Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(Mark one)
þ        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the quarterly period ended September 30, 2018.
 
¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the transition period from _____________________ to _____________________.
Commission file number 0-4604
 
CINCINNATI FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Ohio
 
31-0746871
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification
No.)
 
 
 
6200 S. Gilmore Road, Fairfield, Ohio
 
45014-5141
(Address of principal executive offices)
 
(Zip code)
 
Registrant’s telephone number, including area code: (513) 870-2000
 
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. 
þYes ¨ No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
þYes ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
þ Large accelerated filer ¨ Accelerated filer ¨ Nonaccelerated filer ¨ Smaller reporting company
¨ Emerging growth company

¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
¨Yes þ No
 
As of October 19, 2018, there were 162,737,705 shares of common stock outstanding.




CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2018
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Results
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 2


Part I – Financial Information
Item 1.    Financial Statements (unaudited)
 
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in millions, except per share data)
 
September 30,
 
December 31,
 
 
2018
 
2017
Assets
 
 

 
 

Investments
 
 

 
 

Fixed maturities, at fair value (amortized cost: 2018—$10,653; 2017—$10,314)
 
$
10,660

 
$
10,699

Equity securities, at fair value (cost: 2018—$3,294; 2017—$3,094)
 
6,663

 
6,249

Other invested assets
 
110

 
103

Total investments
 
17,433

 
17,051

Cash and cash equivalents
 
616

 
657

Investment income receivable
 
129

 
134

Finance receivable
 
69

 
61

Premiums receivable
 
1,709

 
1,589

Reinsurance recoverable
 
424

 
432

Prepaid reinsurance premiums
 
44

 
42

Deferred policy acquisition costs
 
743

 
670

Land, building and equipment, net, for company use (accumulated depreciation:
   2018—$259; 2017—$253)
 
191

 
185

Other assets
 
327

 
216

Separate accounts
 
795

 
806

Total assets
 
$
22,480

 
$
21,843

 
 
 
 
 
Liabilities
 
 

 
 

Insurance reserves
 
 

 
 

Loss and loss expense reserves
 
$
5,578

 
$
5,273

Life policy and investment contract reserves
 
2,770

 
2,729

Unearned premiums
 
2,591

 
2,404

Other liabilities
 
755

 
792

Deferred income tax
 
797

 
745

Note payable
 
30

 
24

Long-term debt and capital lease obligations
 
830

 
827

Separate accounts
 
795

 
806

Total liabilities
 
14,146

 
13,600

 
 
 
 
 
Commitments and contingent liabilities (Note 12)
 


 


 
 
 
 
 
Shareholders' Equity
 
 

 
 

Common stock, par value—$2 per share; (authorized: 2018 and 2017—500 million
   shares; issued: 2018 and 2017—198.3 million shares)
 
397

 
397

Paid-in capital
 
1,273

 
1,265

Retained earnings
 
8,164

 
5,180

Accumulated other comprehensive income (loss)
 
(4
)
 
2,788

Treasury stock at cost (2018—35.6 million shares and 2017—34.4 million shares)
 
(1,496
)
 
(1,387
)
Total shareholders' equity
 
8,334

 
8,243

Total liabilities and shareholders' equity
 
$
22,480

 
$
21,843

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


Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 3


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Dollars in millions, except per share data)
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 

 
 

 
 

 
 

Earned premiums
$
1,298

 
$
1,247

 
$
3,852

 
$
3,696

Investment income, net of expenses
154

 
153

 
458

 
453

Investment gains and losses, net
458

 
7

 
372

 
156

Fee revenues
3

 
3

 
11

 
12

Other revenues
2

 
2

 
4

 
4

Total revenues
1,915

 
1,412

 
4,697

 
4,321

Benefits and Expenses
 

 
 

 
 

 
 

Insurance losses and contract holders' benefits
879

 
874

 
2,616

 
2,581

Underwriting, acquisition and insurance expenses
401

 
393

 
1,199

 
1,157

Interest expense
14

 
13

 
40

 
39

Other operating expenses
3

 
3

 
10

 
11

 Total benefits and expenses
1,297

 
1,283

 
3,865

 
3,788

Income Before Income Taxes
618

 
129

 
832

 
533

Provision (Benefit) for Income Taxes
 

 
 

