Edgar Filing: CINCINNATI FINANCIAL CORP

10-K

United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K



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

For the fiscal year ended December 31, 2015.



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

For the transition period from _____________________ to _____________________.

Commission file number 0-4604

Cincinnati Financial Corporation

(Exact name of registrant as specified in its charter)



Ohio	31-0746871
(State 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)

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 - 2015 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’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 filer þ 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 based on the closing price of $50.18 per share as reported on Nasdaq Global Select Market on June 30, 2015, was $7,466,710,235.

As of February 19, 2016, there were 164,339,638 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 30, 2016, are incorporated by reference into Part III of this Form 10-K.

Cincinnati Financial Corporation - 2015 10-K - Page 2

2015 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



Part I		4
Item 1.	Business	4
	Cincinnati Financial Corporation – Introduction	4
	Our Business and Our Strategy	5
	Our Segments	13
	Other	23
	Regulation	24
Item 1A.	Risk Factors	26
Item 1B.	Unresolved Staff Comments	35
Item 2.	Properties	35
Item 3.	Legal Proceedings	35
Item 4.	Mine Safety Disclosures	35
Part II		36
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	36
Item 6	Selected Financial Data	39
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	40
	Introduction	40
	Executive Summary	40
	Critical Accounting Estimates	45
	Recent Accounting Pronouncements	53
	Financial Results	54
	Liquidity and Capital Resources	90
	Safe Harbor Statement	106
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	108
Item 8.	Financial Statements and Supplementary Data	114
	Responsibility for Financial Statements	114
	Management’s Annual Report on Internal Control Over Financial Reporting	115
	Report of Independent Registered Public Accounting Firm	116
	Consolidated Balance Sheets	118
	Consolidated Statements of Income	119
	Consolidated Statements of Comprehensive Income	120
	Consolidated Statements of Shareholders’ Equity	121
	Consolidated Statements of Cash Flows	122
	Notes to Consolidated Financial Statements	123
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	158
Item 9A.	Controls and Procedures	158
Item 9B.	Other Information	158
Part III		159
Item 10.	Directors, Executive Officers and Corporate Governance	159
Item 11.	Executive Compensation	161
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	161
Item 13.	Certain Relationships and Related Transactions, and Director Independence	161
Item 14.	Principal Accounting Fees and Services	161
Part IV		162
Item 15.	Exhibits, Financial Statement Schedules	162

Cincinnati Financial Corporation - 2015 10-K - Page 3

Part I

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 2015, we employed 4,493 associates, including 3,045 headquarters associates who provide support to 1,448 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 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. The Cincinnati Insurance Company also conducts the business of our reinsurance assumed operations, known as Cincinnati Re^SM. 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 offers excess and surplus lines insurance products.

The two noninsurance 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 on our website,

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 - 2015 10-K - Page 4

Our Business and Our Strategy

Introduction

The Cincinnati Insurance Company was founded more than 65 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

At year-end 2015, a select group of independent agencies in 39 states actively marketed our property casualty insurance within their communities. Standard market commercial lines and excess and surplus lines policies were marketed in all of those states, while personal lines policies were marketed in 31 of those states. Within our 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 professional independent insurance agencies and to their continued success


•	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 for insurance policies sold, reduced by losses and loss expenses from insurance coverages provided by those policies. Those revenues are further reduced by underwriting expenses associated with marketing policies or related to 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 for insurance policies sold, until funds 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, with additional contribution from compounding over time.


•	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)

Cincinnati Financial Corporation - 2015 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


•	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. We also compete with carriers that market personal lines products through captive agents and direct writers. Some of our agencies describe their roles as brokers instead of agents. 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 fully committed to the independent agency channel for marketing our insurance policies, while our reinsurance assumed operation typically markets through broker organizations or similar intermediaries that specialize in reinsurance. 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 communities, providing important knowledge of local market trends, opportunities and challenges.

We work to support agencies with tools and resources that help communicate the value of a Cincinnati policy to their clients and prospective clients. We plan to build on our past marketing efforts and continue with our national advertising campaign that began in 2015, expanding it slightly. 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.

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 through 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 can offer our excess and surplus lines products exclusively to the independent agencies who market our other property casualty insurance products.

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-quality service and competitive pricing.

The excess and surplus lines insurance 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 persons or organizations that are caused by their nature, 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 brokers, whether they are small specialty insurers or specialized divisions of larger insurance organizations. We established an excess and surplus lines operation to help meet the needs of agency clients when insurance is unavailable in the standard market. Agencies have access to Cincinnati Specialty Underwriters' product line through CSU Producer Resources, the wholly owned insurance brokerage subsidiary of Cincinnati Financial Corporation. By providing superior service, we can help our agencies grow while also profitably growing our property casualty business.

Cincinnati Financial Corporation - 2015 10-K - Page 6

At year-end 2015, our 1,526 property casualty agency relationships were marketing our standard market insurance products from 1,956 reporting locations. An increasing number of agencies have multiple, separately identifiable locations, reflecting their growth as well as 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 2014, we had 1,466 agency relationships with 1,884 reporting locations.

We made 114 new property casualty agency appointments in 2015 and 99 new appointments in 2014. Of these new appointments, 85 and 63, respectively, were new relationships. The remainder were either: new branch offices opened by existing Cincinnati agencies; or agencies that merged with a Cincinnati agency and we still believed would produce a meaningful amount of new business premiums. These new appointments may be partially offset by other changes in agency structures, such as consolidation through mergers or acquisitions. Our net increase in agency relationships was 60 in 2015 and 16 in 2014. The net increase in reporting agency locations for those same years was 72 and 61.

On average, we have a 12.0 percent share of the standard lines property casualty insurance purchased through our reporting agency locations, according to 2014 data from agency surveys. Our share is 16.5 percent in reporting agency locations that have represented us for more than 10 years; 8.4 percent in agencies that have represented us for six to 10 years; 5.2 percent in agencies that have represented us for two to five years; and 0.8 percent in agencies that have represented us for one year or less.

Our largest single agency relationship accounted for approximately 0.8 percent of our total property casualty earned premiums in 2015. No aggregate locations under a single ownership structure accounted for more than 3 percent of our earned premiums in 2015.

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 assert 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 rather 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. For example, we maintain a diversified investment portfolio by reviewing and applying diversification parameters and tolerances.

•

Our $9.650 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 32 percent at December 31, 2015. No corporate bond exposure accounted for more than 0.6 percent of our fixed-maturity portfolio, and no municipal exposure accounted for more than 0.3 percent.

•

The strength of our fixed-maturity portfolio provides an opportunity to invest for potential capital appreciation by purchasing equity securities. Our $4.706 billion equity portfolio minimizes concentrations in single stocks or industries. At December 31, 2015, 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 19 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, 2015, we held $1.783 billion of our cash and invested assets at the parent-company level, of which $1.580 billion, or 88.6 percent, was invested in common stocks, and $106 million, or 5.9 percent, was cash and cash equivalents.

We minimize reliance on debt as a source of capital, maintaining a debt-to-total-capital ratio below 20 percent. At December 31, 2015, this ratio at 11.3 percent was well below the target limit. Long-term debt at year-end 2015 totaled $786 million and our short-term debt was $35 million, down from $49 million at the prior year end. The long-

Cincinnati Financial Corporation - 2015 10-K - Page 7

term debt consists of three nonconvertible, 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.

