiencing average pricing decline experienced in 2008. Consistent with several commercial lines industry pricing surveys in recent years,renewal price percentage increases near the upper end of the high-single-digit range. During 2014, we continued to further segment our larger accounts typically experienced more pressure to lower pricing upon renewal. Our smaller accounts sometimes saw little if any premium decrease at renewal. For the last half of 2011, we estimated that 75 percent to 80 percent of our standard commercial lines policies, renewed at flat or higher prices.

While ouremphasizing identification and retention of policies we believed had relatively stronger price adequacy. Conversely, we continued to seek more aggressive renewal terms and conditions on policies we believed had relatively weaker pricing, in turn retaining fewer of those policies. As a result, the average change in commercial lines policy retention rates have remained fairly stablerenewal pricing tended to be lower than in 2013.


In recent years prior to 2011, our agency renewal written premium trends reflectedincluded an unfavorable effect from the effects of economic slowdown ordownturn and slow recovery in various regions. Each year since then, the effect was favorable. Changes in the economy affect insured exposures that directly relate to premium amounts for any given policy. For commercial accounts, we usually calculate initial estimates for general liability premiums based on estimated sales or payroll volume, while we calculate workers’ compensation premiums based on estimated payroll volume. A change in sales or payroll volume generally indicates a change in demand for a business’s goods or services, as well as a change in its exposure to risk. Policyholders who experience sales or payroll volume changes due to economic factors may also have other exposures requiring insurance, such as commercial auto or commercial property, in addition to general liability and workers’ compensation.property. Premium levels for these other types of coverages generally are not linked directly to sales or payroll volumes.

Premiums resulting from audits of actual sales or payrolls that confirmed or adjusted initial premium estimates significantly affectedhave had a mixed effect on premium trends in recent years. On an earned premium basis for our commercial lines insurance segment, audits contributed $46$5 million ofto the $43$220 million earned premiums increase in 2011 and $152014, negative $3 million of the $45$253 million earned premiums decreaseincrease in 2010.2013 and $35 million of the $186 million earned premiums increase in 2012. On a net written premium basis, audits contributed $34$9 million of the $63$162 million net written premiums increase in 2011 and $232014, $12 million of the $26$301 million net written premiums decreaseincrease in 2010.

Cincinnati Financial Corporation – 2011 10-K - 58
2013 and $30 million of the $241 million net written premiums increase in 2012.

In 2011,2014, our commercial lines new business premiums written by our agencies grew 6decreased 8 percent reversing theor $31 million, compared with 2013. Commercial lines new business declinepremiums written rose 11 percent in 2013 to a record-high amount of 3 percent$391 million. In 2014, our workers' compensation line of business decreased by $18 million, reflecting strong competition in the marketplace and accounting for 2010.much of the $31 million commercial lines decrease. For new business, our field associates are frequently in our agents’ offices helping toto: help judge the quality of each account, emphasizingaccount; emphasize the Cincinnati value proposition, callingproposition; call on sales prospects with those agents,agents; carefully evaluatingevaluate risk exposureexposure; and providingprovide their best quotes. Some of our new business comes from accounts that are not new to the agent. We believe these seasoned accounts tend to be priced more accurately than business that may be less familiaris new to our agent in cases where it was recently obtained from a competing agent.us and the agency. As we appoint new agencies who choose to move accounts to us, we report these accounts as new business to us.

New business premium volume in recent years has been significantly influenced by new agency appointments. All agencies newly appointed since the beginning of 2010 generated2013 produced commercial lines new business written premiums of $34$24 million during 2011,2014, up $26$17 million from 2010,what they produced during 2013, while all other agencies contributed the remaining $273$336 million, which was down 3 percent.

Many$48 million from the $384 million they produced in 2013.

Other written premiums – primarily premiums ceded to our reinsurers as part of the recently appointed agencies areour reinsurance program – in five states we entered since 2008: Texas, Colorado, Connecticut, Oregon and Wyoming. Those states accounted for 11 percent of the $307total reduced our 2014 commercial lines net written premiums by $14 million 2011 new business volume. On amore than in 2013. A decrease in ceded premiums contributed $19 million to net written premium basis, agencies in those states contributed $69 million of commercial lines volume during 2011, up $29 million from 2010. New states represent significant potentialgrowth for long-term premium growth. Based on our history of appointing new agencies, we generally earn a 10 percent share of an agency’s business within 10 years of its appointment.

The table below summarizes agents’ contribution to our commercial lines new business and net written premiums for the five states we entered since 2008. Net written premiums are earned over the term covered by insurance policies and are an important leading indicator of earned premium revenue trends.

  Year  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) Entered  2011  2010  2009  Change %  Change % 
New business written premiums:                        
Texas  2008  $20  $19  $11   5   73 
Colorado  2009   7   8   1   (13)  700 
Connecticut  2010   2   -   -   nm   nm 
Oregon  2010   3   -   -   nm   nm 
Wyoming  2009   2   -   -   nm   nm 
Subtotal      34   27   12   26   125 
All other states      273   262   286   4   (8)
Total     $307  $289  $298   6   (3)
                         
Net written premiums:                        
Texas  2008  $46  $30  $11   53   173 
Colorado  2009   15   10   1   50   900 
Connecticut  2010   2   -   -   nm   nm 
Oregon  2010   4   -   -   nm   nm 
Wyoming  2009   2   -   -   nm   nm 
Subtotal      69   40   12   73   233 
All other states      2,149   2,115   2,169   2   (2)
Total     $2,218  $2,155  $2,181   3   (1)

2014, compared with 2013. Other written premiums primarily premiums that are ceded to reinsurers and that lower our net written premiums, hadalso included a significantly greater unfavorable effect in 2011less favorable adjustment for 2014, compared with 2010. The $40 million change was driven by additional ceded premiums2013, for our property catastrophe reinsurance treaty, $24 million for reinstatement premiums following two large catastrophe events during 2011 and $14 million for the third and fourth event cover that was discussed in Consolidated Property Casualty Insurance Results of Operations, Page 51. For estimated direct written premiums of policies in effect but not yet processed, 2011 had a less favorableprocessed. This written premium adjustment and 2010 had a more favorable adjustment, both compared with the prior year. The adjustment for estimated premiums had an immaterial effect on earned premiums.

Cincinnati Financial Corporation – 2011 10-K - 59

Commercial Lines Insurance Loss and Loss Expenses

Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. Most of the incurred losses and loss expenses shown in the commercial lines insurance segment three-year highlights table on Page 57 are for the respective current accident years, andwith reserve development on prior accident years is shown separately. Since less than half of our consolidated property casualtycommercial lines insurance segment current accident year incurred losses and loss expenses represents net paid losses,amounts, the majority represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously

Cincinnati Financial Corporation - 2014 10-K - Page 68


reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 79.264.1 percent accident year 20102013 loss and loss expense ratio reported as of December 31, 2010,2013, developed favorably by 6.91.2 percentage points to 72.362.9 percent due to claims settling claims for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2011.2014. Accident years 20102013 and 20092012 for the commercial lines insurance segment have both developed favorably, as indicated by the progression over time for the ratios in the table.

(Dollars in millions)                  
Accident year loss and loss expenses incurred and ratios to earned premiums:            
Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $1,804  $1,557  $1,467   82.1%  72.3%  66.7%
as of December 31, 2010      1,706   1,485       79.2   67.5 
as of December 31, 2009          1,662           75.5 

(Dollars in millions)            
Accident year loss and loss expenses incurred and ratios to earned premiums:     
Accident year: 2014 2013 2012 2014 2013 2012
as of December 31, 2014 $1,869
 $1,658
 $1,639
 65.5% 62.9% 68.8%
as of December 31, 2013  
 1,691
 1,646
  
 64.1
 69.1
as of December 31, 2012  
  
 1,712
  
  
 71.8
             
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, of Operations, Page 51, explain much of the movement in current accident year loss and loss expense ratios amongfor accident years 20092012 through 2011.2014. Catastrophe losses added 10.34.8 percentage points for 2011, 4.7in 2014, 4.3 points for 2010in 2013 and 3.08.9 points for 2009in 2012 to the respective commercial lines current accident year loss and loss expense ratios in the table above.

The trend for our commercial lines current accident year loss and loss expense ratio before catastrophe losses over the past three years included unique items for 2011 discussed below, in addition to normal loss cost inflation and higher pricing.

The 71.860.7 percent ratio for current accident year loss and loss expenses before catastrophe losses for 2011 declined 2.72014 rose 0.9 percentage points compared with the 74.559.8 percent accident year 20102013 ratio measured as of December 31, 2010. The effect2013. Noncatastrophe weather losses, noted above, accounted for much of the $24 million ceded to reinstate coverage layers of our property catastrophe reinsurance treaty increased the 2011 ratio by 0.8 percentage points. Large losses, described below,increase and the corresponding ratios for new losses above $250,000 caused a 1.9 percentage-point rise in the 2011 ratio. The refined line of business allocation process for loss expenses reduced the 2011 ratio by approximately 3 percentage points. We believe the remainder of the reduction is largely due tohelped offset favorable effects from initiatives to improve pricing precision and loss experience related to claims and loss control practices, somewhat offset by normal loss cost inflation.

practices. Large losses, described below, and the corresponding ratios for new losses above $1 million, contributed a 0.3 percentage-point increase to the 2014 ratio.

Commercial lines reserve development on prior accident years of $57 million in 2014 continued to net to a favorable amount, but represented a smaller benefit than the $95 million recognized in 2011, as $2342013. The $38 million was recognized, somewhat lower than $269decrease in 2014 included $74 million in 2010.from our commercial casualty line of business. More than 9585 percent of our commercial lines reserve net favorable development on prior accident years recognized during 20112014 occurred in our workers’ compensation line of business. Favorable development recognized during 2013 and 2012 was mostly from our commercial casualty and workers’ compensation lines of business, with a slight majority occurring in the commercial casualty. Development recognized during 2009 and 2010 was mostly from our commercial casualty line of business. Development by line of business and other trends for commercial lines loss and loss expenses and the related ratios are further analyzed in Commercial Lines of Business Analysis beginning on Page 62, and in Commercial LinesLiquidity and Capital Resources, Property Casualty Insurance Segment Development of Estimated Reserves by Accident Year,Year.

Cincinnati Financial Corporation - 2014 10-K - Page 93.

69
Cincinnati Financial Corporation – 2011 10-K - 60


Commercial Lines Insurance Losses by Size

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
New losses greater than $4,000,000 $56  $44  $52   27   (15)
New losses $1,000,000-$4,000,000  148   120   130   23   (8)
New losses $250,000-$1,000,000  156   148   164   5   (10)
Case reserve development above $250,000  187   164   245   14   (33)
Total large losses incurred  547   476   591   15   (19)
Other losses excluding catastrophe losses  517   587   565   (12)  4 
Catastrophe losses  223   89   54   151   65 
Total net losses incurred $1,287  $1,152  $1,210   12   (5)
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
New losses greater than $4,000,000  2.6%  2.0%  2.4%  0.6   (0.4)
New losses $1,000,000-$4,000,000  6.7   5.6   5.9   1.1   (0.3)
New losses $250,000-$1,000,000  7.1   6.9   7.5   0.2   (0.6)
Case reserve development above $250,000  8.5   7.6   11.2   0.9   (3.6)
Total large loss ratio  24.9   22.1   27.0   2.8   (4.9)
Other losses excluding catastrophe losses  23.5   27.3   25.7   (3.8)  1.6 
Catastrophe losses  10.2   4.1   2.5   6.1   1.6 
Total net loss ratio  58.6%  53.5%  55.2%  5.1   (1.7)

(Dollars in millions, net of reinsurance) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Current accident year losses greater than $5,000,000 $30
 $23
 $22
 30
 5
Current accident year losses $1,000,000-$5,000,000 149
 132
 117
 13
 13
Large loss prior accident year reserve development 7
 36
 15
 (81) nm
Total large losses incurred 186
 191
 154
 (3) 24
Losses incurred but not reported 90
 125
 (7) (28) nm
Other losses excluding catastrophe losses 1,096
 923
 841
 19
 10
Catastrophe losses 114
 93
 187
 23
 (50)
Total losses incurred $1,486
 $1,332
 $1,175
 12
 13
           
Ratios as a percent of earned premiums:  
  
  
 Pt. Change Pt. Change
Current accident year losses greater than $5,000,000 1.0% 0.9% 0.9 % 0.1
 0.0
Current accident year losses $1,000,000-$5,000,000 5.2
 5.0
 4.9
 0.2
 0.1
Large loss prior accident year reserve development 0.3
 1.4
 0.6
 (1.1) 0.8
Total large loss ratio 6.5
 7.3
 6.4
 (0.8) 0.9
Losses incurred but not reported 3.1
 4.8
 (0.2) (1.7) 5.0
Other losses excluding catastrophe losses 38.4
 35.0
 35.3
 3.4
 (0.3)
Catastrophe losses 4.0
 3.5
 7.8
 0.5
 (4.3)
Total loss ratio 52.0% 50.6% 49.3 % 1.4
 1.3
           
In 2011,2014, total large losses incurred increaseddecreased by $71$5 million or 153 percent, net of reinsurance, helping to raise thereinsurance. The corresponding ratio by 2.8decreased 0.8 percentage points. The majority2014 decreases on both a dollar and ratio basis were largely due to lower amounts for our workers' compensation line of the increase was forbusiness and were somewhat offset by higher incurredlarge losses for firesour commercial casualty and commercial auto claims.property lines of business. In 20102013, the total large losses incurred ratio was lowerhigher than it was in 2009,2012, primarily due to lower incurredhigher large losses for general liability coverages largely included in our commercial casualty line of business.property. Our analysis indicated no unexpected concentration of these losses and reserve increases by geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.

Commercial Lines Insurance Underwriting Expenses

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Commission expenses $415  $391  $408   6   (4)
Other underwriting expenses  300   299   294   0   2 
Policyholder dividends  16   14   17   14   (18)
Total underwriting expenses $731  $704  $719   4   (2)
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Commission expenses  18.9%  18.2%  18.6%  0.7   (0.4)
Other underwriting expenses  13.7   13.8   13.3   (0.1)  0.5 
Policyholder dividends  0.7   0.7   0.8   0.0   (0.1)
Total underwriting expense ratio  33.3%  32.7%  32.7%  0.6��  0.0 

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Commission expenses $526
 $492
 $442
 7
 11
Other underwriting expenses 360
 349
 328
 3
 6
Policyholder dividends 16
 16
 16
 0
 0
Total underwriting expenses $902
 $857
 $786
 5
 9
Ratios as a percent of earned premiums:  
  
  
 Pt. Change Pt. Change
Commission expense 18.4% 18.7% 18.6% (0.3) 0.1
Other underwriting expense 12.7
 13.2
 13.7
 (0.5) (0.5)
Policyholder dividends 0.5
 0.6
 0.7
 (0.1) (0.1)
Total underwriting expense ratio 31.6% 32.5% 33.0% (0.9) (0.5)
           
Commercial lines commission expenses as a percent of earned premiumpremiums were slightly lower in 2014, compared with 2013. The ratio increased slightly during 2011, in part due to higher agency profit-sharing commissions. Although the commercial lines segment had an underwriting loss in 2011,2013, compared with a small underwriting profit in 2010, the agencies that earned profit-sharing commissions2012. The 2014 and 2013 ratios for their commercial lines business did so at a higher aggregate amount in 2011.

Otherother underwriting expenses for 2011 and the corresponding ratio was essentially flat compared with the 2010 level.

Cincinnati Financial Corporation – 2011 10-K - 61
each decreased by 0.5 percentage points, as earned premiums grew faster than expenses.


Cincinnati Financial Corporation - 2014 10-K - Page 70


Commercial Lines of Business Analysis

Approximately 95 percent of our commercial lines premiums relate to accounts with coverages from more than one of our business lines. As a result, we believe that the commercial lines insurance segment is best measured and evaluated on a segment basis. However, we provide line-of-business data to analyze growth and profitability trends separately for each line. The accident year loss data provides current estimates of incurred loss and loss expenses and corresponding ratios over the most recent three accident years. Accident year data classifies losses according to the year in which the corresponding loss events occur, regardless of when the losses are actually reported, recorded or paid.

For 2011,2014, commercial casualty, our largest line of business with earned premiums representing over 30 percent of earned premiums for our commercial lines insurance segment, earned premiums, continued to be very profitable, based on the total loss and loss expense ratio. Commercial property and specialty packages had 2011auto, representing approximately 18 percent of earned premiums for our commercial lines insurance segment, was the only commercial line of business with a 2014 total loss and loss expense ratiosratio significantly higher than we desired, largely due to unusually high weather-related losses in 2011.desired. As discussed below, we are taking actions to improve commercial auto pricing and reduce loss costs to benefit future profitability trends. The executive risk portion of bond and executive risk continues to experience effects from the U.S. credit crisis of 2008, as most of our prior accident year claims related to financial institution liability developed unfavorably. Since the credit crisis, many of our financial institution policies have been non-renewed, reducing exposure for this portion of our bond and executive risk business. Profitability trends for workers’ compensation continued to improve, reflecting what we believe are the results of initiatives to improve pricing and reduce loss costs.


Commercial Casualty

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Commercial casualty:                    
Net written premiums $710  $686  $704   3   (3)
Earned premiums  711   693   712   3   (3)
Loss and loss expenses from:                    
Current accident year before catastrophe losses  496   555   542   (11)  2 
Current accident year catastrophe losses  0   0   0   nm   nm 
Prior accident years before catastrophe losses  (132)  (186)  (154)  29   (21)
Prior accident years catastrophe losses  0   0   0   nm   nm 
Total loss and loss expenses $364  $369  $388   (1)  (5)
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Current accident year before catastrophe losses  69.7%  80.1%  76.2%  (10.4)  3.9 
Current accident year catastrophe losses  0.0   0.0   0.0   0.0   0.0 
Prior accident years before catastrophe losses  (18.5)  (26.9)  (21.6)  8.4   (5.3)
Prior accident years catastrophe losses  0.0   0.0   0.0   0.0   0.0 
Total loss and loss expense ratio  51.2%  53.2%  54.6%  (2.0)  (1.4)

Accident year loss and loss expenses incurred and ratios to earned premiums:

Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $496  $438  $449   69.7%  63.2%  63.1%
as of December 31, 2010      555   437       80.1   61.4 
as of December 31, 2009          542           76.2 

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Written premiums $969
 $897
 $793
 8
 13
Earned premiums 938
 856
 767
 10
 12
           
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Current accident year before catastrophe losses 59.4% 56.0 % 64.1 % 3.4
 (8.1)
Current accident year catastrophe losses —
 —
 —
 0.0
 0.0
Prior accident years before catastrophe losses 0.5
 (8.2) (23.1) 8.7
 14.9
Prior accident years catastrophe losses —
 —
 —
 0.0
 0.0
Total loss and loss expense ratio 59.9% 47.8 % 41.0 % 12.1
 6.8
           

Commercial casualty is our largest line of business and has in recent years maintainedexperienced a very satisfactory total loss and loss expense ratio.ratio for many years. Premium growth trends for 2011 reversed compared with 2010,continued in 2014, largely reflecting the slowly improving economy in additiondue to higher pricing.pricing and an increase in premiums from audits that confirmed or adjusted initial premium estimates. Premium growth in 2013 was largely due to the same factors as in 2014, plus help from new business written premiums that increased more than 15 percent.

The 2014 total loss and loss expense ratio rose 12.1 percentage points, primarily due to the absence of a benefit from favorable development on prior accident year reserves. As discussed above in the commercial lines insurance premiumsoverview section of Commercial Lines Insurance Results, of Operations, on Page 58, economic trends cause corresponding changes in underlying insured exposures, including general liability coverage where the premium amount is heavily influenced by economically-driven measures of risk exposure such as sales volume. Slowly improving economic factors during 2011 helped increaseour commercial casualty net written and earned premiums, including favorable effects for premiums from audits. Also during 2011, our underwriters began full use of predictive modeling tools for general liability coveragesline experienced a 1.6 point increase in our commercial package accounts, and we believe such tools are improving our pricing precision.

The 2011 totalits paid loss and loss expense ratio improved, primarily due to the lower currentfor cumulative accident yearyears three or more years old, resulting in a significant increase in estimates for IBNR losses and loss expenses and higher earned premiums. Favorable development onfor all prior accident year reserves continuedyears in 2011total. This line of business experienced favorable reserve development in 2013 at a significantsatisfactory level, reflecting favorable loss emergence trends and a further moderationthough less than in 2012. Moderation in loss cost trends, particularly for umbrella liability coverage included in many commercial package accounts.accounts, had a larger than usual effect in 2012. Development trends are further discussed in Commercial LinesLiquidity and Capital Resources, Property Casualty Insurance Segment Development of Estimated Reserves by Accident Year,Year.



Cincinnati Financial Corporation - 2014 10-K - Page 93.

The 2011 current accident year loss and loss expense ratio before catastrophe losses improved by 10.4 percentage points compared with accident year 2010, largely reflecting higher earned premiums from improving economic trends and pricing that offset normal loss cost inflation. In addition, the refined line of business allocation process for loss expenses reduced the 2011 ratio by approximately 4 percentage points.

71
Cincinnati Financial Corporation – 2011 10-K - 62


Commercial Property

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Commercial property:                    
Net written premiums $512  $497  $485   3   2 
Earned premiums  497   489   485   2   1 
Loss and loss expenses from:                    
Current accident year before catastrophe losses  309   286   257   8   11 
Current accident year catastrophe losses  146   75   42   95   79 
Prior accident years before catastrophe losses  (21)  (3)  (5)  (600)  40 
Prior accident years catastrophe losses  3   (7)  (11)  nm   36 
Total loss and loss expenses $437  $351  $283   25   24 
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Current accident year before catastrophe losses  62.1%  58.4%  53.1%  3.7   5.3 
Current accident year catastrophe losses  29.4   15.4   8.8   14.0   6.6 
Prior accident years before catastrophe losses  (4.1)  (0.6)  (1.1)  (3.5)  0.5 
Prior accident years catastrophe losses  0.7   (1.4)  (2.2)  2.1   0.8 
Total loss and loss expense ratio  88.1%  71.8%  58.6%  16.3   13.2 

Accident year loss and loss expenses incurred and ratios to earned premiums:

Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $455  $352  $287   91.5%  72.0%  59.2%
as of December 31, 2010      361   291       73.8   60.2 
as of December 31, 2009          299           61.9 

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Written premiums $776
 $673
 $573
 15
 17
Earned premiums 728
 623
 545
 17
 14
           
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Current accident year before catastrophe losses 51.0 % 50.7 % 46.1 % 0.3
 4.6
Current accident year catastrophe losses 14.3
 14.9
 31.7
 (0.6) (16.8)
Prior accident years before catastrophe losses (2.9) (1.3) (3.1) (1.6) 1.8
Prior accident years catastrophe losses (1.8) (2.3) (1.8) 0.5
 (0.5)
Total loss and loss expense ratio 60.6 % 62.0 % 72.9 % (1.4) (10.9)
           

Commercial property net written premiums and earned premiums for 2011 rose significantly in both 2014 and 2013, largely due to improvinghigher pricing, trends.

rising insured exposures and migrating certain polices formerly in our other commercial lines category. That ongoing migration pertains to property coverages in CinciPakTM, a newer program designed to replace many of our former specialty products. Premium growth initiatives had a significant effect in 2013, as new business written premiums increased nearly 15 percent.


The 2011 total loss and loss expense ratio rose 16.3improved 1.4 percentage points in 2014, compared with 2013, primarily due to more favorable development on prior accident year reserves before catastrophe losses. Higher pricing and profit improvement initiatives described below contributed to the ratio improvement, but were somewhat offset by a 16.12.9 percentage point increase in catastrophe losses. In addition, the ratio increased 5.2 percentage points from higher large losses related to fires, and it also rose from other weather-related losses that were not identified as part of designated catastrophe events for the property casualty industry, typically referred to as non-catastrophenoncatastrophe weather losses. The effect of the $13 million ceded to reinstate coverage layers of our property catastrophe reinsurance treaty increased the 2011 ratio by 2.2 percentage points. The refined line of business allocation process for loss expenses reduced the 2011 total loss and loss expense ratio by 3.5improved 10.9 percentage points and also had the effect of decreasing the ratio for current accident year beforein 2013, compared with 2012, primarily due to lower catastrophe losses.

The 2011 current accident year


In addition to ongoing improvements in pricing precision and segmentation, we believe our property loss and loss expense ratio before catastrophe losses also rose, compared with accident year 2010, largelyimprovement is in part due to higher large losses from firesincreased use of property inspections and similar loss control efforts. More specialization among selected claims associates and increased losses from non-catastrophe weather. In 2011, we began full use of predictive modeling tools for property coverages in our commercial package accounts to improve our pricing precision. We also increased ourhigher minimum loss control staff,deductible amounts, including more specialization in the areas of conducting property inspections for both newper-building and renewal business. We believe these initiatives will improve profitability over time.

Commercial Auto

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Commercial auto:                    
Net written premiums $405  $385  $388   5   (1)
Earned premiums  394   384   394   3   (3)
Loss and loss expenses from:                    
Current accident year before catastrophe losses  294   269   273   9   (1)
Current accident year catastrophe losses  7   4   3   75   33 
Prior accident years before catastrophe losses  (27)  (32)  (20)  16   (60)
Prior accident years catastrophe losses  0   (1)  0   nm   nm 
Total loss and loss expenses $274  $240  $256   14   (6)
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Current accident year before catastrophe losses  74.5%  70.0%  69.2%  4.5   0.8 
Current accident year catastrophe losses  1.9   1.1   0.7   0.8   0.4 
Prior accident years before catastrophe losses  (6.9)  (8.2)  (5.0)  1.3   (3.2)
Prior accident years catastrophe losses  (0.2)  (0.3)  0.0   0.1   (0.3)
Total loss and loss expense ratio  69.3%  62.6%  64.9%  6.7   (2.3)

Accident year loss and loss expenses incurred and ratios to earned premiums:

Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $301  $259  $246   76.4%  67.5%  62.5%
as of December 31, 2010      273   253       71.1   64.2 
as of December 31, 2009          276           69.9 

Cincinnati Financial Corporation – 2011 10-K - 63

Net written premiums and earned premiums for commercial auto were up in 2011, partly from improving pricing trends. Commercial auto is one of the business lines that we renew and price annually, so market trends may be reflected for this line of business sooner than for some other commercial lines. Higher new business written premiums from agencies accounted for $7 million of the $20 million increase in net written premiums.

The 2011 total loss and loss expense ratio rose 6.7 percentage points, largely due to a 3.6 point increase from higher large losses. The refined line of business allocation process for loss expenses contributed 1.7 percentage points to the 2011 total loss and loss expense ratio andwind or hail deductibles, also contributed to the increase in the ratio for the current accident year before catastrophe losses.

The 2011 current accident year loss and loss expense ratio before catastrophe losses rose 4.5 percentage points, compared with accident year 2010, primarily due to a rise in loss cost trends that might relate to the improving economy, combined with pricing that improved more slowly. Non-catastrophe weather losses also had a slight adverse effect on the ratio.

Workers’ Compensation

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Workers' compensation:                    
Net written premiums $312  $310  $323   1   (4)
Earned premiums  318   311   326   2   (5)
Loss and loss expenses from:                    
Current accident year before catastrophe losses  307   331   355   (7)  (7)
Current accident year catastrophe losses  0   0   0   nm   nm 
Prior accident years before catastrophe losses  (97)  (39)  48   (149)  nm 
Prior accident years catastrophe losses  0   0   0   nm   nm 
Total loss and loss expenses $210  $292  $403   (28)  (28)
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Current accident year before catastrophe losses  96.6%  106.5%  108.8%  (9.9)  (2.3)
Current accident year catastrophe losses  0.0   0.0   0.0   0.0   0.0 
Prior accident years before catastrophe losses  (30.5)  (12.6)  14.7   (17.9)  (27.3)
Prior accident years catastrophe losses  0.0   0.0   0.0   0.0   0.0 
Total loss and loss expense ratio  66.1%  93.9%  123.5%  (27.8)  (29.6)

Accident year loss and loss expenses incurred and ratios to earned premiums:

Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $307  $299  $283   96.6%  96.3%  86.7%
as of December 31, 2010      331   302       106.5   92.4 
as of December 31, 2009          355           108.8 

Cincinnati Financial Corporation – 2011 10-K - 64
improvement of those ratios.

Workers’ compensation

Commercial Auto
(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Written premiums $548
 $507
 $444
 8
 14
Earned premiums 528
 479
 426
 10
 12
           
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Current accident year before catastrophe losses 68.7 % 67.8 % 70.7 % 0.9
 (2.9)
Current accident year catastrophe losses 0.9
 0.7
 1.3
 0.2
 (0.6)
Prior accident years before catastrophe losses 7.4
 0.4
 (0.1) 7.0
 0.5
Prior accident years catastrophe losses (0.1) (0.2) (0.2) 0.1
 0.0
Total loss and loss expense ratio 76.9 % 68.7 % 71.7 % 8.2
 (3.0)
           

Commercial auto net written premiums and earned premiums rose in 2011 as2014 and 2013, largely due to higher pricing offset a $3 million reduction in newboth years. New business written premiums that reflected particularly cautious risk selection. As discussedrose nearly 15 percent in the commercial lines insurance premiums section of Commercial Lines Insurance Results of Operations, on Page 58, economic trends cause corresponding changes in underlying insured exposures, including workers’ compensation coverage where the2013, reflecting premium amount is heavily influenced by economically-driven measures of risk exposure such as payroll volume. Slowly improving economic factors during 2011 helped increase net written and earned premiums, including favorable effects from premiums resulting from audits.

growth initiatives.


The 20112014 total loss and loss expense ratio was 27.8rose 8.2 percentage points lower, reflecting both higher favorablein 2014, compared with 2013. That increase was largely due to an increase of 7.0 points in unfavorable development on prior accident year reserves before catastrophe losses, including 4.7 points attributable to case incurred experience on known claims and 2.3 points attributable to IBNR reserves. As part of the U.S. economic recession of a few years ago, slowing business activity influenced our estimates of reserves for ultimate losses and loss expenses during that period. As the economy slowly recovered, we believe we were slow to recognize some of the higher loss cost effects in current accident

Cincinnati Financial Corporation - 2014 10-K - Page 72


year reserve estimates for at least part of that period. As claims that occurred during that period have become more mature, paid and reported loss cost trends resulted in us increasing our reserve estimates for claims that have not yet been settled. The 2013 ratio improved, compared with 2012, primarily due to a lower ratio for current accident year losses and loss expenses. We believe that reflected better pricing precision and other initiatives to improve profitability.

During 2013 and 2014, a multi-department, multi-disciplinary taskforce studied and began implementing initiatives to improve our commercial auto profitability, similar to the approach we used to improve workers’ compensation results. Important initiatives include additional education for underwriting associates and more focus on factors to improve pricing precision. These factors include improving premium rate classification and using other rating variables in risk selection and pricing, plus further automating collection of key rating variables.
Workers’ Compensation
(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Written premiums $365
 $374
 $341
 (2) 10
Earned premiums 370
 365
 344
 1
 6
           
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Current accident year before catastrophe losses 77.8 % 78.0 % 83.0 % (0.2) (5.0)
Current accident year catastrophe losses —
 —
 —
 0.0
 0.0
Prior accident years before catastrophe losses (13.9) (3.9) (21.5) (10.0) 17.6
Prior accident years catastrophe losses —
 —
 —
 0.0
 0.0
Total loss and loss expense ratio 63.9 % 74.1 % 61.5 % (10.2) 12.6
           

Workers’ compensation net written premiums decreased in 2014, while earned premiums rose slightly. Both increased in 2013. Average renewal pricing rose in both 2014 and 2013, but an $18 million decrease in new business written premiums in 2014 offset the effect of price increases, netting to the decrease in net written premiums. New business written premiums contributed nearly half of the increase in 2013 net written premiums.

The refined line of business allocation process for loss expenses reduced the 20112014 total loss and loss expense ratio by 11.5 percentage points and also had the effect of decreasing the ratio for current accident year before catastrophe losses.

The 2011 current accident year loss and loss expense ratio declined 9.9 percentage pointsimproved compared with accident year 2010, estimated as of December 31, 2010. In addition2013, primarily due to themore benefit from favorable effect of the refined line of business allocation process for loss expenses, the loss portion of the ratio improved, reflecting initiatives begun early in 2010 as discussed below.

Favorable development on prior accident year reserves rose in 2011, primarily due to more favorable trends in loss payments as well as case reserves. The indicated calendar year trend for future loss payments has decreased slightly, but such decreases have a leveraged effect on less mature accident years. Development trends are further discussed in Commercial Lines Insurance Segment Development of Estimated Reserves by Accident Year, Page 93.

Since we pay a lower commission rate on workers’ compensation business, relative to our other commercial lines of business, this line has a higher calendar year loss and loss expense breakeven point than our other commercial business lines. The ratio was at an unprofitable level in recent years, and management continues to work to improve financial performance for this line. We believe variousour workers' compensation results continue to reflect ongoing benefits of profit improvement initiatives that began in recent years contributed to the improved profitability trend since 2009.

During 2009, we beganincluding using a predictive modeling tool to improve risk selection and pricing adequacy. Predictive modeling increases precision, and thereby facilitates adequate pricing so that our agents can better compete for the most desirable workers’ compensation business. In 2010, we also added to ouradding staff of loss control field representatives, premium audit field representatives and field claims representatives specializing in workers’ compensation risks. In early 2010, we implementedrisks and direct reporting of workers’ compensation claims, allowingclaims. Direct reporting allows us to quickly obtain detailed information from policyholders to promptly assign the appropriate level of claims handling expertise to each case. Obtaining more information sooner for specific claims allows for medical care appropriate to the nature of each injury, benefiting injured workers, employers and agents while ultimately lowering overall loss costs.

In addition, our medical provider bill review process continues to provide significant savings compared with initial charges by providers.


The 2013 total loss and loss expense ratio rose, compared with 2012, reflecting less benefit from favorable development on prior accident year reserves. Reserves were added during 2013 for older, pre-2009 accident years, reflecting paid loss data indicating it is taking longer to pay out older claims. Because some open workers’ compensation claims extend beyond 30 years, a small assumption change for the average life of a claim can add up to a considerable reserve amount recognized in any given period.

Development trends are further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year. The workers’ compensation business line includes our longest tail exposures, making initial estimates of accident year loss and loss expenses incurred more uncertain. Due to the lengthy payout period of workers’ compensation claims, small shifts in medical cost inflation and payout periods could have a significant effect on our potential future liability compared with our current projections.

Cincinnati Financial Corporation – 2011 10-K - 65

Specialty Packages

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Specialty packages:                    
Net written premiums $137  $149  $148   (8)  1 
Earned premiums  138   149   147   (7)  1 
Loss and loss expenses from:                    
Current accident year before catastrophe losses  98   91   84   8   8 
Current accident year catastrophe losses  72   22   21   227   5 
Prior accident years before catastrophe losses  6   2   1   200   100 
Prior accident years catastrophe losses  (1)  (4)  (1)  75   (300)
Total loss and loss expenses $175  $111  $105   58   6 
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Current accident year before catastrophe losses  70.9%  61.1%  56.9%  9.8   4.2 
Current accident year catastrophe losses  51.8   14.5   14.2   37.3   0.3 
Prior accident years before catastrophe losses  3.9   1.8   0.3   2.1   1.5 
Prior accident years catastrophe losses  (0.6)  (2.6)  (0.8)  2.0   (1.8)
Total loss and loss expense ratio  126.0%  74.8%  70.6%  51.2   4.2 

Accident year loss

Cincinnati Financial Corporation - 2014 10-K - Page 73


Other Commercial Lines
(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Written premiums $264
 $309
 $308
 (15) 0
Earned premiums 292
 313
 301
 (7) 4
           
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Current accident year before catastrophe losses 53.4 % 55.3 % 56.8 % (1.9) (1.5)
Current accident year catastrophe losses 9.2
 5.8
 11.0
 3.4
 (5.2)
Prior accident years before catastrophe losses (4.8) 3.8
 (2.3) (8.6) 6.1
Prior accident years catastrophe losses (0.7) (0.6) (2.3) (0.1) 1.7
Total loss and loss expense ratio 57.1 % 64.3 % 63.2 % (7.2) 1.1
           

Other commercial lines includes policies with various insurance coverages, including various specialty packages designed for certain classes of business. Also included are policies providing management liability or surety coverages, in addition to policies with specific coverages for machinery and loss expenses incurred and ratiosequipment. In recent years prior to earned premiums:

Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $170  $114  $106   122.7%  76.7%  71.9%
as of December 31, 2010      113   105       75.6   71.1 
as of December 31, 2009          105           71.1 

Specialty packages net2014, we separately reported more detailed results for these various types of policies.


Net written premiums and earned premiums were downfor our other commercial lines decreased in 2011, primarily2014, driven by a decrease in our specialty packages policies. Premiums for specialty packages decreased largely due to ceded premiumsthe introduction of CinciPak, a newer program designed to reinstate coverage layersreplace many of our specialty products. Premiums for CinciPak are included in our commercial casualty or commercial property catastrophe reinsurance treaty.

lines of business.


The 2011 total loss and loss expense ratio rose 51.2 percentage pointsfor other commercial lines improved in 2014, compared with 2013. The 2014 improvement was primarily due to a 39.3 point increase in catastrophe losses. It also rosemore benefit from other weather-related losses that were not identified as part of designated catastrophe events for the property casualty industry, typically referred to as non-catastrophe weather losses. The effect of the $10 million in premiums ceded to reinstate coverage layers of our property catastrophe reinsurance treaty increased the 2011 ratio by 8.4 percentage points.

The 2011 current accident year loss and loss expense ratio before catastrophe losses also increased, compared with accident year 2010, largely due to non-catastrophe weather and the effects of reinstatement premiums. In 2011 we began full use of predictive modeling tools for auto, general liability and property coverages for some commercial package accounts included in specialty packages. We believe these pricing analytics tools will improve our pricing precision and our loss ratios over time. By late 2012 we expect to be using predictive modeling tools to improve our pricing precision for certain additional business policies included in our specialty packages line of business. We also increased our loss control staff, including more specialization in the areas of conducting property inspections for both new and renewal business. We believe these initiatives will improve profitability over time.

Surety and Executive Risk

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Surety and executive risk:                    
Net written premiums $104  $93  $101   12   (8)
Earned premiums  103   95   104   8   (9)
Loss and loss expenses from:                    
Current accident year before catastrophe losses  65   64   76   2   (16)
Current accident year catastrophe losses  0   0   0   nm   nm 
Prior accident years before catastrophe losses  34   3   (3)  nm   nm 
Prior accident years catastrophe losses  0   0   0   nm   nm 
Total loss and loss expenses $99  $67  $73   48   (8)
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Current accident year before catastrophe losses  63.7%  66.5%  73.2%  (2.8)  (6.7)
Current accident year catastrophe losses  0.0   0.0   0.0   0.0   0.0 
Prior accident years before catastrophe losses  33.0   3.4   (2.7)  29.6   6.1 
Prior accident years catastrophe losses  0.0   0.0   0.0   0.0   0.0 
Total loss and loss expense ratio  96.7%  69.9%  70.5%  26.8   (0.6)

Accident year loss and loss expenses incurred and ratios to earned premiums:

Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $65  $85  $89   63.7%  88.5%  85.6%
as of December 31, 2010      64   90       66.5   86.7 
as of December 31, 2009          76           73.2 

Cincinnati Financial Corporation – 2011 10-K - 66

Net written premiums and earned premiums for surety and executive risk rose in 2011, partly from a $3 million increase in new business written premiums. In addition, premiums ceded to reinsurers had less of a downward effect on net written premiums and earned premiums in 2011. Ceded premiums were reduced due to better than expected loss experience in recent years, resulting in lower rates charged by reinsurers.

The 2011 total loss and loss expense ratio rose 26.8 percentage points due to a 29.6 point increase from unfavorablefavorable development on prior accident year reserves. IncludedThat ratio rose modestly in the unfavorable development was $13 million or 13.1 percentage points for the refined line of business allocation process for loss expenses. The refined allocation had a negligible effect on the ratio for the current accident year before catastrophe losses. Most of the remainder of unfavorable2013, compared with 2012, when less benefit from favorable development on prior accident year reserves was for four claims frommore than offset lower catastrophe losses. Development on prior accident year 2008, tworeserves was unfavorable in 2013, largely due to experience with our management liability policies. Prior accident year reserve development has been volatile for this business in recent years, reflecting varying loss experience for director and officer liability and two for fidelity bonding duerelated to fraud or lending practices at financial institutions.

The 2011 current accident year loss and loss expense ratio before catastrophe losses improved 2.8 percentage points, compared with accident year 2010, reflecting an improved loss climate for financial institutions. 

We continue to address the potential risk inherent in the financial institutions portionwe insured during the U.S. credit crisis of our surety and executive risk business line as2008. We described how we work with our agents to identify the strongest financial institutions, in addition to using credit rating and other metrics to carefully re-underwrite in-force policies when they are considered for renewal.

We have actively managedmanage the potentially high risk of writing director and officer liability by:

·Marketing primarily to nonprofit organizations, which accounted for approximately 64 percent of the policies and 30 percent of the premium volume for director and officer liability new business written in 2011.
·Closely monitoring our for-profit policyholders – At year-end 2011, our director and officer liability policies in force provided coverage to 15 non-financial publicly traded companies, including two Fortune 1000 companies. We also provided this coverage to approximately 500 banks, savings and loans and other financial institutions. The majority of these financial institution policyholders are smaller community banks, and we believe they have no unusual exposure to credit-market concerns, including subprime mortgages. Based on new policy data or information from the most recent policy renewal, only 10 of our bank and savings and loan policyholders have assets greater than $2 billion; only 23 have assets from $1 billion to $2 billion; and 45 have assets from $500 million to $1 billion.
·Writing on a claims-made basis, which normally restricts coverage to losses reported during the policy term.
·Providing limits no higher than $10 million with facultative or treaty reinsurance in place in 2012 to cover losses greater than $6 million.

Machinery and Equipment

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Machinery and equipment:                    
Net written premiums $38  $35  $32   9   9 
Earned premiums  36   33   31   9   6 
Loss and loss expenses from:                    
Current accident year before catastrophe losses  10   9   9   11   0 
Current accident year catastrophe losses  0   0   0   nm   nm 
Prior accident years before catastrophe losses  1   (2)  (2)  nm   0 
Prior accident years catastrophe losses  0   0   0   nm   nm 
Total loss and loss expenses $11  $7  $7   57   0 
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Current accident year before catastrophe losses  26.9%  28.2%  26.9%  (1.3)  1.3 
Current accident year catastrophe losses  0.1   0.0   0.3   0.1   (0.3)
Prior accident years before catastrophe losses  1.2   (6.0)  (5.8)  7.2   (0.2)
Prior accident years catastrophe losses  0.0   (0.3)  0.2   0.3   (0.5)
Total loss and loss expense ratio  28.2%  21.9%  21.6%  6.3   0.3 

Accident year loss and loss expenses incurred and ratios to earned premiums:

Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $10  $10  $7   27.0%  30.5%  22.7%
as of December 31, 2010      9   7       28.2   23.3 
as of December 31, 2009          9           27.2 

Machinery and equipment premiums continued to rise over the three year period, reflecting our superior service, including experienced local specialists who support agencies in writing this line of business. The total and accident year loss and loss expense ratios remain at profitable levels, although they can fluctuate substantially due to the relatively small size of this business line.

Cincinnati Financial Corporation – 2011 10-K - 67
Item 1, Commercial Lines Insurance Segment.

Commercial Lines Insurance Outlook

Net written premiums for the commercial lines industry, excluding theits mortgage and financial guaranty segments,lines of business, are projected to increase approximately 43 percent in 20122015, with the industry statutory combined ratio estimated at approximately 104100 percent. Over the past several years, renewal and new business pricing has experienced significant competitive pressure, reinforcing the need for more pricing analytics and careful risk selection. While competition remains intense, overallindustrywide commercial lines market pricing turned positive toward the end of 2011 and continued to firm in 2012 and 2013, according to several industry surveys, and averagesurveys. Average renewal pricing for our commercial lines insurance segment also turned positive.generally followed a similar trend. Opinions continue to vary, according to a variety of reports that focus on the commercial lines market, regarding the sustainability of improved pricing. According to A.M. Best, further rate firming in select commercial lines pricing is anticipatedexpected to continue experiencing pressure during 2012, following pricing stabilization during 2011.2015. Despite challenging market conditions, we believe we can manage our business and execute strategic initiatives to offset market pressures to some extent and still profitably grow our commercial lines insurance segment.


While our commercial lines new business written premiums were down in 2014, compared with 2013, we continued to increase pricing. That indicates continued improvement in our book of business. We believe that competition increased somewhat in 2014, compared with the previous few years. For 2015, it remains to be seen how that will play out, despite opinions about generally softening pricing in the commercial lines market.

Cincinnati Financial Corporation - 2014 10-K - Page 74


We intend to continuekeep marketing our products to a broad range of business classes with a package approach, while improvingalso continuing to improve our pricing precision. We intend to maintain our underwriting selectivity and carefully manage our rate levels as well as our programs that seek to accurately match exposures with appropriate premiums. We will continue to evaluate each risk individually and to make decisions about rates, the use of three-year commercial policies and other policy conditions on a case-by-case basis, even in lines and classes of business that are under competitive pressure. We believe that our initiatives to improve pricing precision and lower loss costs will continue to benefit commercial lines profitability during 2012,2015, and that recent-year premium growth initiatives will continue to increase commercial lines premiums.


In Item 1, Our Business and Our Strategy, Strategic Initiatives, Page 10 we discuss the initiatives we are implementing to achieve our corporate performance objectives. We discuss factors influencing future results of our property casualty insurance operations in the Executive Summary,Summary.


Cincinnati Financial Corporation - 2014 10-K - Page 38.

75
Cincinnati Financial Corporation – 2011 10-K - 68


Personal Lines Insurance Results of Operations

Overview – Three-Year Highlights

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Earned premiums $762  $721  $685   6   5 
Fee revenues  1   2   1   (50)  100 
Total revenues  763   723   686   6   5 
                     
Loss and loss expenses from:                    
Current accident year before catastrophe losses  584   508   485   15   5 
Current accident year catastrophe losses  181   63   106   187   (41)
Prior accident years before catastrophe losses  (35)  (29)  (45)  (21)  36 
Prior accident years catastrophe losses  (7)  (5)  5   (40)  nm 
Total loss and loss expenses  723   537   551   35   (3)
Underwriting expenses  221   240   215   (8)  12 
Underwriting loss $(181) $(54) $(80)  (235)  33 

          Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Current accident year before catastrophe losses  76.7%  70.4%  70.9%  6.3   (0.5)
Current accident year catastrophe losses  23.6   8.8   15.4   14.8   (6.6)
Prior accident years before catastrophe losses  (4.5)  (4.1)  (6.6)  (0.4)  2.5 
Prior accident years catastrophe losses  (0.9)  (0.7)  0.7   (0.2)  (1.4)
Total loss and loss expenses  94.9   74.4   80.4   20.5   (6.0)
Underwriting expenses  29.0   33.3   31.4   (4.3)  1.9 
Combined ratio  123.9%  107.7%  111.8%  16.2   (4.1)
                     
Combined ratio:  123.9%  107.7%  111.8%  16.2   (4.1)
Contribution from catastrophe losses and prior years reserve development  18.2   4.0   9.5   14.2   (5.5)
Combined ratio before catastrophe losses and prior years reserve development  105.7%  103.7%  102.3%  2.0   1.4 

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Earned premiums $1,041
 $961
 $868
 8
 11
Fee revenues 2
 1
 2
 100
 (50)
Total revenues 1,043
 962
 870
 8
 11
Loss and loss expenses from:  
  
  
  
  
Current accident year before catastrophe losses 660
 594
 591
 11
 1
Current accident year catastrophe losses 92
 84
 160
 10
 (48)
Prior accident years before catastrophe losses (1) (29) (77) 97
 62
Prior accident years catastrophe losses (11) (10) (22) (10) 55
Total loss and loss expenses 740
 639
 652
 16
 (2)
Underwriting expenses 293
 290
 261
 1
 11
Underwriting profit (loss) $10
 $33
 $(43) (70) nm
           
Ratios as a percent of earned premiums:   ��   Pt. Change Pt. Change
Current accident year before catastrophe losses 63.4 % 61.9 % 68.2 % 1.5
 (6.3)
Current accident year catastrophe losses 8.8
 8.8
 18.4
 0.0
 (9.6)
Prior accident years before catastrophe losses (0.1) (3.0) (8.9) 2.9
 5.9
Prior accident years catastrophe losses (1.0) (1.1) (2.5) 0.1
 1.4
Total loss and loss expense 71.1
 66.6
 75.2
 4.5
 (8.6)
Underwriting expense 28.1
 30.2
 30.1
 (2.1) 0.1
Combined ratio 99.2 % 96.8 % 105.3 % 2.4
 (8.5)
           
Combined ratio: 99.2 % 96.8 % 105.3 % 2.4
 (8.5)
Contribution from catastrophe losses and prior years
reserve development		 7.7
 4.7
 7.0
 3.0
 (2.3)
Combined ratio before catastrophe losses and prior years
reserve development		 91.5 % 92.1 % 98.3 % (0.6) (6.2)
           
Performance highlights for the personal lines insurance segment include:

·Premiums – Earned premiums and net written premiums increased in 2011, primarily due to higher renewal written premiums that reflected improved pricing. Growth in earned and net written premiums occurred despite the partially offsetting effect of $18 million for ceded premiums to reinstate coverage layers of our property catastrophe reinsurance treaty.
·Combined ratio – The 2011 combined ratio was 16.2 percentage points higher than in 2010, primarily due to higher catastrophe losses totaling 14.6 percentage points, plus other weather-related losses that offset the favorable effects of improved pricing and a lower underwriting expense ratio. Additional ceded premiums to reinstate coverage layers of our property catastrophe reinsurance treaty and the effect of a refined line of business allocation process for loss expenses also contributed to the higher 2011 combined ratio.
Our personal lines statutory combined ratio was 124.2 percent in 2011, 107.1 percent in 2010 and 111.4 percent in 2009. By comparison, the estimated industry personal lines combined ratio was 107.4 percent in 2011, 100.4 percent in 2010 and 100.6 percent in 2009. Our concentration of business in areas hard-hit by catastrophe events contributed to recent results that differed from the overall industry, an issue we are addressing in part through geographic expansion. Since early 2008, we have worked to improve our geographic diversification by expanding our personal lines operation to several states less prone to catastrophes, including the western states of Arizona, Idaho, Montana, and Utah. We have also non-renewed approximately 2,600 homeowner policies in Florida and Alabama that we believe were the most exposed to losses from hurricane damage. The contribution of catastrophe losses to our personal lines statutory combined ratio was 22.7 percentage points in 2011, 8.1 percentage points in 2010 and 16.1 percentage points in 2009, compared with an estimated 10.5, 5.3 and 4.9 percentage points, respectively, for the industry.

Premiums – Earned premiums and net written premiums continued to grow in 2014, primarily due to higher renewal written premiums that included price increases. Renewal written premiums rose 8 percent in 2014, following an increase of 11 percent in 2013.
Combined ratio – The 2014 combined ratio rose 2.4 percentage points compared with 2013, largely due to a 1.4 percentage-point increase in noncatastrophe weather losses that were not identified as part of designated catastrophe event for the property casualty industry. That unfavorable weather effect somewhat offset benefits from a 2.1 percentage-point improvement in the underwriting expense ratio, primarily from lower commission rates for selected personal lines insurance products. Development on prior accident years’ loss and loss expense reserves before catastrophes during 2014 was 2.9 percentage points less favorable than in 2013, primarily due to increased estimates of reserves for personal umbrella liability coverage.
In recent years, we have increased our use of pricing precision and implemented numerous rate increases to improve our personal lines insurance segment results. To improve results, we also made more use of higher minimum loss deductibles and nonrenewed more policies in selected areas more prone to natural catastrophes. We have worked to improve our geographic diversification by expanding our personal lines operation to several states less prone to catastrophes.
Our personal lines statutory combined ratio was 99.1 percent in 2014, up from 96.3 percent in 2013 but improved from 104.0 percent in 2012. By comparison, the estimated industry personal lines combined ratio was 98.4 percent in 2014, 97.5 percent in 2013 and 101.3 percent in 2012. Our concentration of business in areas affected by catastrophe events contributed to recent-year results that differed from the overall industry, an issue

Cincinnati Financial Corporation - 2014 10-K - Page 76


we are addressing in part through gradual geographic expansion. The contribution of catastrophe losses to our personal lines statutory combined ratio was 7.8 percentage points in 2014, 7.7 percentage points in 2013 and 15.9 percentage points in 2012, compared with an industry estimate of 5.5, 4.3 and 7.4 percentage points, respectively.
Personal Lines Insurance Premiums

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Agency renewal written premiums $755  $685  $642   10   7 
Agency new business written premiums  95   90   75   6   20 
Other written premiums  (49)  (25)  (26)  (96)  4 
Net written premiums  801   750   691   7   9 
Unearned premium change  (39)  (29)  (6)  (34)  (383)
Earned premiums $762  $721  $685   6   5 

Cincinnati Financial Corporation – 2011 10-K - 69

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Agency renewal written premiums $1,005
 $928
 $836
 8
 11
Agency new business written premiums 92
 110
 111
 (16) (1)
Other written premiums (29) (33) (29) 12
 (14)
Net written premiums 1,068
 1,005
 918
 6
 9
Unearned premium change (27) (44) (50) 39
 12
Earned premiums $1,041
 $961
 $868
 8
 11
           
Personal lines insurance is a strategic component of our overall relationship with most of our agencies and is an important component of our agencies’ relationships with their clients. We believe agents recommend Cincinnatiour personal insurance products for their value-oriented clients who seek to balance quality and price and who are attracted by our superior claims service and the benefits of our package approach.

We began using predictive modeling tools for our largest personal lines of business in 2009 and 2010 to increase our pricing sophistication. Wealso believe our efforts to continue improving pricing precision are helping us attract and retain more of our agencies’ preferred business, while also obtaining higher rates for more thinly-priced business. For example,Our progress toward improved geographic diversification is reflected in part through premium growth trends. Personal lines earned premiums in our four highest volume states increased in aggregate by 4 percent in 2014, while premiums for the year 2011remaining states that include our average renewal pricing increases were approximately 50newer areas of operation increased 13 percent higher for homeowner insurance rating segments indicated as lower quality in our model compared with the higher quality rating segments.

aggregate.