 
 

 
 

Current
(98
)
 
27

 
(37
)
 
98

Deferred
163

 
—

 
130

 
32

Total provision for income taxes
65

 
27

 
93

 
130

Net Income
$
553

 
$
102

 
$
739

 
$
403

Per Common Share
 

 
 

 
 

 
 

Net income—basic
$
3.40

 
$
0.62

 
$
4.53

 
$
2.45

Net income—diluted
3.38

 
0.61

 
4.49

 
2.42

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

Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 4


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Net Income
 
$
553

 
$
102

 
$
739

 
$
403

Other Comprehensive Income (Loss)
 
 

 
 

 
 

 
 

Change in unrealized gains on investments, net of tax
  (benefit) of ($17), $66, ($81) and $189, respectively
 
(60
)
 
123

 
(297
)
 
352

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

 
—

 
1

 
1

Change in life deferred acquisition costs, life policy
  reserves and other, net of tax of $0, ($1), $2 and $0,
  respectively
 
1

 
(1
)
 
7

 
1

Other comprehensive income (loss)
 
(59
)
 
122

 
(289
)
 
354

Comprehensive Income
 
$
494

 
$
224

 
$
450

 
$
757

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


Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 5


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in millions)
 
Nine months ended September 30,
 
 
2018
 
2017
Common Stock
 
 
 
 
   Beginning of year
 
$
397

 
$
397

   Share-based awards
 
—

 
—

   End of period
 
397

 
397

 
 
 
 
 
Paid-In Capital
 
 
 
 
   Beginning of year
 
1,265

 
1,252

   Share-based awards
 
(17
)
 
(18
)
   Share-based compensation
 
22

 
19

   Other
 
3

 
3

   End of period
 
1,273

 
1,256

 
 
 
 
 
Retained Earnings
 
 
 
 
   Beginning of year
 
5,180

 
5,037

Cumulative effect of change in accounting for equity securities as of January 1, 2018
 
2,503

 
—

Adjusted beginning of year
 
7,683

 
5,037

   Net income
 
739

 
403

   Dividends declared
 
(258
)
 
(247
)
   End of period
 
8,164

 
5,193

 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
   Beginning of year
 
2,788

 
1,693

Cumulative effect of change in accounting for equity securities as of January 1, 2018
 
(2,503
)
 
—

Adjusted beginning of year
 
285

 
1,693

   Other comprehensive income (loss)
 
(289
)
 
354

   End of period
 
(4
)
 
2,047

 
 
 
 
 
Treasury Stock
 
 
 
 
   Beginning of year
 
(1,387
)
 
(1,319
)
   Share-based awards
 
18

 
22

   Shares acquired - share repurchase authorization
 
(125
)
 
(70
)
   Shares acquired - share-based compensation plans
 
(4
)
 
(6
)
   Other
 
2

 
3

   End of period
 
(1,496
)
 
(1,370
)
 
 
 
 
 
      Total Shareholders' Equity
 
$
8,334

 
$
7,523

 
 
 
 
 
(In millions)
 
 
 
 
Common Stock - Shares Outstanding
 
 
 
 
   Beginning of year
 
163.9

 
164.4

   Share-based awards
 
0.6

 
0.7

   Shares acquired - share repurchase authorization
 
(1.8
)
 
(1.0
)
   Shares acquired - share-based compensation plans
 
—

 
(0.1
)
   End of period
 
162.7

 
164.0

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

Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 6


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
 (Dollars in millions)
 
Nine months ended September 30,
 
 
2018
 
2017
Cash Flows From Operating Activities
 
 

 
 

Net income
 
$
739

 
$
403

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

 
 

Depreciation and amortization
 
48

 
40

Investment gains and losses, net
 
(367
)
 
(156
)
Share-based compensation
 
22

 
19

Interest credited to contract holders'
 
37

 
36

Deferred income tax expense
 
130

 
32

Changes in:
 
 

 
 

Investment income receivable
 
5

 
6

Premiums and reinsurance receivable
 
(114
)
 