At year-end 2015 and 2014, risk-based capital (RBC) for our standard market property casualty insurance, excess and surplus lines insurance and life insurance subsidiaries was strong, far exceeding regulatory requirements.

•

We ended 2015 with a 1.0-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 2015.


•	We ended 2015 with a 7.3 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 2015. A higher ratio indicates an insurer’s stronger security for policyholders and capacity to support business growth.



(Dollars in millions) Statutory Information	At December 31,
	2015		2014
Standard market property casualty insurance subsidiary
Statutory capital and surplus	$	4,412	$	4,472
Risk-based capital (RBC)	4,431		4,490
Authorized control level risk-based capital	582		563

Risk-based capital to authorized control level risk-based capital ratio	7.6		8.0
Written premium to surplus ratio	1.0		0.9
Life insurance subsidiary
Statutory capital and surplus	$	208	$	223
Risk-based capital (RBC)	227		241
Authorized control level risk-based capital	36		33
Total liabilities excluding separate account business	3,132		2,978

Risk-based capital to authorized control level risk-based capital ratio	6.3		7.3
Life statutory risk-based adjusted surplus to liabilities ratio	7.3		8.1
Excess and surplus lines insurance subsidiary
Statutory capital and surplus	$	306	$	266
Risk-based capital (RBC)	306		266
Authorized control level risk-based capital	35		32

Risk-based capital to authorized control level risk-based capital ratio	8.8		8.4
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 65.6 percent at year-end 2015 compared with 67.7 percent at year-end 2014.

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.

Cincinnati Financial Corporation - 2015 10-K - Page 8

Our insurance subsidiaries are highly rated. At February 24, 2016, our insurance financial strength ratings were:



	Insurer Financial Strength Ratings
Rating agency	Standard market property casualty insurance subsidiary			Life insurance subsidiary			Excess and surplus lines insurance subsidiary			Date of most recent affirmation or action
			Rating Tier			Rating Tier			Rating Tier
A. M. Best Co. ambest.com	A+	Superior	2 of 16	A	Excellent	3 of 16	A+	Superior	2 of 16	Stable outlook (12/18/15)
Fitch Ratings fitchratings.com	A+	Strong	5 of 21	A+	Strong	5 of 21	-	-	-	Stable outlook (11/13/15)
Moody's Investors Service moodys.com	A1	Good	5 of 21	-	-	-	-	-	-	Stable outlook (4/30/13)
Standard & Poor's Ratings Services spratings.com	A+	Strong	5 of 21	A+	Strong	5 of 21	-	-	-	Stable outlook (6/30/15)

On December 18, 2015, A.M. Best affirmed our financial strength ratings that it had assigned in December 2008, continuing its stable outlook. On the same date, A.M. Best upgraded to A+ the financial strength rating of our E&S subsidiary, Cincinnati Specialty Underwriters. On July 15, 2015, and on November 13, 2015, Fitch Ratings affirmed the ratings that it had assigned to us in August 2009, continuing its stable outlook. On June 30, 2015, Standard & Poor’s Ratings Services upgraded to A+ the ratings that it had assigned in July 2010, and revised its outlook to stable.

Our debt ratings are discussed in Item 7, Liquidity and Capital Resources, Additional Sources of 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 profitable business and policyholder satisfaction and loyalty. Several of our strategic initiatives are intended 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.

In our 10 highest volume states for consolidated property casualty premiums, 1,124 reporting agency locations wrote 62.3 percent of our 2015 consolidated property casualty earned premium volume compared with 1,091 locations and 62.8 percent in 2014. We continue efforts to geographically diversify our property casualty risks.

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, 2015
Ohio	$	737	17.3	%	251	$	2.9
Illinois	297		6.9		140	2.1
Indiana	265		6.2		116	2.3
Georgia	233		5.5		96	2.4
Pennsylvania	232		5.4		105	2.2
Michigan	220		5.1		140	1.6
North Carolina	220		5.1		101	2.2
Tennessee	166		3.9		63	2.6
Virginia	149		3.5		65	2.3
Kentucky	144		3.4		47	3.1

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Field Focus Emphasizing Service

We rely on our force of 1,448 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, so they are readily available when agencies or policyholders need them. While their work is often conducted at the premises of the agency or policyholder, they also work from offices in their homes. Headquarters associates support agencies and field associates with underwriting, accounting, technology assistance, training and other services. Company executives and headquarters associates 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. The field team provides a variety of services, such as recommending specific actions to improve the safety of the policyholder’s operations. We seek to develop long-term relationships by understanding the unique needs of each agency's clients, who are also our policyholders.

Service using technology solutions gives our agencies access to our systems for ease of processing business transactions. Policyholders can also conveniently access pertinent policy information, helping to reduce costs for agencies and the company. Technology also helps our associates collaborate and process business efficiently, providing more time for personal service to agencies and their clients when needed.

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 858 locally based field claims associates work from their homes and are assigned to specific agencies. They respond personally to policyholders and claimants, and are equipped to handle a claim from nearly anywhere, including printing claim checks at a policyholder's location. 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.

Catastrophe response teams are comprised of volunteers from our experienced field claims staff who have the authority they need to do their jobs. In times of widespread loss, our field claims representatives confidently and quickly resolve claims, often providing claim checks on the same day they inspect the loss. Electronic claim files allow for fast initial contact with 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.

We staff a Special Investigations Unit (SIU) with former law enforcement and claims professionals whose qualifications make them well 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.

We seek to attract and retain high-quality independent insurance agencies 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. This includes offering classes, usually at no cost to agencies, except travel-related expenses they may incur, and other training support. We also offer noninsurance

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financial services. We believe that providing these services enhances agency relationships with the company and their clients, increasing loyalty while diversifying the agency’s revenues.

Insurance Products

We provide well-designed property casualty and life insurance to bring policyholders convenience, discounts and a reduced risk of coverage gaps or disputes. For most agencies that represent us, we believe we offer insurance solutions for approximately 75 percent of the typical insurable risks of their clients. Products for various business lines within our reporting segments offer insurance coverage that includes business property and liability, automobile and homeowner as well as umbrella liability.

The following table shows net written premiums by segment and business line at year-end 2015, 2014 and 2013:



(Dollars in millions)	2015		2014		2013		Percent of total 2015
Segment:
Commercial lines insurance	$	3,025	$	2,922	$	2,760	65.6	%
Personal lines insurance	1,128		1,068		1,005		24.4
Excess and surplus lines insurance	175		153		128		3.8
Life insurance	256		250		241		5.5
Other	33		—		—		0.7
Total	$	4,617	$	4,393	$	4,134	100.0	%

Business line:
Commercial lines insurance
Commercial casualty	$	1,025	$	969	$	897	22.3	%
Commercial property	845		776		673		18.3
Commercial auto	575		548		507		12.5
Workers' compensation	357		365		374		7.7
Other commercial	223		264		309		4.8
Total commercial lines insurance	3,025		2,922		2,760		65.6

Personal lines insurance
Personal auto	524		489		460		11.3
Homeowner	474		456		428		10.3
Other personal	130		123		117		2.8
Total personal lines insurance	1,128		1,068		1,005		24.4

Excess and surplus lines insurance	175		153		128		3.8

Life insurance
Term life insurance	145		138		129		3.1
Universal life insurance	41		41		41		0.9
Other life insurance, annuity and disability income products	70		71		71		1.5
Subtotal	256		250		241		5.5

Cincinnati Re	33		—		—		0.7
Total	$	4,617	$	4,393	$	4,134	100.0	%

We discuss our commercial lines, personal lines and excess and surplus lines insurance segments in their respective sections later in this report.

