Cincinnati Financial Corporation
2008
Annual
Report
on Form10-K
February 27, 2009
About the Company
Cincinnati Financial Corporation stands among the 25 largest property casualty insurers in the nation, based on
premium volume from our insurance subsidiary. A select group of agencies in 35 states actively markets our
property casualty insurance within their communities. Standard market commercial lines policies are available in
all of those states, while personal lines policies are available in 27 and surplus commercial lines policies are
available in 33 of the same 35 states. Within this select group, 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 hallmarks distinguish this company, positioning us to build value and long-term success:
• Commitment to our network of professional independent insurance agencies and to their continued success
• Financial strength that lets us be a consistent market for our agents’ business, supporting stability and confidence
• Operating structure that supports local decision making, showcasing our claims excellence and allowing us to
balance growth with underwriting discipline
Learn more about where we are today and how we plan to create value for shareholders, agents, policyholders
and associates by reviewing publications that we promptly post on www.cinfin.com/Investors as they are
completed. Each piece was accurate at the time it was posted; please refer to the most recent item for the
timeliest information.
2008 Fourth-quarter and Full-Year Letter to Shareholders– available on
www.cinfin.com/Investors
2008 Annual Report on Form 10-K– available now
The SEC Annual Report on Form 10-Kis a detailed document published by every
publicly traded company as required by the U.S. Securities and Exchange Commission.
In our report, we describe your company’s operations, its results and trends, along with
supporting data, discussions, audited financial statements and accompanying notes.
2009 Shareholder Meeting Notice and Proxy Statement – late March 2009
Letter from the Chairman and the Chief Executive Officer – late March 2009
First-quarter 2009 Letter to Shareholders – early May 2009
Second-quarter 2009 Letter to Shareholders– early August 2009
Third-quarter 2009 Letter to Shareholders– early November 2009
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Cincinnati Financial Corporation
2008 Annual Report on Form 10-K
Table of Contents
10-K Page
Part 1
Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Our Business and Our Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Our Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 3
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Part II
Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . 37
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Critical Accounting Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Recent Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Safe Harbor Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Fixed-maturity Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Short-term Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Equity Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Application of Asset Impairment Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Responsibility for Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Management's Annual Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . 92
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . 122
Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Item 8
Part III
Item 10 Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Item 13 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Item 14 Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Part IV
Item 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
(cid:59)
(cid:133)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2008.
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
(State of incorporation)
31-0746871
(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 (cid:59) No (cid:134)
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 (cid:134) No (cid:59)
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 (cid:59) No (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. (cid:133)
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.
(Check one): Large accelerated filer (cid:59) Accelerated filer (cid:133) Non-accelerated filer (cid:133) Smaller reporting company (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No (cid:59)
The aggregate market value of voting stock held by nonaffiliates of the Registrant was $3,708,499,771 as of June 30, 2008.
As of February 19, 2009, there were 162,502,547 shares of common stock outstanding.
Portions of the definitive Proxy Statement for Cincinnati Financial Corporation’s Annual Meeting of Shareholders to be held on
May 2, 2009, are incorporated by reference into Parts II and III of this Form 10-K.
Document Incorporated by Reference
Part I
Business
Item 1.
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 marketing property casualty insurance. Our headquarters is in
Fairfield, Ohio. At year-end 2008, we had 4,179 associates, with 2,984 headquarters associates providing
support to 1,195 field associates.
At year-end 2008, Cincinnati Financial Corporation owned 100 percent of four subsidiaries: The Cincinnati
Insurance Company, CSU Producer Resources Inc., CFC Investment Company and CinFin Capital
Management Company. In addition, the parent company has an investment portfolio, owns the headquarters
building and is responsible for corporate borrowings and shareholder dividends. The Cincinnati Insurance
Company owns 100 percent of our four other insurance subsidiaries.
In addition to The Cincinnati Insurance Company, our standard market property casualty insurance group
includes two of those subsidiaries – The Cincinnati Casualty Company and The Cincinnati Indemnity
Company. This group markets a broad range of business, homeowner and auto policies in 35 states. Other
subsidiaries of The Cincinnati Insurance Company include The Cincinnati Life Insurance Company, which
markets life insurance, disability income policies and annuities, and The Cincinnati Specialty Underwriters
Insurance Company, which began offering surplus lines insurance products in January 2008.
The three other subsidiaries of Cincinnati Financial are CSU Producer Resources, which offers insurance
brokerage services to our independent agencies so their clients can access our surplus lines insurance
products; CFC Investment Company, which offers commercial leasing and financing services to our agents,
their clients and other customers; and CinFin Capital Management Company, which provided asset
management services to internal and third-party clients. CinFin Capital Management will cease operations
effective February 28, 2009.
Our filings with the Securities and Exchange Commission are available, free of charge, on our Web site,
www.cinfin.com, as soon as possible after they have been filed with the SEC. These filings include our annual
reports on Form 10-K, our 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 Web sites. These Web sites, 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 basis. When we provide our results on a
comparable statutory basis, we label it as such; all other company data is presented in accordance with
accounting principles generally accepted in the United States of America (GAAP).
OUR BUSINESS AND OUR STRATEGY
INTRODUCTION
The Cincinnati Insurance Company was founded almost 60 years ago by independent insurance agents. They
established the mission that continues to guide all of the companies in the Cincinnati Financial 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 market stability through financial strength
• producing competitive up-to-date products and services and
• developing associates committed to superior service
A select group of agencies in 35 states actively markets our property casualty insurance within their
communities. Standard market commercial lines policies are available in all of those states, while personal
lines policies are available in 27 and surplus commercial lines policies are available in 33 of the same 35
states. Within this select group, 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 hallmarks distinguish this company, positioning us to build value and long-term success:
• Commitment to our network of professional independent insurance agencies and to their continued
success
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 1
•
Financial strength that lets us 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
Independent Insurance Agency Marketplace
The U.S. property casualty insurance industry is a highly competitive marketplace with over 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)
•
Standard market property casualty insurers generally offer insurance products through one or more
distribution channels:
•
•
independent agents, who represent multiple carriers,
captive agents, who represent one carrier exclusively, or
• direct marketing to consumers
For the most part, we compete with standard market insurance companies that market through independent
insurance agents.
We are committed to this channel. The independent agencies that we choose to market our standard lines
insurance products share our philosophies. They do business person to person; offer broad, value-added
services; maintain sound balance sheets; and manage their agencies professionally. We develop our
relationships with agencies that are active in their local communities, providing important knowledge of local
market trends, opportunities and challenges.
In addition to the standard market for property casualty insurance, the surplus lines market exists due to a
regulatory distinction. Generally, surplus lines insurance carriers provide insurance that is unavailable in the
standard market due to market conditions or due to characteristics of the insured person or organization that
are caused by nature, the insured's claim history or the characteristics of their business. Insurers operating in
the surplus lines market are generally small specialty insurers or specialized divisions of larger insurance
organizations. Each markets through surplus lines insurance brokers.
We opened our own surplus line insurance brokerage firm so that we could offer surplus lines products
exclusively to the independent agents who market our other property casualty insurance products. We also
market life insurance products through the agencies that market our property casualty products.
At year-end 2008, our 1,133 agency relationships had 1,387 reporting locations marketing our standard
market insurance products. An increasing number of agencies have multiple, separately identifiable
locations, reflecting their growth and consolidation of ownership within the independent agency marketplace.
The number of reporting agency locations indicates our agents’ regional scope and the extent of our
presence within our 35 active states. At year-end 2007, our 1,092 agency relationships had 1,327 reporting
locations. At year-end 2006, our 1,066 agency relationships had 1,289 reporting locations.
On average, we have a 12.4 percent share of the property casualty insurance purchased through our
reporting agency locations. Our share is 18.1 percent in reporting agency locations that have represented us
for more than 10 years; 7.4 percent in agencies that have represented us for five to 10 years; 4.4 percent in
agencies that have represented us for one to five years; and 0.6 percent in agencies that have represented
us for less than one year.
Our largest single agency relationship accounted for approximately 1.3 percent of our total property casualty
agency earned premiums in 2008. No aggregate of locations under a single ownership structure accounted
for more than 2.3 percent of our total agency earned premiums in 2008.
Over the next decade, industry analysts predict successful agencies will have opportunities to increase their
size on average almost three-fold. Agencies are expected to continue to pursue consolidation opportunities,
buying or merging with other agencies to create stronger organizations and expand service. In addition to the
growing networks of agency locations owned by banks and brokers, other agencies are addressing the
consolidation by forming voluntary associations that may share back office and other functions to enhance
economies, while maintaining their individual ownership structures.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 2
Financial Strength
We believe that our financial strength and strong surplus position, reflected in our insurer financial strength
ratings, are clear, competitive advantages in the segment 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, and helps us withstand significant challenges.
While the prospect exists for volatility due to our exposures to potential catastrophes or significant capital
market losses, the ratings agencies consistently have asserted that we have built appropriate financial
strength and flexibility to manage that volatility. We remain committed to strategies that emphasize being a
consistent, stable market for our agents’ business over short-term benefits that might accrue by quick
reaction to changes in market conditions.
At year-end 2008 and 2007, risk-based capital (RBC) for our standard and surplus lines property casualty
operations and life operations was exceptionally strong, far exceeding regulatory requirements.
• We ended 2008 with a 0.9-to-1 ratio of property casualty premiums to surplus, a key measure of
property casualty insurance company capacity. Our ratio gives us the flexibility to reduce risk by
expanding our operations into new geographies and product areas. The estimated industry average ratio
also was 0.9 to 1 for 2008. The lower the ratio, the greater capacity an insurer has for growth.
• We ended 2008 with a 17.7 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
9.9 percent for 2008. A higher ratio indicates an insurer’s stronger security for policyholders and
capacity to support business growth.
Standard market property casualty insurance subsidiary
Statutory surplus
Risk-based capital (RBC)
Authorized control level risk-based capital
Ratio of risk-based capital to authorized control level risk-based capital
Written premium to surplus ratio
Life insurance subsidiary
Statutory surplus
Risk-based capital (RBC)
Authorized control level risk-based capital
Ratio of risk-based capital to authorized control level risk-based capital
Total liabilities excluding separate account business
Life statutory risk-based adjusted surplus to liabilities ratio
Surplus lines subsidiary
Statutory surplus
Risk-based capital (RBC)
Authorized control level risk-based capital
Ratio of risk-based capital to authorized control level risk-based capital
Written premium to surplus ratio
$
$
$
At December 31,
2008
2007
$
$
3,360
3,389
407
8.3
0.9
290
290
37
7.8
1,640
4,307
4,336
615
7.0
0.7
477
506
66
7.3
1,552
17.7 %
33.2 %
$
174
174
4
39.7
0.1
196
196
9
20.7
n/a
The consolidated property casualty insurance group’s ratio of investments in common stock to statutory
surplus at 53.4 percent at year-end 2008 compared with 84.5 percent at year-end 2007. The life insurance
company’s ratio was 39.2 percent compared with 70.6 percent a year ago.
Our parent company’s senior debt is rated by four independent ratings firms. In addition, the ratings firms
award our property casualty and life operations insurer 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 rating agency, and each rating should be
evaluated independently of any other rating.
All of our insurance subsidiaries continue to be highly rated. Each of the four organizations that rate our
companies placed the ratings of our standard market property casualty and life companies on watch or
review in June and July 2008 and subsequently lowered them. These actions followed our June
announcement of significant catastrophe losses and declines in value of our investment assets.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 3
As of February 26, 2009, our credit and financial strength ratings were:
Insurance Financial Strength Ratings
Parent
Company
Senior Debt
Rating
Standard Market Property
Casualty Insurance
Subsidiary
Rating
Agency
Rating
Tier
2 of 16
A+
Superior
Life Insurance
Subsidiary
Surplus Lines
Subsidiary
Rating
Tier
Rating
Tier
Status (date)
A
Excellent
3 of 16 A
Excellent 3 of 16 Stable outlook (12/19/08)
AA- Very Strong 4 of 21 AA- Very Strong 4 of 21
A1
Good
5 of 21
-
-
-
BBB+
A+
Strong
5 of 21 A+
Strong
5 of 21
-
-
-
-
-
-
-
-
-
Negative outlook (2/13/09)
Stable outlook (9/25/08)
Negative outlook (06/30/08)
a
A-
A3
A. M. Best Co.
Fitch Ratings
Moody's Investors
Services
Standard & Poor's
Ratings Services
• A.M. Best Co. – On December 22, 2008, A.M. Best affirmed its A (Excellent) financial strength rating and
its issuer credit rating of The Cincinnati Specialty Underwriters Insurance Company, our surplus lines
subsidiary. A.M. Best removed from under review with negative implications its financial strength and
issuer credit ratings for our other insurance companies, lowering the financial strength ratings to
A+ (Superior) for the standard market property casualty insurance group and member companies and to
A (Excellent) for The Cincinnati Life Insurance Company. A.M. Best cited our continued exposure to the
vagaries of the capital markets, at the same time raising the outlook to stable on all of the company’s
ratings to acknowledge our enhanced risk management processes, sound liquidity, superior risk-adjusted
capitalization for our operating entities and successful business profile within our targeted regional
markets.
•
Fitch Ratings -- On February 13, 2009, Fitch Ratings affirmed our ratings it had assigned in July 2008,
continuing its negative outlook due to the downside risk in our equity portfolio. Fitch stated that it viewed
favorably the number of steps we have taken to rebalance our equity portfolio and reduce exposure to
the financial sector. Fitch noted our strong capitalization at the current ratings level and low operating
leverage. In July 2008, Fitch had removed ratings for our three standard market property casualty
insurance companies and The Cincinnati Life Insurance Company from rating watch negative, lowering
the insurer financial strength ratings to AA- (Very Strong).
• Moody’s Investors Service – On September 25, 2008, Moody’s Investors Service removed our standard
market property casualty insurance companies from review, lowering the insurance financial strength
ratings to A1. The outlook on the ratings is stable. Moody’s said its action reflected reduced
shareholders’ equity and risk-adjusted capitalization, concerns about management of investment
portfolio volatility, and increasing commercial lines competition. Moody’s noted our strong regional
franchise and strong risk-adjusted capitalization reflecting consistent reserve strength and manageable
peak-level catastrophe exposure; and an excellent financial leverage profile accompanied by significant
holding company liquidity.
• Standard & Poor’s Ratings Services – On June 30, 2008, Standard & Poor’s Ratings Services removed
our three standard market property casualty insurance companies and The Cincinnati Life Insurance
Company from credit watch, lowering the insurer financial strength ratings to A+ (Strong) with a negative
outlook. Standard & Poor’s said its actions reflected our weakened capitalization and current and
prospective operating performance, increased market competition and reduced liquidity. Standard &
Poor’s noted support for operating company ratings in view of our capital at the A level, extremely strong
and loyal agency force, strong competitive position, improved technological efficiencies, and improved
and adequate enterprise risk management.
Our debt ratings are discussed in Item 7, Additional Sources of Liquidity, Page 71.
Operating Structure
We offer our broad array of insurance products through the independent agency channel. We recognize that
locally based independent agencies have relationships in their communities that can lead to policyholder
satisfaction, loyalty and profitable business. We seek to be a consistent and predictable property casualty
carrier that agencies can rely on to serve their clients. For our standard market business, field and
headquarters underwriters make risk-specific decisions about both new business and renewals.
In our 10 highest volume states for consolidated property casualty premiums, 910 reporting agency locations
wrote 68.7 percent of our 2008 consolidated property casualty earned premium volume compared with
69.1 percent in 2007.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 4
Property Casualty Insurance Earned Premiums by State
(Dollars in millions)
Year ended December 31, 2008
Ohio
Illinois
Indiana
Pennsylvania
Georgia
North Carolina
Michigan
Virginia
Wisconsin
Tennessee
Year ended December 31, 2007
Ohio
Illinois
Indiana
Pennsylvania
North Carolina
Georgia
Michigan
Virginia
Wisconsin
Tennessee
Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
$
$
630
270
205
183
150
150
135
131
108
102
664
283
218
188
154
150
146
140
114
103
20.9 %
9.0
6.8
6.1
5.0
5.0
4.5
4.4
3.6
3.4
21.2 %
9.1
7.0
6.0
4.9
4.8
4.7
4.5
3.6
3.3
219
119
104
80
68
73
101
58
48
40
218
116
101
77
69
66
95
56
47
37
$
$
2.9
2.3
2.0
2.3
2.2
2.1
1.3
2.3
2.3
2.6
3.0
2.4
2.2
2.4
2.2
2.3
1.5
2.5
2.4
2.8
Field Focus
We rely on our 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 they serve and work from offices in their homes,
providing 24/7 availability to our agents. Headquarters associates also provide agencies with underwriting,
accounting and technology assistance and training. Company executives, headquarters underwriters and
special teams 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 new commercial lines
business underwriting. They are joined by field representatives specializing in claims, loss control, personal
lines, machinery and equipment, bond, premium audit, life insurance and leasing. The field team provides
many services for agencies and policyholders; for example, our field machinery and equipment and loss
control representatives perform inspections and recommend specific actions to improve the safety of the
policyholder’s operations and the quality of the agent’s account.
Agents work with us to carefully select risks and assure pricing adequacy. They appreciate the time our
associates invest in creating solutions for their clients while protecting profitability, whether that means
working on an individual case or customizing policy terms and conditions that preserve flexibility, choice and
other sales advantages. We seek to develop long-term relationships by understanding the unique needs of
their customers, our policyholders.
We also are responsive to agent needs for well designed property casualty products. Our commercial lines
products are structured to allow flexible combinations of property and liability coverages in a single package
with a single expiration date. This approach brings policyholders convenience, discounts and a reduced risk
of coverage gaps or disputes. At the same time, it increases account retention and saves time and expense
for the agency and our company.
We seek to employ technology solutions and business process improvements that:
• allow our agencies and our field and headquarters associates to collaborate more efficiently,
• provide our agencies the ability to access our systems and client data to process business transactions
from their offices,
• automate our internal processes so our associates can spend more time serving agents and
policyholders, and
reduce duplicated effort and make our processes more efficient to reduce company and agency costs.
•
Agencies access our systems and other electronic services via their agency management systems or
CinciLink®, our secure agency-only Web site. CinciLink provides an array of Web-based services and content
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 5
that make it easier to do business with us, such as commercial and personal lines rating and processing
systems, policy loss information, sales and marketing materials, educational courses on our products and
services, accounting services, and electronic libraries for property and casualty coverage forms and state
rating manuals.
Superior Claims Service
Our claims philosophy reflects our belief that we will 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 748 locally based field claims representatives work from their homes, assigned to specific agencies.
They respond personally to policyholders and claimants, typically within 24 hours of receiving an agency’s
claim report. We believe we have a competitive advantage because of the person-to-person approach and
the resulting high level of service that our field claims representatives provide. We also help our agencies
provide prompt service to policyholders by giving 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 surplus lines coverage in their communities. Our field
claims representatives handle these claims under the guidance of headquarters-based surplus lines claims
managers.
Our property casualty claims operation uses CMS, a claims management system, to streamline processes
and achieve operational efficiencies. CMS allows field and headquarters claims associates to collaborate on
reported claims through a virtual claim file. Our field claims representatives use tablet computers to view and
enter information into CMS from any location, including an insured’s home or agent’s office, and to print
claim checks using portable printers. Agencies now can access selected CMS information such as activity
notes on workers’ compensation claims. Later in 2009, activity notes for other business lines will be
available to the agencies.
Catastrophe response teams are comprised of volunteers from our experienced field claims staff. We take
pride in giving our field personnel the tools and authority they need to do their jobs. In times of widespread
loss, our field claims representatives confidently and quickly resolve claims, often writing checks on the same
day they inspect the loss. CMS introduced new efficiencies that are especially evident during catastrophes.
Electronic claim files allow for fast initial contact of policyholders and easy sharing of information and data
between rotating storm teams, headquarters and local field claims representatives. When hurricanes or other
weather events are predicted, we can choose to have catastrophe response team members travel to
strategic locations near the expected impact area. This puts them in position to quickly get to the affected
area, set up temporary offices and start calling on policyholders.
Our claims associates work to control costs where appropriate. They use vendor resources that provide
negotiated pricing to our insureds and claimants. Our field claims representatives also are educated
continuously on new techniques and repair trends. They can leverage their local knowledge and experience
with area body shops, which helps them negotiate the right price with any facility the policyholder chooses.
We staff a Special Investigations Unit with former law enforcement and claims professionals whose
qualifications make them uniquely suited to gathering facts to uncover potential fraud. While we believe it’s
our job to pay what is due under each policy, we also want to prevent false claims from unfairly increasing
overall premiums. Our SIU also operates a computer forensic lab, using sophisticated software to recover
data and mitigate the cost of computer-related claims for business interruption and loss of records.
Loss and Loss Expense Reserves
When claims are made by or against policyholders, any amounts that our property casualty operations pay or
expect to pay for covered claims are losses. The costs we incur in investigating, resolving and processing
these claims are loss expenses. Our consolidated financial statements include property casualty loss and
loss expense reserves that estimate the costs of not-yet-paid claims incurred through December 31 of each
year. The reserves include estimates for claims that have been reported to us plus our estimates for claims
that have been incurred but not yet reported (IBNR), along with our estimate for loss expenses associated
with processing and settling those claims. We develop the various estimates based on individual claim
evaluations and statistical projections. We reduce the loss reserves by an estimate for the amount of salvage
and subrogation we expect to recover. Our annual review has led us to add to earnings in each of the past
20 years savings from favorable development of loss reserves on prior accident years.
We encourage you to review several sections of the Management’s Discussion and Analysis where we
discuss our loss reserves in greater depth. In Item 7, Critical Accounting Estimates, Property Casualty
Insurance Loss and Loss Expense Reserves, Page 41, we discuss our process for analyzing potential losses
and establishing reserves. In Item 7, Property Casualty Loss and Loss Expense Obligations and Reserves,
Page 74, and Life Insurance Policyholder Obligations and Reserves, Page 80, we review reserve levels,
including 10 year development of our property casualty loss reserves.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 6
Insurance Products
We actively market property casualty insurance in 35 states through a select group of independent insurance
agencies. Our standard market commercial lines products are marketed in all of those states while our
standard market personal lines are marketed in 27. We discuss our commercial lines and personal lines
insurance operations and products in Commercial Lines Property Casualty Insurance Segment, Page 11, and
Personal Lines Property Casualty Insurance Segment, Page 14. At year-end 2008, CSU Producer Resources
marketed our surplus lines products to agencies in 33 states that represent Cincinnati Insurance.
The Cincinnati Specialty Underwriters Insurance Company was formed in 2007. The company was capitalized
with $200 million from its parent company, The Cincinnati Insurance Company. It began offering surplus lines
insurance products in January 2008. We structured this operation to exclusively serve the needs of the
independent agencies that currently market our standard market insurance policies. When all or a portion of
a current or potential client’s insurance program requires surplus lines coverages, those agencies now can
write the whole account with Cincinnati, gaining benefits not often found in the broader surplus lines market.
Agencies have access to The Cincinnati Specialty Underwriters Insurance Company’s product line through
CSU Producer Resources, the wholly owned insurance brokerage subsidiary of parent-company Cincinnati
Financial Corporation.
Cincinnati Specialty Underwriters and CSU Producer Resources employ a Web-based policy administration
system to quote, bind, issue and deliver policies electronically to agents. This system also provides
integration to existing document management and data management systems, allowing for straight-through
processing of policies and billing.
We also support the independent agencies affiliated with our property casualty operations in their programs
to sell life insurance. The products offered by our life insurance subsidiary round out and protect accounts
and improve account persistency. At the same time, our life operation increases diversification of revenue
and profitability sources for both the agency and our company.
Our property casualty agencies make up the main distribution system for our life insurance products. To help
build scale, we also develop life business from other independent life insurance agencies in geographic
markets not served through our property casualty 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. We emphasize up-to-date products, responsive underwriting, high quality service
and competitive pricing.
Other Services to Agencies
We complement the insurance operations by providing products and services that help attract and retain
high-quality independent insurance agencies. When we appoint agencies, we look for organizations with
knowledgeable, professional staffs. In turn, we make an exceptionally strong commitment to assist them in
keeping their knowledge up to date and educating new people they bring on board as they grow. Numerous
activities fulfill this commitment at our headquarters, in regional and agency locations, and online.
Except travel-related expenses for courses held at our headquarters, most programs are offered at no cost to
our agencies. While that approach may be extraordinary in our industry today, the result is quality service for
our policyholders and increased success for our independent agencies.
In addition to broad education and training support, we make non-insurance financial services available
through CFC Investment Company. CFC Investment Company offers equipment and vehicle leases and loans
for independent insurance agencies, their commercial clients and other businesses. It also provides
commercial real estate loans to help agencies operate and expand their businesses. We believe that
providing these services enhances agency relationships with their clients, increasing loyalty while diversifying
the agency’s revenues.
STRATEGIC INITIATIVES
Management has worked with the board of directors to identify the strategies that can position us for long-
term success. We broadly group these strategies into three areas of focus – preserving capital, improving
insurance profitability and driving premium growth – correlating with the primary ways we measure our
progress toward our long-term financial objectives. Our strategies are intended to position us to compete
successfully in the markets we have targeted while minimizing risk. We believe successful implementation of
the initiatives that support our strategies will help us better serve our agent customers, reduce volatility in
our financial results and weather difficult economic, market or pricing cycles. We describe our expectations
for the results of these initiatives in Item 7, Executive Summary of the Management’s Discussion and
Analysis, Page 37.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 7
Preserve Capital
Our first strategy is to preserve capital. Implementation of the initiatives below that support this strategy is
intended to preserve our capital and liquidity so that we can successfully grow our insurance business. A
strong capital position provides the capacity to support premium growth and provides the liquidity to sustain
our investment in the people and infrastructure needed to implement our other strategic initiatives.
The four primary capital preservation initiatives are:
• Maintain a diversified and stabilized investment portfolio by applying parameters and tolerances – We
discuss our portfolio strategies in greater depth in Investments Segment, Page 17.
o High-quality fixed-maturity portfolio that matches or exceeds total insurance reserves – At year-end
2008, the average rating of the $5.827 billion fixed maturity portfolio was Aa3/A+, and the portfolio
value exceeded total insurance reserve liability. We also have reinsurance recoverables to offset a
portion of insurance reserves.
o Parent company liquidity that increases our flexibility through all periods to maintain our cash
dividend and to continue to invest in and expand our insurance operations – We aim to keep
approximately 90 percent of parent company investments in cash and marketable securities.
At year-end 2008, we held $1.3 billion of our cash and invested assets at the parent company level,
of which $809 million, or 61.5 percent, was invested in common stocks and $344 million, or
26.1 percent, was cash or cash equivalents.
o Diversified equity portfolio that has no concentrated positions in single stocks or industries –
At year-end 2008, no single security accounted for more than 14.5 percent of our portfolio of
publicly traded common stocks and no single sector accounted for more than 21.6 percent. Because
of the strength of our fixed-maturity portfolio, we have the opportunity to invest for potential capital
appreciation by purchasing equity securities. We seek to achieve a total return on the equity portfolio
over any five-year period that exceeds that of the Standard & Poor’s 500 Index while taking equal or
less risk.
• Minimize reliance on debt as a source of capital, maintaining the ratio of debt-to-total capital below
20 percent – This target is higher than we had identified in previous years because total capital declined
in 2008 although debt levels were essentially unchanged. At year-end 2008, this ratio was 16.7 percent
compared with 12.7 percent at year-end 2007 and 11.0 percent at year-end 2006. Our long-term debt
consists of three non-convertible, non-callable debentures, two due in 2028 and one in 2034.
• Purchase reinsurance from highly rated reinsurers to mitigate underwriting risk and to support our ability
to hold investments until maturity. See Item 7, 2009 Reinsurance Programs, Page 81, for additional
details on these programs.
•
Identify tolerances for other operational risks and calibrate management decisions accordingly –
For example, we are developing programs to address the concentration of production operations at our
headquarters location.
We measure the overall success of our strategy to preserve capital primarily by growing investment income
and by achieving over any five-year period a total return on our equity investment portfolio that exceeds the
Standard & Poor’s 500’s return. We also monitor other measures. One of the most significant is our ratio of
property casualty net written premiums to statutory surplus, which was 0.9-to-1 at year-end 2008 compared
with 0.7-to-1 at year-end 2007 and 2006. This ratio is a common measure of operating leverage used in the
property casualty industry; the lower the ratio the more capacity a company has for premium growth. The
estimated property casualty industry net written premium to statutory surplus ratio also was 0.9-to-1 at
year-end 2008, 0.8-to-1 at year-end 2007 and 0.9-to-1 at year-end 2006.
Our second means of verifying our capital preservation strategy is our financial strength ratings as discussed
in Our Business and Our Strategy, Page 1. All of our insurance subsidiaries continue to be highly rated. A third
means is measurement of our risk-based capital ratios, which currently indicate that our insurance
subsidiaries are operating with a level of capital far exceeding regulatory requirements.
Improve Insurance Profitability
Our second strategy is to improve insurance profitability. Implementation of the operational initiatives below
is intended to support improved cash flow and profitable growth for the agencies that represent us and for
our company. These initiatives primarily seek to strengthen our relationships with agents, allowing them to
serve clients faster and manage expenses better. Others may streamline our internal processes so we can
devote more time to agent service.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 8
The three primary initiatives to improve insurance profitability are:
•
Implement technology projects to improve critical efficiencies and streamline processes for our agencies,
allowing us to win an increasing share of their business. By the end of this year, we expect to make
significant strides with deployment of technology initiatives that enhance local decision making based on
the local knowledge and risk selection expertise we derive from our agents and from having a large
network of field representatives who live and work in our agents’ communities:
o Predictive modeling tool for our workers’ compensation business line – The tool will increase pricing
precision so that our agents can better compete for the most desirable workers’ compensation
business. We should begin using this tool to help make risk and pricing selection decisions during
2009.
o Commercial lines policy administration system - By year-end 2009, we expect to deploy a new
system for commercial package and auto to all of our appointed agencies in 10 of our larger states
with additional states in 2010. The new system includes direct bill capabilities and other features we
need so we can cement our spot among the go-to carriers for our agencies.
o Personal lines policy administration system – In early 2010, our personal lines policy processing
system will move to a “next generation” platform. We expect our agents’ efficiency to improve with
newly designed, easier to use screens that can be delivered with greater speed. We continue to
focus on making it easier for our agents to do business with us.
o Online technologies to serve agencies and policyholders – During 2009, we expect to introduce
o
o
online services that agents have requested for policyholders. In the first quarter of 2009, personal
lines policyholders whom we bill for our agents will be able to visit our Web site to make payments.
Improved claims processes with options such as agent access to more detailed information on the
status of pending claims – These capabilities help sustain our reputation for superior claims service
by helping keep the agent better informed on the details of claim status. In 2009, we will enhance
our response time for new claims by adding an online system for agency submission of notices of
loss.
Improving our business data, supporting accurate underwriting, pricing and decisions – Over the
next several years, we will deploy a full data management program, including a property casualty
insurance data warehouse. One of the greatest advantages will be enhanced granularity of pricing
data.
• Continue to staff field positions to ensure that we carefully select and evaluate new business on a case-
by-case basis so we can grow profitably. At year-end 2008, we had 111 field marketing territories, up
from 106 at the end of 2007 and 102 at the end of 2006.
o Personal lines field marketing representatives – In 2008, we expanded the role of our personal lines
marketing representative by locating associates in states newer to our personal lines offerings. In
these states, our personal lines automation has allowed us to introduce or broaden our product
offerings. We now have two headquarters-based and three field-based personal lines marketing
representatives and will add two more in the field in 2009. These representatives have underwriting
authority and visit agencies on a regular basis to promote the advantages of Cincinnati personal
lines.
o Other field associates help provide our agents with superior service and support – Additions are
planned to the field teams that provide the local expertise, help us better understand the accounts
we underwrite and provide another market advantage for our agents. In 2009, we expect to add
three new premium audit representatives and three new loss control representatives, including two
who will help support our expansion into western states. In 2010, we are considering additional
machinery and equipment field positions.
•
Improve internal efficiencies to make best use of our resources – Smart spending today means we will
be even better prepared with strong, local market-based relationships when external conditions improve.
Projects under way include developing an energy efficiency plan for our headquarters buildings and
reviewing underwriting workflow.
We measure the overall success of our strategy to improve insurance profitability primarily through our
GAAP combined ratio, which we believe can be consistently below 100 percent over any five-year period.
In addition, we expect these initiatives to contribute to our rank as the No. 1 or No. 2 carrier based on
premium volume in agencies that have represented us for at least five years. In 2008, we again earned that
rank in more than 75 percent of the agencies that have represented Cincinnati Insurance for more than five
years. We are working to improve that rank again in 2009 and in each of the years that follow.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 9
Drive Premium Growth
Our third strategy is to drive premium growth. Implementation of the operational initiatives below is intended
to expand our geographic footprint and diversify our premium sources to obtain profitable growth without
significant infrastructure expense. Diversified growth also may reduce our catastrophe exposure risk and
temper negative changes that may occur in the economic, judicial or regulatory environments in the
territories we serve.
The four primary initiatives to drive premium growth are:
• New agency appointments in 2009 – We continue to appoint new agencies in our current operating
territories, adding 76 in 2008. Our objective is to appoint additional points of distribution each year. In
2009, we are targeting 65 appointments of independent agencies writing an aggregate $1 billion in
property casualty premiums annually with all carriers they represent. This target includes appointments
in the recently opened state of Texas.
In measuring progress towards achieving this initiative, we include appointment of new agency
relationships with Cincinnati. For those that we believe will produce a meaningful amount of new
business premiums, we also include appointment of agencies that merge with a Cincinnati agency and
new branch offices opened by existing Cincinnati agencies. We made 76, 66 and 55 new appointments
in 2008, 2007 and 2006, respectively. Of these new appointments, 52, 50 and 42, respectively, were
new relationships. These new appointments and other changes in agency structures led to a net increase
in reporting agency locations of 60 in 2008, 38 in 2007 and 37 in 2006. We seek to build a close,
long-term relationships with each agency we appoint. We carefully evaluate the marketing reach of each
new appointment to ensure the territory can support both current and new agencies.
• New states – With our entry into Texas during the fourth quarter of 2008, Cincinnati Insurance now is
actively marketing our policies in 35 states, expanding our opportunities beyond the Midwest and South.
We now have a sizeable presence in the western states -- opening New Mexico and eastern Washington
in 2007, Utah in 2000, Idaho in 1999 and Montana in 1998. We entered Arizona in 1971. We plan to
look next at taking Cincinnati Insurance to agencies in Colorado and Wyoming. While we continually
study the regulatory and competitive environment in other states where we could decide to actively
market our property casualty products, we have not announced the timetable for entry into new states.
We generally are able to reach a 10 percent share of an agency’s business after 10 years. In Delaware,
New Mexico and Washington, our three newest states, we’ve appointed agencies that write about
$400 million annually with all the carriers they represent. Our writings with these new agencies were
almost 2 percent of that total in 2008.
We appointed our first agencies in Texas late in 2008. Over the next 18 months, we expect to appoint
agencies in that state that write about $750 million in premiums annually with all carriers they represent.
• Surplus lines insurance – Another source of premium growth is our new surplus lines operation, which
ended the year on track with products available in 33 states. We entered this business area to better
serve our agents. Today, they write about $2.5 billion annually of surplus lines business with other
carriers. We want to earn an appropriate share by bringing Cincinnati-style service to those clients.
In 2008, our first year, we wrote $14 million in surplus lines premiums and met our 2008 strategic plan
objectives.
• Personal lines – We are working to position our personal lines business for profitable future growth.
By late-2009, we expect to have made more advances using tiered rating, helping to further improve our
rate and credit structures. Personal lines rate changes made in 2008 have started to drive additional
new business.
We believe additional rate changes that became effective the beginning of 2009 can further drive new
business. These changes build on our 2006 introduction of credits for homeowner and personal auto
products that began to address rates that were too high, our 2007 introduction of discounts on
homeowner policies in some states when an auto policy is also purchased and our 2008 introduction of
further credits and debits. These pricing refinements reduced premiums for many policies we write,
presenting an opportunity to market the policy advantages to our agents’ more quality-conscious
clientele.
We also are more aggressively tapping our potential to market personal lines insurance through agencies
that already represent us for commercial lines. We began offering personal lines in two more states in
2008, expanded our product offerings in two others and expect to add two additional states – Idaho, and
South Carolina – in early 2009. We expect to make personal lines available in these six states through
agencies that write approximately $600 million in personal lines premiums annually with all carriers they
represent.
We measure the overall success of this strategy to drive premium growth primarily through changes in net
written premiums, which we believe can grow faster than the industry average over any five-year period.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 10
Notably, many of our growth initiatives have been under way for a year or more and helped us achieve
13 percent new business growth for 2008 although total written premiums were down on weak market
pricing, economic pressures and a reinsurance restatement premium.
OUR SEGMENTS
Consolidated financial results primarily reflect the results of our four reporting segments. These segments
are defined based on financial information we use to evaluate performance and to determine the allocation
of assets.
• Commercial lines property casualty insurance
• Personal lines property casualty insurance
•
Life insurance
Investments
•
We also evaluate results for our consolidated property casualty operations, which is the total of our
commercial lines, personal lines and surplus lines results.
Revenues, income before income taxes, and identifiable assets for each segment are shown in a table in
Item 8, Note 18 of the Consolidated Financial Statements, Page 119. Some of that information also is
discussed in this section of this report, where we explain the business operations of each segment.
The financial performance of each segment is discussed in the Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, which begins on Page 37.
COMMERCIAL LINES PROPERTY CASUALTY INSURANCE SEGMENT
The commercial lines property casualty insurance segment contributed net earned premiums of
$2.316 billion to total revenues, or 60.6 percent of that total, and $70 million to income before income taxes
in 2008. Commercial lines net earned premiums declined 3.9 percent in 2008 after growing 0.4 percent in
2007 and 6.6 percent in 2006.