(66
)
Deferred policy acquisition costs
 
(53
)
 
(44
)
Other assets
 
(22
)
 
(34
)
Loss and loss expense reserves
 
305

 
265

Life policy and investment contract reserves
 
68

 
71

Unearned premiums
 
187

 
168

Other liabilities
 
(37
)
 
(46
)
Current income tax receivable/payable
 
(122
)
 
52

Net cash provided by operating activities
 
826

 
746

Cash Flows From Investing Activities
 
 

 
 

Sale of fixed maturities
 
6

 
20

Call or maturity of fixed maturities
 
920

 
815

Sale of equity securities
 
293

 
290

Purchase of fixed maturities
 
(1,250
)
 
(1,155
)
Purchase of equity securities
 
(311
)
 
(399
)
Investment in finance receivables
 
(25
)
 
(21
)
Collection of finance receivables
 
18

 
17

Investment in buildings and equipment
 
(14
)
 
(14
)
Change in other invested assets, net
 
(17
)
 
(12
)
Net cash used in investing activities
 
(380
)
 
(459
)
Cash Flows From Financing Activities
 
 

 
 

Payment of cash dividends to shareholders
 
(251
)
 
(239
)
Shares acquired - share repurchase authorization
 
(125
)
 
(70
)
Changes in note payable
 
6

 
(3
)
Proceeds from stock options exercised
 
7

 
10

Contract holders' funds deposited
 
62

 
60

Contract holders' funds withdrawn
 
(133
)
 
(119
)
Other
 
(53
)
 
(29
)
Net cash used in financing activities
 
(487
)
 
(390
)
Net change in cash and cash equivalents
 
(41
)
 
(103
)
Cash and cash equivalents at beginning of year
 
657

 
777

Cash and cash equivalents at end of period
 
$
616

 
$
674

Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Interest paid
 
$
27

 
$
26

Income taxes paid
 
82

 
44

Noncash Activities
 
 

 
 

Conversion of securities
 
$
—

 
$
5

Equipment acquired under capital lease obligations
 
14

 
10

Cashless exercise of stock options
 
4

 
6

Other assets and other liabilities
 
38

 
74

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

Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 — Accounting Policies
The condensed consolidated financial statements include the accounts of Cincinnati Financial Corporation and its consolidated subsidiaries, each of which is wholly owned. These statements are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
 
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been condensed or omitted.
 
Our September 30, 2018, condensed consolidated financial statements are unaudited. We believe that we have made all adjustments, consisting only of normal recurring accruals, that are necessary for fair presentation. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our 2017 Annual Report on Form 10-K. The results of operations for interim periods do not necessarily indicate results to be expected for the full year.

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

ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 revised the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The effective date of ASU 2016-01 was for interim and annual reporting periods beginning after December 15, 2017. The company adopted this ASU on January 1, 2018, and applied it prospectively without prior period amounts restated. As a result of the adoption, $2.503 billion of after-tax unrealized gains on equity securities was reclassified on January 1, 2018, from accumulated other comprehensive income to retained earnings. Results of operations were impacted as changes in fair value of equity securities are now reported in net income instead of reported in other comprehensive income. As a result of the adoption of this ASU, for the three and nine months ended September 30, 2018, net investment gains of
$458 million and $372 million in the condensed consolidated statements of income included an increase of $450 million and $351 million from the fair value change of equity securities, respectively.

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

ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Postretirement Benefit Costs. ASU 2017-07 provides guidance on how to present the

Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 8


components of net periodic benefit costs in the income statement for pension plans and other post-retirement benefit plans and allows only the service cost component of net benefit cost to be eligible for capitalization when applicable. The effective date of ASU 2017-07 is for interim and annual reporting periods beginning after December 15, 2017. The company adopted this ASU effective January 1, 2018, and disclosed the line items used in the statements of income to present the service and non-service components of net periodic benefit costs in Note 11, Employee Retirement Benefits, to these consolidated financial statements. The adoption did not have a material impact on our company's consolidated financial position, cash flows or results of operations.