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Strategic Initiatives to Manage Insurance Profitability and Drive Premium Growth

Management has identified a strategy 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 key strategic initiatives into two areas of focus – managing insurance profitability and driving premium growth. These areas correlate with how we measure progress toward our long-term financial objectives. We believe successful execution of our long-term strategy and related shorter-term initiatives will help us achieve our long-term objectives despite potential unfavorable 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 Management's Discussion and Analysis.

Effective capital management is an important part of creating long-term shareholder value, serving as a foundation to support other strategic areas focused on profitable growth of our insurance business. 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 strategic initiatives. Our strong capital and liquidity also provide financial flexibility for shareholder dividends or other capital management actions.

We continue to enhance our property casualty underwriting expertise and to effectively and efficiently underwrite individual policies and process transactions. Ongoing initiatives supporting this work include expanding our pricing and segmentation capabilities through experience and use of predictive analytics and additional data. Our segmentation efforts emphasize identification and retention of insurance policies we believe have relatively stronger pricing, while seeking more aggressive renewal terms and conditions on policies we believe have relatively weaker pricing. An area of concentration in 2016 is the collaborative effort to address underpriced or underperforming business, including improving underwriting and rate adequacy for our commercial auto and personal auto lines of business.

We take ongoing actions intended to improve efficiency and make it easier for agencies or their clients to do business with us. In addition to benefiting agencies we serve, improved processes support our strategy, helping to more quickly deploy product or service enhancements. They also help reduce internal costs and allow us to focus more resources on agency services, such as delivering value through local, individualized insurance solutions at the point of sale. Initiatives include improving workflow tools and processes for underwriters and enhancing solutions tailored to small business policyholders.

We also seek to further penetrate insurance markets as we strive to be the best company serving independent insurance agencies. We expect initiatives aimed at specific market opportunities, along with enhancements to provide industry-leading services, to encourage our agents to grow and to increase our share of their business. Our growth plans incorporate general business statistics and historical profitability trends to estimate premium growth from existing agencies and to make careful projections to assess the number of additional agencies needed. Our focus remains on key components of agent satisfaction based on factors that agents tell us are most important.

We continue to appoint new agencies to develop additional points of distribution. In 2016, we are planning approximately 100 appointments of independent agencies that offer most or all of our property casualty insurance products. We generally earn a 10 percent share of an agency’s business within 10 years of its appointment. See Item 1, Our Business and Our Strategy, Independent Insurance Agency Marketplace, for additional discussion.

We also plan to appoint other agencies that focus on high net worth personal lines clients. In 2016, we are targeting approximately $25 million in high net worth new business written premiums, including premiums from our Executive Capstone™ suite of insurance products and services. Over the next several years, we plan to expand that offering to agencies in additional states as we work to become the carrier of choice for this portion of our agencies’ accounts.

For all of our insurance products, we will work to increase penetration with recently appointed agencies. This includes increasing opportunities for agencies to cross-sell to their clients by providing updated products and services that aim to meet their life insurance needs. We will also continue to add field marketing representatives or provide target market expertise where needed for additional agency support in selected areas.

We expect our strategy and initiatives to contribute to our position as the No. 1 or No. 2 carrier based on premium volume in agencies that have represented us for at least five years. We continued to reach that objective in nearly

Cincinnati Financial Corporation - 2015 10-K - Page 12

75 percent of such agencies based on 2014 premiums. We are working to increase the percentage of agencies where we achieve that rank.

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 insurance


•	Personal lines insurance


•	Excess and surplus lines insurance


•	Life insurance


•	Investments

Revenues, income before income taxes and identifiable assets for each segment are shown in Item 8, Note 18 of the Consolidated Financial Statements. Some of that information is discussed in this section, 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.

Commercial Lines Insurance Segment

In 2015, the commercial lines insurance segment contributed net earned premiums of $2.996 billion, representing 58.3 percent of consolidated total revenues. This segment reported profit before income taxes of $345 million. Commercial lines net earned premiums rose 5 percent in 2015 and 8 percent in 2014.

We believe that our commercial lines business is best measured and evaluated on a segment basis. However, we also provide selected line of business data to summarize growth and profitability trends separately for our business lines. The five 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 injuries sustained from products or liability related to professional services. Specialized casualty policies may include similar coverage such as umbrella liability or employment practices. 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 other coverages such as inland marine, which covers losses related to builder’s risk, cargo or 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 government-specified benefits from work-related injuries to employees.


•	Other commercial lines – This includes several other types of insurance products for businesses, including:

◦

Management liability and surety – Includes 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 organizations and can optionally include other liability coverages. We market primarily to nonprofit organizations, privately held businesses, healthcare organizations, financial institutions and educational institutions. The for-profit portion includes approximately 250 bank or savings and loan financial institutions, with only six having assets of $1 billion or more. The surety portion includes contract and commercial surety bonds for losses resulting from dishonesty, failure to perform and other acts and also includes fidelity bonds for fraudulent acts by specified individuals or dishonest acts by employees.


◦	Specialty packages – Includes coverages for property, liability and business interruption tailored to meet the needs of specific industry classes such as artisan contractors, dentists or smaller main street businesses.

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◦	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 agencies can market to small to midsized businesses in their communities. While some of our property casualty agencies market only our personal lines or management liability and surety products, approximately 95 percent offer some or all of our standard market commercial insurance products.

In 2015, our 10 highest volume commercial lines states generated 59.3 percent of our earned premiums compared with 60.1 percent in 2014 as we continued efforts to geographically diversify our property casualty risks. Earned premiums in the 10 highest volume states increased 4 percent in 2015 and increased 7 percent in the remaining 29 states. The aggregate number of reporting agency locations in our 10 highest volume states increased to 1,101 in 2015 from 1,086 in 2014.

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, 2015
Ohio	$	433	14.4	%	247	$	1.8
Illinois	214		7.1		139	1.5
Pennsylvania	198		6.6		102	1.9
Indiana	177		5.9		114	1.6
North Carolina	149		5.0		98	1.5
Michigan	137		4.6		131	1.0
Georgia	132		4.4		89	1.5
Virginia	119		4.0		61	2.0
Tennessee	118		3.9		60	2.0
Wisconsin	103		3.4		60	1.7

For new commercial lines business, case-by-case underwriting and pricing is coordinated by our locally based field marketing representatives, who are also responsible for selecting new independent agencies. Our agents and our team of field associates get to know the people and businesses in their communities and can make informed decisions about each risk.

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. Our Target Markets department analyzes opportunities and develops new products and services, new coverage options and improvements to existing insurance products.

Understanding evolving market conditions is a critical function for our success, accomplished through both informal commentary and formal reviews. Informally, our field marketing representatives, underwriters and Target Markets department associates routinely receive market intelligence from a variety of channels, including from the agencies with which they work. 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.