The 108 percent increase in 2011 agency renewal written premiums in 2014 and the 11 percent increase in 2013 largely reflected various rate changes during recent years. In October 2011 we began our third roundBeginning in the fourth quarter of 2014, rate increases for theour homeowner line of business averagingaveraged approximately 8 percent, with some individual policy4 percent. That average varied widely by state, according to current rate increases lower or higher based on attributes of risklevel indications that characterize the insured exposure. Thathelp determine appropriate premium rates. The increases followed rate changes over several successive years averaging approximately 7 percent that were implemented beginning the fourth quarter of 2010percentages in a high-single-digit range for states representing the majority of our personal lines business. Similar rate changes averaging approximately 6 percent were

In 2014, we implemented beginning October 2009. Beginning in the second quarter of 2012, we are implementing rate changes for our personal auto line of business in the majority of the 2930 states where we market personal linesauto policies. The average rate change iswas an increase innear the high end of the low-single-digit range, with some individual policies experiencing lower or higher ratesrate changes based on enhanced pricing precision enabled by predictive models. Rate changes for personal auto implemented during the fourth quarter ofin several recent years, beginning in 2010, alsoeach represented an annual average rate increase in the low-single-digit range.

In 2011, our personal

Personal lines new business written premiums written bywere down in 2014, compared with 2013. The downward trend began in the second half of 2013 and was expected due to our agencies grew 6 percent, following 2010 growth at a ratehigher premium rates and underwriting actions such as expanded use of 20 percent. A primary reasonactual cash value loss settlement for older roofs. For the higher ratemajority of growth during 2010 was agent response to a new version of our Diamondstates where we market personal lines policy processing system deployed in early 2010.

policies, those underwriting actions were effective beginning April 1, 2013.

Other written premiums primarily consist of premiums that are ceded to reinsurers and that lower our net written premiums. Other written premiums nearly doubledcontributed to 2014 net written premium growth by $4 million more than in 2011 compared with 2010 and 2009. The change was driven by additional ceded premiums for our property catastrophe reinsurance treaty, including $18 million for reinstatement premiums following two large catastrophe events during 2011 and $12 million for the third and fourth event cover that was discussed in Consolidated Property Casualty Insurance Results of Operations, Page 51.

2013.

Personal Lines Insurance Loss and Loss Expenses

Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. Most of the incurred losses and loss expenses shown in the personal lines insurance segment three-year highlights table on Page 69 are for the respective current accident years, andwith reserve development on prior accident years is shown separately. Since approximately two-thirds of our personal lines current accident year incurred losses and loss expenses represent net paid losses,amounts, the remaining one-third represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 79.270.7 percent accident year 20102013 loss and loss

Cincinnati Financial Corporation - 2014 10-K - Page 77


expense ratio reported as of December 31, 2010,2013, developed favorably by 3.61.6 percentage points to 75.669.1 percent due to claims settling claims for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2011.2014. Accident years 20102013 and 20092012 for the personal lines insurance segment have both developed favorably, as indicated by the progression over time for the ratios in the table.

(Dollars in millions)

Accident year loss and loss expenses incurred and ratios to earned premiums:

Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $765  $545  $569   100.3%  75.6%  83.0%
as of December 31, 2010      571   579       79.2   84.5 
as of December 31, 2009          591           86.3 

(Dollars in millions)            
Accident year loss and loss expenses incurred and ratios to earned premiums:     
Accident year: 2014 2013 2012 2014 2013 2012
as of December 31, 2014 $752
 $664
 $723
 72.2% 69.1% 83.4%
as of December 31, 2013  
 678
 723
  
 70.7
 83.4
as of December 31, 2012  
  
 751
  
  
 86.6
             
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, of Operations, Page 51, explain much of the movement in current accident year loss and loss expense ratios among thefor accident years 2009 through 2011.2014 and 2013, compared with 2012. Catastrophe losses added 23.68.8 percentage points for 2011, 8.8both 2014 and 2013, and 18.4 points for 2010 and 15.4 points for 20092012 to the respective personal lines current accident year loss and loss expense ratios in the table above. CatastrophePersonal lines catastrophe losses for 2014 and 2013 were unusually high during 2011 and 2009, andbasically in line with our 8.7 percent 10-year annual average for the years 2001 through 2010, while 2012 was much higher than that historical average. Personal lines catastrophe losses also are inherently volatile, as discussed above and in Consolidated Property Casualty Insurance Results of Operations, Page 51.

Results.

The trend for our personal lines current accident year loss and loss expense ratio before catastrophe losses over the past three years reflected unique unfavorable items for 2011 discussed below in addition to normal loss cost inflation and higher pricing. For 2011 the unfavorable effects offset the favorable effects of better risk selection and improved pricing discussed above in Personal Lines Insurance Premiums.

Cincinnati Financial Corporation – 2011 10-K - 70

The 76.763.4 percent ratio for current accident year loss and loss expenses before catastrophe losses for 20112014 rose 6.31.5 percentage points compared with the 70.461.9 percent accident year 20102013 ratio measured as of December 31, 2010. Some weather-related2013. Noncatastrophe weather losses, not identified as part of designated catastrophe eventsnoted above, largely accounted for the property casualty industry are typically referred to as non-catastrophe weather losses. For our homeowner line of business alone, non-catastrophe weather losses from wind, hail and lightning were $22 million higher during 2011 compared with 2010, raising the 2011 loss ratio by 2.3 percentage points. The effect of the $18 million ceded to reinstate coverage layers of our property catastrophe reinsurance treaty increased the 2011 ratio by 1.8 percentage points. The refined line of business allocation process for loss expenses added approximately 3 percentage points to the 2011 ratio. Large losses described below were a minor factor as the ratio for new losses above $250,000 rose by 0.4 percentage points.

increase.

Personal lines reserve development on prior accident years continued to net to a favorable amount in 2011,2014, as $42$12 million was recognized, somewhat higherrecognized. That total provided $27 million less benefit than $34 million in 2010 and $40 million in 2009. Approximately 90 percentthe 2013 total of our$39 million. Our other personal line of business was primarily responsible for the 2014 decrease, as reserve development from its personal umbrella liability coverage can fluctuate significantly over time. Our personal lines net favorable reserve development on prior accident years recognized during 20112014 primarily occurred in our homeowner line of business and our other personal line of business, in nearly equal amounts for each line. Developmentbusiness. Favorable development recognized during 20092013 and 20102012 was mostly from our homeowner and other personal linelines of business, primarily for personal umbrella liability coverage.business. Development by line of business and other trends for personal lines loss and loss expenses and the related ratios are further analyzed in Personal Lines of Business Analysis, beginning on Page 72, and in Personal LinesLiquidity and Capital Resources, Property Casualty Insurance Segment Development of Estimated Reserves by Accident Year,Year.

Cincinnati Financial Corporation - 2014 10-K - Page 95.

78



Personal Lines Insurance Losses by Size

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
New losses greater than $4,000,000 $0  $5  $5   (100)  0 
New losses $1,000,000-$4,000,000  25   20   17   25   18 
New losses $250,000-$1,000,000  48   41   48   17   (15)
Case reserve development above $250,000  19   11   19   73   (42)
Total large losses incurred  92   77   89   19   (13)
Other losses excluding catastrophe losses  365   336   281   9   20 
Catastrophe losses  171   58   111   195   (48)
Total net losses incurred $628  $471  $481   33   (2)
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
New losses greater than $4,000,000  0.0%  0.7%  0.7%  (0.7)  0.0 
New losses $1,000,000-$4,000,000  3.3   2.8   2.5   0.5   0.3 
New losses $250,000-$1,000,000  6.3   5.7   6.9   0.6   (1.2)
Case reserve development above $250,000  2.5   1.6   2.8   0.9   (1.2)
Total large loss ratio  12.1   10.8   12.9   1.3   (2.1)
Other losses excluding catastrophe losses  47.9   46.5   41.1   1.4   5.4 
Catastrophe losses  22.5   8.1   16.2   14.4   (8.1)
Total net loss ratio  82.5%  65.4%  70.2%  17.1   (4.8)

(Dollars in millions, net of reinsurance) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Current accident year losses greater than $5,000,000 $—
 $—
 $—
 nm
 nm
Current accident year losses $1,000,000-$5,000,000 20
 32
 31
 (38) 3
Large loss prior accident year reserve development 1
 7
 (5) (86) nm
Total large losses incurred 21
 39
 26
 (46) 50
Losses incurred but not reported 19
 (22) (23) nm
 (4)
Other losses excluding catastrophe losses 539
 466
 441
 16
 6
Catastrophe losses 79
 72
 132
 10
 (45)
Total losses incurred $658
 $555
 $576
 19
 (4)
           
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Current accident year losses greater than $5,000,000 0.0% 0.0 % 0.0 % 0.0
 0.0
Current accident year losses $1,000,000-$5,000,000 1.9
 3.4
 3.6
 (1.5) (0.2)
Large loss prior accident year reserve development 0.1
 0.7
 (0.6) (0.6) 1.3
Total large loss ratio 2.0
 4.1
 3.0
 (2.1) 1.1
Losses incurred but not reported 1.8
 (2.3) (2.7) 4.1
 0.4
Other losses excluding catastrophe losses 51.9
 48.5
 50.9
 3.4
 (2.4)
Catastrophe losses 7.6
 7.5
 15.2
 0.1
 (7.7)
Total loss ratio 63.3% 57.8 % 66.4 % 5.5
 (8.6)
           
In 2011,2014, personal lines total large losses incurred increaseddecreased by $15$18 million or 1946 percent, compared with 2013, net of reinsurance,contributing to thereinsurance. The corresponding ratio increase of 1.3decreased 2.1 percentage points. The majority of the increase was2014 decreases on both a dollar and ratio basis were primarily due to lower amounts for claims related to our personal auto line of business. In 20102013, total large losses increased compared with 2012, primarily due to higher amounts for our other personal line of business. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.
Personal Lines Insurance Underwriting Expenses

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Commission expenses $191
 $192
 $176
 (1) 9
Other underwriting expenses 102
 98
 85
 4
 15
Total underwriting expenses $293
 $290
 $261
 1
 11
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Commission expense 18.3% 20.0% 20.3% (1.7) (0.3)
Other underwriting expense 9.8
 10.2
 9.8
 (0.4) 0.4
Total underwriting expense ratio 28.1% 30.2% 30.1% (2.1) 0.1
           
Personal lines commission expense as a percent of earned premiums decreased in 2014 compared with both 2013 and 2012. The decrease is primarily due to changes in commission rates for some products in our personal lines insurance segment. Other underwriting expenses as a percent of earned premiums were at similar levels for 2014, 2013 and 2012. During those years, other underwriting expenses increased roughly in proportion to earned premiums.


Cincinnati Financial Corporation - 2014 10-K - Page 79


Personal Lines of Business Analysis
We prefer to write personal lines coverages within accounts that include both auto and homeowner coverages as well as coverages from the other personal business line. As a result, we believe that the personal lines insurance segment is best measured and evaluated on a segment basis. However, we provide line-of-business data to analyze growth and profitability trends separately for each line.
For 2014, our personal auto line of business had a total loss and loss expense ratio significantly higher than desired. As discussed in the overview section of Personal Lines Insurance Results, and below, we are taking actions to improve pricing and reduce loss costs that we expect to benefit future profitability trends. A similar approach was used to improve the total loss and loss expense ratio for our homeowner line of business to a satisfactory result in 2014 and 2013.
Personal Auto
(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Written premiums $489
 $460
 $425
 6
 8
Earned premiums 476
 443
 404
 7
 10
           
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Current accident year before catastrophe losses 76.0 % 74.3 % 72.8 % 1.7
 1.5
Current accident year catastrophe losses 1.3
 1.1
 2.8
 0.2
 (1.7)
Prior accident years before catastrophe losses 0.0
 0.0
 (4.1) 0.0
 4.1
Prior accident years catastrophe losses (0.2) (0.3) (0.5) 0.1
 0.2
Total loss and loss expenses ratio 77.1 % 75.1 % 71.0 % 2.0
 4.1
           

Net written premiums for personal auto increased in 2014 and 2013, with both years reflecting recent-year rate increases, ongoing high levels of policy retention and a higher level of insured exposures.

The 2014 total loss and loss expense ratio rose 2.0 percentage points, largely due to a 1.4 point increase for IBNR reserves that contributed to a total increase of 1.7 points in the ratio for the current accident year before catastrophe losses. The 2013 total loss and loss expense ratio increase was primarily due to a reduction in the ratio for favorable reserve development on prior accident years. That reduction related to both case and IBNR reserves. For accident year 2013, a lower catastrophe loss and loss expenses ratio offset a modest increase in the noncatastrophe component. Larger losses, above $250,000 per claim, were $15 million or 37 percent higher in 2013, compared with 2012, contributing to the rise in the total loss and loss expense ratio.
As discussed in Personal Lines Insurance Premiums, we continue to implement rate changes and improve our pricing precision to improve our total loss and loss expense ratio for our personal auto line of business. Rate increases that apply pricing precision features for our personal auto line of business became effective beginning the second-quarter 2014 for the majority of states where we market personal lines products and continue to be implemented. On average, the rate increase percentage was in the low-single-digit range, with approximately half of those states experiencing a mid-single-digit increase. Similar rate increases are planned for the year 2015.

Cincinnati Financial Corporation - 2014 10-K - Page 80


Homeowner
(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Written premiums $456
 $428
 $378
 7
 13
Earned premiums 443
 403
 353
 10
 14
           
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Current accident year before catastrophe losses 54.0 % 49.9 % 67.4 % 4.1
 (17.5)
Current accident year catastrophe losses 18.3
 18.6
 38.8
 (0.3) (20.2)
Prior accident years before catastrophe losses (0.9) (2.8) (9.7) 1.9
 6.9
Prior accident years catastrophe losses (2.2) (2.0) (5.1) (0.2) 3.1
Total loss and loss expense ratio 69.2 % 63.7 % 91.4 % 5.5
 (27.7)
           

Net written premiums for homeowner rose in both 2014 and 2013, primarily due to higher renewal premiums that largely reflected higher pricing.

The total loss and loss expense ratio for 2014 increased 5.5 percentage points compared with 2013, including 2.8 percentage points from weather-related losses not identified as part of designated catastrophe events for the property casualty industry, also known as noncatastrophe weather losses. The 2013 ratio improvement was largely due to lower catastrophe losses and losses before catastrophes. The 2014 catastrophe loss ratio of 16.1 percentage points was near the 17.4 percent 10-year average for the years 1998 through 2007. For the six-year period 2008 through 2013, the homeowner catastrophe loss ratio averaged 31.5 percent, almost double the average of the previous 10 years. Our pricing models are adjusted annually to account for expected losses from catastrophe perils that relate to causes of insured losses from weather or earthquake catastrophe events.

We continue efforts to improve pricing precision through predictive analytics, which we believe will help to maintain long-term profitability. Rate increases in recent years, discussed in Personal Lines Insurance Premiums, should help lower loss ratios as the rate increases are earned. That includes the 2014 effects of our fifth round of homeowner rate increases, averaging approximately 10 percent during the first three quarters of 2014, with some individual policy rate increases lower or higher based on each insured exposure’s specific risk characteristics. Homeowner rate changes for the five most recent prior years represented an average annual rate increase in the high-single-digit range. Rate changes effective beginning the last quarter of 2014 averaged approximately 4 percent. Other profit-improvement initiatives, beginning in 2013, include increasing our use of higher loss deductibles and actual cash value claims settlement for insured damage to older roofs and increasing the number of property inspections conducted as homeowner policies renew. Inspections provide more opportunities for underwriting or pricing actions on a case-by-case basis. We also continue our gradual expansion into states less prone to catastrophe losses, which we believe will reduce variability in the long-term future catastrophe loss ratio.
Other Personal
(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Written premiums $123
 $117
 $115
 5
 2
Earned premiums 122
 115
 111
 6
 4
           
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Current accident year before catastrophe losses 48.3 % 55.7 % 53.8 % (7.4) 1.9
Current accident year catastrophe losses 4.0
 3.6
 10.1
 0.4
 (6.5)
Prior accident years before catastrophe losses 2.5
 (15.4) (23.5) 17.9
 8.1
Prior accident years catastrophe losses (0.2) (0.9) (1.4) 0.7
 0.5
Total loss and loss expense ratio 54.6 % 43.0 % 39.0 % 11.6
 4.0
           


Cincinnati Financial Corporation - 2014 10-K - Page 81


Other personal premiums grew in both 2014 and 2013. Premium trends for this line of business have generally been similar to the growth pattern of our personal auto and homeowner lines before the effects of reinsurance. Most of our other personal coverages are written in conjunction with homeowner or auto policies. In addition to umbrella liability coverage, our other personal lines policies provide property-oriented coverages such as dwelling fire and inland marine.
Loss and loss expense ratios in 2014 continued at a profitable level, in part due to lower catastrophe losses, compared with 2012. Reserve development on prior accident years did not benefit these ratios in 2014, following a significant benefit in both 2013 and 2012. Reserve development can fluctuate significantly for this business line because personal umbrella liability coverage is a major component of other personal losses.
Personal Lines Insurance Outlook
A.M. Best projections for 2015 indicate personal lines written premiums for the U.S. property casualty industry may grow approximately 3 percent, with an industry statutory combined ratio estimated at approximately 99 percent. We believe our growth rate will likely be higher than the industry projection for 2015, driven by our rate increases, stable policy retention rate, accelerated pace of new agency appointments in recent years and increased focus on the high net worth personal lines market. Our high net worth initiative, along with various other actions to improve performance in our personal lines insurance segment, is discussed in greater detail in Item 1, Our Business and Our Strategy, Strategic Initiatives, and Personal Lines Insurance Results. Our personal lines pricing trends need to exceed loss trends to improve personal lines profitability, thereby helping to achieve our corporate financial targets. We discuss our overall outlook for our property casualty insurance operations in the Executive Summary.


Cincinnati Financial Corporation - 2014 10-K - Page 82


Excess and Surplus Lines Insurance Results
Overview – Three-Year Highlights
(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Earned premiums $148
 $116
 $93
 28
 25
           
Loss and loss expenses from:  
  
  
  
  
Current accident year before catastrophe losses 101
 78
 68
 29
 15
Current accident year catastrophe losses 3
 1
 2
 200
 (50)
Prior accident years before catastrophe losses (29) (13) (5) (123) (160)
Prior accident years catastrophe losses —
 —
 —
 nm
 nm
Total loss and loss expenses 75
 66
 65
 14
 2
Underwriting expenses 43
 36
 29
 19
 24
Underwriting profit (loss) $30
 $14
 $(1) 114
 nm
           
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Current accident year before catastrophe losses 68.1 % 67.1 % 72.8 % 1.0
 (5.7)
Current accident year catastrophe losses 1.8
 0.7
 2.1
 1.1
 (1.4)
Prior accident years before catastrophe losses (19.6) (11.2) (5.6) (8.4) (5.6)
Prior accident years catastrophe losses 0.2
 0.1
 0.1
 0.1
 0.0
Total loss and loss expense 50.5
 56.7
 69.4
 (6.2) (12.7)
Underwriting expense 28.9
 31.1
 31.6
 (2.2) (0.5)
Combined ratio 79.4 % 87.8 % 101.0 % (8.4) (13.2)
           
Combined ratio: 79.4 % 87.8 % 101.0 % (8.4) (13.2)
Contribution from catastrophe losses and prior years
    reserve development
 (17.6) (10.4) (3.4) (7.2) (7.0)
Combined ratio before catastrophe losses and prior years
    reserve development
 97.0 % 98.2 % 104.4 % (1.2) (6.2)
           
Our excess and surplus lines insurance segment includes results of The Cincinnati Specialty Underwriters Insurance Company and CSU Producer Resources Inc. The year 2014 represented our seventh full year of operations for our excess and surplus lines insurance segment. Performance highlights for this segment include:
Premiums – Earned premiums continued to rise in 2014, a result of strong growth in net written premiums, similar to recent years. Growth of net written premiums in 2014 was driven by higher renewal written premiums that included average renewal price increases in a mid-single-digit range. New business written premiums for 2014 again rose, compared with the prior year, largely reflecting strong agency relationships and premium growth initiatives.
Combined ratio – The combined ratio improved 8.4 percentage points in 2014, due to larger amounts of favorable reserve development on prior accident years.


Cincinnati Financial Corporation - 2014 10-K - Page 83


Excess and Surplus Lines Insurance Premiums
(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Agency renewal written premiums $111
 $94
 $73
 18
 29
Agency new business written premiums 51
 42
 38
 21
 11
Other written premiums (9) (8) (6) (13) (33)
Net written premiums 153
 128
 105
 20
 22
Unearned premium change (5) (12) (12) 58
 0
Earned premiums $148
 $116
 $93
 28
 25
           
The $17 million increase in 2014 renewal premiums reflected the opportunity to renew many policies for the first time as well as higher renewal pricing. Average renewal pricing increases were in the mid-single-digit range during 2014, down from a high-single-digit range during 2013. December 2014 was the 52nd consecutive month of positive average price changes for this segment of our property casualty business. We measure average changes in excess and surplus lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies.
New business written premiums for the year 2014 rose 21 percent, compared with 2013, reflecting higher pricing and an increase in submissions from agencies requesting an insurance policy quote. High-quality service provided by excess and surplus lines field marketing representatives and headquarters underwriters enhances the benefits of our strong agency relationships, also helping increase our new business written premiums.
Other written premiums are primarily premiums that are ceded to reinsurers and that lower our net written premiums. Ceded premium volume for 2014 increased relative to 2013, reflecting higher written premiums subject to reinsurance.
Excess and Surplus Lines Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses, as well as the associated loss expenses. The majority of the total incurred losses and loss expenses shown in our excess and surplus lines insurance segment three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than 20 percent of our 2014 excess and surplus lines current accident year incurred losses and loss expenses represents net paid amounts, a large majority represents reserves for our estimate of unpaid losses and loss expenses. These reserves develop over time, and we update our estimates of previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 67.8 percent accident year 2013 loss and loss expense ratio reported as of December 31, 2013, developed favorably by 8.1 percentage points to 59.7 percent due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2014. Accident years 2013 and 2012 for this segment have both developed favorably, as indicated by the progression over time of the ratios in the table.
(Dollars in millions)            
Accident year loss and loss expenses incurred and ratios to earned premiums:     
Accident year: 2014 2013 2012 2014 2013 2012
as of December 31, 2014 $104
 $69
 $54
 69.9% 59.7% 57.4%
as of December 31, 2013  
 79
 62
  
 67.8
 65.9
as of December 31, 2012  
  
 70
  
  
 74.9
             
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain some of the movement in current accident year loss and loss expense ratios for accident years 2012 through 2014.
Catastrophe losses added 1.8 percentage points in 2014, following 0.7 percentage points in 2013 and 2.1 percentage points in 2012, to the respective excess and surplus lines current accident year loss and loss expense ratios in the table above.

Cincinnati Financial Corporation - 2014 10-K - Page 84


The 68.1 percent ratio for current accident year loss and loss expenses before catastrophe losses for 2014 rose a modest 1.0 percentage point compared with the 67.1 percent accident year 2013 ratio measured as of December 31, 2013.

Excess and surplus lines reserve development on prior accident years continued to net to a favorable amount in 2014 as $29 million was recognized, compared with $13 million in 2013. Nearly two-thirds of the 2014 favorable development was for accident years 2013 and 2012 in aggregate, and related primarily to lower than anticipated loss emergence on known claims.
We believe the loss and loss expense reserves for our excess and surplus lines business are adequate. We establish case reserves in a manner consistent with standard lines coverages, despite the more restrictive terms and conditions for excess and surplus lines policies. After the first two years of our excess and surplus lines operation, reserves for estimated unpaid losses and loss expenses were $18 million as of December 31, 2009, for losses that occurred in 2008 and 2009. As of December 31, 2014, our estimate for the remaining unpaid losses that occurred in those years was less than $1 million. The inherent uncertainty in estimating reserves is discussed in Liquidity and Capital Resources, Property Casualty Insurance Loss and Loss Expense Reserves. Development trends are further analyzed in Property Casualty Insurance Development of Estimated Reserves by Accident Year.
Excess and Surplus Lines Insurance Losses by Size
(Dollars in millions, net of reinsurance) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Current accident year losses greater than $5,000,000 —
 $—
 $—
 nm
 nm
Current accident year losses $1,000,000-$5,000,000 3
 3
 2
 —
 nm
Large loss prior accident year reserve development (1) 1
 (1) nm
 nm
Total large losses incurred 2
 4
 1
 (50) nm
Losses incurred but not reported 24
 20
 16
 20
 25
Other losses excluding catastrophe losses 25
 23
 29
 9
 (21)
Catastrophe losses 4
 1
 2
 nm
 (50)
Total losses incurred $55
 $48
 $48
 15
 —
           
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Current accident year losses greater than $5,000,000 0.0 % 0.0% 0.0 % 0.0
 0.0
Current accident year losses $1,000,000-$5,000,000 2.3
 2.7
 2.2
 (0.4) 0.5
Large loss prior accident year reserve development (0.9) 0.8
 (0.9) (1.7) 1.7
Total large loss ratio 1.4
 3.5
 1.3
 (2.1) 2.2
Losses incurred but not reported 16.4
 16.8
 16.8
 (0.4) —
Other losses excluding catastrophe losses 17.2
 20.3
 31.3
 (3.1) (11.0)
Catastrophe losses 1.8
 0.7
 2.1
 1.1
 (1.4)
Total loss ratio 36.8 % 41.3% 51.5 % (4.5) (10.2)
           
In 2014, total large losses incurred ratio was lower than it was in 2009, primarily duedecreased by $2 million or 50 percent, net of reinsurance, helping to lower personal autothe corresponding ratio by 2.1 percentage points, compared with 2013. The ratio for 2013 trended in the opposite direction, as earned premium growth lagged the rate of growth in total large losses. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.

Personal Lines Insurance Underwriting Expenses

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Commission expenses $139  $145  $137   (4)  6 
Other underwriting expenses  82   95   78   (14)  22 
Total underwriting expenses $221  $240  $215   (8)  12 
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Commission expenses  18.2%  20.1%  19.9%  (1.9)  0.2 
Other underwriting expenses  10.8   13.2   11.5   (2.4)  1.7 
Total underwriting expense ratio  29.0%  33.3%  31.4%  (4.3)  1.9 

Personal lines commission expense as a percent of earned premium decreased in 2011, primarily due to lower agency profit-sharing commissions. In 2010 higher agency profit-sharing commission drove the increase.

Other underwriting expenses decreased $13 million in 2011, primarily due to a first-quarter 2010 provision for matters involving prior years and related to Note 16, Commitments and Contingent Liabilities,


Cincinnati Financial Corporation - 2014 10-K - Page 134. The provision also accounted for the majority of the increase in 2010.

85
Cincinnati Financial Corporation – 2011 10-K - 71


Personal Lines of Business Analysis

We prefer to write personal lines coverages within accounts that include both auto and homeowner coverages as well as coverages from the other personal business line. As a result, we believe that the personal lines segment is best measured and evaluated on a segment basis. However, we provide line-of-business data to analyze growth and profitability trends separately for each line. The accident year loss data provides current estimates of incurred loss and loss expenses and corresponding ratios over the most recent three accident years. Accident year data classifies losses according to the year in which the corresponding loss events occur, regardless of when the losses are actually reported, recorded or paid.

For 2011, the homeowner line of business continued to have a total loss and loss expense ratio significantly higher than desired. As discussed in the overview section of Personal Lines Insurance Results of Operations, Page 69, and below, we are taking actions to improve pricing and reduce loss costs that we expect to benefit future profitability trends.

Personal Auto

  Years ended December 31,  2011-2011  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Personal auto:                    
Net written premiums $385  $352  $324   9   9 
Earned premiums  368   337   319   9   6 
Loss and loss expenses from:                    
Current accident year before catastrophe losses  282   239   224   18   7 
Current accident year catastrophe losses  11   3   3   267   0 
Prior accident years before catastrophe losses  (3)  (7)  (6)  57   (17)
Prior accident years catastrophe losses  (1)  0   0   nm   nm 
Total loss and loss expenses $289  $235  $221   23   6 
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Current accident year before catastrophe losses  76.7%  70.9%  70.2%  5.8   0.7 
Current accident year catastrophe losses  3.0   1.1   1.0   1.9   0.1 
Prior accident years before catastrophe losses  (0.8)  (2.1)  (2.0)  1.3   (0.1)
Prior accident years catastrophe losses  (0.2)  (0.1)  (0.2)  (0.1)  0.1 
Total loss and loss expense ratio  78.7%  69.8%  69.0%  8.9   0.8 

Accident year loss and loss expenses incurred and ratios to earned premiums:

Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $293  $241  $223   79.7%  71.6%  69.8%
as of December 31, 2010      242   225       72.0   70.4 
as of December 31, 2009          227           71.2 

Net written premiums for personal auto increased significantly in 2011, largely due to very strong new business growth during 2010 that resulted in the opportunity to renew many accounts for the first time during 2011. Rate increases also contributed to the growth.

The total loss and loss expense ratio rose 8.9 percentage points, in part due to a 1.8 point increase from catastrophe losses plus a 2.4 point increase from losses above $250,000. The refined line of business allocation process for loss expenses added another 8.5 percentage points to the 2011 total loss and loss expense ratio and also contributed to the increase in the ratio for the current accident year before catastrophe losses.

Cincinnati Financial Corporation – 2011 10-K - 72

Homeowner

  Years ended December 31,  2011-2011  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Homeowner:                    
Net written premiums $312  $299  $275   4   9 
Earned premiums  294   289   276   2   5 
Loss and loss expenses from:                    
Current accident year before catastrophe losses  231   208   202   11   3 
Current accident year catastrophe losses  158   56   96   182   (42)
Prior accident years before catastrophe losses  (14)  (2)  (5)  (600)  60 
Prior accident years catastrophe losses  (6)  (4)  5   (50)  nm 
Total loss and loss expenses $369  $258  $298   43   (13)
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Current accident year before catastrophe losses  78.7%  72.0%  73.0%  6.7   (1.0)
Current accident year catastrophe losses  53.6   19.3   34.7   34.3   (15.4)
Prior accident years before catastrophe losses  (4.5)  (0.9)  (1.6)  (3.6)  0.7 
Prior accident years catastrophe losses  (2.0)  (1.4)  1.7   (0.6)  (3.1)
Total loss and loss expense ratio  125.8%  89.0%  107.8%  36.8   (18.8)

Accident year loss and loss expenses incurred and ratios to earned premiums:

Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $389  $248  $289   132.3%  86.1%  104.7%
as of December 31, 2010      264   295       91.3   106.9 
as of December 31, 2009          298           107.7 

Net written premiums for homeowner grew $13 million in 2011, reflecting higher renewal premiums that were partially offset by higher ceded premiums for reinsurance. Premiums ceded for reinsurance, which reduce premium revenue, were $40 million in 2011, $18 million in 2010, and $22 million in 2009. The total ceded premiums for 2011 included $16 million to reinstate coverage layers of our property catastrophe reinsurance treaty and $9 million for the third and fourth event cover.

We continue efforts to improve pricing precision through predictive analytics, which we believe will help to achieve long-term profitability. Various rate changes should help lower loss ratios as the rate increases are earned. Those rate changes were implemented beginning in October of 2011, 2010 and 2009 and averaged approximately 8 percent, 7 percent and 6 percent, respectively. We also continued our gradual expansion into states less prone to catastrophe losses, which we believe will reduce variability in the long-term future catastrophe loss ratio. In recent years we have non-renewed approximately 2,600 policies in Florida and Alabama that we believe were the most exposed to losses from hurricane damage. These actions represent important steps we are taking to improve homeowner results.

The total loss and loss expense ratio over the past three years largely fluctuated with catastrophe losses, non-catastrophe weather-related losses and other large losses. For the four-year period 2008 through 2011, the homeowner catastrophe loss ratio averaged 34.7 percent, approximately double the 17.4 percent 10-year average for the years 1998 through 2007. The 36.8 percentage-point increase in the ratio for 2011 included an increase of 33.7 points for catastrophe losses. Non-catastrophe weather losses from wind, hail and lightning were $22 million higher during 2011, raising the 2011 loss ratio by 6.0 percentage points compared with 2010. A $4 million increase in 2011 large losses, compared with 2010, increased the homeowner loss ratio by 1.1 percentage points. The effect of the $16 million ceded premiums to reinstate coverage layers of our property catastrophe reinsurance treaty increased the 2011 ratio by 6.4 percentage points.

The current accident year loss and loss expense ratio before catastrophe losses remained high in 2011 and rose 6.7 points above the 2010 ratio, largely due to the same non-catastrophe weather related losses and reinsurance reinstatement effects noted above that impacted the total loss and loss expense ratio.

Favorable development on prior accident year reserves rose in 2011, primarily due to case reserve development on accident years 2009 and 2010. Development trends for are further discussed in Personal Lines Insurance Segment Development of Estimated Reserves by Accident Year, Page 95.

Cincinnati Financial Corporation – 2011 10-K - 73

Other Personal

  Years ended December 31,  2011-2011  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Other personal:                    
Net written premiums $104  $99  $92   5   8 
Earned premiums  100   95   90   5   6 
Loss and loss expenses from:                    
Current accident year before catastrophe losses  71   61   60   16   2 
Current accident year catastrophe losses  12   4   7   200   (43)
Prior accident years before catastrophe losses  (18)  (20)  (34)  10   41 
Prior accident years catastrophe losses  0   (1)  0   nm   nm 
Total loss and loss expenses $65  $44  $33   48   33 
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Current accident year before catastrophe losses  70.7%  64.1%  66.9%  6.6   (2.8)
Current accident year catastrophe losses  11.7   3.8   7.7   7.9   (3.9)
Prior accident years before catastrophe losses  (17.9)  (20.8)  (38.3)  2.9   17.5 
Prior accident years catastrophe losses  (0.5)  (0.5)  0.6   0.0   (1.1)
Total loss and loss expense ratio  64.0%  46.6%  36.9%  17.4   9.7 

Accident year loss and loss expenses incurred and ratios to earned premiums:

Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $83  $56  $57   82.4%  58.0%  63.2%
as of December 31, 2010      65   59       67.9   65.9 
as of December 31, 2009          67           74.6 

Other personal premiums increased in 2011 and 2010, generally tracking with the growth in our personal auto and homeowner lines before the effects of reinsurance. Most of our other personal coverages are endorsed to homeowner or auto policies. In addition to umbrella liability coverage, our other personal lines policies provide property-oriented coverages such as dwelling fire and inland marine.

While still at a profitable level, the total and current accident year loss and loss expense ratios for other personal increased in 2011, reflecting the results of higher catastrophes and non-catastrophe weather. Reserve development on prior accident years recognized during 2011 was similar to 2010, although it can fluctuate significantly for this business line because personal umbrella liability coverage is a major component of other personal losses. Development trends are further discussed in Personal Lines Insurance Segment Development of Estimated Reserves by Accident Year, Page 95.

Personal Lines Insurance Outlook

A.M. Best projects industrywide personal lines written premiums may grow approximately 3 percent in 2012, with an industry statutory combined ratio estimated at approximately 102 percent. Due to rate increases implemented in late 2011 and a stable policy retention rate, plus the effect of an accelerated pace for recent-year new agency appointments, we believe our growth rate will likely be higher than the industry projection for 2012. In Item 1, Strategic Initiatives, Page 10, and Personal Lines Results of Operations, Pages 69 through 73, we discuss various actions we are taking to address the unsatisfactory performance of our personal lines segment, in particular the homeowner line of business. We also describe steps to enhance our response to the changing marketplace. Our personal lines pricing trends need to exceed loss trends to improve personal lines profitability, thereby helping to achieve our corporate financial targets. We discuss our overall outlook for our property casualty insurance operations in the Executive Summary, Page 38.

Cincinnati Financial Corporation – 2011 10-K - 74

Excess and Surplus Lines Insurance Results of Operations

Overview – Three-Year Highlights

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Earned premiums $70  $49  $27   43   81 
                     
Loss and loss expenses from:                    
Current accident year before catastrophe losses  50   41   21   22   95 
Current accident year catastrophe losses  1   1   0   0   nm 
Prior accident years before catastrophe losses  (9)  (1)  (1)  nm   0 
Prior accident years catastrophe losses  0   0   0   nm   nm 
Total loss and loss expenses  42   41   20   2   105 
Underwriting expenses  22   16   22   38   (27)
Underwriting profit (loss) $6  $(8) $(15)  nm   47 
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                      
Current accident year before catastrophe losses  71.0%  83.8%  75.4%  (12.8)  8.4 
Current accident year catastrophe losses  2.1   1.2   0.2   0.9   1.0 
Prior accident years before catastrophe losses  (12.9)  (1.3)  (0.9)  (11.6)  (0.4)
Prior accident years catastrophe losses  0.1   0.0   0.0   0.1   0.0 
Total loss and loss expenses  60.3   83.7   74.7   (23.4)  9.0 
Underwriting expenses  31.9   31.7   80.2   0.2   (48.5)
Combined ratio  92.2%  115.4%  154.9%  (23.2)  (39.5)
                     
Combined ratio:  92.2%  115.4%  154.9%  (23.2)  (39.5)
Contribution from catastrophe losses and prior years reserve development  (10.7)  (0.1)  (0.7)  (10.6)  0.6 
Combined ratio before catastrophe losses and prior years reserve development  102.9%  115.5%  155.6%  (12.6)  (40.1)

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

·Premiums – Higher earned premiums in 2011 resulted from ongoing strong growth in net written premiums. The year 2011 represented our fourth full year of operations for our excess and surplus lines segment. Growth of net written premiums in 2011 was driven by higher renewal written premiums that included rising average renewal price increases. New business written premiums for 2011 were essentially flat compared with 2010, reflecting strong competition in the excess and surplus lines market.
·Combined ratio – The combined ratio improved in 2011, primarily due to earned premium growth outpacing somewhat higher total loss and loss expenses. The total loss and loss expense ratio decrease was driven by lower ratios for current accident year loss and loss expenses plus higher levels of net favorable reserve development on prior accident years.

Excess and Surplus Lines Insurance Premiums

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Renewal written premiums $49  $29  $10   69   190 
New business written premiums  35   35   32   0   9 
Other written premiums  (5)  (6)  (3)  17   (100)
Net written premiums  79   58   39   36   49 
Unearned premium change  (9)  (9)  (12)  0   25 
Earned premiums $70  $49  $27   43   81 

The $20 million increase in renewal premiums in 2011 reflected the opportunity to renew many policies for the first time as well as higher renewal pricing. Renewal pricing changes during 2011 ranged from a low-single-digit range earlier in the year to a mid-single-digit range later in the year, improving over the flat- to-slightly-up range for the second half of 2010. We measure average changes in excess and surplus lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies.

New business written premiums for the year 2011 were steady compared with 2010, a result of careful underwriting in a market that was highly competitive, as evidenced by standard market companies writing policies for risks formerly insurable only in the excess and surplus lines market. We observed many cases where competing carriers offered policy terms and conditions that were less restrictive than those we observed in the past for similar risks, without a corresponding premium for the broadened insurance coverage. Therefore, we declined to write many of those new business and also some renewal business opportunities.

Cincinnati Financial Corporation – 2011 10-K - 75

Other written premiums are primarily premiums that are ceded to reinsurers and that lower our net written premiums. Ceded premium volume was less in 2011 than in 2010, despite higher written premiums subject to reinsurance, because of more favorable reinsurance pricing. Beginning in 2011, treaty reinsurance for our excess and surplus lines segment was provided by The Cincinnati Insurance Company except for our corporate property catastrophe treaty, where The Cincinnati Specialty Underwriters Insurance Company is a named insured under the treaty. In previous years, all reinsurance for our excess and surplus lines segment was provided by third-party reinsurers. Reinsurance arrangements are further discussed in 2012 Reinsurance Programs, Page 98.

Excess and Surplus Lines Loss and Loss Expenses

Loss and loss expenses include both net paid losses and reserve changes for unpaid losses, as well as the associated loss expenses. Most of the incurred losses and loss expenses shown in the three-year highlights table on Page 75 are for the respective current accident years, and reserve development on prior accident years is shown separately. Since less than 20 percent of our 2011 excess and surplus lines current accident year incurred losses and loss expenses represents net paid losses, a large majority represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 85.0 percent accident year 2010 loss and loss expense ratio reported as of December 31, 2010, developed favorably by 7.4 percentage points to 77.6 percent due to settling claims for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2011. Accident years 2010 and 2009 for this segment have both developed favorably, as indicated by the progression over time for the ratios in the table.

(Dollars in millions)            
Accident year loss and loss expenses incurred and ratios to earned premiums:    
Accident Year: 2011  2010  2009  2011  2010  2009 
as of December 31, 2011 $51  $38  $14   73.1%  77.6%  52.7%
as of December 31, 2010      42   20       85.0   73.5 
as of December 31, 2009          20           75.6 

Catastrophe losses for all segments were higher in 2011 compared with 2010, as discussed in Consolidated Property Casualty Insurance Results of Operations, Page 51. For the excess and surplus lines segment, catastrophe losses rose somewhat, but the resulting higher ratio for the catastrophe loss component of the loss and loss expense ratio was offset by other factors. Catastrophe losses added 2.1 percentage points for 2011, 1.2 for 2010 and 0.2 percentage points for 2009 to the respective excess and surplus lines accident year loss and loss expense ratios in the table above.

The 2011 decrease of 12.8 percentage points in the current accident year loss and loss expense ratio before catastrophe losses was due in part to trends for large losses incurred relative to earned premium trends, as shown in the table below. New losses of $250,000 or more per claim totaled $13 million in 2011, compared with $12 million in 2010. Relative to significant growth in earned premiums, the modest rise in new large losses reduced the ratio by 5.1 percentage points. Higher pricing, as discussed in Excess and Surplus Lines Insurance Premiums above, also helped reduce the current accident year loss and loss expense ratio before catastrophe losses for 2011 compared with 2010.

Excess and surplus lines reserve development on prior accident years continued to net to a favorable amount in 2011 as $9 million was recognized, resulting in a loss and loss expenses ratio significantly lower than in 2010 and 2009. The 2011 favorable development was primarily due to more reliance on claims experience emergence patterns from our excess and surplus lines business for IBNR loss and loss expense estimates, with relatively less reliance on historical claims experience emergence patterns from similar lines of business for our standard commercial lines business.

We believe the loss and loss expenses reserves for our excess and surplus lines business are adequate. We establish case reserves in a manner consistent with standard lines coverages, despite the more restrictive terms and conditions for excess and surplus lines policies. Our first excess and surplus lines policies were written in 2008. After two years of operation, reserves for estimated unpaid losses and loss expenses were $18 million as of December 31, 2009, for losses that occurred in 2008 and 2009. As of December 31, 2011, an estimated $9 million remained unpaid for loss events that occurred in 2008 and 2009. The inherent uncertainty in estimating reserves is discussed in Property Casualty Insurance Loss and Loss Expense Reserves, Page 42. Development trends are further analyzed in Excess and Surplus Lines Insurance Segment Development of Estimated Reserves by Accident Year Reserves, Page 96.

Cincinnati Financial Corporation – 2011 10-K - 76

Excess and Surplus Lines Insurance Losses by Size

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
New losses greater than $4,000,000 $0  $0  $0   nm   nm 
New losses $1,000,000-$4,000,000  0   3   0   (100)  nm 
New losses $250,000-$1,000,000  13   9   0   44   nm 
Case reserve development above $250,000  4   3   1   33   200 
Total large losses incurred  17   15   1   13   nm 
Other losses excluding catastrophe losses  16   13   14   23   (7)
Catastrophe losses  1   1   0   0   nm 
Total net losses incurred $34  $29  $15   17   93 
                     
              Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                    
New losses greater than $4,000,000  0.0%  0.0%  0.0%  0.0   0.0 
New losses $1,000,000-$4,000,000  0.0   5.1   0.0   (5.1)  5.1 
New losses $250,000-$1,000,000  18.4   18.4   1.5   0.0   16.9 
Case reserve development above $250,000  5.8   14.2   1.9   (8.4)  12.3 
Total large loss ratio  24.2   37.7   3.4   (13.5)  34.3 
Other losses excluding catastrophe losses  22.6   27.0   47.1   (4.4)  (20.1)
Catastrophe losses  2.2   1.2   0.0   1.0   1.2 
Total net loss ratio  49.0%  65.9%  50.5%  (16.9)  15.4 

In 2011, total large losses incurred increased by $2 million or 13 percent, net of reinsurance, a rate much lower than earned premium growth at 43 percent, helping to lower the corresponding ratio by 13.5 percentage points, compared with 2010. In 2010 the total large losses incurred ratio rose as the rate of growth in losses significantly outpaced earned premium growth. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.

Excess and Surplus Lines Insurance Underwriting Expenses

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Commission expenses $12  $8  $5   50   60 
Other underwriting expenses  10   8   17   25   (53)
Total underwriting expenses $22  $16  $22   38   (27)
                     
             Pt. Change  Pt. Change 
Ratios as a percent of earned premiums:                     
Commission expenses  17.3%  16.5%  18.0%  0.8   (1.5)
Other underwriting expenses  14.6   15.2   62.2   (0.6)  (47.0)
Total underwriting expense ratio  31.9%  31.7%  80.2%  0.2   (48.5)

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Commission expenses $27
 $21
 $17
 29
 24
Other underwriting expenses 16
 15
 12
 7
 25
Total underwriting expenses $43
 $36
 $29
 19
 24
Ratios as a percent of earned premiums:       Pt. Change Pt. Change
Commission expense 18.3% 18.6% 18.2% (0.3) 0.4
Other underwriting expense 10.6
 12.5
 13.4
 (1.9) (0.9)
Total underwriting expense ratio 28.9% 31.1% 31.6% (2.2) (0.5)
           
Excess and surplus lines commission expense as a percent of earned premiums rosewas fairly stable during the three-year period ending in 2011, primarily due to the absence of ceding commissions formerly received from our third-party reinsurers. As discussed above, beginning in 2011 treaty reinsurance for our excess and surplus lines segment was provided by The Cincinnati Insurance Company.

2014. Other underwriting expenses declined in 20112014 and 2013 as a percent of earned premiums, primarily due to lower technology related costs and earned premiums rising faster than those expenses. The ratio for other underwriting expenses declined in 2010 primarily due to the reduction of various start-up costs that occurred during 2008 and 2009, the first two years of our excess and surplus lines operation. The primary category of expense reduction was development costs for our rating and policy administration system.

Cincinnati Financial Corporation – 2011 10-K - 77

Excess and Surplus Lines Outlook

The excess and surplus lines markets aremarket is expected to see slight firmingthe magnitude of rate increases continue to decline on several classes of business due to increased capacity in 2012, according to several industry reports.the market. Competition is expected to remain strong, in partespecially on large accounts, due primarily to standard market insurance companies insuring businesses that previously were written by excess and surplus lines insurers. While soft market conditions for commercial lines business overall is the driver of this trend, some firmingFirming is expected primarilyto continue for property coverage due to industry catastrophe losses and for select casualtyspecific classes of business where loss costs are exceeding rates.rates, such as habitational and lessors-risk classes for property coverages and also lawyers professional in errors and omissions coverages. The slowly recovering U.S. economy, another major factor in demand for insurance products, is also expected to contribute to modestly increasing premium volumepremiums during 20122015 for the excess and surplus lines industry.

Industry reports suggest that there are opportunities for managing profitability and growth exist through greater useoftechnology. Technology and data are also being used by excess and surplus lines insurance companiestoidentify new exposures in emerging businesses that need insurance protection or other value-added services.

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

Cincinnati Financial Corporation – 2011 10-K - 78


Cincinnati Financial Corporation - 2014 10-K - Page 86


Life Insurance Results of Operations

Overview – Three-Year Highlights

  Years ended December 31,  2011-2010  2010-2009 
(In millions) 2011  2010  2009  Change %  Change % 
                
Earned premiums $165  $158  $143   4   10 
Separate account investment management fees  2   1   0   100   nm 
Total revenues  167   159   143   5   11 
Contract holders' benefits incurred  189   170   160   11   6 
Investment interest credited to contract holders  (81)  (79)  (69)  (3)  (14)
Operating expenses incurred  62   61   50   2   22 
Total benefits and expenses  170   152   141   12   8 
Life insurance segment profit (loss) $(3) $7  $2   nm   250 

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Earned premiums $198
 $189
 $178
 5
 6
Separate account investment management fees 6
 4
 1
 50
 300
Total revenues 204
 193
 179
 6
 8
Contract holders' benefits incurred 229
 204
 185
 12
 10
Investment interest credited to contract holders (83) (80) (82) (4) 2
Underwriting expenses incurred 63
 60
 79
 5
 (24)
Total benefits and expenses 209
 184
 182
 14
 1
Life insurance segment (loss) profit $(5) $9
 $(3) nm
 nm
           
Performance highlights for the life insurance segment include:

·Revenues – Earned premiums rose 4 percent for the year 2011. The largest life insurance product line, term life insurance, continued to grow earned premiums at a strong rate, up 9 percent in 2011. Gross in-force policy face amounts rose to $77.691 billion at year-end 2011 from $74.124 billion at year-end 2010 and $69.815 billion at year-end 2009.

·Profitability – The life insurance segment frequently reports only a small profit or loss because most of its investment income is included in investment segment results. We include only investment income credited to contract holders (interest assumed in life insurance policy reserve calculations) in life insurance segment results. The segment reported a $3 million loss in 2011 and has averaged a $2 million profit over the past six years.

Life Insurance Premiums

  Years ended December 31,  2011-2010  2010-2009 
(Dollars in millions) 2011  2010  2009  Change %  Change % 
Term life insurance $105  $96  $86   9   12 
Universal life insurance  32   35   28   (9)  25 
Other life insurance, annuity, and disability income products  28   27   29   4   (7)
Net earned premiums $165  $158  $143   4   10 

Revenues – Earned premiums rose 5 percent for the year 2014, as shown in the table below. The largest life insurance product line, term life insurance, rose 7 percent. Net in-force policy face amounts rose 5 percent to $50.356 billion at year-end 2014 from $48.063 billion at year-end 2013 and $45.126 billion at year-end 2012.
Profitability – The life insurance segment frequently reports only a small profit or loss because most of its investment income is included in investments segment results. We include only investment income credited to contract holders (interest assumed in life insurance policy reserve calculations) in life insurance segment results. The segment reported a $5 million loss in 2014, following $9 million of profit in 2013 and a $3 million loss in 2012. It has averaged a $1 million profit over the past five years.

Earned premiums rose $9 million in 2014, primarily due to growth in our term life insurance business, as shown in the table below. Growth in 2013 was also primarily due to term life insurance.
(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Term life insurance $131
 $122
 $115
 7 6
Universal life insurance 35
 35
 34
 0 3
Other life insurance, annuity and disability
   income products
 32
 32
 29
 0 10
Net earned premiums $198
 $189
 $178
 5 6
           
We market term, whole and universal life products, fixed annuities and disability income products. In addition, we offer term, whole and universal life and disability insurance to employees at their worksite. These products provide our property casualty agency force with excellent cross-serving opportunities for both commercial and personal accounts.

Earned premiums increased in 2011 largely because of growth in our term life insurance business. Earned premiums from term insurance grew $9 million, or 9 percent.

Separate account investment management fee income contributed $2 million to total revenue in 2011, compared with $1 million contribution in 2010 and less than $1 million in 2009.

Over the past several years, we have worked to maintain a portfolio of simple yet competitive products primarily under the LifeHorizons banner. Our product development efforts emphasize death benefit protection and guarantees. Distribution expansion within our property casualty insurance agencies remains a high priority. In the past several years, we have added life field marketing representatives for the western, southeastern and northeastern states. Our 3230 life field marketing representatives work in partnership with our 125133 property casualty field marketing representatives. Approximately 69 percent of our term and other life insurance product premiums were generated through our property casualty insurance agency relationships.

Life Insurance Profitability

Although we exclude mostinsurance segment expenses consist principally of:

Contract holders’ benefits incurred, related to traditional life and interest-sensitive products, accounted for 78.4 percent of 2014 total benefits and expenses compared with 77.3 percent in 2013 and 70.1 percent in 2012. Total contract holders’ benefits increased as life policy reserves and net death claims were higher in 2014 compared with 2013. Net death claims increased over 2013, exceeding our projections while remaining within our range of pricing expectations.

Cincinnati Financial Corporation - 2014 10-K - Page 87


Underwriting expenses incurred, net of deferred acquisition costs, accounted for 21.6 percent of 2014 total benefits and expenses compared with 22.7 percent in 2013 and 29.9 percent in 2012. Expenses in 2014 increased 5 percent, matching the percentage increase in earned premiums. In 2013, expenses decreased, primarily due to the impact of unlocking of actuarial assumptions for our universal life insurance companycontracts.

Life insurance segment profitability depends largely on premium levels, the adequacy of product pricing, underwriting skill and operating efficiencies. This segment's results include only investment interest credited to contract holders (interest assumed in life insurance policy reserve calculations). The remaining investment income fromis reported in the investments segment results. The life investment segment results, weportfolio is managed to earn target spreads between earned investment rates on general account assets and rates credited to policyholders. We consider the value of assets under management and investment income for the life investment portfolio as key performance indicators for the life insurance segment.
We seek to maintain a competitive advantage with respect to benefits paid and reserve increases by consistently achieving better than average claims experience due to skilled underwriting. Commissions paid by the life insurance operation are on par with industry averages.

We recognize that assets under management, capital appreciation and investment income are integral to evaluation of the success of the life insurance segment because of the long duration of life products. On a basis that includes investment income and realized gains or losses from life insurance-related invested assets, the life insurance company reported a net profit of $20$39 million in 2011,2014, compared with a net profit of $39$48 million in 20102013 and a net profit of $22$38 million in 2009.2012. The life insurance company portfolio had after-tax net realized investment lossesgains of $12$3 million in 2011, which included $20 million in OTTI charges,2014, compared with after-tax net realized investment gains of $2$4 million each in 2010. Net realized investment losses were $13 million in 2009, including $15 million in OTTI charges.2013 and 2012. Realized investment gains and losses are discussed under Investment ResultsInvestments Results. We exclude most of Operations, Page 81.