Approximately 95 percent of our commercial lines premiums are written to provide accounts with coverages
from more than one of our business lines. As a result, we believe that our commercial lines business is best
measured and evaluated on a segment basis. However, we provide line of business data to summarize
growth and profitability trends separately for our business lines. The seven commercial business lines are:
• Commercial casualty – Commercial casualty insurance provides coverage to businesses against third-
party liability from accidents occurring on their premises or arising out of their operations, including
liability coverage for injuries sustained from products sold as well as coverage for professional services,
such as dentistry. Specialized casualty policies may include liability coverage for employment practices
liability (EPLI), which protects businesses against claims by employees that their legal rights as
employees of the company have been violated, and other acts or failures to act under specified
circumstances as well as excess insurance and umbrella liability, including personal umbrella liability
written as an endorsement to commercial umbrella coverages. The commercial casualty business line
includes liability coverage written on both a discounted and non-discounted basis as part of commercial
package policies.
• Commercial property – Commercial property insurance provides coverage for loss or damage to
buildings, inventory and equipment caused by covered causes of loss such as fire, wind, hail, water, theft
and vandalism, as well as business interruption resulting from a covered loss. Commercial property also
includes crime insurance, which provides coverage for losses such as embezzlement or misappropriation
of funds by an employee, among others, and inland marine insurance, which provides coverage for a
variety of mobile equipment, such as contractor’s equipment, builder’s risk, cargo and electronic data
processing equipment. Various property coverages can be written as stand-alone policies or can be
added to a package policy. The commercial property business line includes property coverage written on
both a non-discounted and discounted basis as part of commercial package policies.
• Commercial auto – Commercial auto coverages protect 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 – Workers’ compensation coverage protects employers against specified
benefits payable under state or federal law for workplace injuries to employees. We write workers’
compensation coverage in all of our active states except North Dakota, Ohio and Washington, where
coverage is provided solely by the state instead of by private insurers.
• Specialty packages – Specialty packages include coverages for property, liability and business
interruption tailored to meet the needs of specific industry classes, such as artisan contractors, dentists,
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 11
garage operators, financial institutions, metalworkers, printers, religious institutions, or smaller, main
street businesses. Businessowners policies, which combine property, liability and business interruption
coverages for small businesses, are included in specialty packages.
• Surety and executive risk – This business line includes:
o Contract and commercial surety bonds, which guarantee a payment or reimbursement for financial
losses resulting from dishonesty, failure to perform and other acts.
o Fidelity bonds, which cover losses that policyholders incur as a result of fraudulent acts by specified
individuals or dishonest acts by employees.
o Director and officer liability insurance, which covers liability for alleged errors in judgment, breaches
of duty and wrongful acts related to activities of for-profit or nonprofit organizations. Our director and
officer liability policy can optionally include EPLI coverage.
• Machinery and equipment – Specialized machinery and equipment coverage can provide protection for
loss or damage to boilers and machinery, including production and computer equipment, from sudden
and accidental mechanical breakdown, steam explosion, or artificially generated electrical current.
Our emphasis is on products that agents can market to small- to mid-size businesses in their communities.
Of our 1,387 reporting agency locations, eight market only our surety and executive risk products and
four market only our personal lines products. The remaining 1,375 locations, located in all states in which we
actively market, offer some or all of our standard market commercial insurance products.
In 2008, our 10 highest volume commercial lines states generated 65.9 percent of our earned premiums
compared with 66.7 percent in the prior year. Earned premiums in the 10 highest volume states decreased
4.4 percent in 2008 and decreased 3.1 percent in the remaining 25 states. The number of reporting agency
locations in our 10 highest volume states increased to 905 in 2008 from 878 in 2007.
Commercial Lines Earned Premiums by State
(Dollars in millions)
Year ended December 31, 2008
Ohio
Illinois
Pennsylvania
Indiana
North Carolina
Virginia
Michigan
Georgia
Wisconsin
Tennessee
Year ended December 31, 2007
Ohio
Illinois
Pennsylvania
Indiana
North Carolina
Virginia
Michigan
Wisconsin
Georgia
Tennessee
Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
$
$
377
222
166
148
143
111
107
89
88
82
397
234
170
158
147
119
115
94
88
81
16.2 %
9.5
7.1
6.4
6.2
4.8
4.6
3.8
3.8
3.5
16.5 %
9.7
7.0
6.6
6.1
4.9
4.8
3.9
3.7
3.5
218
118
80
103
73
58
99
68
48
40
216
115
77
100
69
56
95
47
66
37
$
$
1.7
1.9
2.1
1.4
2.0
1.9
1.1
1.3
1.8
2.1
1.8
2.0
2.2
1.6
2.1
2.1
1.2
2.0
1.3
2.2
For new commercial lines business, case-by-case underwriting and pricing is coordinated by our locally based
field marketing representatives. Our agents and our field marketing, claims, loss control, premium audit,
bond and machinery and equipment representatives get to know the people and businesses in their
communities and can make informed decisions about each risk. These field marketing representatives also
are responsible for selecting new independent agencies, coordinating field teams of specialized company
representatives and promoting all of the company's products within the agencies they serve.
Commercial lines policy renewals are managed by headquarters underwriters who are assigned to specific
agencies and consult with local field staff as needed. As part of our team approach, the headquarters
underwriter also helps 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 marketing representatives by providing product training,
answering underwriting questions, helping to determine underwriting eligibility and assisting with the
mechanics of premium determination.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 12
Our commercial lines packages are typically offered on a three-year policy term for most insurance
coverages, a key competitive advantage. 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
cancelled 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. 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 2008 commercial premiums were subject to annual rating or were written on a
one-year policy term.
In our experience, multi-year packages are somewhat less price sensitive for 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.
Staying abreast of evolving market conditions is a critical function, accomplished in both an informal and
a formal manner. Informally, our field marketing representatives and underwriters are in constant receipt of
market intelligence from the agencies with which they work. Formally, our commercial lines product
management group and field marketing associates conduct periodic surveys to obtain competitive
intelligence. This market information helps identify the top competitors by line of business or specialty
program and also identifies our market strengths and weaknesses. The analysis encompasses pricing,
breadth of coverage and underwriting/eligibility issues.
In addition to reviewing our competitive position, our product management group and our underwriting audit
group review compliance with our underwriting standards as well as the pricing adequacy of our commercial
insurance programs and coverages. Further, our research and development department analyzes
opportunities and develops new products, new coverage options and improvements to existing insurance
products.
At year-end 2008, we supported our commercial lines operations with a variety of technology tools. WinCPP®
is our commercial lines premium quoting system. WinCPP is available in all of our agency locations in which
we actively market commercial lines insurance and provides quoting capabilities for nearly 100 percent of
our new and renewal commercial lines business. WinCPP works with our real-time agency interface,
CinciBridge™, which allows automated movement of key underwriting data from an agency’s management
system to WinCPP, reducing agents’ data entry and allowing seamless quoting and rating capabilities.
Many small business accounts written as Businessowners Policies (BOP) and Dentist’s Package Policies
(DBOP) are eligible to be issued at our agency locations through our Web-based e-CLAS® policy processing
system. (A businessowners policy combines property, liability and business interruption coverages for small
businesses.) e-CLAS provides full policy lifecycle transactions, including quoting, issuance, policy changes,
renewal processing and policy printing at the agency location. These features make it easy and efficient for
our agencies to issue and service these policies. At year-end 2008, e-CLAS for BOP and DBOP was in use in
30 states representing 98 percent of our premiums for these products, which are included in the specialty
packages commercial line of business. e-CLAS also uses CinciBridge to provide real-time data transfer with
agency management systems.
We have been streamlining internal processes and achieving operational efficiencies in our headquarters
commercial lines operations through deployment of iView™, a policy imaging and workflow system. This
system provides online access to electronic copies of policy files, enabling our underwriters to respond to
agent requests and inquiries more quickly and efficiently. iView also automates internal workflows through
electronic routing of underwriting and processing work tasks. At year-end 2008, more than 92 percent of in-
force non-workers’ compensation commercial lines policy files were administered and stored electronically in
iView. Workers’ compensation policies are to be added to iView in 2009.
Commercial Lines Insurance Marketplace
Our competition for the types and sizes of commercial accounts we typically write in the standard market
predominantly consists of those companies that also distribute through independent agencies. The
independent agencies that market our commercial lines products typically represent six to 12 standard
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 13
market insurance carriers, including both national and regional carriers, some of which may be mutual
companies.
Overall, the softening commercial lines marketplace of the past several years continued to intensify in 2008.
Over this period, anecdotal reports of very aggressive pricing have grown in frequency. Over the course of
2008, we saw many situations where underwriting discipline appeared to slip as carriers sought to capture
market share. Many carriers continued to manage the soft market conditions by working aggressively to
protect their renewal portfolios. Renewal decreases in the mid-single digits were still prevalent in the fourth
quarter of 2008; however, we have worked to retain our best renewal business while continuing to write new
business and maintain underwriting discipline. In late 2008 and early 2009, we have begun to see
preliminary indications leading us to believe that market pricing may be starting to level.
PERSONAL LINES PROPERTY CASUALTY INSURANCE SEGMENT
The personal lines property casualty insurance segment contributed net earned premiums of $689 million to
total revenues, or 18.0 percent of the total, and reported a loss before income taxes of $82 million in 2008.
Personal lines net earned premiums declined 3.4 percent in 2008, 6.3 percent in 2007 and 5.3 percent in
2006.
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. As a result, 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 – This business line includes personal auto coverages that protect against liability to
others for both bodily injury and property damage, medical payments to insureds and occupants of their
vehicle, physical damage to an insured’s own vehicle from collision and various other perils, and
damages caused by uninsured motorists. In addition, many states require policies to provide first-party
personal injury protection, frequently referred to as no-fault coverage.
• Homeowners – This business line includes homeowner coverages that protect against losses to
dwellings and contents from a wide variety of perils, as well as liability arising out of personal activities
both on and off the covered premises. The company also offers coverage for condominium unit owners
and renters.
• Other personal lines – This includes the variety of other types of insurance products we offer to
individuals such as dwelling fire, inland marine, personal umbrella liability and watercraft coverages.
At year-end, we marketed personal lines insurance products through 954 of our 1,387 reporting agency
locations in 27 of the 35 states in which we offer standard market commercial lines insurance.
The remaining 433 locations primarily are in states where we do not yet actively market these products;
some are in locations where we have determined, in conjunction with agency management, that our personal
lines products were not appropriate for their agencies at this time. As discussed in Strategic Initiatives,
Page 7, introducing personal lines to these agencies is one of the ways we intend to grow profitably in the
next several years. The number of reporting agency locations in our 10 highest volume states increased to
627 in 2008 from 604 in 2007.
In 2008, our 10 highest volume personal lines states generated 85.1 percent of our earned premiums
compared with 84.9 percent in the prior year. Earned premiums in the 10 highest volume states declined
3.0 percent in 2008 and declined 6.4 percent in the remaining states.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 14
Personal Lines Earned Premiums by State
(Dollars in millions)
Year ended December 31, 2008
Ohio
Georgia
Indiana
Illinois
Alabama
Kentucky
Michigan
Florida
Virginia
Wisconsin
Year ended December 31, 2007
Ohio
Georgia
Indiana
Illinois
Alabama
Kentucky
Michigan
Florida
Virginia
Wisconsin
Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
$
$
253
61
57
48
41
34
28
24
20
20
266
61
59
49
37
37
31
23
21
20
36.8 %
8.9
8.3
7.0
5.9
5.0
4.0
3.4
2.9
2.9
37.3 %
8.6
8.3
6.8
5.2
5.2
4.4
3.2
3.0
2.9
199
60
76
84
37
36
70
10
25
30
200
58
71
81
33
36
64
10
22
29
$
$
1.3
1.0
0.8
0.6
1.1
0.9
0.4
2.4
0.8
0.7
1.3
1.1
0.8
0.6
1.1
1.0
0.5
2.3
1.0
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 on the
agent’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. We now have five full-
time personal lines marketing representatives, two headquarters based and three living in the field, and plan
to add two more in 2009. These marketing representatives have underwriting authority and visit agencies on
a regular basis. They reinforce the advantages of our personal lines products and offer training in the use of
our processing system.
Competitive advantages of our personal lines coverages include our claims service, credit structure and
customizable endorsements for both the personal auto and homeowner policies. Most of our personal lines
products are processed through Diamond, our real-time personal lines policy processing system, which
supports and allows once-and-done processing. Diamond incorporates features frequently requested by our
agencies such as direct bill and monthly payment plans, local and headquarters policy printing options, data
transfer to and from popular agency management systems and real-time integration with third-party data
such as insurance scores, motor vehicle reports and address verification. At year-end 2008, Diamond was in
use in 24 states representing approximately 99 percent of our personal lines premium volume, all of which is
on a one-year term.
In 2006, we introduced PL-efiles, a policy imaging system, to our personal lines operations. Through year-end
2008, we had transitioned information on current Diamond personal lines policies to PL-efiles and continue
to work on imaging necessary older information. The transition replaces paper format with electronic copies
of policy documents. PL-efiles complements the Diamond system by giving personal lines underwriters and
support staff online access to policy documents and data, enabling them to respond to agent requests and
inquiries quickly and efficiently.
Personal Lines Insurance Marketplace
The independent agencies that market our personal lines products typically represent four to six standard
personal lines carriers. In addition to carriers that market through independent agents, our personal lines
competition also includes carriers that market through captive agents and direct writers, which our agencies’
clients may investigate independently.
Over the past several years, we have seen increased competition in the personal lines marketplace, driven by
industrywide improvement in results and favorable frequency and severity trends. The increased competition
in the past several years also reflected implementation of tiered rating systems by a growing number of
carriers. Carriers that have adopted these systems rely on increasingly more data, including credit-based
information, to identify multiple relevant variables to segment the market.
We expect the overall market to remain competitive, with small pricing increases in personal lines over the
next 12 to 24 months. Carriers will continue to increase the sophistication of their pricing to attract more
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 15
preferred customers and gain market share. Industry results should continue to improve if catastrophe
losses return to a normalized level.
LIFE INSURANCE SEGMENT
The life insurance segment contributed $126 million, or 3.3 percent, of net earned premiums and $4 million
of income before income taxes in 2008. Life insurance segment profitability is discussed in detail in Item 7,
Life Insurance Results of Operations, Page 64. Life insurance net earned premiums grew 0.8 percent in
2008, 9.0 percent in 2007 and 7.9 percent in 2006.
The overall mission of our company is supported by The Cincinnati Life Insurance Company. Cincinnati Life
helps meet the needs of our agencies, including increasing and diversifying agency revenues. We primarily
focus on life products that produce revenue growth through a steady stream of premium payments.
By diversifying revenue and profitability for both the agency and our company, this strategy enhances the
already strong relationship built by the combination of the property casualty and life companies.
Cincinnati Life seeks to become the life insurance carrier of choice for the independent agencies that work
with our property casualty operations. We emphasize up-to-date products, responsive underwriting and high
quality service as well as competitive commissions. At year-end 2008, almost 75 percent of our
1,387 property casualty reporting agency locations offered Cincinnati Life’s products to their clients. We also
develop life business from approximately 500 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.
Life Insurance Business Lines
Four lines of business – term insurance, universal life insurance, worksite products and whole life insurance
– account for approximately 83.7 percent of the life insurance segment’s revenues:
•
Term insurance – policies under which a death benefit is payable only if the insured dies during a
specific period of time. For policies without a return of premium provision, no benefit is payable if the
insured person survives to the end of the term. For policies in-force with a return of premium provision,
a benefit equal to the sum of all paid premiums is payable if the insured person survives to the end of
the term. While premiums are fixed, they must be paid as scheduled. The policies are fully underwritten.
• Universal life insurance – long-duration life insurance policies. Contract premiums are neither fixed nor
guaranteed; however, the contract does specify a minimum interest crediting rate and a maximum cost
of insurance charge and expense charge. Premiums are not fixed and may be varied by the contract
owner. The cash values, available as a loan collateralized by the cash surrender value, are not
guaranteed and depend on the amount and timing of actual premium payments and the amount of
actual contract assessments. The policies are fully underwritten.
• Worksite products – term insurance, whole life insurance, universal life and disability insurance offered
to employees through their employer. Premiums are collected by the employer using payroll deduction.
Polices are issued using a simplified underwriting approach and on a guaranteed issue basis. Worksite
insurance products provide our property casualty agency force with excellent cross-serving opportunities
for both commercial and personal accounts. Agents report that offering worksite marketing to employees
of their commercial accounts provides a benefit to the employees at no cost to the employer. Worksite
marketing also connects agents with new customers who may not have previously benefited from
receiving the services of a professional independent insurance agent.
• Whole life insurance – policies that provide life insurance for the entire lifetime of the insured; the death
benefit is guaranteed never to decrease and premiums are guaranteed never to increase. While
premiums are fixed, they must be paid as scheduled. These policies provide guaranteed cash values that
are available as loans collateralized by the cash surrender value. The policies are fully underwritten.
In addition, Cincinnati Life markets:
• Disability income insurance provides monthly benefits to offset the loss of income when the insured
person is unable to work due to accident or illness.
• Deferred annuities 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 provide some combination of regular income and lump sum payments in exchange
for a single premium. Immediate annuities also are written by our life insurance segment and purchased
by our property casualty companies to settle casualty claims.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 16
Life Insurance Marketplace
Our property casualty agencies comprise the main distribution system for our life insurance segment. While
other life insurance carriers continue to expand the use of nontraditional distribution channels, such as
banks or direct sales as alternatives to the agency channel, we intend to market solely through independent
agencies, with an emphasis on enhancing relationships with agencies affiliated with our property casualty
insurance operations.
When marketing through our property casualty agencies, we have specific competitive advantages:
• Because our property casualty operations are held in high regard, property casualty agency management
is predisposed to consider selling our life products.
• Marketing efforts for both our property casualty and life insurance businesses are directed by our field
marketing department, which assures consistency of communication and operations. Life field marketing
representatives are available to meet face-to-face with agency personnel and their clients as well.
•
The resources of our life headquarters underwriters and other associates are available to the agents and
field team to assist in the placement of business. Fewer and fewer of our competitors provide direct,
personal support between the agent and the insurance carrier.
We continue to emphasize the cross-serving opportunities of our life insurance, including term and worksite
products, for the property casualty agency’s personal and commercial accounts. In both the property casualty
and independent life agency distribution systems, we enjoy the advantages of offering competitive, up-to-
date products, providing close personal attention in combination with financial strength and stability.
• We primarily offer products addressing the needs of businesses with key person and buy-sell coverages.
We offer personal and commercial clients of our agencies quality, personal life insurance coverage.
•
Term insurance is our largest life insurance product line. We continue to introduce new term products
with features our agents indicate are important, such as a return of premium rider, and we have
restructured our underwriting classifications to better meet the needs of their clients.
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 – AA- (Very Strong) and Standard & Poor's – A+ (Strong), as
discussed in Financial Strength, Page 3. Our life insurance company has not chosen to establish a Moody’s
rating.
Current statutory laws and regulations require life insurance companies to hold redundant reserves,
particularly for preferred risk underwriting classes. While these redundant reserves have no effect on GAAP
results, they depress statutory earnings and require a large commitment of capital. Redundant reserves are
a significant issue, not just for our life insurance operations, but for all writers of term insurance and
universal life with secondary guarantees.
The National Association of Insurance Commissioners recognizes the problems caused by redundant
reserves and is considering a principles-based reserving system rather than the current formulaic system.
While still capturing all material risks, a principles-based system would allow a company to use its own
experience, subject to credibility standards and appropriate margins for uncertainty. Also, under the
proposed principles-based system, the insurer would fully document and disclose all its assumptions and
methods to regulatory officials.
INVESTMENTS SEGMENT
The investment segment contributed $675 million, or 17.6 percent, of our total revenues in 2008, primarily
from net investment income and from realized investment gains and losses from investment portfolios
managed for the holding company and each of the operating subsidiaries. After deducting $63 million in
interest credited to contract holders of the life insurance segment, the investments segment contributed
$612 million of income before income taxes, or more than 100 percent of our 2008 total income before
income taxes.
During 2008, our board and investment department adopted internal guidelines to place additional
parameters around our portfolio. These parameters address, among other issues, the overall mix of the
portfolio as well as security and sector concentrations. The parameters came out of our risk management
program, with the goal of more specifically defining our risk tolerances, aligning our operating plan
accordingly and improving management’s ability to identify and respond to changing conditions. Going
forward, we will evaluate all of our fixed-maturity and equity investments using our investment parameters,
as appropriate.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 17
The fair value (market value) of our investment portfolio was $8.807 billion and $12.198 billion at year-end
2008 and 2007, respectively. Despite the market turmoil of 2008 and our decision to realize $1.024 billion
in gains on security sales during the year, the overall portfolio remained in an unrealized gain position at
year-end.
The cash we generate from insurance operations historically has been invested in three broad categories of
investments:
•
Fixed-maturity investments – Includes taxable and tax-exempt bonds and redeemable preferred stocks.
During 2008 and 2007, purchases served to offset sales, calls and market value declines.
• Equity investments – Includes common and nonredeemable preferred stocks. During 2008 and 2007,
sales and market value declines of equity securities more than offset purchases and market value
appreciation.
• Short-term investments – Primarily commercial paper.
(In millions)
At December 31, 2008
At December 31, 2007
Taxable fixed maturities
Tax-exempt fixed maturities
Common equities
Preferred equities
Short-term investments
Total
Book value % of BV
Fair value % of FV
Book value % of BV
Fair value % of FV
$
$
3,354
2,704
1,889
188
84
8,219
40.8 % $
32.9
23.0
2.3
1.0
100.0 % $
3,094
2,733
2,721
175
84
8,807
35.1 % $
31.0
30.9
2.0
1.0
100.0 % $
3,265
2,518
2,715
260
101
8,859
36.9 % $
28.4
30.7
2.9
1.1
100.0 % $
3,284
2,564
6,020
229
101
12,198
26.9 %
21.0
49.4
1.9
0.8
100.0 %
We actively determine the portion of new cash flow to be invested in fixed-maturity and equity securities at
the parent and insurance subsidiary levels. We consider internal measures, as well as insurance department
regulations and ratings agency guidance. We monitor a variety of metrics, including after-tax yields, the ratio
of investments in common stocks to statutory surplus for the property casualty and life insurance operations
and the parent company's ratio of investment assets to total assets.
At year-end 2008, 1.6 percent of the value of our investment portfolio was made up of securities that do not
actively trade on a public market and require management’s judgment to develop pricing or valuation
techniques (Level 3 assets). We obtain at least two outside valuations for these assets and generally use the
more conservative calculation. These investments include private placements, small issues and various thinly
traded securities. See Item 7, Fair Value Measurements, Page 45, and Item 8, Note 3 of the Consolidated
Financial Statements Page 106, for additional discussion of our valuation techniques.
In addition to securities held in our investment portfolio, at year-end 2008, other invested assets included
$37 million of life policy loans, $32 million of venture capital fund investments, $8 million of private equity
investments and $6 million of investment in real estate.
Fixed-maturity and Short-term Investments
By maintaining a well diversified fixed-maturity portfolio, we attempt to reduce overall risk. We invest new
money in the bond market on a continuous basis, targeting what we believe to be optimal risk-adjusted
after-tax yields. Risk, in this context, includes interest rate, call, reinvestment rate, credit and liquidity risk.
We do not make a concerted effort to alter duration on a portfolio basis in response to anticipated
movements in interest rates. By continuously investing in the bond market, we build a broad, diversified
portfolio that we believe mitigates the impact of adverse economic factors.
We place a strong emphasis on purchasing current income-producing securities for the insurance companies'
portfolios. Within the fixed-maturity portfolio, we invest in a blend of taxable and tax-exempt securities with
an eye toward maximizing credit adjusted after-tax yields.
During the third quarter of 2008, we terminated a securities lending program under which certain fixed
maturities from our investment portfolio were loaned to other institutions for short periods of time. As a
result, no securities were on loan at year-end 2008 compared with $745 million at year-end 2007.
We discuss the program in Item 8, Note 2 of the Consolidated Financial Statements, Page 104.
In conjunction with the program termination, we returned the collateral but chose to retain a small portfolio
of collateralized mortgage obligations (CMOs) rather than sell them at what we felt were distressed prices in
an illiquid market. The CMOs were an investment made by one of the short-duration funds, which
subsequently dissolved and distributed the assets to its investors. All $30 million of the CMOs in the portfolio
are collateralized by Alt-A mortgages that originated between 2004 and 2006. Consequently, at December
31, 2008, we owned investment-grade CMOs with a fair value and book value of $27 million and $39 million,
respectively. Of the $27 million investment-grade CMOs, $21 million were rated AAA by Standard & Poor’s.
We also owned non-investment grade CMOs that had a fair value and book value of $3 million and
$4 million, respectively. We do not intend to make additional investments in this asset category.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 18
Fixed-maturity and Short-term Portfolio Ratings
As of year-end 2008, the portfolio was trading at 96.2 percent of its book value, in line with general market
conditions. The general level of interest rates decreased over the course of 2008; however, credit spreads
widened considerably due to a continued flight to quality.
The downward shift in the higher portfolio ratings during 2008 primarily was driven by significant calls of
government sponsored entities (GSE) bonds, as well as rating withdrawals that occurred in response to the
difficulties experienced by certain municipal bond insurers. The majority of our non-rated securities are
tax-exempt municipal bonds from smaller municipalities that chose not to pursue a credit rating. Credit
ratings as of December 31 for the fixed-maturity and short-term portfolio were:
(Dollars in millions)
At December 31, 2008
Fair
value
Percent
to total
At December 31, 2007
Fair
value
Percent
to total
Moody's Ratings and Standard & Poor's Ratings combined
Aaa, Aa, A, AAA, AA, A
Baa, BBB
Ba, BB
B, B
Caa, CCC
Ca, CC
C, C
Non-rated
Total
$
$
4,149
1,258
240
46
7
3
0
208
5,911
70.2 % $
21.3
4.1
0.8
0.1
0.1
0.0
3.4
100.0 % $
4,366
1,076
225
110
25
0
0
147
5,949
73.4 %
18.1
3.8
1.8
0.4
0.0
0.0
2.5
100.0 %
We discuss the maturity of our fixed-maturity portfolio in Item 8, Note 2 of the Consolidated Financial
Statements, Page 104. Attributes of the fixed-maturity portfolio include:
Weighted average yield-to-book value
Weighted average maturity
Effective duration
Years ended December 31,
2007
2008
5.6 %
8.2 yrs
5.4 yrs
5.3 %
8.0 yrs
4.8 yrs
Taxable Fixed Maturities
Our taxable fixed-maturity portfolio (at fair value) at year-end 2008 included:
• $389 million in U.S. agency paper that is rated Aaa/AAA by Moody’s and Standard & Poor’s, respectively.
• $2.324 billion in investment-grade corporate bonds that have a Moody's rating at or above Baa3 or a
Standard & Poor's rating at or above BBB-.
• $210 million in high-yield corporate bonds that have a Moody's rating below Baa3 or a Standard & Poor's
rating below BBB-.
• $171 million in convertible bonds and redeemable preferred stocks.
Our strategy typically is to buy and hold fixed-maturity investments to maturity, but we monitor credit profiles
and market value movements when determining holding periods for individual securities. With the exception
of U.S. agency paper (government-sponsored entities), no individual issuer's securities accounted for more
than 1.7 percent of the taxable fixed-maturity portfolio at year-end 2008.
The investment-grade corporate bond portfolio is most heavily concentrated in the financial-related sectors,
including banks, brokerage, finance and investment and insurance companies. The financial sectors
represented 34.2 percent of fair value of this portfolio at year-end 2008, compared with 42.1 percent,
at year-end 2007. Although the financial-related sectors make up our largest group of investment-grade
corporate bonds, we believe our concentration is below the average for the corporate bond market as a
whole. Utilities are the only other sector that exceeds 10 percent of our investment-grade corporate bond
portfolio, at 11.6 percent of fair value at year-end 2008.
Tax-exempt Fixed Maturities
We traditionally have purchased municipal bonds focusing on general obligation and essential services
bonds, such as sewer, water or others. While no single municipal issuer accounted for more than 0.6 percent
of the tax-exempt municipal bond portfolio at year-end 2008, there are higher concentrations within
individual states. Holdings in Texas and Indiana accounted for a total of 35.0 percent of the municipal bond
portfolio at year-end 2008.
In recent years, we have purchased insured municipal bonds because of their excellent credit-adjusted
after-tax yields. At year-end 2008, bonds representing $2.290 billion, or 83.8 percent, of the fair value of our
municipal portfolio were insured with an average rating of AAA. Because of our emphasis on general
obligation and essential services bonds, over 90 percent of the insured municipal bonds have an underlying
rating of at least A3 or A-.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 19
Short-term Investments
Our short-term investments consist primarily of commercial paper, demand notes or bonds purchased within
one year of maturity. We make short-term investments primarily with funds to be used to make upcoming
cash payments, such as taxes. At year-end 2008, we had $84 million of short-term investments compared
with $101 million at year-end 2007.
Equity Investments
After covering both our intermediate and long-range insurance obligations with fixed-maturity investments,
we historically used available cash flow to invest in equity securities. Investment in equity securities has
played an important role in achieving our portfolio objectives and has contributed to portfolio appreciation.
We remain committed to our long-term equity focus, which we believe is key to our company’s long-term
growth and stability.
Common Stocks
Our common stock investments generally are dividend-paying securities. In this market, we are seeking to
maximize our potential return while minimizing dividend income risk by selecting securities from a variety of
dividend scenarios, including those with the potential for dividend growth from a below-market current yield.
Other criteria we evaluate include increasing sales and earnings, proven management and a favorable
outlook. We believe our equity investment style is an appropriate long-term strategy after we have purchased
fixed maturity investments to cover our insurance reserves.
In mid-2008, we began applying new investment guidelines that increased portfolio diversification, reducing
single issue and sector concentrations. Our year-end 2008 portfolio has been positioned for reduced volatility
going forward. As a result, despite economic and market disruptions that led to unprecedented value
declines, our equity portfolio suffered less than the broader indices during 2008.
We view our diversifying actions to be consistent with our view of prudent risk management. At year-end
2008, our financial sector holdings were 12.4 percent of our $2.7 billion publicly traded common stock
portfolio, below the Standard & Poor's 500 weighting, and significantly lower than our 56.2 percent financial
sector weighting at year-end 2007. Among other changes, we reduced our Fifth Third Bancorp (NASDAQ:FITB)
holding to approximately 12 million shares at year-end 2008. Following Fifth Third's further reduction of its
dividend payout in December 2008, we sold the remainder of our holding in January 2009 for an additional
capital gain. We expect to continue to make changes to the portfolio, as deemed appropriate.
Proceeds of sales are being reinvested in both fixed income and equity securities with yields that we believe
are likely to be more secure. This may slow the return to growth in investment income although we believe
year-over-year comparisons may turn positive in the second half of 2009.
Common Stock Portfolio Industry Sector Distribution
Sector:
Healthcare
Consumer staples
Energy
Financial
Utilities
Consumer discretionary
Industrials
Information technology
Materials
Telecomm services
Total
Percent of Publicly Traded Common Stock Portfolio
At December 31, 2008
At December 31, 2007
Cincinnati
Financial
S&P 500 Industry
Weightings
Cincinnati
Financial
S&P 500 Industry
Weightings
21.6 %
19.8
16.8
12.4
9.3
6.6
6.1
4.2
1.9
1.3
100.0 %
14.8 %
12.8
13.3
13.3
4.2
8.4
11.1
15.3
3.0
3.8
100.0 %
10.2 %
10.7
11.5
56.2
4.8
2.8
1.9
1.9
0.0
0.0
100.0 %
12.0 %
10.2
12.9
17.6
3.6
8.5
11.5
16.8
3.3
3.6
100.0 %
At year-end 2008, 29.7 percent of our common stock holdings (measured by fair value) were held at the
parent company level.
Until June 2008, we had held more than 10 percent of Fifth Third’s common stock for many years. We
continue to hold more than 5 percent of Piedmont Natural Gas Company (NYSE:PNY). At year-end 2008,
there were 12 holdings with a fair value equal to or greater than 2 percent of our publicly traded common
stock portfolio compared with 15 similar holdings at year-end 2007. No single issue accounted for more than
14.5 percent at year-end 2008.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 20
Nonredeemable Preferred Stocks
We evaluate preferred stocks in a manner similar to the evaluation we make for fixed-maturity investments,
seeking attractive relative yields. We generally focus on investment-grade preferred stocks issued by
companies that have a strong history of paying common dividends, providing us with another layer of
protection. We believe that careful application of this strategy continues to have merit, although events of
2008 indicated that preferred stocks will not receive preferential treatment in a government-sponsored
restructuring. When possible, we seek out preferred stocks that offer a dividend received deduction for
income tax purposes.
Additional information regarding the composition of investments is included in Item 8, Note 2 of the
Consolidated Financial Statements, Page 104.
OTHER
We report as “Other” the other income of our standard market property casualty insurance subsidiary, as well
as non-investment operations of the parent company and its subsidiaries, CFC Investment Company and
CinFin Capital Management Company (excluding client investment activities). In 2008, we also included
results of our surplus lines operations, The Cincinnati Specialty Underwriters Insurance Company and
CSU Producer Resources.
CFC Investment Company
CFC Investment Company offers commercial leasing and financing services to our agents, their clients and
other customers. As of year-end 2008, CFC Investment Company had 2,197 accounts and $71 million in
receivables, compared with 2,590 accounts and $92 million in receivables at year-end 2007.
CinFin Capital Management
CinFin Capital Management provided asset management services to internal and third-party clients.
CinFin Capital advised clients in December 2008 that it would close on February 28, 2009. During the recent
financial market downturn, this business performed satisfactorily relative to the appropriate benchmarks,
and it was profitable over its 10 years in operation. We determined that sufficient future growth through
agency referrals or other routes would have required a substantial increase in resources even as we are
seeking to increase our focus on our core insurance business with new initiatives. Many of our agencies did
not see referrals for investment management services within the scope of their offerings to their clients.
As of year-end 2008, CinFin Capital had 44 institutional, corporate and individual clients. Assets under
management were $817 million. We have given our unaffiliated clients ample opportunity to arrange for
another financial adviser and respond to any market changes in a timely manner. We will continue to manage
internally our pension plan and Cincinnati Life’s separate accounts.
Surplus Lines Property Casualty Insurance
Agencies have access to The Cincinnati Specialty Underwriters Insurance Company’s product line through
CSU Producer Resources, the wholly owned insurance brokerage subsidiary of parent-company Cincinnati
Financial Corporation. CSU Producer Resources has binding authority on all classes of business written
through CSU and maintains appropriate agent and surplus lines licenses to process non-admitted business.
Producers can submit risks to CSU Producer Resources, reflecting the mix of accounts Cincinnati agencies
currently write in their non-admitted surplus lines markets. CSU Producer Resources currently markets and
underwrites commercial general liability, property and miscellaneous errors and omissions coverages in
33 states. It will continue to add lines of business and coverages.
Agency producers have direct access through CSU Producer Resources to our dedicated surplus lines
underwriters, and they also can tap into their agencies’ broader Cincinnati relationships to bring their
policyholders services such as experienced and responsive loss control and claims handling. Our new surplus
lines policy administration system delivers electronic copies of policies to producers within minutes of
underwriting approval and policy issue. CSU Producer Resources gives extra support to our producers by
remitting surplus lines taxes and stamping fees and retaining admitted market affadavits, where required.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 21
REGULATION
STATE REGULATION
The business of insurance primarily is regulated by state law. All of our insurance company subsidiaries are
domiciled in the State of Ohio, except The Cincinnati Specialty Underwriters Insurance Company, which is
domiciled in the State of Delaware. Each insurance subsidiary is governed by the insurance laws and
regulations in its respective state of domicile. We also are subject to state regulatory authorities of all states
in which we write insurance. The state laws and regulations that have the most significant effect on our
insurance operations and financial reporting are discussed below.
•
Insurance Holding Company Regulation – We are regulated as an insurance holding company system in
the respective states of domicile of our standard market property casualty company subsidiary and its
surplus lines and life insurance subsidiaries. These regulations require that we annually furnish financial
and other information about the operations of the individual companies within the holding company
system. All transactions within a holding company affecting insurers must be fair and equitable. Notice to
the state insurance commissioner is required prior to the consummation of transactions affecting the
ownership or control of an insurer and prior to certain material transactions between an insurer and any
person or entity in its holding company group. In addition, some of those transactions cannot be
consummated without the commissioner’s prior approval.
• Subsidiary Dividends – The Cincinnati Insurance Company is 100 percent owned by Cincinnati Financial
Corporation. The dividend-paying capacity of The Cincinnati Insurance Company and its 100 percent
owned subsidiaries is regulated by the laws of the applicable state of domicile. Under these laws, our
insurance subsidiaries must provide a 10-day advance informational notice to the insurance
commissioner for the domiciliary state prior to payment of any dividend or distribution to its
shareholders. In all cases, ordinary dividends may be paid only from earned surplus, which for the Ohio
subsidiaries is the amount of unassigned funds set forth in an insurance subsidiary’s most recent
statutory financial statement. For the Delaware subsidiary, it is the amount of available and accumulated
funds derived from the subsidiary’s net operating profit of its business and realized capital gains.
The insurance company subsidiaries must give 30 days notice to and obtain prior approval from the
state insurance commissioner before the payment of an extraordinary dividend as defined by the state’s
insurance code. You can find information about the dividends paid by our insurance subsidiary in 2008
in Item 8, Note 9 of the Consolidated Financial Statements, Page 110.
•
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 have their source in statutes that delegate regulatory, supervisory and
administrative powers to state insurance departments. Such regulations, supervision and administration
of the insurance subsidiaries include, among others, the standards of solvency that must be met and
maintained; the licensing of insurers and their agents and brokers; the nature and limitations on
investments; deposits of securities for the benefit of policyholders; regulation of policy forms and
premium rates; policy cancellations and non-renewals; periodic examination of the affairs of insurance
companies; annual and other reports required to be filed on the financial condition of insurers or for
other purposes; requirements regarding reserves for unearned premiums, losses and other matters; the
nature of and limitations on dividends to policyholders and shareholders; the nature and extent of
required participation in insurance guaranty funds; the involuntary assumption of hard-to-place or
high-risk insurance business, primarily workers’ compensation insurance; and the collection, remittance
and reporting of certain taxes and fees.