Our emphasis on small to midsized businesses is reflected in the mix of our commercial lines premium volume by policy size. Approximately 80 percent of our commercial in-force policies have annual premiums of $10,000 or less, accounting in total for approximately one-quarter of our 2015 commercial lines premium volume. The remainder of

Cincinnati Financial Corporation - 2015 10-K - Page 14

policies have annual premiums greater than $10,000, including policies with annual premiums greater than $100,000 that account for approximately 18 percent of our 2015 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 2015 commercial premiums were subject to annual rating or were written on a one-year policy term. That 75 percent includes approximately one-third of policies offered on a three-year policy term that expire during any given year.

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, 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 2015, we estimated that policyholders with a contractor-related Insurance Services Office (ISO) general liability code accounted for approximately 36 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 51 percent of our workers’ compensation premiums.

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Personal Lines Insurance Segment

The personal lines insurance segment contributed net earned premiums of $1.097 billion to consolidated total revenues, or 21.3 percent of the total, and reported a loss before income taxes of $12 million in 2015. Personal lines net earned premiums rose 5 percent in 2015 and 8 percent in 2014.

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 2015, for example, 82.6 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.


•	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 other types of insurance products we offer to individuals, including dwelling fire, inland marine, personal umbrella liability and watercraft coverages.

At year-end 2015, we marketed personal lines insurance products through 1,413, or approximately 72 percent, of our 1,956 reporting agency locations. The 1,413 personal lines agency locations are in 31 of the 39 states in which we offered standard market commercial lines insurance. Those agencies produced more than 1.1 million personal lines 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.

We also continue to expand 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 2015, our appointed agencies produced for us nearly $150 million in annual premiums from policyholders with insured home values of $1 million or more. We estimate those policyholders represent approximately 4 percent of our total personal lines policyholders.

In 2015, our 10 highest volume personal lines states generated 78.5 percent of our earned premiums compared with 79.1 percent in 2014. Earned premiums in the five highest volume states increased 3 percent in 2015 while increasing 8 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 to 883 in 2015 from 875 in 2014.

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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, 2015
Ohio	$	290	26.4	%	226	$	1.3
Georgia	91		8.2		85	1.1
Indiana	77		7.0		88	0.9
Michigan	75		6.9		110	0.7
Illinois	70		6.4		98	0.7
North Carolina	64		5.8		84	0.8
Alabama	57		5.2		46	1.2
Kentucky	53		4.8		40	1.3
Tennessee	44		4.0		50	0.9
Minnesota	41		3.8		56	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 agency 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 2015, we had 10 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.

Excess and Surplus Lines Insurance Segment

The excess and surplus lines segment contributed net earned premiums of $168 million to consolidated total revenues, or 3.3 percent of the total, and reported profit before income taxes of $51 million in 2015, its eighth year of operation. Excess and surplus lines net earned premium increased 14 percent in 2015 and 28 percent in 2014.

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, and policyholders in many cases also have standard market insurance with one of our other subsidiaries. Our average excess and surplus lines policy size is approximately $6,000 in annual premiums, and the majority have coverage limits of $1 million or less. All of our excess and surplus lines policies are written for a maximum term of one year. Approximately 88 percent of our 2015 earned premiums for the excess and surplus lines insurance segment provided commercial casualty coverages and about 12 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 injuries sustained from products. Other coverages available include miscellaneous errors and omissions, professional liability and excess liability. 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 2015, 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

Cincinnati Financial Corporation - 2015 10-K - Page 17

standard market. By providing outstanding service, we can help agencies grow and prosper while also profitably growing our property casualty business.

In 2015, our 10 highest volume excess and surplus lines states generated 59.2 percent of our earned premiums compared with 60.5 percent in 2014.

Our 10 highest premium volume excess and surplus lines states are shown in the table below.



(Dollars in millions)	Earned premiums		% of total earned
Year ended December 31, 2015
Texas	$	15	9.2	%
Ohio	14		8.6
Illinois	12		7.4
Indiana	11		6.8
Georgia	10		6.0
Alabama	8		4.8
Michigan	8		4.6
Missouri	7		4.1
North Carolina	7		3.9
Pennsylvania	6		3.8

Agencies representing The Cincinnati Insurance Companies produce approximately $3 billion in annual premiums for all carriers writing excess and surplus lines 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 Cincinnati Specialty Underwriters' product line through CSU Producer Resources, the wholly owned insurance brokerage subsidiary of Cincinnati Financial Corporation. CSU Producer Resources has binding authority on all classes of business written through Cincinnati Specialty Underwriters and maintains appropriate agent and surplus lines licenses to process nonadmitted 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 broader Cincinnati services to provide policyholders additional 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 factored in their profit-sharing agreement with The Cincinnati Insurance Companies. We also offer prompt service, generally issuing approximately 95 percent of policies within 24 hours of a request to bind a policy.

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Life Insurance Segment

The life insurance segment contributed $209 million of net earned premiums, representing 4.1 percent of consolidated total revenues, and reported a loss before income taxes of $2 million in 2015. Life insurance net earned premiums grew 6 percent in 2015 and 5 percent in 2014.

The Cincinnati Life Insurance Company supports our agency-centered business model by deepening the relationships we have with agents while also diversifying revenue and profitability for both the agency and our company. 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.

Life Insurance Business Lines

Four lines of business – term life insurance, universal life insurance, worksite products and whole life insurance – account for 95.6 percent of the life insurance segment’s revenues:


•	Term life insurance – Policies under which a death benefit is payable only if the insured dies during a specific period of time. Policy options include a return of premium provision, a benefit equal to the sum of all paid base premiums that is payable if the insured person survives to the end of the term. The policies are fully underwritten.

•

Universal life insurance – Long-duration life insurance policies that are fully underwritten. 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. 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.

•

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.

•

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.

Life Insurance Distribution

Our life insurance subsidiary is licensed in 49 states and the District of Columbia. At year-end 2015, almost 89 percent of our 1,956 property casualty agency reporting locations offered Cincinnati Life products to their clients. We also develop life business from approximately 650 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

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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.

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 and providing personal attention in combination with financial strength and stability.


•	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. Our life insurance company has chosen not to establish a Moody’s rating.

In 2015, 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, 2015
Ohio	$	49	18.3	%
Pennsylvania	19		7.2
Indiana	17		6.3
Illinois	17		6.2
Georgia	14		5.1

Cincinnati Financial Corporation - 2015 10-K - Page 20

Investments Segment

Revenues of the investments segment are primarily from net investment income and from net 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 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. When allocating cash to various asset classes, we consider market-based factors such as risk adjusted after-tax yields as well as internal measures based in part on insurance department regulations and rating agency guidance.

The fair value of our investment portfolio was $14.356 billion and $14.318 billion at year-end 2015 and 2014, respectively, as shown in the table below. The overall portfolio remained in an unrealized gain position as equity markets were generally flat to down in 2015. Value stocks, to which we are more correlated, experienced bigger declines than the broader stock market. The gain position for our fixed-maturity investments declined in 2015 due to a general increase in interest rates and a widening in corporate credit spreads.