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

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

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

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

ASU 2018-07, Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718, Compensation -

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Page 9


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

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

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

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

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




Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 10


NOTE 2 – Investments
On January 1, 2018, we adopted ASU 2016-01, which resulted in changes in the fair value of equity securities still held, being reported in net income instead of being reported in other comprehensive income. See Note 1, Accounting Policies, for additional discussion.

The following table provides cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value for our fixed-maturity and equity securities:
(Dollars in millions)
 
Cost or
amortized
cost
 
Gross unrealized
 
Fair value
At September 30, 2018
 
 
gains
 
losses
 
Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,709

 
$
94

 
$
60

 
$
5,743

States, municipalities and political subdivisions
 
4,306

 
54

 
65

 
4,295

Commercial mortgage-backed
 
287

 
2

 
4

 
285

Government-sponsored enterprises
 
293

 
—

 
13

 
280

United States government
 
48

 
—

 
1

 
47

Foreign government
 
10

 
—

 
—

 
10

Total
 
$
10,653

 
$
150

 
$
143

 
$
10,660

At December 31, 2017
 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,420

 
$
246

 
$
13

 
$
5,653

States, municipalities and political subdivisions
 
4,316

 
155

 
6

 
4,465

Commercial mortgage-backed
 
280

 
7

 
1

 
286

Government-sponsored enterprises
 
257

 
1

 
4

 
254

United States government
 
31

 
—

 
—

 
31

Foreign government
 
10

 
—

 
—

 
10

Subtotal
 
10,314

 
409

 
24

 
10,699

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
2,918

 
3,135

 
14

 
6,039

Nonredeemable preferred equities
 
176

 
34

 
—

 
210

Subtotal
 
3,094

 
3,169

 
14

 
6,249

Total
 
$
13,408

 
$
3,578

 
$
38

 
$
16,948

 
 
 
 
 
 
 
 
 
 
The net unrealized investment gains in our fixed-maturity portfolio at September 30, 2018, are reduced compared to year end December 31, 2017, as a result of the increase in interest rate environment. Our commercial mortgage-backed securities had an average rating of Aa1/AA at September 30, 2018, and December 31, 2017. At September 30, 2018, Apple Inc. (Nasdaq:AAPL) was our largest single equity holding with a fair value of
$316 million, which was 4.9 percent of our publicly traded common equities portfolio and 1.8 percent of the total investment portfolio.


Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 11


The table below provides fair values and gross unrealized losses by investment category and by the duration of the securities’ continuous unrealized loss positions:
(Dollars in millions)
 
Less than 12 months
 
12 months or more
 
Total
At September 30, 2018
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
2,111

 
$
39

 
$
336

 
$
21

 
$
2,447

 
$
60

States, municipalities and political subdivisions
 
1,545

 
47

 
264

 
18

 
1,809

 
65

Commercial mortgage-backed securities
 
138

 
2

 
43

 
2

 
181

 
4

Government-sponsored enterprises
 
115

 
5

 
165

 
8

 
280

 
13

Foreign government
 
10

 
—

 
—

 
—

 
10

 
—

United States government
 
35

 
1

 
12

 
—

 
47

 
1

Total
 
$
3,954

 
$
94

 
$
820

 
$
49

 
$
4,774

 
$
143

At December 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
330

 
$
4

 
$
252

 
$
9

 
$
582

 
$
13

States, municipalities and political subdivisions
 
88

 
1

 
264

 
5

 
352

 
6

Commercial mortgage-backed
 
33

 
—

 
36

 
1

 
69

 
1

Government-sponsored enterprises
 
96

 
1

 
124

 
3

 
220

 
4

Foreign government
 
10

 
—

 
—

 
—

 
10

 
—

United States government
 
23

 
—

 
6

 
—

 
29

 
—

Subtotal
 
580

 
6

 
682

 
18

 
1,262

 
24

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
229

 
14

 
—

 
—

 
229

 
14

Subtotal
 
229

 
14

 
—

 
—

 
229

 
14

Total
 
$
809

 
$
20

 
$
682

 
$
18

 
$
1,491

 
$
38

 
 
 
 
 
 
 
 
 
 
 
 
 

Contractual maturity dates for fixed-maturity investments were:
(Dollars in millions)
 