The legislative and regulatory climate in Florida continues to create uncertainty for the insurance
industry. In February 2007, we adopted a marketing stance of writing no new business relationships in
Florida. This remained our stance through 2008, except in the lines of directors and officers, surety,
machinery and equipment and life insurance, which we resumed writing in June 2007, subject to existing
guidelines. In 2009, we intend to cautiously resume writing additional commercial lines of business,
while working to more actively manage the associated catastrophe risk, carefully underwriting new
commercial submissions and non-renewing commercial and personal lines policies that present the most
risk of loss because of their age, construction and geographic characteristics. In 2008, our written
premiums from Florida agencies were 2.9 percent of total written premiums, compared with 3.2 percent
in 2007.
On August 24, 2007, the company received administrative subpoenas from the Florida Office of
Insurance Regulation seeking documents and testimony concerning insurance for residential risks
located in Florida and communications with reinsurers, risk modeling companies, rating agencies and
insurance trade associations. We produced documents to respond to the subpoenas. The Office of
Insurance Regulation cancelled and has not rescheduled the hearing noticed in the subpoena for
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 22
October 18, 2007. Although inactive, these subpoenas remain outstanding as of December 31, 2008.
We continue to assess the changing insurance environment in Florida and hope to resume writing our
complete portfolio of insurance products in the state as the market stabilizes.
•
Insurance Guaranty Associations — Each state has insurance guaranty association laws under which the
associations may assess life and property casualty insurers doing business in the state for certain
obligations of insolvent insurance companies to policyholders and claimants. Typically, states assess
each member insurer in an amount related to the insurer’s proportionate share of business written by all
member insurers in the state. Our insurance companies incurred a charge of less than $1 million from
guaranty associations in 2008 and a charge of $2 million in 2007. We cannot predict the amount and
timing of any future assessments or refunds on our insurance subsidiaries under these laws.
• Shared Market and Joint Underwriting Plans – State insurance regulation requires insurers to participate
in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms
that generally provide applicants with various basic insurance coverages when they are not available in
voluntary markets. Such mechanisms are most commonly instituted for automobile and workers’
compensation insurance, but many states also mandate participation in FAIR Plans or Windstorm Plans,
which provide basic property coverages. Participation is based upon the amount of a company’s
voluntary market share in a particular state for the classes of insurance involved. Underwriting results
related to these organizations, which tend to be adverse to our company, have been immaterial to our
results of operations.
• 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 (SAP). 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 analyze the
adequacy of reserves annually. Our appointed actuaries must submit an opinion that reserves are
adequate for policy claims-paying obligations and related expenses.
• Risk-Based Capital Requirements — The NAIC’s risk-based capital (RBC) requirements for property
casualty and life insurers serve as an early warning tool for the NAIC and state regulators to identify
companies that may be undercapitalized and may merit further regulatory action. The NAIC has a
standard formula for annually assessing RBC. The formula for calculating RBC for property casualty
companies takes into account asset and credit risks but places more emphasis on underwriting factors
for reserving and pricing. The formula for calculating RBC for life insurance companies takes into account
factors relating to insurance, business, asset and interest rate risks.
FEDERAL REGULATION
Although the federal government and its regulatory agencies generally do not directly regulate the business
of insurance, federal initiatives often have an impact. Some of the current and proposed federal measures
that may significantly affect our business are discussed below.
•
The Terrorism Risk Insurance Act of 2002 (TRIA) – TRIA was originally signed into law on
November 26, 2002, and extended on December 22, 2005, in a revised form, and extended again on
December 26, 2007. TRIA provides a temporary federal backstop for losses related to the writing of the
terrorism peril in property casualty insurance policies. TRIA now is scheduled to expire
December 31, 2014. Under regulations promulgated under this statute, insurers are required to offer
terrorism coverage for certain lines of property casualty insurance, including property, commercial
multi-peril, fire, ocean marine, inland marine, liability, aircraft and workers’ compensation. In the event of
a terrorism event defined by TRIA, the federal government would reimburse terrorism claim payments
subject to the insurer’s deductible. The deductible is calculated as a percentage of subject written
premiums for the preceding calendar year. Our deductible in 2008 was $395 million (20 percent of
2007 subject premiums) and we estimate it will be $383 million (20 percent of 2008 subject premiums)
in 2009.
• Office of Foreign Asset Control (OFAC) – Subject to an Executive Order signed on September 24, 2001,
intended to thwart financing of terrorists and sponsors of terrorism, financial institutions were required
to block and report transactions and attempted transactions between their organizations and persons
and organizations named in a list published by OFAC. We currently use a combination of software,
third-party vendor and manual searches to accomplish our transaction blocking and reporting activities.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 23
•
•
Investment Advisers Act of 1940 – Our subsidiary, CinFin Capital Management Company, operates an
investment advisory business and is therefore subject to regulation by the SEC as a registered
investment adviser under the Investment Advisers Act of 1940. This law imposes certain annual
reporting, recordkeeping, client disclosure and compliance obligations on CinFin Capital Management.
CinFin Capital Management is terminating operations effective February 28, 2009.
Troubled Asset Relief Program (TARP), the economic stimulus bill, and related executive, legislative and
regulatory actions – The President, Congress and various regulatory agencies have worked, and continue
to work, to enact measures designed to improve the economy by recapitalizing banks, stimulating the
economy, providing relief to homeowners at risk of foreclosure and enhancing oversight of the financial
system. To date, none of these measures directly affect us. We are not a bank or a bank holding
company and do not intend to obtain TARP funds. Effects of other statutes and regulations on our
business are uncertain, as details of existing and proposed laws continue to emerge.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 24
Item 1A. Risk Factors
Our business involves various risks and uncertainties that may affect achievement of our business
objectives. Many of the risks could have ramifications across our organization. For example, while risks
related to setting insurance rates and establishing and adjusting loss reserves are insurance activities, errors
in these areas could have an impact on our investment activities, growth and overall results. The following
discussion should be viewed as a starting point for understanding the significant risks we face. It is not a
definitive summary of their potential impacts or of our strategies to manage and control the risks. Please see
Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Page 37,
for a discussion of those strategies.
The risks and uncertainties discussed below are not the only ones we face. There are additional risks and
uncertainties that we currently do not believe are material at this time. There also may be risks and
uncertainties of which we are not aware. 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.
Readers should carefully consider this information together with the other information we have provided in
this report and in other reports and materials we file periodically with the Securities and Exchange
Commission as well as news releases and other information we disseminate publicly.
We rely exclusively on independent insurance agents to distribute our products.
We market our products through independent, non-exclusive insurance agents. These agents are not
obligated to promote our products and can and do sell our competitors’ products. We must offer insurance
products that meet the needs of these agencies and their clients. We need to maintain good relationships
with the agencies that market our products. If we do not, these agencies may market our competitors’
products instead of ours, which may lead to us having a less desirable mix of business and could affect our
results of operations.
Events or conditions that could diminish our agents’ desire to produce business for us and the competitive
advantage that our independent agencies enjoy:
• Downgrade of the financial strength ratings of our insurance subsidiaries. We believe our strong insurer
financial strength ratings, in particular the A+ (Superior) rating from A.M. Best for our standard market
property casualty insurance subsidiaries, are an important competitive advantage. Ratings agencies
could change or expand their requirements. If our property casualty ratings were to be further
downgraded, our agents might find it more difficult to market our products or might choose to emphasize
the products of other carriers. See Item 1, Our Business and Our Strategy, Page 1, for additional
discussion of our financial strength ratings.
• Concerns that doing business with us is difficult or not profitable, perceptions that our level of service is
no longer a distinguishing characteristic in the marketplace, or perceptions that our business practices
are not compatible with agents’ business models. These issues could occur if agents or policyholders
believe that we are no longer providing the prompt, reliable personal service that has long been a
distinguishing characteristic of our insurance operations.
• Delays in the development, implementation, performance and benefits of technology projects and
enhancements or independent agent perceptions that our technology solutions are inadequate to match
their needs.
A reduction in the number of independent agencies marketing our products, the failure of agencies to
successfully market our products or the choice of agencies to reduce their writings of our products could
affect our results of operations if we are unable to replace them with agencies that produce adequate and
profitable premiums. We could lose premium if a bank that owns appointed agencies changes its strategies.
Further, policyholders may choose a competitor’s product rather than our own because of real or perceived
differences in price, terms and conditions, coverage or service. If the quality of the independent agencies
with which we do business were to decline, that also might cause policyholders to purchase their insurance
through different agencies or channels. Consumers, especially in the personal insurance segments, may
increasingly choose to purchase insurance from distribution channels other than independent insurance
agents, such as direct marketers.
We could experience an unusually high level of losses due to catastrophic, pandemic or
terrorism events or risk concentrations.
In the normal course of our business, we provide coverage against perils for which estimates of losses are
highly uncertain, in particular catastrophic and terrorism events. Catastrophes can be caused by a number of
events, including hurricanes, tornadoes, windstorms, earthquakes, hailstorms, explosions, severe winter
weather and fires. Due to the nature of these events, we are unable to predict precisely the frequency or
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 25
potential cost of catastrophe occurrences. The extent of losses from a catastrophe is a function of both the
total amount of insured exposure in the area affected by the event and the severity of the event. Our ability to
appropriately manage catastrophe risk depends partially on catastrophe models, the accuracy of which may
be impacted by inaccurate or incomplete data, the uncertainty of the frequency and severity of future events
and the uncertain impact of climate change.
The geographic regions in which we market insurance are exposed to numerous natural catastrophes, such
as:
• Hurricanes in the gulf, eastern and southeastern coastal regions.
• Earthquakes in the New Madrid fault zone, which lies within the central Mississippi valley, extending from
northeast Arkansas through southeast Missouri, western Tennessee and western Kentucky to southern
Illinois, southern Indiana and parts of Ohio.
Tornado, wind and hail in the Midwest, South and Southeast and, to a certain extent, the mid-Atlantic.
•
The occurrence of terrorist attacks in the geographic areas we serve could result in substantially higher
claims under our insurance policies than we have anticipated. While we do insure terrorism risk in all areas
we serve, we have identified our major terrorism exposure as general commercial risks in the metropolitan
Chicago area as well as small co-op utilities, small shopping malls and small colleges throughout our 35
active states. Additionally, our life insurance subsidiary could be adversely affected in the event of a terrorist
event or an epidemic such as the avian 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 exceeds our actuarially determined expectations. In addition, our financial condition would 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
companies 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 property casualty insurance products in 35 states, but our
business is concentrated in the Midwest and Southeast. We also have exposure in states where we do not
actively market insurance when clients of our independent agencies have businesses or properties in
multiple states.
The Cincinnati Insurance Company also participates in three assumed reinsurance treaties with two
reinsurers that spread the risk of very high catastrophe losses among many insurers. In 2009, we have
exposure of up to $7 million of assumed losses in three layers, from $1.0 billion to $1.7 billion, from a single
event under an assumed reinsurance treaty for Munich Re Group. The other two assumed reinsurance
treaties are immaterial.
In the event of a severe catastrophic event or terrorist attack elsewhere in the world, our insurance losses
may be immaterial. However, the companies in which we invest might be severely affected, which could
affect our financial condition and results of operations. Our reinsurers might experience significant losses,
potentially jeopardizing their ability to pay losses we cede to them. 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.
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, maintaining sufficient liquidity to pay covered claims and operating expenses,
service our debt obligations and pay dividends.
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 that are beyond our
control, such as inflation, economic growth, interest rates, world political conditions, 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 policyholders’ surplus. For more detailed discussion of risks
associated with our investments, please refer to Item 7A, Qualitative and Quantitative Disclosures About
Market Risk, Page 85.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 26
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 which
jurisdiction 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 are less than liabilities at the time of maturity or termination.
We discuss other risks associated with our separate account BOLIs in Item 7, Critical Accounting Estimates,
Separate Accounts, Page 47.
Further 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 purchased, fail or are otherwise negatively affected. The value of
corporate bonds and common equities we hold in the banking sector could further deteriorate. We may lose
premium if a bank that owns appointed agencies changes its strategies. We could experience increased
losses in our director and officer liability line of business if claims are made against insured financial
institutions.
Our investment performance also could suffer because of the types or concentrations 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 2008, common stock holdings made up 30.6 percent of our invested assets. Adverse news or
events affecting the global or U.S. economy or the equity markets could affect our net income, book value
and overall results as well as our ability to pay our common stock dividend. See Item 7, Investments Results
of Operations, Page 66, and Item 7A, Qualitative and Quantitative Disclosures About Market Risk, Page 85,
for discussion of our investment activities.
Deteriorating 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.
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 and properly analyze data; 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. 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.
Setting appropriate rates could be hampered if a state or states where we write business refuses to allow
rate increases that we believe are necessary to cover the risks insured. At least one state requires us to
purchase reinsurance from a mandatory reinsurance fund. Such reinsurance funds can create a credit risk
for insurers if not adequately funded by the state and, in some cases, the existence of a reinsurance fund
could affect the prices charged for our policies. The effect of these and similar arrangements could reduce
our profitability in any given period or limit our ability to grow our business.
The insurance industry is cyclical and intensely competitive. From time to time, the insurance industry goes
through prolonged periods of intense competition during which it is more difficult to attract new business,
retain existing business and maintain profitability. Competition in our insurance business is based on many
factors, including:
• Competitiveness of premiums charged
• Relationships among carriers, agents, brokers and policyholders
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 27
• 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 at 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 provided to agents and policyholders
• Claims satisfaction and reputation
If our pricing is incorrect or we are 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.
Please see the discussion of our Commercial Lines, Personal Lines and Life Insurance Segments in Item 1,
Page 11, Page 14 and Page 16, for a discussion of our competitive position in the insurance marketplace.
Our loss reserves, our largest liability, are based on estimates and could be inadequate to
cover our actual losses.
Our consolidated financial statements are prepared using GAAP. These principles require us to make
estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and
accompanying Notes. Actual results could differ materially from those estimates. For a discussion of the
significant accounting policies we use to prepare our financial statements and the material implications of
uncertainties associated with the methods, assumptions and estimates underlying our critical accounting
policies, please refer to Item 8, Note 1 of the Consolidated Financial Statements, Page 98, and Item 7,
Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves and Life
Insurance Policy Reserves, Page 41 and Page 44.
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.
Accordingly, our loss reserves for past periods could prove to be inadequate to cover our actual losses and
related expenses. Any changes in these estimates are reflected in our results of operations during the period
in which the changes are made. An increase in our loss reserves would decrease earnings, while a decrease
in our loss reserves would increase earnings.
The estimation process for unpaid loss and loss expense obligations involves uncertainty by its very nature.
We continually review the estimates and adjust the reserves as facts about individual claims develop,
additional losses are reported and new information becomes known. Adjustments due to loss development
on prior periods are reflected in the calendar year in which they are identified. The process used to determine
our loss reserves is discussed in Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and
Loss Expense Reserves and Life Insurance Policy Reserves, Page 41 and Page 44.
Unforeseen losses, the type and magnitude of which we cannot predict, may emerge in the future. These
additional losses could arise from changes in the legal environment, laws and regulations, climate change,
catastrophic events, increases in loss severity or frequency, or other causes. Such future losses could be
substantial.
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 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 are unable to obtain
reinsurance on acceptable terms and in appropriate amounts, our business and financial condition may 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
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 28
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.
Prior to 2003, we participated in USAIG, a joint underwriting association of individual insurance companies
that collectively functions as a worldwide insurance market for all types of aviation and aerospace accounts.
At year-end 2008, 28.6 percent, or $217 million, of our total reinsurance receivables were related to USAIG,
primarily for September 11, 2001, events, offset by $226 million of amounts ceded to other pool participants
and reinsurers. If the pool participants and reinsurers are unable to fulfill their financial obligations and all
security collateral that supports the participants’ obligations becomes worthless, we could be liable for an
additional pool liability of $283 million and our financial position and results of operations could be
materially affected. Currently all pool participants and reinsurers are financially solvent.
We no longer participate in new business generated by USAIG and its members. Please see Item 7,
2009 Reinsurance Programs, Page 81, for a discussion of our reinsurance treaties.
Our business depends on the uninterrupted operation of our facilities, systems and business
functions.
Our business depends on our associate’s 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 70 percent of our associates work at our Fairfield, Ohio,
headquarters.
The effects of changes in industry practices 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 or by increasing the number or
size of claims. In some instances, unforeseeable emerging and latent claim and coverage issues may not
become apparent until some time 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.
Further, the National Association of Insurance Commissioners (NAIC), state insurance regulators and state
legislators are continually reexamining existing laws and regulations governing insurance companies and
insurance holding companies, specifically focusing on modifications to statutory accounting principles,
interpretations of existing laws 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.
Additionally, laws and regulations may be enacted in the wake of the current financial and credit crises that
have adverse affects on our business, potentially including a change from a state-based system of regulation
to a system of federal regulation. While we do not participate or intend to seek to participate in the Troubled
Asset Relief Program, the effect of it or any similar legislation on our industry and the economy in general is
uncertain.
The effects of such changes could adversely affect our results of operations. Please see Item 7, Critical
Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves and Life Insurance
Policy Reserves, Page 41 and Page 44, for a discussion of our reserving practices.
Managing technology initiatives and meeting new data security requirements are significant
challenges.
While technology can streamline many business processes and ultimately reduce the cost of operations,
technology initiatives present short-term cost, implementation and operational risks. In addition, we may
have inaccurate expense projections, implementation schedules or expectations regarding the efficacy of the
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 29
end product. These issues could escalate over time. If we are unable to find and retain employees 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 rapidly emerge and change, exposing us to rising costs and competing
time constraints to secure our data in accordance with customer expectations and statutory and regulatory
requirements. A breach of our security that results in unauthorized access to our data could expose us to
data loss, litigation, damages, fines and penalties, significant increases in compliance costs and reputational
damage.
Please see Item 1, Strategic Initiatives, Page 7 for a discussion of our technology initiatives.
Our status as an insurance holding company with no direct operations could affect our ability
to pay dividends in the future.
Cincinnati Financial Corporation is a holding company that transacts substantially all of its business through
its subsidiaries. Our primary assets are the stock in our operating subsidiaries and our investments.
Consequently, our cash flow to pay cash dividends and interest on our long-term debt depends on dividends
we receive from our operating subsidiaries and income earned on investments held at the parent-company
level.
Dividends paid to our parent company by our insurance subsidiary are restricted by the insurance laws of
Ohio, its domiciliary state. These laws establish minimum solvency and liquidity thresholds and limits.
Currently, the maximum dividend that may be paid without prior regulatory approval is limited to the greater
of 10 percent of statutory surplus or 100 percent of statutory net income for the prior calendar year, up to
the amount of statutory unassigned surplus as of the end of the prior calendar year. Dividends exceeding
these limitations may be paid only with prior approval of the Ohio Department of Insurance. Consequently, at
times, we might not be able to receive dividends from our insurance subsidiary, or we might not receive
dividends in the amounts necessary to meet our debt obligations or to pay dividends on our common stock.
This could affect our financial position.
Please see Item 1, Regulation, Page 22, and Item 8, Note 9 of the Consolidated Financial Statements,
Page 110, for discussion of insurance holding company dividend regulations.
Item 1B.
None
Unresolved Staff Comments
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 30
Properties
Item 2.
Cincinnati Financial Corporation owns our headquarters building located on 100 acres of land in
Fairfield, Ohio. This building has approximately 1,508,200 total square feet of available space. In 2008, we
completed construction of a 425,400 square foot third office tower and 276,800 square foot underground
garage. We expect this expansion to accommodate our business needs for the foreseeable future. The
property, including land, is carried in our financial statements at $159 million as of December 31, 2008, and
is classified as land, building and equipment, net, for company use. John J. & Thomas R. Schiff & Co. Inc.,
a related party, occupies approximately 6,750 square feet (less than 1 percent).
Cincinnati Financial Corporation also owns the Fairfield Executive Center, which is located on the northwest
corner of our headquarters property. This four-story office building has approximately 124,000 square feet of
available space. The property is carried in the financial statements at $6 million as of December 31, 2008,
and is classified as an other invested asset. Unaffiliated tenants occupy approximately 8 percent. All
unoccupied space is currently available for lease.
The Cincinnati Insurance Company owns an unoccupied building on 16 acres of land in Springfield Township,
Ohio, approximately six miles from our headquarters. We plan to renovate the 48,000 square foot building to
serve as a business continuity center. The property, including land, is carried on our financial statements at
$6 million as of December 31, 2008, and is classified as land, building and equipment, net, for company
use.
Item 3.
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.
No matters were submitted to a vote of security holders of Cincinnati Financial during the fourth quarter
of 2008.
Submission of Matters to a Vote of Security Holders
Legal Proceedings
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 31
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 12,000 shareholders of record and approximately
37,000 beneficial shareholders as of December 31, 2008. Many of our independent agent representatives
and most of the 4,179 associates of our subsidiaries own the company’s common stock. We are unable to
quantify those holdings because many are beneficially held.
Our common shares are traded under the symbol CINF on the Nasdaq Global Select Market.
(Source: Nasdaq Global Select Market)
Quarter:
High close
Low close
Period-end close
Cash dividends declared
$
1st
39.71 $
35.10
38.04
0.39
2008
2nd
39.97 $
25.40
25.40
0.39
3rd
33.60 $
21.83
28.44
0.39
4th
31.71 $
18.80
29.07
0.39
1st
45.92 $
42.24
42.40
0.355
2007
2nd
47.62 $
42.57
43.40
0.355
3rd
44.79 $
36.91
43.31
0.355
4th
44.84
38.37
39.54
0.355
We discuss the factors that affect our ability to pay cash dividends and repurchase shares in Item 7, Liquidity
and Capital Resources, Page 70. One factor we address is regulatory restrictions on the dividends our
insurance subsidiary can pay to the parent company, which also is discussed in Item 8, Note 9 of the
Consolidated Financial Statements, Page 110.
The following summarizes securities authorized for issuance under our equity compensation plans as of
December 31, 2008:
Plan category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights at
December 31, 2008
(a)
Weighted-average exercise
price of outstanding
options, warrants and rights
(b)
Number of securities remaining available
for future issuance under equity
compensation plan (excluding securities
reflected in column (a)) at December 31,
2008
(c)
10,789,082 $ 36.31
7,333,645
-
-
10,789,082 $ 36.31
-
7,333,645
The number of securities remaining available for future issuance includes: 7,304,065 shares available for
issuance under the Cincinnati Financial Corporation 2006 Stock Compensation Plan, which can be issued as
stock options, service-based, or performance-based restricted stock units, stock appreciation rights or other
equity-based grants; 25,394 shares available for issuance of full share grants under the Cincinnati Financial
Corporation 2003 Non-Employee Directors’ Stock Plan; and 4,186 shares of stock options available for
issuance under the Cincinnati Financial Corporation Stock Option Plan VII. Additional information about stock-
based associate compensation granted under our equity compensation plans is available in Item 8, Note 17
of the Consolidated Financial Statements, Page 117.
Month
January 1-31, 2008
February 1-29, 2008
March 1-31, 2008
April 1-30, 2008
May 1-31, 2008
June 1-30, 2008
July 1-31, 2008
August 1-31, 2008
September 1-30, 2008
October 1-31, 2008
November 1-30, 2008
December 1-31, 2008
Totals
Total number
of shares
purchased
71,003 $
1,192,197
1,736,800
0
750,957
71,003
0
0
0
0
0
0
3,821,960
Average
price paid
per share
0.00
37.51
37.15
0.00
35.88
34.59
0.00
0.00
0.00
0.00
0.00
0.00
36.28
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
71,003
1,192,197
1,736,800
0
750,000
71,003
0
0
0
0
0
0
3,821,003
12,293,608
11,101,411
9,364,611
9,364,611
8,614,611
8,543,608
8,543,608
8,543,608
8,543,608
8,543,608
8,543,608
8,543,608
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 32
We did not sell any shares that were not registered under the Securities Act during 2008. The board of
directors has authorized share repurchases since 1996. In 2008, we repurchased a total of
3.8 million shares. In January 2008, we acquired 71,003 shares to settle the accelerated share repurchase
program authorized in October 2007, when the board of directors expanded an existing repurchase
authorization to approximately 13 million shares. 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, pursuant to SEC regulations.
The prior repurchase program for 10 million shares was announced in 2005, replacing a program that had
been in effect since 1999. No repurchase program has expired during the period covered by the above table.
All of the publicly announced plan repurchases in the table above were made under the expansion
announced in October 2007 of our 2005 program. Neither the 2005 nor 1999 program had an expiration
date, but no further repurchases will occur under the 1999 program.
Cumulative Total Return
As depicted in the graph below, the five–year total return on a $100 investment made December 31, 2003,
assuming the reinvestment of all dividends, was a negative 9.0 percent for Cincinnati Financial Corporation’s
common stock compared with a negative 2.1 percent for the Standard & Poor’s Composite 1500 Property &
Casualty Insurance Index and a negative 10.5 percent for the Standard & Poor’s 500 Index.
The Standard & Poor’s Composite 1500 Property & Casualty Insurance Index includes 23 companies: Allstate
Corporation, Berkley (W R) Corporation, Chubb Corporation, Cincinnati Financial Corporation, Fidelity National
Financial Inc., First American Corporation, Hanover Insurance Group Inc., Infinity Property & Casualty
Corporation, MBIA Inc., Mercury General Corporation, Navigators Group Inc., Old Republic International
Corporation, Proassurance Corporation, Progressive Corporation, RLI Corporation, Safety Insurance Group
Inc., Selective Insurance Group Inc., Stewart Information Services, Tower Group Inc., Travelers Companies
Inc., United Fire & Casualty Company, XL Capital Ltd. and Zenith National Insurance Corporation.
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.
Total Return Analysis
CFC vs. Market Indices
December 31 Totals
$175
$150
$125
$100
$75
$50
$25
$0
2003
2004
2005
2006
2007
2008
Cincinnati Financial Corporation
S&P 500 Index
S&P Composite 1500 Property & Casualty Insurance Index
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 33
Item 6.
Selected Financial Data
(In millions except per share data)
2008
Years ended December 31,
2007
2006
2005
$
$
Consolidated Income Statement Data
Earned premiums
Investment income, net of expenses
Realized investment gains and losses*
Total revenues
Net income
Net income per common share:
Basic
Diluted
Cash dividends per common share:
Declared
Paid
Shares Outstanding
Weighted average, diluted
Consolidated Balance Sheet Data
Invested assets
Deferred policy acquisition costs
Total assets
Loss and loss expense reserves
Life policy reserves
Long-term debt
Shareholders' equity
Book value per share
Consolidated Property Casualty Operations
Earned premiums
$
Unearned premiums
Loss and loss expense reserves
Investment income, net of expenses
Loss ratio
Loss expense ratio
Underwriting expense ratio
Combined ratio
$
$
$
$
$
3,136
537
138
3,824
429
2.63
2.62
1.56
1.525
163
8,890
509
13,369
4,086
1,551
791
4,182
25.75
3,010
1,542
4,040
350
57.7 %
10.6
32.3
100.6 %
$
$
$
$
3,250
608
382
4,259
855
5.01
4.97
1.42
1.40
172
12,261
461
16,637
3,967
1,478
791
5,929
35.70
3,125
1,562
3,925
393
46.6 %
12.0
31.7
90.3 %
$
$
$
$
3,278
570
684
4,550
930
5.36
5.30
1.34
1.31
175
13,759
453
17,222
3,896
1,409
791
6,808
39.38
3,164
1,576
3,860
367
51.9 %
11.6
30.8
94.3 %
3,164
526
61
3,767
602
3.44
3.40
1.205
1.162
177
12,702
429
16,003
3,661
1,343
791
6,086
34.88
3,058
1,557
3,629
338
49.2 %
10.0
30.0
89.2 %
Per share data adjusted to reflect all stock splits and dividends prior to December 31, 2008.
*
Realized investment gains and losses are integral to our financial results over the long term, but our substantial discretion in
the timing of investment sales may cause this value to fluctuate substantially. Also, applicable accounting standards require
us to recognize gains and losses from certain changes in fair values of securities and embedded derivatives without actual
realization of those gains and losses. We discuss realized investment gains for the past three years in Item 7, Investments
Results of Operations, Page 66.
One-time Charges or Adjustments:
2008 – We changed the form of retirement benefit we offer certain associates to a 401(k) plan with company match
from a qualified defined benefit pension plan. We incurred a pretax expense of $27 million to recognize a settlement loss
associated with the partial termination of the qualified pension plan. The expense reduced net income by $17 million, or
11 cents per share, and raised the combined ratio by 0.8 percentage points.
2003 -- As the result of a settlement negotiated with a vendor, pretax results included the recovery of $23 million of the
$39 million one-time, pretax charge incurred in 2000.
2000 -- We recorded a one-time charge of $39 million, pretax, to write down previously capitalized costs related to the
development of software to process property casualty policies. We earned $5 million in interest in the first quarter from a
$303 million single-premium bank-owned life insurance (BOLI) policy booked at the end of 1999 that was segregated as
a separate account effective April 1, 2000. Investment income and realized investment gains and losses from separate
accounts generally accrue directly to the contract holder and, therefore, are not included in the company’s consolidated
financials.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 34
2004
2003
2002
2001
2000
1999
1998
$
$
$
$
$
$
$
$
3,020
492
91
3,614
584
3.30
3.28
1.04
1.02
178
12,677
400
16,107
3,549
1,194
791
6,249
35.60
2,919
1,537
3,514
289
49.8 %
10.3
29.7
89.8 %
$
$
$
$
2,748
465
(41)
3,181
374
2.11
2.10
0.90
0.89
178
12,485
372
15,509
3,415
1,025
420
6,204
35.10
2,653
1,444
3,386
245
56.1 %
11.6
27.0
94.7 %
$
$
$
$
2,478
445
(94)
2,843
238
1.33
1.32
0.81
0.80
180
11,226
343
14,122
3,176
917
420
5,598
31.43
2,391
1,317
3,150
234
61.5 %
11.4
26.8
99.7 %
$
$
$
$
2,152
421
(25)
2,561
193
1.10
1.07
0.76
0.74
179
11,534
286
13,964
2,887
724
426
5,998
33.62
2,073
1,060
2,894
223
66.6 %
10.1
28.2
104.9 %
$
$
$
$
1,907
415
(2)
2,331
118
0.67
0.67
0.69
0.67
181
11,276
259
13,274
2,473
641
449
5,995
33.80
1,828
920
2,416
223
71.1 %
11.3
30.4
112.8 %
$
$
$
$
1,732
387
0
2,128
255
1.40
1.37
0.62
0.60
186
10,156
226
11,795
2,154
885
456
5,421
30.35
1,658
835
2,093
208
61.6 %
10.0
28.6
100.2 %
1,613
368
65
2,054
242
1.31
1.28
0.55
0.54
190
10,296
143
11,484
2,055
536
472
5,621
30.58
1,543
458
1,979
204
65.4 %
9.3
29.6
104.3 %
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 35
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 36
Item 7.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
INTRODUCTION
The purpose of Management’s Discussion and Analysis is to provide an understanding of Cincinnati Financial
Corporation’s consolidated results of operations and financial condition. Our Management’s Discussion and
Analysis should be read in conjunction with Item 6, Selected Financial Data, Pages 34 and 35, and Item 8,
Consolidated Financial Statements and related Notes, beginning on Page 91. 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 and outlook, as well as details on critical
accounting policies and estimates. Periodically, we refer to estimated industry data so that we can give
information on our performance within the context of the overall insurance industry. Unless otherwise noted,
the industry data is prepared by A.M. Best, a leading insurance industry statistical, analytical and financial
strength rating organization. Information from A.M. Best is presented on a statutory basis. When we provide
our results on a comparable statutory basis, we label it as such; all other company data is presented in
accordance with accounting principles generally accepted in the United States of America (GAAP).
EXECUTIVE SUMMARY
Through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property
casualty insurers in the nation, based on written premium volume for approximately 2,000 U.S. stock and
mutual insurer groups. We market our insurance products through a select group of independent insurance
agencies in 35 states as discussed in Item 1, Our Business and Our Strategy, Page 1.
Although 2008 was a difficult year for our economy, our industry and our company, our long-term perspective
lets us address the immediate challenges while focusing on the major decisions that best position the
company for success through all market cycles. We believe that this forward-looking view has consistently
benefited our policyholders, agents, shareholders 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. Between 2010 and 2014, we expect the total of 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 to average 12 percent to 15 percent. With the current economic and market uncertainty, we
believe this ratio is an appropriate way to measure our long-term progress in creating value.
When looking at our longer-term objectives, we see three performance drivers:
• 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 1.3 percent over the past five years, equal to the
estimated growth rate for a broad group of standard market property casualty insurance companies.
• Combined ratio – We believe our underwriting philosophy and initiatives can generate a GAAP combined
ratio over any five-year period that is consistently below 100 percent. Our GAAP combined ratio has
averaged 92.8 percent over the past five years. Our combined ratio was below 100 percent in each year
during the period, except 2008 when we experienced a record level of catastrophe losses as discussed
in Consolidated Property Casualty Insurance Results of Operations, Page 49. Our statutory combined
ratio averaged 92.6 percent over the same period compared with an estimated 98.5 percent for the
same industry group.
•
Investment contribution - We believe our investment philosophy and initiatives can drive investment
income growth and lead to a total return on our equity investment portfolio over a five-year period that
exceeds the five-year return of the Standard & Poor’s 500 Index.
○
Investment income growth has averaged 2.9 percent over the past five years. It grew in each year
except 2008 when we experienced a dramatic reduction in dividend payouts by financial services
companies held in our equity portfolio, a risk we addressed aggressively during 2008.
○ Over the five years ended December 31, 2008, our compound annual equity portfolio return was a
negative 9.0 percent compared with a compound annual total return of a negative 2.1 percent for
the Index. Our equity portfolio underperformed the market for the five-year period primarily because
of the decline in the market value of our previously large holdings in the financial services sector. In
2008, our compound annual equity portfolio return was a negative 31.5 percent, compared with a
negative 36.9 percent for the Index.
The board of directors is committed to rewarding shareholders directly through cash dividends and through
share repurchase authorization. The board also has periodically declared stock dividends and splits. Through
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 37
2008, the company has increased the indicated annual cash dividend rate for 48 consecutive years, a record
we believe is matched by only 11 other publicly traded companies. While seeing merit in continuing that
record, in February 2009, our board indicated its first priority was assuring continued financial strength for
the company and that its intention was to consider the potential for a 49th year of increase over the course of
2009. We discuss our financial position in more detail in Liquidity and Capital Resources, Page 70.
Strategic Initiatives Highlights
Management has worked with the board of directors to identify the strategies that can lead to long-term
success. Our strategies are intended to position us to compete successfully in the markets we have targeted
while minimizing risk. We believe successful implementation of the initiatives that support our strategies will
help us better serve our agent customers, reduce volatility in our financial results and weather difficult
economic, market or pricing cycles.
• Preserve capital - Implementation of these initiatives is intended to preserve our capital and liquidity so
that we can successfully grow our insurance business. A strong capital position provides the capacity to
support premium growth and provides the liquidity to sustain our investment in the people and
infrastructure needed to implement our other strategic initiatives.
•
Improve insurance profitability - Implementation of these operational initiatives is intended to support
improved cash flow and profitable growth for the agencies that represent us and for our company. These
initiatives primarily seek to strengthen our relationships with agents, allowing them to serve clients faster
and manage expenses better. Others may streamline our internal processes so we can devote more
resources to agent service.
• Drive premium growth - Implementation of these operational initiatives is intended to expand our
geographic footprint and diversify our premium sources to obtain profitable growth without significant
infrastructure expense. Diversified growth also may reduce our catastrophe exposure risk.
We discuss each of these strategies, along with the metrics we use to assess their progress, in Item 1,
Strategic Initiatives, Page 7,
Factors Influencing Our Future Performance
In January and February of 2009, storms affecting our policyholders largely in the Midwest currently are
estimated to have resulted in about $30 million of reported claims, which will be included in first-quarter
pretax catastrophe losses. This estimate does not take into account development of these catastrophes, any
further catastrophe activity that may occur in the remainder of the first quarter of 2009 or potential
development from events in prior periods.
In 2008, the rate of growth in book value plus the rate of dividend contribution was below our target, as
discussed in the review of our financial highlights below. In 2009, we believe our value creation ratio may
also be below our long-term target for several reasons.
•
•
The weak economy is expected to continue to affect policyholders by deflating their business and
personal insurable assets. Until the economy begins to recover, we also do not expect to see significant
appreciation of our investments.
Lingering effects of soft insurance market pricing are expected to affect growth rates and earned
premium levels into 2010, continuing to weaken loss ratios and hamper near-term profitability.
Economic factors, including inflation, may increase our claims and settlement expenses related to
medical care, litigation and construction.
• Property casualty written premium growth may lag as our growth initiatives need more time to reach their
full contribution.
• We will incur the cost of continued investment in our business, including technology, new states and
process initiatives to create long-term value. In addition, we will not see the full advantage of many of our
investments in technology until 2010 and beyond.
• Diversification of the investment portfolio over the past year included sales of selected positions to lock
in gains, reduce concentrations and increase liquidity. Proceeds of sales are being reinvested in both
fixed income and in equity securities with yields that we believe are likely to be more secure. This may
slow the return to growth in investment income although we believe year-over-year comparisons may turn
positive in the second half of the year. We expect to continue to make changes to the portfolio, as
appropriate.
Our view of the value we can create over the next five years relies on two assumptions about the external
environment. First, we’re anticipating some firming of commercial insurance pricing during 2009. Second, we
believe that the economy and financial markets can resume a growth track by the end of 2010. If those
assumptions prove to be inaccurate, we may not be able to achieve our performance targets even if we
accomplish our strategic objectives.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 38
Other factors that could influence our ability to achieve our targets include:
• We expect the insurance marketplace to remain competitive, which is likely to cause carriers to pursue
strategies that they believe could lead to economies of scale, market share gains or the potential for an
improved competitive posture. Direct writers will continue to be a factor in the personal insurance
market.
• We expect the independent insurance agency system to remain strong and viable, with continued agency
consolidation, especially as agency margins come under more pressure due to soft pricing and the
difficult economic environment. The soft commercial market that has extended into 2009 creates
additional risk for agencies. We expect the soft market to continue, particularly in non-catastrophe event
prone states and lines of business, absent a significant event or events.
• We expect initiatives that make it easier for agents to do business with us will continue to be a significant
factor in agency relationships, with technology being a major driver. Policyholders will increasingly
demand online services and access from agents or carriers.