(Dollars in millions)	At December 31, 2015								At December 31, 2014
	Cost or amortized cost		Percent of total				Percent of total		Cost or amortized cost		Percent of total				Percent of total
	Cost or amortized cost		Percent of total		Fair value		Percent of total		Cost or amortized cost		Percent of total		Fair value		Percent of total
Taxable fixed maturities	$	6,170	50.3	%	$	6,353	44.3	%	$	5,882	50.7	%	$	6,330	44.2	%
Tax-exempt fixed maturities	3,154		25.7		3,297		23.0		2,989		25.8		3,130		21.9
Common equity securities	2,749		22.4		4,485		31.2		2,583		22.3		4,679		32.7
Nonredeemable preferred equity securities	189		1.6		221		1.5		145		1.2		179		1.2
Total	$	12,262	100.0	%	$	14,356	100.0	%	$	11,599	100.0	%	$	14,318	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 2015, purchases offset the combined effect of a net decrease in unrealized gains, sales and calls of fixed-maturity securities in our portfolio. During 2014, purchases and fair value gains offset sales and calls.


•	Equity investments – Includes common and nonredeemable preferred stocks. During 2015, the combined effect of a net decrease in unrealized gains and sales of equity securities in our portfolio offset purchases. During 2014, purchases and fair value gains offset sales by a relatively large amount.

At year-end 2015, 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, and Item 8, Note 3 of the Consolidated Financial Statements, for additional discussion of our valuation techniques.

In addition to securities held in our investment portfolio, at year-end 2015, other invested assets included $31 million of life policy loans and $36 million of private 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 - 2015 10-K - Page 21

Fixed-Maturity Securities Investments

By maintaining a well-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.

At December 31, 2015, our investment-grade and noninvestment-grade fixed-maturity securities represented 91.8 percent and 4.1 percent of the portfolio, respectively. The remaining 4.1 percent represented fixed-maturity securities that were not rated by Moody’s or Standard & Poor’s. Our nonrated securities include smaller municipal issues and private placement corporate securities. Many of these, although not rated 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 rating by an agency other than Moody’s or S&P, such as Fitch or Kroll.

Other selected attributes of the fixed-maturity portfolio are shown in 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.



	At December 31,
	2015		2014
Weighted average yield-to-amortized cost	4.70	%	4.76	%
Weighted average maturity	6.9	yrs	6.4	yrs
Effective duration	4.7	yrs	4.4	yrs

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



(Dollars in millions)	At December 31,
	2015		2014
Investment-grade corporate	$	5,060	$	5,208
States, municipalities and political subdivisions	314		313
Below investment-grade corporate	393		318
Commercial mortgage-backed	289		259
Government-sponsored enterprises	278		208
Foreign government	10		10
Convertibles and bonds with warrants attached	5		7
United States government	4		7
Total	$	6,353	$	6,330

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 0.9 percent of the taxable fixed-maturity portfolio at year-end 2015. Investment-grade corporate bonds had an average rating of Baa1 by Moody’s or BBB+ by Standard & Poor’s at year-end 2015. Most of the $314 million of securities issued by states, municipalities and political subdivisions included in our taxable fixed-maturity portfolio at the end of 2015 were Build America Bonds.

The investment-grade corporate bond portfolio is most heavily concentrated in financial-related sectors, representing 37.9 percent of fair value of this portfolio at year-end 2015. We believe our concentration is below the average for the corporate bond market as a whole. The real estate sector, including commercial mortgage-backed securities, accounted for 15.2 percent and the insurance sector accounted for 13.3 percent. No other sector exceeded 10 percent of our investment-grade corporate bond portfolio at year-end 2015.

At December 31, 2015, we had $3.297 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody’s and Standard & Poor’s. The portfolio is well diversified among more than 1,400 municipal bond

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issues. No single municipal issuer accounted for more than 0.8 percent of the tax-exempt fixed-maturity portfolio at year-end 2015.

Equity Securities Investments

After covering both our intermediate and long-range insurance obligations with fixed-maturity investments, we historically have used some available cash flow to invest in equity securities. Our equity securities portfolio includes common stocks and nonredeemable preferred stocks. 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. We believe our strategy of primarily investing in a diversified selection of larger-capitalization, high-quality, dividend-increasing companies generally results in reduced volatility relative to the broader equity markets.

At year-end 2015, no holding had a fair value greater than 3.3 percent of our publicly traded common stock portfolio. JP Morgan Chase & Co. (NYSE:JPM) was our largest single common stock investment

, comprising 3.3 percent of our publicly traded common stock portfolio and 1.0 percent of the entire investment portfolio. The parent company holds 35.2 percent of our common stock holdings (measured by fair value). 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, 2015				At December 31, 2014
	Cincinnati Financial		S&P 500 Industry Weightings		Cincinnati Financial		S&P 500 Industry Weightings
Sector:
Information technology	18.4	%	20.7	%	17.3	%	19.8	%
Financial	15.4		16.5		13.8		16.3
Industrials	14.0		10.0		14.3		10.3
Healthcare	12.2		15.1		11.9		14.7
Consumer staples	11.0		10.1		10.5		10.0
Consumer discretionary	10.6		12.9		10.2		12.1
Energy	7.7		6.5		10.5		8.0
Materials	4.9		2.8		5.5		3.2
Utilities	3.8		3.0		3.7		3.3
Telecomm services	2.0		2.4		2.3		2.3
Total	100.0	%	100.0	%	100.0	%	100.0	%

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 purchased $65 million and sold $20 million in this portfolio in 2015. During 2014, we purchased $20 million and sold $2 million.

Other

We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary CFC Investment Company. At year-end 2015, this subsidiary had $62 million in receivables related to its commercial leasing and financing services, compared with $75 million in receivables at year-end 2014.

Beginning in 2015, we also reported results of our reinsurance assumed operations, known as Cincinnati Re, that are conducted through The Cincinnati Insurance Company. At January 1, 2016, 16 reinsurance treaties arranged through our expanded reinsurance assumed operations were in effect, representing treaty-year net written premiums of approximately $50 million. The treaties and their exposure to losses are diverse in nature, including various lines of business and geographies for the reinsured risks. Some of our treaties reflect a type of contract commonly referred to as participating, typically sharing premiums and losses between the reinsured entity and us,

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as reinsurer, on a pro rata basis. Some are a contract type commonly referred to as excess of loss, where we indemnify the reinsured entity only for losses exceeding a predetermined amount. Exposure to losses from our reinsurance assumed treaties include catastrophic and terrorism events. The largest loss exposure to us among these treaties has an aggregate catastrophe treaty limit of up to $95 million per year.

We also continue to participate in two assumed reinsurance treaties with R.J. Kiln & Company Limited, a reinsurer that spreads its 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. Our loss exposure from a single event was $2 million each for the First Surplus and Second Surplus treaties, at the end of both 2015 and 2014.

Regulation

The business of insurance is primarily 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 primarily governed by the insurance laws and regulations in its respective state of domicile. We also are subject to 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. Information about the risks posed by any noninsurance company subsidiaries must also be disclosed. 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 fully owned by Cincinnati Financial Corporation. The dividend-paying capacity of The Cincinnati Insurance Company and its fully 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 of 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 2015 in Item 8, Note 9 of the Consolidated Financial 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: 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 nonrenewals; 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. Our primary insurance regulators have 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.