Cincinnati Financial Corporation – 2011 10-K - 79

Life segment expenses consist principally of: 

·Contract holders’ benefits incurred, related to traditional life and interest-sensitive products, accounted for 75.3 percent of 2011 total benefits and expenses compared with 73.6 percent in 2010 and 76.4 percent in 2009. Total contract holders’ benefits rose due to net death claims that increased but remained within our range of pricing expectations.

·Operating expenses incurred, net of deferred acquisition costs, accounted for 24.7 percent of 2011 total benefits and expenses compared with 26.4 percent in 2010 and 23.6 percent in 2009. Expenses in 2011 were up slightly, primarily due to increased health care expenses for company associates.

Life segment profitability depends largely on premium levels, the adequacy of product pricing, underwriting skill and operating efficiencies. Life segment results include only investment interest credited to contract holders (interest assumed in life insurance policy reserve calculations). The remainingcompany investment income is reported in the investmentfrom investments segment results. The life investment portfolio is managed to earn target spreads between earned investment rates on general account assets and rates credited to policyholders.


Life Insurance Outlook
We consider the value of assets under management and investment income for the life investment portfolio as key performance indicators forview the life insurance segment.

We seek to maintain a competitive advantage with respect to benefits paidindustry as stable and reserve increases by consistently achieving better than average claims experience due to skilled underwriting. Commissions paid byremain optimistic moving into 2015 despite the life insurance operation are on par with industry averages.

Life Insurance Outlook

The life insurance industry was challenged in 2011 by a persistently low interest rate environment. It now appears likely rates will remain low through 2013 asThe U.S. economy continued to gradually improve with unemployment dropping and Gross Domestic Product marginally improving during the year. We are also encouraged by recent guidance from the Federal Reserve has indicatedthat reiterates its intentplan to keep short-term rates low into 2014. Lowgradually increase the targeted short term interest rates pressure earnings by reducing investment income. They are particularly troublesome for interest-sensitive products that are already crediting interest at or near their guaranteed minimum rates and for products with a fixed rate of interest embedded into their benefit structure.

Because of this low rate environment, we expect broad but incremental price increasesstarting in the life industry in 2012 as companies seek to maintain profit targets in a competitive pricing environment. Such activity is expected to decrease marketplace stability. In addition, turbulence generated from recent introductionlatter half of term universal life products could magnify instability2015.


Disruption in the term market. It now appears likely that pending regulation will clarify existing reserving rulesglobal oil industry and will effectively discourage term universal life sales.other foreign market upheaval led to a surge in demand for U.S. Treasury securities and a corresponding drop in yield. While decreased investment income is a concern, our focus on mortality products insulates us to some degree from the impact of low interest rates. We view this development as a positive since we continue to market term products with simple, more traditional designs.

Whileexpect the economic picture for the U.S. appears to be improving, there is still a lot of uncertainty in a sustained recovery due to high unemployment, low GDP, declining home values and the eurozone crisis. These same factors adversely affected life insurance industry application activity, which was effectively flat last year. Any material uptick will likely be contingent on a stronger U.S. economywaiting and will remain vulnerablewatching to these factors if they continue.

We retain a positive outlook despite all of these obstacles because of our unique distribution system and emphasis on service. We see the historically low ownership of life insurance as a great opportunity and believe that independent agents are the perfect messengerswhat transpires with interest rates later in 2015 before making any major pricing moves.


Another much-discussed threat to communicate the value and stability that our products offer.

Our property casualty agencies remain the main distribution system for our life insurance segment, and we continue to emphasize securing an increasing share of the life insurance premium produced by these agencies. While otherindustry is changing buyer habits. Life insurance ownership is at historic lows, and we view this as an opportunity. We remain committed to emphasizing life insurers expand nontraditional distribution channels such as directinsurance sales we intend to market through agencies affiliated with our property casualty insurance operations or independent life-only agencies. In 2011, our property casualty agencies produced 69 percentdistribution. Our agents give us access to middle market customers who are now more likely to need individual life insurance. Also, as predictive modeling begins to enhance and our life-only agencies 31 percent of ourmake more efficient the life insurance premium.

Operational improvements in technology continueunderwriting process, we are uniquely positioned to make it easier forbenefit due to our agents to do business with us. Major milestones completed in 2011 include the introduction of a suite of electronic applicationsexisting personal and the outsourcing of the policy administration of non-core business. Planned projects in 2012 include an upgraded commissions system and additional straight-through-processing efforts, highlighted by an electronic enrollment system for our worksite line of business. Worksite products are a natural cross-sell opportunity for commercial lines agenciescustomers.


On the regulatory front, we expect the implementation of principle-based statutory reserves to be a long-term positive development, granting us greater flexibility with capital management. Recent legislative action indicates that we may be able to start using the new rules for new business by January 1, 2017. Term insurance remains our core product and were collectively one of our fastest growing lines in 2011.

As planned, annuity sales moderated in 2011. Givenstands to benefit the interest rate issues discussed above, we do not expect to aggressively market our annuity products in 2012. We feel that our asset liability management program allows us to managemost under the risk to in-force business, and we intend to try to keep the impact of new money to a manageable level.

Cincinnati Financial Corporation – 2011 10-K - 80
reserving rules.

Investment

Cincinnati Financial Corporation - 2014 10-K - Page 88


Investments Results of Operations

Overview – Three-Year Highlights

Investment

Investments Results

  Years ended December 31,  2011-2010  2010-2009 
(In millions) 2011  2010  2009  Change %  Change % 
Total investment income, net of expenses, pre-tax $525  $518  $501   1   3 
Investment interest credited to contract holders  (81)  (79)  (69)  (3)  (14)
Realized investment gains and losses summary:                    
Realized investment gains and losses  128   185   440   (31)  (58)
Change in fair value of securities with embedded derivatives  (1)  10   27   nm   (63)
Other-than-temporary impairment charges  (57)  (36)  (131)  (58)  73 
Total realized investment gains and losses  70   159   336   (56)  (53)
Investment operations profit $514  $598  $768   (14)  (22)

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
           
Total investment income, net of expenses $549
 $529
 $531
 4
 0
Investment interest credited to contract holders' (83) (80) (82) (4) 2
Realized investment gains, net 133
 83
 42
 60
 98
Investments profit, pretax $599
 $532
 $491
 13
 8
           
The investmentinvestments segment contributes investment income and realized gains and losses to results of operations. Investments provide our primary source of pretax and after-tax profits.

·Investment income – Pretax investment income increased 1 percent in 2011, primarily because of a higher average dividend payment rate for common stocks in our equity portfolio. Pretax investment income increased 3 percent in 2010, primarily because of additional net purchases in our fixed-maturity portfolio that offset declining bond yields. For the investment portfolio in total, additional net purchases slowed in 2011 relative to 2010 due to higher catastrophe losses that reduced net cash provided by operating activities. After-tax investment income increased 1 percent in 2011, down from 2 percent in 2010, primarily due to lower additional net purchases in our total investment portfolio.

·Realized investment gains and losses – We reported realized investment gains in all three years, largely due to investment sales that were discretionary in timing and amount. Those sales were somewhat offset by OTTI charges.

Investment income – Pretax investment income rose 4 percent in 2014, primarily due to higher dividend income. Dividend income reflected rising dividend rates and net purchases of equity securities from available funds. Interest income rose modestly, as net purchases of fixed-maturity securities offset the continuing effects on bond yields of the low interest rate environment. Pretax investment income decreased less than 1 percent in 2013, as lower interest income essentially offset higher dividend income. Average yields in the investment income table below are based on the average invested asset and cash amounts indicated in the table, using fixed-maturity securities valued at amortized cost and all other securities at fair value.
Realized investment gains and losses – We reported realized investment gains in all three years, largely due to investment sales that were discretionary in timing and amount. Those gains were somewhat offset by OTTI charges.

We believe it is useful to analyze our overall investment performance by using total investment return over several years. Total investment return considers changes in unrealized gains and losses, which are not included in net income, in addition to net investment income and realized investment gains and losses that are included in net income. Changes in unrealized gains and losses shown in the table below include other invested assets. Considering investment gains and losses, both realized and unrealized, over several years helps evaluate performance since gains and losses may experience typical variability during shorter periods of time.
The table below shows total return based on calculation assumptions that simplify cash flow timing that is commonly used in total return measures. This simplified calculation uses data shown in our consolidated financial statements or notes to those statements. Added to invested asset amounts from our consolidated balance sheets are 50 percent of annual amounts pertaining to invested asset categories included in net cash used in investing activities from our consolidated statements of cash flows. The cash flow amounts are reduced by realized gains on investments, with the net result reduced by 50 percent to represent estimated new cash invested during each respective year. All new cash is assumed to be invested at the midpoint of the year.
Total investment return declined 0.6 percentage points in 2014, compared with 2013. The return contribution from the combination of 2014 investment income and net investment gains, both realized and the change in unrealized, essentially matched 2013. The base component of the return calculation, annual average invested assets, was up 8 percent.

Cincinnati Financial Corporation - 2014 10-K - Page 89


(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Invested assets beginning balance:  
  
  
  
  
Fixed maturities $9,121
 $9,093
 $8,779
 0
 4
Equity securities 4,375
 3,373
 2,956
 30
 14
Other invested assets 68
 68
 66
 0
 3
Invested assets beginning balance 13,564
 12,534
 11,801
 8
 6
Average acquisitions (dispositions), net 224
 288
 187
 (22) 54
Annual average invested assets $13,788
 $12,822
 $11,988
 8
 7
           
Total investment return:  
  
  
  
  
Total investment income, net of expenses $549
 $529
 $531
 4
 0
Total realized investment gains and losses 133
 83
 42
 60
 98
Total invested assets change in unrealized gains 391
 459
 391
 (15) 17
Total $1,073
 $1,071
 $964
 0
 11
           
Total return on invested assets before tax 7.8% 8.4% 8.0%  
  
           
Investment Income

The primary drivers of investment income were:

·Interest income was essentially flat for 2011 as the average fixed-maturity pretax yield declined by approximately 20 basis points, offsetting a slightly rising fixed-maturity portfolio on an amortized cost basis. It rose 5 percent in 2010 due to investing our typical allocation of net cash flow from operations in fixed-maturity securities.

·Dividend income rose 5 percent in 2011 after declining 1 percent in 2010. Increases in dividend payment rates for many of the holdings in our common stock portfolio during 2011 drove the increase in dividend income.

Interest income rose $4 million or 1 percent in 2014. The average fixed-maturity pretax yield declined by approximately 14 basis points but was offset by a larger fixed-maturity portfolio that rose 3 percent on an amortized cost basis. Interest income declined in 2013 when that yield declined by approximately 25 basis points while the portfolio rose 5 percent on an amortized cost basis.
Dividend income rose $16 million or 13 percent in 2014, after rising 6 percent in 2013. Increases in dividend payment rates for most of the holdings in our common stock portfolio during both 2014 and 2013, plus a net increase in funds invested in that portfolio for both years, drove the increases in dividend income. In 2011,addition, several of our common stock holdings, in total, issued an additional $5 million in 2012 dividends not typically paid in the fourth quarter, as a result of anticipated dividend tax rate changes effective for 2013.


Cincinnati Financial Corporation - 2014 10-K - Page 90


(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Investment income:  
  
  
  
  
Interest $417
 $413
 $420
 1
 (2)
Dividends 138
 122
 115
 13
 6
Other 2
 3
 3
 (33) 0
Less investment expenses 8
 9
 7
 (11) 29
Total investment income, net of expenses, pretax 549
 529
 531
 4
 0
Less income taxes 130
 128
 129
 2
 (1)
Total investment income, net of expenses, after-tax $419
 $401
 $402
 4
 0
           
Effective tax rate 23.7% 24.1% 24.2%  
  
           
Average invested assets plus cash and cash equivalents $13,951
 $12,832
 $11,847
  
  
Average yield pretax 3.94% 4.12% 4.48%  
  
Average yield after-tax 3.00
 3.13
 3.39
  
  
           
Effective fixed-maturity tax rate 27.0% 27.1% 26.9%  
  
           
Average fixed-maturity at amortized cost $8,755
 $8,430
 $8,153
  
  
Average fixed-maturity yield pretax 4.76% 4.90% 5.15%  
  
Average fixed-maturity yield after-tax 3.48
 3.57
 3.77
  
  
           
In 2014, we continued to invest available cash flow in both fixed income and equity securities in a manner that we believe balances current income needs with longer-term invested assetsasset growth goals.

  Years ended December 31,  2011-2010  2010-2009 
(In millions) 2011  2010  2009  Change %  Change % 
Investment income:                    
Interest $424  $423  $402   0   5 
Dividends  104   99   100   5   (1)
Other  4   4   7   0   (43)
Investment expenses  (7)  (8)  (8)  13   0 
Total investment income, net of expenses, pre-tax  525   518   501   1   3 
Income taxes  (129)  (126)  (118)  (2)  (7)
Total investment income, net of expenses, after-tax $396  $392  $383   1   2 
                     
Effective tax rate  24.6%  24.4%  23.6%        
                     
Average invested assets plus cash and cash equivalents $11,471  $11,129  $10,495         
                     
Average yield pre-tax  4.6%  4.7%  4.8%        
Average yield after-tax  3.5%  3.5%  3.6%        
                     
                     
Effective fixed-maturity tax rate  26.7%  26.4%  25.5%        
                     
Average fixed-maturity at amortized cost $7,986  $7,704  $6,831         
                     
Average fixed-maturity yield pre-tax  5.3%  5.5%  5.9%        
Average fixed-maturity yield after-tax  3.9%  4.0%  4.4%        

While our bond portfolio more than covers our insurance reserve liabilities, we believe our diversified common stock portfolio of mainly blue chip, dividend-paying companies represents one of our best investment opportunities for the long term. We position our portfolio with consideration to both the challenges presented by the current low interest rate environment and the risks presented by potential future inflation. As bonds in our generally laddered portfolio mature or are called over the near term, we will be challenged to replace their current yield. The table below summarizes yield data for bonds in our fixed-maturity portfolio by various maturity periods.
At December 31, 2014Yield % of fixed-maturities
Fixed-maturity yield profile:   
Maturing within one year4.37% 9.2%
Maturing within one to two years4.44
 7.0
Maturing within two to three years4.89
 7.7
Three year average and total maturing4.57
 23.9
Maturing greater than three years4.91
 76.1
Weighted average yield to amortized cost of fixed-maturities4.76
 100.0%
    


Cincinnati Financial Corporation - 2014 10-K - Page 91


The average pretax yield of 3.88 percent for fixed-maturity securities acquired during 2014, shown in the table below, was lower than the 4.76 percent average yield to amortized cost of the fixed-maturity securities portfolio at the end of 2014.
Cincinnati Financial Corporation – 2011 10-K - 81
Year ended December 31,
2014
Average pretax book yield on new fixed-maturities:
Acquired taxable fixed-maturities4.43%
Acquired tax-exempt fixed-maturities3.21
Total fixed-maturities acquired3.88
 


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

Net realized investment gains and losses are made up of realized investment gains andor losses onfrom the saledisposal of securities, changes in the valuation of embedded derivatives within certain convertible securities and OTTI charges. These three areascharges from impaired securities. The factors we consider when evaluating impairments are discussed below.

in Critical Accounting Estimates, Asset Impairment.

Investment gains or losses are recognized upon the sales of investments or as otherwise required under GAAP. The timing of realized gains or losses from sales can have a material effect on results in any given period. However, such gains or losses usually have little, if any, effect on total shareholders’ equity because most equity and fixed-maturity investments are carried at fair value, with the unrealized gain or loss included as a component of other comprehensive income.

Realized Investment Gains and Losses

As appropriate, we buy, hold or sell both fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We generally purchase fixed-maturity securities with the intention to hold until maturity. If they no longer meet our investment criteria, they are divested. Sales of fixed-maturity securities are usually due to a change in credit fundamentals. Pretax realized investment gains in the past three years largely were due to the sale of equity holdings.

Net realized investment gains and losses totaling $128$133 million for the year ended December 31, 2011, reflected:

·$111 million in net realized gains from equity sales.

·$11 million in gains from fixed-maturity sales and calls.

2014, included:

$136 million in net realized gains from equity security sales.
$18 million in net realized gains from fixed-maturity security sales and calls.
$3 million in other net realized gains.
$24 million in OTTI charges to write down six holdings of equity and fixed-maturity securities.

The $185$83 million net realized investment gains and losses in 20102013 were primarilymostly due to a $128$64 million gainin net realized gains from equity security sales.
In 2012, the sale of Verisk Analytics Inc. (NYSE: VRSK).

In 2009, most of the $440$42 million net realized investment gains and losses were primarily due to $624$37 million in net realized gains from equity security sales and $35 million in gains from fixed-maturity security sales of common stock holdings, primarily from five issuers that included the energy, healthcare and financial sectors. Realized losses of $162 million from the sale of several equity securitiescalls, partially offset realized investment gains.

We generally purchase fixed income securities with the intention to hold until maturity. Securities that no longer meet our investment criteria, usually due to a change in credit fundamentals, are divested.

Change in the Valuationby $33 million of Securities with Embedded Derivatives

We have a small portfolio of convertible preferred stocks and bonds that have an embedded derivative component. In 2011, we recorded $1 million in fair value realized losses compared with fair value realized gains of $10 million in 2010 and $27 million in 2009. These changes in fair value were due to the application of ASC 815-15-25, which allows us to account for the entire hybrid financial instrument at fair value, with changes recognized in realized investment gains and losses. The changes in fair values are recognized in net income in the period they occur. See the discussion of Derivative Financial Instruments and Hedging Activities in Item 8, Note 1 of the Consolidated Financial Statements, Page 114, for details on the accounting for convertible security embedded options.

Other-than-temporary Impairment Charges

In 2011, we recorded $57 million in write-downs for 12 securities that we deemed had experienced an other-than-temporary decline in fair value compared with $36 million for 15 securities in 2010 and $131 million for 50 securities in 2009. The factors we consider when evaluating impairments are discussed in Critical Accounting Estimates, Asset Impairment, Page 46. The OTTI charges in 2011, 2010 and 2009 were each 1 percent or less of our investment portfolio at year-end. OTTI charges also include unrealized losses of holdings that we intend to sell but have not yet completed a transaction.

Cincinnati Financial Corporation – 2011 10-K - 82
for 13 securities.


Cincinnati Financial Corporation - 2014 10-K - Page 92


OTTI charges from the investment portfolio by the asset classclasses we described in Item 1, Our Segments, Investments Segment, Page 20, are summarized below:

  Years ended December 31, 
(Dollars in millions) 2011  2010  2009 
Taxable fixed maturities:            
Impairment amount $(4) $(1) $(61)
New amortized cost $6  $9  $81 
Percent to total amortized cost owned  0%  0%  2%
Number of securities other-than-temporarily impaired  6   5   37 
Percent to number of securities owned  0%  0%  3%
             
Tax-exempt fixed maturities:            
Impairment amount $(1) $(2) $(1)
New amortized cost $9  $5  $3 
Percent to total amortized cost owned  0%  0%  0%
Number of securities other-than-temporarily impaired  3   4   2 
Percent to number of securities owned  0%  0%  0%
             
Common equities:            
Impairment amount $(52) $(33) $(59)
New cost $56  $120  $48 
Percent to total cost owned  3%  5%  2%
Number of securities other-than-temporarily impaired  3   4   8 
Percent to number of securities owned  4%  6%  16%
             
Preferred equities:            
Impairment amount $0  $0  $(10)
New cost $0  $0  $5 
Percent to total cost owned  0%  0%  7%
Number of securities other-than-temporarily impaired  0   2   3 
Percent to number of securities owned  0%  8%  12%
             
Total:            
Impairment amount $(57) $(36) $(131)
New cost or amortized cost $71  $134  $137 
Percent to total cost or amortized cost owned  1%  1%  1%
Number of securities other-than-temporarily impaired  12   15   50 
Percent to number of securities owned  1%  1%  2%

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Taxable fixed maturities:  
  
  
Impairment amount $15
 $1
 $1
New amortized cost $22
 $4
 $—
Percent to total amortized cost owned —% —% —%
Number of securities other-than-temporarily impaired 1
 3
 1
Percent to number of securities owned —% —% —%
       
Tax-exempt fixed maturities:  
  
  
Impairment amount $—
 $1
 $—
New amortized cost $—
 $5
 $—
Percent to total amortized cost owned —% —% —%
Number of securities other-than-temporarily impaired 1
 4
 1
Percent to number of securities owned —% —% —%
       
Common equities:  
  
  
Impairment amount $9
 $—
 $32
New cost $79
 $—
 $153
Percent to total cost owned 3% —% 7%
Number of securities other-than-temporarily impaired 4
 —
 11
Percent to number of securities owned 6% —% 15%
       
Totals:  
  
  
Impairment amount $24
 $2
 $33
New cost or amortized cost $101
 $9
 $153
Percent to total cost or amortized cost owned 1% —% 1%
Number of securities other-than-temporarily impaired 6
 7
 13
Percent to number of securities owned —% —% —%
       
OTTI charges from the investment portfolio by industry are summarized as follows:

  Years ended December 31, 
(In millions) 2011  2010  2009 
Fixed maturities:            
Financial $(1) $0  $(30)
Services cyclical  (1)  0   (14)
Real estate  0   (1)  (11)
Consumer cyclical  (1)  0   (5)
Other  (2)  (2)  (2)
Total fixed maturities  (5)  (3)  (62)
             
Common equities:            
Industrials  0   0   (35)
Consumer discretionary  0   0   (10)
Material  0   0   (8)
Health  (2)  (21)  (6)
Financial  (50)  0   0 
Information technology  0   (12)  0 
Total common equities  (52)  (33)  (59)
             
Preferred equities:            
Financial  0   0   (10)
Total preferred equities  0   0   (10)
Total $(57) $(36) $(131)

Cincinnati Financial Corporation – 2011 10-K - 83

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Fixed maturities:  
  
  
Basic industry $15
 $—
 $—
Municipal —
 1
 —
Utilities —
 1
 —
Services cyclical —
 —
 1
Total fixed maturities 15
 2
 1
       
Common equities:  
  
  
Consumer Staples 6
 —
 —
Consumer discretionary —
 —
 14
Industrials —
 —
 8
Material —
 —
 7
Energy 3
 —
 2
Health —
 —
 1
Total common equities 9
 —
 32
Total $24
 $2
 $33
       

Cincinnati Financial Corporation - 2014 10-K - Page 93



Investments Outlook

The general market view is that, in light of Federal Reserve commentary, interest rates are likely to remain well below historic averages for at least the next two to three years. This will continue to apply pressure on investment income.

We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth. In 2012,2015, we expect to continue to allocate a portion of cash available for investment to equity securities, taking into consideration corporate liquidity and income requirements, as well as insurance department regulations and rating agency comments. We discuss our portfolio strategies in Item 1, Our Segments, Investments Segment, Page 20.

Segment.


We believe that a weak or prolonged recovery from current economic conditions could heighten the risk of renewed pressure on securities markets, which could lead to additional OTTI charges. Our asset impairment committee continues to monitor the investment portfolio. The current asset impairment policy is described in Critical Accounting Estimates, Asset Impairment, Page 46.

Impairment.


Other

Revenues and expenses in 20112014 for our Other businesses matched 2010.operations each decreased slightly, compared with 2013. Other includes non-investmentnoninvestment operations of the parent company and its commercial leasing and financial services subsidiary, CFC Investment Company, and former subsidiary CinFin Capital Management Company. Losses before income taxes for Other were largely driven by interest expense from debt of the parent company.

  Years ended December 31,  2011-2010  2010-2009 
(In millions) 2011  2010  2009  Change %  Change % 
Interest and fees on loans and leases $7  $7  $7   0   0 
Other revenues  1   1   2   0   (50)
Total revenues  8   8   9   0   (11)
Interest expense  54   54   55   0   (2)
Operating expenses  13   11   14   18   (21)
Total expenses  67   65   69   3   (6)
Other loss $(59) $(57) $(60)  (4)  5 

(Dollars in millions) Years ended December 31, 2014-2013 2013-2012
  2014 2013 2012 Change % Change %
Interest and fees on loans and leases $6
 $7
 $7
 (14) 0
Other revenues 2
 2
 2
 0
 0
Total revenues 8
 9
 9
 (11) 0
Interest expense 53
 54
 54
 (2) 0
Operating expenses 14
 15
 14
 (7) 7
Total expenses 67
 69
 68
 (3) 1
Other loss $(59) $(60) $(59) 2
 (2)
           
Taxes

We had $10$196 million of federal income tax expense in 20112014 compared with $124$197 million in 20102013 and $150$145 million in 2009.2012. Our corporate effective tax rate for 20112014 was 5.727.2 percent compared with 24.827.6 percent in 20102013 and 25.725.6 percent in 2009.

2012.

The change in our effective tax rate was primarily due to changes in pretax income from underwriting results changes in investment income and the amount of realized investment gains and losses. Changes to tax-exempt interest and the dividend received deductionlosses, with small changes in the current year compared with prior years also contributed to the change.

amount of permanent book-tax differences.


Historically, we have pursued a strategy of investing some portion of cash flow in tax-advantaged fixed-maturity and equity securities to minimize our overall tax liability and maximize after-tax earnings. See Item 1, Our Segments,Tax-Exempt Fixed Maturities, Page 21 for further discussion on municipal bond purchases in our fixed-maturity investment portfolio. For our property casualty insurance subsidiaries, approximately 85 percent of incomeinterest from tax-advantaged fixed-maturity investments isand approximately 60 percent of dividends from qualified equities are exempt from federal tax.tax after applying proration from the 1986 Tax Reform Act. Our non-insurancenoninsurance companies own an immaterial amount of tax-advantaged fixed-maturity investments. For our insurance subsidiaries, the dividend received deduction, after the dividend proration of the 1986 Tax Reform Act, exempts approximately 60 percent of dividends from qualified equities from federal tax. For our non-insurance subsidiaries,noninsurance companies, the dividend received deduction exempts 70 percent of dividends from qualified equities. Details about ourOur life insurance company does not own tax-advantaged, fixed maturity investments or equities subject to the dividend received deduction. Our effective tax rate arereconciliation is found onin Item 8, Note 11 Income Taxes,of the Consolidated Financial Statements.


Cincinnati Financial Corporation - 2014 10-K - Page 29.

94
Cincinnati Financial Corporation – 2011 10-K - 84


Liquidity and Capital Resources

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

Parent Company Liquidity

At December 31, 2014, the parent company had $1.784 billion in cash and marketable securities, providing strong liquidity to fund cash outflows, as needed. The payment of dividends to shareholders is largely based upon receiving subsidiary dividends. Alternatively, we could sell investments or use our line of credit to support the dividend payment.

The parent company’s primary meanssources of meeting liquidity requirementscash inflows are dividends from our insurance subsidiary, investment income and sale proceeds from investments held at the parent company level.investments. The parent company’s primary contractual obligationscash outflows are primarily interest and principal payments on long- and short-term debt, as described under Contractual Obligations, Page 87. Other uses of parent company cash include dividends to shareholders, common stock repurchases and general operating expenses described under Other Commitments, Page 88. As of December 31, 2011, the parent company had $1.051 billion in cash and marketable securities, providing strong liquidity to fund uses of cash.

expenses. The table below shows a summary, by the direct cash flow method, of the major sources and uses of liquidity bycash flow of the parent company.

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Sources of liquidity:      
Insurance subsidiary dividends received $400
 $350
 $285
Proceeds from stock options exercised 22
 25
 9
Investment income received 46
 41
 42
Uses of liquidity:  
  
  
Debt interest payments $52
 $53
 $53
Short-term debt repayment 55
 —
 —
Pension contribution 5
 15
 14
Shareholders' dividend payments 278
 263
 256
Purchase of treasury shares 21
 52
 —
       
Dividends received from subsidiariesthe subsidiary in 20112014 were $100$50 million lessmore than 2010 due to higher catastrophe losses that reduced2013, supported by strong property casualty insurance subsidiary net cash provided byflow from operating activities. No dividends were received from our insurance subsidiary in 2009, in order to maintain strong statutory surplus and financial strength ratings. We expect 2015 parent company sources of liquiditycash flows to increase in 2012 and beyond, primarily from improved profitability from our property casualty operations, assuming a more normal level of catastrophe losses.be similar to 2014. The majority of expenditures for the parent company have been consistent during the last three years, and we expect future expenditures to remain fairly stable. Share repurchases are discretionary, depending on cash availability and capital management decisions.

  Years ended December 31, 
(In millions) 2011  2010  2009 
Sources of liquidity:         
Insurance subsidiary dividends received $170  $270  $0 
Short-term debt  55   0   0 
Investment income received  41   41   41 
Uses of liquidity:            
Debt interest payments $53  $52  $52 
Pension payments  35   25   34 
Shareholders dividend payments  255   252   249 
Purchase of treasury shares  32   10   (1)


Insurance Subsidiary Liquidity

Our

The parent company’s insurance subsidiary’ssubsidiary is largely the operations of the property casualty segments. The primary meanssources of meeting liquidity requirementscash inflows are collection of premiums, investment income, maturity of fixed-income securities and sale proceeds from investments held at the subsidiary level.investments. Property casualty insurance premiums generally are received before losses are paid under the policies purchased with those premiums. Our insurance subsidiary’s expendituresCash outflows are property casualtyprimarily loss and loss expenses, commissions, salaries, taxes, operating expenses and other ongoing operating expenses.investment purchases. Over the past three years,three-year period ended December 31, 2014, premium receipts and investment income have been more than sufficient to pay claims and operating expenses. Excess cash flow wasflows were partially used to pay dividends to the parent company. We are not aware of any known trends that would materially change historical cash flow results over the next 12 months, other than fluctuations in catastrophe claims. We discuss the factors that affected insurance operationsclaims and other large losses either individually or in Commercial Lines and Personal Lines Insurance Results of Operations, Page 57 and Page 69.

aggregate.


The table below shows a summary of operating cash flow for property casualty insurance (direct method). LowerHistorically, annual variation in operating cash flow for 2011 reflected the unusually high levelhas been largely related to changes in amounts of catastrophe losses.

  Years ended December 31, 
(In millions) 2011  2010  2009 
Premiums collected $3,080  $2,971  $2,957 
Loss and loss expenses paid  (2,241)  (1,858)  (1,910)
Commissions and other underwriting expenses paid  (1,005)  (954)  (951)
Insurance subsidiary cash flow from underwriting  (166)  159   96 
Investment income received  357   350   317 
Insurance operating cash flow $191  $509  $413 


Cincinnati Financial Corporation – 2011 10-K - 85
Cincinnati Financial Corporation - 2014 10-K - Page 95


(Dollars in millions) Years ended December 31,
  2014 2013 2012
Premiums collected $4,147
 $3,866
 $3,451
Loss and loss expenses paid (2,413) (2,172) (2,229)
Commissions and other underwriting expenses paid (1,239) (1,164) (1,035)
Cash flow from underwriting 495
 530
 187
Investment income received 371
 355
 360
Cash flow from operations $866
 $885
 $547
       

Additional

Other Sources of Liquidity

Investment income is a primary source of liquidity for both the parent company and our insurance subsidiary operations. For both, cash

Cash in excess of operating requirements and shareholder dividends is invested in fixed-maturity and equity securities. Equity securities provide the potential for future increases in dividend income and for capital appreciation. In Item 1, Investments Segment, Page 20, we discuss our investment strategy, portfolio allocation and quality.

Cash generated from investment income is the mostprovides an important investment contribution to cash flow. While we have never sold investments to make claim payments, theflow and liquidity. The sale of investments could provide an additional source of liquidity at either the parent company or insurance subsidiary level, if required. However, we follow a buy-and-hold investment philosophy, seeking to compound cash flows over the long-term. In addition to possible sales of investments, proceeds of call or maturities of fixed maturitiesfixed-maturity securities also can provide liquidity. During the next five years, $3.324five-year period beginning in 2015, $4.138 billion, or 37.943.7 percent, of our fixed-maturity portfolio willis scheduled to mature. At year-end 2011,2014, total unrealized gains in the investment portfolio, before deferred income taxes, were $1.489$2.719 billion. Liquidity sourced from our investment portfolio is not materially at risk from European-based securities, as our total exposure to such securities at the end of 20112014 was $424$417 million on a fair value basis, or 3.62.9 percent of our total invested assets. We own no European sovereign debt. Our European-based securities are summarized by country in Item 7A, Qualitative and Quantitative Disclosures About Market Risk, Page 102.

Further, financialRisk.

Financial resources of the parent company also could be made available to our insurance subsidiaries, if circumstances required. This flexibility would include our ability to access the capital markets and short-term bank borrowings.

Our debt totaled $894 million at year-end 2011, consisting of $790 million of long-term debt and $104 million in borrowings on our short-term lines of credit. We generally have minimized our reliance on debt financing although we may use lines of creditthe line to fund short-term cash needs.

Long-Term Debt

We provide details of our three long-term notes in Item 8, Note 8 of the Consolidated Financial Statements, Page 127.Statements. None of the notes are encumbered by rating triggers:

·$391 million aggregate principal amount of 6.92% senior debentures due 2028.

·$28 million aggregate principal amount of 6.9% senior debentures due 2028.

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

triggers. The total principal amount of our long-term debt at December 31, 2014, was $793 million and included:

$391 million aggregate principal amount of 6.92% senior debentures due 2028.
$28 million aggregate principal amount of 6.9% senior debentures due 2028.
$374 million aggregate principal amount of 6.125% senior debentures due 2034.

The company’s senior debt is rated investment grade by independent rating firms. On December 23, 2011, A.M. Best lowered its debt rating for our senior debt from a to a-. Three otherNone of the four rating agencies made no changes to our debt ratings in 2011.2014. Our debt ratings at February 25, 2015, were: a- from the other rating agencies are:A.M. Best, BBB+ from Fitch Ratings, A3 from Moody’s Investors Service and BBB from Standard & Poor’s Ratings Services.

Short-Term Debt

At December 31, 2011,2014, we had two linesa $225 million line of credit with commercial banks, totaling $225with $49 million withborrowed. That line of credit had a $104 million borrowed.balance at December 31, 2013. During the third quarter of 2011, there was a2014, we repaid $55 million increase to the previous balanceas part of $49 million in short-term debt by the parent company, primarily to fund share repurchases using our relatively low-cost source of borrowing.There was no change in the amount of the $49 million short-term debt during 2010 or 2009.routine cash management. Access to these linesthis line of credit requires compliance with various covenants, including maintaining a minimum consolidated net worth and not exceeding a 2030 percent consolidated leveragedebt-to-total capital ratio, as defined by the agreement. As ofAt December 31, 2011,2014, we were wellhad in excess of $1.1 billion in net worth compared with our covenant net worth requirement. We are considerably within compliance with all covenants under the credit agreementsagreement, and believe we will remain in compliance.

Our $150 million unsecured revolving line of credit is administered by The Huntington National Bank. It was established in 2007 and will mature in July, 2012. CFC Investment Company also is a borrower under this line of credit. At year-end 2011, there was $104 million borrowed on this line of credit. The Huntington National Bank, a subsidiary of Huntington Bancshares Inc. (Nasdaq:HBAN), is the lead participant with a $75 million share. U.S. Bancorp (NYSE:USB), Bank of America Corporation (NYSE:BAC) and Northern Trust Corporation (Nasdaq:NTRS) also participate, each providing $25 million of capacity.

This line of credit includes a swing line sub-facility for same-day borrowing in the amount of $35 million. The credit agreement provides alternative interest charges based on the type of borrowing and our debt rating. The interest rate charged is adjusted LIBOR plus thean applicable margin. Based on our debt ratings at year-end 2011, interest for Eurodollar rate advances is adjusted LIBOR plus 33 basis points, and for floating rate advances is adjusted LIBOR. Utilization and commitment fees based on Cincinnati Financial Corporation’s year-end 2011 debt ratings are 5 basis points and 8 basis points, respectively.

Our $75

The $225 million unsecured revolving line of credit withis administered by PNC Bank, N.A., a subsidiary of The PNC Financial Services Group Inc. (NYSE:PNC). The agreement was renewed effective August 29, 2011,established in 2012, extended for a one-year term totwo years in 2014, and will expire on August 27, 2012.in May 2019. Our subsidiary CFC Investment Company also is a borrower under this line of credit. PNC Bank is the lead participant bookrunner with a subsidiary$65 million share. Fifth Third Bancorp (Nasdaq:FITB) is

Cincinnati Financial Corporation - 2014 10-K - Page 96


the syndication agent with a $65 million share. U.S. Bancorp (NYSE:USB), BB&T Corp (NYSE:BBT) and Huntington Bancshares, Inc. (Nasdaq:HBAN) each provide $25 million of The PNC Financial Services Group Inc. (NYSE:PNC).

Cincinnati Financial Corporation – 2011 10-K - 86
capacity, and Northern Trust Corporation (Nasdaq:NTRS), provides $20 million of capacity.

We anticipate renewing our lines of credit in 2012 with terms and conditions similar to the expiring agreements. Should available terms and conditions be unacceptable to us, we could repay our short-term debt with the $1.051 billion in cash and marketable securities held by the parent company at year-end 2011, without a material adverse effect on our results of operations.

Capital Resources

Capital resources consisting of shareholders’ equity and total debt represent our overall financial strength to support writingcurrent obligations and growinggrowth in our insurance businesses. At December 31, 2011,2014, we had total shareholders’capital of $7.413 billion. Shareholders’ equity of $5.055was $6.573 billion, an increase of $23$503 million, or less than 18 percent, from the prior year. Our total debt was $894$840 million, up $55down $54 million from a year ago. We seek to maintain a solid financial position and provide capital flexibility by keeping our ratio of debt to total capital moderate. We target a ratio below 20 percent. At year-end 2011,2014, the ratio was 15.011.3 percent compared with 14.312.8 percent at year-end 2010. The increase in the debt-to-total-capital ratio was due to the $55 million increase in debt during the year 2011.

2013.

At the discretion of the board of directors, the company can return cashcapital directly to shareholders:

·Dividends to shareholders –The ability of the company to continue paying cash dividends is subject to factors the board of directors deem relevant. While the board and management believe there is merit to sustaining the company’s record of dividend increases, our first priority is the company’s financial strength. Over the past 10 years, the company has paid an average of approximately 56 percent of net income as dividends. Through 2011, the board had increased our cash dividend for 51 consecutive years. The board decision in August 2011 to increase the dividend demonstrated confidence in the company’s strong capital, liquidity, financial flexibility and initiatives to improve earnings performance.

·Common stock repurchase – Generally, our board believes that share repurchases can help fulfill our commitment to enhancing shareholder value. Consequently, the board has authorized the repurchase of outstanding shares, giving management discretion to purchase shares at reasonable prices in light of circumstances at the time of purchase.

shareholders as discussed below.

Dividends to shareholders –The ability of our company to continue paying cash dividends is subject to factors the board of directors deem relevant. While the board and management believe there is merit to sustaining the company’s long record of dividend increases, our first priority is the company’s financial strength. Over the past 10 years, the company has paid an average of 60 percent of net income as dividends. Through 2014, the board had increased our cash dividend for 54 consecutive years. The board decision in January 2015 to increase the dividend demonstrated confidence in the company’s strong capital, liquidity, financial flexibility and initiatives to grow earnings.
Common stock repurchase – Generally, our board believes that share repurchases can help fulfill our commitment to enhancing shareholder value. Consequently, the board has authorized the repurchase of outstanding shares, giving management discretion to purchase shares at reasonable prices in light of circumstances at the time of purchase. Our approach since mid-2008 washas been to preservehold capital adequate to support future growth of our insurance operations and repurchase a minimal amount of shares. Those repurchases were intended to partially offset the issuance of shares through equity compensation plans, primarily due to vesting of service-based restricted stock units of equity awards granted in the past. In August 2011, repurchases occurred because we believed our stock price was attractive, compared with book value, for such repurchases. Our corporate Code of Conduct restricts repurchases during certain time periods. The details of the repurchase authorizations and activity are described in Item 5, Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, Page 34.

Securities.

Obligations

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


Cincinnati Financial Corporation - 2014 10-K - Page 97


Contractual Obligations

As of December 31, 2011,2014, we estimate our future contractual obligations as follows:

(In millions) Year  Years  Years  There-    
Payment due by period 2012  2013-2014  2015-2016  after  Total 
Gross property casualty loss and loss expense payments $1,647  $1,183  $544  $906  $4,280 
Gross life policyholder obligations  74   156   168   3,766   4,164 
Interest on long-term debt  52   104   104   734   994 
Long-term debt  -   -   -   793   793 
Short-term debt  104   -   -   -   104 
Profit-sharing commissions  68   -   -   -   68 
Operating property  3   4   -   -   7 
Capital lease obligations  14   16   2   -   32 
Computer hardware and software  16   20   9   -   45 
Other invested assets  4   3   -   -   7 
Total $1,982  $1,486  $827  $6,199  $10,494 

(Dollars in millions) Year Years Years There-  
Payment due by period 2015 2016-2017 2018-2019 after Total
Gross property casualty loss and loss expense payments $1,439
 $1,438
 $620
 $941
 $4,438
Gross life policyholder obligations 101
 136
 166
 4,373
 4,776
Interest on long-term debt 52
 104
 104
 578
 838
Long-term debt —
 —
 —
 793
 793
Short-term debt 49
 —
 —
 —
 49
Profit-sharing commissions 121
 —
 —
 —
 121
Operating property 1
 1
 —
 —
 2
Capital lease obligations 18
 12
 5
 1
 36
Computer software 13
 3
 1
 —
 17
Qualified pension plan contribution 5
 —
 —
 —
 5
Other invested assets 5
 9
 6
 —
 20
Total $1,804
 $1,703
 $902
 $6,686
 $11,095
           
Our two most significant contractual obligations are discussed in conjunction with related insurance reserves in Gross Property Casualty Loss and Loss Expense PaymentsObligations and GrossReserves and Life Insurance Policyholder Obligations beginning on Pages 89 and 97, respectively.Reserves in this report. Other future contractual obligations include:

·Interest on long- and short-term debt – We expect total interest expense to be approximately $52 million in 2012. We discuss outstanding debt in Additional Sources of Liquidity, Page 86.

·Property casualty profit-sharing commissions – Profit-sharing commissions are paid to agencies using a formula that takes into account agency profitability and premium volume. We estimate 2012 profit-sharing commission payments of approximately $68 million.

Cincinnati Financial Corporation – 2011 10-K - 87
Interest on long-term debt – We expect total interest expense to be $52 million in 2015. We discuss outstanding debt in Additional Sources of Liquidity.

·Computer hardware and software – We expect to spend $36 million over the next three years for current material commitments for computer hardware and software, including maintenance contracts on hardware and other known obligations. We discuss below the non-contractual expenses we anticipate for computer hardware and software in 2012.

Computer software – We expect to spend approximately $16 million over the next three years for current material commitments for computer software, including maintenance contracts on hardware and other known obligations.

Other Commitments

At December 31, 2011,2014, we believe our most significant other commitments are:

·Qualified pension plan – In 2012, we plan to make a voluntary cash contribution of $14 million to our qualified pension plan. We currently estimate an $18 million net pension expense and an $8 million expense for company 401(k) contributions in 2012.

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

·Other operating expenses – Many of our operating expenses are not contractual obligations but reflect the ongoing expenses of our business. In addition to contractual obligations for hardware and software discussed above, we anticipate capitalizing approximately $4 million in spending for key technology initiatives in 2012. Capitalized development costs related to key technology initiatives totaled $5 million in 2011, $7 million in 2010 and $28 million in 2009. These activities are conducted at our discretion, and we have no material contractual obligations for activities planned as part of these projects.

Commissions – We expect commission payments to generally track with written premiums.
Other operating expenses – Many of our operating expenses are not contractual obligations but reflect the ongoing expenses of our business. In addition to contractual obligations for software disclosed above, we anticipate capitalizing approximately $5 million in spending for key technology initiatives in 2015. Capitalized development costs related to key technology initiatives totaled $5 million in 2014 and $4 million in 2013. These activities are conducted at our discretion, and we have no material contractual obligations for activities planned as part of these projects.

Liquidity and Capital Resources Outlook

A long-term perspective governs our liquidity and capital resources decisions, with the goal of benefitingbenefitting our policyholders, agents, shareholders and associates over time. While ourOur 2014 insurance results for 2011 and 2010 did not meetwere within our longer-term combined ratio objective of being consistently belowaveraging within the range of 95 percent to 100 percent our improved capital position since year-end 2009 provided adequate financial cushion. We have taken the necessary steps to protect our capital and are confidentover five-year periods, resulting in our strategies to return our insurance operations to growth and profitability.

strong underwriting profits.

At December 31, 2011,2014, we had $438$591 million in cash and cash equivalents. That strong liquidity and our consistent cash flows givesgive us the flexibility to meet current obligations and commitments while building value by prudently investing where we see potential for both current income and long-term return.

They also provide adequate financial cushion when short-term operating results do not meet our objectives.

In any year, we consider the most likely source of pressure on liquidity would be an unusually high level of catastrophe loss payments within a short period of time, which issuch as what occurred in the second quarter of 2011. We responded with a reduced insurance subsidiary dividend to our parent company in 2011, compared with 2010.2011. There could also be additional obligations for our insurance operations due to increasing severity or frequency of non-catastrophenoncatastrophe claims. To address the risk of unusualunusually large insurance loss obligations including catastrophe events, we maintain property

Cincinnati Financial Corporation - 2014 10-K - Page 98


casualty reinsurance contracts with highly rated reinsurers, as discussed under 20122015 Reinsurance Programs, Page 98.Programs. We also monitor the financial condition of our reinsurers because their insolvency could place in jeopardyjeopardize a portion of our $622$545 million in outstanding reinsurance receivablesrecoverable asset at December 31, 2011.

2014.

Parent-company liquidity could be constrained by Ohio regulatory requirements that restrict the dividends insurance subsidiaries can pay. During 2015, our insurance subsidiary can declare $447 million in dividends to our parent company without regulatory approval. We do not expect future pension contributions to constrain our liquidity. The fair value of plan assets is 92101 percent of the accumulated benefit obligation at December 31, 2011.

2014. Continued economic weakness also has the potential to affect our liquidity and capital resources in a number of different ways, potentially including:including delinquent payments from agencies, defaults on interest payments by fixed-maturity holdings in our portfolio, dividend reductions by holdings in our equity portfolio or declines in the market value of holdings in our portfolio.

Further, parent company liquidity could be constrained by Ohio regulatory requirements that restrict the dividends insurance subsidiaries can pay. During 2012, total dividends that our insurance subsidiary can pay to our parent company without regulatory approval are approximately $375 million.

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.

Property Casualty Loss and Loss Expense Obligations and Reserves

Our estimate of future gross property casualty loss and loss expense payments of $4.438 billion is lower than loss and loss expense reserves of $4.485 billion reported on our balance sheet at December 31, 2014. The $47 million difference is due to certain life and health loss reserves. Reserving practices are discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves.
For the business lines in the commercial and personal lines insurance segments, and in total for the excess and surplus lines insurance segment, the following table details gross reserves among case, IBNR and loss expense reserves, net of salvage and subrogation reserves. Reserving practices are discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 42.

subrogation. The riseincrease in total gross reserves was primarily due to higher casea $120 million increase in IBNR reserves, including $77 million for our commercial casualty line of business and IBNR$28 million for our workers' compensation line of business. Total gross reserves for our commercial property, specialty packagesexcess and homeownersurplus lines of business. Catastropheinsurance segment rose $45 million, reflecting a 28 percent increase in earned premiums.


Cincinnati Financial Corporation - 2014 10-K - Page 99


Property Casualty Gross Loss and non-catastrophe weather losses accounted for most of the increase.

Cincinnati Financial Corporation – 2011 10-K - 88
Loss Expense Reserves

  Loss reserves  Loss  Total    
  Case  IBNR  expense  gross  Percent 
(In millions) reserves  reserves  reserves  reserves  of total 
At December 31, 2011                    
Commercial lines insurance                    
Commercial casualty $875  $365  $535  $1,775   41.5%
Commercial property  190   35   36   261   6.1 
Commercial auto  260   30   62   352   8.2 
Workers' compensation  467   464   108   1,039   24.3 
Specialty packages  100   9   32   141   3.3 
Surety and executive risk  126   5   77   208   4.9 
Machinery and equipment  1   3   1   5   0.1 
Subtotal  2,019   911   851   3,781   88.4
                     
Personal lines insurance                    
Personal auto  129   (3)  52   178   4.2 
Homeowner  76   39   27   142   3.3 
Other personal  41   52   5   98   2.3 
Subtotal  246   88   84   418   9.8 
                     
Excess and surplus lines  43   18   20   81   1.8 
Total $2,308  $1,017  $955  $4,280   100.0%
At December 31, 2010                    
Commercial lines insurance                    
Commercial casualty $966  $321  $533  $1,820   44.0%
Commercial property  130   13   32   175   4.2 
Commercial auto  258   41   60   359   8.7 
Workers' compensation  476   465   147   1,088   26.3 
Specialty packages  80   2   10   92   2.2 
Surety and executive risk  130   2   57   189   4.6 
Machinery and equipment  1   3   1   5   0.1 
Subtotal  2,041   847   840   3,728   90.1 
                     
Personal lines insurance                    
Personal auto  126   (1)  28   153   3.7 
Homeowner  73   21   17   111   2.7 
Other personal  37   43   9   89   2.1 
Subtotal  236   63   54   353   8.5 
                     
Excess and surplus lines  29   10   17   56   1.4 
                     
Total $2,306  $920  $911  $4,137   100.0%

(Dollars in millions) Loss reserves Loss Total  
  Case IBNR expense gross Percent
  reserves reserves reserves reserves of total
At December, 31 2014          
Commercial lines insurance:  
  
  
  
  
Commercial casualty $794
 $470
 $520
 $1,784
 40.2%
Commercial property 203
 (4) 39
 238
 5.4
Commercial auto 298
 58
 77
 433
 9.8
Workers' compensation 412
 550
 94
 1,056
 23.8
Other commercial 188
 11
 87
 286
 6.4
Subtotal 1,895
 1,085
 817
 3,797
 85.6
Personal lines insurance:  
  
  
  
  
Personal auto 195
 (21) 63
 237
 5.3
Homeowner 74
 12
 23
 109
 2.5
Other personal 45
 43
 5
 93
 2.0
Subtotal 314
 34
 91
 439
 9.8
Excess and surplus lines 77
 79
 46
 202
 4.6
Total $2,286
 $1,198
 $954
 $4,438
 100.0%
           
At December 31, 2013  
  
  
  
  
Commercial lines insurance:  
  
  
  
  
Commercial casualty $790
 $393
 $496
 $1,679
 39.6%
Commercial property 189
 30
 37
 256
 6.0
Commercial auto 264
 40
 69
 373
 8.8
Workers' compensation 421
 522
 95
 1,038
 24.5
Other commercial 211
 15
 95
 321
 7.6
Subtotal 1,875
 1,000
 792
 3,667
 86.5
Personal lines insurance:  
  
  
  
  
Personal auto 178
 (18) 61
 221
 5.2
Homeowner 80
 9
 24
 113
 2.7
Other personal 46
 32
 5
 83
 1.9
Subtotal 304
 23
 90
 417
 9.8
Excess and surplus lines 65
 55
 37
 157
 3.7
Total $2,244
 $1,078
 $919
 $4,241
 100.0%
           
Asbestos and Environmental Loss and Loss Expense Reserves

We carried $136$81 million of net loss and loss expense reserves for asbestos and environmental claims asand $51 million of reserves for mold claims at year-end 2011,2014, compared with $134$77 million and $51 million, respectively, for such claims as ofat year-end 2010. These2013. The asbestos and environmental claims amounts constitute 3.5for each respective year constituted 2.0 percent and 3.51.9 percent of total net loss and loss expense reserves as ofat these year-end dates.

We believe our exposure to asbestos and environmental claims is limited, largely because our reinsurance retention was $500,000 or below prior to 1987. We also were predominantly a personal lines company in the 1960s and 1970s, when asbestos and pollution exclusions were not widely used by commercial lines insurers. During the 1980s and early 1990s, commercial lines grew as a percentage of our overall business and our exposure to asbestos and environmental claims grew accordingly. Over that period, we endorsed to or included in most policies an asbestos and environmental exclusion.

Additionally, since 2002, we have revised policy terms where permitted by state regulation to limit our exposure to mold claims prospectively and further reduce our exposure to other environmental claims generally. Finally, we have not engaged in any mergers or acquisitions through which such a liability could have been assumed. We

Cincinnati Financial Corporation - 2014 10-K - Page 100


continue to monitor our claims for evidence of material exposure to other mass tort classes such as silicosis, but we have found no such credible evidence to date.

Reserving data for asbestos and environmental claims has characteristics that limit the usefulness of the methods and models used to analyze loss and loss expense reserves for other claims. Specifically, asbestos and environmental loss and loss expenses for different accident years do not emerge independently of one another as loss development and Bornhuetter-Ferguson methods assume. In addition, asbestos and environmental loss and loss expense data available to date doesdid not reflect a well-defined tail, greatly complicating the identification of an appropriate probabilistic trend family model.

Due to these considerations, our actuarial staff elected to use At year-end 2014, we used a weighted average of a paid survival ratio method and report year method to estimate reserves for incurred but not yet reportedIBNR asbestos and environmental claims. Although highly uncertain, reserve estimates obtained via this method have developed in a reasonably stable fashion since 2004. Since ourOur exposure to such claims is limited,limited; we believe the paid survival ratio method is sufficient.

a weighted average of both methods produces a sufficient level of reserves.

Gross Property Casualty Loss and Loss Expense Payments

Our estimate of future gross property casualty loss and loss expense payments of $4.280 billion is lower than loss and loss expense reserves of $4.339 billion reported on our balance sheet at December 31, 2011. The $59 million difference is due to life and health loss reserves, as discussed in Item 8, Note 4 of the Consolidated Financial Statements, Page 125.

Cincinnati Financial Corporation – 2011 10-K - 89

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

Our estimates of gross property casualty loss and loss expense payments do not include reinsurance receivables or ceded losses. As discussed in 20122015 Reinsurance Programs, Page 98, we purchase reinsurance to mitigate our property casualty risk exposure. Ceded property casualty reinsurance unpaid receivables of $375$282 million at year-end 20112014 are an offset to our gross property casualty loss and loss expense obligations. Our reinsurance program mitigates the liquidity risk of a single large loss or an unexpected rise in claim severity or frequency due to a catastrophic event. Reinsurance does not relieve us of our obligation to pay covered claims. The financial strength of our reinsurers is important because our ability to recover losses under our reinsurance agreements depends on the financial viability of the reinsurers.