Amortized
cost
 
Fair
value
 
% of fair
value
At September 30, 2018
 
 
 
Maturity dates:
 
 

 
 

 
 

Due in one year or less
 
$
668

 
$
678

 
6.4
%
Due after one year through five years
 
2,797

 
2,823

 
26.5

Due after five years through ten years
 
3,660

 
3,655

 
34.2

Due after ten years
 
3,528

 
3,504

 
32.9

Total
 
$
10,653

 
$
10,660

 
100.0
%
 
 
 
 
 
 
 

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

Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 12


The following table provides investment income and investment gains and losses, net:
(Dollars in millions)
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Investment income:
 
 
 
 
 
 
 
Interest
$
111

 
$
112

 
$
333

 
$
334

Dividends
45

 
43

 
131

 
124

Other
1

 
1

 
3

 
3

Total
157

 
156

 
467

 
461

Less investment expenses
3

 
3

 
9

 
8

Total
$
154

 
$
153

 
$
458

 
$
453

 
 
 
 
 
 
 
 
Investment gains and losses, net:
 

 
 

 
 

 
 

Equity securities:
 

 
 

 
 

 
 

Investment gains and losses on securities sold, net
$
8

 
$
—

 
$
17

 
$
—

Unrealized gains and losses on securities still held, net
450

 
—

 
351

 
—

Gross realized gains
—

 
1

 
—

 
160

Gross realized losses
—

 
—

 
—

 
(14
)
Other-than-temporary impairments
—

 
—

 
—

 
(3
)
Subtotal
458

 
1

 
368

 
143

Fixed maturities:
 

 
 

 
 

 
 

Gross realized gains
2

 
3

 
9

 
16

Gross realized losses
(1
)
 
—

 
(2
)
 
—

Other-than-temporary impairments
—

 
—

 
—

 
(6
)
Subtotal
1

 
3

 
7

 
10

 
 
 
 
 
 
 
 
Other
(1
)
 
3

 
(3
)
 
3

Total
$
458

 
$
7

 
$
372

 
$
156

 
 
 
 
 
 
 
 
 
During the three and nine months ended September 30, 2018, there were no fixed-maturity securities other-than-temporarily impaired. During the three months ended September 30, 2017, there were no equity securities and no fixed-maturity security other-than-temporarily impaired. During the nine months ended September 30, 2017, there were five equity securities and one fixed-maturity security other-than-temporarily impaired. There were no credit losses on fixed-maturity securities for which a portion of other-than-temporary impairment (OTTI) has been recognized in other comprehensive income for the three and nine months ended September 30, 2018 and 2017.

At September 30, 2018, 288 fixed-maturity securities with a total unrealized loss of $49 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity security had a fair value below 70 percent of amortized cost. At December 31, 2017, 249 fixed-maturity securities with a total unrealized loss of $18 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity securities had fair values below 70 percent of amortized cost. There were no equity securities in an unrealized loss position for 12 months or more as of December 31, 2017.
 


Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 13


NOTE 3 – Fair Value Measurements

In accordance with accounting guidance for fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for the valuation technique used, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2017, and ultimately management determines fair value. See our 2017 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 132, for information on characteristics and valuation techniques used in determining fair value.

Fair Value Disclosures for Assets
The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at September 30, 2018, and December 31, 2017. We do not have any liabilities carried at fair value. There were no transfers between Level 1 and Level 2.
(Dollars in millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At September 30, 2018
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$
—

 
$
5,742

 
$
1

 
$
5,743

States, municipalities and political subdivisions
 
—

 
4,291

 
4

 
4,295

Commercial mortgage-backed
 
—

 
285

 
—

 
285

Government-sponsored enterprises
 
—

 
280

 
—

 
280

United States government
 
47

 
—

 
—

 
47

Foreign government
 
—

 
10

 
—

 
10

Subtotal
 
47

 
10,608

 
5

 
10,660

Common equities
 
6,472

 
—

 
—

 
6,472

Nonredeemable preferred equities
 
—

 
191

 
—

 
191

Separate accounts taxable fixed maturities
 
—

 
783

 
—

 
783

Top Hat savings plan mutual funds and common
equity (included in Other assets)
 