Cincinnati Financial Corporation - 2015 10-K - Page 24

•

Insurance Guaranty Associations – For certain obligations of insolvent insurance companies to policyholders and claimants, states assess each member insurer in an amount relative to the insurer’s proportionate share of business written by all member insurers in the state. While the amount of such assessments has not been material in recent years, 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 – Assigned risk plans, reinsurance facilities and joint underwriting associations are mechanisms that generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. States can require participation based upon the amount of an insurance company’s voluntary market share, and underwriting results related to these pools 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 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.

•

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 federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and other qualifications. At December 31, 2015, the company believed it was in compliance with these laws and regulations in all material respects.

•

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 can 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 nonpublic 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 that affects the United States’ financial system and to recommend to the Financial Stability Oversight Council 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.

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

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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 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 the 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.

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, 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 primarily on independent insurance agents to distribute our products.

We market our main products, insurance policies for businesses and individuals, through independent, nonexclusive 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 agents and their clients. We need to maintain good relationships with the agents that market our products. If we do not, these agents 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.

In addition to insurance policies for businesses and individuals, a relatively small part of our business is reinsuring policies written by other insurance companies. Reinsurance assumed is marketed through reinsurance intermediaries and is generally not offered by the typical independent agents who market our insurance policies.

Certain events or conditions could diminish our agents’ desire to produce business for us and the competitive advantage that our independent agents 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 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.

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•	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.

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 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’ 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, for additional discussion of ratings for our long-term debt.

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, both in our insurance and reinsurance operations, we provide coverage against perils for which estimates of losses are highly uncertain, in particular catastrophic and terrorism events. Catastrophes can be man-made or caused by natural perils. Man-made catastrophes to which we may be exposed include, but are not limited to, industrial accidents, terrorist attacks, social unrest and riot. Natural peril catastrophe events to which we may be exposed include, but are not limited to, hurricanes, tornadoes, windstorms, earthquakes, landslides, hailstorms, flooding, severe winter weather and wildfires. 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 and reinsured 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, 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, Liquidity and Capital Resources, 2016 Reinsurance Programs, for a discussion of modeled losses considered in evaluating our risk mitigation strategy, which includes our ceded reinsurance program.

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


•	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.


•	On a worldwide basis, in the event of a severe catastrophic event or terrorist attack we may be exposed to material losses through our reinsurance assumed operations.

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 our insurance policies provide 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, New York, Dallas, 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.

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 is expanding in the area of assumed reinsurance and has hired a number of individuals to build a professional reinsurance operation. Business written includes treaties that provide coverage for property catastrophe and terrorism events on a worldwide basis. The largest loss exposure to us among these treaties has an aggregate catastrophe treaty limit of up to $95 million per year. If there is a high frequency of large property catastrophe or terrorism events, or a single extreme event, during the coverage period of these treaties, our financial position and results of operations could be materially affected.

Additionally, the companies we invest in might be severely affected by a severe catastrophic event or terrorist attack, 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.

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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 Management’s Discussion and Analysis.

For fixed-maturity investments such as bonds, which represented 67.3 percent of the fair value of our investment portfolio at the end of 2015, 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.

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, economic growth, interest rates, world political conditions, changes in laws and regulations, terrorism attacks or threats, adverse events affecting other companies in our industry or the industries in which we invest, market events leading to credit 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 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.

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.

At year-end 2015, common stock holdings made up 31.2 percent of our 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, and Item 7A, Quantitative and Qualitative Disclosures About Market Risk, 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.

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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 states where we write business refuse to allow rate increases that we believe are necessary to cover the risks insured or no longer allow us to use factors that we believe are predictive of loss, such as credit-based factors. 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

We compete with major U.S., Bermuda, European, and other international insurers and reinsurers and with underwriting syndicates, some of which have greater financial, marketing and management resources than we do. Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources. We also compete with new companies that continue to enter the insurance and reinsurance markets. In addition, capital market participants have created alternative products that are intended to compete with reinsurance products that we sell in our reinsurance assumed operations. Increased competition could result in fewer submissions, lower premium rates, and less favorable policy terms and conditions, which could reduce our underwriting margins and have a material adverse effect on our results of operations and financial condition.

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If our pricing was 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, 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 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. They are also subject to uncertainties and limitations inherent in any statistical analysis. Actual results may be materially different 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.

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, 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, and Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves and Life Insurance Policy 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.

Unforeseen losses, the type and magnitude of which we cannot predict, may emerge. 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.

In addition to the risks stated above, reinsurance assumed reserves are subject to uncertainty because a reinsurer relies on the original underwriting decisions made by ceding companies. As a result, we are subject to the risk that our ceding companies may not have adequately evaluated the risks reinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. In addition, there is generally a longer lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer and ultimate resolution or settlement of the loss.

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

Cincinnati Financial Corporation - 2015 10-K - Page 31

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.

Please see Item 7, Liquidity and Capital Resources, 2016 Reinsurance Ceded Programs, for a discussion of selected reinsurance transactions.

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 68 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. 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, by varying assumptions underlying our critical accounting 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.

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.

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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 and the influence of international laws and regulations, including those that may be enacted in the wake of the financial and credit crises, may have adverse effects 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 nonbank 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, 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 costs 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.

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 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 commercially 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 cybercrime. Increasing sophistication of cyber 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 or the security of a vendor 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.

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.

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Dividends received from our insurance subsidiary are restricted by the insurance laws of Ohio, its domiciliary state. These laws establish minimum solvency and liquidity thresholds and limits. In 2016, the maximum dividend that may be paid without prior regulatory approval is 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. 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, and Item 8, Note 9 of the Consolidated Financial Statements, for a discussion of insurance holding company dividend regulations.

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ITEM 1B. Unresolved Staff Comments

None

ITEM 2. Properties

Cincinnati Financial Corporation owns our headquarters building located on 100 acres of land in Fairfield, Ohio. This building has 1,508,200 square feet of total space. The property, including land, is carried in our financial statements at $134 million at December 31, 2015, and is classified as land, building and equipment, net, for company use. John J. & Thomas R. Schiff & Co. Inc., a related party, occupies 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 owns Gilmore Pointe, located on the northwest corner of our headquarters property. This four-story building contains approximately 103,000 square feet of usable space. The property is carried in the financial statements at $5 million at December 31, 2015, and is classified as land, building and equipment, net, for company use. Unaffiliated tenants occupied 7 percent of the usable square footage at year end December 31, 2015. This property is used by all segments reported in the Consolidated Financial Statements and accompanying Notes. On January 25, 2016, the company entered into a leasing agreement with a new tenant that will be leasing 61,000 square feet of usable space beginning during the third quarter of 2016. Once the new tenant takes occupancy, 66 percent of the usable square footage will be occupied by unaffiliated tenants.

The Cincinnati Insurance Company owns the CFC Winton Center used for business continuity, with approximately 48,000 square feet of total space, located approximately six miles from our headquarters. The property, including land, is carried on our financial statements at $9 million at December 31, 2015, 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

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

This item is not applicable to the company.

Cincinnati Financial Corporation - 2015 10-K - Page 35

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 71,500 shareholders of record as of December 31, 2015. While approximately 13,000 shareholders are registered, the majority of shareholders are beneficial owners whose shares are held in “street name” by brokers and institutional accounts. We believe many of our independent agent representatives and most of the 4,493 associates of our subsidiaries own the company’s common stock.