We direct our associates and agencies to settle claims and pay losses as quickly as is practical, and we made $2.241$2.413 billion of net claim payments during 2011.2014. At year-end 2011,2014, total net property casualty reserves of $3.905$4.156 billion reflected $2.056$2.091 billion in unpaid amounts on reported claims (case reserves), $920 million in loss expense reserves and $929 million$1.145 billion in estimates of claims that were incurred but had not yet been reported (IBNR). The specific amounts and timing of obligations related to case reserves and associated loss expenses are not set contractually. The amounts and timing of obligations for IBNR claims and related loss expenses are unknown. We discuss our methods of establishing loss and loss expense reserves and our belief that reserves are adequate in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 42.

Reserves.

The historical pattern of using premium receipts for the payment of loss and loss expenses has enabled us to extend slightly the maturities of our investment portfolio beyond the estimated settlement date of the loss reserves. The effective duration of our consolidated property casualty fixed-maturity portfolio was 4.34.4 years at year-end 2011.2014. By contrast, the duration of our loss and loss expense reserves was approximately 4.254.24 years. We believe this difference in duration does not affect our ability to meet current obligations because cash flow from operations is sufficient to meet these obligations. In addition, investment holdings could be sold, if necessary, to meet higher than anticipated loss and loss expenses.

Range of Reasonable Reserves

The company established a reasonably likely range for net loss and loss expense reserves of $3.677$3.922 billion to $4.056$4.296 billion at year-end 2011,2014, with the company carrying net reserves of $3.905$4.156 billion. The likely range was $3.571$3.727 billion to $3.952$4.078 billion at year-end 2010,2013, with the company carrying net reserves of $3.811$3.942 billion. Our loss and loss expense reserves are not discounted for the time-value of money, but we have reduced the reserves by an estimate of the amount of salvage and subrogation payments we expect to recover. We provide a reconciliation of the property casualty reserves with the loss and loss expense reserve as shown on the balance sheet in Item 8, Note 4 of the Consolidated Financial Statements, Page 125.

The low point of each year’s range corresponds to approximately one standard error below each year’s mean reserve estimate, while the high point corresponds to approximately one standard error above each year’s mean reserve estimate. We discussed management’s reasons for basing reasonably likely reserve ranges on standard errors in Critical Accounting Estimates, Reserve Estimate Variability, Page 45.

Variability.

The ranges reflect our assessment of the most likely unpaid loss and loss expenses at year-end 20112014 and 2010.2013. However, actual unpaid loss and loss expenses could nonetheless fall outside of the indicated ranges.


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Management’s best estimate of total loss and loss expense reserves as of year-end 20112014 was consistent with the corresponding actuarial best estimate. Management’s best estimate of total loss and loss expense reserves as of year-end 20102013 also was consistent with the corresponding actuarial best estimate.

Development of Reserves for Loss and Loss Expenses

We reconcile the beginning and ending balances of our reserves for loss and loss expenses at December 31, 2011, 20102014, 2013 and 2009,2012, in Item 8, Note 4 of the Consolidated Financial Statements, Page 125.Statements. The reconciliation of our year-end 20102013 reserve balance to net incurred losses one year later recognizes approximately $285recognized $98 million of favorable reserve development.

The table on the following pagebelow shows the development of estimated reserves for loss and loss expenses for the past 10 years.

·Section A shows our total property casualty loss and loss expense reserves recorded at the balance sheet date for each of the indicated calendar years on a gross and net basis. Those reserves represent the estimated amount of unpaid loss and loss expenses for claims arising in the indicated calendar year and all prior accident years at the balance sheet date, including losses that were incurred but not yet reported to the company.

Cincinnati Financial Corporation – 2011 10-K - 90
Section A shows our total property casualty loss and loss expense reserves recorded at the balance sheet date for each of the indicated calendar years on a gross and net basis. Those reserves represent the estimated amount of unpaid loss and loss expenses for claims arising in the indicated calendar year and all prior accident years at the balance sheet date, including losses that were incurred but not yet reported to the company.

·Section B shows the cumulative net amount paid with respect to the previously recorded reserve as of the end of each succeeding year. For example, as of December 31, 2011, we had paid $1.910 billion of loss and loss expenses in calendar years 2002 through 2011 for losses that occurred in accident years 2001 and prior. An estimated $259 million of losses remained unpaid as of year-end 2011 (net re-estimated reserves of $2.169 billion from Section C less cumulative net paid loss and loss expenses of $1.910 billion).

·Section C shows the re-estimated amount of the previously reported reserves based on experience as of the end of each succeeding year. The estimate is increased or decreased as we learn more about the development of the related claims.

·Section D, cumulative net reserve development, represents the aggregate change in the estimates for all years subsequent to the year the reserves were initially established. For example, reserves established at December 31, 2001, had developed favorably by $183 million over 10 years, net of reinsurance, which was reflected in income over the 10 years. The table shows favorable reserve development as a negative number. Favorable reserve development on prior accident years, which represents a negative expense, is favorable to income. The “One year later” line in the table shows the effects on income before income taxes in 2011, 2010 and 2009 of changes in estimates of the reserves for loss and loss expenses for all accident years. The effect was favorable to pretax income for those three years by $285 million, $304 million, and $188 million, respectively.

Section B shows the cumulative net amount paid with respect to the previously recorded reserve as of the end of each succeeding year. For example, as of December 31, 2014, we had paid $2.355 billion of loss and loss expenses in calendar years 2005 through 2014 for losses that occurred in accident years 2004 and prior. An estimated $330 million of losses remained unpaid as of year-end 2014 (net re-estimated reserves of $2.685 billion from Section C less cumulative net paid loss and loss expenses of $2.355 billion).
Section C shows the re-estimated amount of the previously reported reserves based on experience as of the end of each succeeding year. The estimate is increased or decreased as we learn more about the development of the related claims.
Section D, cumulative net reserve development, represents the aggregate change in the estimates for all years subsequent to the year the reserves were initially established. For example, reserves established at December 31, 2004, had developed favorably by $292 million over 10 years, net of reinsurance, which was reflected in income over the 10 years. The table shows favorable reserve development as a negative number. Favorable reserve development on prior accident years, which represents a negative expense, is favorable to income. The “One year later” line in the table shows the effects on income before income taxes in 2014, 2013 and 2012 of changes in estimates of the reserves for loss and loss expenses for all accident years. The effect was favorable to pretax income for those three years by $98 million, $147 million, and $396 million, respectively.

In evaluating the development of our estimated reserves for loss and loss expenses for the past 10 years, note that each amount includes the effects of all changes in amounts for prior periods. For example, payments or reserve adjustments related to losses settled in 20112014 but incurred in 20052008 are included in the cumulative deficiency or redundancy amount for 20052008 and each subsequent year. In addition, this table presents calendar year data, not accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that affected development of reserves in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future reserve development based on this data.

Differences between the property casualty reserves reported in the accompanying consolidated balance sheets (prepared in accordance with GAAP) and those same reserves reported in the annual statements (filed with state insurance departments in accordance with statutory accounting practices – SAP), relate principally to the reporting of reinsurance recoverables, which are recognized as receivables for GAAP and as an offset to reserves for SAP.


Cincinnati Financial Corporation – 2011 10-K - 91
Cincinnati Financial Corporation - 2014 10-K - Page 102



Development of Estimated Reserves for Property and Casualty Loss and Loss Expenses

  Calendar year ended December 31,             
(In millions) 2001  2002  2003  2004  2005  2006  2007  2008  2009  2010  2011 
A. Originally reported reserves for unpaid loss and loss expenses:                             
Gross of reinsurance $2,865  $3,150  $3,386  $3,514  $3,629  $3,860  $3,925  $4,040  $4,096  $4,137  $4,280 
Reinsurance recoverable  513   542   541   537   518   504   528   542   435   326   375 
Net of reinsurance $2,352  $2,608  $2,845  $2,977  $3,111  $3,356  $3,397  $3,498  $3,661  $3,811  $3,905 
                                             
B. Cumulative net paid as of:                                   
One year later $758  $799  $817  $907  $944  $1,006  $979  $994  $926  $1,035     
Two years later  1,194   1,235   1,293   1,426   1,502   1,547   1,523   1,529   1,511         
Three years later  1,455   1,519   1,626   1,758   1,845   1,896   1,857   1,912             
Four years later  1,614   1,716   1,823   1,963   2,059   2,096   2,102                 
Five years later  1,717   1,823   1,945   2,096   2,176   2,247                     
Six years later  1,778   1,889   2,031   2,163   2,282                         
Seven years later  1,819   1,940   2,077   2,238                             
Eight years later  1,855   1,973   2,132                                 
Nine years later  1,879   2,015                                     
Ten years later  1,910                                         
                                             
C. Net reserves re-estimated as of:                                   
One year later $2,307  $2,528  $2,649  $2,817  $2,995  $3,112  $3,074  $3,310  $3,357  $3,526     
Two years later  2,263   2,377   2,546   2,743   2,871   2,893   3,042   3,197   3,251         
Three years later  2,178   2,336   2,489   2,657   2,724   2,898   3,005   3,124             
Four years later  2,153   2,299   2,452   2,578   2,776   2,907   2,957                 
Five years later  2,127   2,276   2,414   2,645   2,788   2,900                     
Six years later  2,122   2,259   2,469   2,662   2,790                         
Seven years later  2,111   2,298   2,491   2,665                             
Eight years later  2,147   2,318   2,496                                 
Nine years later  2,165   2,323                                     
Ten years later  2,169                                         
                                             
D. Cumulative net redundancy as of:                                   
One year later $(45) $(80) $(196) $(160) $(116) $(244) $(323) $(188) $(304) $(285)    
Two years later  (89)  (231)  (299)  (234)  (240)  (463)  (355)  (301)  (410)        
Three years later  (174)  (272)  (356)  (320)  (387)  (458)  (392)  (374)            
Four years later  (199)  (309)  (393)  (399)  (335)  (449)  (440)                
Five years later  (225)  (332)  (431)  (332)  (323)  (456)                    
Six years later  (230)  (349)  (376)  (315)  (321)                        
Seven years later  (241)  (310)  (354)  (312)                            
Eight years later  (205)  (290)  (349)                                
Nine years later  (187)  (285)                                    
Ten years later  (183)                                        
                                             
Net reserves re-estimated—latest $2,169  $2,323  $2,496  $2,665  $2,790  $2,900  $2,957  $3,124  $3,251  $3,526     
Re-estimated recoverable—latest  481   513   492   511   477   467   448   477   376   304     
Gross liability re-estimated—latest $2,650  $2,836  $2,988  $3,176  $3,267  $3,367  $3,405  $3,601  $3,627  $3,830     
                                             
Cumulative gross redundancy $(215) $(314) $(398) $(338) $(362) $(493) $(520) $(439) $(469) $(307)    

Cincinnati Financial Corporation – 2011 10-K - 92
(Dollar in millions)                      
  2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
A.  Originally reported reserves for unpaid loss and loss expenses:
Gross of reinsurance $3,514
 $3,629
 $3,860
 $3,925
 $4,040
 $4,096
 $4,137
 $4,280
 $4,169
 $4,241
 $4,438
Reinsurance recoverable 537
 518
 504
 528
 542
 435
 326
 375
 356
 299
 282
Net of reinsurance $2,977
 $3,111
 $3,356
 $3,397
 $3,498
 $3,661
 $3,811
 $3,905
 $3,813
 $3,942
 $4,156
                       
B.  Cumulative net paid as of:
One year later $907
 $944
 $1,006
 $979
 $994
 $926
 $1,035
 $1,106
 $1,127
 $1,201
  
Two years later 1,426
 1,502
 1,547
 1,523
 1,529
 1,511
 1,663
 1,717
 1,822
  
  
Three years later 1,758
 1,845
 1,896
 1,857
 1,912
 1,921
 2,052
 2,170
      
Four years later 1,963
 2,059
 2,096
 2,102
 2,174
 2,188
 2,330
  
  
  
  
Five years later 2,096
 2,176
 2,247
 2,264
 2,343
 2,359
          
Six years later 2,163
 2,282
 2,360
 2,371
 2,455
  
  
  
  
  
  
Seven years later 2,238
 2,355
 2,437
 2,443
              
Eight years later 2,291
 2,402
 2,484
  
  
  
  
  
  
  
  
Nine years later 2,328
 2,439
                  
Ten years later 2,355
  
  
  
  
  
  
  
  
  
  
                       
C.  Net reserves re-estimated as of:
One year later $2,817
 $2,995
 $3,112
 $3,074
 $3,310
 $3,357
 $3,526
 $3,509
 $3,666
 $3,844
  
Two years later 2,743
 2,871
 2,893
 3,042
 3,197
 3,251
 3,283
 3,464
 3,624
    
Three years later 2,657
 2,724
 2,898
 3,005
 3,124
 3,076
 3,279
 3,437
  
  
  
Four years later 2,578
 2,776
 2,907
 2,957
 3,043
 3,121
 3,270
        
Five years later 2,645
 2,788
 2,900
 2,925
 3,073
 3,115
  
  
  
  
  
Six years later 2,662
 2,790
 2,890
 2,949
 3,069
            
Seven years later 2,665
 2,792
 2,918
 2,955
  
  
  
  
  
  
  
Eight years later 2,657
 2,821
 2,918
                
Nine years later 2,684
 2,818
  
  
  
  
  
  
  
  
  
Ten years later 2,685
                    
                       
D.  Cumulative net redundancy as of:
One year later $(160) $(116) $(244) $(323) $(188) $(304) $(285) $(396) $(147) $(98)  
Two years later (234) (240) (463) (355) (301) (410) (528) (441) (189)  
  
Three years later (320) (387) (458) (392) (374) (585) (532) (468)      
Four years later (399) (335) (449) (440) (455) (540) (541)  
  
  
  
Five years later (332) (323) (456) (472) (425) (546)          
Six years later (315) (321) (466) (448) (429)  
  
  
  
  
  
Seven years later (312) (319) (438) (442)              
Eight years later (320) (290) (438)  
  
  
  
  
  
  
  
Nine years later (293) (293)                  
Ten years later (292)  
  
  
  
  
  
  
  
    
                       
Net reserves re-estimated—latest $2,685
 $2,818
 $2,918
 $2,955
 $3,069
 $3,115
 $3,270
 $3,437
 $3,624
 $3,844
  
Re-estimated recoverable—latest 526
 500
 492
 480
 517
 422
 351
 413
 366
 307
  
Gross liability re-estimated—latest $3,211
 $3,318
 $3,410
 $3,435
 $3,586
 $3,537
 $3,621
 $3,850
 $3,990
 $4,151
  
                       
Cumulative gross redundancy $(303) $(311) $(450) $(490) $(454) $(559) $(516) $(430) $(179) $(90)  
                       

Commercial Lines

Cincinnati Financial Corporation - 2014 10-K - Page 103



Property Casualty Insurance Segment Development of Estimated Reserves by Accident Year

The following table shows net reserve changes at year-end 2011, 20102014, 2013 and 20092012 by commercial line of businessproperty casualty segment and accident year:

  Commercial  Commercial  Commercial  Workers'  Specialty  Surety &  Machinery &    
(In millions) casualty  property  auto  compensation  packages  exec risk  equipment  Totals 
As of December 31, 2011                                
2010 accident year $(117) $(9) $(14) $(32) $2  $21  $1  $(148)
2009 accident year  12   (5)  (6)  (18)  1   (1)  0   (17)
2008 accident year  (16)  (4)  (4)  (10)  0   11   0   (23)
2007 accident year  (23)  0   (3)  (10)  (2)  2   0   (36)
2006 accident year  (2)  1   0   (7)  0   0   0   (8)
2005 accident year  1   (1)  0   (4)  1   0   0   (3)
2004 and prior accident years  13   0   0   (16)  3   1   0   1 
Deficiency/(redundancy) $(132) $(18) $(27) $(97) $5  $34  $1  $(234)
                                 
Reserves estimated as of December 31, 2010 $1,644  $156  $355  $1,010  $91  $152  $5  $3,413 
Reserves re-estimated as of December 31, 2011  1,512   138   328   913   96   186   6   3,179 
Deficiency/(redundancy) $(132) $(18) $(27) $(97) $5  $34  $1  $(234)
                                 
As of December 31, 2010                                
2009 accident year $(105) $(8) $(22) $(54) $0  $14  $(1) $(176)
2008 accident year  (51)  0   (9)  5   0   (6)  (1)  (62)
2007 accident year  (33)  (1)  (5)  (1)  (2)  (1)  0   (43)
2006 accident year  (5)  0   3   5   0   (3)  0   0 
2005 accident year  0   (1)  (1)  (5)  (1)  (1)  0   (9)
2004 accident year  (4)  0   1   0   1   0   0   (2)
2003 and prior accident years  12   0   0   11   0   0   0   23 
Deficiency/(redundancy) $(186) $(10) $(33) $(39) $(2) $3  $(2) $(269)
                                 
Reserves estimated as of December 31, 2009 $1,605  $115  $374  $975  $81  $153  $5  $3,308 
Reserves re-estimated as of December 31, 2010  1,419   105   341   936   79   156   3   3,039 
Deficiency/(redundancy) $(186) $(10) $(33) $(39) $(2) $3  $(2) $(269)
                                 
As of December 31, 2009                                
2008 accident year $(89) $(15) $(13) $(11) $(4) $(2) $0  $(134)
2007 accident year  (36)  0   (5)  5   2   9   (1)  (26)
2006 accident year  (33)  4   (4)  2   0   (3)  (1)  (35)
2005 accident year  (17)  (1)  1   6   2   (5)  0   (14)
2004 accident year  3   (2)  0   6   1   0   0   8 
2003 accident year  9   (1)  1   6   0   0   0   15 
2002 and prior accident years  9   (1)  0   34   (1)  (2)  0   39 
Deficiency/(redundancy) $(154) $(16) $(20) $48  $0  $(3) $(2) $(147)
                                 
Reserves estimated as of December 31, 2008 $1,559  $136  $385  $842  $82  $130  $7  $3,141 
Reserves re-estimated as of December 31, 2009  1,405   120   365   890   82   127   5   2,994 
Deficiency/(redundancy) $(154) $(16) $(20) $48  $0  $(3) $(2) $(147)

(Dollars in millions) Commercial Personal E&S  
  lines lines lines Totals
As of December 31, 2014
2013 accident year $(33) $(15) $(10) $(58)
2012 accident year (7) —
 (8) (15)
2011 accident year (9) (1) (6) (16)
2010 accident year —
 2
 (5) (3)
2009 accident year (3) —
 —
 (3)
2008 accident year (9) —
 —
 (9)
2007 and prior accident years 4
 2
 —
 6
(Favorable)/unfavorable $(57) $(12) $(29) $(98)
         
As of December 31, 2013
2012 accident year $(67) $(27) $(9) $(103)
2011 accident year (25) (13) (3) (41)
2010 accident year (48) 1
 (1) (48)
2009 accident year 13
 2
 —
 15
2008 accident year 9
 (1) —
 8
2007 accident year (5) —
 —
 (5)
2006 and prior accident years 28
 (1) —
 27
(Favorable)/unfavorable $(95) $(39) $(13) $(147)
         
As of December 31, 2012
2011 accident year $(93) $(60) $—
 $(153)
2010 accident year (49) (16) (3) (68)
2009 accident year (80) (11) (2) (93)
2008 accident year (45) (5) —
 (50)
2007 accident year (18) (3) —
 (21)
2006 accident year (12) (1) —
 (13)
2005 and prior accident years 5
 (3) —
 2
(Favorable)/unfavorable $(292) $(99) $(5) $(396)
         
Overall favorable development for commercial linesconsolidated property casualty reserves of $234$98 million in 20112014 illustrated the potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty and workers’ compensation. Favorable reserve development of $132 million for the commercial casualty line accounted for approximately 55 percent of the segment total in 2011, while favorable reserve development of $97 million for the workers’ compensation line accounted for approximately 40 percent of the segment total in 2011. Drivers of significant reserve development are discussed below.

·Moderation in commercial casualty trend selections – We saw moderating loss cost trends continue in several commercial casualty coverages, most notably for umbrella liability coverage. A number of factors seem to have played a role, including a slow economic recovery, favorable court decisions, policy form restrictions, and claims department initiatives. Accordingly, it is not entirely clear whether these moderating loss cost trends will persist, and our actuaries have responded cautiously to these changes, electing to recognize improvements in trends used for estimating reserves in a progressive, incremental fashion.

·Commercial casualty loss emergence – As in 2010, commercial multiple peril liability coverages contributed to favorable reserve development. Actual reported losses in calendar year 2011 fell short of the amount projected at year-end 2010 by more than $40 million.

·Commercial auto loss emergence – Similar to commercial casualty, commercial auto liability contributed to favorable development because both paid and reported loss emergence during calendar year 2011 was substantially less than expected. As of December 31, 2010 we expected reported loss emergence in the next 12 calendar months to be approximately $21 million; actual emergence was $17 million. Paid loss emergence was approximately 16 percent lower than expected at the prior year-end.

Cincinnati Financial Corporation – 2011 10-K - 93

·Workers’ compensation trends and initiatives – Favorable calendar year development was $97 million. Accident year 2010 contributed $32 million in favorable development. Accident year 2009 contributed $18 million in favorable development with all other prior years accounting for the balance. The trend for payments to be made in future calendar years is down slightly, likely due to the claims initiatives that began in 2010. Initiatives to improve profitability for our workers’ compensation line of business are discussed in Commercial Lines Insurance Results of Operations, Commercial Lines of Business Analysis, Page 62.

·Surety and executive risk unfavorable development – Reserve development on prior accident years recorded during 2011 for accident year 2010 was primarily due to the refined line of business allocation process for loss expenses discussed in Commercial Lines Insurance Results of Operations, Commercial Lines of Business Analysis, Page 62. Unfavorable development recorded for accident year 2008 was mostly due to adverse loss emergence on a few large claims related to coverage provided to financial institutions.

As noted in Critical Accounting Estimates, Key Assumptions - Loss Reserving, Page 44, our models predict that actual loss and loss expense emergence will differ from projections, and we do not attempt to monitor or identify such normal variations.

Cincinnati Financial Corporation – 2011 10-K - 94
The table in Property Casualty Loss and Loss Expense Obligations and Reserves shows reserves by segment and lines of business and the components of gross reserves among case, IBNR and loss expense reserves.

Personal Lines Insurance Segment Development of Estimated Reserves by Accident Year

The following table shows net reserve changes at year-end 2011, 2010 and 2009 by personal

Cincinnati Financial Corporation - 2014 10-K - Page 104


Reserve development on all prior accident years for our commercial casualty line of business netted to an unfavorable $5 million. Favorable reserve development of $51 million for the workers’ compensation line accounted for nearly 90 percent of our commercial lines insurance segment net total in 2014. Our commercial property line of business experienced $34 million of favorable reserve development on prior accident years recorded during 2014, including $13 million for catastrophe losses. Our commercial auto line of business experienced $39 million of unfavorable reserve development on prior accident years recorded during 2014. Drivers of significant reserve development for various lines of business are discussed below.
Commercial casualty adverse development for prior accident years – During 2014, we experienced unanticipated claims development on prior accident years, especially for umbrella liability coverage. That included an increase in aggregate paid losses or loss expenses for accident years three or more years old. Those payments emerged at levels higher than we expected, particularly for accident years 2005 and 2007. Considering that new data, our actuaries responded cautiously, and we increased our estimates for IBNR losses and loss expenses for all prior accident year:

  Personal     Other    
(In millions) auto  Homeowner  personal  Totals 
As of December 31, 2011                
2010 accident year $(2) $(15) $(9) $(26)
2009 accident year  (2)  (6)  (2)  (10)
2008 accident year  0   1   (2)  (1)
2007 accident year  (1)  0   (2)  (3)
2006 accident year  0   0   (2)  (2)
2005 accident year  0   0   (1)  (1)
2004 and prior accident years  1   0   0   1 
Deficiency/(redundancy) $(4) $(20) $(18) $(42)
                 
Reserves estimated as of December 31, 2010 $154  $105  $84  $343 
Reserves re-estimated as of December 31, 2011  150   85   66   301 
Deficiency/(redundancy) $(4) $(20) $(18) $(42)
                 
As of December 31, 2010                
2009 accident year $(2) $(3) $(8) $(13)
2008 accident year  (2)  (3)  (8)  (13)
2007 accident year  1   0   (3)  (2)
2006 accident year  (1)  0   (2)  (3)
2005 accident year  (1)  0   2   1 
2004 accident year  (1)  0   (1)  (2)
2003 and prior accident years  (1)  0   (1)  (2)
Deficiency/(redundancy) $(7) $(6) $(21) $(34)
                 
Reserves estimated as of December 31, 2009 $154  $89  $89  $332 
Reserves re-estimated as of December 31, 2010  147   83   68   298 
Deficiency/(redundancy) $(7) $(6) $(21) $(34)
                 
As of December 31, 2009                
2008 accident year $(3) $(2) $(17) $(22)
2007 accident year  (3)  3   (12)  (12)
2006 accident year  (1)  0   (10)  (11)
2005 accident year  1   0   (1)  0 
2004 accident year  0   0   5   5 
2003 accident year  0   (1)  2   1 
2002 and prior accident years  0   0   (1)  (1)
Deficiency/(redundancy) $(6) $0  $(34) $(40)
                 
Reserves estimated as of December 31, 2008 $165  $82  $106  $353 
Reserves re-estimated as of December 31, 2009  159   82   72   313 
Deficiency/(redundancy) $(6) $0  $(34) $(40)

years in total. Our products liability coverage within commercial casualty experienced a higher-than-anticipated 2014 increase in paid losses or loss expenses, primarily for more recent prior accident years. That increase, plus an approximately equal increase in reserves, resulted in net unfavorable or adverse development on prior accident years for products liability. In 2014, our medical professional liability coverage within commercial casualty experienced net favorable development on prior accident years, but less so than in 2013, when it was more than twice the annual average of years 2010 through 2012.

Commercial auto loss emergence – Commercial auto continued to develop unfavorably during calendar year 2014. This line of business has been troublesome for the industry as a whole in recent years. As part of the U.S. economic recession of a few years ago, slowing business activity influenced our estimates of reserves for ultimate losses and loss expenses during that period. As the economy slowly recovered, we believe we were slow to recognize some of the higher loss cost effects in current accident year reserve estimates for at least part of that period. As claims that occurred during that period have become more mature, paid and reported loss cost trends resulted in us increasing our reserve estimates. Initiatives to improve profitability of our commercial auto line of business are discussed in Commercial Lines Insurance Results, Commercial Lines of Business Analysis.
Workers’ compensation – We continue to see favorable reserve development, for all prior accident years in aggregate. During 2014, the trend for estimated payments to be made in future calendar years was down slightly. However, we continue to monitor this line closely, as a sudden increase in trend for future payments has a highly leveraged effect. During 2013, paid loss amounts were higher than we expected for several older accident years, and we increased our reserve estimates accordingly. Initiatives to improve profitability of our workers’ compensation line of business are discussed in Commercial Lines Insurance Results, Commercial Lines of Business Analysis.

Favorable development forof personal lines insurance segment reserves illustrates the potential for revisions inherent in estimating reserves. We continued to see favorableIn 2014, we experienced unfavorable reserve development related to umbrella liability coverage in the other personal line of business. Among the factors that appeared to be causing moderating loss cost trends were a slow economic recovery,That followed several years of favorable court decisions, policy form restrictions, and claims department initiatives.

reserve development.

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

For our homeowner line of business, the favorable reserve development on prior accident years recorded during 2011 for accident years 2010 and 2009 was primarily due to a reduction in case reserves for losses.

Cincinnati Financial Corporation – 2011 10-K - 95

Excess and Surplus Lines Insurance Segment Development of Estimated Reserves by Accident Year

For the excess and surplus lines insurance segment, the table showing reserves by segment and lines of business in Property Casualty Loss and Loss Expense Obligations and Reserves, Page 88, shows the components of gross reserves among case, IBNR and loss expense reserves. Total gross reserves were up $25$45 million from year-end 20102013 primarily due to the increase in premiums and exposures for this segment, as we discussed in Excess and Surplus Lines Insurance Results of Operations, Page 75.Results. Favorable development during 20112014 of $9$29 million for excess and surplus lines insurance segment reserves, shown in the table belowabove, illustrates the potential for revisions inherent in estimating reserves. During 2011, we began to rely more heavily on development patterns from our own excess and surplus lines business, contributing to the modest decrease in reserves, especially for the defense and cost containment portion of loss expense reserves.

The following table shows net reserve changes at year-end 2011, 2010 and 2009 by accident year:

           Excess & 
(In millions)          Surplus Lines 
As of December 31, 2011                
2010 accident year          $(4)
2009 accident year              (5)
2008 accident year              0 
Deficiency/(redundancy)             $(9)
                 
Reserves estimated as of December 31, 2010             $55 
Reserves re-estimated as of December 31, 2011              46 
Deficiency/(redundancy)             $(9)
                 
As of December 31, 2010             
2009 accident year             $(1)
2008 accident year              0 
Deficiency/(redundancy)             $(1)
                 
Reserves estimated as of December 31, 2009             $23 
Reserves re-estimated as of December 31, 2010              22 
Deficiency/(redundancy)          $(1)
                 
As of December 31, 2009                
2008 accident year             $(1)
Deficiency/(redundancy)             $(1)
                 
Reserves estimated as of December 31, 2008             $0 
Reserves re-estimated as of December 31, 2009           (1)
Deficiency/(redundancy)             $(1)

Cincinnati Financial Corporation – 2011 10-K - 96


Cincinnati Financial Corporation - 2014 10-K - Page 105


Life Insurance Policyholder Obligations and Reserves

Gross Life Insurance Policyholder Obligations

Our estimates of life, annuity and disability policyholder obligations reflect future estimated cash payments to be made to policyholders for future policy benefits, policyholders’ account balances and separate account liabilities. These estimates include death and disability income claims, policy surrenders, policy maturities, annuity payments, minimum guarantees on separate account products, commissions and premium taxes offset by expected future deposits and premiums on in-force contracts.

Our estimates of gross life, annuity and disability obligations do not reflect net recoveries from reinsurance agreements. Ceded life reinsurance receivables were $225$250 million at year-end 2011.2014. As discussed in 20122015 Reinsurance Programs, Page 98, we purchase reinsurance to mitigate our life insurance risk exposure. At year-end 2011,2014, ceded death benefits represented approximately 45.942.8 percent of our total gross policy face amounts in force.

These estimated cash outflows are undiscounted with respect to interest. As a result, the sum of the cash outflows for all years of $4.164$4.776 billion (total of life insurance obligations) exceeds the liabilities recorded in life policy and investment contract reserves and separate accounts for future policy benefits and claims of $2.835$3.194 billion (total of life insurance policy reserves and separate account policy reserves). Separate account policy reserves make up all but $7$22 million of separate accounts liabilities.

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

Life Insurance Reserves

Gross life policy reserves were $2.214$2.497 billion at year-end 2011,2014, compared with $2.034$2.390 billion at year-end 2010.2013. The increase was primarily due to reserves for deferred annuities.traditional life insurance contracts. We establish reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates and investment yields, including a provision for uncertainty. Once these assumptions are established, they generally are maintained throughout the lives of the contracts. We use both our own experience and industry experience adjusted for historical trends in arriving at our assumptions for expected mortality, morbidity and withdrawal rates. We use our own experience and historical trends for setting our assumptions for expected expenses. We base our assumptions for expected investment income on our own experience adjusted for current economic conditions.

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

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

Cincinnati Financial Corporation – 2011 10-K - 97

2012

2015 Reinsurance Programs

A single large loss or an unexpected rise in claims severity or frequency due to a catastrophic event could present us with a liquidity risk. In an effort to control such losses, we avoid marketing property casualty insurance in specific geographic areas and monitor our exposure in certain coastal regions. An example of this is the reduction of our homeowner policies in the southeastern U.S. coastal region in recent years. This area was identified as a major contributor to our catastrophe probable maximum loss estimates and has subsequently been greatly reduced. We also continually review aggregate exposures to huge disasters and purchase reinsurance protection to cover these exposures. We use the Risk Management Solutions (RMS) and Applied Insurance Research (AIR) models to evaluate exposures to a once-in-a-100 yearonce-in-a-100-year and a once-in-a-250 yearonce-in-a-250-year event to help determine appropriate reinsurance coverage programs. In conjunction with these activities, we also continue to evaluate information provided by our reinsurance broker. These various sources explore and analyze credible scientific evidence, including the impact of global climate change, which may affect our exposure under insurance policies.


Cincinnati Financial Corporation - 2014 10-K - Page 106


To help determine appropriate reinsurance coverage for hurricane, earthquake and tornado/hail exposures, we use the RMS and AIR models to estimate the probable maximum loss from a single event or multiple events occurring in a one-year period. The models are proprietary in nature, and the vendors that provide them periodically update the models, sometimes resulting in significant changes to their estimate of probable maximum loss. As of the end of 2011,2014, both models indicated that a hurricane event represents our largest amount of exposure to losses. The table below summarizes estimated probabilities and the corresponding probable maximum loss from a single hurricane event occurring in a one-year period, and indicates the effect of such losses on consolidated shareholders’ equity as ofat December 31, 2011.2014. Net losses are net of reinsurance and income taxes.

 RMS  AIR 
       Percent        Percent 
(Dollars in millions)  Gross  Net  of total  Gross  Net  of total 
Probability as of December 31, 2011 Losses  Losses  equity  Losses  Losses  equity 
2.0% of a 1 in 50 year event $688  $208   4.1% $403  $110   2.2%
1.0% of a 1 in 100 year event  983   503   10.0   626   146   2.9 
0.4% of a 1 in 250 year event  1,482   1,001   19.8   872   392   7.8 
0.2% of a 1 in 500 year event  1,940   1,459   28.9   1,153   673   13.3 

taxes, and assume our 2015 reinsurance programs apply.

(Dollars in millions)RMS ModelAIR Model
   Percent  Percent
 GrossNetof totalGrossNetof total
Probability at December 31, 2014losseslossesequitylosseslossesequity
2.0% (1 in 50 year event)$366
$74
1.1%$333
$73
1.1%
1.0% (1 in 100 year event)563
80
1.2
453
76
1.2
0.4% (1 in 250 year event)912
284
4.3
722
161
2.4
0.2% (1 in 500 year event)1,254
507
7.7
883
265
4.0
The modeled losses according to RMS in the table are based on theirits RiskLink version 11.013.1 catastrophe model and utilizeuse a near-termmedium-term storm catalog methodology. The near-termmedium-term storm catalog theory is a more conservative approach and places a higher weighting on the increased hurricane activity of the past several years, thus producing higher probable maximum loss projections than a longer-term view. The modeled losses according to AIR in the table are based on theirits AIR Clasic/2 version 1315 catastrophe model and utilizeuse a long-term methodology. The AIR storm catalog includes decades of documented weather events used in simulations for probable maximum loss projections.

Reinsurance mitigates the risk of highly uncertain exposures and limits the maximum net loss that can arise from large risks or risks concentrated in areas of exposure. Management’s decisions about the appropriate structure of reinsurance protection and level of risk retention are affected by various factors, including changes in our underwriting practices, capacity to retain risks and reinsurance market conditions. In evaluating our 2012 reinsurance program, we considered alternative reinsurance structures including catastrophe bonds and aggregate excess of loss coverage. After careful review of these options, we determined that the traditional reinsurance program we have historically utilized was the most financially prudent approach.

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

Currently participating on our standard market property and casualty per-risk and per-occurrence programs are Hannover Reinsurance Company, Munich Reinsurance America, Partner Reinsurance Company of the U.S. and Swiss Reinsurance America Corporation, all of which had A.M. Best insurer financial strength ratings of A (Excellent)A+ (Superior) or A+ (Superior)better as of December 31, 2011.2014. Our property catastrophe program is subscribed through a broker by reinsurers from the United States, Bermuda, London and the European markets. The largest participant in our property catastrophe program, representing approximately 5047 percent of total participation, is the Lloyds of London placement that features numerous syndicates, with the R.J. Kiln group& Company Limited and the Catlin syndicateSyndicate taking the largest participations. Other primary participants in our property catastrophe program include a Liberty Syndicate, Alterra, ArgoSyndicates, Axis Specialty, Amlin Re and Flagstone Reinsurance Limited.

Until 2002 we participated inMarkel Ltd.


Cincinnati Financial Corporation - 2014 10-K - Page 107


The following table shows our five largest property casualty reinsurance receivable amounts by reinsurer at year‑end 2014 and 2013. USAIG is a joint underwriting association of individual insurance companies that collectively functions as a worldwide aviation insurance market for all types of aviation and aerospace accounts. Ourmarket. We terminated our participation was terminatedin the association after policy year 2002. At year-end 2011, 17.4 percent, or $108 million, of our total reinsurance receivables were related to USAIG, primarily for events of September 11, 2001, offset by $116 million due to USAIG, the third-party administrator for pool participants. If the pool participants and reinsurers were unable to fulfill their financial obligations and all security collateral that supports the participants’ obligations became worthless, we could be liable for an additional pool liability of $220 million and our financial position and results of operations could be materially affected. Currently all pool participants and reinsurers are financially solvent.

Cincinnati Financial Corporation – 2011 10-K - 98

The following table shows our five largest reinsurance receivable amounts by reinsurer at year-end 2011 and 2010. The A.M. Best insurer financial strength ratings as of December 31, 2011the end of the two most recent years are also shown for each those reinsurers.

  2011  2010 
(Dollars in millions) Total  A.M. Best  Total  A.M. Best 
Name of reinsurer Receivable  Rating  Receivable  Rating 
             
USAIG $108   NA  $109   NA 
Swiss Reinsurance America Corporation  71   A+   84   A 
Lloyds of London  63   A    1   A 
Munich Reinsurance America  47   A+   54   A+ 
General Reinsurance Corporation  36   A++   41   A++ 

reinsurers that are rated by Best.

(Dollars in millions) 2014 2013
Name of reinsurer Total
receivable		 A.M. Best
Rating		 Total
receivable		 A.M. Best
Rating
USAIG $98
 NA $105
 NA
Swiss Reinsurance America Corporation 57
 A+ 57
 A+
Munich Reinsurance America 35
 A+ 37
 A+
Michigan Catastrophic Claims Association
 32
 NA 28
 NA
General Reinsurance Corporation
 28
 A++ 30
 A++
         
Primary components of the 20122015 property and casualty reinsurance program include:

·
Property per risk treaty – The primary purpose of the property treaty is to provide capacity up to $25 million, adequate for the majority of the risks we write. It also includes protection for extra-contractual liability coverage losses. We retain the first $10 million of each loss. Losses between $10 million and $25 million are reinsured at 100 percent. The ceded premium is estimated at $19 million for 2015, compared with $28 million for 2014 and $38 million for 2013. Lower 2015 rates and a $2 million increase in our retention per loss offset the effect of estimates of increased direct written premiums that are subject to the treaty.
Property excess treaty – For 2015, we again purchased a property treaty is to provide capacity up to $25 million, adequate for the majority of the risks we write. It also includes protection for extra-contractual liability coverage losses. We retain the first $6 million of each loss, except for our homeowner line of business, which has a separate treaty that limits our retention to $4 million per loss. Losses between $6 million and $25 million are reinsured at 100 percent. The ceded premium is estimated at $37 million for 2012, compared with $32 million in 2011 and $36 million in 2010. The higher ceded premium for 2012 compared with 2011 is largely due to higher rates and estimates of higher levels of property coverage direct written premiums that are subject to the treaty.

·Casualty per occurrence treaty – The casualty treaty provides capacity up to $25 million. Similar to the property treaty, it provides sufficient capacity to cover the vast majority of casualty accounts we insure and also includes protection for extra-contractual liability coverage losses. We retain the first $6 million of each loss. Losses between $6 million and $25 million are reinsured at 100 percent. The ceded premium is estimated at $37 million in 2012, similar to approximately $37 million paid in 2011 and in 2010. Lower 2012 rates for this treaty were partially offset by estimates of higher levels of liability coverage direct written premiums that are subject to the treaty.

·Casualty excess treaties – We purchase a casualty reinsurance treaty that provides an additional $25 million in protection for certain casualty losses. This treaty, along with the casualty per occurrence treaty, provides a total of $50 million of protection for workers’ compensation, extra-contractual liability coverage and clash coverage losses, which would apply when a single occurrence involves multiple policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The ceded premium is estimated at approximately $2 million in 2012, similar to the premium we paid in 2011 and 2010.

We purchase a second casualty excess treaty, which provides an additional $20$10 million in casualty lossprotection for property losses. Effective February 1, 2015, we purchased an additional $15 million of coverage. ThisThese treaties, along with the property per risk treaty, also provides catastrophic coverage for workers’ compensation and extra-contractual liability coverage losses.a total of $50 million of protection. The ceded premium is estimated at approximately $1$6 million for 2012,2015, compared with $4 million for both 2014 and 2013, when the coverage amount was $10 million.

Casualty per occurrence treaty – The casualty treaty provides capacity up to $25 million. Similar to the property treaty, it provides sufficient capacity to cover the vast majority of casualty accounts we insure and also includes protection for extra-contractual liability coverage losses. We retain the first $10 million of each loss. Losses between $10 million and $25 million are reinsured at 100 percent. The ceded premium is estimated at $13 million for 2015, compared with $23 million for 2014 and $30 million for 2013. Lower 2015 rates and a $2 million increase in our retention per loss offset the effect of estimates of increased direct written premiums that are subject to the treaty.
Casualty excess treaty – We purchase a casualty reinsurance treaty that provides an additional $45 million in protection for certain casualty losses. This treaty, along with the casualty per occurrence treaty, provides a total of $70 million of protection for workers’ compensation, extra-contractual liability coverage and clash coverage losses, which would apply when a single occurrence involves multiple policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The ceded premium is estimated at approximately $3 million for 2015, similar to the premium for both 2014 and 2013.
Property catastrophe treaty – To protect against catastrophic events such as wind and hail, hurricanes or earthquakes, we paidpurchased property catastrophe reinsurance with a limit up to $600 million. Losses from the same occurrence can now be aggregated into one limit over an 120 hour period and applied to the treaty towards recovery. This is an expansion in 2011coverage over the previous treaty’s 96-hour limitation. The treaty contains one reinstatement provision. For the 2015 treaty, ceded premiums are estimated at $42 million, down from $50 million for 2014, reflecting a $25 million increase in our retention per event, lower rates and 2010.

minor changes in our share of losses described below. We retain the first $100 million of any loss, and a share of losses up to $600 million, as indicated below:
·Property catastrophe treaty – To protect against catastrophic events such as wind and hail, hurricanes or earthquakes, we purchased property catastrophe reinsurance with a limit up to $600 million. The treaty contains one reinstatement provision. For the 2012 treaty, ceded premiums are estimated at $59 million, up from approximately $49 million in 2011 and in 2010, due to increasing the coverage limit above $500 million plus higher rates. We retain the first $75 million of any loss, up from $45 million for 2011, plus varying shares of losses up to $600 million:

o51.7 percent of losses between $75 million and $100 million
◦
o11.35.0 percent of losses between $100 million and $200 million
o
◦5.45.0 percent of losses between $200 million and $300 million
o
◦5.0 percent of losses between $300 million and $400 million
o
◦5.0 percent of losses between $400 million and $600 million


Cincinnati Financial Corporation - 2014 10-K - Page 108


Beginning in 2013 we added an alternative reinsurance structure to protect against certain catastrophic events, and a similar structure is in place for 2014 through 2016. For certain exposures in the United States, we arranged for the purchase of collateralized reinsurance funded through the issuance of collateralized risk-linked securities, known as catastrophe bonds. The catastrophe bond arrangements generally provide reinsurance coverage for specific types of losses in specific geographic locations. They are generally designed to supplement coverage provided under the property catastrophe treaty. Effective January 2014, we have a catastrophe bond arrangement providing up to $100 million in reinsurance protection. It expires in January 2017 and provides coverage for severe convective storm losses in certain key core regions as well as supplemental coverage in the event of an earthquake occurring along the New Madrid fault line and faults occurring in the states of Utah, Washington and Oregon.

After reinsurance, and before any applicable benefit from our catastrophe bond, our maximum exposure to a catastrophic event that caused $500causes $600 million in covered losses in 2015 would be $115$125 million compared with $88$115 million in 2011 and $104 million in 2010.for 2014. The largest catastrophe loss event in our history occurred during 2011 from a May 20-27 storm system that included a tornado in Joplin, Missouri, and also significant losses from hail in the Dayton, Ohio, area. Our losses from that storm were estimated at December 31, 2011,2014, to be $235$225 million before reinsurance.

Cincinnati Financial Corporation – 2011 10-K - 99

Individual risks with insured values in excess of $25$50 million, as identified in the policy, are handled through a different reinsurance mechanism. We typically reinsure property coverage for individual risks with insured values between $25$50 million and $65 million under an automatic facultative agreement. For risks with property values exceeding $65 million, we negotiate the purchase of facultative coverage on an individual certificate basis. For casualty coverage on individual risks with limits exceeding $25 million, facultative reinsurance coverage is placed on an individual certificate basis. For risks with property or casualty limits whichthat are between $25 million and $27 million, we sometimes forego facultative reinsurance and retain an additional $2 million of loss exposure.

Terrorism coverage at various levels has been secured in most of our reinsurance agreements. The broadest coverage for this peril is found in the property and casualty working treaties, the property per risk treaty and the casualty per occurrence treaty, which provide coverage for commercial and personal risks. Our property catastrophe treaty provides terrorism coverage for personal risks, and coverage for commercial risks with total insured values of $10$13 million or less. For insured values between $10$13 million and $25$50 million, there also may be coverage in the property working treaty.

A form of reinsurance is also provided through The Terrorism Risk Insurance Act of 2002 (TRIA). TRIA was originally signed into law on November 26, 2002, and extended on December 22, 2005, in a revised form, and extended again on December 26, 2007.2007, and January 12, 2015. TRIA provides a temporary federal backstop for losses related to the writing of the terrorism peril in property casualty insurance policies. TRIA now is scheduled to expire December 31, 2014. Under regulations promulgated under this statute, insurers are required to offer terrorism coverage for certain lines of property casualty insurance, including property, commercial multi-peril, fire, ocean marine, inland marine, liability, aircraft and workers’ compensation. In the event of a terrorism event defined by TRIA, the federal government would reimburse terrorism claim payments subject to the insurer’s deductible. The deductible is calculated as a percentage of subject written premiums for the preceding calendar year. Our deductible in 20112014 was $366$459 million (20 percent of 20102013 subject premiums), and we estimate it is $383$494 million (20 percent of 20112014 subject premiums) in 2012.

for 2015.

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

The Cincinnati Specialty Underwriters Insurance Company which began issuing insurance policies in 2008, has separate property and casualty reinsurance treaties for 20122014 through its parent, The Cincinnati Insurance Company. Primary components of the treaties include:

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

·Casualty treaties – The casualty treaty is written on an excess of loss basis and provide limits up to $6 million, which is adequate capacity for the risk profile we insure. A second treaty layer of $5 million excess of $6 million is written to provide coverage for extra contractual obligations or clash exposures. The maximum retention for any one casualty loss is $1 million by The Cincinnati Specialty Underwriters Insurance Company. Losses between $1 million and $11 million are reinsured at 100 percent by The Cincinnati Insurance Company.

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

·Property catastrophe treaty – As a subsidiary of The Cincinnati Insurance Company, The Cincinnati Specialty Underwriters Insurance Company has been added as a named insured under our corporate property catastrophe treaty. All terms and conditions of this treaty apply to policies underwritten by The Cincinnati Specialty Underwriters Insurance Company.

Property per risk treaty – The property treaty provides limits up to $5 million, which is adequate capacity for the risk profile we insure. It also includes protection for extra-contractual liability coverage losses. Cincinnati Specialty Underwriters retains the first $500,000 of any policy loss. Losses between $500,000 and $5 million are reinsured at 100 percent by Cincinnati Insurance.
Casualty treaties – The casualty treaty is written on an excess of loss basis and provide limits up to $6 million, which is adequate capacity for the risk profile we insure. A second treaty layer of $5 million excess of $6 million is written to provide coverage for extra contractual obligations or clash exposures. The maximum retention for any one casualty loss is $1 million by Cincinnati Specialty Underwriters. Losses between $1 million and $6 million are reinsured at 100 percent by Cincinnati Insurance.

Cincinnati Financial Corporation - 2014 10-K - Page 109


Basket retention – Cincinnati Specialty Underwriters has purchased this coverage to limit our retention to $1 million in the event that the same occurrence results in both a property and a casualty loss.
Property catastrophe treaty – As a subsidiary of Cincinnati Insurance, Cincinnati Specialty Underwriters is a named insured under our corporate property catastrophe treaty, and for our collateralized reinsurance funded through the issuance of catastrophe bonds. All terms and conditions of this reinsurance coverage apply to policies underwritten by Cincinnati Specialty Underwriters.

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

Cincinnati Life, our life insurance subsidiary, purchases reinsurance under separate treaties with many of the same reinsurers that write the property casualty working treaties. For our core term life insurance line of business, we retain no more than a $500,000 exposure on a single policy, ceding the balance using excess over retention mortality coverage and retaining the policy reserve. Because of the conservative nature of statutory reserving principles, retaining the policy reserve unduly depresses our statutory earnings and requires a large commitment of our capital. Our corporate retention is $1 million on a single life. For term life insurance business written prior to 2005, we retain 10 percent to 25 percent of each term policy, not to exceed $500,000, ceding the balance of mortality risk and policy reserve.
The following table shows our five largest life reinsurance receivable amounts by reinsurer at year-end 2014 and 2013. The A.M. Best insurer financial strength ratings as of the end of the two most recent years are also shown for each those reinsurers that are rated by Best.

(Dollars in millions)��2014 2013
Name of reinsurer Total
receivable		 A.M. Best
Rating		 Total
receivable		 A.M. Best
Rating
Swiss Re Life & Health America, Inc. $90
 A+ $89
 A+
Lincoln National Life Insurance Company 43
 A+ 42
 A+
Security Life of Denver Insurance Company 30
 A 28
 A
General Re Life Corporation
 30
 A++ 27
 A++
Employers Reassurance Corporation 15
 A- 14
 A-
         

We also have catastrophe reinsurance coverage on our life insurance operations that reimburses us for covered net losses in excess of $9 million. Our recovery is capped at $75 million for losses involving our associates.
Assumed Reinsurance

The Cincinnati Insurance Company’s reinsurance program for 20122015 includes participation in two assumed reinsurance treaties with R.J. Kiln Group& Company Limited, a reinsurer that spreads the riskits losses to its property book of business among many reinsurers. The exposure to loss is usually triggered as a result of very high catastrophe losses among many insurers.losses. The largerFirst Surplus treaty has exposure for us of up to nearly $3$2 million of assumed losses from a single event and the smallerSecond Surplus treaty also has exposure for us of up to nearly $2 million of assumed losses from a single event. The treaties with Kiln Group Limited were in place during 20112014 at similarslightly higher exposure levels. A separate assumed reinsurance treaty, with Munich Re Group, was in effect during 2011 but was not renewed for 2012. The Munich Re Group treaty had exposure of up to $7 million of assumed losses in three layers, from $1.0 billion to $1.7 billion, from a single event.

Cincinnati Financial Corporation – 2011 10-K - 100


Cincinnati Financial Corporation - 2014 10-K - Page 110


Safe Harbor Statement

This is our “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in Item 1A, Risk Factors, Page 26.

Factors.

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 or assumptions used for critical accounting estimates
Declines in overall stock market values negatively affecting the company’s equity portfolio and book value
Domestic and global events resulting in capital market or credit market uncertainty, followed by prolonged periods of economic instability or recession, that lead 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

·Inadequate estimates or assumptions used for critical accounting estimates

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

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

·Events resulting in capital market or credit market uncertainty, followed by prolonged periods of economic instability or recession, that lead to:

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

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

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

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
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 and our relationships with agents, policyholders and others
Disruption of the insurance market caused by technology innovations such as driverless cars that could decrease consumer demand for insurance products
Delays or performance inadequacies from ongoing development and implementation of underwriting and pricing methods, including telematics and other usage-based insurance methods, or technology projects and enhancements expected to increase our pricing accuracy, underwriting profit and competitiveness
Increased competition that could result in a significant reduction in the company’s premium volume
Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could alter our competitive advantages
Inability to obtain adequate reinsurance on acceptable terms, amount of reinsurance 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:
·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

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

·Delays in adoption and implementation of underwriting and pricing methods that could increase our pricing accuracy, underwriting profit and competitiveness

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

·Inability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased, financial strength of reinsurers and the potential for non-payment 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

·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

o
◦Concerns that doing business with the company is too difficult

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

o
◦DelaysInability or inadequaciesunwillingness to nimbly develop and introduce coverage product updates and innovations that our competitors offer and consumers expect to find in the development, implementation, performance and benefits of technology projects and enhancementsmarketplace


Cincinnati Financial Corporation - 2014 10-K - Page 111


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:
·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:

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

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

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

o
◦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

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

o
◦Increase our other expenses

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

o
◦Place us at a disadvantage in the marketplace

o
◦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

Cincinnati Financial Corporation – 2011 10-K - 101
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

·Difficulties with technology or data security breaches, including cyber attacks, that could negatively affect our ability to conduct business and our relationships with agents, policyholders and others

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.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk



Cincinnati Financial Corporation - 2014 10-K - Page 112


ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk

Introduction

Market risk is the potential for a decrease in securities value resulting from broad yet uncontrollable forces such as: inflation, economic growth, interest rates, world political conditions or other widespread unpredictable events. It is comprised of many individual risks that, when combined, create a macroeconomic impact. The company accepts and manages risks in the investment portfolio as part of the means of achieving portfolio objectives. Some of the risks are:

·Political – the potential for a decrease in value due to the real or perceived impact of governmental policies or conditions

·Regulatory – the potential for a decrease in value due to the impact of legislative proposals or changes in laws or regulations

·Economic – the potential for a decrease in value due to changes in general economic factors (recession, inflation, deflation, etc.)