We discuss in our Item 1A, Risk Factors, Page 25, many potential risks to our business and our ability to
achieve our qualitative and quantitative objectives. These are real risks, but their probability of occurring may
not be high. We also believe that our risk management programs generally can mitigate their potential
effects, in the event they do occur.
We have formal risk management programs overseen by a senior officer and supported by a team of
representatives from business areas. The team reports to our chairman, our president and chief executive
officer and our board of directors, as appropriate, on detailed and summary risk assessments, risk metrics
and risk plans. Our use of operational audits, strategic plans and departmental business plans, as well as our
culture of open communications and our fundamental respect for our code of conduct, continue to help us
manage risks on an ongoing basis.
Below we review highlights of our financial results for the past three years. Detailed discussion of these
topics appears in Results of Operations, Page 48, and Liquidity and Capital Resources, Page 70.
CORPORATE FINANCIAL HIGHLIGHTS
The value creation ratio discussed in the Executive Summary, Page 37, was a negative 23.5 percent in 2008,
a negative 5.7 percent in 2007 and a positive 16.7 percent in 2006. In both 2008 and 2007, a decline in
unrealized gains on our investment portfolio was the most significant factor in the decline in book value as
discussed below. In 2008, net income also was significantly below the level of the prior two years.
Cash dividends declared per share rose 9.9 percent in 2008, 6.0 percent in 2007 and 11.2 percent in 2006.
Balance Sheet Data and Performance Measures
(Dollars in millions except share data)
Balance sheet data
Invested assets
Total assets
Short-term debt
Long-term debt
Shareholders' equity
Book value per share
Debt-to-capital ratio
Performance measures
Value creation ratio
At December 31,
2008
At December 31,
2007
At December 31,
2006
$
$
8,890
13,369
49
791
4,182
25.75
$
12,261
16,637
69
791
5,929
35.70
13,759
17,222
49
791
6,808
39.38
16.7 %
12.7 %
11.0 %
2008
Years ended December 31,
2007
2006
(23.5) %
(5.7) %
16.7 %
Invested assets declined because of lower fair values for portfolio investments, largely due to economic
factors. The downturn in the economy had a particularly adverse effect on our financial sector equity
holdings, which made up a significant portion of the portfolio prior to mid-2008. By year-end 2008, the
portfolio was substantially more diversified and generally better positioned to withstand short-term
fluctuations. We discuss our investment strategy in Item 1, Investments Segment, Page 17, and results for
the segment in Investments Results of Operations, Page 66.
Our ratio of debt to total capital (debt plus shareholders’ equity) rose over the three years due to the effect on
shareholders’ equity of the declining value of our invested assets. Long-term debt was unchanged over the
period.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 39
Income Statement and Per Share Data
(Dollars in millions except share data)
Income statement data
Earned premiums
Investment income, net of expenses
Realized investment gains and losses (pretax)
Total revenues
Net income
Per share data (diluted)
Net income
Cash dividends declared
Twelve months ended December 31,
2007
2006
2008
$
$
3,136 $
537
138
3,824
429
2.62 $
1.56
3,250 $
608
382
4,259
855
4.97 $
1.42
3,278
570
684
4,550
930
5.30
1.34
Diluted weighted average shares outstanding
163,362,409
172,167,452
175,451,341
2007-2006
2008-2007
Change % Change %
(3.5)
(11.6)
(64.0)
(10.2)
(49.9)
(47.3)
9.9
(5.1)
(0.9)
6.6
(44.1)
(6.4)
(8.0)
(6.2)
6.0
(1.9)
Net income declined in 2008 from the higher levels of the prior two years because of a three-year decline in
realized investment gains, a first-ever decline in investment income and a lower aggregate contribution from
our insurance segments. The pension plan settlement reduced 2008 net income by $17 million, or 11 cents
per share. The transition from a defined benefit pension plan reduces company risk while providing flexible,
company-sponsored 401(k) benefit to associates.
Weighted average shares outstanding may fluctuate from period to period because we repurchase shares
under board authorizations and we issue shares when associates exercise stock options. Weighted average
shares outstanding on a diluted basis declined 9 million in 2008, 3 million in 2007 and 2 million in 2006.
As discussed in Investments Results of Operation, Page 66, security sales led to realized investment gains in
all three years, although 2008 gains were tempered by $510 million in other-than-temporary impairment
charges. Realized investment gains and losses are integral to our financial results over the long term. We
have substantial discretion in the timing of investment sales and, therefore, the gains or losses that are
recognized in any period. That discretion generally is independent of the insurance underwriting process.
Also, applicable accounting standards require us to recognize gains and losses from certain changes in fair
values of securities and for securities with embedded derivatives without actual realization of those gains
and losses.
Lower income from dividends led to an 11.6 percent decline in net investment income in 2008, the first
decline in this measure in company history. The primary reason for the decline was dividend reductions by
common and preferred holdings, including reductions during the year on positions subsequently sold or
reduced.
Contribution from Insurance Segments
(Dollars in millions)
Consolidated property casualty highlights
Written premiums
Earned premiums
Underwriting profit (loss)
GAAP combined ratio
Statutory combined ratio
Written premium to statutory surplus
Years ended December 31,
2007
2006
2008
2007-2006
2008-2007
Change % Change %
$
$
3,010
3,010
(17)
$
3,117
3,125
304
3,178
3,164
181
(3.4)
(3.7)
(105.6)
(1.9)
(1.2)
68.3
100.6 %
100.4
0.9
90.3 %
90.3
0.7
Pt. Change
94.3 %
93.9
0.7
10.3
10.1
0.2
Pt. Change
(4.0)
(3.6)
0.0
The trend in overall written premium growth reflected the competitive and market factors discussed in
Item 1, Commercial Lines and Personal Lines Property Casualty Insurance Segment, Page 11 and Page 14.
In 2008, our property casualty insurance operations reported an underwriting loss after achieving record
profitability in 2007. Underwriting profitability can be measured by the combined ratio. (The combined ratio is
the percentage of each earned premium dollar spent on claims plus all expenses -- the lower the ratio, the
better the performance.) In 2008 and 2007, higher savings from favorable development on prior period
reserves helped offset other loss and loss expenses. Catastrophe losses fluctuated dramatically over the
three-year period, making an unusually high contribution of 6.8 percentage points to the combined ratio in
2008 after an unusually low 0.8 points in 2007. The pension plan settlement increased the 2008 combined
ratio by 0.8 percentage points.
Our new surplus lines operation contributed $14 million to net written premiums and $5 million to earned
premiums, but had an immaterial effect on net income. The business achieved its first-year strategic plan
objectives.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 40
Our life insurance segment continued to provide a consistent source of profit. We discuss results for the
segment in Life Insurance Results of Operations, Page 64. Income and gains from the life insurance
investment portfolio are included in Investment segment results.
CRITICAL ACCOUNTING ESTIMATES
Cincinnati Financial Corporation’s financial statements are prepared using GAAP. These principles require
management to make estimates and assumptions that affect the amounts reported in the Consolidated
Financial Statements and accompanying Notes. Actual results could differ materially from those estimates.
The significant accounting policies used in the preparation of the financial statements are discussed in
Item 8, Note 1 of the Consolidated Financial Statements, Page 98. In conjunction with that discussion,
material implications of uncertainties associated with the methods, assumptions and estimates underlying
the company’s critical accounting policies are discussed below. The audit committee of the board of directors
reviews the annual financial statements with management and the independent registered public accounting
firm. These discussions cover the quality of earnings, review of reserves and accruals, reconsideration of the
suitability of accounting principles, review of highly judgmental areas including critical accounting policies,
audit adjustments and such other inquiries as may be appropriate.
PROPERTY CASUALTY INSURANCE LOSS AND LOSS EXPENSE RESERVES
Overview
We establish loss and loss expense reserves for our property casualty insurance business as balance sheet
liabilities. These reserves account for unpaid loss and loss expenses as of a financial statement date. Unpaid
loss and loss expenses are the estimated amounts necessary to pay for and settle all outstanding insured
claims, including incurred but not reported (IBNR) claims, as of that date.
For some lines of business that we write, a considerable and uncertain amount of time can elapse between
the occurrence, reporting and payment of insured claims. The amount we will actually have to pay for such
claims also can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss
and loss expense reserves our most significant estimate. Gross loss and loss expense reserves were
$4.040 billion at year-end 2008 compared with $3.925 billion at year-end 2007.
How Reserves Are Established
Our field claims representatives establish case reserves when claims are reported to the company to provide
for our unpaid loss and loss expense obligation associated with these claims. Experienced headquarters
claims supervisors review individual case reserves greater than $35,000 that were established by field
claims representatives. Headquarters claims managers also review case reserves greater than $100,000.
Our claims representatives base their case reserve estimates primarily upon case-by-case evaluations that
consider:
•
•
type of claim involved
circumstances surrounding each claim
• policy provisions pertaining to each claim
• potential for subrogation or salvage recoverable
general insurance reserving practices
•
Case reserves of all sizes are subject to review on a 90-day cycle, or more frequently if new information about
a loss becomes available. As part of the review process, we monitor industry trends, cost trends, relevant
court cases, legislative activity and other current events in an effort to ascertain new or additional loss
exposures.
We also establish incurred but not reported (IBNR) reserves to provide for all unpaid loss and loss expenses
not accounted for by case reserves:
•
For weather events designated as catastrophes, we calculate IBNR reserves directly as a result of an
estimated IBNR claim count and an estimated average claim amount for each event. Our claims
department management coordinates the assessment of these events and prepares the related IBNR
reserve estimates. Such an assessment involves a comprehensive analysis of the nature of the storm, of
policyholder exposures within the affected geographic area and of available claims intelligence.
Depending on the nature of the event, available claims intelligence could include surveys of field claims
associates within the affected geographic area, feedback from a catastrophe claims team sent into the
area, as well as data on claims reported as of the financial statement date. We generally use the
catastrophe definition provided by Property Claims Service, a division of Insurance Services Office.
PCS defines a catastrophe as an event that causes countrywide damage of $25 million or more in
insured property losses and affects a significant number of policyholders and insureds.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 41
•
For asbestos and environmental claims, we calculate IBNR reserves by deriving an actuarially based
estimate of total unpaid loss and loss expenses. We then reduce the estimate by total case reserves.
We discuss the reserve analysis that applies to asbestos and environmental reserves in Asbestos and
Environmental Reserves, Page 76.
•
For all other claims and events, we calculate IBNR reserves quarterly by first deriving an actuarially
based estimate of the ultimate cost of total loss and loss expenses incurred. We then reduce the
estimate by total loss and loss expense payments and total case reserves carried. We discuss below the
development of actuarial-based estimates of the ultimate cost of total loss and loss expenses incurred.
Our actuarial staff applies significant judgment in selecting models and estimating model parameters when
preparing reserve analyses. In addition, unpaid loss and loss expenses are inherently uncertain as to timing
and amount. Uncertainties relating to model appropriateness, parameter estimates and actual loss and loss
expense amounts are referred to as model, parameter and process uncertainty, respectively. Our
management and actuarial staff control for these uncertainties in the reserving process in a variety of ways.
Our actuarial staff bases its IBNR reserve estimates for these losses primarily on the indications of methods
and models that analyze accident year data. Accident year is the year in which an insured claim, loss, or loss
expense occurred. The specific methods and models that our actuaries have used for the past several years
are:
• paid and reported loss development methods
• paid and reported loss Bornhuetter-Ferguson methods
individual and multiple probabilistic trend family models
•
Our actuarial staff uses diagnostics provided by stochastic reserving software to evaluate the
appropriateness of the models and methods listed above. The software's diagnostics have indicated that the
appropriateness of these models and methods for estimating IBNR reserves for our lines of business tends to
depend on a line's tail. Tail refers to the time interval between a typical claim's occurrence and its settlement.
For our long-tail lines such as workers’ compensation and commercial casualty, models from the probabilistic
trend family tend to provide superior fits and to validate well compared with models underlying the loss
development and Bornhuetter-Ferguson methods. The loss development and Bornhuetter-Ferguson methods,
particularly the reported loss variations, tend to produce the more appropriate IBNR reserve estimates for our
short-tail lines such as homeowner and commercial property. For our mid-tail lines such as personal and
commercial auto liability, all models and methods provide useful insights.
Our actuarial staff also devotes significant time and effort to the estimation of model and method
parameters. The loss development and Bornhuetter-Ferguson methods require the estimation of numerous
loss development factors. The Bornhuetter-Ferguson methods also involve the estimation of numerous
ultimate loss ratios by accident year. Models from the probabilistic trend family require the estimation of
development trends, calendar year inflation trends and exposure levels. Consequently, our actuarial staff
monitors a number of trends and measures to gain key business insights necessary for exercising
appropriate judgment when estimating the parameters mentioned.
These trends and measures include:
•
•
•
company and industry pricing
company and industry exposure
company and industry loss frequency and severity
• past large loss events such as hurricanes
•
•
company and industry premium
company in-force policy count
• average premium per policy
These trends and measures also support the estimation of ultimate accident year loss ratios needed for
applying the Bornhuetter-Ferguson methods and for assessing the reasonability of all IBNR reserve estimates
computed. Our actuarial staff reviews these trends and measures quarterly and updates them as necessary.
Quarterly, our actuarial staff summarizes its reserve analysis by preparing an actuarial best estimate and a
range of reasonable IBNR reserves intended to reflect the uncertainty of the estimate. An inter-departmental
committee that includes our actuarial management team reviews the results of each quarterly reserve
analysis. The committee establishes management’s best estimate of IBNR reserves, which is the amount that
is included in each period’s financial statements. In addition to the information provided by actuarial staff,
the committee also considers factors such as the following:
•
large loss activity and trends in large losses
• new business activity
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 42
•
•
•
judicial decisions
general economic trends such as inflation
trends in litigiousness and legal expenses
• product and underwriting changes
changes in claims practices
•
The determination of management's best estimate, like the preparation of the reserve analysis that supports
it, involves considerable judgment. Changes in reserving data or the trends and factors that influence
reserving data may signal fundamental shifts or may simply reflect single-period anomalies. Even if a change
reflects a fundamental shift, the full extent of the change may not become evident until years later.
Moreover, since our methods and models do not explicitly relate many of the factors we consider directly to
reserve levels, we typically cannot quantify the precise impact of such factors on the adequacy of reserves
prospectively or retrospectively.
Due to the uncertainties described above, our ultimate loss experience could prove better or worse than our
carried reserves reflect. To the extent that reserves are inadequate and increased, the amount of the
increase is a charge in the period that the deficiency is recognized, raising our loss and loss expense ratio
and reducing earnings. To the extent that reserves are redundant and released, the amount of the release is
a credit in the period that the redundancy is recognized, reducing our loss and loss expense ratio and
increasing earnings.
Key Assumptions - Loss Reserving
Our actuarial staff makes a number of key assumptions when using their methods and models to derive IBNR
reserve estimates. Appropriate reliance on these key assumptions essentially entails determinations of the
likelihood that statistically significant patterns in historical data may extend into the future. The four most
significant of the key assumptions used by our actuarial staff and approved by management are:
• Emergence of loss and allocated loss expenses on an accident year basis. Historical paid loss, reported
loss and paid allocated loss expense data for the business lines we analyze contain patterns that reflect
how unpaid losses, unreported losses and unpaid allocated loss expenses as of a financial statement
date will emerge in the future on an accident year basis. Unless our actuarial staff or management
identifies reasons or factors that invalidate the extension of historical patterns into the future, these
patterns can be used to make projections necessary for estimating IBNR reserves. Our actuaries
significantly rely on this assumption in the application of all methods and models mentioned above.
• Calendar year inflation. For long-tail and mid-tail business lines, calendar year inflation trends for future
paid losses and paid allocated loss expenses will not vary significantly from a stable, long-term average.
Our actuaries base reserve estimates derived from probabilistic trend family models on this assumption.
• Exposure levels. Historical earned premiums, when adjusted to reflect common levels of product pricing
and loss cost inflation, can serve as a proxy for historical exposures. Our actuaries require this
assumption to estimate expected loss ratios and expected allocated loss expense ratios used by the
Bornhuetter-Ferguson reserving methods. They also use this assumption to establish exposure levels for
recent accident years, characterized by “green” or immature data, when working with probabilistic trend
family models.
• Claims having atypical emergence patterns. Characteristics of certain subsets of claims, such as high
frequency, high severity, or mass tort claims, have the potential to distort patterns contained in historical
paid loss, reported loss and paid allocated loss expense data. When testing indicates this to be the case
for a particular subset of claims, our actuaries segregate these claims from the data and analyze them
separately. Subsets of claims that could fall into this category include hurricane claims, individual large
claims and asbestos and environmental claims.
These key assumptions have not changed since 2005, when our actuarial staff began using probabilistic
trend family models to estimate IBNR reserves.
Paid losses, reported losses and paid allocated loss expenses are subject to random as well as systematic
influences. As a result, actual paid losses, reported losses and paid allocated loss expenses are virtually
certain to differ from projections. Such differences are consistent with what specific models for our business
lines predict and with the related patterns in the historical data used to develop these models. As a result,
management does not closely monitor statistically insignificant differences between actual and projected
data.
Reserve Estimate Variability
Management believes that the standard error of a reserve estimate, a measure of the estimate's variability,
provides the most appropriate measure of the estimate's sensitivity. The reserves we establish depend on
the models we use and the related parameters we estimate in the course of conducting reserve analyses.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 43
However, the actual amount required to settle all outstanding insured claims, including IBNR claims, as of a
financial statement date depends on stochastic, or random, elements as well as the systematic elements
captured by our models and estimated model parameters. For the lines of business we write, process
uncertainty – the inherent variability of loss and loss expense payments – typically contributes more to the
imprecision of a reserve estimate than parameter uncertainty.
Consequently, a sensitivity measure that ignores process uncertainty would provide an incomplete picture of
the reserve estimate's sensitivity. Since a reserve estimate's standard error accounts for both process and
parameter uncertainty, it reflects the estimate's full sensitivity to a range of reasonably likely scenarios.
The table below provides standard errors and reserve ranges for lines of business that account for
90.6 percent of our 2008 loss and loss expense reserves as well as the potential effects on our net income,
assuming a 35 percent federal tax rate. Standard errors and reserve ranges for assorted groupings of these
lines of business cannot be computed by simply adding the standard errors and reserve ranges of the
component lines of business, since such an approach would ignore the effects of product diversification. See
Range of Reasonable Reserves, Page 74, for a total reserve range. While the table reflects our assessment of
the most likely range within which each line's actual unpaid loss and loss expenses may fall, one or more
lines' actual unpaid loss and loss expenses could nonetheless fall outside of the indicated ranges.
(In millions)
At December 31, 2008
Total
Commercial casualty
Commercial property
Commercial auto
Workers' compensation
Personal auto
Homeowners
At December 31, 2007
Total
Commercial casualty
Commercial property
Commercial auto
Workers' compensation
Personal auto
Homeowners
Net loss and loss expense range of reserves
Carried
reserves
Low
point
High
point
Standard
error
Net income
effect
$
$
$
$
3,498 $
1,559 $
137
385
842
165
82
3,397 $
1,565 $
121
383
777
189
77
3,256 $
1,280 $
123
367
854
153
74
3,132 $
1,352 $
104
362
726
173
75
3,592
1,595 $
160
401
943
170
90
3,427
1,634 $
136
395
786
191
88
158 $
19
17
45
8
8
141 $
16
17
30
9
7
103
12
11
29
5
5
92
10
11
20
6
5
If actual unpaid loss and loss expenses fall within these ranges, our cash flow and fixed maturity investments
should provide sufficient liquidity to make the subsequent payments. To date, our cash flow has covered our
loss and loss expense payments, and we have never had to sell investments to make these payments. If this
were to become necessary, however, our fixed maturity investments should provide us with ample liquidity. At
year-end 2008, consolidated fixed maturity investments exceeded total insurance reserves (including life
policy reserves) by more than $190 million.
LIFE INSURANCE POLICY RESERVES
We establish the reserves for traditional life insurance policies based on expected expenses, mortality,
morbidity, withdrawal rates and investment yields, including a provision for uncertainty. Once these
assumptions are established, they generally are maintained throughout the lives of the contracts. We use
both our own experience and industry experience adjusted for historical trends in arriving at our assumptions
for expected mortality, morbidity and withdrawal rates. We use our own experience and historical trends for
setting our assumptions for expected expenses. We base our assumptions for expected investment income
on our own experience adjusted for current economic conditions.
We establish reserves for our universal life, deferred annuity and investment contracts equal to the
cumulative account balances, which include premium deposits plus credited interest less charges and
withdrawals. Some of our universal life insurance policies contain no-lapse guarantee provisions. For these
policies, we establish a reserve in addition to the account balance based on expected no-lapse guarantee
benefits and expected policy assessments.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 44
ASSET IMPAIRMENT
Our fixed-maturity and equity investment portfolios are our largest assets. The company's asset impairment
committee continually monitors the holdings in these portfolios and all other assets for signs of other-than-
temporary or permanent impairment. The committee monitors significant decreases in the fair value of
invested assets, changes in legal factors or in the business climate, an accumulation of costs in excess of the
amount originally expected to acquire or construct an asset, uncollectability of all receivable assets, or other
factors such as bankruptcy, deterioration of creditworthiness, failure to pay interest or dividends or signs
indicating that the carrying amount may not be recoverable.
The application of our impairment policy resulted in other-than-temporary impairment charges that reduced
our income before income taxes by $510 million in 2008, $16 million in 2007 and $1 million in 2006.
Impairment charges are recorded for other-than-temporary declines in value, if, in the asset impairment
committee’s judgment, there is little expectation that the value may be recouped within a designated
recovery period. Other than-temporary impairment losses represent non-cash charges to income.
Our portfolio managers monitor their assigned portfolios. If a security is trading below book value, the
portfolio managers undertake additional reviews. Such declines often occur in conjunction with events taking
place in the overall economy and market, combined with events specific to the industry or operations of the
issuing organization. Management reviews quantitative measurements such as a declining trend in fair value,
the extent of the fair value decline and the length of time the value of the security has been depressed, as
well as qualitative measures such as pending events, credit ratings and issuer liquidity. We are even more
proactive when these declines in valuation are greater than might be anticipated when viewed in the context
of overall economic and market conditions. We provide information about valuation of our invested assets in
Item 8, Note 2 of the Consolidated Financial Statements, Page 104.
All securities valued below 100 percent of book value are reported to the asset impairment committee for
evaluation. A security valued between 95 percent and 100 percent of book value is not monitored separately
by the committee. These assets generally are at this value because of interest rate-driven factors.
When evaluating for other-than-temporary impairments, the committee considers the company's intent and
ability to retain a security for a period adequate to recover its cost. Because of the company's financial
strength, management may not impair certain securities even when they are trading below cost.
For fixed-maturity investments, we can make that determination based on our ability to hold until their
scheduled redemption securities that are meeting their debt obligations and have the potential to recover
value. For equity investments, we can make that determination based on a thorough assessment of the
potential for recovery over a longer-term horizon. In addition to evaluating the security’s current valuation, the
impairment committee reviews objective evidence that indicates the potential for a recovery in value.
Information is evaluated regarding the security, such as financial performance, near-term prospects and the
financial condition of the region and industry in which the issuer operates.
Securities that have previously been impaired are evaluated based on their adjusted book value and written
down further, if deemed appropriate. We provide detailed information about securities trading in a
continuous loss position at year-end 2008 in Item 7A, Application of Asset Impairment Policy, Page 87.
An other-than-temporary decline in the fair value of a security is recognized in net income as realized
investment losses.
Other-than-temporary impairment charges are distinct from the ordinary fluctuations seen in the value of a
security when considered in the context of overall economic and market conditions. Securities considered to
have a temporary decline would be expected to recover their fair value, which may be at maturity. Under the
same accounting treatment as fair value gains, temporary declines (changes in the fair value of these
securities) are reflected in shareholders’ equity on our balance sheet in accumulated other comprehensive
income, net of tax, and have no impact on reported net income.
FAIR VALUE MEASUREMENTS
Valuation of Financial Instruments
Valuation of financial instruments, primarily securities held in our investment portfolio, is a critical
component of our interim financial statement preparation. We account for our investment portfolio at fair
value and apply fair value measurements as defined by SFAS No. 157, Fair Value Measurements, to financial
instruments. Fair value is applicable to SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments, and SFAS No. 107, Disclosures about Fair Value of
Financial Instruments.
We adopted the provisions of SFAS No. 157 on January 1, 2008. SFAS No. 157 defines fair value as the exit
price or the amount that would be 1) received to sell an asset or 2) paid to transfer a liability in an orderly
transaction between marketplace participants at the measurement date. When determining an exit price, we
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 45
must, whenever possible, rely upon observable market data. Prior to the adoption of SFAS No. 157, we
considered various factors such as liquidity and volatility but primarily obtained pricing from various external
services, including broker quotes.
The SFAS No. 157 exit price notion requires our valuation also to consider what a marketplace participant
would pay to buy an asset or receive to assume a liability. Therefore, while we can consider pricing data from
outside services, we ultimately determine whether the data or inputs used by these outside services are
observable or unobservable.
In accordance with SFAS No. 157, we have categorized our financial instruments, based on the priority of the
inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within
different levels of the hierarchy, the categorization is based on the lowest level that is significant to the fair
value measurement of the instrument.
Financial assets and liabilities recorded on the Consolidated Balance Sheets are categorized based on the
inputs to the valuation techniques as described in Item 8, Note 3 of the Consolidated Financial Statements,
Page 106.
Level 1 and Level 2 Valuation Techniques
Over 98 percent of our $8.8 billion invested assets measured at fair value are classified as Level 1 or Level
2. Financial assets that fall within Level 1 and Level 2 are priced according to observable data from identical
or similar securities that have traded in the marketplace. Also within Level 2 are securities that are valued by
outside services or brokers where we have evaluated the pricing methodology and determined that the inputs
are observable.
Included in the Level 2 hierarchy are a small portfolio of collateralized mortgage obligations that represented
less than 1 percent of the fair value of our investment portfolio at December 31, 2008. We obtained the
CMOs as part of the termination of our securities lending program during 2008. The CMOs were an
investment made by one of the short-duration funds, which subsequently dissolved and distributed the
assets to its investors. When we terminated the securities lending program, we chose to retain the CMOs
rather than sell them at what we felt were distressed prices in an illiquid market.
All $30 million of the CMOs in our portfolio are collateralized by Alt-A mortgages that originated between
2004 and 2006. We owned investment grade CMOs with a fair value and book value of $27 million and
$39 million, respectively, at December 31, 2008. Of the $27 million investment-grade CMOs, $21 million
were rated AAA by Standard & Poor’s. We also owned non-investment grade CMOs that had a fair value and
book value of $3 million and $4 million, respectively. We do not intend to make additional investments in this
asset category.
Level 3 Valuation Techniques
Financial assets that fall within the Level 3 hierarchy are valued based upon unobservable market inputs,
normally because they are not actively traded on a public market. Level 3 taxable fixed maturities securities
include certain private placements, small issues, general corporate bonds and medium-term notes. Level 3
tax-exempt fixed maturities securities include various thinly traded municipal bonds. Level 3 common
equities include private equity securities. Level 3 preferred equities include private and thinly traded
preferred securities.
Pricing for each Level 3 security is based upon inputs that are market driven, including third-party reviews
provided to the issuer or broker quotes. However, we placed in the Level 3 hierarchy securities for which we
were unable to obtain the pricing methodology or we could not consider the price provided as binding.
Management ultimately determined the pricing for each Level 3 security that we considered to be the best
exit price valuation. As of December 31, 2008, total Level 3 assets were 1.6 percent of our investment
portfolio measured at fair value, which was relatively stable throughout 2008. Broker quotes are obtained for
thinly traded securities that subsequently fall within the Level 3 hierarchy. We obtained two non-binding
quotes from brokers and used the more conservative price for fair value. At December 31, 2008, total fair
value of assets priced by broker quotes for the SFAS No. 157 disclosure was $83 million and consisted
mostly of taxable fixed maturities.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 46
EMPLOYEE BENEFIT PENSION PLAN
As discussed in Item 8, Note 13 of the Consolidated Financial Statements, Page 113, we modified our
qualified defined benefit pension during 2008, terminating participation in the plan for certain participants in
a transition to a sponsored 401(k) with company matching of associate contributions. Contributions and
pension costs are developed from annual actuarial valuations. These valuations involve key assumptions
including discount rates and expected return on plan assets, which are updated each year. Any adjustments
to these assumptions are based on considerations of current market conditions. Therefore, changes in the
related pension costs or credits may occur in the future due to changes in assumptions.
Key assumptions used in developing the 2008 net pension obligation were a 6.00 percent discount rate and
rates of compensation increases ranging from 4 percent to 6 percent. Key assumptions used in developing
the 2008 net pension expense were a 6.25 percent discount rate, an 8 percent expected return on plan
assets and rates of compensation increases ranging from 4 percent to 6 percent. See Note 13 for additional
information on assumptions.
In 2008, the net pension expense was $47 million, including one-time charges of $27 million for settlement
and $3 million for curtailment related to the modifications to the qualified pension plan. In 2009, we expect a
net pension expense of $11 million.
Holding all other assumptions constant, a 0.5 percentage point decline in the discount rate would lower our
2009 net income before income taxes by $1 million. Likewise, a 0.5 percentage point decline in the expected
return on plan assets would lower our 2009 income before income taxes by $1 million.
The fair value of the plan assets was $52 million less than the accumulated benefit obligation at year end
2008 and $4 million greater than the accumulated benefit obligation at year-end 2007. The fair value of the
plan assets was $88 million less than the projected plan benefit obligation at year-end 2008 and $60 million
less at year-end 2007. Market conditions and interest rates significantly affect future assets and liabilities of
the pension plan. In 2009, we expect to contribute approximately $33 million to our qualified plan.
DEFERRED ACQUISITION COSTS
We establish a deferred asset for costs that vary with, and are primarily related to, acquiring property
casualty and life insurance business. These costs are principally agent commissions, premium taxes and
certain underwriting costs, which are deferred and amortized into income as premiums are earned. Deferred
acquisition costs track with the change in premiums. Underlying assumptions are updated periodically to
reflect actual experience. Changes in the amounts or timing of estimated future profits could result in
adjustments to the accumulated amortization of these costs.
For property casualty policies, deferred acquisition costs are amortized over the terms of the policies. For life
policies, acquisition costs are amortized into income either over the premium-paying period of the policies or
the life of the policy, depending on the policy type.
CONTINGENT COMMISSION ACCRUAL
Another significant estimate relates to our accrual for property casualty contingent (profit-sharing)
commissions. We base the contingent commission accrual estimates on property casualty underwriting
results and on supplemental information. Contingent commissions are paid to agencies using a formula that
takes into account agency profitability, premium volume and other factors, such as prompt monthly payment
of amounts due to the company. Due to the complexity of the calculation and the variety of factors that can
affect contingent commissions for an individual agency, the amount accrued can differ from the actual
contingent commissions paid. The contingent commission accrual of $75 million in 2008 contributed
2.5 percentage points to the property casualty combined ratio. If contingent commissions paid were to vary
from that amount by 5 percent, it would affect 2009 net income by $2 million (after tax), or 1 cent per share,
and the combined ratio by approximately 0.1 percentage points.
SEPARATE ACCOUNTS
We issue life contracts, referred to as bank-owned life insurance policies (BOLI). Based on the specific
contract provisions, the assets and liabilities for some BOLIs are legally segregated and recorded as assets
and liabilities of the separate accounts. Other BOLIs are included in the general account. For separate
account BOLIs, minimum investment returns and account values are guaranteed by the company and also
include death benefits to beneficiaries of the contract holders.
Separate account assets are carried at fair value. Separate account liabilities primarily represent the contract
holders' claims to the related assets and are carried at an amount equal to the contract holders account
value. Generally, investment income and realized investment gains and losses of the separate accounts
accrue directly to the contract holders and, therefore, are not included in our Consolidated Statements of
Income. However, each separate account contract includes a negotiated realized gain and loss sharing
arrangement with the company. This share is transferred from the separate account to our general account
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 47
and is recognized as revenue or expense. In the event that the asset value of contract holders' accounts is
projected below the value guaranteed by the company, a liability is established through a charge to our
earnings.
For our most significant separate account, written in 1999, realized gains and losses are retained in the
separate account and are deferred and amortized to the contract holder over a five-year period, subject to
certain limitations. Upon termination or maturity of this separate account contract, any unamortized deferred
gains and/or losses will revert to the general account. In the event this separate account holder were to
exchange the contract for the policy of another carrier in 2009, the account holder would pay a surrender
charge equal to 1 percent of the contract’s account value. The surrender charge falls to zero in 2010 and
beyond.
At year-end 2008, net unamortized realized losses amounted to $12 million. In accordance with this
separate account agreement, the investment assets must meet certain criteria established by the regulatory
authorities to whose jurisdiction 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,
and charged to the general account. Potentially, losses could be material; however, unrealized losses are
approximately $36 million before tax in the separate account portfolio, which had a book value of
$521 million at year-end 2008.
RECENT ACCOUNTING PRONOUNCEMENTS
Information about recent accounting pronouncements is provided in Item 8, Note 1 of the Consolidated
Financial Statements, Page 98. We have determined that recent accounting pronouncements have not had
nor are they expected to have any material impact on our consolidated financial statements.
RESULTS OF OPERATIONS
Consolidated financial results primarily reflect the results of our four reporting segments. These segments
are defined based on financial information we use to evaluate performance and to determine the allocation
of assets.
• Commercial lines property casualty insurance
• Personal lines property casualty insurance
•
Life insurance
Investments
•
We report as “Other” the non-investment operations of the parent company and its subsidiaries
CFC Investment Company and CinFin Capital Management Company (excluding client investment activities),
as well as other income of our standard market property casualty insurance operations. CinFin Capital
Management will terminate all operations effective February 28, 2009. Beginning in 2008, we also include in
Other the results of The Cincinnati Specialty Underwriters Insurance Company and CSU Producer Resources.
We measure profit or loss for our commercial lines and personal lines property casualty and life insurance
segments based upon underwriting results (profit or loss), which represent net earned premium less loss and
loss expenses and underwriting expenses on a pretax basis. We also frequently evaluate results for our
consolidated property casualty insurance operations, which is the total of our commercial, personal and
surplus insurance results. Underwriting results and segment pretax operating income are not substitutes for
net income determined in accordance with GAAP.
For our consolidated property casualty insurance operations as well as the insurance segments, statutory
accounting data and ratios are key performance indicators that we use to assess business trends and to
make comparisons to industry results, since GAAP-based industry data generally is not as readily available.
Investments held by the parent company and the investment portfolios for the insurance subsidiaries are
managed and reported as the investments segment, separate from the underwriting businesses. Net
investment income and net realized investment gains and losses for our investment portfolios are discussed
in the Investments Results of Operations.
The calculations of segment data are described in more detail in Item 8, Note 18 of the Consolidated
Financial Statements, Page 119. The following sections review results of operations for each of the four
segments. Commercial Lines Insurance Results of Operations begins on Page 51, Personal Lines Insurance
Results of Operations begins on Page 59, Life Insurance Results of Operations begins on Page 64, and
Investments Results of Operations begins on Page 66. We begin with an overview of our consolidated
property casualty operations, which is the total of our commercial lines, personal lines and surplus lines
results.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 48
CONSOLIDATED PROPERTY CASUALTY INSURANCE RESULTS OF OPERATIONS
In addition to the factors discussed in Commercial Lines and Personal Lines Insurance Results of Operations,
Page 51 and Page 59, growth and profitability for our consolidated property casualty insurance operations
were affected by a number of common factors.
Changes in written and earned premiums over the past three years reflected growing price competition
partially offset by consistently high retention rates of renewal business. New business written directly by
agencies rose in 2008 after declining in 2007. The resurgence in new business was largely due to the
contribution of agencies appointed the past five years, the contribution of our surplus lines business and
more competitive personal lines pricing. Other written premium is largely ceded reinsurance premiums.
(Dollars in millions)
Agency renewal written premiums
Agency new business written premiums
Other written premiums
Net written premiums
Unearned premium change
Earned premiums
2008
Years ended December 31,
2007
2006
$
$
2,828
368
(186)
3,010
0
3,010
$
$
2,960
325
(168)
3,117
8
3,125
$
$
2,931
357
(110)
3,178
(14)
3,164
2008-2007
2007-2006
Change % Change %
1.0
(8.9)
(54.2)
(1.9)
nm
(1.2)
(4.5)
13.1
(10.3)
(3.4)
nm
(3.7)
Our combined ratio before catastrophe losses and savings from favorable prior period reserve development
rose substantially in 2008 due to lower pricing prompted by soft market conditions and also due to normal
loss cost inflation, a higher level of larger commercial lines losses and the pension plan settlement cost. The
pension plan settlement increased the 2008 combined ratio by 0.8 percentage points. Our 2007combined
ratio before catastrophe losses and savings from favorable prior period reserve development rose largely due
to the effects of lower pricing, normal loss cost inflation and a higher level of larger commercial lines losses.
(Dollars in millions)
Earned premiums
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Underwriting expenses
Underwriting profit
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Underwriting expenses
Combined ratio
Combined ratio
Contribution from catastrophe losses and prior years
reserve development
Combined ratio before catastrophe losses and prior
years reserve development
2008
Years ended December 31,
2007
2006
2008-2007
Change %
2007-2006
Change %
$
3,010
$
3,125
$
3,164
(3.7)
(1.2)
$
2,174
205
(321)
(2)
2,056
971
(17)
$
72.2 %
6.8
(10.7)
0.0
68.3
32.3
100.6 %
100.6 %
(3.9)
2,030
47
(224)
(21)
1,832
989
304
$
64.9 %
1.4
(7.1)
(0.6)
58.6
31.7
90.3 %
90.3 %
(6.3)
1,947
176
(113)
(2)
2,008
975
181
61.6 %
5.5
(3.6)
0.0
63.5
30.8
94.3 %
94.3 %
1.9
104.5 %
96.6 %
92.4 %
7.1
341.2
(43.5)
90.4
12.2
(1.8)
nm
4.1
(73.4)
(94.3)
nm
(8.8)
1.3
68.3
Pt. Change
Pt. Change
7.3
5.4
(3.6)
0.6
9.7
0.6
10.3
10.3
2.4
7.9
3.3
(4.1)
(3.5)
(0.6)
(4.9)
0.9
(4.0)
(4.0)
(8.2)
4.2
Catastrophe losses contributed 6.8 percentage points to the combined ratio in 2008, the highest
catastrophe loss ratio for our company since 1991. In 2007, catastrophe losses added just 0.8 percentage
points, the lowest ratio over the same period. The following table shows catastrophe losses incurred, net of
reinsurance, for the past three years, as well as the effect of loss development on prior period catastrophe
reserves.