37

 
—

 
—

 
37

Total
 
$
6,556

 
$
11,582

 
$
5

 
$
18,143

 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$
—

 
$
5,652

 
$
1

 
$
5,653

States, municipalities and political subdivisions
 
—

 
4,460

 
5

 
4,465

Commercial mortgage-backed
 
—

 
286

 
—

 
286

Government-sponsored enterprises
 
—

 
254

 
—

 
254

United States government
 
31

 
—

 
—

 
31

Foreign government
 
—

 
10

 
—

 
10

Subtotal
 
31

 
10,662

 
6

 
10,699

Common equities, available for sale
 
6,039

 
—

 
—

 
6,039

Nonredeemable preferred equities, available for sale
 
—

 
210

 
—

 
210

Separate accounts taxable fixed maturities
 
—

 
795

 
—

 
795

Top Hat savings plan mutual funds and common
  equity (included in Other assets)
 
31

 
—

 
—

 
31

Total
 
$
6,101

 
$
11,667

 
$
6

 
$
17,774

 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 14


 
Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value as of September 30, 2018. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the condensed consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. Transfers out of Level 3 included situations where a broker quote was used without observable inputs or data that could be corroborated by our pricing vendors in the prior period and significant other observable inputs were identified in the current period. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.

The following table provides the change in Level 3 assets for the three months ended September 30:
 (Dollars in millions)
 
Asset fair value measurements using significant unobservable inputs
 
 
Corporate
fixed
maturities
 
States,
municipalities
and political
subdivisions
fixed maturities
 
Total
Beginning balance, July 1, 2018
 
$
1

 
$
4

 
$
5

Total gains or losses (realized/unrealized):
 
 

 
 

 
 

Included in net income
 
—

 
—

 
—

Included in other comprehensive income
 
—

 
—

 
—

Purchases
 
—

 
—

 
—

Sales
 
—

 
—

 
—

Transfers into Level 3
 
—

 
—

 
—

Transfers out of Level 3
 
—

 
—

 
—

Ending balance, September 30, 2018
 
$
1

 
$
4

 
$
5

 
 
 
 
 
 
 
Beginning balance, July 1, 2017
 
$
1

 
$
5

 
$
6

Total gains or losses (realized/unrealized):
 
 

 
 

 
 

Included in net income
 
—

 
—

 
—

Included in other comprehensive income
 
—

 
—

 
—

Purchases
 
—

 
—

 
—

Sales
 
—

 
—

 
—

Transfers into Level 3
 
—

 
—

 
—

Transfers out of Level 3
 
—

 
—

 
—

Ending balance, September 30, 2017
 
$
1

 
$
5

 
$
6

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 15


The following table provides the change in Level 3 assets for the nine months ended September 30:
(Dollars in millions)
Asset fair value measurements using significant unobservable inputs
 
 
Corporate
fixed
maturities
 
States,
municipalities
and political
subdivisions
fixed maturities
 
Total
Beginning balance, January 1, 2018
 
$
1

 
$
5

 
$
6

Total gains or losses (realized/unrealized):
 
 
 
 

 
 

Included in net income
 
—

 
—

 
—

Included in other comprehensive income
 
—

 
(1
)
 
(1
)
Purchases
 
—

 
—

 
—

Sales
 
—

 
—

 
—

Transfers into Level 3
 
—

 
—

 
—

Transfers out of Level 3
 
—

 
—

 
—

Ending balance, September 30, 2018
 
$
1

 
$
4

 
$
5

 
 
 
 
 
 
 
Beginning balance, January 1, 2017
 
$
78

 
$
—

 
$
78

Total gains or losses (realized/unrealized):
 
 
 
 

 
 
Included in net income
 
—

 
—

 
—

Included in other comprehensive income
 
—

 
—

 
—

Purchases
 
—

 
5

 
5

Sales
 
—

 
—

 
—

Transfers into Level 3
 
—

 
—

 
—

Transfers out of Level 3
 
(77
)
 
—

 
(77
)
Ending balance, September 30, 2017
 
$
1

 
$
5

 
$
6

 
 
 
 
 
 
 

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

Fair Value Disclosures for Assets and Liabilities Not Carried at Fair Value
 
The disclosures below are presented to provide information about the effects of current market conditions on financial instruments that are not reported at fair value in our condensed consolidated financial statements.
 