·Revaluation – the potential for a decrease in value due to a change in relative value (change in market multiple) of the market brought on by general economic factors

·Interest-rate – the potential for a decrease in value of a security or portfolio due to its sensitivity to changes (increases or decreases) in the general level of interest rates

·Company-specific risk – the potential for a particular issuer to experience a decline in value due to the impact of sector or market risk on the holding or because of issues specific to the firm

·Fraud – the potential for a negative impact on an issuer’s performance due to actual or alleged illegal or improper activity of individuals it employs

·Credit – the potential for deterioration in an issuer’s financial profile due to specific company issues, problems it faces in the course of its operations or industry-related issues

·Default – the possibility that an issuer will not make a required payment (interest payment or return of principal) on its debt. Generally this occurs after its financial profile has deteriorated (credit risk) and it no longer has the means to make its payments

Political – the potential for a decrease in value due to the real or perceived impact of governmental policies or conditions
Regulatory – the potential for a decrease in value due to the impact of legislative proposals or changes in laws or regulations
Economic – the potential for a decrease in value due to changes in general economic factors (recession, inflation, deflation, etc.)
Revaluation – the potential for a decrease in value due to a change in relative value (change in market multiple) of the market brought on by general economic factors
Interest-rate – the potential for a decrease in value of a security or portfolio due to its sensitivity to changes (increases or decreases) in the general level of interest rates
Company-specific risk – the potential for a particular issuer to experience a decline in value due to the impact of sector or market risk on the holding or because of issues specific to the firm
Fraud – the potential for a negative impact on an issuer’s performance due to actual or alleged illegal or improper activity of individuals it employs
Credit – the potential for deterioration in an issuer’s financial profile due to specific company issues, problems it faces in the course of its operations or industry-related issues
Default – the possibility that an issuer will not make a required payment (interest payment or return of principal) on its debt. Generally this occurs after its financial profile has deteriorated (credit risk) and it no longer has the means to make its payments.

The investment committee of the board of directors monitors the investment risk management process primarily through its executive oversight of our investment activities. We take an active approach to managing market and other investment risks, including the accountabilities and controls over these activities. Actively managing these market risks is integral to our operations and could require us to change the character of future investments purchased or sold or require us to shift the existing asset portfolios to manage exposure to market risk within acceptable ranges.

Sector risk is the potential for a negative impact on a particular industry due to its sensitivity to factors that make up market risk. Market risk affects general supply/demand factors for an industry and affects companies within that industry to varying degrees.

Cincinnati Financial Corporation – 2011 10-K - 102

Risks associated with the five asset classes described in Item 1, Our Segments, Investments Segment, Page 20, can be summarized as follows (H – high, A – average, L – low):

 

Taxable


fixed maturities

 

Tax-exempt


fixed maturities

 

Common


equities

 

Preferred 

Nonredeemable preferred
equities

PoliticalA H A A
RegulatoryA A A A
EconomicA A H A
RevaluationA A H A
Interest rateH H A H
FraudA L A A
CreditA L A A
DefaultA L A A


Cincinnati Financial Corporation - 2014 10-K - Page 113


Our investment portfolio had no European sovereign debt holdings but did include a relatively small amount of other European-based securities. The December 31, 20112014, fair value total of $424$417 million consisted of $421 million in bonds and $3 million in preferred stocks.fixed-maturity securities. The table below summarizes amounts for those securities by country.

 At December 31, 2011 
  Financial  Non-financial  Total 
  Amortized  Fair  Amortized  Fair  Amortized  Fair 
(In millions)  cost  value  cost  value  cost  value 
Great Britain $63  $64  $112  $123  $175  $187 
Switzerland  39   40   3   4   42   44 
France  28   25   10   10   38   35 
Netherlands  12   14   22   25   34   39 
Belgium  0   0   28   35   28   35 
Germany  8   8   10   10   18   18 
Italy  0   0   17   15   17   15 
Ireland  11   11   5   6   16   17 
Spain  0   0   12   12   12   12 
Sweden  0   0   8   8   8   8 
Luxembourg  0   0   8   8   8   8 
Greece  0   0   6   6   6   6 
Total European exposure $161  $162  $241  $262  $402  $424 

(Dollars in millions) Financial Nonfinancial Total
  Amortized Fair Amortized Fair Amortized Fair
  cost value cost value cost value
Great Britain $36
 $40
 $83
 $89
 $119
 $129
Netherlands 35
 36
 26
 29
 61
 65
Switzerland 17
 18
 24
 25
 41
 43
Sweden 19
 19
 13
 13
 32
 32
Belgium —
 —
 28
 32
 28
 32
France 12
 12
 12
 13
 24
 25
Spain 5
 6
 18
 19
 23
 25
Germany 8
 8
 13
 13
 21
 21
Luxembourg —
 —
 18
 19
 18
 19
Ireland —
 —
 12
 14
 12
 14
Italy —
 —
 11
 12
 11
 12
Total European exposure $132
 $139
 $258
 $278
 $390
 $417
             

Fixed-Maturity Securities Investments

For investment-grade corporate bonds, the inverse relationship between interest rates and bond prices leads to falling bond values during periods of increasing interest rates. We address this risk by attempting to construct a generally laddered maturity schedule that allows us to reinvest cash flows at prevailing rates. Although the potential for a worsening financial condition, and ultimately default, does exist with investment-grade corporate bonds, we address this risk by performing credit analysis and monitoring as well as maintaining a diverse portfolio of holdings.

The primary risk related to high-yield corporate bonds is credit risk or the potential for a deteriorating financial structure. A weak financial profile can lead to rating downgrades from the credit rating agencies, which can put further downward pressure on bond prices. Interest rate risk, while significant, is less of a factor with high-yield corporate bonds, as valuation is related more directly to underlying operating performance than to general interest rates. This puts more emphasis on the financial results achieved by the issuer rather than on general economic trends or statistics within the marketplace. We address this concern by analyzing issuer- and industry-specific financial results and by closely monitoring holdings within this asset class.

The primary risks related to tax-exempt bonds are interest rate risk and political risk associated with the specific economic environment within the political boundaries of the issuing municipal entity. We address these concerns by focusing on municipalities’ general-obligation debt and on essential-service bonds. Essential-service bonds derive a revenue stream from municipal services that are vital to the people living in the area (water service, sewer service, etc.). Another risk related to tax-exempt bonds is regulatory risk or the potential for legislative changes that would negate the benefit of owning tax-exempt bonds. We monitor regulatory activity for situations that may negatively affect current holdings and our ongoing strategy for investing in these securities.

The final, less significant risk is our exposure to credit risk for a portion of the tax-exempt portfolio that has support from corporate entities. Examples are bonds insured by corporate bond insurers or bonds with interest payments made by a corporate entity through a municipal conduit/authority. Our decisions regarding these investments primarily consider the underlying municipal situation. The existence of third-party insurance is intended to reduce risk in the event of default. In circumstances in which the municipality is unable to meet its obligations, risk would be increased if the insuring entity were experiencing financial duress. Because of our diverse exposure and selection of higher-rated entities with strong financial profiles, we do not believe this is a material concern as we discuss in Item 1, Our Segments, Investments Segment,Segment.

Cincinnati Financial Corporation - 2014 10-K - Page 20.

114
Cincinnati Financial Corporation – 2011 10-K - 103


Interest Rate Sensitivity Analysis

Because of our strong surplus,shareholders’ equity, long-term investment horizon and ability to hold most fixed-maturity investments to maturity, we believe the company is well positioned if interest rates were to rise. 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 increase the number of fixed-maturity holdings fair valued below 100 percent of amortized cost, we believe lower fixed-maturity security values due solely to interest rate changes would not signal a decline in credit quality.

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.

The table below summarizes the effect of hypothetical changes in interest rates on thefair value of our fixed-maturity portfolio:

 Interest Rate Shift in Basis Points 
(In millions)  -200  -100  0  100  200 
At December 31, 2011 $9,597  $9,179  $8,779  $8,390  $8,008 
                     
At December 31, 2010 $9,260  $8,814  $8,383  $7,964  $7,568 

portfolio.

(Dollars in millions) Effect from interest rate change in basis points
  -200 -100 — 100 200
At December 31, 2014 $10,321
 $9,882
 $9,460
 $9,041
 $8,628
At December 31, 2013 $9,968
 $9,545
 $9,121
 $8,708
 $8,316
           
The effective duration of the fixed-maturity portfolio was 4.4 years at year-end 2011,2014, compared with 5.04.5 years at year-end 2010.2013. A 100-basis-point movement in interest rates would result in an approximately 4.54.4 percent 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 the dynamic financial planning model, the selected interest rate change of 100 to 200 basis points represents our views 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 Securities Investments

Common stocks are subject to a variety of risk factors encompassed under the umbrella of market risk. General economic swings influence the performance of the underlying industries and companies within those industries. In 2008 for example, a downturn in the economy had a negative effect on an equity portfolio. Industry- and company-specific risks also have the potential to substantially affect the value of our portfolio. We implemented newOur investment guidelines in 2008 to help address these risks by diversifying the portfolio and establishing parameters to help manage exposures.


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 December 31, 2014 $3,401
 $3,886
 $4,372
 $4,858
 $5,344
 $5,830
 $6,315
At December 31, 2013 $3,063
 $3,500
 $3,938
 $4,375
 $4,813
 $5,250
 $5,688
               

Our equity holdings represented $2.956$4.858 billion in fair value and accounted for approximately 5378 percent of the net unrealized appreciationgains and losses of the entire portfolio at year-end 2011.2014. No holding had a fair value equal to or greater than 4 percent of our $4.679 billion publicly traded common stock portfolio. We had 17 holdings among eight different sectors each with a fair value greater than $100 million. See Item 1, Our Segments, Investments Segment Page 20,and Item 8, Note 2 of the Consolidated Financial Statements, for additional details on our holdings.


The primary risks related to preferred stocks are similar to those related to investment grade corporate bonds. Rising interest rates adversely affect market values due to the normal inverse relationship between interest rates

Cincinnati Financial Corporation - 2014 10-K - Page 115


and bond prices. Credit risk exists due to the subordinate position of preferred stocks in the capital structure. We minimize this risk by primarily purchasing investment grade preferred stocks of issuers with a strong history of paying a common stock dividend.

Application of Asset Impairment Policy

As discussed in Item 7, Critical Accounting Estimates, Asset Impairment, Page 46, our fixed-maturity and equity investment portfolios are evaluated differently for other-than-temporary impairments. The company’s asset impairment committee monitors a number of significant factors for indications of investments fair valued below the carrying amount may not be recoverable. The application of our impairment policy resulted in OTTI charges that reduced our income before income taxes by $57$24 million in 2011, $362014, $2 million in 20102013 and $131$33 million in 2009.2012. Impairments are discussed in Item 7, Investment Results of Operations, Page 81.

Investments Results.

We expect the number of securities fair valued below 100 percent of cost or amortized cost to fluctuate as interest rates rise or fall and credit spreads expand or contract due to prevailing economic conditions. Further, cost or amortized cost for some securities have been revised due to impairment charges recognized in prior periods. At year-end 2011, 1372014, 223 of the 2,7243,015 securities we owned were fair valued below 100 percent of cost or amortized cost compared with 316556 of the 2,6712,879 securities we owned at year-end 20102013 and 35568 of the 2,5052,784 securities we owned at year-end 2009.

Cincinnati Financial Corporation – 2011 10-K - 104
2012.

The 137223 holdings fair valued below cost or amortized cost at year-end 20112014 represented 7.05.9 percent of invested assetsthe investment portfolio and $53$22 million in unrealized losses.

·122 of these holdings were fair valued between 90 percent and 100 percent of cost or amortized cost. The value of these securities fluctuates primarily because of changes in interest rates. The fair value of these 122 securities was $654 million at year-end 2011, and they accounted for $20 million in unrealized losses.

·14 of these holdings were fair valued between 70 percent and 90 percent of cost or amortized cost. The fair value of these holdings was $162 million, and they accounted for $33 million in unrealized losses. These securities, which are being closely monitored, have been affected by a combination of factors including wider credit spreads driven primarily by the continuing effects of pressure in the real estate market and the slow pace of the economic recovery. The majority of these securities are in the financial-related sectors.

·One security was fair valued below 70 percent of cost at year-end 2011. The fair value of this security was $1 million, and it accounted for less than $1 million in unrealized loss.

217 of these holdings were fair valued between 90 percent and 100 percent of cost or amortized cost. The value of these securities fluctuates primarily because of changes in interest rates. The fair value of these 217 securities was $815 million at year-end 2014, and they accounted for $19 million in unrealized losses.
Six of these holdings were fair valued between 70 percent and 90 percent of cost or amortized cost. The fair value of these holdings was $24 million, and they accounted for $3 million in unrealized losses.
No securities were trading below 70 percent of cost at year-end 2014.


Cincinnati Financial Corporation - 2014 10-K - Page 116


The following table summarizes the length of time securities in the investment portfolio have been in a continuous unrealized gain or loss position.

 Less than 12 months  12 months or more  Total 
(In millions) Fair
value		  Unrealized
losses		  Fair
value		  Unrealized
losses		  Fair
value		  Unrealized
losses		 
At December 31, 2011                   
Fixed maturities:                        
States, municipalities and political subdivisions $-  $-  $12  $-  $12  $- 
United States government  1   -   -   -   1   - 
Government-sponsored enterprises  10   -   -   -   10   - 
Corporate securities  380   13   57   5   437   18 
Subtotal  391   13   69   5   460   18 
Equity securities:                        
Common equities  333   35   -   -   333   35 
Preferred equities  5   -   19   -   24   - 
Subtotal  338   35   19   -   357   35 
Total $729  $48  $88  $5  $817  $53 
                         
At December 31, 2010                        
Fixed maturities:       ��                
States, municipalities and political subdivisions $325  $9  $9  $1  $334  $10 
Government-sponsored enterprises  133   1   -   -   133   1 
Corporate securities  354   6   39   3   393   9 
Subtotal  812   16   48   4   860   20 
Equity securities:                        
Common equities  337   28   -   -   337   28 
Preferred equities  5   -   23   1   28   1 
Subtotal  342   28   23   1   365   29 
Total $1,154  $44  $71  $5  $1,225  $49 

Cincinnati Financial Corporation – 2011 10-K - 105

(Dollars in millions) Less than 12 months 12 months or more Total
At December 31, 2014 Fair
value		 Unrealized
losses		 Fair
value		 Unrealized
losses		 Fair
value		 Unrealized
losses
Fixed maturity securities:
Corporate $261
 $8
 $90
 $3
 $351
 $11
States, municipalities and political subdivisions 17
 —
 135
 2
 152
 2
Government-sponsored enterprises 3
 —
 23
 —
 26
 —
Commercial mortgage-backed 11
 —
 181
 5
 192
 5
Foreign government —
 —
 —
 —
 —
 —
United States government —
 —
 —
 —
 —
 —
Subtotal 292
 8
 429
 10
 721
 18
Equity securities:  
  
  
  
  
  
Common equities 85
 3
 —
 —
 85
 3
Nonredeemable preferred equities 16
 —
 17
 1
 33
 1
Subtotal 101
 3
 17
 1
 118
 4
Total $393
 $11
 $446
 $11
 $839
 $22
At December 31, 2013  
  
  
  
  
  
Fixed maturity securities:
Corporate $572
 $20
 $43
 $2
 $615
 $22
States, municipalities and political subdivisions 490
 18
 42
 3
 532
 21
Commercial mortgage-backed 125
 5
 —
 —
 125
 5
Government-sponsored enterprises 199
 27
 1
 —
 200
 27
Foreign government 10
 —
 —
 —
 10
 —
United States government 1
 —
 —
 —
 1
 —
Subtotal 1,397
 70
 86
 5
 1,483
 75
Equity securities:  
  
  
  
  
  
Common equities 77
 1
 —
 —
 77
 1
Nonredeemable preferred equities 42
 3
 —
 —
 42
 3
Subtotal 119
 4
 —
 —
 119
 4
Total $1,516
 $74
 $86
 $5
 $1,602
 $79
             

Cincinnati Financial Corporation - 2014 10-K - Page 117


The following table summarizes our investment portfolio, classifying securities based on fair values relative to cost or amortized cost:

    Cost or     Gross  Gross 
  Number  amortized  Fair  unrealized  investment 
(Dollars in millions)  of issues  cost  value  gain/loss  income 
At December 31, 2011                    
Taxable fixed maturities:                    
Fair valued below 70% of amortized cost  0  $0  $0  $0  $0 
Fair valued at 70% to less than 100% of amortized cost  111   466   448   (18)  19 
Fair valued at 100% and above of amortized cost  1,271   4,903   5,399   496   276 
Securities sold in current year  0   0   0   0   15 
Total  1,382   5,369   5,847   478   310 
                     
Tax-exempt fixed maturities:                    
Fair valued below 70% of amortized cost  0   0   0   0   0 
Fair valued at 70% to less than 100% of amortized cost  9   12   12   0   0 
Fair valued at 100% and above of amortized cost  1,245   2,703   2,920   217   114 
Securities sold in current year  0   0   0   0   3 
Total  1,254   2,715   2,932   217   117 
                     
Common equities:                    
Fair valued below 70% of cost  1   1   1   0   0 
Fair valued at 70% to less than 100% of cost  13   367   332   (35)  9 
Fair valued at 100% and above of cost  56   1,720   2,521   801   77 
Securities sold in current year  0   0   0   0   9 
Total  70   2,088   2,854   766   95 
                     
Preferred equities:                    
Fair valued below 70% of cost  0   0   0   0   0 
Fair valued at 70% to less than 100% of cost  3   24   24   0   1 
Fair valued at 100% and above of cost  15   50   78   28   5 
Securities sold in current year  0   0   0   0   0 
Total  18   74   102   28   6 
                     
Portfolio summary:                    
Fair valued below 70% of cost or amortized cost  1   1   1   0   0 
Fair valued at 70% to less than 100% of cost or amortized cost  136   869   816   (53)  29 
Fair valued at 100% and above of cost or amortized cost  2,587   9,376   10,918   1,542   472 
Investment income on securities sold in current year  0   0   0   0   27 
Total  2,724  $10,246  $11,735  $1,489  $528 
                     
At December 31, 2010                    
Portfolio summary:                    
Fair valued below 70% of cost or amortized cost  0  $0  $0  $0  $0 
Fair valued at 70% to less than 100% of cost or amortized cost  316   1,274   1,225   (49)  38 
Fair valued at 100% and above of cost or amortized cost  2,355   8,900   10,199   1,299   457 
Investment income on securities sold in current year  0   0   0   0   27 
Total  2,671  $10,174  $11,424  $1,250  $522 

Cincinnati Financial Corporation – 2011 10-K - 106

Item 8.Financial Statements and Supplementary Data

(Dollars in millions)       Number
of issues		 Cost or
amortized
cost		 Fair
value		 Gross
unrealized
gain/loss		 Gross
investment
income
At December 31, 2014  
  
  
  
  
Taxable fixed maturities:  
  
  
  
  
Fair valued below 70% of amortized cost —
 $—
 $—
 $—
 $—
Fair valued at 70% to less than 100% of amortized cost 114
 589
 572
 (17) 20
Fair valued at 100% and above of amortized cost 1,283
 5,293
 5,758
 465
 271
Securities sold in current year —
 —
 —
 —
 15
Total 1,397
 5,882
 6,330
 448
 306
           
Tax-exempt fixed maturities:  
  
  
  
  
Fair valued below 70% of amortized cost —
 —
 —
 —
 —
Fair valued at 70% to less than 100% of amortized cost 100
 150
 149
 (1) 3
Fair valued at 100% and above of amortized cost 1,418
 2,839
 2,981
 142
 99
Securities sold in current year —
 —
 —
 —
 8
Total 1,518
 2,989
 3,130
 141
 110
           
Common equities:  
  
  
  
  
Fair valued below 70% of cost —
 —
 —
 —
 —
Fair valued at 70% to less than 100% of cost 4
 88
 85
 (3) 2
Fair valued at 100% and above of cost 68
 2,495
 4,594
 2,099
 120
Securities sold in current year —
 —
 —
 —
 6
Total 72
 2,583
 4,679
 2,096
 128
           
Nonredeemable preferred equities:  
  
  
  
  
Fair valued below 70% of cost —
 —
 —
 —
 —
Fair valued at 70% to less than 100% of cost 5
 34
 33
 (1) 2
Fair valued at 100% and above of cost 23
 111
 146
 35
 8
Securities sold in current year —
 —
 —
 —
 —
Total 28
 145
 179
 34
 10
           
Portfolio summary:  
  
  
  
  
Fair valued below 70% of cost or amortized cost —
 —
 —
 —
 —
Fair valued at 70% to less than 100% of cost or amortized cost 223
 861
 839
 (22) 27
Fair valued at 100% and above of cost or amortized cost 2,792
 10,738
 13,479
 2,741
 498
Investment income on securities sold in current year —
 —
 —
 —
 29
Total 3,015
 $11,599
 $14,318
 $2,719
 $554
           
At December 31, 2013  
  
  
  
  
Portfolio summary:  
  
  
  
  
Fair valued below 70% of cost or amortized cost —
 $—
 $—
 $—
 $—
Fair valued at 70% to less than 100% of cost or amortized cost 556
 1,681
 1,602
 (79) 41
Fair valued at 100% and above of cost or amortized cost 2,323
 9,480
 11,894
 2,414
 471
Investment income on securities sold in current year —
 —
 —
 —
 23
Total 2,879
 $11,161
 $13,496
 $2,335
 $535
           



Cincinnati Financial Corporation - 2014 10-K - Page 118


ITEM 8.       Financial Statements and Supplementary Data
Responsibility for Financial Statements

We have prepared the consolidated financial statements of Cincinnati Financial Corporation and our subsidiaries for the year ended December 31, 2011,2014, in accordance with accounting principles generally accepted in the United States of America (GAAP).

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

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

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

Deloitte & Touche LLP, our independent registered public accounting firm, audited the consolidated financial statements of Cincinnati Financial Corporation and subsidiaries for the year ended December 31, 2011. Its report is on Page 109.2014. Deloitte & Touche LLP met with our audit committee to discuss the results of theirits examination. They have the opportunity to discuss the adequacy of internal controls and the quality of financial reporting without management present.

Cincinnati Financial Corporation – 2011 10-K - 107



Cincinnati Financial Corporation - 2014 10-K - Page 119


Management’s Annual Report on Internal Control Over Financial Reporting

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

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

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

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

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

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

The company’s management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2011,2014, as required by Section 404 of the Sarbanes Oxley Act of 2002. Management’s assessment was based on the criteria established in theInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and was designed to provide reasonable assurance that the company maintained effective internal control over financial reporting as of December 31, 2011.2014. The assessment led management to conclude that, as of December 31, 2011,2014, the company’s internal control over financial reporting was effective based on those criteria.

The company’s independent registered public accounting firm has issued an audit report on our internal control over financial reporting as of December 31, 2011. This report appears on Page 109.

2014.


/S/ Steven J. Johnston

Steven J. Johnston, FCAS, MAAA, CFA,

CERA

President and Chief Executive Officer

/S/ Michael J. Sewell

Michael J. Sewell, CPA

Chief Financial Officer, Senior Vice President and Treasurer

February 29, 2012

Cincinnati Financial Corporation – 2011 10-K - 108
27, 2015



Cincinnati Financial Corporation - 2014 10-K - Page 120


Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Cincinnati Financial Corporation

Fairfield, Ohio


We have audited the accompanying consolidated balance sheets of Cincinnati Financial Corporation and subsidiaries (the company)“Company”) as of December 31, 20112014 and 2010,2013, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011.2014. Our audits also included the financial statement schedules listed in the Index at Item 15(c). We also have audited the company’sCompany’s internal control over financial reporting as of December 31, 2011,2014, based on criteria established in theInternal Control –- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The company’sCompany’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedules and an opinion on the company’sCompany’s internal control over financial reporting based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


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


Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Cincinnati Financial Corporation - 2014 10-K - Page 121


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the companyCompany as of December 31, 20112014 and 2010,2013 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011,2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, the companyCompany maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,2014, based on the criteria established inInternal Control –- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.



/S/ Deloitte & Touche LLP

Cincinnati, Ohio

February 29, 2012

Cincinnati Financial Corporation – 2011 10-K - 109
27, 2015



Cincinnati Financial Corporation - 2014 10-K - Page 122


Cincinnati Financial Corporation and Subsidiaries

Consolidated Balance Sheets

 December 31,  December 31, 
(In millions except per share data)  2011  2010 
       
ASSETS        
Investments        
Fixed maturities, at fair value (amortized cost: 2011—$8,084; 2010—$7,888) $8,779  $8,383 
Equity securities, at fair value (cost: 2011—$2,162; 2010—$2,286)  2,956   3,041 
Other invested assets  66   84 
Total investments  11,801   11,508 
Cash and cash equivalents  438   385 
Investment income receivable  119   119 
Finance receivable  76   73 
Premiums receivable  1,087   1,015 
Reinsurance receivable  622   572 
Prepaid reinsurance premiums  24   18 
Deferred policy acquisition costs  510   488 
Land, building and equipment, net, for company use (accumulated depreciation: 2011—$376; 2010—$352)  227   229 
Other assets  93   67 
Separate accounts  671   621 
Total assets $15,668  $15,095 
         
LIABILITIES        
Insurance reserves        
Loss and loss expense reserves $4,339  $4,200 
Life policy reserves  2,214   2,034 
Unearned premiums  1,633   1,553 
Other liabilities  517   539 
Deferred income tax  314   260 
Note payable  104   49 
Long-term debt and capital lease obligation  821   807 
Separate accounts  671   621 
Total liabilities  10,613   10,063 
         
Commitments and contingent liabilities (Note 16)  —   — 
         
SHAREHOLDERS' EQUITY        
Common stock, par value—$2 per share; (authorized: 2011—500 million shares, 2010—500 million shares; issued: 2011—196 million shares, 2010—196 million shares)  393   393 
Paid-in capital  1,096   1,091 
Retained earnings  3,885   3,980 
Accumulated other comprehensive income  901   769 
Treasury stock at cost (2011—34 million shares, 2010—34 million shares)  (1,220)  (1,201)
Total shareholders' equity  5,055   5,032 
Total liabilities and shareholders' equity $15,668  $15,095 

(Dollars in millions except per share data) December 31, December 31,
  2014 2013
Assets  
  
  Investments  
  
    Fixed maturities, at fair value (amortized cost: 2014—$8,871; 2013—$8,638) $9,460
 $9,121
    Equity securities, at fair value (cost: 2014—$2,728; 2013—$2,523) 4,858
 4,375
    Other invested assets 68
 68
      Total investments 14,386
 13,564
  Cash and cash equivalents 591
 433
  Investment income receivable 123
 121
  Finance receivable 75
 85
  Premiums receivable 1,405
 1,346
  Reinsurance recoverable 545
 547
  Prepaid reinsurance premiums 29
 26
  Deferred policy acquisition costs 578
 565
  Land, building and equipment, net, for company use (accumulated depreciation:
     2014—$446; 2013—$420)
 194
 210
  Other assets 75
 73
  Separate accounts 752
 692
    Total assets $18,753
 $17,662
     
Liabilities  
  
  Insurance reserves  
  
    Loss and loss expense reserves $4,485
 $4,311
    Life policy and investment contract reserves 2,497
 2,390
  Unearned premiums 2,082
 1,976
  Other liabilities 648
 611
  Deferred income tax 840
 673
  Note payable 49
 104
  Long-term debt and capital lease obligations 827
 835
  Separate accounts 752
 692
    Total liabilities 12,180
 11,592
     
  Commitments and contingent liabilities (Note 16) —
 —
     
Shareholders' Equity  
  
  Common stock, par value—$2 per share; (authorized: 2014 and 2013—500 million shares;
    issued: 2014 and 2013—198.3 million shares)
 397
 397
Paid-in capital 1,214
 1,191
Retained earnings 4,505
 4,268
Accumulated other comprehensive income 1,744
 1,504
Treasury stock at cost (2014—34.6 million shares and 2013—35.2 million shares) (1,287) (1,290)
Total shareholders' equity 6,573
 6,070
Total liabilities and shareholders' equity $18,753
 $17,662
     
Accompanying notesNotes are an integral part of these consolidated financial statements.

Cincinnati Financial Corporation – 2011 10-K - 110
Consolidated Financial Statements.



Cincinnati Financial Corporation - 2014 10-K - Page 123


Cincinnati Financial Corporation and Subsidiaries

Consolidated Statements of Income

 Years ended December 31, 
(In millions except per share data)  2011  2010  2009 
REVENUES            
Earned premiums $3,194  $3,082  $3,054 
Investment income, net of expenses  525   518   501 
Fee revenues  4   4   3 
Other revenues  10   9   9 
Realized investment gains (losses), net            
Other-than-temporary impairments on fixed maturity securities  (5)  (3)  (62)
Other-than-temporary impairments on fixed maturity securities transferred to Other Comprehensive Income  -   -   - 
Other realized investment gains (losses), net  75   162   398 
Total realized investment gains (losses), net  70   159   336 
Total revenues  3,803   3,772   3,903 
             
BENEFITS AND EXPENSES            
Insurance losses and policyholder benefits  2,524   2,180   2,242 
Underwriting, acquisition and insurance expenses  1,036   1,021   1,004 
Other operating expenses  13   16   20 
Interest expense  54   54   55 
Total benefits and expenses  3,627   3,271   3,321 
             
INCOME BEFORE INCOME TAXES  176   501   582 
             
PROVISION (BENEFIT) FOR INCOME TAXES            
Current  27   94   79 
Deferred  (17)  30   71 
Total provision for income taxes  10   124   150 
             
NET INCOME $166  $377  $432 
             
PER COMMON SHARE            
Net income—basic $1.02  $2.32  $2.66 
Net income—diluted  1.02   2.31   2.65 

(Dollars in millions except per share data) Years ended December 31,
  2014 2013 2012
Revenues  
  
  
Earned premiums $4,243
 $3,902
 $3,522
Investment income, net of expenses 549
 529
 531
Realized investment gains, net 133
 83
 42
Fee revenues 12
 8
 6
Other revenues 8
 9
 10
Total revenues 4,945
 4,531
 4,111
Benefits and Expenses  
  
  
Insurance losses and policyholder benefits 2,856
 2,505
 2,322
Underwriting, acquisition and insurance expenses 1,301
 1,243
 1,155
Interest expense 53
 54
 54
Other operating expenses 14
 15
 14
Total benefits and expenses 4,224
 3,817
 3,545
Income Before Income Taxes 721
 714
 566
Provision for Income Taxes  
  
  
Current 159
 178
 119
Deferred 37
 19
 26
Total provision for income taxes 196
 197
 145
Net Income $525
 $517
 $421
Per Common Share  
  
  
Net income—basic $3.21
 $3.16
 $2.59
Net income—diluted 3.18
 3.12
 2.57
       
Accompanying notesNotes are an integral part of these consolidated financial statements.

Cincinnati Financial Corporation – 2011 10-K - 111
Consolidated Financial Statements.



Cincinnati Financial Corporation - 2014 10-K - Page 124


Cincinnati Financial Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity

             Accumulated     Total 
  Common Stock        Other     Share- 
  Outstanding     Paid-In  Retained  Comprehensive  Treasury  holders' 
(In millions)  Shares  Amount  Capital  Earnings  Income  Stock  Equity 
                      
Balance December 31, 2008  162  $393  $1,069  $3,579  $347  $(1,206) $4,182 
                             
Net income  -   -   -   432   -   -   432 
Other comprehensive income, net  -   -   -   -   383   -   383 
Total comprehensive income                          815 
Cumulative effect of change in accounting for other-than-temporary impairments as of April 1, 2009, net of tax  -   -   -   106   (106)  -   - 
Dividends declared  -   -   -   (255)  -   -   (255)
Stock options exercised  -   -   -   -   -   1   1 
Stock-based compensation  -   -   10   -   -   -   10 
Other  -   -   2   -   -   5   7 
Balance December 31, 2009  162  $393  $1,081  $3,862  $624  $(1,200) $4,760 
                             
Balance December 31, 2009  162  $393  $1,081  $3,862  $624  $(1,200) $4,760 
                             
Net income  -   -   -   377   -   -   377 
Other comprehensive income, net  -   -   -   -   145   -   145 
Total comprehensive income                          522 
Dividends declared  -   -   -   (259)  -   -   (259)
Stock options exercised  1   -   (2)  -   -   2   - 
Stock-based compensation  -   -   11   -   -   -   11 
Purchases of treasury shares  -   -   -   -   -   (10)  (10)
Other  -   -   1   -   -   7   8 
Balance December 31, 2010  163  $393  $1,091  $3,980  $769  $(1,201) $5,032 
                             
Balance December 31, 2010  163  $393  $1,091  $3,980  $769  $(1,201) $5,032 
                             
Net income  -   -   -   166   -   -   166 
Other comprehensive income, net  -   -   -   -   132   -   132 
Total comprehensive income                          298 
Dividends declared  -   -   -   (261)  -   -   (261)
Stock options exercised  -   -   (10)  -   -   6   (4)
Stock-based compensation  -   -   13   -   -   -   13 
Purchases of treasury shares  (1)  -   -   -   -   (32)  (32)
Other  -   -   2   -   -   7   9 
Balance December 31, 2011  162  $393  $1,096  $3,885  $901  $(1,220) $5,055 

Comprehensive Income

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Net Income $525
 $517
 $421
Other Comprehensive Income  
  
  
Unrealized gains on investments, net of tax of $134, $161, and $135, respectively 250
 299
 251
Amortization of pension actuarial loss and prior service cost, net of tax of $(6), $29, and $(4), respectively (12) 54
 (9)
Change in life deferred acquisition costs, life policy reserves and other, net of tax of $2, $12, and $(7), respectively 2
 22
 (14)
Other comprehensive income, net of tax 240
 375
 228
Comprehensive Income $765
 $892
 $649
       
Accompanying notesNotes are an integral part of these consolidated financial statements.

Cincinnati Financial Corporation – 2011 10-K - 112
Consolidated Financial Statements.


Cincinnati Financial Corporation - 2014 10-K - Page 125


Cincinnati Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

 Years ended December 31, 
(In millions)  2011  2010  2009 
CASH FLOWS FROM OPERATING ACTIVITIES            
Net income $166  $377  $432 
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation, amortization and other non-cash items  42   41   38 
Realized gains on investments, net  (70)  (159)  (336)
Stock-based compensation  13   11   10 
Interest credited to contract holders  51   48   43 
Deferred income tax (benefit) expense  (17)  30   71 
Changes in:            
Investment income receivable  -   (1)  (20)
Premiums and reinsurance receivable  (128)  80   148 
Deferred policy acquisition costs  (33)  (23)  (12)
Other assets  2   3   10 
Loss and loss expense reserves  139   58   56 
Life policy reserves  76   113   110 
Unearned premiums  80   44   (35)
Other liabilities  (49)  (18)  5 
Current income tax receivable/payable  (25)  (73)  5 
Net cash provided by operating activities  247   531   525 
CASH FLOWS FROM INVESTING ACTIVITIES            
Sale of fixed maturities  71   199   187 
Call or maturity of fixed maturities  808   886   659 
Sale of equity securities  539   273   1,247 
Purchase of fixed maturities  (1,087)  (1,483)  (2,135)
Purchase of equity securities  (337)  (396)  (796)
Change in short-term investments, net  -   7   78 
Investment in buildings and equipment, net  (7)  (17)  (42)
Investment in finance receivables  (32)  (27)  (34)
Collection of finance receivables  30   29   30 
Change in other invested assets, net  7   -   (9)
Net cash used in investing activities  (8)  (529)  (815)
CASH FLOWS FROM FINANCING ACTIVITIES            
Payment of cash dividends to shareholders  (255)  (252)  (249)
Purchase of treasury shares  (32)  (10)  - 
Increase in notes payable  55   -   - 
Proceeds from stock options exercised  1   -   - 
Contract holders' funds deposited  172   170   162 
Contract holders' funds withdrawn  (121)  (74)  (66)
Excess tax benefits on share-based compensation  5   2   - 
Other  (11)  (10)  (9)
Net cash used in financing activities  (186)  (174)  (162)
Net change in cash and cash equivalents  53   (172)  (452)
Cash and cash equivalents at beginning of year  385   557   1,009 
Cash and cash equivalents at end of period $438  $385  $557 
             
Supplemental disclosures of cash flow information:            
Interest paid $53  $53  $55 
Income taxes paid  51   167   74 
Non-cash activities:            
Conversion of securities $-  $5  $90 
Equipment acquired under capital lease obligations  28   -   15 

Shareholders’ Equity  

       
Accumulated
Other
Comprehensive
Income
   
Total
Share-
holders'
Equity
(In millions)Common Stock 
Paid-In
Capital
 
Retained
Earnings
  
Treasury
Stock
 
 Outstanding
Shares		 Amount     
Balance, December 31, 2011162.2
 $393
 $1,096
 $3,863
 $901
 $(1,220) $5,033
Net income—
 —
 —
 421
 —
 —
 421
Other comprehensive income, net—
 —
 —
 —
 228
 —
 228
Dividends declared—
 —
 —
 (263) —
 —
 (263)
Share-based awards exercised and vested0.7
 1
 19
 —
 —
 2
 22
Share-based compensation—
 —
 16
 —
 —
 —
 16
Treasury shares acquired—share repurchase authorization—
 —
 —
 —
 —
 —
 —
Shares acquired under employee share-based compensation plans(0.3) —
 —
 —
 —
 (12) (12)
Other0.3
 —
 3
 —
 —
 5
 8
Balance, December 31, 2012162.9
 $394
 $1,134
 $4,021
 $1,129
 $(1,225) $5,453
              
Balance, December 31, 2012162.9
 $394
 $1,134
 $4,021
 $1,129
 $(1,225) $5,453
Net income—
 —
 —
 517
 —
 —
 517
Other comprehensive income, net—
 —
 —
 —
 375
 —
 375
Dividends declared—
 —
 —
 (270) —
 —
 (270)
Share-based awards exercised and vested1.6
 3
 36
 —
 —
 10
 49
Share-based compensation—
 —
 18
 —
 —
 —
 18
Treasury shares acquired—share repurchase authorization(1.0) —
 —
 —
 —
 (52) (52)
Shares acquired under employee share-based compensation plans(0.6) —
 —
 —
 —
 (28) (28)
Other0.2
 —
 3
 —
 —
 5
 8
Balance, December 31, 2013163.1
 $397
 $1,191
 $4,268
 $1,504
 $(1,290) $6,070
              
Balance, December 31, 2013163.1
 $397
 $1,191
 $4,268
 $1,504
 $(1,290) $6,070
Net income—
 —
 —
 525
 —
 —
 525
Other comprehensive income, net—
 —
 —
 —
 240
 —
 240
Dividends declared—
 —
 —
 (288) —
 —
 (288)
Share-based awards exercised and vested1.3
 —
 —
 —
 —
 37
 37
Share-based compensation—
 —
 19
 —
 —
 —
 19
Treasury shares acquired—share repurchase authorization(0.5) —
 —
 —
 —
 (21) (21)
Shares acquired under employee share-based compensation plans(0.4) —
 —
 —
 —
 (19) (19)
Other0.2
 —
 4
 —
 —
 6
 10
Balance, December 31, 2014163.7
 $397
 $1,214
 $4,505
 $1,744
 $(1,287) $6,573
              
Accompanying notesNotes are an integral part of these consolidated financial statements.

Consolidated Financial Statements.

Cincinnati Financial Corporation – 2011 10-K - 113
Cincinnati Financial Corporation - 2014 10-K - Page 126


Cincinnati Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Cash Flows From Operating Activities  
  
  
Net income $525
 $517
 $421
Adjustments to reconcile net income to net cash provided by operating activities:  
  
  
Depreciation and amortization 51
 50
 44
Realized investment gains, net (133) (83) (42)
Share-based compensation 19
 18
 16
Interest credited to contract holders 47
 44
 44
Deferred income tax expense 37
 19
 26
Changes in:    
  
Investment income receivable (2) (6) 4
Premiums and reinsurance recoverable (60) (64) (122)
Deferred policy acquisition costs (20) (44) (28)
Other assets 19
 (32) (4)
Loss and loss expense reserves 174
 81
 (109)
Life policy reserves 119
 84
 72
Unearned premiums 106
 184
 159
Other liabilities (11) 77
 78
Current income tax receivable/payable 2
 (49) 79
Net cash provided by operating activities 873
 796
 638
Cash Flows From Investing Activities  
  
  
Sale of fixed maturities 26
 40
 144
Call or maturity of fixed maturities 1,019
 930
 927
Sale of equity securities 335
 178
 216
Purchase of fixed maturities (1,312) (1,381) (1,166)
Purchase of equity securities (392) (265) (425)
Investment in finance receivables (18) (39) (33)
Collection of finance receivables 31
 30
 34
Investment in buildings and equipment, net (9) (7) (6)
Change in other invested assets, net 9
 5
 5
Net cash used in investing activities (311) (509) (304)
Cash Flows From Financing Activities  
  
  
Payment of cash dividends to shareholders (278) (263) (256)
Purchase of treasury shares (21) (52) —
Payments on note payable (55) —
 —
Proceeds from stock options exercised 22
 25
 10
Contract holders' funds deposited 86
 86
 99
Contract holders' funds withdrawn (143) (128) (126)
Excess tax benefits on share-based compensation 2
 5
 1
Other (17) (14) (13)
Net cash used in financing activities (404) (341) (285)
Net change in cash and cash equivalents 158
 (54) 49
Cash and cash equivalents at beginning of year 433
 487
 438
Cash and cash equivalents at end of year $591
 $433
 $487
Supplemental Disclosures of Cash Flow Information:  
  
  
Interest paid $53
 $53
 $54
Income taxes paid 154
 222
 38
Noncash Activities:    
  
Conversion of securities $7
 $—
 $26
Equipment acquired under capital lease obligations 12
 28
 23
Cashless exercise of stock options 19
 28
 12
       
Accompanying Notes are an integral part of these Consolidated Financial Statements.

Cincinnati Financial Corporation - 2014 10-K - Page 127


Notes to Consolidated Financial Statements

1.Summary of Significant Accounting Policies


NOTE 1 – Summary of Significant Accounting Policies
Nature of Operations

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

The Cincinnati Insurance Company leads our standard market property casualty insurance group that also includes two subsidiaries: The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This group markets a broad range of standard market business, homeownercommercial and autopersonal policies. The group providesfocuses on delivery of quality customer service to our select group of 1,3121,466 independent insurance agencies with 1,6481,884 reporting locations across 39 states. Other subsidiaries of The Cincinnati Insurance Company include The Cincinnati Life Insurance Company, which markets life and disability income insurance and fixed annuities, and The Cincinnati Specialty Underwriters Insurance Company, which began offeringoffers excess and surplus lines property and casualty insurance products in 2008.

products.

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

Basis of Presentation

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

The preparation of 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.

In the fourth quarter of 2011, we changed our presentation of long-term debt in our consolidated balance sheets to include capital lease obligations now under the single caption, “Long-term debt and capital lease obligation.” Previously capital lease obligations were included in the single caption, “Other liabilities.” We reclassified $17 million of capital lease obligations into “Long-term debt and capital lease obligation” for the prior year presented.

Earnings per Share

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

Stock-Basedshare‑based awards using the treasury stock method.

Share-Based Compensation

We account for stock-basedshare-based compensation in accordance with Accounting Standards Codification (ASC) 718, Compensation – Stock Compensation.Compensation. We grant qualified and non-qualified stock-basednonqualified share-based compensation under authorized plans. The stock options vest ratably over three years following the date of grant and are exercisable over 10-year10-year periods. We grant service-based restricted stock units that cliff vest three years after the date of grant. We also grant performance-based restricted stock units that vest if certain performancemarket conditions are attained. In 2011,2014, the CFC compensation committee approved a mix ofshare-based awards including incentive stock options, non-qualifiednonqualified stock options, service-based restricted and performance-based restricted stock units. See Note 17, Stock-BasedShare-Based Associate Compensation Plans, Page 134, for further details.

Employee Benefit Pension Plan

We sponsor a defined benefit pension plan that was modified during 2008. We frozeclosed entry into the pension plan, and only participants 40 years of age or older could elect to remain in the plan. Our pension expense is based on certain actuarial assumptions and also is composed of several components that are determined using the projected unit credit actuarial cost method. Refer to Note 13, Employee Retirement Benefits, Page 130 for more information regardingabout our defined benefit pension plan.

Property Casualty Insurance

The consolidated property casualty companies actively write property casualty insurance through independent agencies in 39 states. Our 10 largest states generated 62.8 percent and 63.8 percent of total earned premiums in 2014 and 2013, respectively. Ohio, our largest state, accounted for 17.7 percent and 18.5 percent of total earned

Cincinnati Financial Corporation - 2014 10-K - Page 128


premiums in 2014 and 2013, respectively. Illinois, Indiana, Pennsylvania, Georgia, Michigan and North Carolina each accounted for between 5 percent and 8 percent of total earned premiums in 2014. Our largest single agency relationship accounted for approximately 0.8 percent of our total property casualty earned premiums in 2014. No aggregate agency relationship locations under a single ownership structure accounted for more than 2.1 percent of our total property casualty earned premiums in 2014. We record revenues for installment charges as Fee revenues in the consolidated statements of income.
Property casualty written premiums are deferred and recorded as earned premiums on a pro rata basis over the terms of the policies. We record as unearned premiums the portion of written premiums that applies to unexpired policy terms. The expensesExpenses associated with issuingsuccessfully acquiring insurance policies – primarily commissions, premium taxes and underwriting costs – are deferred and amortized over the terms of the policies. All acquisition costs are in accordance with ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. We assess recoverability of deferred acquisition costs at the segment level, consistent with the way we acquire, service and manage insurance policies and measure profitability. We analyze our acquisition cost assumptions to reflect actual experience, and we test forevaluate potential premium deficiencies.

Cincinnati Financial Corporation – 2011 10-K - 114

A segment premium deficiency is recorded when the sum of expected loss and loss adjustment expenses, expected policyholder dividends and unamortized deferred acquisition expenses exceeds the total of unearned premiums and anticipated investment income. A premium deficiency is first recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If the premium deficiency is greater than unamortized acquisition costs, a liability is accrued for the excess deficiency. We did not record a premium deficiency for the three years ended 2011, 2010 and 2009.

Certain property casualty policies are not booked beforeentered into policy underwriting systems as of the effective date.date of coverage. An actuarial estimate is made to determine the amount of unbookedthese unprocessed written premiums. A large majority of the estimate is unearned and does not have ahas no material impact on earned premiums.


Premiums receivable are reviewed for impairment on a quarterly basis. We currently do not havemaintain an allowance for uncollectible premiums.

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

The consolidated property casualty companies actively write property casualty insurance through independent agencies in 39 states. Our 10 largest states generated 66.5 percent and 67.1 percent of total earned premiums in 2011 and 2010,respectively. Ohio, our largest state, accounted for 19.5 percent and 20.5 percent of total earned premiums in 2011 and 2010, respectively. Georgia, Illinois, Indiana, Michigan, North Carolina, Pennsylvania and Virginia each accounted for between 4 percent and 8 percent of total earned premiums in 2011. Our largest single agency relationship accounted for approximately 1.2 percent of our total property casualty earned premiums in 2011. No aggregate agency relationship locations under a single ownership structure accounted for more than 2.1 percent of our total property casualty earned premiums in 2011.


Policyholder Dividends

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

Profit-Sharing Commission Accrual

We base the profit-sharing commission accrual estimate from property casualty underwriting results. These commissions are paid to agencies using a formula that takes into account agency profitability and premium volume. The commission accrual of $68 million as of December 31, 2011, contributed 2.2 percentage points to the property casualty combined ratio. Profit-sharing commission accruals for 2010 and 2009 were $77 million and $81 million, respectively.

Life and Health Insurance

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

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


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

Cincinnati Financial Corporation - 2014 10-K - Page 129


historical trends, in arriving at our assumptions for expected mortality, morbidity and withdrawal rates. We use our own experience and historical trends for setting our assumption for expected expenses. We base our assumption for expected investment income on our own experience, adjusted for current economic conditions.

Cincinnati Financial Corporation – 2011 10-K - 115

When we issue a

We capitalize acquisition costs for traditional long-duration contracts. We charge these capitalized costs associated with successfully acquiring traditional long-duration contract we capitalize acquisition costs. Acquisition costs are costs that vary with, and are primarily related to, the production of new business. We then charge these deferred policy acquisition costs to expensesinsurance policies over the premium-paying period of the contract, and wepolicies. We use the same assumptions used in establishing the liability for the contract. All acquisition costs reflect the retrospective adoption of Accounting Standards Update (ASU) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate our deferred acquisition cost for recoverability.

Universal life contracts are long-duration contracts for which contractual provisions are not fixed, unlike whole life insurance. Universal life contracts allow policyholders to vary the amount of premium, within limits, without our consent. However, we may vary the mortality, expense charges and the interest crediting rate, within limits, used to accumulate policy values. We do not record universal life premiums as revenue. Instead we recognize as revenue the mortality charges, administration charges and surrender charges when received. Some of our universal life contracts assess administration charges in the early years of the contract that are compensation for services we will provide in the later years of the contract. These administration charges are deferred and are recognized over the period when we provide those future services.

For universal life long-duration contracts, we

We maintain a liability equal to the policyholder account value. There is no provision for adverse deviation. Some of our universal life policies contain no-lapse guarantee provisions. For these policies, we establish a reserve in addition to the account balance, based on expected no-lapse guarantee benefits and expected policy assessments.

When we issue a

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

Separate Accounts

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

We carry the assets of separate account BOLIs at fair value. The liabilities on separate account BOLIs primarily are the contract holders’ claims to the related assets and are carried at an amount equal to the contract holders’ account value. At December 31, 2011,2014, the current fair value of the BOLI invested assets and cash exceeded the current fair value of the contract holders’ account value by approximately $42$47 million. If the BOLI projected fair value were to fall below the value we guaranteed, a liability would be established bywith a corresponding charge to the company’s earnings.

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

We record as revenues separate account investment management fees in Fee revenues of the consolidated statements of income.


Reinsurance

We reduce risk and uncertainty by buying property casualty and life reinsurance. Reinsurance contracts do not relieve us from our dutyobligation to policyholders, but rather help protect our financial strength to perform that duty. All of ourthese ceded reinsurance contracts transfer the economic risk of loss.

We also serve in acontinue to assume risk with limited wayexposure as a reinsurer for other insurance companies, reinsurers and involuntary state pools. We record our transactions for such assumed reinsurance based on reports provided to us by the ceding reinsurer.


Cincinnati Financial Corporation - 2014 10-K - Page 130


Both reinsurance assumed and ceded premiums are deferred and recorded as earned premiums on a pro rata basis over the terms of the contract. We estimate loss amounts recoverable from our reinsurers based on the reinsurance policy terms. Historically, our claims with reinsurers have been paid. We do not have an allowance for uncollectible reinsurance.

Cincinnati Financial Corporation – 2011 10-K - 116

Cash and Cash Equivalents

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

Investments

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

On April 1, 2009, we adopted a subsection of ASC 320, Recognition and Presentation of Other-Than-Temporary Impairments (OTTI).

Our invested asset impairment policy states that fixed maturities below their amortized cost that the company (1) intends to sell or (2) more likely than not will be required to sell before recovery of their amortized cost basis are deemed to be other-than-temporarily impaired.impaired (OTTI). The amortized cost of any such securities is reduced to fair value as the new cost basis, and a realized loss is recorded in the period in which it is recognized. When these two criteria are not met, and the company believes that full collection of interest and/or principal is not likely, we determine the net present value of future cash flows by using the effective interest rate implicit in the security at the date of acquisition as the discount rate and compare that amount with the amortized cost and fair value of the security. The difference between the net present value of the expected future cash flows and amortized cost of the security is considered a credit loss and recognized as a realized loss in the period in which it occurred. The difference between the fair value and the net present value of the cash flows of the security, the non-creditnoncredit loss, is recognized in other comprehensive income as an unrealized loss. WithWe had no fixed-maturity securities with a noncredit loss for the adoption of this subsection of ASC 320 in the second quarter of 2009, we recognized a cumulative effect adjustment of $106 million, net of tax, to reclassify the non-credit component of previously recognized impairments by increasing retained earningsyears ended 2014 and reducing accumulated other comprehensive income (AOCI).

2013.

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

We include the noncredit portion of fixed-maturity OTTI charges and all other unrealized gains and losses on investments, net of taxes, in shareholders’ equity as accumulated other comprehensive income (AOCI). Realized gains and losses on investments are recognized in net income based on the trade date accounting method.
Included within our other invested assets are $37$31 million of life policy loans and $29$37 million of venture capital fundprivate equity investments. Life policy loans are carried at the receivable value, which approximates fair value. The venture capital fundsprivate equity investments provide their financial statements to us and generally report investments on their balance sheets at fair value. We use the equity method of accounting for venture capital fundprivate equity investments.

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

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

Fair Value Disclosures

We account for our investment portfolio at fair value and apply fair value measurements as defined by ASC 820, Fair Value Measurements and Disclosures, to financial instruments. Fair value is applicable to ASC 320, Investments-Debt and Equity Securities, ASC 815, Derivatives and Hedging, and ASC 825, Financial Instruments.

ASC 820 defines fair value as the exit price or the amount that would be (1) received to sell an asset or (2) paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date. When determining an exit price, we rely upon observable market data whenever possible. We primarily base fair value for

Cincinnati Financial Corporation - 2014 10-K - Page 131


investments in equity and fixed-maturity securities (including redeemable preferred stock and assets held in separate accounts) on quoted market prices or on prices from a pricing vendor, an outside resource that supplies global securities pricing, dividend, corporate action and descriptive information to support fund pricing, securities operations, research and portfolio management. The company obtains and reviews the pricing service’s valuation methodologies and related inputs and validates these prices by replicating a sample across each asset class using a discounted cash flow model. When a price is not available from these sources, as in the case of securities that are not publicly traded, we determine the fair value using various inputs including quotes from independent brokers. The fair value of investments not priced by a pricing vendor is less than 1 percent of the fair value of our total investment portfolio. See Note 3, Fair Value Measurements, Page 123, for further details.