Hurricane Ike, which reached the Gulf Coast on September 12, 2008, moved into the Midwest on
September 14, causing unusually high winds in Ohio, Indiana and Kentucky. At December 31, 2008, our
gross losses from Hurricane Ike were estimated at $129 million, making it the single largest catastrophe in
the company’s history. Net of reinsurance, the loss was estimated at $58 million. Virtually all of the losses
reported by our policyholders occurred in the Midwest.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 49
Catastrophe Losses Incurred
(In millions, net of reinsurance)
Cause of loss
Dates
2008
Jan. 4-9
Jan. 29-30
Feb. 5-6
Mar. 14
Mar. 15-16
Apr. 9-11
May 1
May 10-12
May 22-26
May 29- Jun 1
Jun. 2-4
Jun. 5-8
Jun. 11-12
Jun. 25
Jul. 19
Jul. 26
Sep. 12-14
Other 2008 catastrophes
Development on 2007 and prior catastrophes
Calendar year incurred total
Wind, hail, flood, freezing
Wind, hail
Wind, hail, flood
Tornadoes, wind, hail, flood
Wind, hail
Wind, hail, flood
Wind, hail
Wind, hail, flood
Wind, hail
Wind, hail, flood
Wind, hail, flood
Wind, hail, flood
Wind, hail, flood
Wind, hail, flood
Wind, hail, flood
Wind, hail, flood
Hurricane Ike
2007
Mar. 1-2
Jun. 7-9
Sep. 20-21
Other 2007 catastrophes
Development on 2006 and prior catastrophes
Calendar year incurred total
Wind, hail, flood
Wind, hail, flood
Wind, hail, flood
2006
Mar. 11-13
Apr. 2-3
Apr. 6-8
Apr. 13-15
Jun. 18-22
Jul. 19-21
Aug. 23-25
Oct. 2-4
Nov. 30-Dec. 3
Other 2006 catastrophes
Development on 2005 and prior catastrophes
Calendar year incurred total
Wind, hail
Wind, hail
Wind, hail
Wind, hail
Wind, hail, flood
Wind, hail, flood
Wind, hail, flood
Wind, hail, flood
Wind, hail, ice, snow
Region
South, Midwest
Midwest
Midwest
South
South
South
South
South, Mid-Atlantic
Midwest
Midwest
Midwest
Midwest
Midwest
Midwest
Midwest
Midwest
South, Midwest
South
Midwest
Midwest
Midwest, Mid-Atlantic
Midwest
South
South
South
South
Midwest
Midwest
Midwest, South
Commercial
lines
Personal
lines
Total
$
$
$
$
$
$
4 $
5
5
4
2
17
5
3
4
4
6
8
10
2
2
1
22
2
(3)
103 $
6 $
4
2
14
(10)
16 $
29 $
12
13
4
3
4
5
7
4
7
1
89 $
2 $
4
8
0
8
2
1
4
3
4
4
6
4
2
2
7
36
2
1
100 $
2 $
5
4
9
(10)
10 $
8 $
5
24
6
2
1
2
31
4
3
0
86 $
6
9
13
4
10
19
6
7
7
8
10
14
14
4
4
8
58
4
(2)
203
8
9
6
23
(20)
26
37
17
37
10
5
5
7
38
8
10
1
175
The three-year rise in total underwriting expenses largely was due to the rise in non-commission underwriting
expenses, reflecting our continued investment in the people and systems necessary for our future growth.
The change in our pension plan added 0.8 percentage points to the overall combined ratio, including a
0.5 percentage point addition to the non-commission expense ratio.
(Dollars in millions)
Commission expenses
Underwriting expenses
Policyholder dividends
Total underwriting expenses
Ratios as a percent of earned premiums:
Commission expenses
Underwriting expenses
Policyholder dividends
Total underwriting expense ratio
$
$
2008
Years ended December 31,
2007
2006
552
404
15
971
$
$
18.3 %
13.5
0.5
32.3 %
599
375
15
989
$
$
19.2 %
12.0
0.5
31.7 %
596
363
16
975
18.8 %
11.5
0.5
30.8 %
2008-2007
Change %
(7.8)
7.9
(3.5)
(1.8)
2007-2006
Change %
0.4
3.2
(5.4)
1.3
Pt. Change
Pt. Change
(0.9)
1.5
0.0
0.6
0.4
0.5
0.0
0.9
The discussions of our property casualty insurance segments provide additional detail about these factors.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 50
COMMERCIAL LINES INSURANCE RESULTS OF OPERATIONS
Overview -- Three-year Highlights
Years ended December 31,
2007
2006
2008
2008-2007
Change %
2007-2006
Change %
$
2,316
$
2,411
$
2,402
(3.9)
0.4
(Dollars in millions)
Earned premiums
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Underwriting expenses
Underwriting profit
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Underwriting expenses
Combined ratio
$
1,671
106
(270)
(3)
1,504
742
70
$
72.1 %
4.6
(11.7)
(0.1)
64.9
32.1
97.0 %
1,572
26
(194)
(10)
1,394
756
261
$
65.2 %
1.1
(8.0)
(0.4)
57.9
31.3
89.2 %
1,476
87
(98)
1
1,466
728
208
61.4 %
3.6
(4.1)
0.1
61.0
30.3
91.3 %
6.3
299.7
(39.3)
69.3
7.8
(1.8)
683.3
6.4
(69.2)
(94.9)
nm
(4.8)
3.7
21.6
Pt. Change
Pt. Change
6.9
3.5
(3.7)
0.3
7.0
0.8
7.8
7.8
0.1
7.7
3.8
(2.5)
(3.9)
(0.5)
(3.1)
1.0
(2.1)
(2.1)
(6.9)
4.8
Combined ratio
Contribution from catastrophe losses and prior years
reserve development
Combined ratio before catastrophe losses and prior
years reserve development
97.0 %
89.2 %
91.3 %
(7.2)
(7.3)
(0.4)
104.2 %
96.5 %
91.7 %
Performance highlights for the commercial lines segment include:
• Premiums – Pricing in our industry continues to be very competitive, and the poor economy is driving
exposures lower. While our net written premium growth rate lagged that of the overall commercial lines
industry, we feel our current pace for new and renewal business is consistent with our agents’ practice of
selecting and retaining accounts with manageable risk characteristics that support the lower prevailing
prices. We believe our pace reflects the advantages we achieve through our field focus, which provides
us with quality intelligence on local market conditions. Commercial lines industry net written premiums
were estimated to decline 3.8 percent in 2008 and 0.3 percent in 2007, after rising 3.5 percent in
2006. Our earned premiums declined in 2008 after rising slightly in 2007.
• Combined ratio – Our commercial lines combined ratio rose to 97.0 percent in 2008 from very strong
performances in 2007 and 2006. The 2008 ratio largely reflected higher current accident year losses
before catastrophe losses. We continue to focus on sound underwriting fundamentals and obtaining
adequate premiums per policy. We discuss factors affecting the combined ratio and reserve
development by line of business below. Approximately $49 million, or 2.1 percentage points, of the rise
in current accident year loss and loss expenses was due to refinements made to the allocation of IBNR
reserves by accident year.
Our commercial lines statutory combined ratio was 96.6 percent in 2008 compared with 89.2 percent in
2007 and 90.8 percent in 2006. By comparison, the estimated industry commercial lines combined ratio
was 106.5 percent in 2008, 95.1 percent in 2007 and 91.2 percent in 2006. Industry commercial lines
estimates include the mortgage and financial guaranty insurers, which saw a surge in claims following
the historically high level of mortgage defaults in 2008.
Commercial Lines Insurance Premiums
(Dollars in millions)
Agency renewal written premiums
Agency new business written premiums
Other written premiums
Net written premiums
Unearned premium change
Earned premiums
2008
Years ended December 31,
2007
2006
$
$
2,156
312
(157)
2,311
5
2,316
$
$
2,271
287
(145)
2,413
(2)
2,411
$
$
2,209
324
(91)
2,442
(40)
2,402
2008-2007
2007-2006
Change % Change %
2.8
(11.5)
(57.7)
(1.2)
94.6
0.4
(5.1)
8.8
(8.3)
(4.2)
nm
(3.9)
As commercial lines markets have grown more competitive over the past several years, we have focused on
leveraging our local relationships as well as the efforts of our agents and the teams that work with them. In
this environment, we have been careful to maintain appropriate pricing discipline for both new and renewal
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 51
business as we emphasize the importance of assessing account quality to our agencies and underwriters.
We continue to make case-by-case decisions not to write or renew certain business. We continue to use rate
credits to retain renewals of quality business and earn new business. Our experience remains that the larger
the account, the higher the credits, with variations by geographic region and class of business. Agency
emphasis on larger accounts, convenience and technology considerations were the primary reasons for a
slight decline in the number of our smaller policies.
Over the past three years, we continued to focus on seeking and maintaining adequate premium per
exposure as well as pursuing non-pricing means of enhancing longer-term profitability. Non-pricing means
have included deliberate reviews of each risk, terms and conditions and limits of insurance. We continue to
adhere to our underwriting guidelines, to re-underwrite books of business with selected agencies and to
update policy terms and conditions. In addition, we continue to leverage our strong local presence. Our field
marketing representatives meet with local agencies to reaffirm agreements on the extent of frontline renewal
underwriting agents will perform. Loss control, machinery and equipment and field claims representatives
continue to conduct on-site inspections. To assist underwriters, field claims representatives prepare full
reports on risks of concern.
Both renewal and new business reflected the effects of the economic slowdown in many regions, as
exposures declined and policyholders became increasingly focused on reducing expenses. For commercial
accounts, we typically calculate general liability premiums based on sales or payroll volume while we
calculate workers’ compensation premiums based on payroll volume. A change in sales or payroll volume
generally indicates a change in demand for a business’s goods or services, as well as a change in its
exposure to risk. Policyholders who experience sales or payroll volume changes due to economic factors may
be purchasers of other types of insurance, such as commercial auto or commercial property, in addition to
general liability and workers’ compensation. Premium levels for these other types of policies generally are not
linked directly to sales or payroll volumes.
In 2008, we estimated that policyholders with a contractor-related ISO general liability code accounted for
approximately 38 percent of our general liability premiums, which are included in the commercial casualty
line of business, and that policyholders with a contractor-related NCCI workers’ compensation code
accounted for approximately 47 percent of our workers’ compensation premiums. The contractor market has
been one of the more adversely affected by the economic slowdown.
The decline in 2008 agency renewal written premiums was largely driven by the pricing and exposure
declines while policy retention rates remained relatively steady. For renewal business, our headquarters
underwriters talk regularly with agents. Our field teams are available to assist headquarters underwriters by
conducting inspections and holding renewal review meetings with agency staff. These activities can help
verify that a commercial account retains the characteristics that caused us to write the business initially. For
renewal business, the typical pricing decline has moved into the mid-single-digits, although higher declines
occur. In addition to pricing pressures, premiums confirmed by audits of policyholder sales and payrolls
declined for 2008.
For new business, our field associates are in our agents’ offices helping to judge the quality of each account,
emphasizing the Cincinnati value proposition, calling on sales prospects with those agents, carefully
evaluating risk exposure and working up their best quotes. In 2008, new business premium growth largely
was driven by agencies appointed in the past five years with relatively stable contributions from the
remaining agencies. At year-end 2008, our field marketing representatives reported pricing down about
5 percent to 10 percent on average to write the same piece of quality new business we would have quoted in
2007, the third consecutive year of significant declines in our new business pricing. Pricing on new business
remains competitive as many carriers appear to be managing the soft market by working aggressively to
protect their renewal portfolios.
In 2007 and 2008, other written premiums lowered net written premiums more than 2006. Higher ceded
reinsurance costs were the primary driver in both 2007 and 2008, including the reinsurance reinstatement
premium incurred in 2008.
Commercial Lines Insurance Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the
associated loss expenses.
(Dollars in millions)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2008
as of December 31, 2007
as of December 31, 2006
1,777
2008
$
$
2007
1,493
1,599
$
2006
1,397
1,457
1,563
2008
76.7 %
2007
2006
61.9 %
66.3
58.2 %
60.6
65.1
For our larger business lines, the trend in the current accident year loss and loss expense ratio before
catastrophe losses over the past three years reflected normal loss cost inflation as well as competitive
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 52
market conditions and softer pricing that began in 2005 and continued through 2008, as discussed above.
In 2008, we saw a higher level of larger losses from director and officer liability coverages, as discussed
below. The increase in larger losses in 2007 was primarily seen in general liability, commercial auto and
workers’ compensation.
Catastrophe losses were highly volatile over the three year period as discussed in Consolidated Property
Casualty Insurance Results of Operations, Page 49. Savings from prior period reserve development continued
to trend favorably in 2008 as discussed in Commercial Lines Insurance Segment Reserves, Page 77.
Commercial Lines Insurance Losses by Size
(Dollars in millions)
New losses greater than $4,000,000
New losses $2,000,000-$4,000,000
New losses $1,000,000-$2,000,000
New losses $750,000-$1,000,000
New losses $500,000-$750,000
New losses $250,000-$500,000
Case reserve development above $250,000
Total large losses incurred
Other losses excluding catastrophe losses
Catastrophe losses
Total losses incurred
Ratios as a percent of earned premiums:
New losses greater than $4,000,000
New losses $2,000,000-$4,000,000
New losses $1,000,000-$2,000,000
New losses $750,000-$1,000,000
New losses $500,000-$750,000
New losses $250,000-$500,000
Case reserve development above $250,000
Total large loss ratio
Other losses excluding catastrophe losses
Catastrophe losses
Total loss ratio
$
$
Years ended December 31,
2007
2006
2008
41
75
78
41
45
98
229
607
547
103
1,257
$
$
1.8 %
3.2
3.4
1.8
2.0
4.2
9.9
26.3
23.4
4.5
54.2 %
4
111
90
33
48
74
201
561
502
16
1,079
$
$
0.2 %
4.6
3.7
1.4
2.0
3.0
8.4
23.3
20.8
0.7
44.8 %
0
111
67
28
40
64
201
511
562
89
1,162
0.0 %
4.6
2.8
1.2
1.7
2.7
8.3
21.3
23.4
3.7
48.4 %
2008-2007
Change %
835.3
(32.8)
(13.8)
21.8
(6.0)
33.7
13.9
8.0
8.9
560.2
16.4
2007-2006
Change %
nm
0.3
34.2
18.8
20.9
14.1
0.3
10.0
(10.6)
(82.3)
(7.0)
Pt. Change
Pt. Change
1.6
(1.4)
(0.3)
0.4
0.0
1.2
1.5
3.0
2.6
3.8
9.4
0.2
0.0
0.9
0.2
0.3
0.3
0.1
2.0
(2.6)
(3.0)
(3.6)
The rise in the loss and loss expense ratio reflected a growing contribution from new losses and case reserve
increases greater than $250,000. In total, commercial lines new losses and reserve increases greater than
$250,000 rose to 26.3 percent of earned premiums from 23.3 percent in 2007 and 21.3 percent in 2006.
Our analysis indicated no unexpected concentration of these losses and reserve increases by geographic
region, policy inception, agency or field marketing territory. We believe the increase was due to a number of
factors, including a larger number of director and officer liability claims, changes in retention levels for our
per risk reinsurance programs, changes in case reserving practices for our workers’ compensation business
line, natural volatility and general inflationary trends in loss costs, which we continue to monitor. In 2006 and
2007, our retention for our property and casualty working treaties was $4 million. In 2008, we raised the
casualty retention to $5 million.
Commercial Lines Insurance Underwriting Expenses
(Dollars in millions)
Commission expenses
Underwriting expenses
Policyholder dividends
Total underwriting expenses
Ratios as a percent of earned premiums:
Commission expenses
Underwriting expenses
Policyholder dividends
Total underwriting expense ratio
$
2008
Years ended December 31,
2007
2006
413
314
15
742
$
17.8 %
13.7
0.6
32.1 %
454
287
15
756
$
18.8 %
11.9
0.6
31.3 %
444
268
16
728
18.5 %
11.1
0.7
30.3 %
2008-2007
Change %
(8.9)
9.5
(3.5)
(1.8)
2007-2006
Change %
2.0
7.0
(5.4)
3.7
Pt. Change
Pt. Change
(1.0)
1.8
0.0
0.8
0.3
0.8
(0.1)
1.0
Commercial lines commission expense as a percent of earned premium declined in 2008 from the relatively
stable level of the prior two years. The change in the ratio reflected both the decline in earned premiums and
a lower level of contingent commissions in 2008. Commission expenses include our profit-sharing, or
contingent, commissions, which are calculated on the profitability of an agency’s aggregate property casualty
book of Cincinnati business, taking into account longer-term profit and premium volume, with a percentage
for prompt payment of premiums and other criteria, to reward the agency’s effort. These profit-based
commissions generally fluctuate with our loss and loss expense ratio. Our 2008 contingent commission
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 53
accrual reflected our estimate of the profit-sharing commissions to be paid to our agencies in early 2009,
based largely on each agency’s performance in 2008.
In both 2007 and 2008, non-commission expenses rose on flat or declining earned premiums, which also led
to unfavorable deferred acquisition expense comparisons. Further, in 2008, the salary cost contribution rose
by approximately 0.8 percentage points and the change in our pension plan contributed 0.5 percentage
points to the ratio. In 2007, our surplus lines start-up activities contributed slightly to higher staffing and
technology expenses. Surplus lines expenses were included in Other in 2008. Refinements in the allocation
of expenses between our commercial lines and personal lines segments also contributed to minor variations
in the non-commission underwriting expenses.
Commercial Lines Insurance Outlook
Industrywide commercial lines written premiums are expected to decline approximately 1.4 percent in
2009 with the industry combined ratio estimated at 105.1 percent. As discussed in Item 1, Commercial Lines
Insurance Marketplace, Page 13, over the past several years, renewal and new business pricing has come
under steadily increasing pressure, reinforcing the need for more flexibility and careful risk selection.
We expect commercial lines price declines to slow in 2009.
We intend to continue marketing our products to a broad range of business classes, pricing our products
appropriately and taking a package approach. We intend to maintain our underwriting selectivity and
carefully manage our rate levels as well as our programs that seek to accurately match exposures with
appropriate premiums. We will continue to evaluate each risk individually and to make decisions about rates,
the use of three-year commercial policies and other policy conditions on a case-by-case basis, even in lines
and classes of business that are under competitive pressure. Nonetheless, we expect commercial lines
profitability to remain under pressure in 2009.
In Item 1, Strategic Initiatives, Page 7, we discuss the initiatives we are implementing to achieve our
corporate performance objectives. We discuss our overall outlook for our property casualty insurance
operations in the Executive Summary, Page 37.
Commercial Lines of Business Analysis
Approximately 95 percent of our commercial lines premiums relate to accounts with coverages from more
than one of our business lines. As a result, we believe that the commercial lines segment is best measured
and evaluated on a segment basis. However, we provide line of business data to summarize growth and
profitability trends separately for each line. The accident year loss data provides current estimates of
incurred loss and loss expenses and corresponding ratios over the most recent three accident years.
Accident year data classifies losses according to the year in which the corresponding loss events occur,
regardless of when the losses are actually reported, recorded or paid.
Commercial Casualty
(Dollars in millions)
Commercial casualty:
Written premiums
Earned premiums
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2007
2006
2008
2008-2007
Change %
2007-2006
Change %
$
$
764
763
576
0
(257)
0
319
$
$
830
827
572
0
(149)
0
423
$
$
838
831
540
0
(100)
0
440
(7.9)
(7.8)
0.7
nm
(72.3)
nm
(24.7)
(1.0)
(0.5)
6.0
nm
(50.1)
nm
(4.0)
75.4 %
69.2 %
65.0 %
0.0
(33.7)
0.0
0.0
(18.1)
0.0
0.0
(12.0)
0.0
41.7 %
51.1 %
53.0 %
Pt. Change
6.2
0.0
(15.6)
0.0
(9.4)
Pt. Change
4.2
0.0
(6.1)
0.0
(1.9)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2008
as of December 31, 2007
as of December 31, 2006
2008
576
$
$
2007
2006
$
479
572
414
469
540
2008
75.4 %
2007
2006
57.9 %
69.2
49.8 %
56.4
65.0
Commercial casualty is our largest business line. The decline in commercial casualty net written premiums
reflected the intensifying competition in the casualty market. In addition, premiums for this business line can
reflect economic trends, including changes in underlying exposures.
The calendar year loss and loss expense ratio improved in 2008 and 2007, largely because of higher savings
from favorable development on prior period reserves. Factors contributing to the higher savings included
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 54
refinements to our IBNR reserve allocation, quarter-to-quarter reductions in actuarial reserve estimates, the
introduction of an additional umbrella reserving model, sooner-than-expected moderation in the inflation
trend of allocated loss expenses and unusual deviations from predictions of reserving methods and models.
These factors are discussed in Commercial Lines Insurance Segment Reserves, Page 77. The level of new
losses and case reserve increases greater than $250,000 was slightly lower than in 2007.
The current accident year loss and loss expense ratio before catastrophe losses deteriorated over the
three-year period, primarily because of lower pricing per exposure and normal loss cost inflation. Further, the
commercial casualty business line includes some of our longest tail exposures, making initial estimates of
accident year loss and loss expenses incurred more uncertain, as we discuss in Critical Accounting
Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 41.
Commercial Property
(Dollars in millions)
Commercial property:
Written premiums
Earned premiums
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2007
2008
2006
2008-2007
Change %
2007-2006
Change %
$
$
481
487
282
81
(7)
(3)
353
$
$
57.7 %
16.6
(1.3)
(0.4)
72.6 %
499
497
240
20
(10)
(9)
241
$
$
48.3 %
4.0
(2.0)
(1.8)
48.5 %
505
491
216
62
(2)
6
282
(3.6)
(2.0)
17.3
304.2
29.1
73.4
46.7
(1.1)
1.2
11.1
(67.4)
(519.7)
nm
(14.6)
44.0 %
12.6
(0.4)
1.3
57.5 %
Pt. Change
9.4
12.6
0.7
1.4
24.1
Pt. Change
4.3
(8.6)
(1.6)
(3.1)
(9.0)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2008
as of December 31, 2007
as of December 31, 2006
2008
363
$
$
2007
2006
$
260
260
266
274
278
2008
74.3 %
2007
2006
52.3 %
52.3
54.2 %
55.7
56.6
Commercial property is our second largest business line. The decline in commercial property net written
premiums over the three-year period reflected pricing declines exacerbated by higher reinsurance premiums,
including the premium reinstatement premium in 2008.
The calendar year loss and loss expense ratio deteriorated substantially in 2008 after improving in 2007,
primarily due to fluctuations in catastrophe losses. New losses and case reserve increases greater than
$250,000 added 3.4 percentage points to the 2008 ratio. Development on prior period reserves was
relatively stable over the period.
The current accident year loss and loss expense ratio before catastrophe losses deteriorated over the
three-year period. A portion of the increase was due to a higher loss expense allocation because of the level
of catastrophe and weather-related losses. In addition, the refinement in the allocation of IBNR reserves by
accident year artificially accentuated the difference between the 2007 and 2008 ratios by approximately
2 percentage points.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 55
Commercial Auto
(Dollars in millions)
Commercial auto:
Written premiums
Earned premiums
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2007
2008
2006
2008-2007
Change %
2007-2006
Change %
$
$
402
411
303
2
(8)
0
297
$
$
429
440
303
1
(25)
(1)
278
$
$
450
453
296
4
(22)
0
278
(6.2)
(6.7)
(0.5)
240.5
67.6
nm
6.3
(4.7)
(2.9)
3.0
(83.4)
(18.5)
nm
0.2
73.7 %
69.3 %
65.2 %
0.6
(2.0)
0.0
0.0
(5.8)
0.0
0.9
(4.6)
0.0
72.3 %
63.5 %
61.5 %
Pt. Change
4.4
0.6
3.8
0.0
8.8
Pt. Change
4.1
(0.9)
(1.2)
0.0
2.0
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2008
as of December 31, 2007
as of December 31, 2006
2008
305
$
$
2007
2006
2008
2007
2006
$
298
304
289
284
300
74.3 %
67.7 %
69.3
63.8 %
62.7
66.1
The decline in commercial auto written premiums over the three-year period reflected the downward pressure
exerted by the market on the pricing of commercial accounts. Commercial auto is one of the business lines
that we renew and price annually, so market trends may be reflected here more quickly than in other lines.
Commercial auto also experiences pricing pressure because it often represents the largest portion of
insurance costs for many commercial policyholders.
The calendar year loss and loss expense ratios moved above the range we consider appropriate in 2008 due
to ongoing pricing pressures and normal loss cost inflation. We believe volatility in the number of commercial
auto losses greater than $1 million reflected natural volatility and general inflationary trends in loss costs.
Savings from development on prior period reserves was lower in 2008 than 2007 and 2006 as commercial
auto paid and reported loss development trends were relatively stable.
Pricing and normal loss cost inflation were the primary drivers of the deterioration in the accident year loss
and loss expense ratio before catastrophe losses over the past three years.
Workers’ Compensation
(Dollars in millions)
Workers' compensation:
Written premiums
Earned premiums
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2007
2008
2006
2008-2007
Change %
2007-2006
Change %
$
$
382
375
342
0
(3)
0
339
$
$
378
373
326
0
(10)
0
316
$
$
379
366
300
0
13
0
313
1.1
0.6
4.9
nm
75.0
nm
7.5
(0.3)
1.9
7.4
nm
nm
nm
1.0
91.1 %
87.3 %
82.8 %
0.0
(0.7)
0.0
0.0
(2.7)
0.0
0.0
2.6
0.0
90.4 %
84.6 %
85.4 %
Pt. Change
3.8
0.0
2.0
0.0
5.8
Pt. Change
4.5
0.0
(5.3)
0.0
(0.8)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2008
as of December 31, 2007
as of December 31, 2006
2008
342
$
$
2007
2006
2008
2007
2006
$
305
326
284
284
300
91.1 %
81.7 %
87.3
77.6 %
77.6
82.8
Workers’ compensation written premiums have been relatively flat over the past three years. Although we
have seen rising policy counts, these gains have been offset by reductions in payroll levels due to the
troubled economy as well as rate decreases and the use of credits in a majority of our territories. We have
had initiatives in place to judiciously expand our workers’ compensation business in selected states that
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 56
traditionally have been profitable markets for us and to enter states, such as Arizona and West Virginia,
where we previously were not actively writing the line. We cannot offer workers’ compensation coverage in
Ohio, our highest total property casualty premium volume state, because it is provided solely by the state
instead of private insurers.
Since we pay a lower commission rate on workers’ compensation business, this line has a higher calendar
year loss and loss expense breakeven point than our other commercial business lines. Nonetheless, the ratio
remained above our target levels over the three-year period. Management is actively pursuing programs to
improve financial performance for this line. For example, in 2009, we are putting in place a predictive
modeling program to improve our pricing accuracy, and we are accelerating our delivery of loss control
services to help manage our workers’ compensation profitability.
In addition, the workers’ compensation business line includes our longest tail exposures, making initial
estimates of accident year loss and loss expenses incurred more uncertain. Due to the lengthy payout period
of workers’ compensation claims, small shifts in medical cost inflation and payout periods could have a
significant effect on our potential future liability compared with our current projections.
Specialty Packages
(Dollars in millions)
Specialty packages:
Written premiums
Earned premiums
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2007
2006
2008
2008-2007
Change %
2007-2006
Change %
$
$
145
144
87
23
(3)
(1)
106
$
$
60.8 %
15.6
(2.5)
(0.4)
73.5 %
146
146
80
6
0
0
86
$
$
54.8 %
4.0
0.5
0.1
59.4 %
144
141
71
20
8
(4)
95
(0.5)
(1.3)
9.2
287.4
nm
nm
22.0
1.5
3.1
12.8
(71.8)
nm
nm
(7.6)
50.2 %
14.5
4.7
(3.1)
66.3 %
Pt. Change
6.0
11.6
(3.0)
(0.5)
14.1
Pt. Change
4.6
(10.5)
(4.2)
3.2
(6.9)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2008
as of December 31, 2007
as of December 31, 2006
2008
110
$
$
2007
2006
2008
2007
2006
$
87
86
91
92
91
76.4 %
59.9 %
58.9
64.7 %
65.3
64.7
Specialty packages net written premiums were relatively flat over the three-year period. Our commercial lines
policy processing system for Businessowners Policies, which are included in this business line, is helping us
meet changing agency needs and address pricing, technology and service innovations that other carriers
have introduced for similar products in recent years.
The calendar year loss and loss expense ratio reflected the volatility in catastrophe losses over the three-year
period. In addition, the current accident year loss and loss expense ratio before catastrophe losses has risen
over the period because of pricing reductions and normal loss cost inflation.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 57
Surety and Executive Risk
(Dollars in millions)
Surety and executive risk:
Written premiums
Earned premiums
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2007
2008
2006
2008-2007
Change %
2007-2006
Change %
$
$
107
107
71
0
7
0
78
$
$
102
100
41
0
1
0
42
$
$
97
93
41
0
6
0
47
4.0
7.7
75.2
nm
494.7
nm
87.0
5.2
7.8
(1.4)
nm
(79.7)
nm
(11.1)
66.1 %
40.6 %
44.4 %
0.0
6.5
0.0
0.0
1.2
0.0
0.0
6.3
0.0
72.6 %
41.8 %
50.7 %
Pt. Change
25.5
0.0
5.3
0.0
30.8
Pt. Change
(3.8)
0.0
(5.1)
0.0
(8.9)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2008
as of December 31, 2007
as of December 31, 2006
2008
71
$
$
2007
2006
2008
2007
2006
$
54
41
42
44
41
66.1 %
54.3 %
40.6
45.2 %
47.3
44.4
Surety and executive risk net written premiums rose over the three-year period as we enhanced our
marketing of these products.
Director and officer liability coverage accounted for 58.9 percent of surety and executive risk premiums in
2008 compared with 62.3 percent in 2007 and 60.5 percent in 2006. We actively manage the potentially
high risk of writing director and officer liability by:
• Marketing primarily to nonprofit organizations, which accounted for approximately 80 percent of the
director and officer liability policies we wrote in 2008.
• Writing on a claims-made basis, which normally restricts coverage to losses reported during the policy
term.
• Providing limits no higher than $15 million with facultative or treaty reinsurance in place in 2009 for
losses greater than $6 million.
•
Limiting the number of for-profit policies. At year-end 2008, our in-force director and officer liability
policies provided coverage to 30 non-financial publicly traded companies, including two Fortune 1000
companies. We also provided this coverage to approximately 500 banks, savings and loans and other
financial institutions. The majority of these financial institution policyholders are smaller community
banks, and we believe they have no unusual exposure to credit-market concerns, including subprime
mortgages. Based on new policy data or information from the most recent policy renewal, only 12 of our
bank and savings and loan policyholders have assets greater than $2 billion, including one Fortune 500
company; only 23 have assets between $1 billion and $2 billion; and 49 have assets between
$500 million and $1 billion.
The calendar year and current accident year loss and loss expense ratios rose substantially in 2008, driven
by additional director and officer new losses and case reserve increases greater than $250,000. During
2008, 38 of the new director and officer losses and case reserve increases added approximately $43 million
to loss and loss expenses compared with 20 adding about $9 million in 2007 and 16 adding about $16
million in 2006. The higher level in 2008 was largely due to six new losses and five case reserve increases
greater than $1 million on claims made in 2007. Eight of these 11 items were related to lending practices at
financial institutions. To address the potential risk of this portion of our surety and executive risk business
line moving forward, we are working with our agents to limit the number of new director and officer policies
for financial institutions. At renewal, we are carefully re-underwriting each account based on credit rating and
other metrics.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 58
Machinery and Equipment
(Dollars in millions)
Machinery and equipment:
Written premiums
Earned premiums
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2007
2006
2008
2008-2007
Change %
2007-2006
Change %
$
$
30
29
11
0
1
0
12
$
$
29
28
10
0
(2)
0
8
$
$
29
27
11
0
1
0
12
3.5
3.1
10.9
nm
nm
nm
57.7
0.2
2.4
(11.2)
nm
nm
nm
(32.3)
36.1 %
0.9
5.5
0.0
42.5 %
33.6 %
0.0
(5.5)
(0.3)
27.8 %
38.8 %
0.4
2.8
0.0
42.0 %
Pt. Change
2.5
0.9
11.0
0.3
14.7
Pt. Change
(5.2)
(0.4)
(8.3)
(0.3)
(14.2)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2008
as of December 31, 2007
as of December 31, 2006
2008
11
$
$
2007
2006
2008
2007
2006
$
10
10
11
10
11
37.0 %
34.2 %
33.6
41.1 %
35.9
39.2
Machinery and equipment net written premiums rose in 2008 after a relatively flat 2007. Because of the
relatively small size of this business line, the calendar year and accident year loss and loss expense ratios
can fluctuate substantially.
PERSONAL LINES INSURANCE RESULTS OF OPERATIONS
Years ended December 31,
2007
2008-2007
Change %
2008
2006
(Dollars in millions)
2007-2006
Change %
Earned premiums
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Underwriting expenses
Underwriting profit (loss)
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Underwriting expenses
Combined ratio
$
$
689
$
714
$
498
99
(51)
1
547
224
(82)
$
72.2 %
14.4
(7.3)
0.1
79.4
32.5
111.9 %
459
20
(30)
(11)
438
233
43
$
64.3 %
2.8
(4.3)
(1.5)
61.3
32.6
93.9 %
762
471
89
(15)
(3)
542
247
(27)
62.1 %
11.6
(2.1)
(0.4)
71.2
32.4
103.6 %
Combined ratio
Contribution from catastrophe losses and prior years
reserve development
Combined ratio before catastrophe losses and prior
years reserve development
111.9 %
93.9 %
103.6 %
7.2
(3.0)
9.1
104.7 %
96.9 %
94.5 %
(3.4)
(6.3)
8.7
396.4
(67.6)
nm
25.2
(3.9)
nm
(3.0)
(77.5)
(90.2)
(270.3)
(19.3)
(5.6)
nm
Pt. Change
Pt. Change
7.9
11.6
(3.0)
1.6
18.1
(0.1)
18.0
18.0
10.2
7.8
2.2
(8.8)
(2.2)
(1.1)
(9.9)
0.2
(9.7)
(9.7)
(12.1)
2.4
Overview -- Three-year Highlights
Performance highlights for the personal lines segment include:
• Premiums – Over the past three years, competition in our personal lines markets rose and we continued
to adjust pricing in an effort to return to consistent profitability in our personal lines segment. Our written
premiums declined on lower premiums per policy and higher reinsurance-related premiums as new
business growth remained positive. Industry average written premium growth was estimated at
1.0 percent in 2008 after being flat in 2007 and rising 2.0 percent in 2006.
• Combined ratio – The combined ratio rose substantially in 2008 after improving in 2007. The year-over-
year differences were partially due to dramatic fluctuations in the level of catastrophe losses. In 2008,
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 59
the current accident year loss and loss expense ratio before catastrophe losses also rose substantially.
Approximately $20 million, or 2.9 percentage points, of the rise in current accident year loss and loss
expenses was due to refinements made to the allocation of IBNR reserves by accident year.
Our personal lines statutory combined ratio was 111.6 percent in 2008, 94.1 percent in 2007 and
103.6 percent in 2006. By comparison, the estimated industry personal lines combined ratio was
103.3 percent in 2008, 96.1 percent in 2007 and 92.3 percent in 2006. Our concentration of business
in areas hard-hit by catastrophe events contributed to recent results that differed from the overall
industry.
Personal Lines Insurance Premiums
(Dollars in millions)
Agency renewal written premiums
Agency new business written premiums
Other written premiums
Net written premiums
Unearned premium change
Earned premiums
Years ended December 31,
2007
2006
2008
$
$
672
42
(29)
685
4
689
$
$
690
38
(24)
704
10
714
$
$
721
32
(17)
736
26
762
2007-2006
2008-2007
Change % Change %
(4.4)
16.9
(36.3)
(4.4)
(59.1)
(6.3)
(2.5)
9.5
(22.5)
(2.7)
(53.2)
(3.4)
Personal lines insurance is a strategic component of our overall relationship with many of our agencies and
an important component of our agencies’ relationships with their clients. We believe agents recommend
Cincinnati personal insurance products for their value-oriented clients who seek to balance quality and price
and who are attracted by our superior claims service and the benefits of our package approach.
Our personal lines policyholder retention and new business levels have remained at higher levels following
our July 2006 introduction of a limited program of policy credits for personal auto and homeowner pricing in
most of the states in which our Diamond system is in use. The program provided credits for eligible new and
renewal policyholders identified as above-average risks.
The rate of decline in our personal lines agency renewal written premiums further slowed in 2008, as the
benefits of additional tiers to our pricing structure were seen in many states. These tiers are intended to
improve our ability to compete for our agents’ highest quality personal lines accounts, increasing
opportunities for our agents to market the advantages of our personal lines products and services to their
clients.
The number of in-force homeowner and personal auto policies has declined steadily, but the year-over-year
rate of decline slowed to 2.3 percent as of year-end 2008 compared with 3.1 percent at year-end 2007.
Additional pricing and credit changes were implemented in early 2009, with introductions in additional states
planned for subsequent months. This round of changes further improves pricing for the best accounts, which
should help us retain and attract even more of our agents’ preferred business.
Our personal lines new business written by our agencies rose for the third consecutive year in 2008 as the
number of agency locations writing our personal lines rose by over 130, or 14.0 percent, in 2008. We set the
stage to improve our geographic diversification by opening Arizona and Utah to personal lines. We also
expanded our activity in Maryland and North Carolina by introducing personal auto and appointing additional
locations from our existing agency network. However, the increased new business did not fully offset the
impact of lost business and lower rates on above-average quality renewal business.
In 2007 and 2008, other written premiums lowered net written premiums more than 2006. Higher ceded
reinsurance costs were the primary driver in both years, including the reinsurance reinstatement premium
incurred in 2008.