This table summarizes the book value and principal amounts of our long-term debt:
(Dollars in millions)
 
 
 
Book value
 
Principal amount
Interest
rate
 
Year of 
issue
 
 
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
 
 
 
2018
 
2017
 
2018
 
2017
6.900
%
 
1998
 
Senior debentures, due 2028
 
$
26

 
$
26

 
$
28

 
$
28

6.920
%
 
2005
 
Senior debentures, due 2028
 
391

 
391

 
391

 
391

6.125
%
 
2004
 
Senior notes, due 2034
 
370

 
370

 
374

 
374

 

 
 
 
Total
 
$
787

 
$
787

 
$
793

 
$
793

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 16


The following table shows fair values of our note payable and long-term debt:
(Dollars in millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other observable inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At September 30, 2018
 
 
 
 
Note payable
 
$
—

 
$
30

 
$
—

 
$
30

6.900% senior debentures, due 2028
 
—

 
32

 
—

 
32

6.920% senior debentures, due 2028
 
—

 
472

 
—

 
472

6.125% senior notes, due 2034
 
—

 
437

 
—

 
437

Total
 
$
—

 
$
971

 
$
—

 
$
971

 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
Note payable
 
$
—

 
$
24

 
$
—

 
$
24

6.900% senior debentures, due 2028
 
—

 
34

 
—

 
34

6.920% senior debentures, due 2028
 
—

 
505

 
—

 
505

6.125% senior notes, due 2034
 
—

 
477

 
—

 
477

Total
 
$
—

 
$
1,040

 
$
—

 
$
1,040

 
 
 
 
 
 
 
 
 
 
The following table shows the fair value of our life policy loans included in other invested assets and the fair values of our deferred annuities and structured settlements included in life policy and investment contract reserves:
(Dollars in millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At September 30, 2018
 
 
 
 
Life policy loans
 
$
—

 
$
—

 
$
40

 
$
40

 
 
 
 
 
 
 
 
 
Deferred annuities
 
—

 
—

 
760

 
760

Structured settlements
 
—

 
194

 
—

 
194

Total
 
$
—

 
$
194

 
$
760

 
$
954

 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
Life policy loans
 
$
—

 
$
—

 
$
41

 
$
41

 
 
 
 
 
 
 
 
 
Deferred annuities
 
—

 
—

 
834

 
834

Structured settlements
 
—

 
210

 
—

 
210

Total
 
$
—

 
$
210

 
$
834

 
$
1,044

 
 
 
 
 
 
 
 
 
 
Outstanding principal and interest for these life policy loans totaled $32 million and $31 million at September 30, 2018, and December 31, 2017, respectively.
 
Recorded reserves for the deferred annuities were $802 million and $835 million at September 30, 2018, and December 31, 2017, respectively. Recorded reserves for the structured settlements were $157 million and $161 million at September 30, 2018, and December 31, 2017, respectively.



Cincinnati Financial Corporation Third-Quarter 2018 10-Q
Page 17


NOTE 4 – Property Casualty Loss and Loss Expenses
This table summarizes activity for our consolidated property casualty loss and loss expense reserves:
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Gross loss and loss expense reserves, beginning
  of period
 
$
5,423

 
$
5,213

 
$
5,219

 
$
5,035

Less reinsurance recoverable
 
188

 
283

 
187

 
298

Net loss and loss expense reserves, beginning of
  period
 
5,235

 
4,930

 
5,032

 
4,737

Net incurred loss and loss expenses related to:
 
 

 
 

 
 

 
 

Current accident year
 
857

 
835

 
2,548

 
2,493

Prior accident years
 
(44
)
 
(20
)
 
(123
)
 
(96
)
Total incurred
 
813

 
815

 
2,425

 
2,397

Net paid loss and loss expenses related to:
 
 

 
 

 
 

 
 

Current accident year
 
392