Cincinnati Financial Corporation – 2011 10-K - 117

For the purpose of ASC 825 disclosure, we base fair value for long-term senior notes on market pricing of similar debt instruments that are actively trading. We base fair value for notes payable on our year-end outstanding balance because it is short term and tied to a variable interest rate. We estimate the fair value of liabilities for investment contracts and annuities. These estimates are developedannuities using discounted cash flow calculations across a wide range of economic interest rate scenarios with a provision for our own creditnonperformance risk. We base fair value for long-term senior notes on the quoted market prices for such notes. We base fair value for notes payable on our year-end outstanding balance. We also estimate the fair value for assets arising from policyholder loans on insurance contracts using a discounted cash flow model.

Derivative Financial Instruments and Hedging Activities

We Determination of fair value for structured settlements assumes the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2014, to account for derivative financial instruments as prescribed by ASC 815, Derivatives and Hedging. The hedging definitions included in ASC 815 guide our recognition of the changes in the fair value of derivative financial instruments either as realized gains or losses in the consolidated statements of income or as a component of AOCI in shareholder’s equity in the periodnonperformance risk. See Note 3, Fair Value Measurements, for which they occur.

Lease/Finance

Our leasing subsidiary provides auto and equipment direct financing (leases and loans) to commercial and individual clients. We generally transfer ownership of the property to the client as the terms of the leases expire. Our lease contracts contain bargain purchase options. We account for these leases and loans as direct financing-type leases. We record income over the financing term using the effective interest method. Finance receivables are reviewed for impairment on a quarterly basis. Impairment of our finance receivables is considered insignificant to our consolidated financial condition, results of operations and cash flows.

We capitalize and amortize lease or loan origination costs over the life of the financing, using the effective interest method. These costs may include, but are not limited to: finder fees, broker fees, filing fees and the cost of credit reports.

further details.

Land, Building and Equipment

We record land at cost, and record building and equipment at cost less accumulated depreciation. Certain equipmentEquipment held under capital leases also is classified as property and equipment with the related lease obligations recorded as liabilities. We capitalize and amortize costs for internally developed computer software during the application development stage. These costs generally consist of external consulting, payroll and payroll-related costs. Our depreciation is based on estimated useful lives (ranging from three years to 39½ years)39.5 years) using straight-line and accelerated methods. Depreciation expense was $46$37 million for each year in 2011, $40 million in 2010,2014, 2013 and $48 million in 2009.2012. We monitor land, building and equipment and software assets for potential impairments. Potential impairments may include a significant decrease in the fair values of the assets, considerable cost overruns on projects, a change in legal factors or business climate or other factors that indicate that the carrying amount may not be recoverable.recoverable or useful. There were no recorded land, building and equipment impairments for 2011, 20102014, 2013 or 2009.

2012.

Income Taxes

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

See Note 11, Income Taxes, Page 129, for further detail on our uncertain tax positions. Although no Internal Revenue Service (IRS) penalties currently are accrued, if incurred, they would be recognized as a component of income tax expense. Accrued IRS
Finance Receivables
Our leasing subsidiary provides auto and equipment direct financing (leases and loans) to commercial and individual clients. We generally transfer ownership of the property to the client as the terms of the leases expire. Our lease contracts contain bargain purchase options. We account for these leases and loans as direct financing-type leases. We capitalize and amortize lease or loan origination costs over the life of the financing, using the effective interest expense is recognized as other operating expensemethod. These costs may include, but are not limited to finder fees, broker fees, filing fees and the cost of credit reports. We record income in the Other revenues of the consolidated statements of income.

income over the financing term using the effective interest method. Finance receivables are reviewed for impairment on a quarterly basis and considered insignificant to our consolidated financial condition, results of operations and cash flows.


Cincinnati Financial Corporation - 2014 10-K - Page 132



Subsequent Events

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

Pending Accounting Standards

·In October 2010,Updates

ASU 2014-09, Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-26,Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU 2010-26 modifies the definitions of the type of costs incurred by insurance entities that can be capitalized in the successful acquisition of new and renewal contracts. ASU 2010-26 requires incremental direct costs of successful contract acquisition as well as certain costs related to underwriting, policy issuance and processing, medical and inspection and sales force contract selling for successful contract acquisition to be capitalized. These incremental direct costs and other costs are those that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. The effective date of ASU 2010-26 is for interim and annual reporting periods beginning after December 15, 2011. We anticipate that ASU 2010-26 will have an after-tax reduction on our shareholders’ equity of approximately $20 million, or about $0.12 of book value per share. We will adopt the ASU retrospectively. The ASU will not have a material impact on our company’s financial position, cash flows or results of operations on a historical or prospective basis.

Cincinnati Financial Corporation – 2011 10-K - 118

·In May 2011, the FASB issued ASU 2011-04,Fair Value Measurements, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The ASU converges fair value measurement and disclosures among U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and expands disclosure requirements, particularly for Level 3 inputs. The ASU is effective for interim and annual periods beginning after December 15, 2011, and should be applied prospectively. The ASU has not yet been adopted and will not have a material impact on our company’s financial position, cash flows or results of operations.

·In December 2011, the FASB issued ASU 2011-11,Disclosures About Offsetting Assets and Liabilities. ASU 2011-11 requires entities to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The ASU is effective for interim and annual reporting periods beginning on or after January 1, 2013, and should be applied retrospectively for all comparative periods presented. The ASU has not yet been adopted and will not have a material impact on our company’s financial position, cash flows or results of operations.

·In December 2011, the FASB issued ASU 2011-12,Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income. ASU 2011-05 requires entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single, continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-12 defers the changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. The deferral of those changes allows the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income for all periods presented. We will continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. ASU 2011-12 is effective for the same time period as ASU 2011-05, which is for interim and annual reporting periods beginning after December 15, 2011. The ASU has not yet been adopted and will not have a material impact on our company’s financial position, cash flows or results of operations.

Adopted Accounting Standards

·In January 2010, the FASB issued ASU 2010-06,Fair Value Measurements and Disclosures Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Insurance contracts do not fall within the scope of this ASU. The effective date of ASU 2014-09 is for annual reporting periods beginning after December 15, 2016. The ASU has not yet been adopted; however, there is not expected to be a material impact on our company’s consolidated financial position, cash flows or results of operations.. ASU 2010-06 applies to all entities that are required to make disclosures about recurring or nonrecurring fair value measurements. ASU 2010-06 requires separate disclosures of the activity in the Level 3 category related to any purchases, sales, issuances and settlements on a gross basis. The company adopted ASU 2010-06 during 2011, and it did not have a material impact on our company’s financial position, cash flows or results of operations as it focuses on additional disclosures.

·In April 2010, the FASB issued ASU 2010-15,How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments. ASU 2010-15 applies to all insurance entities that have separate accounts that meet the definition and requirements set forth in the Accounting Standards Codification Manual. ASU 2010-15 clarifies that an insurance entity should not consider any separate account interests held for the benefit of contract holders in an investment to be the insurer’s interests. The insurance entity should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation. The insurance entity may combine those interests when the separate account interests are held for the benefit of a related-party policyholder as defined in the Variable Interest Subsections of the Consolidation topic in the Codification Manual. The company adopted ASU 2010-15 during 2011, and it did not have a material impact on our company’s financial position, cash flows or results of operations.

Cincinnati Financial Corporation – 2011 10-K - 119

2.Investments

ASU 2014-12, Compensation-Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

In June 2014, the FASB Issued ASU 2014-12, Compensation-Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that performance targets that affect vesting and that could be achieved after the requisite service period be treated as performance conditions. The effective date of ASU 2014-12 is for interim and annual reporting periods beginning after December 15, 2015. The ASU has not yet been adopted and will not have a material impact on our company’s consolidated financial position, cash flows or results of operations.

ASU 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis

In February 2015, the FASB Issued ASU 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis. ASU 2015-02 makes amendments to the current consolidation guidance, focusing mainly on the investment management industry; however entities across all industries will be impacted. The effective date of ASU 2015-02 is for interim and annual reporting periods beginning after December 15, 2015. The ASU has not yet been adopted; however, there is not expected to be a material impact on our company’s consolidated financial position, cash flows or results of operations.



Cincinnati Financial Corporation - 2014 10-K - Page 133



 NOTE 2 – Investments
The following table provides cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value for our invested assets:

 Cost or          
  amortized  Gross unrealized  Fair 
(In millions) cost  gains  losses  value 
At December 31, 2011             
Fixed maturities:                
States, municipalities and political subdivisions $3,006  $246  $-  $3,252 
Convertibles and bonds with warrants attached  59   -   -   59 
United States government  6   1   -   7 
Government-sponsored enterprises  159   1   -   160 
Foreign government  3   -   -   3 
Corporate securities  4,851   465   18   5,298 
Subtotal  8,084   713   18   8,779 
Equity securities:                
Common equities  2,088   801   35   2,854 
Preferred equities  74   28   -   102 
Subtotal  2,162   829   35   2,956 
Total $10,246  $1,542  $53  $11,735 
                 
At December 31, 2010                
Fixed maturities:                
States, municipalities and political subdivisions $3,043  $110  $10  $3,143 
Convertibles and bonds with warrants attached  69   -   -   69 
United States government  4   1   -   5 
Government-sponsored enterprises  201   -   1   200 
Foreign government  3   -   -   3 
Corporate securities  4,568   404   9   4,963 
Subtotal  7,888   515   20   8,383 
Equity securities:                
Common equities  2,211   757   28   2,940 
Preferred equities  75   27   1   101 
Subtotal  2,286   784   29   3,041 
Total $10,174  $1,299  $49  $11,424 

fixed-maturity and equity securities:

(Dollars in millions) 
Cost or
amortized
cost
 Gross unrealized  Fair
value
At December 31, 2014  gains losses 
Fixed-maturity securities:  
  
  
  
Corporate $5,117
 $420
 $11
 $5,526
States, municipalities and political subdivisions 3,267
 178
 2
 3,443
Commercial mortgage-backed 250
 9
 —
 259
Government-sponsored enterprises 213
 —
 5
 208
Foreign government 10
 —
 —
 10
Convertibles and bonds with warrants attached 7
 —
 —
 7
United States government 7
 —
 —
 7
Subtotal 8,871
 607
 18
 9,460
Equity securities:  
  
  
  
Common equities 2,583
 2,099
 3
 4,679
Nonredeemable preferred equities 145
 35
 1
 179
Subtotal 2,728
 2,134
 4
 4,858
Total $11,599
 $2,741
 $22
 $14,318
         
At December 31, 2013  
  
  
  
Fixed-maturity securities:  
  
  
  
Corporate $5,122
 $433
 $22
 $5,533
States, municipalities and political subdivisions 3,107
 125
 21
 3,211
Commercial mortgage-backed 148
 —
 5
 143
Government-sponsored enterprises 227
 —
 27
 200
Foreign government 10
 —
 —
 10
Convertibles and bonds with warrants attached 17
 —
 —
 17
United States government 7
 —
 —
 7
Subtotal 8,638
 558
 75
 9,121
Equity securities:  
  
  
  
Common equities 2,396
 1,818
 1
 4,213
Nonredeemable preferred equities 127
 38
 3
 162
Subtotal 2,523
 1,856
 4
 4,375
Total $11,161
 $2,414
 $79
 $13,496
         
The net unrealized investment gains in our fixed-maturity portfolio are primarily the result of the currentcontinued low interest rate environment that has increased theirthe fair value.value of our fixed-maturity portfolio. Theseven largest net unrealized investment gains in our common stock portfolio are primarily from two holdings,Exxon Mobil Corporation (NYSE:XOM), The Procter & Gamble Company (NYSE:PG), Honeywell International Incorporated (NYSE:HON), BlackRock Inc. (NYSE:BLK), Genuine Parts Company (NYSE:GPC), RPM International (NYSE:RPM) and Exxon Mobil CorporationJohnson and Johnson (NYSE:XOM)JNJ), which had a combined net gain position of $213 million.$619 million. At December 31, 2011, we had $59 million2014, Apple Inc. (Nasdaq:AAPL) was our largest single combined stock holding with a fair value of hybrid securities included in fixed maturities that follow ASC 815-15-25, Accounting for Certain Hybrid3.3 percent of our publicly traded common stock portfolio and 1.1 percent of the total investment portfolio.

Cincinnati Financial Instruments. The hybrid securities are carried at fair value, and the changes in fair value are included in realized investment gains and losses. For the years ended December 31, 2011 and 2010, there were no other-than-temporary impairments included within AOCI.

Corporation - 2014 10-K - Page 134
Cincinnati Financial Corporation – 2011 10-K - 120


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

 Less than 12 months  12 months or more  Total 
 Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
(In millions)  value  losses  value  losses  value  losses 
At December 31, 2011                   
Fixed maturities:                        
States, municipalities and political subdivisions $-  $-  $12  $-  $12  $- 
United States government  1   -   -   -   1   - 
Government-sponsored enterprises  10   -   -   -   10   - 
Corporate securities  380   13   57   5   437   18 
Subtotal  391   13   69   5   460   18 
Equity securities:                        
Common equities  333   35   -   -   333   35 
Preferred equities  5   -   19   -   24   - 
Subtotal  338   35   19   -   357   35 
Total $729  $48  $88  $5  $817  $53 
                         
At December 31, 2010                        
Fixed maturities:                        
States, municipalities and political subdivisions $325  $9  $9  $1  $334  $10 
Government-sponsored enterprises  133   1   -   -   133   1 
Corporate securities  354   6   39   3   393   9 
Subtotal  812   16   48   4   860   20 
Equity securities:                        
Common equities  337   28   -   -   337   28 
Preferred equities  5   -   23   1   28   1 
Subtotal  342   28   23   1   365   29 
Total $1,154  $44  $71  $5  $1,225  $49 

At December 31, 2011, contractual

(Dollars in millions) Less than 12 months 12 months or more Total
At December 31, 2014 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Fixed maturity securities:
Corporate $261
 $8
 $90
 $3
 $351
 $11
States, municipalities and political subdivisions 17
 —
 135
 2
 152
 2
Commercial mortgage-backed 3
 —
 23
 —
 26
 —
Government-sponsored enterprises 11
 —
 181
 5
 192
 5
Subtotal 292
 8
 429
 10
 721
 18
Equity securities:  
  
  
  
  
  
Common equities 85
 3
 —
 —
 85
 3
Nonredeemable preferred equities 16
 —
 17
 1
 33
 1
Subtotal 101
 3
 17
 1
 118
 4
Total $393
 $11
 $446
 $11
 $839
 $22
At December 31, 2013  
  
  
  
  
  
Fixed maturity securities:
Corporate $572
 $20
 $43
 $2
 $615
 $22
States, municipalities and political subdivisions 490
 18
 42
 3
 532
 21
Commercial mortgage-backed 125
 5
 —
 —
 125
 5
Government-sponsored enterprises 199
 27
 1
 —
 200
 27
Foreign government 10
 —
 —
 —
 10
 —
United States government 1
 —
 —
 —
 1
 —
Subtotal 1,397
 70
 86
 5
 1,483
 75
Equity securities:  
  
  
  
  
  
Common equities 77
 1
 —
 —
 77
 1
Nonredeemable preferred equities 42
 3
 —
 —
 42
 3
Subtotal 119
 4
 —
 —
 119
 4
Total $1,516
 $74
 $86
 $5
 $1,602
 $79
             
Contractual maturity dates for fixed-maturity investments were:

 Amortized  Fair  % of fair 
(Dollars in millions)  cost  value  value 
Maturity dates occurring:         
Less than 1 year $394  $401   4.6%
Years 1 - 5  2,771   2,923   33.3 
Years 6 - 10  3,614   4,028   45.8 
Years 11 - 20  1,081   1,175   13.4 
Over 20 years  224   252   2.9 
Total $8,084  $8,779   100.0%

(Dollars in millions) Amortized cost 
Fair
value
 % of fair value
At December 31, 2014   
Maturity dates occurring:  
  
  
Less than 1 year $502
 $509
 5.4%
Years 1 - 5 3,404
 3,687
 39.0
Years 5 - 10 3,322
 3,506
 37.0
Due after ten years 1,643
 1,758
 18.6
Total $8,871
 $9,460
 100.0%
       
Actual maturities may differ from contractual maturities when there is a right to call or prepay obligations with or without call or prepayment penalties.

At December 31, 2011,2014, fixed-maturity investments with amortized cost of $86$75 million and fair value of $78 million were on deposit with various states in compliance with regulatory requirements. At December 31, 2013, fixed‑maturity investments with amortized cost of $80 million and fair value of $93$84 million were on deposit with various states in compliance with regulatory requirements.


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Cincinnati Financial Corporation - 2014 10-K - Page 135


The following table provides investment income, realized investment gains and losses and the change in unrealized investment gains and losses, and other items:

 Years ended December 31, 
(In millions)  2011  2010  2009 
Investment income summarized by investment category:            
Interest on fixed maturities $424  $423  $402 
Dividends on equity securities  104   99   100 
Other investment income  4   4   7 
Total  532   526   509 
Less investment expenses  7   8   8 
Total $525  $518  $501 
             
Realized investment gains and losses summary:            
Fixed maturities:            
Gross realized gains $11  $25  $15 
Gross realized losses  0   (12)  (30)
Other-than-temporary impairments  (5)  (3)  (62)
Equity securities:            
Gross realized gains  151   174   624 
Gross realized losses  (40)  0   (162)
Other-than-temporary impairments  (52)  (33)  (69)
Securities with embedded derivatives  (1)  10   27 
Other  6   (2)  (7)
Total $70  $159  $336 
             
Change in unrealized investment gains and losses and other summary:            
Fixed maturities $200  $154  $734 
Equity securities  39   70   (134)
Adjustment to deferred acquisition costs and life policy reserves  (14)  (9)  (24)
Pension obligations  (25)  3   (14)
Other  3   5   28 
Income taxes on above  (71)  (78)  (207)
Total $132  $145  $383 

by investment category:

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Investment income:  
  
  
Interest $417
 $413
 $420
Dividends 138
 122
 115
Other 2
 3
 3
Total 557
 538
 538
Less investment expenses 8
 9
 7
Total $549
 $529
 $531
       
Realized investment gains and losses summary:  
  
  
Fixed maturities:  
  
  
Gross realized gains $21
 $15
 $36
Gross realized losses (3) —
 —
Other-than-temporary impairments (15) (2) (1)
Equity securities:      
Gross realized gains 136
 64
 39
Gross realized losses —
 —
 (2)
Other-than-temporary impairments (9) —
 (32)
Other 3
 6
 2
Total $133
 $83
 $42
       
Change in unrealized investment gains and losses:  
  
  
Fixed maturities $106
 $(387) $176
Equity securities 278
 847
 210
Less income taxes 134
 161
 135
Total $250
 $299
 $251
       
For the years ended December 31, 20112014, 2013 and 2010,2012, there were no credit losses on fixed-maturity securities for which a portion of OTTI has been recognized in other comprehensive income.

During 2011,2014, we other-than-temporarily impaired 12six securities. At December 31, 2011, 202014, 144 fixed-maturity investments with a total unrealized loss of $5$10 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below 70 percent of amortized cost. TwoThere were three equity security investments with a total unrealized loss of less than $1 million had been in an unrealized loss position for 12 months or more with a total unrealized loss of $1 million as of December 31, 2011.2014. Of that total, no equity security investments were tradinghad fair values below 70 percent of cost.

During 2010,2013, we other-than-temporarily impaired 15seven securities. At December 31, 2010, 172013, 40 fixed-maturity investments with a total unrealized loss of $4$5 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below 70 percent of amortized cost. ThreeThere were no equity security investments with a total unrealized loss of $1 million had been in an unrealized loss position for 12 months or more as of December 31, 2010. Of that total, no equity investments were trading below 70 percent of cost.

2013.

During 2009,2012, we other-than-temporarily impaired 5013 securities. At December 31, 2009, 1212012, four fixed-maturity investments with a total unrealized loss of $25$1 million had been in an unrealized loss position for 12 months or more. Of that total, eightno fixed-maturity investments had fair values below 70 percent of amortized cost with a total unrealized loss of $2 million. Tencost. There were no equity security investments with a total unrealized loss of $26 million had been in an unrealized loss position for 12 months or more as of December 31, 2009. Of that total, no equity investments were trading below 70 percent of cost.

When determining OTTI charges for our fixed-maturity portfolio, management places significant emphasis on whether issuers of debt are current on contractual payments and whether future contractual amounts are likely to be paid. As required by ASC 320 effective April 1, 2009, our invested asset impairment policy for fixed-maturity securities states that OTTI is considered to have occurred (1) if we intend to sell the impaired fixed-maturity security or (2) if it is more likely than not we will be required to sell the fixed maturity security before recovery of its amortized cost basis. If we intend to sell or it is more likely than not we will be required to sell, the amortized cost of any such securities is reduced to fair value as the new cost basis, and a realized loss is recorded in the period in which it is recognized. When we believe that full collection of interest and/or principal is not likely, we determine the net present value of future cash flows by using the effective interest rate implicit in the security at the date of acquisition as the discount rate and compare that amount to the amortized cost and fair value of the security. The difference between the net present value of the expected future cash flows and amortized cost of the security is considered a credit loss and recognized as a realized loss in the period in which it occurred. The difference between the fair value and the net present value of the cash flows of the security, the non-credit loss, is recognized in other comprehensive income as an unrealized loss.

Cincinnati Financial Corporation – 2011 10-K - 122
2012.

With the adoption of ASC 320 in the second quarter of 2009, we recognized a cumulative effect adjustment of $106 million, net of tax, to reclassify the non-credit component of previously recognized impairments by increasing retained earnings and reducing AOCI.

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

For each of our equity securities in an unrealized loss position at December 31, 2011, we applied the objective qualitative and quantitative criteria of our invested asset impairment policy for OTTI. Our long-term equity investment philosophy, emphasizing companies with strong indications of paying and growing dividends, combined with our strong surplus, liquidity and cash flow, supports our ability to hold these investments to recovery. Based on the individual qualitative and quantitative factors, as discussed above, we evaluate and determine an expected recovery period for each security. A change in the condition of a security can warrant impairment before the expected recovery period. If the security has not recovered cost within the expected recovery period, the security is other-than-temporarily impaired.

3.Fair Value Measurements



Cincinnati Financial Corporation - 2014 10-K - Page 136


NOTE 3 – Fair Value Measurements

Fair Value Hierarchy

In accordance with 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 sincefrom those used at December 31, 2010,2013, and ultimately management determines fair value.

Financial instruments reported at fair value in our consolidated financial statements are categorized based upon the following characteristics or inputs to the valuation techniques:


Level 1 – Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in active markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.
Level 2 – Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets and liabilities that are actively traded. This also includes pricing models for which the inputs are corroborated by market data.
Level 3 – Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following:
·Level 1 – Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in active markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.

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

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

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

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

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

We conduct a thorough review of fair value hierarchy classifications on a quarterly basis. Reclassification of certain financial instruments may occur when input observability changes. As noted below in

The technique used for the Level 3 disclosure table, reclassifications are reported as transfers2 fixed-maturity securities and taxable fixed maturities in or outseparate accounts is the application of matrix pricing. The inputs used include relevant market information by asset class, trade activity of like securities, yield to maturity and economic events. All of the Level 3 category as2 fixed-maturity securities are priced by a nationally recognized pricing vendor.

The Level 2 nonredeemable preferred equities technique used is the application of matrix pricing. The inputs used, similar to those used by the pricing vendor for our fixed-maturity securities, include relevant market information, trade activity of like securities, yield to maturity, corporate action notices and economic events. All of the beginning of the quarter in which the reclassification occurred.

Cincinnati Financial Corporation – 2011 10-K - 123
Level 2 nonredeemable preferred equities are priced by a nationally recognized pricing vendor.

The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis for the years endedat December 31, 20112014 and 2010.2013. We do not have any material liabilities carried at fair value. There were also no significant transfers between Level 1 and Level 2.

 Asset fair value measurements at December 31, 2011, using: 
(In millions)  Quoted prices in
active markets for
identical assets
(Level 1)		  Significant other
observable inputs
(Level 2)		  Significant
unobservable
inputs
(Level 3)		  Total 
Fixed maturities, available for sale:                
States, municipalities and political subdivisions $-  $3,249  $3  $3,252 
Convertibles and bonds with warrants attached  -   59   -   59 
United States government  7   -   -   7 
Government-sponsored enterprises  -   160   -   160 
Foreign government  -   3   -   3 
Corporate securities  -   5,280   18   5,298 
Subtotal  7   8,751   21   8,779 
Common equities, available for sale  2,854   -   -   2,854 
Preferred equities, available for sale  -   98   4   102 
Taxable fixed-maturities separate accounts  -   628   -   628 
Top Hat Savings Plan  8   -   -   8 
Total $2,869  $9,477  $25  $12,371 

 Asset fair value measurements at December 31, 2010, using: 
(In millions)  Quoted prices in
active markets for
identical assets
(Level 1)		  Significant other
observable inputs
(Level 2)		  Significant
unobservable
inputs
(Level 3)		  Total 
Fixed maturities, available for sale:                
States, municipalities and political subdivisions $-  $3,139  $4  $3,143 
Convertibles and bonds with warrants attached  -   69   -   69 
United States government  5   -   -   5 
Government-sponsored enterprises  -   200   -   200 
Foreign government  -   3   -   3 
Corporate securities  -   4,943   20   4,963 
Subtotal  5   8,354   24   8,383 
Common equities, available for sale  2,940   -   -   2,940 
Preferred equities, available for sale  -   96   5   101 
Taxable fixed-maturities separate accounts  -   606   2   608 
Top Hat Savings Plan  9   -   -   9 
Total $2,954  $9,056  $31  $12,041 

2 for the years ended December 31, 2014 and 2013.


Cincinnati Financial Corporation - 2014 10-K - Page 137



(Dollars in millions) 
Quoted prices in
active markets for
identical assets
(Level 1)
   
Significant 
unobservable 
inputs 
(Level 3)
  
At December 31, 2014  
Significant other
observable inputs
(Level 2)
  Total
Fixed maturities, available for sale:  
  
  
  
Corporate $—
 $5,508
 $18
 $5,526
States, municipalities and political subdivisions —
 3,443
 —
 3,443
Commercial mortgage-backed —
 259
 —
 259
Government-sponsored enterprises —
 208
 —
 208
Foreign government —
 10
 —
 10
Convertibles and bonds with warrants attached —
 7
 —
 7
United States government 7
 —
 —
 7
Subtotal 7
 9,435
 18
 9,460
Common equities, available for sale 4,679
 —
 —
 4,679
Nonredeemable preferred equities, available for sale —
 177
 2
 179
Separate accounts taxable fixed maturities —
 731
 —
 731
Top Hat Savings Plan - mutual funds and common equities (included in Other assets) 18
 —
 —
 18
Total $4,704
 $10,343
 $20
 $15,067
         
At December 31, 2013  
  
  
  
Fixed maturities, available for sale:  
  
  
  
Corporate $—
 $5,531
 $2
 $5,533
States, municipalities and political subdivisions —
 3,211
 —
 3,211
Commercial mortgage-backed —
 143
 —
 143
Government-sponsored enterprises —
 200
 —
 200
Foreign government —
 10
 —
 10
Convertibles and bonds with warrants attached —
 17
 —
 17
United States government 7
 —
 —
 7
Subtotal 7
 9,112
 2
 9,121
Common equities, available for sale 4,213
 —
 —
 4,213
Nonredeemable preferred equities, available for sale —
 160
 2
 162
Separate accounts taxable fixed maturities —
 682
 —
 682
Top Hat Savings Plan - mutual funds and common equities (included in Other assets) 14
 —
 —
 14
Total $4,234
 $9,954
 $4
 $14,192
         
Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the table belowfollowing tables by security type with a summary of changes in fair value for the years ended December 31, 20112014 and 2010. As of December 31, 2011 and 2010, total2013. Total Level 3 assets werecontinue to be less than 1 percent of financial assets measured at fair value.

Cincinnati Financial Corporation – 2011 10-K - 124

The following tables provide changesvalue in the consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to Level 3 securities during 2011 and 2010:

 Asset fair value measurements using significant unobservable inputs (Level 3) 
(In millions)  Corporate
fixed
maturities		  Taxable fixed
maturities- 
separate accounts		  States,
municipalities
and political
subdivisions
fixed maturities		  Preferred
equities		  Total 
Beginning balance, January 1, 2011 $20  $2  $4  $5  $31 
Total gains or losses (realized/unrealized):                    
Included in earnings (or changes in net assets)  -   -   -   -   - 
Included in other comprehensive income  -   -   -   -   - 
Purchases  16   -   -   -   16 
Sales  -   -   (1)  -   (1)
Transfers into Level 3  10   -   -   1   11 
Transfers out of Level 3  (28)  (2)  -   (2)  (32)
Ending balance, December 31, 2011 $18  $-  $3  $4  $25 

 Asset fair value measurements using significant unobservable inputs (Level 3) 
(In millions)  Corporate
fixed
maturities		  Taxable fixed
maturities- 
separate accounts		  States,
municipalities
and political
subdivisions
fixed maturities		  Preferred
equities		  Total 
Beginning balance, January 1, 2010 $27  $-  $4  $5  $36 
Total gains or losses (realized/unrealized):                    
Included in earnings (or changes in net assets)  -   -   -   -   - 
Included in other comprehensive income  2   -   -   -   2 
Purchases, sales, issuances, and settlements  (3)  2   -   -   (1)
Transfers into Level 3  4   -   -   -   4 
Transfers out of Level 3  (10)  -   -   -   (10)
Ending balance, December 31, 2010 $20  $2  $4  $5  $31 

Forinputs used to develop the year ended December 31, 2011, three Level 3 corporate fixed-maturity securities were purchased for $16 million and three corporate fixed-maturity securities were transferredvaluations. Transfers into Level 3 for $10 million. There were also six corporate fixed-maturity securities that were transferredincluded situations where a fair value quote was not provided by the company's nationally recognized pricing vendor and as a result the price was stale or had been replaced with a broker quote where the inputs had not been corroborated to be market observable resulting in the security being classified as Level 3. Transfers out of Level 3 included situations where a broker quote was used in the prior period and a fair value quote became available from the company's pricing vendor in the current period. A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for $28 million. As a resultindividual securities were not significant.


Cincinnati Financial Corporation - 2014 10-K - Page 138


The quantitative detail of these purchases and transfers, corporate fixed-maturity securities decreased $2 million. There were no other significant changesunobservable inputs is neither provided nor reasonably available to us.
The following table provides the change in Level 3 assets during 2014 and 2013:
(Dollars in millions)Asset fair value measurements using significant unobservable inputs (Level 3)
  
Corporate
fixed
maturities
 
States, 
municipalities 
and political 
subdivisions 
fixed maturities
 
Nonredeemable preferred 
equities
 Total
Beginning balance, January 1, 2014 $2
 $—
 $2
 $4
Total gains or losses (realized/unrealized):  
  
  
  
Included in net income —
 —
 —
 —
Included in other comprehensive income —
 —
 —
 —
Purchases —
 —
 —
 —
Sales —
 —
 —
 —
Transfers into Level 3 16
 —
 —
 16
Transfers out of Level 3 —
 —
 —
 —
Ending balance, December 31, 2014 $18
 $—
 $2
 $20
         
Beginning balance, January 1, 2013 $3
 $1
 $1
 $5
Total gains or losses (realized/unrealized):  
  
  
  
Included in net income —
 —
 —
 —
Included in other comprehensive income —
 —
 —
 —
Purchases —
 —
 1
 1
Sales —
 (1) —
 (1)
Transfers into Level 3 —
 —
 —
 —
Transfers out of Level 3 (1) —
 —
 (1)
Ending balance, December 31, 2013 $2
 $—
 $2
 $4
         
With the year endedexception of the Level 3 rollforward table, additional disclosure for the Level 3 category is not material.
Fair Value Disclosure for Assets and Liabilities Not Carried at Fair Value
The disclosures below are presented to provide information about the effects of current market conditions on financial instruments that are not reported at fair value in our consolidated financial statements.
The following table shows fair values of our note payable and long-term debt:
(Dollars in millions) 
Quoted prices in
active markets for 
identical assets
(Level 1)
 Significant other 
observable inputs 
(Level 2)		 
Significant
unobservable
inputs
(Level 3)
 Total
At December 31, 2014    
Note payable $—
 $49
 $—
 $49
6.900% senior debentures, due 2028 —
 34
 —
 34
6.920% senior debentures, due 2028 —
 496
 —
 496
6.125% senior notes, due 2034 —
 449
 —
 449
Total $—
 $1,028
 $—
 $1,028
         
At December 31, 2013        
Note payable $—
 $104
 $—
 $104
6.900% senior debentures, due 2028 —
 30
 —
 30
6.920% senior debentures, due 2028 —
 458
 —
 458
6.125% senior notes, due 2034 —
 399
 —
 399
Total $—
 $991
 $—
 $991
         

Cincinnati Financial Corporation - 2014 10-K - Page 139


Fair value of the note payable was determined based upon the outstanding balance at December 31, 2011.

4.Property Casualty Loss and Loss Expenses

2014 and 2013, because it is short term and tied to a variable interest rate. The note payable was classified as Level 2 as a market does not exist.

Fair value of the long-term debt was determined under the fair value measurements and disclosure accounting rules based on market pricing of similar debt instruments that are actively trading. We determine fair value for our debt the same way that we value corporate fixed maturities in our investment portfolio. Fair value can vary with macroeconomic conditions. Regardless of the fluctuations in fair value, the outstanding principal amount of our long-term debt is $793 million at both December 31, 2014 and 2013. None of the long-term debt is encumbered by rating triggers.

The following table shows the fair value of our life policy loans, included in other invested assets:
(Dollars in millions) 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs 
(Level 2)
 
Significant 
unobservable 
inputs
(Level 3)
 Total
At December 31, 2014    
Life policy loans $—
 $—
 $39
 $39
         
At December 31, 2013        
Life policy loans $—
 $—
 $45
 $45
         
Recorded outstanding principal and interest for these life policy loans were $31 million and $36 million at December 31, 2014 and 2013, respectively. To determine the fair value, we make the following significant assumptions: (1) the discount rates used to calculate the present value of expected payments are the risk-free spot rates, as nonperformance risk is minimal; and (2) the loan repayment rate by which policyholders pay off their loan balances is in line with past experience.
The following table shows fair value of our deferred annuities and structured settlements included in life policy and investment contract reserves:
(Dollars in millions) 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs 
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 Total
At December 31, 2014    
Deferred annuities $—
 $—
 $897
 $897
Structured settlements —
 217
 —
 217
Total $—
 $217
 $897
 $1,114
         
At December 31, 2013        
Deferred annuities $—
 $—
 $911
 $911
Structured settlements —
 219
 —
 219
Total $—
 $219
 $911
 $1,130
         
Recorded reserves for the deferred annuities were $863 million and $862 million at December 31, 2014 and 2013, respectively. Recorded reserves for the structured settlements were $182 million and $189 million at December 31, 2014 and 2013, respectively.
Fair values for deferred annuities were calculated based upon internally developed models because active, observable markets do not exist for those items. To determine the fair value, we made the following significant assumptions: (1) the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2014 and 2013, to account for nonperformance risk; (2) the rate of interest credited to policyholders is the portfolio net earned interest rate less a spread for expenses and profit; and (3) additional lapses occur when the credited interest rate is exceeded by an assumed competitor credited rate, which is a function of the risk-free rate of the economic scenario being modeled.

Cincinnati Financial Corporation - 2014 10-K - Page 140


Determination of fair value for structured settlements assumes the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2014 and 2013, to account for nonperformance risk.

NOTE 4 – Property Casualty Loss and Loss Expenses
This table summarizes activity for our consolidated property casualty loss and loss expense reserves:

 Years ended December 31, 
(In millions)  2011  2010  2009 
Gross loss and loss expense reserves, January 1 $4,137  $4,096  $4,040 
Less reinsurance receivable  326   435   542 
Net loss and loss expense reserves, January 1  3,811   3,661   3,498 
Net incurred loss and loss expenses related to:            
Current accident year  2,620   2,319   2,274 
Prior accident years  (285)  (304)  (188)
Total incurred  2,335   2,015   2,086 
Net paid loss and loss expenses related to:            
Current accident year  1,206   939   929 
Prior accident years  1,035   926   994 
Total paid  2,241   1,865   1,923 
             
Net loss and loss expense reserves, December 31  3,905   3,811   3,661 
Plus reinsurance receivable  375   326   435 
Gross loss and loss expense reserves, December 31 $4,280  $4,137  $4,096 

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Gross loss and loss expense reserves, January 1 $4,241
 $4,169
 $4,280
Less reinsurance recoverable 299
 356
 375
Net loss and loss expense reserves, January 1 3,942
 3,813
 3,905
Net incurred loss and loss expenses related to:  
  
  
Current accident year 2,725
 2,448
 2,533
Prior accident years (98) (147) (396)
Total incurred 2,627
 2,301
 2,137
Net paid loss and loss expenses related to:  
  
  
Current accident year 1,212
 1,045
 1,123
Prior accident years 1,201
 1,127
 1,106
Total paid 2,413
 2,172
 2,229
       
Net loss and loss expense reserves, December 31 4,156
 3,942
 3,813
Plus reinsurance recoverable 282
 299
 356
Gross loss and loss expense reserves, December 31 $4,438
 $4,241
 $4,169
       
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 management andthat 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 consolidated balance sheets also includes $59
$47 million, $63$70 million and $46$61 million for certain accident, life and health loss reserves at December 31, 2011, 20102014, 2013 and 2009,2012, respectively.

Cincinnati Financial Corporation – 2011 10-K - 125

During 2011,2014, we experienced $285$98 million of favorable loss development on prior accident years comprised mostlyincluding $57 million of $234favorable development in commercial lines, $12 million of favorable development in personal lines and $29 million of favorable development in excess and surplus lines. Favorable development in 2014 was $49 million less than in 2013, largely due to the change in prior accident years before catastrophes. Overall favorable development for commercial lines reserves illustrated the potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty and workers’ compensation. We recognized favorable reserve development of $51 million for the workers’ compensation line, $34 million for the commercial property line and $14 million for the homeowner line, due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Our commercial casualty line experienced $5 million of adverse development due to an increase in its paid loss and loss expenses for cumulative accident years three or more years old, resulting in an increase recognized in estimates for IBNR losses and loss expenses for all prior accident years in total compared to 2013 and 2012. Our commercial auto line developed unfavorably by $39 million during 2014 due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled.

During 2013, we experienced $147 million of favorable development on prior accident years including $95 million
of favorable development in commercial lines, $39 million of favorable development in personal lines and $13 million of favorable development in excess and surplus lines. Favorable development in 2013 was $249 million less than in 2012, largely due to the change in prior accident years before catastrophes. Overall favorable

Cincinnati Financial Corporation - 2014 10-K - Page 141


development for commercial lines reserves illustrated the potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty and workers’ compensation. We recognized favorable reserve development of $70 million for the commercial casualty line, $22 million for the commercial property line, $14 million for the workers' compensation line and $19 million for the homeowner line, due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines.
During 2012, we experienced $396 million of favorable development on prior accident years including $292 million of favorable development in commercial lines, $99 million of favorable development in personal lines and $5 million of favorable development in excess and surplus lines. Overall favorable development for commercial lines reserves illustrated the potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty and workers’ compensation. We recognized favorable reserve development of $132$177 million for the commercial casualty line, $74 million for the workers’ compensation line and favorable development of $97$52 million for the workers’ compensationhomeowner line, due to reduced uncertainty of these lines one year later.

During 2010, we experienced $304 million of favorable loss development on prior accident years comprised mostly of $269 million in commercialyear loss and loss adjustment expense for these lines. Overall favorable development for commercial lines reserves illustrated the potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty and workers’ compensation. We recognized favorable reserve development of $186 million for the commercial casualty line and favorable reserve development of $39 million for the workers’ compensation line due to reduced uncertainty of these lines one year later.

During 2009, we experienced $188 million of favorable loss development on prior accident years comprised of $147 million in commercial lines. Overall favorable development for commercial lines reserves illustrated the potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty and workers’ compensation. We recognized favorable reserve development of $154 million for the commercial casualty line and recognized adverse reserve development for the workers’ compensation line of $48 million.

Asbestos and Environmental Reserves

We carried $136$81 million of net loss and loss expense reserves for asbestos and environmental claims at December 31, 2011, compared with $134and
$51 million of reserves for suchmold claims at December 31, 2010. These2014, compared with $77 million and $51 million, respectively, at December 31, 2013. The asbestos and environmental claims amounts constitute 3.5for each respective year constituted 2.0 percent and 1.9 percent of total net loss and loss expense reserves as of bothat these year-end dates.

We believe our exposure to asbestos and environmental claims is limited, largely because our reinsurance retention was $500,000$500,000 or below prior to 1987. We also were predominantly a personal lines company in the 1960s and 1970s. During the 1980s and early 1990s, commercial lines grew as a percentage of our overall business and our exposure to asbestos and environmental claims grew accordingly. Over that period, we included an asbestos and environmental exclusion in most policies or endorsed the exclusion to the policies.

Additionally, since 2002, we have revised policy terms, where permitted by state regulation, to limit our exposure to mold claims prospectively and further reduce our exposure to other environmental claims generally. Finally, we We have not engaged in any mergers or acquisitions through which such a liability could have been assumed. We continue to monitor our claims for evidence of material exposure to other mass tort classes such as silicosis, but we have found no such credible evidence to date.

5.Life Policy Reserves

NOTE 5 – Life Policy and Investment Contract Reserves
We establish the reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, lapsewithdrawal rates, timing of claim presentation and investment yields, including a provision for uncertainty. Once these assumptions are established, they generally are maintained throughout the lives of the contracts. We use both our own experience and industry experience, adjusted for historical trends, in arriving at our assumptions for expected mortality, morbidity and withdrawal rates as well as for expected expenses. We base our assumptions for expected investment income on our own experience adjusted for current economic conditions.

We establish reserves for the company’s universal life, deferred annuity and investment contractsstructured 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.

  At December 31, 
(In millions) 2011  2010 
Ordinary/traditional life $691  $628 
Universal life  481   459 
Deferred annuities  827   730 
Investment contracts  198   200 
Other  17   17 
Total gross reserves $2,214  $2,034 

Cincinnati Financial Corporation – 2011 10-K - 126

Reserves for deferred annuities and other investment contracts were $1.025 billion and $930 million at December 31, 2011 and December 31, 2010, respectively. Fair value for these deferred annuities

This table summarizes our life policy and investment contracts was $1.002 billion and $933 million at December 31, 2011, and December 31, 2010, respectively. Fair values of liabilitiescontract reserves:
(Dollars in millions) At December 31,
  2014 2013
Ordinary/traditional life $875
 $815
Deferred annuities 863
 862
Universal life 530
 508
Structured settlements 182
 189
Other 47
 16
Total life policy and investment contract reserves $2,497
 $2,390
     

Cincinnati Financial Corporation - 2014 10-K - Page 142


NOTE 6 – Deferred Policy Acquisition Costs
Expenses associated with certain investment contracts are calculated based upon internally developed models because active, observable markets do not exist for those items. To determine the fair value, we make the following significant assumptions: (1) the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers as of December 31, 2011, to account for non-performance risk; (2) the rate of interest credited to policyholders is the portfolio net earned interest rate less a spread for expenses and profit; and (3) additional lapses occur when the credited interest rate is exceeded by an assumed competitor credited rate, which is a function of the risk-free rate of the economic scenario being modeled. The fair value of life policy loans outstanding principal and interest approximated $43 million, compared with book value of $37 million reported in the consolidated balance sheets at December 31, 2011. The fair value of life policy loans outstanding principal and interest approximated $46 million, compared with book value of $40 million reported in the consolidated balance sheets as of December 31, 2010.

6.Deferred Acquisition Costs

The expenses associated with issuingsuccessfully acquiring 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 our deferred acquisitionthe costs for recoverability. All acquisition costs reflect ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, which we retrospectively adopted on January 1, 2012.


The table below shows the deferred policy acquisition costs and asset reconciliation, including thereconciliation:
(Dollars in millions) Years ended December 31,
  2014 2013 2012
Deferred policy acquisition costs asset, January 1 $565
 $470
 $477
Capitalized deferred policy acquisition costs 827
 802
 734
Amortized deferred policy acquisition costs (807) (758) (706)
Amortized shadow deferred policy acquisition costs (7) 51
 (35)
Deferred policy acquisition costs asset, December 31 $578
 $565
 $470
       
The change in amortized shadow deferred policy acquisition costs.

  Years ended December 31, 
(In millions) 2011  2010  2009 
Deferred policy acquisition costs asset at January 1 $488  $481  $509 
Capitalized deferred policy acquisition costs  718   676   650 
Amortized deferred policy acquisition costs  (685)  (653)  (638)
Amortized shadow deferred policy acquisition costs  (11)  (16)  (40)
Deferred policy acquisition costs asset at December 31 $510  $488  $481 

There were nocosts in 2013 compared with 2014 and 2012 was the result of rising interest rates. No premium deficiencies were recorded in the consolidated statements of income in 2014, 2013 and 2012, as the sum of the anticipated loss and loss adjustment expenses, policyholder dividends and unamortized deferred acquisition expenses did not exceed the related unearned premiums and anticipated investment income.

7.Notes Payable

At December 31, 2011 and 2010, we had two lines

NOTE 7 – Note Payable
We have one line of credit within 2014 and 2013 through multiple commercial banks with an aggregatea borrowing capacity of $225 million.
$225 million and an additional $50 million accordion feature. Our note payable balance, which approximates fair value, was $104 million at year-end 2011 and $49 million at year-end 2010. The $150 million lineunsecured revolving credit facility has a term of credit with a $104 million balancefive years that expires July of 2012. The $75 million line of credit expires August of 2012.May 13, 2019. We had no compensating balance requirements on short-term debt for either 20112014 or 2010.2013. At December 31, 2014, $49 million was drawn on the line of credit. At December 31, 2013,
$104 million was drawn on the line of credit. The interest rate charged on our borrowings on these lines ofthis credit agreement ranged from 0.581.15 percent to 2.581.30 percent during 2011.

8.Long-term Debt and Capital Lease Obligation

2014 and ranged from 1.30 percent to 1.35 percent during 2013.


NOTE 8 – Long-Term Debt and Capital Lease Obligations
This table summarizes the principal amounts of our long-term debt excluding unamortized discounts:

        Book value  Principal amount 
(In millions)       December 31,  December 31,  December 31,  December 31, 
Interest rate  Year of issue    2011  2010  2011  2010 
                   
 6.900%  1998  Senior debentures, due 2028 $28  $28  $28  $28 
 6.920%  2005  Senior debentures, due 2028  391   391   391   391 
 6.125%  2004  Senior notes, due 2034  371   371   374   374 
         Total $790  $790  $793  $793 

The fair valuediscounts, none of our senior debt approximated $814 million at year-end 2011 compared with $783 million at year-end 2010. Fair value for 2011 and 2010 was determined under ASC 820 based on market pricing of these or similar debt instruments that are actively trading. Fair value can vary with macroeconomic concerns. Regardless of the fluctuations in fair value, the outstanding principal amount of our long-term debt remained unchanged from year-end 2010. None of the noteswhich are encumbered by rating triggers.

triggers:

(Dollars in millions)   Book value Principal amount
 Interest rate 
 Year of
 issue
   December 31, December 31, December 31, December 31,
    2014 2013 2014 2013
6.900% 1998 Senior debentures, due 2028 $28
 $28
 $28
 $28
6.920% 2005 Senior debentures, due 2028 391
 391
 391
 391
6.125% 2004 Senior notes, due 2034 372
 371
 374
 374
    Total $791
 $790
 $793
 $793
             
Capital lease obligations, excluding an insignificant amount of interest, totaled $36 million and $45 million in 2014 and 2013, respectively. Below are the expected capital lease obligations totaling $31 million, excluding an insignificant amount of interest, that we expect to pay over the next fivesix years:

  Years ended December 31, 
(In millions) 2012  2013  2014  2015  2016 
Capital lease obligations $14  $11  $4  $2  $0 

9.Shareholders’ Equity and Dividend Restrictions

(Dollars in millions)Years ended December 31, 
 2015 2016 2017 2018 20192020
Capital lease obligations$18
 $9
 $3
 $2
 $3
$1
           

Cincinnati Financial Corporation - 2014 10-K - Page 143


NOTE 9 – Shareholders’ Equity and Dividend Restrictions
Declared cash dividends per share were $1.76, $1.655 and $1.62 for the years ended December 31, 2014, 2013 and 2012, respectively.

Our insurance subsidiary declared dividends to the parent company of $180$400 million in 2011, $2202014, $375 million in 20102013 and $50$300 million in 2009.2012. State regulatory requirements restrict the dividends insurance subsidiaries can pay. Dividends must be paid within 30 days of declaration. Generally, the most our insurance subsidiary can pay without prior regulatory approval is the greater of 10 percent of policyholderstatutory capital and surplus or 100 percent of statutory net income for the prior calendar year. Dividends exceeding these limitations may be paid only with approval of the insurance department of the domiciliary state. During 2012,2015, the total that our leadinsurance subsidiary, which is the parent of all other insurance subsidiaries, may declare in dividends is approximately $375$447 million.

Cincinnati Financial Corporation – 2011 10-K - 127

As of December 31, 2011, 4.4 million shares of common stock were available for future equity award grants.

Declared cash dividends per share were $1.605, $1.59 and $1.57 for the years ended December 31, 2011, 2010 and 2009, respectively.

Accumulated Other Comprehensive Income

The change in AOCI includes changes in unrealized gainstable below shows beginning and losses onend of year accumulated other comprehensive income or loss for investments, and pension obligations, as follows:

  Years ended December 31, 
  2011  2010  2009 
  Before  Income     Before  Income     Before  Income    
(In millions) tax  tax  Net  tax  tax  Net  tax  tax  Net 
Accumulated unrealized gains on investments available for sale and other at January 1 $1,232  $422  $810  $1,012  $345  $667  $570  $189  $381 
                                     
Increase in unrealized gains  309   108   201   387   136   251   936   330   606 
Cumulative effect of change in accounting for other-than-temporary impairments  0   0   0   0   0   0   (163)  (57)  (106)
Reclassification adjustment for (gains) losses included in net income  (70)  (25)  (45)  (159)  (56)  (103)  (336)  (119)  (217)
Adjustment to deferred acquisition costs and life policy reserves and other  (11)  (3)  (8)  (8)  (3)  (5)  5   2   3 
Effect on other comprehensive income  228   80   148   220   77   143   442   156   286 
Accumulated unrealized gains on investments available for sale and other at December 31 $1,460  $502  $958  $1,232  $422  $810  $1,012  $345  $667 
                                     
Accumulated unrealized losses for pension obligations at January 1 $(63) $(22) $(41) $(66) $(23) $(43) $(52) $(18) $(34)
Change in pension obligations  (25)  (9)  (16)  3   1   2   (14)  (5)  (9)
Accumulated unrealized losses for pension obligations at December 31 $(88) $(31) $(57) $(63) $(22) $(41) $(66) $(23) $(43)
                                     
Accumulated other comprehensive income at January 1 $1,169  $400  $769  $946  $322  $624  $518  $171  $347 
Unrealized investment gains and losses and other adjustments  228   80   148   220   77   143   442   156   286 
Change in pension obligations  (25)  (9)  (16)  3   1   2   (14)  (5)  (9)
Accumulated other comprehensive income at December 31 $1,372  $471  $901  $1,169  $400  $769  $946  $322  $624 

10.Reinsurance

life deferred acquisition costs, life policy reserves and other. The changes from the beginning of year to the end of year are the result of changes to other comprehensive income or loss (OCI).

 (Dollars in millions) 2014  2013  2012
  
Before
tax
 
Income
tax
 Net  Before
tax		 Income
tax		 Net  Before
tax		 Income
tax		 Net
Investments:                    
AOCI, January 1 $2,335
 $808
 $1,527
  $1,875
 $647
 $1,228
  $1,489
 $512
 $977
OCI before realized gains recognized in net income 514
 181
 333
  537
 188
 349
  426
 149
 277
Realized gains recognized in net income (130) (47) (83)  (77) (27) (50)  (40) (14) (26)
OCI 384
 134
 250
  460
 161
 299
  386
 135
 251
AOCI, December 31 $2,719
 $942
 $1,777
  $2,335
 $808
 $1,527
  $1,875
 $647
 $1,228
                     
Pension Obligations:                    
AOCI, January 1 $(18) $(6) $(12)  $(101) $(35) $(66)  $(88) $(31) $(57)
OCI before realized losses recognized in net income (21) (7) (14)  83
 29
 54
  (13) (4) (9)
Realized losses recognized in net income 3
 1
 2
  —
 —
 —
  —
 —
 —
OCI (18) (6) (12)  83
 29
 54
  (13) (4) (9)
AOCI, December 31 $(36) $(12) $(24)  $(18) $(6) $(12)  $(101) $(35) $(66)
                     
Life deferred acquisition costs, life policy reserves and other:                    
AOCI, January 1 $(16) $(5) $(11)  $(50) $(17) $(33)  $(29) $(10) $(19)
OCI before realized gains recognized in net income 7
 3
 4
  40
 14
 26
  (19) (7) (12)
Realized gains recognized in net income (3) (1) (2)  (6) (2) (4)  (2) —
 (2)
OCI 4
 2
 2
  34
 12
 22
  (21) (7) (14)
AOCI, December 31 $(12) $(3) $(9)  $(16) $(5) $(11)  $(50) $(17) $(33)
                     
Summary of AOCI:                    
AOCI, January 1 $2,301
 $797
 $1,504
  $1,724
 $595
 $1,129
  $1,372
 $471
 $901
Investments OCI 384
 134
 250
  460
 161
 299
  386
 135
 251
Pension obligations OCI (18) (6) (12)  83
 29
 54
  (13) (4) (9)
Life deferred acquisition costs, life policy reserves and other OCI 4
 2
 2
  34
 12
 22
  (21) (7) (14)
Total OCI 370
 130
 240
  577
 202
 375
  352
 124
 228
AOCI, December 31 $2,671
 $927
 $1,744
  $2,301
 $797
 $1,504
  $1,724
 $595
 $1,129
                     


Cincinnati Financial Corporation - 2014 10-K - Page 144


NOTE 10 – Reinsurance
Reinsurance mitigates the risk of highly uncertain exposures and limitsreduces the maximum net loss that can arise from large risks or risks concentrated in areas of exposure. 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.

Primary components of our property and casualty reinsurance program include a property per risk treaty, property excess treaty, casualty per occurrence treaty, andcasualty excess treaty, property catastrophe treaty.

treaty and catastrophe bonds.