Personal Lines Insurance Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the
associated loss expenses. The increase in the current accident year loss and loss expense ratio before
catastrophe losses over the past three years was due to the pricing factors discussed above, normal loss cost
inflation, refinements made to the allocation of IBNR reserves by accident year and higher non-catastrophe
weather-related losses. Larger personal lines losses were a smaller percentage of earned premiums in 2008.
(Dollars in millions)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2008
as of December 31, 2007
as of December 31, 2006
2008
597
$
$
2007
2006
$
480
478
535
547
561
2008
86.6 %
2007
2006
67.3 %
67.0
70.2 %
71.8
73.6
Catastrophe losses were highly volatile over the three-year period as discussed in Consolidated Property
Casualty Insurance Results of Operations, Page 49. Savings from prior period reserve development continued
to trend favorably in 2008 as discussed in Personal Lines Insurance Segment Reserves, Page 79.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 60
Personal Lines Insurance Losses by Size
(Dollars in millions)
Years ended December 31,
2007
2008
2006
New losses greater than $4,000,000
New losses $2,000,000-$4,000,000
New losses $1,000,000-$2,000,000
New losses $750,000-$1,000,000
New losses $500,000-$750,000
New losses $250,000-$500,000
Case reserve development above $250,000
Total large losses incurred
Other losses excluding catastrophe losses
Catastrophe losses
Total losses incurred
Ratios as a percent of earned premiums:
New losses greater than $4,000,000
New losses $2,000,000-$4,000,000
New losses $1,000,000-$2,000,000
New losses $750,000-$1,000,000
New losses $500,000-$750,000
New losses $250,000-$500,000
Case reserve development above $250,000
Total large losses incurred
Other losses excluding catastrophe losses
Catastrophe losses
Total loss ratio
$
$
5
0
16
7
11
26
16
81
295
100
476
$
$
0.7 %
0.0
2.3
1.0
1.6
3.8
2.3
11.7
42.8
14.5
69.0 %
0
13
15
8
10
26
19
91
279
10
380
$
$
0.0 %
1.9
2.0
1.1
1.5
3.6
2.7
12.8
39.1
1.3
53.2 %
0
8
14
9
8
22
23
84
309
86
479
0.0 %
1.0
1.8
1.1
1.1
2.9
3.1
11.0
40.6
11.3
62.9 %
2008-2007
Change %
nm
(100.0)
10.7
(11.5)
9.6
1.9
(20.1)
(11.0)
5.6
958.8
25.4
2007-2006
Change %
nm
72.0
3.5
(6.7)
20.9
15.5
(16.4)
8.1
(9.7)
(89.0)
(20.8)
Pt. Change
Pt. Change
0.7
(1.9)
0.3
(0.1)
0.1
0.2
(0.4)
(1.1)
3.7
13.2
15.8
0.0
0.9
0.2
0.0
0.4
0.7
(0.4)
1.8
(1.5)
(10.0)
(9.7)
The effect on the loss and loss expense ratio from new losses and case reserve increases greater than
$250,000 was lower in 2008 than it was in 2007. Our analysis indicated no unexpected concentration of
these losses and reserve increases by risk category, geographic region, policy inception, agency or field
marketing territory. We believe the increase in 2007 largely was due to general inflationary trends in loss
costs, which we continue to monitor, as well as natural volatility.
Personal Lines Insurance Underwriting Expenses
(Dollars in millions)
Commission expenses
Underwriting expenses
Total underwriting expenses
Ratios as a percent of earned premiums:
Commission expenses
Underwriting expenses
Total underwriting expense ratio
Years ended December 31,
2007
2006
2008
$
$
136
88
224
$
$
19.7 %
12.8
32.5 %
145
88
233
$
$
20.3 %
12.3
32.6 %
2008-2007
Change %
(6.4)
0.4
(3.9)
2007-2006
Change %
(4.4)
(7.5)
(5.6)
152
95
247
Pt. Change
Pt. Change
19.9 %
12.5
32.4 %
(0.6)
0.5
(0.1)
0.4
(0.2)
0.2
Personal lines commission expense as a percent of earned premium declined in 2008 after rising slightly in
2007. The 2008 decline in the ratio reflected both the decline in earned premiums and a lower level of
contingent commissions. Commission expenses include our profit-sharing, or contingent, commissions, which
are calculated on the profitability of an agency’s aggregate property casualty book of Cincinnati business,
taking into account longer-term profit and premium volume, with a percentage for prompt payment of
premiums and other criteria, to reward the agency’s effort. These profit-based commissions generally
fluctuate with our loss and loss expense ratio. Our 2008 contingent commission accrual reflected our
estimate of the profit-sharing commissions to be paid to our agencies in early 2009 based largely on each
agency’s performance in 2008.
Non-commission underwriting expenses were relatively stable over the three-year period. The modest
increase in 2008 was due to the pension charge. Refinements in the allocation of expenses between our
commercial lines and personal lines segments also contributed to minor variations in the non-commission
underwriting expenses.
Personal Lines Insurance Outlook
Industry analysts currently anticipate industrywide personal lines written premiums may rise approximately
2.5 percent in 2009, with the combined ratio estimated at 97.6 percent. While the improvement in our new
business levels and policy retention rates over the past several years are positive indications for our personal
lines business, we expect our growth rate to be below that of the industry as we continue to address our
pricing. In Item 1, Strategic Initiatives, Page 7, we discuss the initiatives we are implementing to address the
unsatisfactory performance of our personal lines segment, in particular the homeowner line of business.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 61
We describe steps that will enhance our response to the changing marketplace. We are aware that our
personal lines pricing and loss activity are at levels that could put achievement of our corporate financial
objectives at risk if those trends continue. We discuss our overall outlook for our property casualty insurance
operations in the Executive Summary, Page 37.
Personal Lines of Business Analysis
We prefer to write personal lines coverage on an account basis that includes both auto and homeowner
coverages as well as coverages from the other personal business line. As a result, we believe that the
personal lines segment is best measured and evaluated on a segment basis. However, we provide line of
business data to summarize growth and profitability trends separately for each line. The accident year loss
data provides current estimates of incurred loss and loss expenses and corresponding ratios over the most
recent three accident years. Accident year data classifies losses according to the year in which the
corresponding loss events occur, regardless of when the losses are actually reported, recorded or paid.
Personal Auto
(Dollars in millions)
Personal auto:
Written premiums
Earned premiums
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2007
2008
2006
2008-2007
Change %
2007-2006
Change %
$
$
320
325
226
4
(12)
0
218
$
$
69.4 %
1.2
(3.4)
0.0
67.2 %
332
342
225
1
5
(3)
228
$
$
65.8 %
0.3
1.6
(0.9)
66.8 %
359
385
237
11
2
0
250
(3.7)
(5.0)
0.3
266.3
nm
nm
(4.4)
(7.5)
(11.0)
(5.2)
(89.4)
190.3
nm
(8.6)
61.7 %
2.7
0.5
0.1
65.0 %
Pt. Change
3.6
0.9
(5.0)
0.9
0.4
Pt. Change
4.1
(2.4)
1.1
(1.0)
1.8
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2008
as of December 31, 2007
as of December 31, 2006
2008
230
$
$
2007
2006
2008
2007
2006
$
237
226
247
251
248
70.6 %
69.2 %
66.1
64.3 %
65.4
64.4
The decline in written and earned premiums slowed over the past three years as we continued to modify
pricing, improving retention and attracting new policyholders. New business activity is nearing a level that
would allow us to replace premiums lost due to price reductions and normal attrition. We continue to monitor
and modify selected rates and credits to address our competitive position.
The calendar year loss and loss expense ratio rose slightly over the three-year period. In recent years, we
have seen generally higher costs for liability claims, including severe injuries, and we have sought rate
increases for liability coverages that partially offset price decreases for physical damage coverages.
Pricing decreases and normal loss cost inflation also were primary drivers in the rise in the accident year loss
and loss expense ratio before catastrophe losses over the past three years. In addition, the 2008 accident
year loss and loss expense ratio rose by approximately 4 percentage points because of the refinements
made to our IBNR reserve allocation by accident year.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 62
Homeowner
(Dollars in millions)
Homeowner:
Written premiums
Earned premiums
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2007
2008
2006
2008-2007
Change %
2007-2006
Change %
$
$
277
277
194
89
(9)
1
275
$
$
69.9 %
32.1
(3.2)
0.4
99.2 %
284
285
161
17
(3)
(7)
168
$
$
56.5 %
6.0
(1.0)
(2.5)
59.0 %
290
289
163
72
8
(3)
240
(2.5)
(2.6)
20.5
416.6
(235.4)
nm
63.7
(2.1)
(1.6)
(1.7)
(76.1)
nm
(109.1)
(30.0)
56.6 %
24.9
2.7
(1.2)
83.0 %
Pt. Change
13.4
26.1
(2.2)
2.9
40.2
Pt. Change
(0.1)
(18.9)
(3.7)
(1.3)
(24.0)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2008
as of December 31, 2007
as of December 31, 2006
2008
283
$
$
2007
2006
$
177
178
226
229
235
2008
102.0 %
2007
2006
62.3 %
62.5
78.2 %
79.2
81.5
Written and earned premium trends in 2008 and 2007 reflected improved new business levels offset by
higher reinsurance premiums in both years. Reinsurance premiums, including a reinstatement premium of
$8 million in 2008, were $33 million in 2008, $21 million in 2007 and $16 million in 2006. The pricing
changes of the past several years have had a positive effect on policyholder retention and new business
activity. We continue to monitor and modify selected rates and credits to address our competitive position.
The calendar year loss and loss expense ratio over the past three years fluctuated with catastrophe losses.
Catastrophe losses have been above our expected range in recent years, averaging 24.7 percent of
homeowner earned premium from 2006 to 2008, compared with a five-year average of 20.9 percent.
The current accident year loss and loss expense ratio before catastrophe losses rose significantly in 2008, in
part because of the decline in earned premiums, which largely reflected rate changes we made to keep our
retention rate and new business at acceptable levels. Non-catastrophe weather-related losses contributed
about 5 percentage points to the 2008 ratio. In addition, the refinements made to our IBNR reserve
allocation by accident year and a lower estimate of salvage and subrogation reserves raised the ratio by
about 2 percentage points.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 63
Other Personal
(Dollars in millions)
Other personal:
Written premiums
Earned premiums
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expenses
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident year catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2007
2008
2006
2008-2007
Change %
2007-2006
Change %
$
$
88
87
79
6
(30)
(1)
54
$
$
88
87
72
2
(33)
0
41
$
$
87
88
71
6
(25)
0
52
0.6
0.1
8.6
271.0
8.4
nm
32.5
0.4
(1.2)
1.3
(73.6)
(28.3)
nm
(21.7)
89.9 %
6.9
(34.4)
(0.2)
62.2 %
82.9 %
1.9
(37.6)
(0.2)
47.0 %
81.0 %
7.0
(29.0)
0.4
59.4 %
Pt. Change
7.0
5.0
3.2
0.0
15.2
Pt. Change
1.9
(5.1)
(8.6)
(0.6)
(12.4)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2008
as of December 31, 2007
as of December 31, 2006
2008
85
$
$
2007
2006
2008
2007
2006
$
66
74
61
67
77
96.8 %
76.1 %
84.8
69.6 %
75.7
88.0
Other personal written premiums were essentially unchanged over the three-year period. The decline in the
number of homeowner and personal auto policies over the past several years hindered growth in this
business line since most of our other personal coverages are endorsed to homeowner or auto policies.
The calendar year loss and loss expense ratio for other personal deteriorated in 2008 after improving in
2007. Variations in catastrophe losses and favorable development on prior period reserves accounted for
this result. Savings from favorable development on prior period reserves is high for this business line
because personal umbrella losses, which are a major component of other personal losses, can fluctuate
significantly.
LIFE INSURANCE RESULTS OF OPERATIONS
Overview -- Three-year Highlights
Performance highlights for the life insurance segment include:
• Revenues – Driven by higher term life insurance premiums, earned premiums have grown over the past
three years although separate account management fees have fluctuated, primarily reflecting a net
realized capital loss sharing agreement between the separate account and the general account. Life
insurance premiums have driven the increase in gross in-force policy face amounts to $65.888 billion at
year-end 2008 from $61.875 billion at year-end 2007 and $56.971 billion at year-end 2006.
• Profitability – The life insurance segment frequently reports only a small profit or loss on a GAAP basis
because most of its investment income is included in investment segment results. We include only
investment income credited to contract holders (interest assumed in life insurance policy reserve
calculations) in life insurance segment results. The segment reported a $4 million profit in 2008.
At the same time, we recognize that assets under management, capital appreciation and investment
income are integral to evaluation of the success of the life insurance segment because of the long
duration of life products. For that reason, we also evaluate GAAP data, including all investment activities
on life insurance-related assets. Due to realized investment losses in 2008, the life insurance company
reported a GAAP net loss of $19 million compared with net profit of $65 million in 2007 and $63 million
in 2006. The life insurance company portfolio had after-tax realized investment losses of $58 million in
2008, including $66 million in other-than-temporary impairment charges. For 2007 and 2006, realized
investment losses were minimal, and we reported after-tax realized investment gains of $26 million and
$29 million in those years. Realized investment gains and losses are discussed under Investments
Results of Operations, Page 66.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 64
Life Insurance Results
(In millions)
Written premiums
Earned premiums
Separate account investment management fees
Total revenues
Contract holders benefits incurred
Investment interest credited to contract holders
Operating expenses incurred
Total benefits and expenses
Life insurance segment profit (loss)
Years ended December 31,
2007
2006
2008
2008-2007
Change %
$
$
$
185 $
126 $
2
128
142
(63)
45
124
4 $
167 $
125 $
4
129
133
(59)
52
126
3 $
161
115
3
118
122
(54)
51
119
(1)
11.0
0.8
(56.0)
(1.1)
6.1
5.2
(12.8)
(1.2)
0.9
2007-2006
Change %
3.2
9.0
25.1
9.5
9.2
9.8
0.8
5.3
nm
Life Insurance Growth
We market term, whole and universal life products, fixed annuities and disability income products.
In addition, we offer term, whole and universal life and disability insurance to employees at their worksite.
These products provide our property casualty agency force with excellent cross-serving opportunities for both
commercial and personal accounts.
Earned premiums increased slightly in 2008 largely because of growth in our term insurance business. Total
statutory life insurance net written premiums rose in 2008 to $185 million, compared with $167 million and
$161 million in 2007 and 2006. Total statutory written premiums for life insurance operations for all periods
include life insurance, annuity and accident and health premiums. The increase in total statutory life
insurance written premiums primarily was due to sales of term life insurance and annuity products.
Earned premiums for universal life products declined because fee income decreased 21 percent in 2008,
principally reflecting an increase in our liability for unearned front-end loads, an actuarial adjustment.
Separate account investment management fee income contributed $2 million to total revenue in 2008,
compared with a $4 million contribution in 2007 and $3 million in 2006. These fees declined primarily
because of a net realized capital loss sharing agreement between the separate account and the general
account.
Over the past several years, we have worked to maintain a portfolio of simple, yet competitive products,
primarily under the LifeHorizons banner. Our product development efforts emphasize death benefit
protection and guarantees. Distribution expansion within our property casualty insurance agencies remains a
high priority. In the past several years, we have added life field marketing representatives for the western,
southeastern and northeastern states. Our 30 life field marketing representatives work in partnership with
our more than 100 property casualty field marketing representatives. Approximately 71 percent of our term
and other life insurance product premiums were generated through our property casualty insurance agency
relationships.
Life Insurance Profitability
Life segment expenses consist principally of:
• Contract holders (policyholders) benefits incurred related to traditional life and interest-sensitive
products accounted for 75.7 percent of 2008 total benefits and expenses compared with 71.9 percent
in 2007 and 73.8 percent in 2006. Total benefits and expenses rose due to net death claims that
increased but remained within our range of pricing expectations.
• Operating expenses incurred, net of deferred acquisition costs, accounted for 24.3 percent of 2008 total
benefits and expenses compared with 28.1 percent in 2007 and 26.2 percent in 2006. Operating
expenses declined on an absolute and percentage basis principally because of the level of deferred
acquisition costs associated with new term life insurance policies.
Life segment profitability depends largely on premium levels, the adequacy of product pricing, underwriting
skill and operating efficiencies. Life segment results include only investment interest credited to contract
holders (interest assumed in life insurance policy reserve calculations). The remaining investment income is
reported in the investment segment results. The life investment portfolio is managed to earn target spreads
between earned investment rates on general account assets and rates credited to policyholders. We consider
the value of assets under management and investment income for the life investment portfolio as key
performance indicators for the life insurance segment.
We seek to maintain a competitive advantage with respect to benefits paid and reserve increases by
consistently achieving better than average claims experience due to skilled underwriting. Commissions paid
by the life insurance operation are on par with industry averages.
During the past several years, we have invested in imaging and workflow technology and have significantly
improved application processing. We have achieved process efficiencies while improving our service. These
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 65
efficiencies have played a significant role in cost containment and in our ability to increase total premiums
and policy count over the past 10 years with minimal headcount additions.
Life Insurance Outlook
The life insurance industry faced a difficult year as broad and deep dislocations in the financial markets led
to investment losses. While our investments also suffered, Cincinnati Life finished 2008 with very strong
statutory capital and surplus and risk based capital ratios.
The difficulties have been most acute for writers of variable and equity-indexed products. In addition to losing
significant amounts of fee income, such writers must draw down on capital to establish additional reserves
for product guarantees and they must pay a higher cost for hedging programs as the markets have declined
and become more volatile. We have not entered the variable or equity-indexed market, so we are not subject
to the severe costs associated with these products.
Companies writing competitively priced term life insurance also must deal with very conservative statutory
reserves and the associated heavy capital requirements. Many term life writers have used capital market
solutions to move redundant reserves off their balance sheets. The increased cost of these solutions has
decreased their viability as a method for relieving reserve strain. Because of our financial strength, we have
not had to employ these solutions, and their unavailability is not curtailing our ability to continue offering
competitively priced term life insurance.
Some life companies are adopting new rules and/or requesting permitted practices from their domiciliary
state that allow them to strengthen their statutory balance sheets by reducing their reserve and/or capital
requirements. In view of our strong capital, we have elected not to follow such a course of action. Even in the
current difficult business and economic environment, we believe that we are in a good position to grow at
reasonable and profitable levels in 2009.
INVESTMENTS RESULTS OF OPERATIONS
Overview -- Three-year Highlights
The investment segment contributes investment income and realized gains and losses to results of
operations. Investments provide our primary source of pretax and after-tax profits.
•
Investment income – Pretax investment income declined 11.6 percent in 2008, primarily because of
dividend reductions by common and preferred holdings, including reductions during the year on positions
subsequently sold or reduced. Investment income rose 6.6 percent to a record high in 2007 on strong
cash flow for new investments, higher interest income from the healthy fixed-maturity portfolio and
increased dividend income from the common stock portfolio.
• Realized investment gains and losses – We reported realized investment gains in all three years, largely
due to investment sales that were discretionary in timing and amount. In 2008, those sales were offset
by $510 million of other-than-temporary impairment charges for the writedown of 126 securities.
Investment Results
(In millions)
Investment income:
Interest
Dividends
Other
Investment expenses
Total investment income, net of expenses
Investment interest credited to contract holders
Realized investment gains and losses summary:
Realized investment gains and losses
Change in fair value of securities with embedded derivatives
Other-than-temporary impairment charges
Total realized investment gains and losses
Investment operations income
$
$
Investment Income
The primary drivers of investment income were:
Years ended December 31,
2007
2006
2008
2007-2006
2008-2007
Change % Change %
326 $
204
14
(7)
537
(63)
686
(38)
(510)
138
612 $
308 $
294
15
(9)
608
(59)
409
(11)
(16)
382
931 $
300
262
15
(7)
570
(54)
6.0
(30.5)
(4.5)
12.6
(11.6)
(5.2)
2.5
12.1
(0.5)
(18.7)
6.6
(9.8)
678
7
(1) nm
67.6
(243.8)
684
1,200
(64.0)
(34.2)
(39.6)
nm
nm
(44.1)
(22.4)
•
Interest income rose again in 2008. Purchases of new fixed maturity securities over the course of 2008
served to offset market value declines generally driven by macro factors. At year-end 2008, the fixed
maturity portfolio was trading at 96.2 percent of book value compared with 101.1 percent at year-end
2007.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 66
• Dividend income declined 30.5 percent in 2008 after rising in 2007 and 2006. Because our equity
portfolio was heavily concentrated in the financial sector at the beginning of 2008, we experienced
dividend reductions by many common and preferred holdings, including reductions during the year on
positions subsequently sold or reduced.
We are investing available cash flow in both fixed income and equity securities with yields that we believe are
likely to be more secure. This may slow the return to growth in investment income although we believe year-
over-year comparisons may turn positive in the second half of 2009.
Net Realized Investment Gains and Losses
Net realized investment gains and losses are made up of realized investment gains and losses on the sale of
securities, changes in the valuation of embedded derivatives within certain convertible securities and other-
than-temporary impairment charges. These three areas are discussed below.
Investment gains or losses are recognized upon the sales of investments or as otherwise required under
GAAP. The timing of realized gains or losses from sales can have a material effect on results in any quarter.
However, such gains or losses usually have little, if any, effect on total shareholders’ equity because most
equity and fixed maturity investments are carried at fair value, with the unrealized gain or loss included as a
component of other comprehensive income. Impairment charges are recorded for other-than-temporary
declines in value if, in the asset impairment committee’s judgment, there is little expectation that the value
may be recouped within a designated recovery period. Other-than-temporary impairment losses represent
non-cash charges to income.
Realized Investment Gains and Losses
As appropriate, we buy, hold or sell both fixed-maturity and equity securities on an ongoing basis to help
achieve our portfolio objectives.
Pretax realized investment gains in the past three years largely were due to the sale of equity holdings.
In 2008, most of the gain was due to sales of holdings of common and preferred stocks of financial services
issuers, reflecting our historical weighting in financial sector securities. The majority of these holdings were
sold following reductions or elimination of their cash dividends to shareholders. Because of our low cost
basis, we were able to record gains on many of these sales despite the decline in overall stock market values
during 2008. Realized gains were lower in 2007, although we chose to take gains from partial sales of
selected holdings and to sell other holdings because of general credit concerns that began in the subprime
mortgage market and spread to other areas in the homebuilding and related industries over the course of
2007. The gain in 2006 largely was due to the sale of our entire Alltel common stock holding.
During the past three years, fixed maturity securities were divested as a result of calls or as outright sales
executed to either improve yield prospects or in response to adverse credit concerns. Although we prefer to
hold fixed-maturity investments until they mature, a decision to sell reflects our perception of a change in the
underlying fundamentals of the security and preference to allocate those funds to investments that more
closely meet our established parameters for long-term stability and growth. Our opinion that a security
fundamentally no longer meets our investment parameters may reflect a loss of confidence in the issuer’s
management, a change in underlying risk factors (such as political risk, regulatory risk, sector risk or credit
risk), or a strategic shift in business strategy that is not consistent with our long-term outlook.
Change in the Valuation of Securities with Embedded Derivatives
We have a small portfolio of convertible preferred stocks and bonds, which have an embedded derivative
component under GAAP accounting rules. In 2008 and 2007, we recorded $38 million and $11 million in fair
value declines compared with $7 million in fair value increases in 2006. In 2008 and 2007, these changes
in fair value were due to the application of SFAS No. 155, which allows us to account for the entire hybrid
financial instrument at fair value, with changes recognized in realized investment gains and losses. In 2006,
these changes in fair value were due to the application of SFAS No. 133, which required measurement of the
fluctuations in the value of the embedded derivative features in selected convertible securities. The changes
in fair values are recognized in net income in the period they occur. See the discussion of Derivative Financial
Instruments and Hedging Activities in Item 8, Note 1 of the Consolidated Financial Statements, Page 98, for
details on the accounting for convertible security embedded options.
Other-than-temporary Impairment Charges
In 2008, we recorded $510 million in write-downs of 126 securities that we deemed had experienced an
other-than-temporary decline in fair value versus $16 million in 2007 and $1 million in 2006. The factors we
consider when evaluating impairments are discussed in Critical Accounting Estimates, Asset Impairment,
Page 45. The other-than-temporary impairment charges in 2008 represented 5.7 percent of our total
invested assets at year-end. Other-than-temporary impairment charges also include unrealized losses of
holdings that we had identified for sale but not yet completed a transaction.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 67
Other-than-temporary impairment charges from the investment portfolio by the asset class we described in
Item 1, Investments Segment, Page 17, are summarized below:
Years ended December 31,
2007
2006
2008
(Dollars in millions)
Taxable fixed maturities:
Impairment amount
New book value
Percent to total owned
Number of securities impaired
Percent to total owned
Tax-exempt fixed maturities:
Impairment amount
New book value
Percent to total owned
Number of securities impaired
Percent to total owned
Common equities:
Impairment amount
New book value
Percent to total owned
Number of securities impaired
Percent to total owned
Preferred equities:
Impairment amount
New book value
Percent to total owned
Number of securities impaired
Percent to total owned
Total:
Impairment amount
New book value
Percent to total owned
Number of securities impaired
Percent to total owned
$
$
$
$
$
$
$
$
$
$
(162)
187
$
$
6 %
86
10 %
$
$
(1)
1
0 %
1
0 %
(214)
87
$
$
5 %
9
18 %
$
$
(133)
98
52 %
30
86 %
(510)
373
$
$
5 %
126
6 %
(14)
46
$
$
1 %
18
2 %
$
$
$
$
$
$
0
0
0 %
0
0 %
(2)
2
0 %
2
4 %
0
0
0 %
0
0 %
(16)
48
$
$
1 %
20
1 %
(1)
0
0 %
1
0 %
0
0
0 %
0
0 %
0
0
0 %
0
0 %
0
0
0 %
0
0 %
(1)
0
0 %
1
0 %
0
0
(1)
0
0
(1)
0
0
0
0
0
0
0
(1)
Other-than-temporary impairment charges from the investment portfolio by industry are summarized as
follows:
(In millions)
Fixed maturities:
Financial
Real estate
Consumer cyclical
Service cyclical
Other
Total fixed maturities
Common equities:
Financial
Health
Real estate
Total common equities
Preferred equities:
Financial
Other
Total preferred equities
Total
Years ended December 31,
2008
2007
2006
$
$
(72)
(49)
(14)
(17)
(11)
(163)
(184)
(30)
0
(214)
(132)
(1)
(133)
(510)
$
$
$
(4)
0
(1)
(6)
(3)
(14)
0
0
(2)
(2)
0
0
0
(16)
$
The increase in other-than-temporary impairment charges in 2008 was largely due to writedowns of holdings
of bonds and common and preferred stocks of financial services issuers, reflecting our historical weighting in
this sector and the decline in overall stock market values during 2008. Impairment charges rose slightly in
2007 on the initial concerns regarding the real estate market. While we own only $30 million of
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 68
mortgage backed securities in our investment portfolio, we do own investments in industries directly affected
by this credit environment.
Investments Outlook
We continue to focus on portfolio strategies to balance near-term income generation and long-term book
value growth. In 2009, we expect to continue to allocate a portion of cash available for investment to equity
securities, taking into consideration corporate liquidity and income requirements, as well as insurance
department regulations and ratings agency comments. We discuss our portfolio strategies in Item 1,
Investments Segment, Page 17.
We believe a continuation of the current credit environment, if exacerbated by recessionary economic
conditions, could lead to further declines in portfolio values and additional other-than-temporary impairment
charges. All but 83 securities of the 2,223 securities in the portfolio were trading at or above 70 percent of
book value at year-end 2008. Our asset impairment committee continues to monitor the investment
portfolio. The current asset impairment policy is described in Critical Accounting Estimates, Asset
Impairment, Page 45.
OTHER
Revenues were relatively stable over the three years for our Other business. This includes the other income
of our standard market insurance subsidiary, as well as non-investment operations of the parent company
and its subsidiaries, CFC Investment Company and CinFin Capital Management Company (excluding client
investment activities). In 2008, we also include results of our surplus lines operations, The Cincinnati
Specialty Underwriters Insurance Company and CSU Producer Resources.
Losses before income taxes for our Other business were largely driven by interest expense from debt of the
parent company. In 2008, the loss also reflected expenses related to the surplus lines operation.
(In millions)
Interest and fees on loans and leases
Earned premiums
Money management fees
Other revenues
Total revenues
Interest expense
Losses and loss expenses
Underwriting expenses
Operating expenses
Total expenses
Pre-tax loss
Years ended December 31,
2007
2006
2008
2007-2006
2008-2007
Change % Change %
$
$
8
5
2
1
16
53
5
5
17
80
(64)
$
$
10
0
3
2
15
51
0
1
9
61
(46)
$
$
11
0
2
1
14
53
0
0
12
65
(51)
(21.1)
nm
(29.2)
(27.8)
6.6
3.8
nm
318.9
74.3
20.8
(25.3)
(9.5)
nm
4.0
398.8
7.1
(3.1)
nm
nm
(19.8)
(4.4)
7.6
TAXES
We had $111 million of income tax expense in 2008 compared with $337 million in 2007 and $399 million
in 2006. The effective tax rate for 2008 was 20.7 percent compared with 28.3 percent in 2007 and
30.0 percent in 2006.
The primary reason for the change in the effective tax rate was the level and timing of realized gains as
discussed in Investments Results of Operations, Page 66. In 2008, we had pretax realized gains of
$138 million compared with pretax gains of $382 million in 2007 and $684 million in 2006. Growth in the
tax-exempt municipal bond portfolio, lower investment income from dividends and changes in operating
earnings over the periods also contributed to the change in the effective tax rate for 2008.
We pursue a strategy of investing some portion of cash flow in tax-advantaged fixed-maturity and equity
securities to minimize our overall tax liability and maximize after-tax earnings. For our insurance subsidiaries,
approximately 85 percent of income from tax-advantaged fixed-maturity investments is exempt from federal
tax. Our non-insurance companies own no tax-advantaged fixed-maturity investments. For our insurance
subsidiaries, the dividend received deduction, after the dividend proration of the 1986 Tax Reform Act,
exempts approximately 60 percent of dividends from qualified equities from federal tax. For our
non-insurance subsidiaries, the dividend received deduction exempts 70 percent of dividends from qualified
equities. Details about our effective tax rate are found in Item 8, Note 11 of the Consolidated Financial
Statements, Page 111.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 69
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital resources represent the overall financial strength of our company and our ability to
generate cash flows to meet the short- and long-term cash requirements of business obligations and growth
needs. We seek to maintain prudent levels of liquidity and financial strength for the protection of our
policyholders, creditors and shareholders. We manage liquidity at two levels. The first is the liquidity of the
parent company. The second is the liquidity of our insurance subsidiary. The management of liquidity at both
levels is essential because each has different funding needs and sources and each is subject to certain
regulatory guidelines and requirements.
Parent Company Liquidity
The parent company’s primary means of meeting liquidity requirements are dividends from our insurance
subsidiary, investment income and after-tax sale proceeds from investments held at the parent company
level. The parent company’s primary contractual obligations are interest and principal payments on long- and
short-term debt as described under Contractual Obligations, Page 73. Other uses of parent company cash
include general operating expenses described under Other Commitments, Page 73, as well as dividends to
shareholders and common stock repurchases.
This table shows a summary of the major sources and uses of liquidity by the parent company:
(In millions)
Sources of liquidity:
Dividends received from insurance subsidiary
Dividend received from other operating subsidiaries
Investment income
Uses of liquidity:
Interest on debt
Pension payments
Dividends to shareholders
Purchase of treasury shares
Years ended December 31,
2007
2006
2008
$
$
220 $
10
68
53 $
34
250
139
450 $
0
101
52 $
10
240
307
275
0
98
51
0
228
120
At the discretion of the board of directors, the company can return cash directly to shareholders:
• Dividends to shareholders – Over the past 10 years, the company has paid an average of 38.5 percent of
net income as dividends. Dividends paid over the period have averaged 2.9 percent of beginning
shareholders’ equity. The ability of the company to continue paying cash dividends is subject to factors
the board of directors may deem relevant.
Through 2008, the board had increased our cash dividend for 48 consecutive years. In February 2009,
the board of directors cited current economic and market conditions as it chose to continue for later
discussion the potential for an increase in the 2009 dividend payout level. While the board and
management believe there is merit to sustaining the company’s record of dividend increases, our first
priority is the company’s financial strength.
• Common stock repurchase – Generally, our board believes that stock repurchases can help fulfill our
commitment to enhancing shareholder value. Consequently, the board has authorized the repurchase of
outstanding shares, giving management discretion to purchase shares at reasonable prices in light of
circumstances at the time of purchase, pursuant to SEC regulations.
In 2008, we repurchased 3.8 million shares, all in the first six months of the year. As economic and
market conditions deteriorated, we choose to preserve capital rather than continue repurchase activity.
In the past, repurchases have occurred when we believe that stock prices on the open market are
favorable for such repurchases. Our corporate code of conduct restricts repurchases during certain time
periods. At a minimum, we historically have repurchased to offset dilution from share-based
compensation.
The details of the repurchase authorizations and activity are described in Item 5, Related Stockholder
Matters and Issuer Purchases of Equity Securities, Page 32. Between February 1999 and year-end
2008, we have repurchased 28.7 million shares at a total cost to the company of $1.105 billion. We do
not adjust the number of shares repurchased and average price per repurchased share for stock
dividends.
Insurance Subsidiary Liquidity
Our insurance subsidiary’s primary means of meeting liquidity requirements are investment income and
after-tax sale proceeds from investments held at the subsidiary level and collection of insurance premiums.
Property casualty insurance premiums generally are received before losses are paid under the policies
purchased with those premiums. While first-year life insurance expenses normally exceed first-year
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 70
premiums, subsequent premiums are used to generate investment income until the policy benefits are paid
or the policy term expires.
Our insurance subsidiary’s primary contractual obligations are property casualty loss and loss expenses and
life policyholder obligations as well as certain ongoing operating expenses as shown under Contractual
Obligations, Page 73. Other uses of insurance subsidiary cash include payments of dividends to the parent
company and other operating expenses as discussed under Other Commitments, Page 73.
This table shows a summary of operating cash flow of the insurance subsidiary (direct method):
(In millions)
Premiums collected
Loss and loss expenses paid
Commissions and other underwriting expenses paid
Insurance subsidiary cash flow from underwriting
Investment income received
Insurance subsidiary operating cash flow
Years ended December 31,
2007
2006
2008
$
$
3,163 $
(2,064)
(1,078)
21
481
502 $
3,256 $
(1,888)
(1,053)
315
505
820 $
3,285
(1,859)
(1,036)
390
471
861
Over the past three years, cash receipts from property casualty and life insurance premiums, along with
investment income, have been more than sufficient to pay claims, operating expenses and dividends to the
parent company. We discuss the factors that affected insurance operations in Commercial Lines and
Personal Lines Insurance Results of Operations, Page 51 and Page 59.
Additional Sources of Liquidity
Investing is a primary source of liquidity for both the parent company and insurance subsidiary. At both the
parent company and insurance subsidiary, cash in excess of operating requirements is invested in
fixed-maturity and equity securities. Equity securities provide the potential for future increases in dividend
income and for appreciation. In Item 1, Investments Segment, Page 17, we discuss our investment strategy,
portfolio allocation and quality.
Income from our investments is the most important investment contribution to cash flow. After-tax proceeds
of call or maturities also can provide liquidity. Although we have never sold investments to make claims
payments, the sale of investments could provide an additional source of liquidity at either the parent
company or insurance subsidiary level, if required, although we follow a buy-and-hold investment philosophy
seeking to compound cash flows over the long-term. At year-end 2008, total unrealized gains in the
investment portfolio, before deferred income taxes, were $588 million, down from $3.339 billion at year-end
2007, because of investment sales and market value declines of our equity holdings.
Further, financial resources of the parent company also could be made available to our insurance subsidiary,
if circumstances required. This would include our ability to access the capital markets and short-term bank
borrowings.
One way we seek to maintain a solid financial position and provide capital flexibility is by keeping our ratio of
debt to total capital low. We now are targeting a ratio below 20 percent. At year-end 2008, the ratio was
16.7 percent compared with 12.7 percent at year-end 2007. The change was due entirely to the lower level
of shareholders’ equity at year-end 2008. Based on our present capital requirements, we do not believe we
will need to materially increase debt levels during 2009. As a result, we believe that changes in our debt-to-
capital ratio will again be a function of changes in shareholders’ equity.
We had $791 million of long-term debt and $49 million in borrowings on our short-term lines of credit at
year-end 2008. We generally have minimized our reliance on debt financing although we may use lines of
credit to fund short-term cash needs.
Long-term Debt
We provide details of our three long-term notes in Item 8, Note 8 of the Consolidated Financial Statements,
Page 109. None of the notes are encumbered by rating triggers:
• $392 million aggregate principal amount of 6.92% senior debentures due 2028.
• $28 million aggregate principal amount of 6.9% senior debentures due 2028.
• $375 million aggregate principal amount of 6.125% senior debentures due 2034.
On December 22, 2008, A.M. Best removed our ratings from under review with negative implications, raised
the outlook to stable and lowered Cincinnati Financial Corporation’s issuer credit rating and senior debt
ratings to a from aa-; the issuer credit ratings of our standard market property casualty insurance group and
member companies to aa from aa+; and the issuer credit ratings of our life insurance subsidiary to
a+ from aa-.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 71
On February 13, 2009, Fitch Ratings affirmed the ratings it had assigned on July 17, 2008, when it lowered
the issuer default rating of Cincinnati Financial Corporation to A from AA- and its senior debt ratings to A- from
A+, with a negative outlook.
Moody’s Investors Service removed our ratings from review on September 25, 2008, lowering the senior debt
rating of Cincinnati Financial Corporation to A3 from A2 with a stable outlook. Moody’s maintained a
two-notch spread between the debt rating and insurance financial strength ratings due to significant financial
flexibility and liquidity afforded by the holding company’s large investment portfolio representing over
100 percent of its outstanding debt.
Standard & Poor’s Ratings Services removed our counterparty credit ratings from credit watch on
June 30, 2008, lowering Cincinnati Financial Corporation to BBB+ and our standard market property casualty
insurance companies and our life insurance subsidiary to A+ with a negative outlook.