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



(Source: Nasdaq Global Select Market)	2015								2014
Quarter:	1^st		2^nd		3^rd		4^th		1^st		2^nd		3^rd		4^th
High	$	54.92	$	54.25	$	56.94	$	61.59	$	52.19	$	49.73	$	48.86	$	55.35
Low	50.12		49.74		49.72		52.63		44.90		47.00		45.69		45.09
Period-end close	53.28		50.18		53.80		59.17		48.66		48.04		47.05		51.83
Cash dividends declared	0.46		0.46		0.46		0.92		0.44		0.44		0.44		0.44

We discuss the factors that affect our ability to pay cash dividends and repurchase shares in Item 7, Liquidity and Capital Resources. Regulatory restrictions on dividends our insurance subsidiary can pay to the parent company are discussed in Item 8, Note 9 of the Consolidated Financial Statements.

The following summarizes securities authorized for issuance under our equity compensation plans as of December 31, 2015:



Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights at December 31, 2015	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, 2015
	(a)	(b)		(c)
Equity compensation plans approved by security holders	3,872,021	$	39.78	4,697,091
Equity compensation plans not approved by security holders	—	—		—
Total	3,872,021	$	39.78	4,697,091

The number of securities remaining available for future issuance assumes performance-based awards are issued at the target-level performance level and includes: 4,095,307 shares available for issuance under the Cincinnati Financial Corporation 2012 Stock Compensation Plan (the 2012 Plan), 444,707 shares available for issuance under the Cincinnati Financial Corporation 2006 Stock Compensation Plan (the 2006 Plan), and 157,077 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. Awards other than stock options and stock appreciation rights granted from the 2012 and 2006 plans are counted as three shares against the plan for each one share of common stock actually issued. Additional information about share-based associate compensation granted under our equity compensation plans is available in Item 8, Note 17 of the Consolidated Financial Statements.

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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, 2015	—	—		—	5,099,493
February 1-28, 2015	—	—		—	5,099,493
March 1-31, 2015	—	—		—	5,099,493
April 1-30, 2015	100,000	$	50.69	100,000	4,999,493
May 1-31, 2015	300,000	50.98		300,000	4,699,493
June 1-30, 2015	—	—		—	4,699,493
July 1-31, 2015	—	—		—	4,699,493
August 1-31, 2015	300,000	51.83		300,000	4,399,493
September 1-30, 2015	100,000	51.47		100,000	4,299,493
October 1-31, 2015	—	—		—	4,299,493
November 1-30, 2015	—	—		—	4,299,493
December 1-31, 2015	200,000	60.11		200,000	4,099,493
Totals	1,000,000	53.08		1,000,000

We did not sell any of our shares that were not registered under the Securities Act during 2015. The board of directors has authorized share repurchases since 1996. Purchases are expected to be made generally through open market transactions. The board gives management discretion to purchase shares at reasonable prices in light of circumstances at the time of purchase, subject to SEC regulations. On October 24, 2007, the board of directors expanded the repurchase authorization to approximately 13 million shares. We have 4,099,493 shares available for purchase under our programs at December 31, 2015.

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Cumulative Total Return

As depicted in the graph below, the five-year total return on a $100 investment made December 31, 2010, assuming the reinvestment of all dividends, was 130.1 percent for Cincinnati Financial Corporation’s common stock compared with 110.3 percent for the Standard & Poor’s Composite 1500 Property & Casualty Insurance Index and 80.8 percent for the Standard & Poor’s 500 Index.

The Standard & Poor’s Composite 1500 Property & Casualty Insurance Index included 26 companies at year-end 2015: Ace Limited, The Allstate Corporation, Amerisafe Inc., Aspen Insurance Holdings Limited, W. R. Berkley Corporation, The Chubb Corporation, Cincinnati Financial Corporation, Employers Holdings Inc., First American Financial Corporation, The Hanover Insurance Group Inc., HCI Group Inc., Infinity Property and Casualty Corporation, 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, The Travelers Companies Inc., United Fire & Casualty Company, United Insurance Holdings Corporation, 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.

Comparison of Five-Year Cumulative Total Return*

*$100 invested on December 31, 2010, in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.

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ITEM 6. Selected Financial Data



(In millions except per share data and shares outstanding in thousands)	Years ended December 31,
	2015			2014			2013			2012			2011
Consolidated Income Statement Data
Earned premiums	$	4,480		$	4,243		$	3,902		$	3,522		$	3,194
Investment income, net of expenses	572			549			529			531			525
Realized investment gains, net*	70			133			83			42			70
Total revenues	5,142			4,945			4,531			4,111			3,803
Net income	634			525			517			421			164
Net income per common share:
Basic	$	3.87		$	3.21		$	3.16		$	2.59		$	1.01
Diluted	3.83			3.18			3.12			2.57			1.01
Cash dividends per common share:
Ordinary declared	1.84			1.76			1.655			1.62			1.605
Ordinary paid	1.82			1.74			1.6425			1.615			1.6025
Special declared and paid	0.46			—			—			—			—
Diluted weighted average shares outstanding	165.6			165.1			165.4			163.7			163.3
Consolidated Balance Sheet Data
Total investments	$	14,423		$	14,386		$	13,564		$	12,534		$	11,801
Net unrealized investment portfolio gains	2,094			2,719			2,335			1,875			1,489
Deferred policy acquisition costs	616			578			565			470			477
Total assets	18,888			18,748			17,657			16,543			15,630
Gross loss and loss expense reserves	4,718			4,485			4,311			4,230			4,339
Life policy and investment contract reserves	2,583			2,497			2,390			2,295			2,214
Long-term debt	786			786			785			785			785
Shareholders' equity	6,427			6,573			6,070			5,453			5,033
Book value per share	39.20			40.14			37.21			33.48			31.03
Shares outstanding	163,944			163,747			163,109			162,874			162,186
Value creation ratio	3.4		%	12.6		%	16.1		%	12.6		%	6.0		%
Consolidated Property Casualty Operations Data
Earned premiums	$	4,271		$	4,045		$	3,713		$	3,344		$	3,029
Unearned premiums	2,200			2,081			1,970			1,790			1,631
Gross loss and loss expense reserves	4,660			4,438			4,241			4,169			4,280
Investment income, net of expenses	368			358			348			351			350
Loss and loss expense ratio	60.2		%	65.0		%	61.9		%	63.9		%	77.0		%
Underwriting expense ratio	30.9			30.6			31.9			32.2			32.3
Combined ratio	91.1		%	95.6		%	93.8		%	96.1		%	109.3		%

We retrospectively adopted ASU 2015-15, Interest-Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, as of December 31, 2015. All prior year information has been restated.

On January 1, 2012, we retrospectively adopted ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. All prior year information has been restated.

* 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.

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

Introduction

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

We begin with an executive summary of our results of operations, followed by other highlights, an overview of our strategy, an outlook for future performance and details on critical accounting estimates. In several instances, we refer to estimated industry data so that we can provide information on our performance within the context of the overall insurance industry. Unless otherwise noted, the industry data is prepared by A.M. Best 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).