Our consolidated statements of income include earned consolidated property casualty insurance premiums on assumed and ceded business:

  Years ended December 31, 
(In millions) 2011  2010  2009 
Direct earned premiums $3,236  $3,080  $3,068 
Assumed earned premiums  12   10   12 
Ceded earned premiums  (219)  (166)  (169)
Net earned premiums $3,029  $2,924  $2,911 

Changes in 2011 ceded earned premiums compared with prior periods are related to earned reinstatement premiums for additional reinsurance coverage as a result of the increase in catastrophe losses that occurred during 2011.

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Direct earned premiums $4,209
 $3,903
 $3,520
Assumed earned premiums 12
 11
 9
Ceded earned premiums (176) (201) (185)
Earned premiums $4,045
 $3,713
 $3,344
       
Our consolidated statements of income include incurred consolidated property casualty insurance loss and loss expenses on assumed and ceded business:

  Years ended December 31, 
(In millions) 2011  2010  2009 
Direct incurred loss and loss expenses $2,588  $2,003  $2,135 
Assumed incurred loss and loss expenses  24   11   10 
Ceded incurred loss and loss expenses  (277)  (4)  (63)
Net incurred loss and loss expenses $2,335  $2,010  $2,082 

Changes in 2011 ceded loss and loss expenses compared with prior periods are related to our increase in catastrophe losses that resulted in increased

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Direct incurred loss and loss expenses $2,661
 $2,323
 $2,235
Assumed incurred loss and loss expenses 6
 11
 6
Ceded incurred loss and loss expenses (40) (33) (104)
Incurred loss and loss expenses $2,627
 $2,301
 $2,137
       
Our ceded incurred losses toresults generally vary with our reinsurers in 2011.

Cincinnati Financial Corporation – 2011 10-K - 128
catastrophe experience.

For the year ended December 31, 2010, a reserve reduction occurred in our USAIG pool. Direct and ceded incurred loss and loss expenses were reduced by $33 million, and there was no effect on net incurred loss and loss expenses.

Cincinnati Life

Our life insurance company purchases reinsurance for protection of a portion of the risk that is written. Primary components of our life reinsurance program include individual mortality coverage, and aggregate catastrophe and accidental death coverage in excess of certain deductibles.
Our consolidated statements of income include earned life insurance premiums on assumed and ceded business:

  Years ended December 31, 
(In millions) 2011  2010  2009 
Direct earned premiums $220  $211  $196 
Assumed earned premiums  -   -   - 
Ceded earned premiums  (55)  (53)  (53)
Net earned premiums $165  $158  $143 

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Direct earned premiums $259
 $248
 $235
Ceded earned premiums (61) (59) (57)
Earned premiums $198
 $189
 $178
       

Cincinnati Financial Corporation - 2014 10-K - Page 145


Our consolidated statements of income include life insurance contract holders’ benefits incurred on assumed and ceded business:

  Years ended December 31, 
(In millions) 2011  2010  2009 
Direct contract holders' benefits incurred $232  $233  $201 
Assumed contract holders' benefits incurred  -   -   - 
Ceded contract holders' benefits incurred  (43)  (63)  (41)
Net incurred loss and loss expenses $189  $170  $160 

The reduction in 2011 ceded contract holders’ benefits incurred compared with 2010 related to ceded death claims.

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Direct contract holders' benefits incurred $299
 $266
 $232
Ceded contract holders' benefits incurred (70) (62) (47)
Contract holders' benefits incurred $229
 $204
 $185
       
The ceded benefits incurred can vary depending on the type of life insurance policy held and the year the policy was sold.

11.Income Taxes

issued.

NOTE 11 – Income Taxes
The significant components of deferred tax assets and liabilities included in the consolidated balance sheets at December 31 were as as��follows:

  At December 31, 
(In millions) 2011  2010 
Deferred tax assets:        
Loss and loss expense reserves $201  $182 
Unearned premiums  113   107 
Investments  36   31 
Other  46   34 
Total  396   354 
Deferred tax liabilities:        
Unrealized investment gains and losses  481   411 
Deferred acquisition costs  167   157 
Life policy reserves  42   26 
Other  20   20 
Total  710   614 
Net deferred tax liability $314  $260 

(Dollars in millions) At December 31,
  2014 2013
Deferred tax assets:  
  
Loss and loss expense reserves $197
 $206
Unearned premiums 145
 137
Investments 16
 19
Other 41
 46
Total 399
 408
Deferred tax liabilities:  
  
Unrealized investment gains, net 937
 807
Deferred acquisition costs 183
 178
Life policy reserves 110
 86
Other 9
 10
Total 1,239
 1,081
Net deferred income tax liability $840
 $673
     
Deferred tax assets and liabilities reflect temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount recognized for tax purposes.

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

  Years ended December 31, 
(Dollars in millions) 2011  2010  2009 
Tax at statutory rate $62   35.0% $175   35.0% $204   35.0%
Increase (decrease) resulting from:                        
Tax-exempt income from municipal bonds  (35)  (19.6)  (36)  (7.2)  (38)  (6.5)
Dividend received exclusion  (20)  (11.5)  (19)  (3.8)  (19)  (3.4)
Other  3   1.8   4   0.8   3   0.6 
Effective tax $10   5.7% $124   24.8% $150   25.7%

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Tax at statutory rate: $252
 35.0 % $250
 35.0 % $198
 35.0 %
Increase (decrease) resulting from:  
  
    
  
  
Tax-exempt income from municipal bonds (33) (4.6) (32) (4.5) (33) (5.9)
Dividend received exclusion (29) (4.0) (26) (3.6) (24) (4.2)
Other 6
 0.8
 5
 0.7
 4
 0.7
Provision for income taxes $196
 27.2 % $197
 27.6 % $145
 25.6 %
             
The provision for federal income taxes is based upon filing a consolidated income tax return for the company and its subsidiaries. As of December 31, 2011,2014 and 2013, we had no operating or capital loss carry forwards. The change in our effective tax rate was primarily due to changes in pretax income from underwriting results, changes in investment income and the amount of realized investment gains and losses.

Cincinnati Financial Corporation – 2011 10-K - 129


Cincinnati Financial Corporation - 2014 10-K - Page 146


Unrecognized Tax Benefits

Below is the unrecognized tax benefit for the years ended December 31:

  Years ended December 31, 
(In millions) 2011  2010  2009 
Gross unrecognized tax benefits at January 1 $0  $0  $2 
Gross increase in prior year positions  0   0   0 
Gross decrease in prior year positions  0   0   (2)
Gross increase in current year positions  0   0   0 
Gross decrease in current year positions  0   0   0 
Settlements with tax authorities  0   0   0 
Decrease for lapse in applicable statute of limitations  0   0   0 
Gross unrecognized tax benefits at December 31 $0  $0  $0 

As a result of positions either taken in our 2011 through 2013 federal tax returns filed with the IRS or expected to be taken in the 20112014 filing, we believe it is more likely than not that our tax positions for which we previously carried a liability for unrecognized tax benefits will be sustained upon examination by the IRS.

In We therefore carry no amount for unrecognized tax benefits for the years ended 2011 through 2014.


The statute of limitations for federal tax purposes have closed for tax years 2008 and earlier. Although all issues for tax years 2009 and 2010 have been settled and agreed to, the statute of limitations for these two tax years remains open until December 2010, we reached agreement31, 2015. Our recent settlement with the IRS settling all issues related to the 2007 and 2008 tax years. In November, 2011, the IRS began its audit of tax years 2009 and 2010.

2010 resulted in no material changes to the returns as filed.


Income taxes paid in our consolidated statements of cash flows are shown net of refunds received of less than
$1 million in both 2014 and 2013 and $11 million in 2012.
In addition to our IRS filings, we file income tax returns with immaterial amounts in various state jurisdictions.

12.Net Income Per Common Share

The statute of limitations for state income tax purposes has closed for tax years 2009 and earlier.


NOTE 12 – Net Income Per Common Share
Basic earnings per share are computed based on the weighted average number of common shares outstanding. Diluted earnings per share are computed based on the weighted average number of common and dilutive potential common shares outstanding. We have adjusted shares and earnings per share to reflect alloutstanding using the treasury stock splits and stock dividends prior to December 31, 2011.

method. The table shows calculations for basic and diluted earnings per share are calculated as follows:

  Years ended December 31, 
(In millions except per share data) 2011  2010  2009 
Numerator:            
Net income—basic and diluted $166  $377  $432 
             
Denominator:            
Weighted-average common shares outstanding  162,667,354   162,777,695   162,595,041 
Effect of stock-based awards:            
Nonvested shares  509,177   484,829   271,822 
Stock options  82,691   11,967   - 
Adjusted diluted weighted-average shares  163,259,222   163,274,491   162,866,863 
             
Earnings per share:            
Basic $1.02  $2.32  $2.66 
Diluted  1.02   2.31   2.65 
             
Number of anti-dilutive stock-based awards  7,757,969   9,538,350   9,875,411 

share:

(In millions except per share data) Years ended December 31,
 2014 2013 2012
Numerator:  
  
  
Net income—basic and diluted $525
 $517
 $421
Denominator:  
  
  
Basic weighted-average common shares outstanding 163.5
 163.5
 162.5
Effect of stock-based awards:  
  
  
Stock options 1.0
 1.2
 0.5
Nonvested shares 0.6
 0.7
 0.7
Diluted weighted-average shares 165.1
 165.4
 163.7
Earnings per share:  
  
  
Basic $3.21
 $3.16
 $2.59
Diluted 3.18
 3.12
 2.57
Number of anti-dilutive stock-based awards 0.7
 0.4
 5.9
       
The current sources of dilution of our common shares are certain equity-based awards as discussed in Note 17, Stock-BasedShare-Based Associate Compensation Plans, Page 134.Plans. The above table showsincludes the number of anti-dilutive stock-based awards at year-end 2011, 20102014, 2013 and 2009.2012. We did not include these stock-based awards in the computation of net income per common share (diluted) because their exercise would have anti-dilutive effects.

13.


Cincinnati Financial Corporation - 2014 10-K - Page 147


NOTE 13 – Employee Retirement Benefits

We sponsor a qualified defined benefit pension plan. During 2008, we changed the form of retirement benefit we offer some associates to a company match on contributions to a 401(k) plan from the defined benefit pension plan. We frozeclosed entry into the pension plan for new associates as of June 30, 2008, and only participants 40 years of age or older as of August 31, 2008, could elect to continue to participate. For participants who left the pension plan, benefit accruals were frozen as of August 31, 2008. For participants remaining in the pension plan, we continue to contribute to fund future benefit obligations. Benefits for the defined benefit pension plan are based on years of credited service and compensation level. Contributions are based on the prescribed method defined in the Pension Protection Act. Our pension expense is based on certain actuarial assumptions and also is composed of several components that are determined using the projected unit credit actuarial cost method. During the fourth quarter of 2011, theThe qualified pension plan washas been amended to allow for distribution of vested balances to terminated participants. The plan paid $9 million to these terminated vested participants during 2011.

Cincinnati Financial Corporation – 2011 10-K - 130

We also sponsor a defined contribution plan (401(k) plan). Matching company contributions totaled $8$11 million, $8
$10 million and $7$9 million during the years 2011, 20102014, 2013 and 2009,2012, respectively. Associates who are not accruing benefits under the pension plan are eligible to receive the company match of up to 6 percent of cash compensation. We also pay all operating expenses for the 401(k) plan. Participants vest in the company match for the 401(k) plan after three years of eligible service.

We maintain a supplemental executive retirement plan (SERP) with obligationsa benefit obligation of approximately $8$13 million at
year-end 2014 and $9 million at year-end 2011 and $6 million at year-end 2010,2013, which areis included in the obligation and expense amounts.projected benefit obligation. The company also makes available to a select group of associates the CFC Top Hat Savings Plan, a non-qualifiednonqualified deferred compensation plan. For SERP participants who left the defined benefit pension plan, SERP benefit accruals were frozen aswhich had a fair value of $18 million and $14 million at December 31, 2008. During 2009, the frozen accrued SERP benefit for those participants, collectively amounting to approximately $1 million, transferred to the Top Hat Savings Plan. Beginning in 2009, for these associates, the company began matching deferrals to the Top Hat Savings Plan up to the first 6 percent of an associate’s compensation that exceeds the compensation limit specified by the Internal Revenue Code of 1986, as amended. Participants vest after three years of eligible service.

2014 and 2013, respectively.

Defined Benefit Pension Plan Assumptions

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

  Qualified Pension Plan  SERP 
  2011  2010  2011  2010 
Discount rate  5.10%  5.85%  4.75%  5.55%
Rate of compensation increase  3.50-5.50   3.50-5.50   3.50-5.50   3.50-5.50 

for the plans:

  Qualified Pension Plan SERP
  2014 2013 2014 2013
Discount rate 4.25% 5.15% 4.05% 4.80%
Rate of compensation increase 2.75-3.25
 2.75-3.25
 2.75-3.25
 2.75-3.25
         
To determine the discount rate for each plan, a hypothetical diversifiedtheoretical settlement portfolio of actual domestic Aahigh quality rated corporate bonds was chosen to provide payments approximately matching the plan’s expectedprojected benefit payments. A single interest rate for each plan was determined based on the anticipated yieldresulting in a discounted value of the constructed portfolio.plan's benefit payments that equates to the market value of the selected bonds. The discount rate is reflective of current market interest rate conditions and our plan's liability characteristics. Based on this analysis, we decreased the rate from the prior year by 0.90 percentage points for the qualified pension plan and by 0.75 percentage points for the qualified plan and by 0.80 percentage points for the SERP due to market interest rate conditions at year-end 2011.SERP. Compensation increase assumptions reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases.

Here The mortality assumption was updated in 2014 to the RP-2014 Employee Mortality Tables and RP-2014 Annuitant Mortality Tables for males and females projected generationally with Scale MP-2014. The updated mortality table did not have a significant impact on our financial statements as our qualified plan assumes benefits will be paid in the form of lump sums.


This is a summary of the weighted-average assumptions we useused to determine our net expense for the plan:

  Qualified Pension Plan  SERP 
  2011  2010  2009  2011  2010  2009 
Discount rate  5.85%  6.10%  6.00%  5.55%  6.10%  6.00%
Expected return on plan assets  7.50   8.00   8.00   n/a   n/a   n/a 
Rate of compensation increase  3.50-5.50   4.00-6.00   4.00-6.00   3.50-5.50   4.00-6.00   4.00-6.00 

plans:

  Qualified Pension Plan SERP
  2014 2013 2012 2014 2013 2012
Discount rate 5.15% 4.20% 5.10% 4.80% 3.95% 4.75%
Expected return on plan assets 7.25
 7.50
 7.50
 n/a
 n/a
 n/a
Rate of compensation increase 2.75-3.25
 2.75-3.25
 3.50-5.50
 2.75-3.25
 2.75-3.25
 3.50-5.50
             

Cincinnati Financial Corporation - 2014 10-K - Page 148


The discount rate was decreasedincreased by 0.250.95 percentage points for the qualified pension plan and 0.550.85 percentage points for the SERP due to market interest rate conditions at the beginning of 2011.in 2014. The discount rate assumptions for our benefit obligation generally track with high gradequality rated corporate bond yields chosen in our hypotheticaltheoretical settlement portfolio, and yearly adjustments reflect any changes to those bond yields. We believe the expected return on plan assets is representative of the expected long-term rate of return on these assets. We reduced the return on plan assets, from 8.00 percent to 7.50 percent, which is consistent with current2014 expectations of interest rates and based partially on the fact that the plan’s common stock holdings pay dividends. We believe this rate is representative of the expected long-term rate of return on these plan assets. We review historical actual return on plan assets when determining our expected long-term rate of return. Total portfolio return for 2014 was 11.7 percent and for 2013 was 24.0 percent. Our compensation increase assumptions in 2014 reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases.

Cincinnati Financial Corporation – 2011 10-K - 131

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

  At December 31, 
(In millions) 2011  2010 
Change in projected benefit obligation:        
Benefit obligation at January 1 $245  $221 
Service cost  11   10 
Interest cost  14   14 
Actuarial loss  30   6 
Benefits paid  (19)  (6)
Projected benefit obligation at December 31 $281  $245 
         
Accumulated benefit obligation $236  $213 
         
Change in plan assets:        
Fair value of plan assets at January 1 $183  $144 
Actual return on plan assets  17   20 
Employer contributions  35   25 
Benefits paid  (19)  (6)
Fair value of plan assets at December 31 $216  $183 
         
Unfunded status:        
Unfunded status at December 31 $(65) $(62)

(Dollars in millions) At December 31,
  2014 2013
Change in projected benefit obligation:  
  
Benefit obligation, January 1 $284
 $320
Service cost 10
 13
Interest cost 15
 13
Actuarial loss (gain) 35
 (34)
Benefits paid (27) (28)
Other 2
 —
Projected benefit obligation, December 31 $319
 $284
     
Accumulated benefit obligation $284
 $257
     
Change in plan assets:  
  
Fair value of plan assets, January 1 $280
 $238
Actual return on plan assets 30
 55
Employer contribution 5
 15
Benefits paid (27) (28)
Fair value of plan assets, December 31 $288
 $280
     
Funded status, December 31 $(31) $(4)
     
The decreases in discount rate and lump sum rate resulted in an increase in actuarial loss and projected benefit obligation from 2013 and an increase in unfunded status.


Cincinnati Financial Corporation - 2014 10-K - Page 149


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

  At December 31, 
(In millions) 2011  2010 
       
Pension amounts recognized as other liabilities in the consolidated balance sheets: $(65) $(62)
         
Amounts recognized in accumulated other comprehensive income not yet recognized:        
Net actuarial loss $86  $60 
Prior service cost  2   3 
Total $88  $63 

(Dollars in millions) At December 31,
  2014 2013
Pension amounts recognized in the consolidated balance sheets:    
Other assets $—
 $4
Other liabilities (31) (8)
Net amount recognized $(31) $(4)
     
Amounts recognized in accumulated other comprehensive income:  
  
Net actuarial loss $34
 $18
Prior service cost 2
 —
Total $36
 $18
     
The change in the amount recognized in other comprehensive income is largely due to the decrease in discount rate. We assume that 100 percent of participants will chooserate and corresponding decreases in assumed lump sum payments.

Hererates.

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

  Years ended December 31, 
(In millions) 2011  2010  2009 
Service cost $11  $10  $10 
Interest cost  14   14   12 
Expected return on plan assets  (16)  (14)  (12)
Amortization of actuarial loss and prior service cost  4   2   1 
Net periodic benefit cost $13  $12  $11 

  Years ended December 31, 
(In millions) 2011  2010  2009 
Current year actuarial loss $30  $0  $15 
Recognition of actuarial loss  (4)  (2)  0 
Recognition of prior service cost  (1)  (1)  (1)
Total loss (gain) recognized in other comprehensive income $25  $(3) $14 

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Net periodic benefit cost:      
Service cost $10
 $13
 $12
Interest cost 15
 13
 14
Expected return on plan assets (17) (17) (16)
Amortization of actuarial loss and prior service cost 2
 9
 8
Other 3
 2
 —
Net periodic benefit cost $13
 $20
 $18
       
(Dollars in millions) Years ended December 31,
  2014 2013 2012
Other changes in plan assets and benefit obligations recognized in      
other comprehensive income:      
Current year actuarial loss (gain) $21
 $(72) $20
Amortization of actuarial loss (5) (10) (6)
Current year prior service cost 2
 —
 —
Amortization of prior service cost —
 (1) (1)
Total recognized in other comprehensive loss (income) $18
 $(83) $13
       
The total recognized in net periodic benefit cost and other comprehensive income was $38a net cost of $31 million, $9net benefit of $63 million, and $25a net cost of $31 million for the years ended December 31, 2011, 20102014, 2013 and 2009,2012, respectively. The increasechange in the amount recognized in other comprehensive income from 2013 is largely due to the decreases in discount rate and lump sum rate from prior year end.rates, partially offset with greater than anticipated return on plan assets. The estimated costs to be amortized from AOCI into net periodic benefit cost over the next year for our plans are a $6
$5 million in actuarial loss and a $1 million in prior service cost.

Cincinnati Financial Corporation – 2011 10-K - 132


Cincinnati Financial Corporation - 2014 10-K - Page 150


Defined Benefit Pension Plan Assets

The pension plan assets are managed to maximize total return over the long term while providing sufficient liquidity and current return to satisfy the cash flow requirements of the plan. The plan’s day-to-day investment decisions are managed by our internal investment department; however, overall investment strategies are discussed with our employee benefits committee.

Our investment strategy, currently driven by the low interest rate environment, is to weight our portfolio towards large cap, high quality, dividend growing equities that we have historically favored. As our plan matures and interest rates normalize, we expect a greater allocation to fixed income securities to better align asset and liability market risks. Our fixed-maturity bond portfolio is investment grade. The plan does not engage in derivative transactions.

Excluding cash, during 20112014 we allocatedheld approximately 7081 percent of our pension portfolio to highly observablein domestic common equity investments, which reflect the long-term time horizon of pension obligations. The remainder of the portfolio is allocated 16consisted of 12 percent toin states, municipalities and taxable political subdivisions fixed-maturity investments 12and 7 percent toin domestic corporate fixed-maturity investments and 2 percent to preferred equities.investments. Our common equity portfolio allocated 20consisted of 23 percent toin the financial sector, 19 percent in the information technology sector, 1914 percent to the financial sector and 13 percent toin the healthcare sector during 2011. All remainingand 12 percent in the industrial sector at year-end 2014. No additional sectors accountaccounted for 10 percent or lessmore of theour common equity portfolio balance at year end 2011.year-end 2014. We had $2$11 million of cash on hand at December 31, 2011, with carrying value approximating fair value. We have purchased more fixed maturities over the past several years2014, to increase the duration of the fixed-maturity portfolio, diversify the types of credit risk and to better match our liability risks, which is consistent with our investment strategy. Our fixed-maturity bond portfolio is investment grade. The plan does not engage in derivative transactions. We do not expect to change the current allocation of pension investments for 2012.

cover retirements.

Investments in securities are valued based on the fair value hierarchy outlined in Note 3, Fair Value Measurements, Page 123.Measurements. The pension plan did not have any liabilities carried at fair value during the years ended December 31, 2014 and 2013. There have been no transfers between Level 1 and Level 2 for the years ended December 31, 2014 and 2013. The following table illustratesshows the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 20112014 and 2010. The pension plan did not have any liabilities carried2013. Excluded from the table below is cash on hand of $11 million and $19 million at fair value or any Level 3 assets at or during the years ended December 31, 20112014 and 2010. There have been no transfers between Level 1 and Level 2 for the period ended December 31, 2011 and 2010.

  Asset fair value measurements at December 31, 2011 using:  
(In millions) Quoted prices in
active markets for
identical assets
(Level 1)		  Significant other
observable inputs
(Level 2)		  Significant
unobservable
inputs
(Level 3)		  Total 
Fixed maturities, available for sale:                
Corporate securities $-  $25  $-  $25 
States, municipalities and political subdivisions  -   34   -   34 
Total fixed maturities, available for sale  -   59   -   59 
Common equities, available for sale  149   -   -   149 
Preferred equities, available for sale  4   -   -   4 
Total $153  $59  $-  $212 
                 
   Asset fair value measurements at December 31, 2010 using: 
(In millions) Quoted prices in
active markets for
identical assets
(Level 1)		  Significant other
observable inputs (Level 2)		  Significant
unobservable
inputs
(Level 3)		  Total 
Fixed maturities, available for sale:                
Corporate securities $-  $27  $-  $27 
States, municipalities and political subdivisions  -   21   -   21 
Total fixed maturities, available for sale  -   48   -   48 
Common equities, available for sale  122   -   -   122 
Preferred equities, available for sale  4   -   -   4 
Total $126  $48  $-  $174 

2013.

(Dollars in millions) Quoted prices in
active markets for
identical assets (Level 1)		 Significant other
observable inputs (Level 2)		 
Significant
unobservable
inputs
(Level 3)
 Total
At December 31, 2014    
Fixed maturities, available for sale:  
  
  
  
States, municipalities and political subdivisions $—
 $33
 $—
 $33
Corporate securities —
 19
 —
 19
Total fixed maturities, available for sale —
 52
 —
 52
Common equities, available for sale 225
 —
 —
 225
Total $225
 $52
 $—
 $277
         
At December 31, 2013        
Fixed maturities, available for sale:  
  
  
  
States, municipalities and political subdivisions $—
 $32
 $—
 $32
Corporate securities —
 21
 —
 21
Total fixed maturities, available for sale —
 53
 —
 53
Common equities, available for sale 208
 —
 —
 208
Total $208
 $53
 $—
 $261
         

Cincinnati Financial Corporation - 2014 10-K - Page 151


Our pension plan assets included 567,113467,113 shares of the company’s common stock at both December 31, 2014 and 2013, which had a fair value of $17$24 million at both December 31, 2011. At December 31, 2010 our pension plan held 642,113 shares of the company’s common stock, which had a fair value of $20 million.2014 and 2013. The defined benefit pension plan did not purchase any shares of our common stock during 20112014 and 2010.2013. No shares of our common stock were sold during 2014. During 2011,2013, the pension plan sold 75,000100,000 shares of the company’s common stock for a realized gain of $2$5 million. No shares of our common stock were sold during 2010. The company paid $1 million in cash dividends on our common stock to the pension plan in both 20112014 and 2010.

2013.

We expect to contribute $14contributed $5 million to our qualified plan during the first quarter of 2015 and $2expect to pay out $3 million toof benefit payments from the SERP during 2012.2015. We expect to make the following benefit payments for our qualified plan and SERP, reflecting expected future service:

  Years ended December 31, 
(In millions) 2012  2013  2014  2015  2016  2017 - 2021 
Expected future benefit payments $23  $26  $22  $16  $20  $127 

Cincinnati Financial Corporation – 2011 10-K - 133

14.Statutory Accounting Information (unaudited)

(Dollars in millions) Years ended December 31,
  2015 2016 2017 2018 2019 2020 - 2024
Expected future benefit payments $26
 $32
 $29
 $23
 $24
 $142
             


Cincinnati Financial Corporation - 2014 10-K - Page 152


NOTE 14 – Statutory Accounting Information
Insurance companies’ statutory financial statements are presented on the basis of accounting practices prescribed or permitted by applicable state insurance departments of domicile. Insurance companies use statutory accounting practices (SAP) as recognized by various states. We have adopted the National Association of Insurance Commissioners’ (NAIC) Accounting Practices and Procedures manual, version effective January 1, 2001, and updates through the current year as a component of prescribed or permitted practices by regulatory authorities.laws of the state of domicile. The primary differences between SAP and GAAP include the valuation of unrealized investment gains and losses, expensing of policy acquisition costs, actuarial assumptions for life insurance reserves and deferred income taxes based on differences in statutory and taxable income.

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

  SAP Net Income (Loss)  Capital and Surplus 
  Years ended December 31,  At December 31, 
(In millions) 2011  2010  2009  2011  2010 
The Cincinnati Insurance Company $120  $318  $339  $3,747  $3,777 
The Cincinnati Casualty Company  15   10   29   280   269 
The Cincinnati Indemnity Company  2   2   8   73   70 
The Cincinnati Specialty Underwriters Insurance Company  11   1   (7)  186   172 
The Cincinnati Life Insurance Company  (13)  15   15   281   303 

15.Transactions with Affiliated Parties

(Dollars in millions) Net income (loss) Capital and surplus
  Years ended December 31, At December 31,
  2014 2013 2012 2014 2013
The Cincinnati Insurance Company $436
 $418
 $334
 $4,472
 $4,326
The Cincinnati Casualty Company 12
 10
 10
 330
 317
The Cincinnati Indemnity Company 3
 2
 2
 86
 82
The Cincinnati Specialty Underwriters Insurance Company 32
 18
 6
 266
 228
The Cincinnati Life Insurance Company (19) (20) 5
 223
 247
           
NOTE 15 – Transactions With Affiliated Parties
We paid certain officers and directors, or insurance agencies of which they are shareholders, commissions of approximately
$7 million in 2014, $6 million in 2011, 20102013 and 2009,$5 million 2012, on premium volume of approximately $34$41 million, $36$35 million and $36
$35 million for 2011, 20102014, 2013 and 2009,2012, respectively.

16.Commitments and Contingent Liabilities

NOTE 16 – Commitments and Contingent Liabilities
In the ordinary course of conducting business, the company and its subsidiaries are named as defendantsinvolved in various legal proceedings. Mostproceedings, namely claims litigation. The company's insurance subsidiaries participate in most of these proceedings are claims litigation involving the company’s insurance subsidiaries in which the company isby either defending or providing indemnity for third-party claims brought against insureds who areor litigating first-party coverage claims. The company accounts for such activity through the establishment of unpaid loss and loss adjustment 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 actions,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 putative class actionsproceedings have alleged, for example, breach of an alleged duty to search national data bases 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 in the handling of insurance claims or claims alleging discrimination by former associates.


Cincinnati Financial Corporation - 2014 10-K - Page 153


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 shoulddo 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 quarterlymost recent review, our estimate for any other matter for which the risk of loss is more than remote we are unable to reasonably estimate the potential loss or establish a reasonable range of loss.

17.Stock-Based Associate Compensation Plans

We currently have fouris less than $1 million.


NOTE 17 – Share-Based Associate Compensation Plans
Four equity compensation plans thatcurrently permit us to grant various types of equity awards. We currently grant incentive stock options, non-qualifiednonqualified stock options, service-based restricted stock units and performance-based restricted stock units to associates, including some with market-based performance objectives under our shareholder-approved plans. We also have a Holiday Stock Plan that permits annual awards of one share of common stock to each full-time associate for each full calendar year of service up to a maximum of 10 shares. One of our equity compensation plans permits us to grant stock to our outside directors as a component of their annual compensation.

Stock-based We used treasury shares for share-based compensation award issues or exercises during 2014.


Share-based compensation cost after tax was $9$13 million $8, $12 million and $7$11 million for the years ended
December 31, 2011, 20102014, 2013 and 2009,2012, respectively. The related income tax benefit recognized was $4$6 million $3,
$6 million and $3$5 million for the years ended December 31, 2011, 20102014, 2013 and 2009,2012, respectively. Options exercised during the years ended December 31, 2011, 20102014, 2013 and 20092012, had intrinsic value less than $1 million. (Intrinsicof $13 million,
$17 million, and $6 million, respectively. Intrinsic value is the market price less the exercise price.) Options vested during the yearyears ended December 31, 20112014, 2013 and 2010,2012, had total intrinsic value of $2$9 million, $15 million and $1$5 million, respectively. Options vested during the year ended 2009 had intrinsic value less than $1 million.

Cincinnati Financial Corporation – 2011 10-K - 134

As of December 31, 2011,2014, we had $15$21 million of unrecognized total compensation cost related to non-vestednonvested stock options and restricted stock unit awards. That cost will be recognized over a weighted-average period of 1.91.7 years.

Stock Options
Stock options are granted to associates at an exercise price that is equal to the fair value as determined by the average high and low sales price reported on the Nasdaq Global Select Market for the grant date and are exercisable over 10-year10-year periods. The stock options generally vest ratably over a three-year period. In determining the share-based compensation amounts, we estimate the fair value of each option granted on the date of grant using a binomial option-pricing model. We make the following assumptions in four areas to develop the binomial option-pricing model:

·model as follows:
Weighted-average expected term is based on historical experience of similar awards with consideration for current exercise trends.

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

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

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

During 2011 and 2010, we granted stock-based awards to associates and issuedwith consideration for current exercise trends.

Expected volatility is based on our common stock to eligible associates under our Holiday Stock Plan. No stock-based awards were granted to associates during 2009 except for under our Holiday Stock Plan. price over a historical period that approximates the expected term.
Dividend yield is determined by dividing the annualized per share dividend by the stock price on the date of grant.
Risk-free rates are the implied yield currently available on zero-coupon U.S. Treasury issues with a remaining term approximating the expected term.

Cincinnati Financial Corporation - 2014 10-K - Page 154


The following weighted average assumptions were used in determining fair value for option grants issued during 20112014 and 2010 in determining fair value:

  2011  2010 
Weighted-average expected term  9 years   8 years 
Expected volatility  26.06-26.12%  27.11-27.16%
Dividend yield  4.70-5.29%  5.41-5.94%
Risk-free rates  2.86-3.41%  3.49-3.52%
Weighted-average fair value of options granted during the period $7.29  $5.13 

Here2013:

  2014 2013 2012
Weighted-average expected term 8-9 years 9-10 years 8-10 years
Expected volatility 25.20-26.22% 25.25-26.31% 25.26-26.20%
Dividend yield 3.76% 3.65% 4.51-4.52%
Risk-free rates 2.42-2.62% 1.82-2.00% 1.58-2.00%
Weighted-average fair value of options granted during the period $10.16 $9.71 $6.78
       
This is a summary of options information:

(Dollars in millions, shares in thousands) Shares  Weighted-
average
exercise price		  Aggregate
intrinsic
value		 
Outstanding at January 1, 2011  9,690  $36.59     
Granted  891   33.98     
Exercised  (28)  26.83     
Forfeited or expired  (1,196)  33.94     
Outstanding at December 31, 2011  9,357   36.71  $6 
             
Options exercisable at end of period  7,913  $37.75  $4 

(Dollars in millions, shares in thousands) Shares 
Weighted-
average
exercise price
 Aggregate
intrinsic
value
Outstanding shares at January 1, 2014 6,332
 $38.39
  
Granted 401
 46.81
  
Exercised (1,086) 37.59
  
Forfeited or expired (689) 39.49
  
Outstanding shares at December 31, 2014 4,958
 39.10
 $66
       
Options exercisable at end of period 4,165
 $38.17
 $59
       
Cash received from the exercise of options was $1$22 million, for the year ended December 31, 2011,$25 million and less than $1$10 million for the years ended 2010December 31, 2014, 2013 and 2009.

2012, respectively. We acquired 378,276, 577,745 and 311,524 shares totaling

$19 million, $28 million and $12 million, respectively, from associates in consideration for option exercises during 2014, 2013 and 2012. The weighted-average remaining contractual life for options expected to vest as of December 31, 2014, was 8.4 years.
Options outstanding and exercisable consisted of the following at December 31, 2011:

(Shares in thousands)         
  Options outstanding  Options exercisable 
Range of exercise prices Shares  Weighted-average remaining contractual life  Weighted-
average
exercise price		  Shares  Weighted-
average
exercise price		 
$25.00 to $29.99  1,615   7.35   yrs  $26.59   1,045  $26.58 
$30.00 to $34.99  2,847   3.22   yrs   33.76   1,973   33.67 
$35.00 to $39.99  1,880   3.46   yrs   38.79   1,880   38.79 
$40.00 to $44.99  1,813   3.49   yrs   42.56   1,813   42.56 
$45.00 to $49.99  1,202   3.88   yrs   45.26   1,202   45.26 
Total  9,357   4.12   yrs   36.71   7,913   37.75 

2014:

(Shares in thousands) Options outstanding Options exercisable
Range of exercise prices Shares Weighted-average
remaining contractual
life		 Weighted-
average
exercise price		 Shares Weighted-
average
exercise price
$25.00 to $29.99 731
 4.58 years $26.58
 731
 $26.58
$30.00 to $34.99 675
 6.01 years 33.96
 675
 33.96
$35.00 to $39.99 981
 4.90 years 37.31
 824
 37.63
$40.00 to $44.99 1,258
 3.09 years 43.58
 1,015
 43.32
$45.00 to $49.99 1,313
 3.50 years 45.73
 920
 45.26
Total 4,958
 4.17 years 39.10
 4,165
 38.17
           
The weighted-average remaining contractual life for exercisable awards as of December 31, 20112014, was 3.33.4 years. AUnder all active shareholder approved plans, a total of 16.917.3 million shares arewere authorized to be granted under the shareholder-approved plans.granted. At December 31, 2011, 4.42014, 6.2 million shares wereremained available for future issuance under the plans. During 2009, our shareholders approved the Directors’ Stock Plan of 2009, which authorizes 300,000 shares to be granted to our directors. During 20112014, we granted 24,49220,760 shares of common stock to our directors for 20102013 board service fees. We currently issue new shares or use treasury shares for stock-based compensation award issues or exercises.

Cincinnati Financial Corporation – 2011 10-K - 135


Cincinnati Financial Corporation - 2014 10-K - Page 155


Restricted Stock Units

Service-based restricted stock units are granted to associates are valued at fair value of the shares on the date of grant less the present value of the dividends that holders of restricted stock units willdo not receive on the shares underlying the restricted stock units during the vesting period. Service-based restricted stock units cliff vest three years after the date of grant. Service-based restricted stock units vested during the year had an intrinsic value of $13$14 million, $15 million and $5less than $1 million for the years ended December 31, 20112014, 2013 and 2010,2012, respectively. There were no performance-based restricted stock units that lapsed during the years ended December 31, 2011 and 2010. Both service-based and performance-based restricted stock units that vested or lapsed had intrinsic value less than $1 million during the year ended December 31, 2009.

We have market-basedperformance-based awards that vest on the first day of March after a three-calendar-year performance period. These awards vest according to the level of three-year total shareholder return achieved compared towith a peer group over a three-year period. performance period with payouts ranging from 0 - 200 percent for awards granted in 2013 and 2014. For awards granted in 2012, the payout range on these performance awards is 0 - 125 percent. Three-year total shareholder return is calculated by Bloomberg, using annualized total return of a stock to an investor due to capital gain appreciation plus reinvestment of all dividends. We issued 59,615 shares of performance-based restricted stock units during 2014 at the maximum-level performance hurdle for the three-year performance period ended December 31, 2013, as we achieved a three-year total shareholder return that exceeded all seven of the companies in our 2011 peer group. For the three-year performance period ended December 31, 2014, our total shareholder return exceeded six of 10 peers in our 2012 peer group. We expect payout of these shares at the target level to occur in March of 2015. Performance-based awards vested during the year had an intrinsic value of $3 million, $3 million and $2 million for the years ended December 31, 2014, 2013 and 2012, respectively.
These performance-based awards are valued using a Monte-Carlo valuation on the date of grant, which uses a risk-neutralrisk‑neutral framework to model future stock price movements based upon the risk-free rate of return, the volatility of each peer and the pairwise correlations of each peer being modeled. Compensation cost is recognized regardless of whether the market-based performance objective has been satisfied. We make assumptions to develop the Monte-Carlo model as follows:

·Correlation coefficients are based upon the price data used to calculate the historical volatilities. The correlation coefficients are used to model the way in which each entity tends to move in relation to each other.

·Expected volatility is based on our stock price over a historical period that approximates the expected term. We have used the historical volatilities over a range of 2.59-2.87 for 2011 and 2.76-2.86 years for 2010 grants.

·Dividend yield has been modeled assuming that the holder of the award is not entitled to receive dividends that are paid during the performance period. Dividend yield range from 4.68%-5.26% for 2011 grants and 5.41%-5.94% for 2010 grants.

·Risk-free rates are equal to the yield, as of the measurement date, of the zero-coupon U.S. Treasury bill that is commensurate with the performance period. Risk free rates used range from 0.65%-1.25% for 2011 grants and 1.43%-1.50% for 2010 grants.

Here

Correlation coefficients are based upon the price data used to calculate the historical volatilities. The correlation coefficients are used to model the way each entity tends to move in relation to each other.
Expected volatility is based on our stock price over a historical period that approximates the remainder of the performance period. We have used the historical volatilities of 2.88 percent for 2014 grants and 2.87 percent for 2013 grants.
Dividend yield has been modeled assuming dividends are reinvested in the issuing entity on a continuous basis and the holder of the award is not entitled to receive dividends paid during the performance period. Dividend yields of 3.74 percent for 2014 grants and 3.63 percent for 2013 grants were used.
Risk-free rates are equal to the yield, as of the measurement date, of the zero-coupon U.S. Treasury bill that is commensurate with the performance measurement period. Risk-free rates used were 0.66 percent for 2014 and 0.40 percent for 2013 grants.
This is a summary of restricted stock unitservice-based and performance-based share information, assuming a target payout for 2011:

(Shares in thousands) Service-based
shares		  Weighted-
average grant-
date fair value		  Performance-based 
shares		  Weighted-
average grant-
date fair value		 
Nonvested at January 1, 2011  716  $26.00   149  $26.08 
Granted  298   29.59   51   30.96 
Vested  (433)  28.46   0   0.00 
Forfeited or canceled  (18)  24.77   (44)  32.56 
Nonvested at December 31, 2011  563   26.05   156   25.86 

18.Segment Information

performance-based shares, for the year 2014:

(Shares in thousands) Service-based
shares		 Weighted-
average grant
date fair value		 Performance-based
shares		 Weighted-
average grant
date fair value
Nonvested at January 1, 2014 936
 $33.61
 246
 $37.66
Granted 331
 41.84
 99
 36.03
Vested (271) 29.79
 (60) 30.91
Forfeited or canceled (28) 36.28
 (2) 31.77
Nonvested at December 31, 2014 968
 37.42
 283
 38.55
         

Cincinnati Financial Corporation - 2014 10-K - Page 156


NOTE 18 – Segment Information
We operate primarily in two industries, property casualty insurance and life insurance. We regularly review our reporting segments to make decisions about allocating resources and assessing performance:

·performance. Our reporting segments are:
Commercial lines property casualty insurance

·Personal lines property casualty insurance

·Excess and surplus lines property casualty insurance

·Life insurance

·Investment operations

In the fourth quarter of 2011, we refined our allocation process of property casualty loss expenses. The new allocation estimate for adjusting and other expenses was based on claim count as compared with our previous allocation, which was based on claim dollar amount. As a result of this one-time refinement, adjusting and other expenses incurred increased $23 million for the personal lines segment and decreased $23 million for the commercialinsurance

Personal lines segment with various impacts to their respective lines of business.

We revised our reportable segments during 2010 to establish a separate reportable segment for excessinsurance

Excess and surplus lines allowing readers to view this business in a manner similar to the way we manage it internally when making operating decisions. This segment includes results of The Cincinnati Specialty Underwriters Insurance Company and CSU Producer Resources.

insurance

Life insurance
Investments

We report as Other the non-investmentnoninvestment operations of the parent company and its non-insurernoninsurer subsidiary, CFC Investment Company. Also included in 2009 results for this segment are the operations of a former subsidiary, CinFin Capital Management.

Cincinnati Financial Corporation – 2011 10-K - 136

Revenues come primarily from unaffiliated customers:

·All four insurance segments record revenues from insurance premiums earned. Life insurance segment revenues also include separate account investment management fees.

·Fee revenues for the commercial and personal insurance segments primarily represent installment fees.

·Our investment operations’ revenues are pretax net investment income plus realized investment gains and losses.

·Other revenues are primarily finance/lease income.

All four insurance segments record revenues from insurance premiums earned. Life insurance segment revenues also include separate account investment management fees.
Fee revenues for the commercial and personal insurance segments primarily represent installment fees. Fee revenues for the life insurance segment represent separate account investment management fees.
Our investments’ revenues consist of pretax net investment income and realized investment gains and losses.
Other revenues are primarily finance income.

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

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

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

o
◦For the life insurance segment, we calculate underwriting incomeprofit or loss by recordingas premiums earned and separate account investment management fees, minus contract holders’ benefits and expenses incurred, plus investment interest credited to contract holders.

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

·Loss before income taxes for the Other category is primarily due to interest expense from debt of the parent company and operating expenses of our headquarters.

Income before income taxes for the investments segment is net investment income plus realized investment gains and losses for investments of the entire company, minus investment interest credited to contract holders of the life insurance segment.
Loss before income taxes for the Other category is primarily due to interest expense from debt of the parent company and operating expenses of our headquarters.

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

Cincinnati Financial Corporation – 2011 10-K - 137


Cincinnati Financial Corporation - 2014 10-K - Page 157


This table summarizes segment information:

  Years ended December 31, 
(In millions) 2011  2010  2009 
Revenues:            
Commercial lines insurance            
Commercial casualty $711  $693  $712 
Commercial property  497   489   485 
Commercial auto  394   384   394 
Workers' compensation  318   311   326 
Specialty packages  138   149   147 
Surety and executive risk  103   95   104 
Machinery and equipment  36   33   31 
Commercial lines insurance premiums  2,197   2,154   2,199 
Fee revenue  3   2   2 
Total commercial lines insurance  2,200   2,156   2,201 
             
Personal lines insurance            
Personal auto  368   337   319 
Homeowner  294   289   276 
Other personal lines  100   95   90 
Personal lines insurance premiums  762   721   685 
Fee revenue  1   2   1 
Total personal lines insurance  763   723   686 
             
Excess and surplus lines insurance  70   49   27 
Life insurance  167   159   143 
Investment operations  595   677   837 
Other  8   8   9 
Total $3,803  $3,772  $3,903 
             
Income (loss) before income taxes:            
Insurance underwriting results:            
Commercial lines insurance $(101) $15  $(33)
Personal lines insurance  (181)  (54)  (80)
Excess and surplus lines insurance  6   (8)  (15)
Life insurance  (3)  7   2 
Investment operations  514   598   768 
Other  (59)  (57)  (60)
Total $176  $501  $582 
             
Identifiable assets:  December 31,   December 31,     
   2011   2010     
Property casualty insurance $2,298  $2,008     
Life insurance  1,244   1,214     
Investment operations  11,883   11,543     
Other  243   330     
Total $15,668  $15,095     

Cincinnati Financial Corporation – 2011 10-K - 138

19.Quarterly Supplementary Data (unaudited)

(Dollars in millions) Years ended December 31,
  2014 2013 2012
Revenues:  
  
  
Commercial lines insurance  
  
  
Commercial casualty $938
 $856
 $767
Commercial property 728
 623
 545
Commercial auto 528
 479
 426
Workers' compensation 370
 365
 344
Other commercial lines 292
 313
 301
Commercial lines insurance premiums 2,856
 2,636
 2,383
Fee revenues 4
 3
 4
Total commercial lines insurance 2,860
 2,639
 2,387
       
Personal lines insurance  
  
  
Personal auto 476
 443
 404
Homeowner 443
 403
 353
Other personal lines 122
 115
 111
Personal lines insurance premiums 1,041
 961
 868
Fee revenues 2
 1
 2
Total personal lines insurance 1,043
 962
 870
       
Excess and surplus lines insurance 148
 116
 93
       
Life insurance premiums 198
 189
 178
Separate account investment management fees 6
 4
 1
Total life insurance 204
 193
 179
       
Investments  
  
  
Investment income, net of expenses 549
 529
 531
Realized investment gains, net 133
 83
 42
Total investment revenue 682
 612
 573
       
Other 8
 9
 9
Total revenues $4,945
 $4,531
 $4,111
       
Income (loss) before income taxes:  
  
  
Insurance underwriting results:  
  
  
Commercial lines insurance $146
 $186
 $181
Personal lines insurance 10
 33
 (43)
Excess and surplus lines insurance 30
 14
 (1)
Life insurance (5) 9
 (3)
Investments 599
 532
 491
Other (59) (60) (59)
Total income before income taxes $721
 $714
 $566
       
  December 31, December 31,  
Identifiable assets: 2014 2013  
Property casualty insurance $2,656
 $2,455
  
Life insurance 1,316
 1,225
  
Investments 14,441
 13,618
  
Other 340
 364
  
Total $18,753
 $17,662
  
       


Cincinnati Financial Corporation - 2014 10-K - Page 158


NOTE 19 – Quarterly Supplementary Data
This table includes unaudited quarterly financial information for the years ended December 31, 20112014 and 2010:

  Quarter    
(Dollars in millions except per share data) 1st  2nd  3rd  4th  Full year 
2011                    
Revenues * $929  $975  $944  $955  $3,803 
Income (loss) before income taxes  76   (97)  11   186   176 
Net income (loss)  62   (49)  19   134   166 
Net income (loss) per common share—basic  0.38   (0.30)  0.12   0.83   1.02 
Net income (loss) per common share—diluted  0.38   (0.30)  0.12   0.83   1.02 
                     
2010                    
Revenues * $887  $878  $1,071  $936  $3,772 
Income before income taxes  85   21   221   174   501 
Net income  68   27   156   126   377 
Net income per common share—basic  0.42   0.17   0.95   0.78   2.32 
Net income per common share—diluted  0.42   0.17   0.95   0.77   2.31 

2013:

(Dollars in millions except per share data) Quarter  
  1st 2nd 3rd 4th Full year
2014  
  
  
  
  
Revenues $1,189
 $1,214
 $1,280
 $1,262
 $4,945
Income before income taxes 119
 107
 259
 236
 721
Net income 91
 84
 183
 167
 525
Net income per common share—basic 0.56
 0.51
 1.12
 1.03
 3.21
Net income per common share—diluted 0.55
 0.51
 1.11
 1.02
 3.18
           
2013  
  
  
  
  
Revenues $1,103
 $1,104
 $1,152
 $1,172
 $4,531
Income before income taxes 217
 148
 182
 167
 714
Net income 154
 110
 131
 122
 517
Net income per common share—basic 0.95
 0.67
 0.80
 0.75
 3.16
Net income per common share—diluted 0.94
 0.66
 0.79
 0.74
 3.12
           
Note: The sum of the quarterly reported per share amounts may not equal the full year as each is computed independently.

*Revenues including realized investment gains and losses, which are integral to our financial results over the long term, may cause this value to fluctuate substantially because we have substantial discretion in the timing of investment sales. Also, applicable accounting standards require us to recognize gains and losses from certain changes in fair values of securities and embedded derivatives without actual realization of those gains and losses. We discuss realized investment gains for the past three years in Item 7, Investments Results of Operations, Page 81.

Cincinnati Financial Corporation – 2011 10-K - 139

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



Cincinnati Financial Corporation - 2014 10-K - Page 159


ITEM 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
We had no disagreements with the independent registered public accounting firm on accounting and financial disclosure during the last two fiscal years.

Item 9A.Controls and Procedures

ITEM 9A. 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 December 31, 2011.2014. 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

·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.

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
such information is accumulated and communicated to the company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting – During the three months ended December 31, 2011,2014, 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. Management’s Annual Report on Internal Control Over Financial Reporting and the Report of the Independent Registered Public Accounting Firm are set forth in Item 8, Pages 108 and 109.

Item 9B.Other Information

None

Cincinnati Financial Corporation – 2011 10-K - 140
8.

ITEM 9B. Other Information
None


Cincinnati Financial Corporation - 2014 10-K - Page 160


Part III

Our Proxy Statement will be filed with the SEC no later than March 27, 2012,April 30, 2015, in preparation for the 20122015 Annual Meeting of Shareholders scheduled for April 28, 2012.May 2, 2015. As permitted in Paragraph G(3) of the General Instructions for Form 10-K, we are incorporating by reference to that statement portions of the information required by Part III as noted in Item 10 through Item 14 below.

ITEM 10.    Directors, Executive Officers and Corporate Governance
a) The following sections of our Proxy Statement for our Annual Meeting of Shareholders to be held May 2, 2015, are incorporated herein by reference: “Section 16(a) Beneficial Ownership Reporting Compliance,” “Information about the Board of Directors,” and “Governance of Your Company.”
b) Information about the “Code of Ethics for Senior Financial Officers” appeared in the 2004 Proxy Statement as an appendix and is available at cinfin.com/investors. Our Code of Ethics applies to those who are responsible for preparing and disclosing our financial information. This includes our chief executive officer, chief financial officer and others performing similar functions.
c) Set forth below is information concerning the company’s executive officers who are not also directors of the company, as of February 27, 2015.
Item 10.Directors, Executive Officers and Corporate Governance

a)The following sections of our Proxy Statement for our Annual Meeting of Shareholders to be held April 28, 2012, are incorporated herein by reference: “Section 16(a) Beneficial Ownership Reporting Compliance,” “Information about the Board of Directors,” and “Governance of Your Company.”

b)Information about the “Code of Ethics for Senior Financial Officers” appeared in the 2004 Proxy Statement as an appendix and is available atwww.cinfin.com/investors. Our Code of Ethics applies to those who are responsible for preparing and disclosing our financial information. This includes our chief executive officer, chief financial officer and others performing similar functions or reporting directly to these officers.

c)Set forth below is information concerning the company’s executive officers who are not also directors of the company, as of February 27, 2012.