Short-term Debt
At year-end 2008, we had two lines of credit with commercial banks amounting to $225 million with
$49 million outstanding.
Our $75 million unsecured line of credit with PNC Bank, N.A. was established more than five years ago and
was renewed effective June 30, 2008 for a one-year term to expire on June 30, 2009. The line has no
financial covenants, and we currently believe we may be able to renew it under terms and conditions that are
essentially unchanged. CFC Investment Company, a subsidiary of Cincinnati Financial Corporation, also is a
borrower under this line of credit. At year-end 2008, there was $49 million outstanding on this line of credit
at a rate of LIBOR plus 50 basis points. PNC Bank is a subsidiary of PNC Financial Services Group, Inc.
(NYSE:PNC)
The second line of credit is an unsecured $150 million revolving line of credit administered by
The Huntington National Bank. It was established in 2007 and will mature in 2012. The line contains
customary financial covenants that we presently meet. It is to be used for general corporate purposes. We
borrowed $20 million against the line in 2007, which was repaid during 2008.
The line of credit includes a swing line sub-facility for same-day borrowing in the amount of $35 million.
The credit agreement provides alternative interest charges based on the type of borrowing and our debt
rating. The interest rate charged for an advancement is adjusted LIBOR plus the applicable margin. Based on
our debt ratings at year-end 2008, interest for Eurodollar rate advances is adjusted LIBOR plus 33 basis
points, and for floating rate advances is adjusted LIBOR. Utilization and commitment fees based on
Cincinnati Financial Corporation’s current debt rating are 5 basis points and 8 basis points, respectively. CFC
Investment Company, a subsidiary of Cincinnati Financial Corporation, is a co-borrower under the agreement.
The Huntington National Bank, a subsidiary of Huntington Bancshares Inc. (NASDAQ:HBAN), is the lead
participant with a $75 million share. U.S. Bancorp (NYSE:USB), Bank of America (NYSE:BAC) and Northern
Trust Corporation (NASDAQ: NTRS) also participate, each providing $25 million of capacity.
Liquidity and Capital Resources Outlook
A long-term perspective governs all of our major decisions, with the goal of benefiting our policyholders,
agents, shareholders and associates over time. Exacerbating the effect of our weaker insurance results, the
ongoing instability of the financial markets in 2008 highlighted the value of building a cushion of financial
strength over a period of years. In responding to current economic pressures, we are confident in the steps
we have taken to protect our capital. We also are confident in our strategies to return our insurance
operations to growth and profitability.
Our consistent cash flows and prudent cash balances continue to create exceptional liquidity. We enter 2009
with slightly more than $1 billion in cash and cash equivalents on hand, in part due to an unusual level of
investment sales and bond calls in the second half of 2008, as well as unusual challenges in making new
investments due to economic and market conditions. That high cash level gives us the flexibility to meet
current obligations while building value by prudently investing where we see potential for both current income
and long-term return.
In any year, we consider the most likely source of pressure on liquidity would be an unusually high level of
catastrophe losses in a short period of time. This could create additional obligations for our insurance
operations by increasing the severity or frequency of claims. To address the risk of unusual insurance loss
obligations including catastrophe events, we maintain property casualty reinsurance contracts with highly
rated reinsurers, as discussed under 2009 Reinsurance Programs, Page 81. We also monitor the financial
condition of our reinsurers because an insolvency could place in jeopardy a portion of our $759 million in
outstanding reinsurance recoverables as of December 31, 2008.
Continued economic weakness also has the potential to affect our liquidity and capital resources in a number
of different ways, including: delinquent payments from agencies, defaults on interest payments by fixed-
maturity holdings in our portfolio, dividend reductions by holdings in our equity portfolio or declines in the
market value of holdings in our portfolio.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 72
Further, parent company liquidity could be constrained by State of Ohio regulatory requirements that restrict
the dividends insurance subsidiaries can pay. During 2009, total dividends that our insurance subsidiary can
pay to our parent company without regulatory approval are approximately $336 million.
Off-balance Sheet Arrangements
We do not use any special-purpose financing vehicles or have any undisclosed off-balance sheet
arrangements (as that term is defined in applicable SEC rules) that are reasonably likely to have a current or
future material effect on the company’s financial condition, results of operation, liquidity, capital
expenditures or capital resources. Similarly, the company holds no fair-value contracts for which a lack of
marketplace quotations would necessitate the use of fair-value techniques.
OBLIGATIONS
We pay obligations to customers, suppliers and associates in the normal course of our business operations.
Some are contractual obligations that define the amount, circumstances and/or timing of payments. We
have other commitments for business expenditures, however, the amount, circumstances and/or timing of
our other commitments are not dictated by contractual arrangements.
Other Commitments
As of December 31, 2008, we believe our most significant other commitments are:
• Qualified pension plan – In 2009, we currently estimate a voluntary cash contribution of $33 million to
pension plan assets. Our results of operation would reflect an anticipated $11 million net pension
expense and an estimated $8 million expense for company 401(k) contributions. Going forward,
potential savings due to lower funding requirements for the pension plan are expected to be offset by the
company 401(k) contributions. We chose to transition away from a defined benefit plan to reduce the
company’s future market risk while offering associates an up-to-date, more flexible benefits program. We
discuss the change to the pension plan and future contributions in Item 8, Note 13 to the Consolidated
Financial Statements, Page 113.
• Commissions – We expect commission payments to generally track with written premiums. We discuss
commission trends in the Commercial Lines and Personal Lines Insurance Results of Operations,
Page 51 and Page 59.
• Other operating expenses – Many of our operating expenses are not contractual obligations but reflect
the ongoing expenses of our business. Non-commission operating expenses paid rose in the past two
years.
○ Staffing – Staffing expenses are the largest component of our operating expenses. We expect a
minimal increase in staffing expenses in 2009. Recent growth in our associate base has been
largely limited to positions supporting enhanced service and technology to our agencies and staffing
additional field territories.
○ Technology – In addition to contractual obligations for hardware and software discussed below, we
anticipate capitalizing approximately $50 million in spending for key technology initiatives in 2009.
Technology projects are discussed in Item 1, Strategic Initiatives, Page 7. Capitalized development
costs related to key technology initiatives totaled $38 million in 2008. These activities are
conducted at our discretion, and we have no material contractual obligations for activities planned
as part of these projects.
Contractual Obligations
As of December 31, 2008, we estimate our future contractual obligations as follows:
(In millions)
Gross property casualty loss and loss expense payments
Gross life policyholder obligations
Interest on long-term debt
Long-term debt
Short-term debt
Profit-sharing commissions
Operating property
Capital lease obligations
Computer hardware and software
Other invested assets
Liability for uncertain tax positions
Total
Year
2009
Payment due by period
Years
Years
2012-2013
2010-2011
There-
after
Total
$
$
1,247 $
50
52
0
49
75
6
7
6
8
0
1,500 $
1,330 $
66
104
0
0
0
1
7
10
10
2
1,530 $
579 $
102
104
0
0
0
0
0
5
9
0
799 $
884 $
3,295
892
795
0
0
0
0
0
7
0
5,873 $
4,040
3,513
1,152
795
49
75
7
14
21
34
2
9,702
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 73
Our most significant contractual obligations are discussed in conjunction with related insurance reserves in
Gross Property Casualty Loss and Loss Expense Payments and Gross Life Insurance Policyholder Obligations
on Page 74 and Page 80, respectively. Other future contractual obligations include:
•
Interest on long- and short-term debt – We expect total interest expense to be approximately $53 million
in 2009. We discuss outstanding debt in Additional Sources of Liquidity, Page 71.
• Profit-sharing commissions –Profit-sharing, or contingent, commissions are paid to agencies using a
formula that takes into account agency profitability and other factors. We estimate 2009 contingent
commission payments of approximately $75 million. We discuss commission expense trends in
Commercial Lines and Personal Lines Results of Operations, Page 51 and Page 59.
• Computer hardware and software – We expect to need approximately $21 million over the next three
years for current material commitments for computer hardware and software, including maintenance
contracts on hardware and other known obligations. We discussed above the non-contractual expenses
we anticipate for computer hardware and software in 2009.
• Operating property – We expect to invest a total of $9 million, including $7 million over the next two
years to renovate an unoccupied building several miles from our headquarters for use as a business
continuity center.
Property Casualty Loss and Loss Expense Obligations and Reserves
Gross Property Casualty Loss and Loss Expense Payments
Our estimate of future gross property casualty loss and loss expense payments of $4.040 billion is lower than
loss and loss expense reserves of $4.086 billion as of year-end 2008. The $46 million difference is due to
life and health loss reserves, as discussed in Item 8, Note 5 of the Consolidated Financial Statements, Page
108.
While we believe that historical performance of property casualty and life loss payment patterns is a
reasonable source for projecting future claims payments, there is inherent uncertainty in this estimate of
contractual obligations. We believe that we could meet our obligations under a significant and unexpected
change in the timing of these payments because of the liquidity of our invested assets, strong financial
position and access to lines of credit.
Our estimates of gross property casualty loss and loss expense payments also do not include reinsurance
receivables or ceded losses. As discussed in 2009 Reinsurance Programs, Page 81, we purchase
reinsurance to mitigate our property casualty risk exposure. Ceded property casualty reinsurance receivables
of $542 million at year-end 2008 are an offset to our gross property casualty loss and loss expense
obligations. Our reinsurance program mitigates the liquidity risk of a single large loss or an unexpected rise in
claims severity or frequency due to a catastrophic event. Reinsurance does not relieve us of our obligation to
pay covered claims. The financial strength of our reinsurers is important because our ability to recover for
losses under one of our reinsurance agreements depends on the financial viability of the reinsurer.
We direct our associates and agencies to settle claims and pay losses as quickly as is practical and made
$1.955 billion in net claim payments during 2008. At year-end 2008, net property casualty reserves reflected
$2.009 billion in unpaid amounts on reported claims (case reserves), $802 million in loss expense reserves
and $687 million in estimates of claims that were incurred but had not yet been reported (IBNR). The specific
amounts and timing of obligations related to case reserves and associated loss expenses are not set
contractually. The amounts and timing of obligations for IBNR claims and related loss expenses are unknown.
We discuss our methods to establish loss and loss expense reserves and our belief that reserves are
adequate in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves,
Page 41.
The historical pattern of using premium receipts for the payment of loss and loss expenses has enabled us to
extend slightly the maturities of our investment portfolio beyond the estimated settlement date of the loss
reserves. The effective duration of our fixed-maturity portfolio was 5.4 years at year-end 2008. By contrast,
the duration of our loss and loss expense reserves was 3.0 years, and the duration of all insurance operation
liabilities was 3.3 years. We believe this difference in duration does not affect our ability to meet current
obligations because cash flow from operations is sufficient to meet these obligations. In addition, investment
holdings could be liquidated, if necessary, to meet higher than anticipated loss and loss expenses.
Range of Reasonable Reserves
The company established a reasonably likely range for net loss and loss expense reserves of $3.256 billion
to $3.592 billion at year-end 2008, with the company carrying net reserves of $3.498 billion. The likely range
was $3.132 billion to $3.427 billion at year-end 2007, with the company carrying net reserves of
$3.397 billion. Our loss and loss expense reserves are not discounted for the time-value of money, but we
have reduced the reserves by an estimate of the amount of salvage and subrogation payments we expect to
recover. We provide a reconciliation of the property casualty reserves with the loss and loss expense reserve
as shown on the balance sheet in Item 8, Note 5 of the Consolidated Financial Statements, Page 108.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 74
The low point of each year’s range corresponds to approximately one standard error below each year's mean
reserve estimate, while the high point corresponds to approximately one standard error above each year's
mean reserve estimate. We discussed management's reasons for basing reasonably likely reserve ranges on
standard errors in Critical Accounting Estimates, Reserve Estimate Variability, Page 43.
The ranges reflect our assessment of the most likely unpaid loss and loss expenses at year-end 2008 and
2007. However, actual unpaid loss and loss expenses could nonetheless fall outside of the indicated ranges.
Management's best estimate of total loss reserves as of year-end 2008 was consistent with the
corresponding actuarial best estimate. Management's best estimate of total loss reserves as of
year-end 2007 also was consistent with the corresponding actuarial best estimate.
Development of Loss and Loss Expenses
We reconcile the beginning and ending balances of our reserves for loss and loss expenses at
December 31, 2008, 2007 and 2006, in Item 8, Note 5 of the Consolidated Financial Statements, Page 108.
The reconciliation of our year-end 2007 reserve balance to net incurred losses one year later recognizes
approximately $323 million of redundant reserves.
The table on the following page shows the development of estimated reserves for loss and loss expenses the
past 10 years.
• Section A shows our total property casualty loss and loss expense reserves recorded at the balance
sheet date for each of the indicated calendar years on a gross and net basis. Those reserves represent
the estimated amount of unpaid loss and loss expenses for claims arising in the indicated calendar year
and all prior accident years at the balance sheet date, including losses that were incurred but not yet
reported to the company.
• Section B shows the cumulative net amount paid with respect to the previously recorded reserve as of
the end of each succeeding year. For example, as of December 31, 2008, we had paid $1.429 billion of
loss and loss expenses in calendar years 1999 through 2008 for losses that occurred in accident years
1998 and prior. An estimated $170 million of losses remained unpaid as of year-end 2009
(net re-estimated reserves of $1.599 billion from Section C less cumulative paid loss and loss expenses
of $1.429 billion).
• Section C shows the re-estimated amount of the previously reported reserves based on experience as of
the end of each succeeding year. The estimate is increased or decreased as we learn more about the
development of the related claims.
• Section D, cumulative net redundancy, represents the aggregate change in the estimates for all years
subsequent to the year the reserves were initially established. For example, reserves established at
December 31, 1998, had developed a $241 million redundancy over 10 years, net of reinsurance, which
was reflected in income over the 10 years. The table shows favorable development in redundant
reserves as a negative number. The reconciliation shows the effects on income in 2008, 2007 and 2006
of changes in estimates of the reserves for loss and loss expenses for all accident years.
In evaluating the development of our estimated reserves for loss and loss expenses for the past 10 years,
note that each amount includes the effects of all changes in amounts for prior periods. For example,
payments or reserve adjustments related to losses settled in 2008 but incurred in 2002 are included in the
cumulative deficiency or redundancy amount for 2002 and each subsequent year. In addition, this table
presents calendar year data, not accident or policy year development data, which readers may be more
accustomed to analyzing. Conditions and trends that affected development of the reserves in the past may
not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies
or deficiencies based on this data.
Differences between the property casualty reserves reported in the accompanying consolidated balance
sheets (prepared in accordance with GAAP) and those same reserves reported in the annual statements
(filed with state insurance departments in accordance with statutory accounting practices – SAP), relate
principally to the reporting of reinsurance recoverables, which are recognized as receivables for GAAP and as
an offset to reserves for SAP.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 75
Development of Estimated Reserves for Loss and Loss Expenses
(In millions)
A. Originally reported reserves for unpaid loss and loss expenses:
1998
1999
2000
Calendar year ended December 31,
2001
2002
2003
2004
2005
2006
2007
2008
$ 1,978 $
138
$ 1,840 $
2,093 $
161
1,932 $
2,401 $
219
2,182 $
2,865 $
513
2,352 $
3,150 $
542
2,608 $
3,386 $
541
2,845 $
3,514 $
537
2,977 $
3,629 $
518
3,111 $
3,860 $
504
3,356 $
3,925
528
3,397
$
$
4,040
542
3,498
Gross of reinsurance
Reinsurance recoverable
Net of reinsurance
B. Cumulative net paid as of:
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
C. Net reserves re-estimated as of:
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
$
522 $
833
1,067
1,207
1,283
1,333
1,366
1,390
1,409
1,429
$ 1,724 $
1,728
1,636
1,615
1,608
1,602
1,577
1,593
1,603
1,599
$
D. Cumulative net redundancy as of:
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
(116) $
(112)
(204)
(225)
(232)
(238)
(263)
(247)
(237)
(241)
591 $
943
1,195
1,327
1,412
1,464
1,496
1,520
1,545
1,912 $
1,833
1,802
1,771
1,757
1,733
1,739
1,746
1,741
(20) $
(99)
(130)
(161)
(175)
(199)
(193)
(186)
(191)
697 $
758 $
799 $
817 $
907 $
944 $
1,116
1,378
1,526
1,623
1,680
1,717
1,750
1,194
1,455
1,614
1,717
1,778
1,819
1,235
1,519
1,716
1,823
1,889
1,293
1,626
1,823
1,945
1,426
1,758
1,963
1,502
1,845
$
979
1,006
1,547
2,120 $
2,083
2,052
2,010
1,999
1,992
1,994
1,986
2,307 $
2,263
2,178
2,153
2,127
2,122
2,111
2,528 $
2,377
2,336
2,299
2,276
2,259
2,649 $
2,546
2,489
2,452
2,414
(62) $
(99)
(130)
(172)
(183)
(190)
(188)
(196)
(45) $
(89)
(174)
(199)
(225)
(230)
(241)
(80) $
(231)
(272)
(309)
(332)
(349)
(196) $
(299)
(356)
(393)
(431)
2,817 $
2,743
2,657
2,578
2,995 $
2,871
2,724
3,112 $
2,893
3,074
(160) $
(234)
(320)
(399)
(116) $
(240)
(387)
(244) $
(463)
(323)
Net reserves re-estimated—latest
Re-estimated recoverable—latest
Gross liability re-estimated—latest
$ 1,599 $
211
$ 1,810 $
1,741 $
218
1,959 $
1,986 $
245
2,231 $
2,111 $
517
2,628 $
2,259 $
552
2,811 $
2,414 $
532
2,946 $
2,578 $
553
3,131 $
2,724 $
518
3,242 $
2,893 $
525
3,418 $
3,074
513
3,587
Cumulative gross redundancy
$
(168) $
(134) $
(170) $
(237) $
(339) $
(440) $
(383) $
(387) $
(442) $
(338)
Asbestos and Environmental Reserves
We carried $114 million of net loss and loss expense reserves for asbestos and environmental claims as of
year-end 2008, compared with $123 million for such claims as of year-end 2007. These amounts constitute
2.8 percent and 3.1 percent of total loss and loss expense reserves as of these year-end dates.
We believe our exposure to asbestos and environmental claims is limited, largely because our reinsurance
retention was $500,000 or below prior to 1987. We also predominantly were a personal lines company in the
1960s and 1970s when asbestos and pollution exclusions were not widely used. During the 1980s and early
1990s, commercial lines grew as a percentage of our overall business and our exposure to asbestos and
environmental claims grew accordingly. Over that period, we endorsed to or included in most policies an
asbestos and environmental exclusion.
Additionally, since 2002, we have revised policy terms where permitted by state regulation to limit our
exposure to mold claims prospectively and further reduce our exposure to other environmental claims
generally. Finally, we have not engaged in any mergers or acquisitions through which such a liability could
have been assumed. We continue to monitor our claims for evidence of material exposure to other mass tort
classes such as silicosis, but we have found no such credible evidence to date.
Reserving data for asbestos and environmental claims has characteristics that limit the usefulness of the
methods and models used to analyze loss and loss expense reserves for other claims. Specifically, asbestos
and environmental loss and loss expenses for different accident years do not emerge independently of one
another as loss development and Bornhuetter-Ferguson methods assume. In addition, asbestos and
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 76
environmental loss and loss expense data available to date does not reflect a well-defined tail, greatly
complicating the identification of an appropriate probabilistic trend family model.
Due to these considerations, our actuarial staff elected to use a paid survival ratio method to estimate
reserves for incurred but not yet reported asbestos and environmental claims. Although highly uncertain,
reserve estimates obtained via this method have held up reasonably well since 2004. Between 2006 and
2008, total asbestos and environmental reserves decreased 11.6 percent. Our exposure to such claims is
limited; therefore, we do not believe that a more detailed reserve analysis would be an appropriate use of
resources.
Commercial Lines Insurance Segment Reserves
For the business lines in the commercial lines insurance segment, the following table shows the breakout of
gross reserves among case, IBNR and loss expense reserves. The rise in total gross reserves for our
commercial business lines is partially due to normal loss cost inflation and exposure growth in our workers’
compensation business line, the higher level of catastrophe losses in 2008 and an increase in larger surety
and executive risk losses, as discussed in Commercial Lines Insurance Results of Operations, Page 51.
(In millions)
At December 31, 2008
Commercial casualty
Commercial property
Commercial auto
Workers' compensation
Specialty packages
Surety and executive risk
Machinery and equipment
Total
At December 31, 2007
Commercial casualty
Commercial property
Commercial auto
Workers' compensation
Specialty packages
Surety and executive risk
Machinery and equipment
Total
Loss reserves
Case
reserves
IBNR
reserves
Loss
expense
reserves
Total
gross
reserves
Percent
of total
$
$
$
$
1,046 $
135
276
445
74
129
3
2,108 $
1,035 $
104
276
426
67
68
4
1,980 $
327 $
7
48
353
1
(4)
3
735 $
389 $
6
48
315
1
2
3
764 $
527 $
32
65
126
10
50
1
811 $
524 $
29
65
119
9
42
1
789 $
1,900
174
389
924
85
175
7
3,654
1,948
139
389
860
77
112
8
3,533
52.0 %
4.8
10.6
25.3
2.3
4.8
0.2
100.0 %
55.1 %
3.9
11.0
24.3
2.3
3.2
0.2
100.0 %
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 77
The following table shows net reserve changes at year-end 2008, 2007 and 2006 by commercial line of
business and accident year:
(Dollars in millions)
As of December 31, 2008
2007 accident year
2006 accident year
2005 accident year
2004 accident year
2003 accident year
2002 accident year
2001 and prior accident years
Deficiency/(redundancy)
Reserves estimated as of December 31, 2007
Reserves re-estimated as of December 31, 2008
Deficiency/(redundancy)
As of December 31, 2007
2006 accident year
2005 accident year
2004 accident year
2003 accident year
2002 accident year
2001 accident year
2000 and prior accident years
Deficiency/(redundancy)
Reserves estimated as of December 31, 2006
Reserves re-estimated as of December 31, 2007
Deficiency/(redundancy)
As of December 31, 2006
2005 accident year
2004 accident year
2003 accident year
2002 accident year
2001 accident year
2000 accident year
1999 and prior accident years
Deficiency/(redundancy)
Reserves estimated as of December 31, 2005
Reserves re-estimated as of December 31, 2006
Deficiency/(redundancy)
Commercial
casualty
Commercial Commercial
property
auto
Workers'
compensation
Specialty
packages
Surety & Machinery &
exec risk
equipment
Totals
$
$
$
$
$
$
$
$
$
$
$
$
(93) $
(55)
(48)
(28)
(19)
(4)
(11)
(258) $
$
1,565
1,307
(258) $
(70) $
(22)
(34)
(2)
(15)
(8)
2
(149) $
$
1,483
1,334
(149) $
(52) $
(21)
(12)
2
(9)
(9)
2
(99) $
$
1,359
1,260
(99) $
$
0
(7)
(2)
1
0
0
(2)
(10) $
$
121
111
(10) $
(4) $
(13)
(1)
0
(1)
0
0
(19) $
$
170
151
(19) $
17
(3)
(3)
(1)
(4)
(1)
0
5
160
165
5
$
$
$
$
(7) $
5
(1)
(4)
1
(2)
0
(8) $
$
383
375
(8) $
(15) $
(6)
1
(3)
1
(1)
(2)
(25) $
$
386
361
(25) $
(17) $
1
1
(2)
(2)
(1)
(1)
(21) $
$
386
365
(21) $
(21) $
0
5
4
6
1
3
(2) $
$
777
775
(2) $
(20) $
0
1
(1)
5
2
3
(10) $
$
713
703
(10) $
(2) $
5
0
(3)
(1)
1
9
9
$
634
643
9
$
$
$
1
(1)
(2)
(2)
0
0
0
(4) $
$
76
72
(4) $
1
2
(1)
0
(1)
0
0
1
84
85
1
3
(1)
1
0
0
(1)
0
2
73
75
2
$
$
$
$
$
$
$
$
14
(2)
(2)
(3)
(1)
1
0
7
94
101
7
3
3
(1)
(3)
(3)
1
1
1
83
84
1
7
(3)
(1)
1
1
0
0
5
63
68
5
$
$
$
$
$
$
$
$
$
$
$
$
0
1
0
0
0
0
0
1
8
9
1
$
$
$
$
(1) $
(1)
0
0
0
0
0
(2) $
$
9
7
(2) $
1
0
0
0
0
0
0
1
6
7
1
$
$
$
$
(106)
(59)
(50)
(32)
(13)
(4)
(10)
(274)
3,024
2,750
(274)
(106)
(37)
(35)
(9)
(14)
(6)
4
(203)
2,928
2,725
(203)
(43)
(22)
(14)
(3)
(15)
(11)
10
(98)
2,681
2,583
(98)
Overall favorable development for commercial lines reserves of $274 million in 2008 illustrated the potential
for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty.
Favorable reserve development for the commercial casualty line accounted for 94.2 percent of the segment
total in 2008. Five factors, accounting for $182 million of favorable reserve development for the commercial
casualty line of business as discussed below, were atypical.
• Refinements in IBNR reserve allocation - Systems limitations prior to 2006 restricted the detail in which
our actuaries could allocate IBNR reserves by accident year. The implementation of new systems at the
end of 2005 eliminated those limitations. By the end of 2008, our actuaries had refined their IBNR
reserve allocation by accident year to take advantage of the new systems' flexibility and to more precisely
reflect the findings of their quarterly reserve analyses. The new allocation placed a total for all lines of
$69 million more reserves in the latest accident year, accident year 2008, than the old allocation would
have. Of that $69 million, approximately $49 million was related to commercial lines of business.
Accordingly, commercial lines favorable reserve development increased by a like amount for all of
calendar year 2008. Commercial casualty's share of the favorable reserve development was
approximately $36 million.
• Quarter-to-quarter reductions in actuarial reserve estimates - Our actuaries perform a detailed reserve
analysis in the fourth quarter of each year, based on data available through the end of the preceding
third quarter to estimate reserves the company should carry at the end of the year. Once fourth quarter
data becomes available, they update their analysis to reflect the actual data. The actuaries use the
updated analysis to estimate the range of reasonable reserves shown in Range of Reasonable Reserves,
Page 74, as well as to guide reserving decisions in the first half of the following year. The updated
analysis for 2007 reflected reserve estimates that were $66 million lower than the analysis conducted
during the fourth quarter, including updated reserve estimates for commercial casualty that were
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 78
approximately $43 million lower. The release in 2008 of $43 million of commercial casualty reserves on
prior accident years added to the line's favorable reserve development.
•
Introduction of additional umbrella reserving model - Our actuaries became increasingly dissatisfied in
2008 with the performance of the reserving model they had been using to estimate commercial umbrella
loss reserves, which are a component of our commercial casualty reserves. As a result, they began using
blended trends from two separate reserving models to estimate required commercial umbrella reserves
as of year-end 2008. If the actuaries had estimated required commercial umbrella reserves as of year-
end 2007 in a similar fashion, commercial casualty reserves at year-end 2007 would have been
approximately $54 million lower. Accordingly, 2008 favorable reserve development for the commercial
casualty line would have been reduced by a like amount.
• Sooner-than-expected moderation in inflation trend of allocated loss expenses - For some of our
commercial casualty coverages, the claims department's early settlement resolution initiative caused
calendar year payments for allocated loss expenses to inflate at a temporarily higher rate beginning in
2005. Based on data available in 2007, our actuaries expected the higher inflation rate to persist
through the end of 2007. In 2008, they learned that the inflation rate had reverted to normal in 2007. If
our actuaries had recognized this reversion when deriving year-end 2007 reserve estimates, commercial
casualty reserves as of year-end 2007 would have been approximately $8 million lower.
• Unusual deviations from predictions of reserving methods and models - At year-end 2007, our actuaries
based loss reserve estimates for commercial multi-peril liability coverages, which are part of the
commercial casualty line, on the indications of the reported loss development method and a selected
paid loss probabilistic trend family model. In deriving the reported loss development estimate, the
actuaries relied heavily on five-year averages to guide their parameter selections. The vast majority of
these selections proved high in 2008, some significantly so. Our actuaries also identified a significant
deviation in 2008 related to the use of the paid loss probabilistic trend family model. Consideration of
premium growth, pricing changes and loss cost trends for commercial multi-peril liability coverages led
them to use an index to capture exposure growth that paid loss data for immature accident years could
fail to reflect. In 2008, it became apparent that the index was not needed. We believe that the
implementation of tighter terms and conditions on general liability policies between 2002 and 2005
played a role in this deviation. If our actuaries had recognized these deviations when deriving year-end
2007 reserve estimates, commercial casualty reserves as of year-end 2007 would have been
approximately $39 million lower.
Factors contributing to the remaining $76 million of commercial casualty favorable reserve development
were not unusual or unexpected. As noted in Critical Accounting Estimates, Key Assumptions - Loss
Reserving, Page 43, our models predict that actual loss and loss expense emergence will differ from
projections, and we do not attempt to monitor or identify such normal variations.
Personal Lines Insurance Segment Reserves
For the business lines in the personal lines insurance segment, the following table shows the breakout of
gross reserves among case, IBNR and loss expense reserves. Total gross reserves were down slightly from
year-end 2007 due to the decline in premiums and exposures for this segment. However, gross reserves for
the homeowner line of business rose slightly on a higher level of catastrophe losses in 2008, as we
discussed in Personal Lines Insurance Results of Operations, Page 59.
(In millions)
At December 31, 2008
Personal auto
Homeowners
Other personal
Total
At December 31, 2007
Personal auto
Homeowners
Other personal
Total
Loss reserves
Case
reserves
IBNR
reserves
Loss
expense
reserves
Total
gross
reserves
Percent
of total
$
$
$
$
141 $
67
53
261 $
163 $
61
54
278 $
(3) $
17
52
66 $
(4) $
8
54
58 $
28 $
15
11
54 $
30 $
14
12
56 $
166
99
116
381
189
83
120
392
43.5 %
26.0
30.5
100.0 %
48.2 %
21.0
30.8
100.0 %
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 79
The following table shows net reserve changes at year-end 2008, 2007 and 2006 by personal line of
business and accident year:
(Dollars in millions)
As of December 31, 2008
2007 accident year
2006 accident year
2005 accident year
2004 accident year
2003 accident year
2002 accident year
2001 and prior accident years
Deficiency/(redundancy)
Reserves estimated as of December 31, 2007
Reserves re-estimated as of December 31, 2008
Deficiency/(redundancy)
As of December 31, 2007
2006 accident year
2005 accident year
2004 accident year
2003 accident year
2002 accident year
2001 accident year
2000 and prior accident years
Deficiency/(redundancy)
Reserves estimated as of December 31, 2006
Reserves re-estimated as of December 31, 2007
Deficiency/(redundancy)
As of December 31, 2006
2005 accident year
2004 accident year
2003 accident year
2002 accident year
2001 accident year
2000 accident year
1999 and prior accident years
Deficiency/(redundancy)
Reserves estimated as of December 31, 2005
Reserves re-estimated as of December 31, 2006
Deficiency/(redundancy)
Personal
auto
Homeowner
Other
personal
Totals
11
(4)
(9)
(5)
(2)
(1)
(1)
(11)
189
178
(11)
3
5
(2)
(3)
(1)
0
0
2
206
208
2
4
6
(3)
(2)
(2)
(1)
0
2
213
215
2
$
$
$
$
$
$
$
$
$
$
$
$
(1)
(3)
(1)
(2)
(1)
0
0
(8)
77
69
(8)
(7)
0
(3)
(1)
0
0
1
(10)
104
94
(10)
5
1
0
(1)
0
0
0
5
99
104
5
$
$
$
$
$
$
$
$
$
$
$
$
(8)
(5)
(8)
(3)
(4)
(1)
(1)
(30)
107
77
(30)
(11)
(5)
(10)
(1)
(4)
(1)
(1)
(33)
118
85
(33)
(7)
(2)
(4)
(4)
(2)
(3)
(3)
(25)
118
93
(25)
$
$
$
$
$
$
$
$
$
$
$
$
2
(12)
(18)
(10)
(7)
(2)
(2)
(49)
373
324
(49)
(15)
0
(15)
(5)
(5)
(1)
0
(41)
428
387
(41)
2
5
(7)
(7)
(4)
(4)
(3)
(18)
430
412
(18)
$
$
$
$
$
$
$
$
$
$
$
$
Favorable development for personal lines segment reserves illustrates the potential for revisions inherent in
estimating reserves. As discussed in Commercial Lines Insurance Segment Reserves, Page 77, several
atypical factors contributed to commercial lines favorable reserve development in 2008, two of which also
contributed to personal lines favorable reserve development. First, during 2008, we refined our allocation of
IBNR reserves by accident year. The new allocation placed approximately $20 million more reserves in the
latest accident year, accident year 2008, than would have occurred using the prior allocation method.
Accordingly, favorable reserve development increased by the same amount for calendar year 2008. Also
during 2008, we began using blended trends from two separate reserving models to estimate required
personal umbrella reserves as of year-end 2008. This added approximately $14 million of savings from
development on prior accident years to the other personal business line.
Life Insurance Policyholder Obligations and Reserves
Gross Life Insurance Policyholder Obligations
Our estimates of life, annuity and disability policyholder obligations reflect future estimated cash payments to
be made to policyholders for future policy benefits, policyholders’ account balances and separate account
liabilities. These estimates include death and disability claims, policy surrenders, policy maturities, annuity
payments, minimum guarantees on separate account products, commissions and premium taxes offset by
expected future deposits and premiums on in-force contracts.
Our estimates of gross life, annuity and disability obligations do not reflect net recoveries from reinsurance
agreements. Ceded life reinsurance receivables were $206 million at year-end 2008. As discussed in 2009
Reinsurance Programs, Page 81, we purchase reinsurance to mitigate our life insurance risk exposure.
At year-end 2008, ceded death benefits represented approximately 51.2 percent of our total policy face
amounts in force.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 80
These estimated cash outflows are undiscounted with respect to interest. As a result, the sum of the cash
outflows for all years of $3.513 billion (total of life insurance obligations) exceeds the liabilities recorded in
life policy reserves and separate accounts for future policy benefits and claims of $2.144 billion (total of life
insurance policy reserves and separate account policy reserves). Separate account policy reserves make up
all but $1 million of separate accounts liabilities.
We have made significant assumptions to determine the estimated undiscounted cash flows of these policies
and contracts that include mortality, morbidity, future lapse rates and interest crediting rates. Due to the
significance of the assumptions used, the amounts presented could materially differ from actual results.
Life Insurance Reserves
Gross life policy reserves were $1.551 billion at year-end 2008, compared with $1.478 billion at year-end
2007. We establish reserves for traditional life insurance policies based on expected expenses, mortality,
morbidity, withdrawal rates and investment yields, including a provision for uncertainty. Once these
assumptions are established, they generally are maintained throughout the lives of the contracts. We use
both our own experience and industry experience adjusted for historical trends in arriving at our assumptions
for expected mortality, morbidity and withdrawal rates. We use our own experience and historical trends for
setting our assumptions for expected expenses. We base our assumptions for expected investment income
on our own experience adjusted for current economic conditions.
We establish reserves for our universal life, deferred annuity and investment contracts equal to the
cumulative account balances, which include premium deposits plus credited interest less charges and
withdrawals. Some of our universal life insurance policies contain no-lapse guarantee provisions. For these
policies, we establish a reserve in addition to the account balance based on expected no-lapse guarantee
benefits and expected policy assessments.
We regularly review our life insurance business to ensure that any deferred acquisition cost associated with
the business is recoverable and that our actuarial liabilities (life insurance segment reserves) make sufficient
provision for future benefits and related expenses.
2009 REINSURANCE PROGRAMS
A single large loss or an unexpected rise in claims severity or frequency due to a catastrophic event could
present us with a liquidity risk. In an effort to control such losses, we forego marketing property casualty
insurance in specific geographic areas, monitor our exposure in certain coastal regions, review aggregate
exposures to huge disasters and purchase reinsurance. We use the Risk Management Solutions (RMS) and
Applied Insurance Research (AIR) models to evaluate exposures to a once-in-a-100 year and a once-in-a-250
year event to help determine appropriate reinsurance coverage programs. In conjunction with these
activities, we also continue to evaluate information provided by our reinsurance broker. These various
sources explore and analyze credible scientific evidence, including the impact of global climate change,
which may affect our exposure under insurance policies.
Reinsurance mitigates the risk of highly uncertain exposures and limits the maximum net loss that can arise
from large risks or risks concentrated in areas of exposure. Management’s decisions about the appropriate
level of risk retention are affected by various factors, including changes in our underwriting practices,
capacity to retain risks and reinsurance market conditions. Reinsurance does not relieve us of our obligation
to pay covered claims. The financial strength of our reinsurers is important because our ability to recover for
losses covered under any reinsurance agreement depends on the financial viability of the reinsurer.
Currently participating on our standard market property and casualty per-risk and per-occurrence programs
are Hannover Reinsurance Company, Munich Reinsurance America, Partner Reinsurance Company of the
U.S. and Swiss Reinsurance America Corporation, all of which have A.M. Best insurer financial strength
ratings of A (Excellent) or A+ (Superior). Our property catastrophe program is subscribed through a broker by
reinsurers from the United States, Bermuda, London and the European markets.
Primary components of the 2009 property and casualty reinsurance program include:
• Property per risk treaty – The primary purpose of the property treaty is to provide capacity up to
$25 million, adequate for the majority of the risks we write. It also includes protection for extra-
contractual liability coverage losses. We retain the first $5 million of each loss, up from the $4 million
retention in 2008. Losses between $5 million and $25 million are reinsured at 100 percent. The ceded
premium is estimated at $34 million for 2009, compared with $37 million in 2008 and $35 million in
2007.
• Casualty per occurrence treaty – The casualty treaty provides capacity up to $25 million. Similar to the
property treaty, it provides sufficient capacity to cover the vast majority of casualty accounts we insure
and also includes protection for extra-contractual liability coverage losses. We retain the first $6 million
of each loss, up from the $5 million retention in 2008. Losses between $6 million and $25 million are
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 81
reinsured at 100 percent. The ceded premium is estimated at $40 million in 2009, compared with
$43 million in 2008 and $50 million in 2007.