Through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on net written premium volume for the first nine months of 2015, 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.

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

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

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, 2015	3.4	%	10.7	%	10.1	%
As of December 31, 2014	12.6		13.8		11.7
As of December 31, 2013	16.1		11.6		13.1

For the period 2013 through 2017, we are targeting an annual value creation ratio averaging 10 percent to 13 percent. We were below that range for 2015, but within it for the three-year and five-year periods that ended in December 2015. 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. Although a similar contribution was

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not expected to occur in the subsequent five-year period, as indicated by a significant negative effect in both 2013 and 2015, management continues to believe 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,
	2015		2014		2013
Value creation ratio major components:
Net income before net realized gains	8.9	%	7.2	%	8.5	%
Change in fixed-maturity securities, realized and unrealized gains	(2.6	)	1.2		(4.5	)
Change in equity securities, realized and unrealized gains	(2.9	)	4.3		10.9
Other	0.0		(0.1	)	1.2
Value creation ratio	3.4	%	12.6	%	16.1	%

The 2015 value creation ratio included strong operating results as its primary contributor, offsetting negative contributions from both our fixed-maturity and equity securities investment portfolios due to a decline in market valuations for much of the year. 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 in aggregate was 0.9 points lower. The 2013 VCR included very favorable contributions from both operating results and a rising valuation for our equity securities investment portfolio, partially offset by an unfavorable valuation effect from our fixed-maturity securities portfolio. It 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 that effect in 2014 and 2015 was minimal.



(Dollars are per share)	Years ended December 31,
	2015			2014			2013
Book value change per share:
End of period book value	$	39.20		$	40.14		$	37.21
Less beginning of period book value	40.14			37.21			33.48
Change in book value	$	(0.94	)	$	2.93		$	3.73

Change in book value:
Net income before realized gains	$	3.59		$	2.69		$	2.84
Change in fixed-maturity securities, realized and unrealized gains	(1.04		)	0.43			(1.50		)
Change in equity securities, realized and unrealized gains	(1.16		)	1.61			3.64
Dividend declared to shareholders	(2.30		)	(1.76		)	(1.66		)
Other	(0.03		)	(0.04		)	0.41
Change in book value	$	(0.94	)	$	2.93		$	3.73

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 in recent years, the long-term nature of this measure provides a meaningful measure of our long-term progress in creating shareholder value. A reconciliation of this non-GAAP measure to comparable GAAP measures is shown in the table below.

Cincinnati Financial Corporation - 2015 10-K - Page 41



(Dollars are per share)	Years ended December 31,
	2015			2014			2013
Value creation ratio:
End of year book value	$	39.20		$	40.14		$	37.21
Less beginning of year book value	40.14			37.21			33.48
Change in book value	(0.94		)	2.93			3.73
Dividend declared to shareholders	2.30			1.76			1.655
Total value creation	$	1.36		$	4.69		$	5.385

Value creation ratio from change in book value*	(2.3		)%	7.9		%	11.1		%
Value creation ratio from dividends declared to shareholders**	5.7			4.7			5.0
Value creation ratio	3.4		%	12.6		%	16.1		%

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

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

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

•

Premium growth – We believe over any five-year period our agency relationships and initiatives can lead to a property casualty written premium growth rate that exceeds the industry average. The compound annual growth rate of our net written premiums was 8.0 percent over the five-year period 2011 through 2015, approximately double the 3.8 percent estimated growth rate for the property casualty insurance industry. The industry’s growth rate excludes its mortgage and financial guaranty lines of business. In late 2011, we established a long-term target for profitable premium growth of our property casualty and life insurance segments in aggregate. In 2015, our direct written premiums totaled $4.739 billion, less than the target of $5 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 97.2 percent over the five-year period 2011 through 2015. Performance as measured by the combined ratio is discussed in Consolidated Property Casualty Insurance Results. Our statutory combined ratio averaged 96.5 percent over the five-year period 2011 through 2015 compared with an estimated 100.2 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.


◦	Investment income growth, on a pretax basis, had a compound annual growth rate of 2.0 percent over the five-year period 2011 through 2015. It has grown every year since 2009, except for 2013 with its slight decrease of less than 1 percent.

◦

Over the five years ended December 31, 2015, our equity portfolio compound annual total return was 10.9 percent compared with a compound annual total return of 12.6 percent for the Index. Our equity portfolio favors larger-capitalization, high-quality, dividend growing stocks with a value orientation. In recent years, returns for this type of stocks have generally lagged the broader market. For the year 2015, our annual equity portfolio total return was negative 3.6 percent, compared with positive 1.4 percent for the Index.

The board of directors is committed to rewarding shareholders directly through cash dividends and share repurchase authorizations. Through 2015, the company has increased the annual cash dividend rate for 55 consecutive years, a record we believe is matched by only eight other publicly traded U.S. companies. In addition to regular dividends, excellent company performance provided the opportunity to further reward shareholders and was the main driver of a special dividend paid in December 2015. The board regularly evaluates relevant factors in dividend-related decisions, and the 2015 increase to the regular dividend and the special dividend reflected confidence in our strong capital, liquidity and financial flexibility, as well as progress through our initiatives to improve earnings performance while growing insurance premium revenues. We discuss our financial position in more detail in Liquidity and Capital Resources.

Cincinnati Financial Corporation - 2015 10-K - Page 42

Corporate Financial Highlights

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

Balance Sheet Data



(Dollars in millions except share data)	At December 31,			At December 31,
	2015			2014
Balance sheet data:
Total investments	$	14,423		$	14,386
Total assets	18,888			18,748
Short-term debt	35			49
Long-term debt	786			786
Shareholders' equity	6,427			6,573
Book value per share	39.20			40.14
Debt-to-total-capital ratio	11.3		%	11.3		%

Total investments rose by less than 1 percent during 2015 on a fair value basis, with a net decline in our securities portfolio valuation that nearly offset the 6 percent increase in its cost basis. Entering 2016, we believe the portfolio continues to be well diversified and is well positioned to withstand short-term fluctuations. We discuss our investment strategy in Item 1, Investments Segment, and results for the segment in Investments Results. Total assets also rose less than 1 percent. Shareholders’ equity and book value per share each decreased by 2 percent, for reasons discussed in the preceding Executive Summary.

The amount of our debt obligations decreased by $14 million in 2015, compared with 2014. Our 11.3 percent ratio of debt to total capital (debt plus shareholders’ equity) at year-end 2015 matched the prior-year ratio and remained comfortably within our target range.

Income Statement and Per Share Data



(Dollars in millions except per share data)	Years ended December 31,							2015-2014		2014-2013
	2015			2014		2013		Change %		Change %
Net income and comprehensive income data:
Earned premiums	$	4,480		$	4,243	$	3,902	6		9
Investment income, net of expenses (pretax)	572			549		529		4		4
Realized investment gains, net (pretax)	70			133		83		(47	)	60
Total revenues	5,142			4,945		4,531		4		9
Net income	634			525		517		21		2
Comprehensive income	234			765		892		(69	)	(14	)
Net income per share - diluted	3.83			3.18		3.12		20		2
Cash dividends declared per share	2.30			1.76		1.655		31		6
Diluted weighted average shares outstanding	165.6			165.1		165.4		0		0
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