Name and Age as of

February 27, 2012

2015
 

Primary Title(s) and Business Responsibilities
Since

February 2007

2010
 

Executive
Officer Since

Teresa C. Cracas, (46)Esq. (49) Senior
Chief risk officer and senior vice president and chief risk officer since 2011 of The Cincinnati Insurance Company; until 2011, vice president and counsel.counsel until 2011. Responsible for strategic planning and risk management, and, since 2011,including oversight of modeling for financial analysis, and property casualty reserving, pricing and pricing, including staff underwriting, pricing analytics and corporate actuarial operations.insurance regulatory filings.
 2011
Donald J. Doyle, Jr., CPCU, AIM (45)(48) Senior vice president of The Cincinnati Insurance Company. Responsible since 2007 for excess and surplus lines underwriting and operations. 2008
Craig W. Forrester, CLU (53)Senior vice president and chief technology officer of The Cincinnati Insurance Company. Responsible for information technology hardware systems and new technologies.2003
Martin F. Hollenbeck, CFA, CPCU (52)(55) President and chief operating officer since 2008 of CFC Investment Company, a subsidiary. President from 2008 to 2009 of CinFin Capital Management Company, a formercommercial lease and finance subsidiary. Chief investment officer since 2009,and senior vice president, assistant secretary and assistant treasurer since 2008 of Cincinnati Financial Corporation. Chief investment officer and senior vice president since 2009 of The Cincinnati Insurance Company; until 2009, vice president. Responsible for investment operations and leasing and financing services; responsible until 2009 for operation of asset management services.2008
Thomas A. Joseph, CPCU (56)President since 2008 of The Cincinnati Casualty Company. Senior vice president of The Cincinnati Insurance Company. Responsible for property casualty reinsurance and for personal lines underwriting and operations; responsible until 2008 for commercial lines underwritingall investment operations. 2003

Cincinnati Financial Corporation – 2011 10-K - 141

Name and Age as of

February 27, 2012

Primary Title(s) and Business Responsibilities Since

February 2007

Executive
Officer Since

2008
John S. Kellington (50)(53) SeniorChief information officer and senior vice president and chief information officer of The Cincinnati Insurance Company. Responsible for enterprise strategic technology and oversight of all technology activities. From 2007 to 2010, seniorSenior vice president of ACORD Corporation, a nonprofit group that develops global insurance standards. Until 2007, senior vice president and chief technology officer of Ohio Casualty Group.standards until 2010. 2010
Lisa A. Love, (52)Esq. (55) Senior vice president, general counsel and corporate secretary of Cincinnati Financial Corporation and The Cincinnati Insurance Company since 2011. Until 2011, seniorCompany. Senior counsel of The Cincinnati Insurance Company.Company until 2011. Responsible for corporate legal, governance and compliance activities, including oversight of regulatory and consumer relations, operations.shareholder services and contract administration. 2011
Eric N. Mathews, CPCU, AIAF (56)(59) Principal accounting officer, since 2008 and vice president, assistant secretary and assistant treasurer.treasurer of Cincinnati Financial Corporation. Senior vice president of The Cincinnati Insurance Company. Responsible for corporate accounting and SEC accounting. 2001


Cincinnati Financial Corporation - 2014 10-K - Page 161


Name and Age as of
February 27, 2015
Primary Title(s) and Business Responsibilities
Since February 2010
Executive
Officer Since
Martin J. Mullen, CPCU (56)(59) SeniorChief claims officer and senior vice president and chief claims officer since 2008 of The Cincinnati Insurance Company; vice president until 2008.Company. Responsible for oversight of all headquarters and field claims operations, including special investigations unit and claims administration; responsible until 2008 for casualty claims.administration. 2008
David H. Popplewell, FALU, LLIF (68)(71) President and chief operating officer of The Cincinnati Life Insurance Company. Responsible for life insurance underwriting and operations. 1997
Jacob F. Scherer, Jr. (59)(62) ExecutiveChief insurance officer and executive vice president since 2008 of The Cincinnati Insurance Company; senior vice president until 2008.Company. Responsible for executive oversight of business and personal property casualty insurance andsales, marketing, underwriting, related field services, relationships with independent agents and reinsurance programs. Executive vice president of business insurance agents, including oversightuntil 2012 and executive vice president of sales and marketing commercial lines, target markets, excess and surplus lines and meetings and travel operations.until 2011. 1995
Michael J. Sewell, (48)CPA (51) Senior vice president and chiefChief financial officer and treasurer since 2011senior vice president of Cincinnati Financial Corporation and The Cincinnati Insurance Company. Treasurer since 2011Company, and treasurer of Cincinnati Financial Corporation. Until 2011, lead partnerResponsible for oversight of the Cincinnati office ofall accounting, finance, financial reporting, purchasing and investor relations. Partner at Deloitte & Touche LLP. Responsible for all accounting, finance and financial reporting.LLP until 2011. 2011
Joan O. Shevchik,Stephen M. Spray (48)Senior vice president of The Cincinnati Insurance Company; vice president until 2012. Responsible for sales and marketing, including management of field underwriters and independent agency relationships; responsible from 2010 to 2011 for target markets commercial products.2012
Charles P. Stoneburner II, CPCU, CLU (61)AIM (62) Senior vice president of The Cincinnati Insurance Company. Responsible for corporate communications.2003
Charles P. Stoneburner II, CPCU, AIM (59)Senior vice president since 2008 of The Cincinnati Insurance Company; until 2008, vice president. Responsible for commercial lines underwriting and operations, including oversight of management liability and surety insurance, machinery and equipment insurance, loss control and premium audit; responsible until 2008 for field claims operations.audit. 2008
Timothy L. Timmel, (63)Esq. (66) Senior vice president of The Cincinnati Insurance Company. Responsible for operations including oversight of administrative services, corporate communications, facilities maintenance and security, government relations, human resources, learning and development and legal litigation, human resources and, since 2008, administrative services, data entry, facilities, maintenance, printing and security operations; also responsible until 2008 for field claims operations.litigation. 1997

William H. Van Den Heuvel (48)Senior vice president of The Cincinnati Financial Corporation – 2011 10-K - 142Insurance Company. Responsible for personal lines underwriting and operations. Chief operating officer and executive vice president for U.S. and Canada personal lines insurance at AIG until 2014. Western Zone executive and senior vice president for AIG Private Client Group until 2012.2014

Item 11.Executive Compensation



Cincinnati Financial Corporation - 2014 10-K - Page 162


ITEM 11.    Executive Compensation
The “Compensation of Named Executive Officers and Directors,” section of our Proxy Statement for our Annual Meeting of Shareholders to be held April 28, 2012, whichMay 2, 2015, is incorporated herein by reference. It includes the “Report of the Compensation Committee,” “Compensation Committee Interlocks and Insider Participation,” and the “Compensation Discussion and Analysis,Analysis.”
ITEM 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
a) The “Security Ownership of Principal Shareholders and Management” section of our Proxy Statement for our Annual Meeting of Shareholders to be held May 2, 2015, is incorporated herein by reference.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

a)The “Security Ownership of Principal Shareholders and Management” section of our Proxy Statement for our Annual Meeting of Shareholders to be held April 28, 2012, is incorporated herein by reference.

b)Information on securities authorized for issuance under equity compensation plans appears in Part II, Item 5, Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, Page 34. Additional information on share-based compensation under our equity compensation plans is available in Item 8, Note 17 of the Consolidated Financial Statements, Page 134.

Item 13.Certain Relationships and Related Transactions, and Director Independence

b) Information on securities authorized for issuance under equity compensation plans appears in Part II, Item 5, Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Additional information on share-based compensation under our equity compensation plans is available in Item 8, Note 17 of the Consolidated Financial Statements.
ITEM 13.    Certain Relationships and Related Transactions, and Director Independence
The following sections of our Proxy Statement for our Annual Meeting of Shareholders to be held April 28, 2012,May 2, 2015, are incorporated herein by reference: “Governance of Your Company —– Director Independence” and “Governance of Your Company —– Certain Relationships and Transactions.”

Item 14.Principal Accounting Fees and Services

ITEM 14.    Principal Accounting Fees and Services
The “Audit-Related Matters,” section of our Proxy Statement for our Annual Meeting of Shareholders to be held April 28, 2012, whichMay 2, 2015, is incorporated herein by reference. It includes the “Proposal 2 —Ratification– Ratification of Selection of Independent Registered Public Accounting Firm,” “Report of the Audit Committee,” “Fees Billed by the Independent Registered Public Accounting Firm,”Firm” and “Services Provided by the Independent Registered Public Accounting Firm,” is incorporated herein by reference.

Firm”.



Cincinnati Financial Corporation - 2014 10-K - Page 163


Part IV

Item 15.Exhibits, Financial Statement Schedules

a)Financial Statements – information contained in Part II, Item 8, of this report, Page 110 to Page 113

b)Exhibits – see Index of Exhibits, Page 155
c)Financial Statement Schedules
Schedule I – Summary of Investments — Other than Investments in Related Parties, Page 144
Schedule II – Condensed Financial Statements of Parent Company, Page 146
Schedule III – Supplementary Insurance Information, Page 149
Schedule IV – Reinsurance, Page 151
Schedule V – Valuation and Qualifying Accounts, Page 152
Schedule VI – Supplementary Information Concerning Property Casualty Insurance Operations, Page 153

Cincinnati Financial Corporation – 2011 10-K - 143

ITEM 15.    Exhibits, Financial Statement Schedules
a) Financial Statements – information contained in Part II, Item 8, of this report, Page 123 to Page 127
b) Exhibits – see Index of Exhibits, Page 177
c) Financial Statement Schedules
Schedule I

Cincinnati Financial Corporation and Subsidiaries
Summary of Investments - Other than Investments in Related Parties

(In millions) At December 31, 2011 
Type of investment Cost or
amortized cost		  Fair
value		  Balance sheet 
Fixed maturities:            
     United States government:            
        The Cincinnati Insurance Company $1  $1  $1 
        The Cincinnati Casualty Company  1   1   1 
        The Cincinnati Indemnity Company  1   1   1 
        The Cincinnati Life Insurance Company  3   4   4 
              Total  6   7   7 
     Government-sponsored enterprises:            
        The Cincinnati Insurance Company  5   5   5 
        The Cincinnati Life Insurance Company  154   155   155 
              Total  159   160   160 
     Foreign government:            
        The Cincinnati Insurance Company  3   3   3 
              Total  3   3   3 
     States, municipalities and political subdivisions:            
        The Cincinnati Insurance Company  2,497   2,694   2,694 
        The Cincinnati Casualty Company  138   148   148 
        The Cincinnati Indemnity Company  36   40   40 
        The Cincinnati Specialty Underwriters Insurance Company  130   144   144 
        CSU Producers Resources Inc.  1   1   1 
        The Cincinnati Life Insurance Company  204   225   225 
              Total  3,006   3,252   3,252 
     Convertibles and bonds with warrants attached:            
        The Cincinnati Insurance Company  50   50   50 
        The Cincinnati Life Insurance Company  4   4   4 
        Cincinnati Financial Corporation  5   5   5 
              Total  59   59   59 
     All other corporate bonds:            
        The Cincinnati Insurance Company  2,380   2,602   2,602 
        The Cincinnati Casualty Company  80   85   85 
        The Cincinnati Indemnity Company  20   22   22 
        The Cincinnati Specialty Underwriters Insurance Company  114   121   121 
        The Cincinnati Life Insurance Company  2,061   2,241   2,241 
        CSU Producers Resources Inc.  7   7   7 
        Cincinnati Financial Corporation  189   220   220 
              Total  4,851   5,298   5,298 
                 Total fixed maturities $8,084  $8,779  $8,779 

Cincinnati Financial Corporation – 2011 10-K - 144
– Summary of Investments – Other Than Investments in Related Parties, Page 165
Schedule II – Condensed Financial Statements of Parent Company, Page 167

Schedule III – Supplementary Insurance Information, Page 171
Schedule IV – Reinsurance, Page 173
Schedule V – Valuation and Qualifying Accounts, Page 174
Schedule VI – Supplementary Information Concerning Property Casualty Insurance Operations, Page 175

Cincinnati Financial Corporation - 2014 10-K - Page 164


Schedule I
Cincinnati Financial Corporation and Subsidiaries
Summary of Investments - Other Than Investments in Related Parties
(Dollars in millions) At December 31, 2014
Type of investment 
Cost or
amortized cost
 
Fair
value
 Balance sheet
Fixed maturities:  
  
  
States, municipalities and political subdivisions:  
  
  
The Cincinnati Insurance Company $2,634
 $2,759
 $2,759
The Cincinnati Casualty Company 136
 143
 143
The Cincinnati Indemnity Company 39
 41
 41
The Cincinnati Life Insurance Company 187
 213
 213
The Cincinnati Specialty Underwriters Insurance Company 270
 286
 286
CSU Producer Resources Inc. 1
 1
 1
Total 3,267
 3,443
 3,443
Convertibles and bonds with warrants attached:  
  
  
The Cincinnati Insurance Company 7
 7
 7
Total 7
 7
 7
United States government:  
  
  
The Cincinnati Insurance Company 1
 1
 1
The Cincinnati Casualty Company 2
 2
 2
The Cincinnati Indemnity Company 1
 1
 1
The Cincinnati Life Insurance Company 3
 3
 3
Total 7
 7
 7
Government-sponsored enterprises:  
  
  
The Cincinnati Life Insurance Company 209
 204
 204
The Cincinnati Insurance Company 4
 4
 4
Total 213
 208
 208
Foreign government:  
  
  
The Cincinnati Insurance Company 10
 10
 10
Total 10
 10
 10
All other corporate bonds:  
  
  
The Cincinnati Insurance Company 2,507
 2,706
 2,706
The Cincinnati Casualty Company 110
 118
 118
The Cincinnati Indemnity Company 21
 23
 23
The Cincinnati Specialty Underwriters Insurance Company 151
 159
 159
The Cincinnati Life Insurance Company 2,517
 2,706
 2,706
CSU Producer Resources Inc. 4
 4
 4
Cincinnati Financial Corporation 57
 69
 69
Total 5,367
 5,785
 5,785
Total fixed maturities $8,871
 $9,460
 $9,460
       

Cincinnati Financial Corporation - 2014 10-K - Page 165


Schedule I (continued)

Cincinnati Financial Corporation and Subsidiaries
Summary of Investments - Other than Investments in Related Parties

(In millions) At December 31, 2011 
Type of investment Cost or
 amortized cost		  Fair
 value		  Balance sheet 
Equity securities:            
  Common stocks:            
        The Cincinnati Insurance Company $1,371  $1,920  $1,920 
        The Cincinnati Casualty Company  46   62   62 
        The Cincinnati Indemnity Company  13   16   16 
        The Cincinnati Specialty Underwriters Insurance Company  41   45   45 
        The Cincinnati Life Insurance Company  3   3   3 
        CSU Producers Resources Inc.  2   2   2 
        Cincinnati Financial Corporation  612   806   806 
              Total  2,088   2,854   2,854 
  Nonredeemable preferred stocks:            
        The Cincinnati Insurance Company  67   89   89 
        The Cincinnati Life Insurance Company  7   13   13 
              Total  74   102   102 
                 Total equity securities $2,162  $2,956  $2,956 
Other invested assets:            
  Policy loans:            
     The Cincinnati Life Insurance Company  37   —   37 
  Limited partnerships:            
     Cincinnati Financial Corporation  29   —   29 
        Total other invested assets $66   —  $66 
           Total investments $10,312   —  $11,801 

Cincinnati Financial Corporation – 2011 10-K - 145

Cincinnati Financial Corporation and Subsidiaries
Summary of Investments - Other Than Investments in Related Parties
(Dollars in millions) At December 31, 2014
Type of investment 
Cost or
amortized cost
 
Fair
value
 Balance sheet
Equity securities:  
  
  
Common equities:  
  
  
The Cincinnati Insurance Company $1,462
 $2,831
 $2,831
The Cincinnati Casualty Company 45
 91
 91
The Cincinnati Indemnity Company 12
 22
 22
The Cincinnati Specialty Underwriters Insurance Company 51
 85
 85
CSU Producer Resources Inc. 9
 11
 11
Cincinnati Financial Corporation 1,004
 1,639
 1,639
Total 2,583
 4,679
 4,679
Nonredeemable preferred equities:  
  
  
The Cincinnati Insurance Company 137
 167
 167
The Cincinnati Life Insurance Company 5
 8
 8
Cincinnati Financial Corporation 3
 4
 4
Total 145
 179
 179
Total equity securities $2,728
 $4,858
 $4,858
Other invested assets:  
  
  
Policy loans:  
  
  
The Cincinnati Life Insurance Company $31
 —
 $31
Private equity:  
  
  
Cincinnati Financial Corporation 37
 —
 37
Total other invested assets $68
 —
 $68
Total investments $11,667
 —
 $14,386
       

Cincinnati Financial Corporation - 2014 10-K - Page 166


Schedule II

Cincinnati Financial Corporation (parent company only)
Condensed Balance Sheets

 At December 31, 
(In millions)  2011  2010 
ASSETS        
Investments        
Fixed maturities, at fair value $225  $241 
Equity securities, at fair value  806   763 
Investment real estate, net  -   5 
Other invested assets  29   39 
Cash and cash equivalents  20   38 
Equity in net assets of subsidiaries  4,798   4,695 
Investment income receivable  4   5 
Land, building and equipment, net, for company use (accumulated depreciation: 2011—$94; 2010—$77)  158   159 
Prepaid income tax  -   15 
Other assets  13   15 
Due from subsidiaries  65   54 
Total assets $6,118  $6,029 
         
LIABILITIES        
Dividends declared but unpaid $65  $65 
Deferred federal income tax  40   42 
Long-term debt  790   790 
Other liabilities  168   100 
Total liabilities  1,063   997 
         
SHAREHOLDERS' EQUITY        
Common stock  393   393 
Paid-in capital  1,096   1,091 
Retained earnings  3,885   3,980 
Accumulated other comprehensive income  901   769 
Treasury stock at cost  (1,220)  (1,201)
Total shareholders' equity  5,055   5,032 
Total liabilities and shareholders' equity $6,118  $6,029 

Cincinnati Financial Corporation (parent company only)
Condensed Balance Sheets
(Dollars in millions) At December 31,
  2014 2013
Assets  
  
Investments  
  
Fixed maturities, at fair value $69
 $75
Equity securities, at fair value 1,643
 1,366
Other invested assets 37
 32
Total investments 1,749
 1,473
Cash and cash equivalents 72
 91
Equity in net assets of subsidiaries 5,627
 5,351
Investment income receivable 6
 5
Land, building and equipment, net, for company use (accumulated depreciation:
2014—$112; 2013—$106)		 144
 148
Prepaid income tax —
 2
Other assets 23
 24
Due from subsidiaries 107
 114
Total assets $7,728
 $7,208
Liabilities  
  
Dividends declared but unpaid $72
 $68
Deferred federal income tax 216
 185
Long-term debt 791
 790
Other liabilities 76
 95
Total liabilities 1,155
 1,138
Shareholders' Equity  
  
Common stock 397
 397
Paid-in capital 1,214
 1,191
Retained earnings 4,505
 4,268
Accumulated other comprehensive income 1,744
 1,504
Treasury stock at cost (1,287) (1,290)
Total shareholders' equity 6,573
 6,070
Total liabilities and shareholders' equity $7,728
 $7,208
     
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8,8.

Cincinnati Financial Corporation - 2014 10-K - Page 114.

167
Cincinnati Financial Corporation – 2011 10-K - 146


Schedule II (continued)

Cincinnati Financial Corporation (parent company only)
Condensed Statements of Income

 Years ended December 31, 
(In millions)  2011  2010  2009 
REVENUES             
  Investment income, net of expenses $41  $41  $41 
  Realized gains on investments  15   17   135 
  Other revenue  14   14   15 
     Total revenues  70   72   191 
             
EXPENSES            
  Interest expense  53   52   52 
  Other expenses  25   24   27 
     Total expenses  78   76   79 
             
INCOME BEFORE INCOME TAXES AND EARNINGS OF SUBSIDIARIES  (8)  (4)  112 
             
PROVISION (BENEFIT) FOR INCOME TAXES  (9)  (7)  32 
             
NET INCOME BEFORE EARNINGS OF SUBSIDIARIES  1   3   80 
             
  Increase in equity of subsidiaries  165   374   352 
             
NET INCOME $166  $377  $432 

Cincinnati Financial Corporation (parent company only)
Condensed Statements of Income
(Dollars in millions) Years ended December 31,
  2014 2013 2012
Revenues  
  
  
Investment income, net of expenses $46
 $41
 $42
Realized investment gains, net 34
 21
 34
Other revenue 16
 15
 15
Total revenues 96
 77
 91
Expenses  
  
  
Interest expense 52
 53
 53
Other expenses 28
 29
 27
Total expenses 80
 82
 80
Income (Loss) Before Income Taxes and Earnings of Subsidiaries 16
 (5) 11
Benefit for income taxes (5) (11) (4)
Net Income Before Earnings of Subsidiaries 21
 6
 15
Increase in equity of subsidiaries 504
 511
 406
Net Income $525
 $517
 $421
       
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8,8.

Cincinnati Financial Corporation - 2014 10-K - Page 114.

168
Cincinnati Financial Corporation – 2011 10-K - 147


Schedule II (continued)

Cincinnati Financial Corporation (parent company only)
Condensed Statements of Cash Flows

 Years ended December 31, 
(In millions)  2011  2010  2009 
CASH FLOWS FROM OPERATING ACTIVITIES            
Net income $166  $377  $432 
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation and amortization  7   7   8 
Realized gains on investments  (15)  (17)  (135)
Dividends from subsidiaries  180   220   50 
Changes in:            
Increase in equity of subsidiaries  (165)  (374)  (352)
Investment income receivable  1   -   (1)
Current federal income taxes  25   3   (104)
Deferred income taxes  (10)  2   24 
Other assets  2   -   (2)
Other liabilities  (23)  (12)  (22)
Net cash (used in) provided by operating activities  168   206   (102)
             
CASH FLOWS FROM INVESTING ACTIVITIES            
Sale of fixed-maturities  5   32   22 
Call or maturity of fixed maturities  13   21   15 
Sale of equity securities  101   85   408 
Purchase of fixed maturities  -   (27)  (206)
Purchase of equity securities  (78)  (92)  (246)
Change in short-term investments, net  -   -   65 
Investment in buildings and equipment, net  (1)  -   (1)
Change in other invested assets, net  5   -   (5)
Net cash provided by investing activities  45   19   52 
             
CASH FLOWS FROM FINANCING ACTIVITIES            
Increase in notes payable  55   -   - 
Payment of cash dividends to shareholders  (255)  (252)  (249)
Purchase of treasury shares  (32)  (10)  1 
Proceeds from stock options exercised  (4)  (2)  - 
Net transfers to subsidiaries  2   21   8 
Other  3   2   - 
Net cash used in financing activities  (231)  (241)  (240)
Net decrease in cash and cash equivalents  (18)  (16)  (290)
Cash and cash equivalents at beginning of year  38   54   344 
Cash and cash equivalents at end of year $20  $38  $54 

Cincinnati Financial Corporation (parent company only)
Condensed Statements of Comprehensive Income
(Dollars in millions) Years ended December 31,
  2014 2013 2012
Net Income $525
 $517
 $421
Other Comprehensive Income, Before Tax  
  
  
Unrealized gains on investments available-for-sale 150
 303
 67
Unrealized gains on investments held by subsidiaries 367
 240
 361
Reclassification adjustment for (gains) included in net income (34) (21) (34)
Reclassification adjustment for (gains) included in net income on subsidiaries (99) (62) (8)
Unrealized gains (losses) on other 7
 (1) 5
Unrealized (losses) gains on other subsidiaries (3) 35
 (26)
Unrealized gains on investments available-for-sale, investments held by subsidiaries and other 388
 494
 365
Amortization of pension actuarial (loss) gain and prior service cost (18) 83
 (13)
Other comprehensive income before tax 370
 577
 352
Income taxes on above of other comprehensive income 130
 202
 124
Other comprehensive income, net of tax 240
 375
 228
Comprehensive Income $765
 $892
 $649
       
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8,8.


Cincinnati Financial Corporation - 2014 10-K - Page 114.

169
Cincinnati Financial Corporation – 2011 10-K - 148


Schedule II (continued)

Cincinnati Financial Corporation (parent company only)
Condensed Statements of Cash Flows
(Dollars in millions) Years ended December 31,
  2014 2013 2012
Cash Flows From Operating Activities  
  
  
Net income $525
 $517
 $421
Adjustments to reconcile net income to net cash provided by operating activities:  
  
  
Depreciation and amortization 7
 7
 7
Realized investment gains, net (34) (21) (34)
Dividends from subsidiaries 400
 378
 300
Changes in:  
  
  
Increase in equity of subsidiaries (504) (511) (406)
Investment income receivable (1) (2) 1
Current federal income taxes 3
 12
 (24)
Deferred income tax (6) (6) 18
Other assets 20
 (30) (2)
Other liabilities (14) 39
 7
Intercompany receivable for operations 22
 (39) —
Net cash provided by operating activities 418
 344
 288
       
Cash Flows From Investing Activities  
  
  
Sale of fixed maturities —
 —
 114
Call or maturity of fixed maturities 4
 23
 13
Sale of equity securities 112
 75
 111
Purchase of fixed maturities —
 —
 (1)
Purchase of equity securities (225) (179) (212)
Investment in buildings and equipment, net (2) (1) (1)
Change in other invested assets, net 4
 4
 4
Return of capital from subsidiaries —
 22
 —
Net cash (used) provided by investing activities (107) (56) 28
       
Cash Flows From Financing Activities  
  
  
Payments on notes payable (55) —
 —
Payment of cash dividends to shareholders (278) (263) (256)
Purchase of treasury shares (21) (52) —
Proceeds from stock options exercised 22
 25
 9
Net transfers to subsidiaries —
 —
 (2)
Other 2
 3
 3
Net cash used in financing activities (330) (287) (246)
Net change in cash and cash equivalents (19) 1
 70
Cash and cash equivalents at beginning of year 91
 90
 20
Cash and cash equivalents at end of year $72
 $91
 $90
       
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8.

Cincinnati Financial Corporation - 2014 10-K - Page 170


Schedule III

Cincinnati Financial Corporation and Subsidiaries
Supplementary Insurance Information

 Years ended December 31, 
(In millions)  2011  2010  2009 
Deferred policy acquisition costs:            
     Commercial lines insurance $221  $217  $219 
     Personal lines insurance  99   84   78 
     Excess and surplus lines insurance  10   9   6 
        Total property casualty insurance  330   310   303 
     Life insurance  180   178   178 
        Total $510  $488  $481 
             
Gross future policy benefits, losses, claims and expense losses:            
     Commercial lines insurance $3,780  $3,728  $3,725 
     Personal lines insurance  419   353   349 
     Excess and surplus lines insurance  81   56   22 
        Total property casualty insurance  4,280   4,137   4,096 
     Life insurance  2,257   2,073   1,817 
        Total   (1) $6,537  $6,210  $5,913 
             
Gross unearned premiums:            
     Commercial lines insurance $1,149  $1,116  $1,112 
     Personal lines insurance  440   401   372 
     Excess and surplus lines insurance  42   34   23 
        Total property casualty insurance  1,631   1,551   1,507 
     Life insurance  2   2   2 
        Total   (1) $1,633  $1,553  $1,509 
             
Other policy claims and benefits payable:            
     Commercial lines insurance $-  $-  $- 
     Personal lines insurance  -   -   - 
     Excess and surplus lines insurance  -   -   - 
        Total property casualty insurance  -   -   - 
     Life insurance  16   24   12 
        Total   (1) $16  $24  $12 
             
Earned premiums:            
     Commercial lines insurance $2,197  $2,154  $2,199 
     Personal lines insurance  762   721   685 
     Excess and surplus lines insurance  70   49   27 
        Total property casualty insurance  3,029   2,924   2,911 
     Life insurance  165   158   143 
        Total $3,194  $3,082  $3,054 

Cincinnati Financial Corporation – 2011 10-K - 149

Cincinnati Financial Corporation and Subsidiaries
Supplementary Insurance Information
(Dollars in millions) Years ended December 31,
  2014 2013 2012
Deferred policy acquisition costs:  
  
  
Commercial lines insurance $257
 $251
 $235
Personal lines insurance 108
 104
 93
Excess and surplus lines insurance 14
 11
 9
Total property casualty insurance 379
 366
 337
Life insurance 199
 199
 133
Total $578
 $565
 $470
       
Gross future policy benefits, losses, claims and expense losses:  
  
  
Commercial lines insurance $3,797
 $3,667
 $3,645
Personal lines insurance 439
 417
 398
Excess and surplus lines insurance 202
 157
 126
Total property casualty insurance 4,438
 4,241
 4,169
Life insurance 2,519
 2,441
 2,341
Total (1) $6,957
 $6,682
 $6,510
       
Gross unearned premiums:  
  
  
Commercial lines insurance $1,441
 $1,372
 $1,246
Personal lines insurance 562
 535
 490
Excess and surplus lines insurance 78
 67
 54
Total property casualty insurance 2,081
 1,974
 1,790
Life insurance 1
 2
 2
Total (1) $2,082
 $1,976
 $1,792
       
Other policy claims and benefits payable:  
  
  
Commercial lines insurance $—
 $—
 $—
Personal lines insurance —
 —
 —
Excess and surplus lines insurance —
 —
 —
Total property casualty insurance —
 —
 —
Life insurance 25
 19
 15
Total (1) $25
 $19
 $15
       
Earned premiums:  
  
  
Commercial lines insurance $2,856
 $2,636
 $2,383
Personal lines insurance 1,041
 961
 868
Excess and surplus lines insurance 148
 116
 93
Total property casualty insurance 4,045
 3,713
 3,344
Life insurance 198
 189
 178
Total $4,243
 $3,902
 $3,522
       

Cincinnati Financial Corporation - 2014 10-K - Page 171


Schedule III (continued)

Cincinnati Financial Corporation and Subsidiaries
Supplementary Insurance Information

 Years ended December 31, 
(In millions)  2011  2010  2009 
Investment income, net of expenses:            
     Commercial lines insurance $-  $-  $- 
     Personal lines insurance  -   -   - 
     Excess and surplus lines insurance  -   -   - 
        Total property casualty insurance  (2)  350   348   336 
     Life insurance  134   129   122 
        Total $484  $477  $458 
             
Benefits, claims losses and settlement expenses:            
     Commercial lines insurance $1,570  $1,437  $1,515 
     Personal lines insurance  723   537   551 
     Excess and surplus lines insurance  42   41   20 
        Total property casualty insurance  2,335   2,015   2,086 
     Life insurance  189   170   160 
     Consolidated eliminations  -   (5)  (4)
        Total $2,524  $2,180  $2,242 
             
Amortization of deferred policy acquisition costs:            
     Commercial lines insurance $473  $454  $458 
     Personal lines insurance  157   148   143 
     Excess and surplus lines insurance  19   14   10 
        Total property casualty insurance  649   616   611 
     Life insurance  36   37   27 
        Total   (3) $685  $653  $638 
             
Other underwriting and insurance expenses:            
     Commercial lines insurance $259  $250  $261 
     Personal lines insurance  64   92   71 
     Excess and surplus lines insurance  2   2   11 
        Total property casualty insurance  325   344   343 
     Life insurance  26   24   23 
        Total   (3) $351  $368  $366 
             
Net written premiums:            
     Commercial lines insurance $2,218  $2,155  $2,181 
     Personal lines insurance  801   750   691 
     Excess and surplus lines insurance  79   58   39 
        Total property casualty insurance  3,098   2,963   2,911 
     Accident health insurance  3   3   3 
        Total $3,101  $2,966  $2,914 

Cincinnati Financial Corporation and Subsidiaries
Supplementary Insurance Information
(Dollars in millions) Years ended December 31,
  2014 2013 2012
Investment income, net of expenses:      
Commercial lines insurance $—
 $—
 $—
Personal lines insurance —
 —
 —
Excess and surplus lines insurance —
 —
 —
Total property casualty insurance (2) 358
 348
 351
Life insurance 144
 140
 137
Total $502
 $488
 $488
       
Benefits, claims losses and settlement expenses:  
  
  
Commercial lines insurance $1,812
 $1,596
 $1,420
Personal lines insurance 740
 639
 652
Excess and surplus lines insurance 75
 66
 65
Total property casualty insurance 2,627
 2,301
 2,137
Life insurance 229
 204
 185
Total $2,856
 $2,505
 $2,322
       
Amortization of deferred policy acquisition costs:  
  
  
Commercial lines insurance $537
 $514
 $462
Personal lines insurance 209
 192
 183
Excess and surplus lines insurance 24
 21
 17
Total property casualty insurance 770
 727
 662
Life insurance 37
 31
 45
Total (3) $807
 $758
 $707
       
Underwriting, acquisition and insurance expenses:  
  
  
Commercial lines insurance $365
 $343
 $324
Personal lines insurance 84
 98
 78
Excess and surplus lines insurance 19
 15
 12
Total property casualty insurance 468
 456
 414
Life insurance 26
 29
 34
Total (3) $494
 $485
 $448
       
Net written premiums:  
  
  
Commercial lines insurance $2,922
 $2,760
 $2,459
Personal lines insurance 1,068
 1,005
 918
Excess and surplus lines insurance 153
 128
 105
Total property casualty insurance 4,143
 3,893
 3,482
Accident health insurance 3
 2
 3
Total $4,146
 $3,895
 $3,485
       
Notes to Schedule III:

(1) The sum of gross future policy benefits, losses, claims and expense losses, gross unearned premium and other policy claims and benefits payable is equal to the sum of Loss and loss expense reserves, Life policy reserves and investment contract reserves and Unearned premiums reported in the company’s consolidated balance sheets, Page 110.

sheets.

(2) This segment information is not regularly allocated to segments and reviewed by company management in making decisions about resources to be allocated to the segments or to assess their performance.

(3) The sum of amortization of deferred policy acquisition costs and other underwriting and insurance expenses is equal to underwriting,Underwriting, acquisition and insurance expenses in the consolidated statements of income.

Cincinnati Financial Corporation – 2011 10-K - 150


Cincinnati Financial Corporation - 2014 10-K - Page 172


Schedule IV

Cincinnati Financial Corporation and Subsidiaries
Reinsurance

 Years ended December 31, 
(Dollars in millions)  2011  2010  2009 
Gross amounts:            
  Life insurance in force $77,691  $74,123  $69,814 
  Earned premiums            
     Commercial lines insurance $2,348  $2,281  $2,324 
     Personal lines insurance  812   746   715 
     Excess and surplus lines insurance  76   53   28 
        Total property casualty insurance  3,236   3,080   3,067 
     Life insurance  220   211   196 
        Total $3,456  $3,291  $3,263 
             
Ceded amounts to other companies:            
  Life insurance in force $35,690  $35,016  $34,232 
  Earned premiums            
     Commercial lines insurance $162  $136  $137 
     Personal lines insurance  51   26   31 
     Excess and surplus lines insurance  6   4   1 
       Total  219   166   169 
     Life insurance  55   53   53 
        Total $274  $219  $222 
             
Assumed amounts from other companies:            
  Life insurance in force $1  $1  $1 
  Earned premiums            
     Commercial lines insurance $11  $9  $12 
     Personal lines insurance  1   1   1 
     Excess and surplus lines insurance  -   -   - 
        Total property casualty insurance  12   10   13 
     Life insurance  -   -   - 
        Total $12  $10  $13 
             
Net amounts:            
  Life insurance in force $42,001  $39,108  $35,583 
  Earned premiums            
     Commercial lines insurance $2,197  $2,154  $2,199 
     Personal lines insurance  762   721   685 
     Excess and surplus lines insurance  70   49   27 
        Total property casualty insurance  3,029   2,924   2,911 
     Life insurance  165   158   143 
        Total $3,194  $3,082  $3,054 
             
Percentage of amounts assumed to net:            
  Life insurance in force  0.0%  0.0%  0.0%
  Earned premiums            
     Commercial lines insurance  0.5%  0.4%  0.5%
     Personal lines insurance  0.2   0.2   0.2 
     Excess and surplus lines insurance  0.0   0.0   0.0 
        Total property casualty insurance  0.4   0.4   0.4 
     Life insurance  0.0   0.0   0.0 
     Total  0.4   0.4   0.4 

Cincinnati Financial Corporation – 2011 10-K - 151

Cincinnati Financial Corporation and Subsidiaries
Reinsurance
(Dollars in millions) Years ended December 31,
  2014 2013 2012
Gross amounts:  
  
  
Life insurance in force $88,045
 $85,015
 $81,467
Earned premiums  
  
  
Commercial lines insurance $2,973
 $2,777
 $2,524
Personal lines insurance 1,080
 1,002
 897
Excess and surplus lines insurance 156
 124
 99
Total property casualty insurance 4,209
 3,903
 3,520
Life insurance 259
 248
 235
Total $4,468
 $4,151
 $3,755
       
Ceded amounts to other companies:  
  
  
Life insurance in force $37,689
 $36,952
 $36,340
Earned premiums  
  
  
Commercial lines insurance $128
 $151
 $149
Personal lines insurance 40
 42
 30
Excess and surplus lines insurance 8
 8
 6
Total property casualty insurance 176
 201
 185
Life insurance 61
 59
 57
Total $237
 $260
 $242
       
Assumed amounts from other companies:  
  
  
Life insurance in force $—
 $—
 $—
Earned premiums  
  
  
Commercial lines insurance $11
 $10
 $8
Personal lines insurance 1
 1
 1
Excess and surplus lines insurance —
 —
 —
Total property casualty insurance 12
 11
 9
Life insurance —
 —
 —
Total $12
 $11
 $9
       
Net amounts:  
  
  
Life insurance in force $50,356
 $48,063
 $45,126
Earned premiums  
  
  
Commercial lines insurance $2,856
 $2,636
 $2,383
Personal lines insurance 1,041
 961
 868
Excess and surplus lines insurance 148
 116
 93
Total property casualty insurance 4,045
 3,713
 3,344
Life insurance 198
 189
 178
Total $4,243
 $3,902
 $3,522
       
Percentage of amounts assumed to net:  
  
  
Life insurance in force —% —% —%
Earned premiums  
  
  
Commercial lines insurance 0.4% 0.4% 0.3%
Personal lines insurance 0.1
 0.1
 0.1
Excess and surplus lines insurance —
 —
 —
Total property casualty insurance 0.5
 0.5
 0.3
Life insurance —
 —
 —
Total 0.5
 0.5
 0.3
       

Cincinnati Financial Corporation - 2014 10-K - Page 173


Schedule V

Cincinnati Financial Corporation and Subsidiaries
Valuation and Qualifying Accounts

 At December 31, 
(In millions)  2011  2010  2009 
Allowance for doubtful receivables:            
 Balance at beginning of period $3  $3  $4 
    Additions charged to costs and expenses  2   2   2 
    Deductions  (3)  (2)  (3)
 Balance at end of period $2  $3  $3 

Cincinnati Financial Corporation – 2011 10-K - 152

Cincinnati Financial Corporation and Subsidiaries
Valuation and Qualifying Accounts
(Dollars in millions) At December 31,
  2014 2013 2012
Allowance for doubtful receivables:  
  
  
Balance at beginning of year $2
 $2
 $2
Additions charged to costs and expenses 2
 1
 1
Deductions (1) (1) (1)
Balance at end of year $3
 $2
 $2
       

Cincinnati Financial Corporation - 2014 10-K - Page 174


Schedule VI

Cincinnati Financial Corporation and Subsidiaries
Supplementary Information Concerning Property Casualty Insurance Operations

 Years ended December 31, 
(In millions)  2011  2010  2009 
Deferred policy acquisition costs:            
     Commercial lines insurance $221  $217  $219 
     Personal lines insurance  99   84   78 
     Excess and surplus lines insurance  10   9   6 
       Total $330  $310  $303 
             
Reserves for unpaid claims and claim adjustment expenses:            
     Commercial lines insurance $3,780  $3,728  $3,725 
     Personal lines insurance  419   353   349 
     Excess and surplus lines insurance  81   56   22 
       Total $4,280  $4,137  $4,096 
             
Reserve discount deducted $-  $-  $- 
             
Unearned premiums:            
     Commercial lines insurance $1,147  $1,116  $1,112 
     Personal lines insurance  440   401   372 
     Excess and surplus lines insurance  42   34   23 
       Total $1,629  $1,551  $1,507 
             
Earned premiums:            
     Commercial lines insurance $2,197  $2,154  $2,199 
     Personal lines insurance  762   721   685 
     Excess and surplus lines insurance  70   49   27 
       Total $3,029  $2,924  $2,911 
             
Investment income:            
     Commercial lines insurance $-  $-  $- 
     Personal lines insurance  -   -   - 
     Excess and surplus lines insurance  -   -   - 
       Total (1) $350  $348  $336 
             
Loss and loss expenses incurred related to current accident year:            
     Commercial lines insurance $1,804  $1,706  $1,662 
     Personal lines insurance  765   571   591 
     Excess and surplus lines insurance  51   42   21 
       Total $2,620  $2,319  $2,274 
             
Loss and loss expenses incurred related to prior accident years:            
     Commercial lines insurance $(234) $(269) $(147)
     Personal lines insurance  (42)  (34)  (40)
     Excess and surplus lines insurance  (9)  (1)  (1)
       Total $(285) $(304) $(188)
             
Amortization of deferred policy acquisition costs:            
     Commercial lines insurance $473  $454  $458 
     Personal lines insurance  157   148   143 
     Excess and surplus lines insurance  19   14   10 
       Total $649  $616  $611 
             
Paid loss and loss expenses:            
     Commercial lines insurance $1,545  $1,330  $1,348 
     Personal lines insurance  676   526   573 
     Excess and surplus lines insurance  20   9   2 
       Total $2,241  $1,865  $1,923 
             
Net written premiums:            
     Commercial lines insurance $2,218  $2,155  $2,181 
     Personal lines insurance  801   750   691 
     Excess and surplus lines insurance  79   58   39 
       Total $3,098  $2,963  $2,911 

Cincinnati Financial Corporation and Subsidiaries
Supplementary Information Concerning Property Casualty Insurance Operations
(Dollars in millions) Years ended December 31,
  2014 2013 2012
Deferred policy acquisition costs:  
  
  
Commercial lines insurance $257
 $251
 $235
Personal lines insurance 108
 104
 93
Excess and surplus lines insurance 14
 11
 9
Total $379
 $366
 $337
       
Reserves for unpaid claims and claim adjustment expenses:  
  
  
Commercial lines insurance $3,797
 $3,667
 $3,645
Personal lines insurance 439
 417
 398
Excess and surplus lines insurance 202
 157
 126
Total $4,438
 $4,241
 $4,169
       
Reserve discount deducted $—
 $—
 $—
       
Unearned premiums:  
  
  
Commercial lines insurance $1,441
 $1,370
 $1,246
Personal lines insurance 562
 534
 490
Excess and surplus lines insurance 78
 66
 54
Total $2,081
 $1,970
 $1,790
       
Earned premiums:  
  
  
Commercial lines insurance $2,856
 $2,636
 $2,383
Personal lines insurance 1,041
 961
 868
Excess and surplus lines insurance 148
 116
 93
Total $4,045
 $3,713
 $3,344
       
Investment income:  
  
  
Commercial lines insurance $—
 $—
 $—
Personal lines insurance —
 —
 —
Excess and surplus lines insurance —
 —
 —
Total (1) $358
 $348
 $351
       
Loss and loss expenses incurred related to current accident year:  
  
  
Commercial lines insurance $1,869
 $1,691
 $1,712
Personal lines insurance 752
 678
 751
Excess and surplus lines insurance 104
 79
 70
Total $2,725
 $2,448
 $2,533
       
Loss and loss expenses incurred related to prior accident years:  
  
  
Commercial lines insurance $(57) $(95) $(292)
Personal lines insurance (12) (39) (99)
Excess and surplus lines insurance (29) (13) (5)
Total $(98) $(147) $(396)
       
Amortization of deferred policy acquisition costs:  
  
  
Commercial lines insurance $537
 $514
 $461
Personal lines insurance 209
 192
 183
Excess and surplus lines insurance 24
 21
 17
Total $770
 $727
 $661
       
Paid loss and loss expenses:  
  
  
Commercial lines insurance $1,666
 $1,498
 $1,546
Personal lines insurance 717
 639
 659
Excess and surplus lines insurance 30
 35
 24
Total $2,413
 $2,172
 $2,229
       
Net written premiums:  
  
  
Commercial lines insurance $2,922
 $2,760
 $2,459
Personal lines insurance 1,068
 1,005
 918
Excess and surplus lines insurance 153
 128
 105
Total $4,143
 $3,893
 $3,482
       
Note to Schedule VI:

(1) This segment information is not regularly allocated to segments and not reviewed by company management in making decisions about resources to be allocated to the segments or to assess their performance.


Cincinnati Financial Corporation – 2011 10-K - 153
Cincinnati Financial Corporation - 2014 10-K - Page 175


Signatures

Signatures

Pursuant to the requirements of Section 13 or 15 (d)15(d) 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

/S/ Eric N. Mathews

By:Eric N. Mathews, CPCU, AIAF
Title:Principal Accounting Officer, Vice President, Assistant Secretary and Assistant Treasurer
Date:February 27, 2012


By:        Eric N. Mathews, CPCU, AIAF
Title:        Principal Accounting Officer, Vice President, Assistant Secretary and Assistant Treasurer
Date:         February 27, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SignatureTitleDate
/S/ Kenneth W. StecherChairman of the BoardFebruary 27, 20122015
Kenneth W. Stecher
/S/ Steven J. JohnstonPresident, Chief Executive Officer and DirectorFebruary 27, 20122015
Steven J. Johnston
/S/ Michael J. SewellChief Financial Officer, Senior Vice President and TreasurerFebruary 27, 20122015
Michael J. Sewell
/S/ William F. BahlDirectorFebruary 27, 20122015
William F. Bahl
/S/ Gregory T. BierDirectorFebruary 27, 20122015
Gregory T. Bier
/S/ Dirk J. DebbinkDirectorFebruary 27, 2015
Dirk J. Debbink
/S/ Linda W. Clement-HolmesDirectorFebruary 27, 20122015
Linda W. Clement-Holmes
/S/ Kenneth C. LichtendahlDirectorFebruary 27, 20122015
Kenneth C. Lichtendahl
/S/ W. Rodney McMullenDirectorFebruary 27, 20122015
W. Rodney McMullen
/S/ David P. OsbornDirectorFebruary 27, 2015
David P. Osborn
/S/ Gretchen W. PriceDirectorFebruary 27, 20122015
Gretchen W. Price
/S/ John J. Schiff, Jr.DirectorFebruary 27, 20122015
John J. Schiff, Jr.
/S/ Thomas R. SchiffDirectorFebruary 27, 20122015
Thomas R. Schiff
/S/ Douglas S. SkidmoreDirectorFebruary 27, 20122015
Douglas S. Skidmore
/S/ John F. Steele, Jr.DirectorFebruary 27, 20122015
John F. Steele, Jr.
/S/ Larry R. WebbDirectorFebruary 27, 20122015
Larry R. Webb
/S/ E. Anthony WoodsDirectorFebruary 27, 2012
E. Anthony Woods

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Index of Exhibits

Index of Exhibits

Exhibit No.Exhibit Description
3.1Amended and Restated Articles of Incorporation of Cincinnati Financial Corporation (incorporated by reference to the company’s 2010 Annual Report on Form 10-K dated February 25, 2011, Exhibit 3.1)
3.2Regulations of Cincinnati Financial Corporation (incorporated by reference to the company'scompany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Exhibit 3.2) (File No. 000-04604)
4.1Indenture with The Bank of New York Trust Company (incorporated by reference to the company’s Current Report on Form 8-K dated November 2, 2004, filed with respect to the issuance of the company’s 6.125% Senior Notes due November 1, 2034)
4.2Supplemental Indenture with The Bank of New York Trust Company (incorporated by reference to the company’s Current Report on Form 8-K dated November 2, 2004, filed with respect to the issuance of the company’s 6.125% Senior Notes due November 1, 2034)
4.3Second Supplemental Indenture with The Bank of New York Trust Company (incorporated by reference to the company’s Current Report on Form 8-K dated May 9, 2005, filed with respect to the completion of the company’s exchange offer and rescission offer for its 6.90% senior debentures due 2028)
4.4Form of 6.125% Exchange Note Due 2034 (included in Exhibit 4.2)
4.5Form of 6.92% Debentures Due 2028 (included in Exhibit 4.3)
4.6Indenture with the First National Bank of Chicago (subsequently assigned to The Bank of New York Trust Company) (incorporated by reference to the company’s registration statement on Form S-3 effective May 22, 1998 (File No. 333-51677))
4.7Form of 6.90% Debentures Due 2028 (included in Exhibit 4.6)
10.1Agreement with Messer Construction (incorporated by reference to the company’s 2004 Annual Report on Form 10-K dated March 11, 2005)
10.2Cincinnati Financial Corporation Directors’ Stock Plan of 2009 (incorporated by reference to the company’s definitive Proxy Statement dated March 20, 2009)
10.310.2Cincinnati Financial Corporation Stock Option Plan No. VI (incorporated by reference to the company’s definitive Proxy Statement dated March 1, 1999) (File No. 000-04604)
10.410.3Cincinnati Financial Corporation Stock Option Plan No. VII (incorporated by reference to the company’s definitive Proxy Statement dated March 8, 2002) (File No. 000-04604)
10.510.4Cincinnati Financial Corporation Annual Incentive Compensation Plan of 2009, as amended January 31, 2014 (incorporated by reference to Exhibit 10.1 filed with the company’s definitive Proxy StatementCurrent Report on Form 8-K dated March 20, 2009)February 3, 2014)
10.610.5Cincinnati Financial Corporation 2006 Stock Compensation Plan (incorporated by reference to the company’s definitive Proxy Statement dated March 30, 2007)
10.6Cincinnati Financial Corporation 2012 Stock Compensation Plan (incorporated by reference to the company’s definitive Proxy Statement dated March 16, 2012)
10.7Amended and Restated Cincinnati Financial Corporation Supplemental Retirement Plan dated January 1, 2009 (incorporated by reference to Exhibit 10.1710.7 filed with the company’s QuarterlyAnnual Report on Form 10-Q for the quarter ended September 30, 2006)10-K dated February 27, 2013)
10.8Form of Incentive Stock Option Agreement for Stock Option Plan VII (incorporated by reference to Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated October 20, 2006)
10.9Form of Nonqualified Stock Option Agreement for Stock Option Plan VII (incorporated by reference to Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated October 20, 2006)
10.10Form of Incentive Stock Option Agreement for the 2006 Stock Compensation Plan (incorporated by reference to Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated October 20, 2006)
10.11Form of Nonqualified Stock Option Agreement for the 2006 Stock Compensation Plan (incorporated by reference to Exhibit 10.4 filed with the company’s Current Report on Form 8-K dated October 20, 2006)
10.12Form of Restricted Stock Unit Agreement for use under the Cincinnati Financial Corporation 2006 Stock Compensation Plan (performance-based) (incorporated by reference to Exhibit 10.1 filed with the company'scompany’s Current Report on Form 8-K dated November 18, 2008)
10.13Form of Incentive Compensation Agreement for the Cincinnati Financial Corporation Incentive Compensation Plan of 2009 (incorporated by reference to Exhibit 10.1 filed with the company'scompany’s Current Report on Form 8-K dated March 16, 2009)
10.14Unwritten arrangement with Lehman Brothers Inc. to sell 35,000,000 sharesForm of Fifth Third stock held byIncentive Stock Option Agreement for the Cincinnati Financial Corporation 2012 Stock Compensation Plan (incorporated by reference to the further description of the arrangement set forth onExhibit 10.1 filed with the company’s Current Report on Form 8-K dated July 25, 2008)February 21, 2013)
10.15Amended and RestatedForm of Nonqualified Stock Option Agreement for the Cincinnati Financial Corporation Top Hat Savings2012 Stock Compensation Plan dated November 14, 2008 (incorporated by reference to Exhibit 10.38 filed with the company’s Annual Report on Form 10-K dated February 27, 2009)
10.16Restricted Stock Unit Agreement for John J. Schiff, Jr. dated November 14, 2008 (incorporated by reference to Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated November 14, 2008)February 21, 2013)


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Exhibit No.Exhibit Description
10.1710.16Form of Restricted Stock Unit Agreement (service based) for James E. Benoski dated November 14, 2008the Cincinnati Financial Corporation 2012 Stock Compensation Plan (incorporated by reference to Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated November 14, 2008)February 21, 2013)
10.1810.17Form of Restricted Stock Unit Agreement (performance based) for Kenneth W. Stecher dated November 14, 2008the Cincinnati Financial Corporation 2012 Stock Compensation Plan (incorporated by reference to Exhibit 10.4 filed with the company’s Current Report on Form 8-K dated November 14, 2008)February 21, 2013)
10.1910.18Restricted Stock Unit Agreement for Steven J. JohnstonAmended and Restated Cincinnati Financial Corporation Top Hat Savings Plan dated November 14, 2008January 1, 2011 (incorporated by reference to Exhibit 10.510.14 filed with the company’s CurrentAnnual Report on Form 8-K10-K dated November 14, 2008)February 27, 2013)
10.20Restricted Stock Unit Agreement for Thomas A. Joseph dated November 14, 2008 (incorporated by reference to Exhibit 10.6 filed with the company’s Current Report on Form 8-K dated November 14, 2008)
10.21Restricted Stock Unit Agreement for J.F. Scherer dated November 14, 2008 (incorporated by reference to Exhibit 10.7 filed with the company’s Current Report on Form 8-K dated November 14, 2008)
10.22Incentive Compensation Award Agreement for Kenneth W. Stecher dated March 16, 2009 under Incentive Compensation Plan of 2009 (incorporated by reference to Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated March 16, 2009)
10.23Incentive Compensation Award Agreement for Steven J. Johnston dated March 16, 2009 under Incentive Compensation Plan of 2009 (incorporated by reference to Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated March 16, 2009)
10.24Credit Agreement by and among Cincinnati Financial Corporation, CFC Investment Company, and PNC Bank, National Association, dated August 27, 2010 (incorporated by reference to Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated August 27, 2010) (which supersedes that certain Offer and Acceptance of terms to renew $75 million unsecured line of credit with PNC Bank, National Association, effective June 30, 2009, that was filed with and described in the company’s Current Report on Form 8-K dated July 7, 2009) (incorporated by reference to Exhibit 10.1 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)
10.25Swap Agreement by and among Cincinnati Financial Corporation, CFC Investment Company and PNC Bank, National Association, dated August 31, 2009 (incorporated by reference to Exhibit 10.2 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)
10.26Letter Agreement by and among Cincinnati Financial Corporation , CFC Investment Company and PNC Bank, National Association, dated August 25, 2011 renewing $75 Million committed line of credit pursuant to the Credit Agreement referenced in Exhibit 10.39 above (incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K dated August 25, 2011)
10.2710.19Cincinnati Financial Corporation Executive Deferred Compensation Agreement by and between the Cincinnati Financial Corporation and Michael J. Sewell, dated as of October 25, 2011 (incorporated by reference to Exhibit 10.2 filed with the Company’scompany’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)2011)
10.20
Amended and Restated Credit Agreement by and among Cincinnati Financial Corporation, CFC Investment Company, PNC Bank, N.A. as Administrative Agent, PNC Capital Markets LLC, as Sole Bookrunner and Joint Lead Arranger, Fifth Third Bank, N.A., as Joint Lead Arranger and Syndication Agent, The Huntington National Bank and U.S. Bank, N.A., as Documentation Agents, dated May 13, 2014 (incorporated by reference to the company’s Current Report on Form 8-K dated May 13, 2014, Exhibit 10.1)
10.21Agreement by and between The Cincinnati Insurance Company and its affiliated and subsidiary companies and Thomas A. Joseph dated October 19, 2012 (incorporated by reference Exhibit 10.1 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012)
11Statement re: Computation of per share earnings for the years ended December 31, 2011, 2010,2014, 2013, and 20092012, contained in Part II, Item 8, Note 12, to the Consolidated Financial Statements
14Cincinnati Financial Corporation Code of Ethics for Senior Financial Officers (incorporated by reference to the company’s Definitivedefinitive Proxy Statement datadated March 18, 2004 (File No. 000-04604))
21Cincinnati Financial Corporation subsidiaries contained in Part I, Item 1, of this report
23Consent of Independent Registered Public Accounting Firm
31ACertification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 – Chief Executive Officer
31BCertification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 – Chief Financial Officer
32Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002

Cincinnati Financial Corporation – 2011 10-K - 156101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document


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