• Casualty excess treaties – We purchase a casualty reinsurance treaty that provides an additional
$25 million in protection for certain casualty losses. This treaty, along with the casualty per occurrence
treaty, provides a total of $50 million of protection for workers’ compensation, extra-contractual liability
coverage and clash coverage losses, which would apply when a single occurrence involved multiple
policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The ceded
premium is estimated at $2 million in 2009, unchanged from 2008.
We purchase a second casualty excess treaty, which provides an additional $20 million in casualty loss
coverage. This treaty also provides catastrophic coverage for workers’ compensation and extra-
contractual liability coverage losses. The ceded premium is estimated at less than $1 million for 2009,
similar to the premium we paid in 2008.
• Property catastrophe treaty – To protect against catastrophic events such as wind and hail, hurricanes or
earthquakes, we purchase property catastrophe reinsurance with a limit up to $500 million. For the
2009 treaty, ceded premiums are estimated at $48.6 million compared with $41.3 million in 2008 and
$48 million in 2007. We retain the first $45 million of any loss and varying shares of losses up to
$500 million:
○ 33 percent of losses between $45 million and $70 million
○ 19 percent of losses between $70 million and $105 million
○ 14 percent of losses between $105 million and $200 million
○ 20 percent of losses between $200 million and $300 million
○ 18 percent of losses between $300 million and $400 million and
○ 7 percent of losses between $400 million and $500 million.
After reinsurance, our maximum exposure to a catastrophic event that caused $500 million in covered
losses would be $118 million compared with $105 million in 2008. The largest catastrophe loss in our
history was Hurricane Ike in September 2008, which was estimated to be $129 million before
reinsurance. The treaty contains one reinstatement provision.
Individual risks with insured values in excess of $25 million, as identified in the policy, are handled through a
different reinsurance mechanism. We typically reinsure property coverage for individual risks with insured
values between $25 million and $65 million under an automatic facultative treaty. For risks with property
values exceeding $65 million, we negotiate the purchase of facultative coverage on an individual certificate
basis. For casualty coverage on individual risks with limits exceeding $25 million, facultative reinsurance
coverage is placed on an individual certificate basis.
Terrorism coverage at various levels has been secured in most of our reinsurance agreements. The broadest
coverage for this peril is found in the property and casualty working treaties, which provide coverage for
commercial and personal risks. Our property catastrophe treaty provides coverage for personal risks, and the
majority of its reinsurers provide limited coverage for commercial risks with total insured values of
$10 million or less. For insured values between $10 million and $25 million, there also may be coverage in
the property working treaty.
Reinsurance protection for the company’s surety business is covered under separate treaties with many of
the same reinsurers that write the property casualty working treaties.
CSU, the company’s newly formed surplus lines subsidiary, has purchased a property and casualty
reinsurance treaty for 2009 through Swiss Reinsurance America Corporation. Primary components of the
treaty include:
• Property per risk treaty – The property treaty provides limits up to $5 million, which provides adequate
capacity for the risk profile we expect to write in 2009. We retain the first $1 million of any policy loss.
Losses between $1 million and $5 million are reinsured at 100 percent.
• Casualty per occurrence treaty - The casualty treaty provides limits up to $5 million, which provides
adequate capacity for the risk profile we expect to write in 2009. We retain the first $1 million of any
policy loss. Losses between $1 million and $5 million are reinsured at 100 percent.
• Basket retention – CSU has purchased this coverage to limit our retention to $1 million in the event that
the same occurrence results in both a property and a casualty loss.
• Property catastrophe treaty – As a subsidiary of The Cincinnati Insurance Company, CSU has been added
as a named insured under our property catastrophe treaty. All terms and conditions of this treaty apply to
policies underwritten by CSU.
For property or casualty risks with limits exceeding $5 million, underwriters place facultative reinsurance
coverage on an individual certificate basis. The combined property and casualty treaty provides protection on
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 82
a participating basis for extra contractual obligations, as well as exposure to losses in excess of policy limits.
The limit is $5 million for both property and casualty.
Cincinnati Life, our life insurance business, purchases reinsurance under separate treaties with many of the
same reinsurers that write the property casualty working treaties. In 2005, we modified our reinsurance
protection for our term life insurance business due to changes in the marketplace that affected the cost and
availability of reinsurance for term life insurance. We are retaining no more than a $500,000 exposure,
ceding the balance using excess over retention mortality coverage, and retaining the policy reserve. Retaining
the policy reserve has no direct impact on GAAP results. However, because of the conservative nature of
statutory reserving principles, retaining the policy reserve unduly depresses our statutory earnings and
requires a large commitment of our capital. We also have catastrophe reinsurance coverage on our life
insurance operations that reimburses us up to $50 million for covered net losses in excess of $10 million.
The treaty contains a reinstatement provision, provided the covered losses are not due to terrorism, and
contains protection for extra-contractual liability coverage losses. For term life insurance business written
prior to 2005, we retain 10 percent to 25 percent of each term policy, not to exceed $500,000, ceding the
balance of mortality risk and policy reserve.
The NAIC recently rejected a package of industry proposals to relax certain statutory reserve and capital
requirements. Due to our strong capital position, we do not intend to seek permission from the Ohio
Department of Insurance to use these proposals as permitted practices. We continue to monitor the
marketplace for attractive alternatives to finance the redundant statutory reserve strain associated with our
term life insurance products.
SAFE HARBOR STATEMENT
This is our “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Our business
is subject to certain risks and uncertainties that may cause actual results to differ materially from those
suggested by the forward-looking statements in this report. Some of those risks and uncertainties are
discussed in our Item 1A, Risk Factors, Page 25. Although we often review or update our forward-looking
statements when events warrant, we caution our readers that we undertake no obligation to do so.
Factors that could cause or contribute to such differences include, but are not limited to:
•
Further decline in overall stock market values negatively affecting the company’s equity portfolio and
book value
• Events, such as the credit crisis, followed by prolonged periods of economic instability, that lead to:
○ Significant or prolonged decline in the value of a particular security or group of securities and
impairment of the asset(s)
○ Significant decline in investment income due to reduced or eliminated dividend payouts from a
particular security or group of securities
○ Significant rise in losses from surety and director and officer policies written for financial institutions
• Recession or other economic conditions or regulatory, accounting or tax changes resulting in lower
demand for insurance products
• Prolonged low interest rate environment or other factors that limit the company’s ability to generate
growth in investment income or interest rate fluctuations that result in declining values of fixed-maturity
investments, including declines in accounts in which we hold bank-owned life insurance contract assets
•
Further deterioration in the banking sector or with banks with which we have relationships
• Changing consumer buying habits and consolidation of independent insurance agencies that could alter
our competitive advantages
• Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns,
environmental events, terrorism incidents or other causes
•
Increased frequency and/or severity of claims
• Delays or inadequacies in the development, implementation, performance and benefits of technology
projects and enhancements
• Ability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased, financial
strength of reinsurers and the potential for non-payment or delay in payment by reinsurers
•
Increased competition that could result in a significant reduction in the company’s premium growth rate
• Events or conditions that could weaken or harm the company’s relationships with its independent
agencies and hamper opportunities to add new agencies, resulting in limitations on the company’s
opportunities for growth, such as:
○ Multi-notch downgrades of the company’s financial strength ratings
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 83
○ Concerns that doing business with the company is too difficult
○ Perceptions that the company’s level of service, particularly claims service, is no longer a
distinguishing characteristic in the marketplace
• Underwriting and pricing methods adopted by competitors that could allow them to identify and flexibly
price risks, which could decrease our competitive advantages
• Personal lines pricing and loss trends that lead management to conclude that this segment could not
attain sustainable profitability, which could prevent the capitalization of policy acquisition costs
• Actions of insurance departments, state attorneys general or other regulatory agencies, including a
change to a federal system of regulation from a state-based system, that:
○ Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business
○ Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and
regulations
Increase our expenses
○
○ Add assessments for guaranty funds, other insurance related assessments or mandatory
reinsurance arrangements; or that impair our ability to recover such assessments through future
surcharges or other rate changes
○ Limit our ability to set fair, adequate and reasonable rates
○ Place us at a disadvantage in the marketplace
○ Restrict our ability to execute our business model, including the way we compensate agents
• Adverse outcomes from litigation or administrative proceedings
• Events or actions, including unauthorized intentional circumvention of controls, that reduce the
company’s future ability to maintain effective internal control over financial reporting under the
Sarbanes-Oxley Act of 2002
•
Inaccurate estimates or assumptions used for critical accounting estimates
• Unforeseen departure of certain executive officers or other key employees due to retirement, health or
other causes that could interrupt progress toward important strategic goals or diminish the effectiveness
of certain longstanding relationships with insurance agents and others
• Events, such as an epidemic, natural catastrophe or terrorism, that could hamper our ability to assemble
our workforce at our headquarters location
Further, the company’s insurance businesses are subject to the effects of changing social, economic and
regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and
restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand
overall regulation. The company also is subject to public and regulatory initiatives that can affect the market
value for its common stock, such as recent measures affecting corporate financial reporting and governance.
The ultimate changes and eventual effects, if any, of these initiatives are uncertain.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 84
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
INTRODUCTION
Market risk is the potential for a decrease in securities value resulting from broad yet uncontrollable forces
such as: inflation, economic growth, interest rates, world political conditions or other widespread
unpredictable events. It is comprised of many individual risks that, when combined, create a macroeconomic
impact. The company accepts and manages risks in the investment portfolio as part of the means of
achieving portfolio objectives. Some of the risks are:
• Political – the potential for a decrease in value due to the real or perceived impact of governmental
policies or conditions
• Regulatory – the potential for a decrease in value due to the impact of legislative proposals or changes in
laws or regulations
• Economic – the potential for a decrease in value due to changes in general economic factors (recession,
inflation, deflation, etc.)
• Revaluation – the potential for a decrease in value due to a change in relative value (change in market
multiple) of the market brought on by general economic factors
•
Interest-rate – the potential for a decrease in value of a security or portfolio due to its sensitivity to
changes (increases or decreases) in the general level of interest rates
• Company-specific risk is the potential for a particular issuer to experience a decline in value due to the
impact of sector or market risk on the holding or because of issues specific to the firm:
•
Fraud – the potential for a negative impact on an issuer’s performance due to actual or alleged illegal or
improper activity of individuals it employs
• Credit – the potential for deterioration in an issuer’s financial profile due to specific company issues,
problems it faces in the course of its operations or industry-related issues
• Default – the possibility that an issuer will not make a required payment (interest payment or return of
principal) on its debt. Generally this occurs after its financial profile has deteriorated (credit risk) and it
no longer has the means to make its payments
The investment committee of the board of directors monitors the investment risk management process
primarily through its executive oversight of our investment activities. We take an active approach to
managing market and other investment risks, including the accountabilities and controls over these
activities. Actively managing these market risks is integral to our operations and could require us to change
the character of future investments purchased or sold or require us to shift the existing asset portfolios to
manage exposure to market risk within acceptable ranges.
Sector risk is the potential for a negative impact on a particular industry due to its sensitivity to factors that
make up market risk. Market risk affects general supply/demand factors for an industry and will affect
companies within that industry to varying degrees.
Risks associated with the five asset classes described in Item 1, Investments Segment, Page 17, can be
summarized as follows (H – high, A – average, L – low):
Political
Regulatory
Economic
Revaluation
Interest rate
Fraud
Credit
Default
Taxable
fixed maturities
A
A
A
A
H
A
A
A
Tax-exempt
fixed maturities
H
A
A
A
H
L
L
L
Common
equities
A
A
H
H
A
A
A
A
Preferred
equities
A
A
A
A
H
A
A
A
Short-term
investments
L
L
L
L
L
L
L
L
FIXED-MATURITY INVESTMENTS
For investment-grade corporate bonds, the inverse relationship between interest rates and bond prices leads
to falling bond values during periods of increasing interest rates. Although the potential for a worsening
financial condition, and ultimately default, does exist with investment-grade corporate bonds, their higher-
quality financial profiles make credit risk less of a concern than for lower-quality investments. We address
this risk by consistently investing within a particular maturity range. Over the years, this approach has
provided the portfolio with a laddered maturity schedule, which we believe is less subject to large swings in
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 85
value due to interest rate changes. While a single maturity range may see values drop due to general interest
rate levels, other maturity ranges would typically be less affected by those changes. Additionally, purchases
are spread across a wide spectrum of industries and companies, diversifying our holdings and minimizing the
impact of specific industries or companies with greater sensitivities to interest rate fluctuations.
The primary risk related to high-yield corporate bonds is credit risk or the potential for a deteriorating
financial structure. A weak financial profile can lead to rating downgrades from the credit rating agencies,
which can put further downward pressure on bond prices. Interest rate risk, while significant, is less of a
factor with high-yield corporate bonds, as valuation is related more directly to underlying operating
performance than to general interest rates. This puts more emphasis on the financial results achieved by the
issuer rather than on general economic trends or statistics within the marketplace. We address this concern
by analyzing issuer- and industry-specific financial results and by closely monitoring holdings within this asset
class.
The primary risks related to tax-exempt bonds are interest rate risk and political risk associated with the
specific economic environment within the political boundaries of the issuing municipal entity. We address
these concerns by focusing on municipalities' general-obligation debt and on essential-service bonds.
Essential-service bonds derive a revenue stream from municipal services that are vital to the people living in
the area (water service, sewer service, etc.). Another risk related to tax-exempt bonds is regulatory risk or the
potential for legislative changes that would negate the benefit of owning tax-exempt bonds. We monitor
regulatory activity for situations that may negatively affect current holdings and our ongoing strategy for
investing in these securities.
The final, less significant risk is our exposure to credit risk for a portion of the tax-exempt portfolio that has
support from corporate entities. Examples are bonds insured by corporate bond insurers or bonds with
interest payments made by a corporate entity through a municipal conduit/authority. Our decisions regarding
these investments primarily consider the underlying municipal situation. The existence of third-party
insurance is intended to reduce risk in the event of default. In circumstances in which the municipality is
unable to meet its obligations, risk would be increased if the insuring entity were experiencing financial
duress. Because of our diverse exposure and selection of higher-rated entities with strong financial profiles,
we do not believe this is a material concern as we discuss in Item 1, Investments Segment, Page 17.
Interest Rate Sensitivity Analysis
Because of our strong surplus, long-term investment horizon and ability to hold most fixed-maturity
investments to maturity, we believe the company is well positioned if interest rates were to rise. A higher rate
environment would provide the opportunity to invest cash flow in higher-yielding securities, while reducing the
likelihood of untimely redemptions of currently callable securities. While higher interest rates would be
expected to continue to increase the number of fixed-maturity holdings trading below 100 percent of book
value, we believe lower fixed-maturity security values due solely to interest rate changes would not signal
a decline in credit quality.
Our dynamic financial planning model uses analytical tools to assess market risks. As part of this model, the
effective duration of the fixed-maturity portfolio is continually monitored by our investment department to
evaluate the theoretical impact of interest rate movements.
The table below summarizes the effect of hypothetical changes in interest rates on the fixed-maturity
portfolio:
(In millions)
At December 31, 2008
At December 31, 2007
Fair value of
fixed maturity
portfolio
$
5,827
$
5,848
Effective duration
100 basis point
spread decrease
6,141
$
100 basis point
spread increase
5,514
6,131
5,565
The effective duration of the fixed maturity portfolio was 5.4 years at year-end 2008, compared with
4.8 years at year-end 2007. A 100 basis point movement in interest rates would result in an approximately
5.4 percent change in the fair value of the fixed maturity portfolio. Generally speaking, the higher a bond is
rated, the more directly correlated movements in its market value are to changes in the general level of
interest rates, exclusive of call features. The market values of average- to lower-rated corporate bonds are
additionally influenced by the expansion or contraction of credit spreads.
In the dynamic financial planning model, the selected interest rate change of 100 basis points represents our
views of a shift in rates that is quite possible over a one-year period. The rates modeled should not be
considered a prediction of future events as interest rates may be much more volatile in the future. The
analysis is not intended to provide a precise forecast of the effect of changes in rates on our results or
financial condition, nor does it take into account any actions that we might take to reduce exposure to such
risks.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 86
SHORT-TERM INVESTMENTS
Our short-term investments consist primarily of commercial paper, demand notes or bonds purchased within
one year of maturity. We make short-term investments primarily with funds to be used to make upcoming
cash payments, such as taxes. At year-end 2008, short-term investments included $16 million that were
frozen in The Reserve’s Primary Fund. Between mid-September and year-end 2008, the fund had returned
approximately $71 million to us in its liquidation process. In February 2009, the fund returned $6 million of
the year-end balance and we expect to receive the remainder during 2009.
EQUITY INVESTMENTS
Common stocks are subject to a variety of risk factors encompassed under the umbrella of market risk.
General economic swings influence the performance of the underlying industries and companies within those
industries. As we saw in 2008, a downturn in the economy can have a negative effect on an equity portfolio.
Industry- and company-specific risks also have the potential to substantially affect the value of our portfolio.
We implemented new investment guidelines in 2008 to help address these risks by diversifying the portfolio
and establishing parameters to help manage exposures.
Our equity holdings represented $2.896 billion in fair value and contributed all of the unrealized appreciation
of the portfolio at year-end 2008. See Item 1, Investments Segment, Page 17, for additional details on our
holdings.
The primary risks related to preferred stocks are similar to those related to investment grade corporate
bonds. Falling interest rates adversely affect market values due to the normal inverse relationship between
rates and yields. Credit risk exists due to the subordinate position of preferred stocks in the capital structure.
We minimize this risk by primarily purchasing investment grade preferred stocks of issuers with a strong
history of paying a common stock dividend. Events of 2008 indicated that the risk related to preferred stocks
is greater because they would not receive preferential treatment in a government-sponsored restructuring.
APPLICATION OF ASSET IMPAIRMENT POLICY
As discussed in Item 7, Critical Accounting Estimates, Asset Impairment, Page 45, our fixed-maturity and
equity investment portfolios are our largest assets. The company's asset impairment committee monitors a
number of significant factors for indications that the value of investments trading below the carrying amount
may not be recoverable. The application of our impairment policy resulted in other-than-temporary
impairment charges that reduced our income before income taxes by $510 million in 2008, $16 million in
2007 and $1 million in 2006. Impairments are discussed in Item 7, Investment Results of Operations,
Page 66.
We expect the number of securities trading below 100 percent of book value to fluctuate as interest rates
rise or fall and credit spreads expand or contract due to prevailing economic conditions. Further, book values
for some securities have been revised due to impairment charges recognized in prior periods. At year-end
2008, 944 of the 2,233 securities we owned were trading below 100 percent of book value compared with
373 of the 2,053 securities we owned at year-end 2007 and 679 of the 1,973 securities we owned at
year-end 2006.
When evaluating the potential for future other-than-temporary impairments, we consider our intent and ability
to retain a security for a period adequate to recover its cost. Because of our investment philosophy and
strong capitalization, we can hold securities that might otherwise be deemed impaired until their scheduled
redemption as we evaluate their potential for recovery based on economic, industry or company factors.
The 944 holdings trading below book value at year-end 2008 represented 40.3 percent of invested assets
and $596 million in unrealized losses. We deem the risk related to securities trading between 70 percent
and 100 percent of book value to be relatively minor and at least partially offset by the earned income
potential of these investments.
• 585 of these holdings were trading between 90 percent and 100 percent of book value. The value of
these securities fluctuates primarily because of changes in interest rates. The fair value of these
585 securities was $2.081 billion at year-end 2008, and they accounted for $88 million in unrealized
losses.
• 276 of these holdings were trading between 70 percent and 90 percent of book value. The fair value of
these holdings was $1.177 billion, and they accounted for $302 million in unrealized losses. These
securities, which are being closely monitored, have been affected by a combination of factors including
wider credit spreads driven primarily by the distress in the mortgage market, slumping real estate
valuations, the effects of a slowing economy and the effects of higher interest rates on longer duration
instruments. The majority of these securities are in the financial-related sectors.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 87
• 83 securities were trading below 70 percent of book value at year-end 2008. The fair value of these
holdings was $322 million, and they accounted for $206 million in unrealized losses. The real estate
sector accounted for $53 million of the unrealized losses, industrials accounted for $48 million, health
care for $27 million, technology-related for $23 million, and the financial sector for $20 million.. No
other sector accounted for more than 10 percent of the unrealized losses. We believe that normalization
of macro economic conditions has the potential to result in fair value recoveries within the individual
recovery periods identified for each security.
The following table summarizes the length of time securities in the investment portfolio have been in a
continuous unrealized gain or loss position.
(Dollars in millions)
At December 31, 2008
Taxable fixed maturities:
Trading below 70% of book value
Trading at 70% to less than 100% of book value
Trading at 100% and above of book value
Total
Tax-exempt fixed maturities:
Trading below 70% of book value
Trading at 70% to less than 100% of book value
Trading at 100% and above of book value
Total
Common equities:
Trading below 70% of book value
Trading at 70% to less than 100% of book value
Trading at 100% and above of book value
Total
Preferred equities:
Trading below 70% of book value
Trading at 70% to less than 100% of book value
Trading at 100% and above of book value
Total
Short-term investments:
Trading below 70% of book value
Trading at 70% to less than 100% of book value
Trading at 100% and above of book value
Total
Summary:
Trading below 70% of book value
Trading at 70% to less than 100% of book value
Trading at 100% and above of book value
Total
6 Months or less
Gross
unrealized
gain/loss
Number
of
issues
> 6 - 12 Months
Number
of
issues
Gross
unrealized
gain/loss
> 12 - 24 Months
Gross
unrealized
gain/loss
Number
of
issues
> 24 - 36 Months
Gross
unrealized
gain/loss
Number
of
issues
73 $
244
171
488
4
56
591
651
5
19
7
31
1
8
16
25
0
0
1
1
(102)
(75)
34
(143)
(4)
(7)
29
18
(99)
(135)
8
(226)
(1)
(5)
1
(5)
0
0
0
0
0 $
164
3
167
0
239
0
239
0
2
2
4
0
3
3
6
0
4
0
4
0
(95)
1
(94)
0
(16)
0
(16)
0
(11)
3
(8)
0
(3)
1
(2)
0
0
0
0
0 $
35
31
66
0
18
123
141
0
0
1
1
0
4
0
4
0
0
0
0
83
327
786
1,196 $
(206)
(222)
72
(356)
0
412
8
420 $
0
(125)
5
(120)
0
57
155
212 $
0
(17)
1
(16)
0
(2)
10
8
0
0
5
5
0
(6)
0
(6)
0
0
0
0
0
(25)
16
(9)
0 $
41
77
118
0
24
238
262
0
0
15
15
0
0
0
0
0
0
0
0
0
(16)
9
(7)
0
(2)
21
19
0
0
1,061
1,061
0
0
0
0
0
0
0
0
0
65
330
395 $
0
(18)
1,091
1,073
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 88
The following table summarizes the investment portfolio:
(Dollars in millions)
At December 31, 2008
Taxable fixed maturities:
Trading below 70% of book value
Trading at 70% to less than 100% of book value
Trading at 100% and above of book value
Securities sold in current year
Total
Tax-exempt fixed maturities:
Trading below 70% of book value
Trading at 70% to less than 100% of book value
Trading at 100% and above of book value
Securities sold in current year
Total
Common equities:
Trading below 70% of book value
Trading at 70% to less than 100% of book value
Trading at 100% and above of book value
Securities sold in current year
Total
Preferred equities:
Trading below 70% of book value
Trading at 70% to less than 100% of book value
Trading at 100% and above of book value
Securities sold in current year
Total
Short-term investments:
Trading below 70% of book value
Trading at 70% to less than 100% of book value
Trading at 100% and above of book value
Securities sold in current year
Total
Portfolio summary:
Trading below 70% of book value
Trading at 70% to less than 100% of book value
Trading at 100% and above of book value
Investment income on securities sold in current year
Total
At December 31, 2007
Portfolio summary:
Trading below 70% of book value
Trading at 70% to less than 100% of book value
Trading at 100% and above of book value
Investment income on securities sold in current year
Total
Number
of issues
Book
value
Fair
value
Gross
unrealized
gain/loss
Gross
investment
income
73 $
272 $
170 $
484
282
-
839
4
337
952
-
1,293
5
21
25
-
51
1
15
19
-
35
0
4
1
-
5
1,974
1,108
-
3,354
9
708
1,987
-
2,704
242
814
833
-
1,889
5
98
85
-
188
0
54
30
-
84
1,771
1,153
-
3,094
5
681
2,047
-
2,733
143
668
1,910
-
2,721
4
84
87
-
175
0
54
30
-
84
83
861
1,279
-
2,223 $
3 $
370
1,680
-
2,053 $
528
3,648
4,043
-
8,219 $
18 $
2,064
6,777
-
8,859 $
322
3,258
5,227
-
8,807 $
12 $
1,882
10,304
-
12,198 $
(102) $
(203)
45
-
(260)
(4)
(27)
60
-
29
(99)
(146)
1,077
-
832
(1)
(14)
2
-
(13)
0
0
0
-
0
(206)
(390)
1,184
-
588 $
(6) $
(182)
3,527
-
3,339 $
16
113
68
22
219
1
29
82
2
114
8
27
131
9
175
0
7
9
4
20
0
0
0
2
2
25
176
290
39
530
0
92
473
36
601
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 89
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 90
Financial Statements and Supplementary Data
Item 8.
RESPONSIBILITY FOR FINANCIAL STATEMENTS
We have prepared the consolidated financial statements of Cincinnati Financial Corporation and our
subsidiaries for the year ended December 31, 2008, in accordance with accounting principles generally
accepted in the United States of America (GAAP).
We are responsible for the integrity and objectivity of these financial statements. The amounts, presented on
an accrual basis, reflect our best estimates and judgment. These statements are consistent in all material
aspects with other financial information in the Annual Report on Form 10-K. Our accounting system and
related internal controls are designed to assure that our books and records accurately reflect the company’s
transactions in accordance with established policies and procedures as implemented by qualified personnel.
Our board of directors has established an audit committee of independent outside directors. We believe
these directors are free from any relationships that could interfere with their independent judgment as audit
committee members.
The audit committee meets periodically with management, our independent registered public accounting firm
and our internal auditors to discuss how each is handling responsibilities. The audit committee reports their
findings to the board of directors. The audit committee recommends to the board the annual appointment of
the independent registered public accounting firm. The audit committee reviews with this firm the scope of
the audit assignment and the adequacy of internal controls and procedures.
Deloitte & Touche LLP, our independent registered public accounting firm, audited the consolidated financial
statements of Cincinnati Financial Corporation and subsidiaries for the year ended December 31, 2008.
Their report is on Page 93. Deloitte’s auditors met with our audit committee to discuss the results of their
examination. They have the opportunity to discuss the adequacy of internal controls and the quality of
financial reporting without management present.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 91
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The management of Cincinnati Financial Corporation and its subsidiaries is responsible for establishing and
maintaining adequate internal controls, designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America (GAAP). The company’s internal
control over financial reporting includes those policies and procedures that:
1. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and the directors of the company;
and
3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the company’s assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility
of human error and the circumvention of overriding controls. Accordingly, even effective internal control can
provide only reasonable assurance with respect to financial statement preparation and presentation. Further,
because of changes in conditions, the effectiveness of internal control may vary over time.
The company’s management assessed the effectiveness of the company’s internal control over financial
reporting as of December 31, 2008, as required by Section 404 of the Sarbanes Oxley Act of 2002.
Management’s assessment is based on the criteria established in the Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and was
designed to provide reasonable assurance that the company maintained effective internal control over
financial reporting as of December 31, 2008. The assessment led management to conclude that, as of
December 31, 2008, the company’s internal control over financial reporting was effective based on those
criteria.
The company’s independent registered public accounting firm has issued an audit report on our internal
control over financial reporting as of December 31, 2008. This report appears on Page 93.
/S/ Kenneth W. Stecher
Kenneth W. Stecher
Director, President and Chief Executive Officer
/S/ Steven J. Johnston
Steven J. Johnston, FCAS, MAAA, CFA
Chief Financial Officer, Senior Vice President, Secretary and Treasurer
February 27, 2009
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 92
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Cincinnati Financial Corporation
Fairfield, Ohio
We have audited the accompanying consolidated balance sheets of Cincinnati Financial Corporation and
subsidiaries (the company) as of December 31, 2008 and 2007, and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2008. Our audits also included the financial statement schedules listed in the Index at Item
15(c). We also have audited the company’s internal control over financial reporting as of
December 31, 2008, based on criteria established in the Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. The company’s management is
responsible for these financial statements and financial schedules, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting report. Our
responsibility is to express an opinion on these financial statements and financial statement schedules and
an opinion on the company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audit of financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of,
the company’s principal executive and principal financial officers, or persons performing similar functions,
and effected by the company’s board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles and that
receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may
not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of the company as of December 31, 2008 and 2007, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, the
company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2008, based on the criteria established in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
/S/ Deloitte & Touche LLP
Cincinnati, Ohio
February 27, 2009
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 93
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions except per share data)
ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2008—$6,058; 2007—$5,783)
(includes securities pledged to creditors: 2008—$0; 2007—$745)
Equity securities, at fair value (cost: 2008—$2,077; 2007—$2,975)
Short-term investments, at fair value (amortized cost: 2008—$84; 2007—$101)
Other invested assets
Total investments
Cash and cash equivalents
Securities lending collateral invested
Investment income receivable
Finance receivable
Premiums receivable
Reinsurance receivable
Prepaid reinsurance premiums
Deferred policy acquisition costs
Deferred income tax
Land, building and equipment, net, for company use (accumulated depreciation:
2008—$297; 2007—$276)
Other assets
Separate accounts
Total assets
LIABILITIES
Insurance reserves
Loss and loss expense reserves
Life policy reserves
Unearned premiums
Securities lending payable
Other liabilities
Deferred income tax
Note payable
6.125% senior notes due 2034
6.9% senior debentures due 2028
6.92% senior debentures due 2028
Separate accounts
Total liabilities
Commitments and contingent liabilities (Note 16)
SHAREHOLDERS' EQUITY
Common stock, par value—$2 per share; (authorized: 2008—500 million shares,
2007—500 million shares; issued: 2008—196 million shares, 2007—196 million shares)
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock at cost (2008—34 million shares, 2007—30 million shares)
Total shareholders' equity
Total liabilities and shareholders' equity
Accompanying notes are an integral part of these statements.
December 31,
2008
December 31,
2007
$
5,827
$
5,848
2,896
84
83
8,890
1,009
0
98
71
1,059
759
15
509
126
236
49
548
13,369
4,086
1,551
1,544
0
618
0
49
371
28
392
548
9,187
$
$
6,249
101
63
12,261
226
760
124
92
1,107
754
13
461
0
239
72
528
16,637
3,967
1,478
1,564
760
574
977
69
371
28
392
528
10,708
—
—
393
1,069
3,579
347
(1,206)
4,182
13,369
$
393
1,049
3,404
2,151
(1,068)
5,929
16,637
$
$
$
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 94
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share data)
REVENUES
Earned premiums
Property casualty
Life
Investment income, net of expenses
Realized investment gains and losses
Other income
Total revenues
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits
Commissions
Other operating expenses
Taxes, licenses and fees
Increase in deferred policy acquisition costs
Interest expense
Total benefits and expenses
INCOME BEFORE INCOME TAXES
PROVISION (BENEFIT) FOR INCOME TAXES
Current
Deferred
Total provision for income taxes
NET INCOME
PER COMMON SHARE
Net income—basic
Net income—diluted
Accompanying notes are an integral part of these statements.
2008
Years ended December 31,
2007
2006
3,010
126
537
138
13
3,824
2,193
576
411
68
(17)
53
3,284
540
238
(127)
111
429
2.63
2.62
$
$
$
3,125
125
608
382
19
4,259
1,963
624
362
75
(9)
52
3,067
1,192
325
12
337
855
5.01
4.97
$
$
$
3,163
115
570
684
18
4,550
2,128
630
354
77
(21)
53
3,221
1,329
404
(5)
399
930
5.36
5.30
$
$
$
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 95
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions)
COMMON STOCK
Beginning of year
Stock options exercised
End of year
PAID-IN CAPITAL
Beginning of year
Stock options exercised
Share-based compensation
Other
End of year
RETAINED EARNINGS
Beginning of year
Cumulative effect of change in accounting for hybrid financial securities
Cumulative effect of change in accounting for uncertain tax positions
Adjusted beginning of year
Net income
Dividends declared
End of year
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of year
Cumulative effect of change in accounting for hybrid financial securities
Adjusted beginning of year
Other comprehensive income (loss), net
Cumulative effect of change in accounting for pension obligations
End of year
TREASURY STOCK
Beginning of year
Purchase
Reissued
End of year
Total shareholders' equity
COMMON STOCK - NUMBER OF SHARES OUTSTANDING
Beginning of year
Shares issued
Purchase of treasury shares
End of year
COMPREHENSIVE INCOME
Net income
Net unrealized investment gains and losses, net of deferred income tax
of 2008 — $(972); 2007—$(667); 2006—$54
Pension obligations
Total comprehensive income (loss)
Accompanying notes are an integral part of these statements.
2008
Years ended December 31,
2007
2006
$
$
$
$
393
0
393
1,049
4
15
1
1,069
3,404
0
0
3,404
429
(254)
3,579
2,151
0
2,151
(1,804)
0
347
(1,068)
(139)
1
(1,206)
4,182
166
0
(4)
162
429
(1,794)
(10)
(1,375)
$
$
$
$
391
2
393
1,015
19
14
1
1,049
2,786
5
(1)
2,790
855
(241)
3,404
3,379
(5)
3,374
(1,223)
0
2,151
(763)
(306)
1
(1,068)
5,929
173
0
(7)
166
855
(1,231)
8
(368)
$
$
$
$
389
2
391
969
28
17
1
1,015
2,088
0
0
2,088
930
(232)
2,786
3,284
0
3,284
127
(32)
3,379
(644)
(120)
1
(763)
6,808
174
1
(2)
173
930
127
0
1,057
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 96
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
2008
Years ended December 31,
2007
2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items
Realized gains on investments
Share-based compensation
Interest credited to contract holders
Changes in:
Investment income receivable
Premiums and reinsurance receivable
Deferred policy acquisition costs
Other assets
Loss and loss expense reserves
Life policy reserves
Unearned premiums
Other liabilities
Deferred income tax
Current income tax
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of fixed maturities
Call or maturity of fixed maturities
Sale of equity securities
Collection of finance receivables
Purchase of fixed maturities
Purchase of equity securities
Change in short-term investments, net
Investment in buildings and equipment, net
Investment in finance receivables
Change in other invested assets, net
Change in securities lending collateral invested
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of cash dividends to shareholders
Purchase of treasury shares
Change in notes payable
Proceeds from stock options exercised
Contract holder funds deposited
Contract holder funds withdrawn
Change in securities lending payable
Excess tax benefits on share-based compensation
Other
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Interest paid (net of capitalized interest:2008—3$; 2007—$4; 2006—$2)
Income taxes paid
Non-cash activities:
Conversion of securities
Equipment acquired under capital lease obligations
Accompanying notes are an integral part of these statements.
$
429
$
855
$
32
(138)
15
34
26
43
(17)
5
119
67
(20)
(25)
(127)
41
484
167
1,029
2,052
36
(1,695)
(771)
20
(36)
(17)
(17)
741
1,509
(250)
(139)
(20)
4
25
(66)
(760)
0
(4)
(1,210)
783
226
1,009
53
197
25
2
$
$
$
$
$
$
36
(382)
14
36
(3)
(50)
(8)
(4)
71
101
(15)
64
12
(22)
705
321
520
812
37
(924)
(769)
(5)
(70)
(23)
(1)
(760)
(862)
(240)
(307)
20
19
12
(79)
760
2
(6)
181
24
202
226
51
346
20
12
$
$
$
930
38
(684)
17
31
(3)
(13)
(21)
17
235
81
20
(5)
(5)
(23)
615
110
343
859
35
(753)
(689)
(15)
(52)
(41)
(11)
0
(214)
(228)
(120)
49
27
32
(78)
0
2
(2)
(318)
83
119
202
53
429
50
12
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 97
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Operations
Cincinnati Financial operates through our insurance group and three complementary subsidiary companies:
The Cincinnati Insurance Company leads our standard market property casualty insurance group that also
includes two subsidiaries: The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This
group markets a broad range of standard market business, homeowner and auto policies in 35 states. The
group provides quality customer service to our select group of 1,113 local insurance agencies with
1,387 reporting locations. Other subsidiaries of The Cincinnati Insurance Company include The Cincinnati
Life Insurance Company, which markets life insurance policies, disability income policies and annuities, and
The Cincinnati Specialty Underwriters Insurance Company, which began offering excess and surplus lines
insurance products in 2008.
The three complementary subsidiaries are CSU Producer Resources Inc., which offers insurance brokerage
services to our independent agencies so their clients can access our excess and surplus lines insurance
products; CFC Investment Company, which offers commercial leasing and financing services to our agents,
their clients and other customers; and CinFin Capital Management Company, which provides asset
management services to institutions, corporations and individuals. CinFin Capital Management will cease
operations effective February 28, 2009.
Basis of Presentation
Our consolidated financial statements include the accounts of the parent company and our wholly owned
subsidiaries. We present our statements in accordance with accounting principles generally accepted in the
United States of America (GAAP). In consolidating our accounts, we have eliminated intercompany balances
and transactions.
In accordance with GAAP, we have made estimates and assumptions that affect the amounts we report and
discuss in the consolidated financial statements and accompanying notes. Actual results could differ from
our estimates.
Earnings per Share
Net income per common share is based on the weighted average number of common shares outstanding
during each of the respective years. We calculate net income per common share (diluted) assuming the
exercise of stock-based awards. We have adjusted shares and earnings per share to reflect all stock splits
and dividends prior to December 31, 2008.
Share-based Compensation
We grant qualified and non-qualified share-based compensation under authorized plans. Until 2007, all
stock-based awards were in the form of stock options that had an exercise price equal to the market value of
the underlying common stock on the date of grant. The options vest ratably over three years following the
date of grant and are exercisable over 10 year periods.
The 2006 Stock Compensation Plan provides the compensation committee of the board of directors flexibility
in the types of available stock-based awards including stock options, restricted stock, restricted stock units,
stock appreciation rights and other stock-based awards. The 2006 Stock Compensation Plan also provides
for the grant of performance-based awards.
In 2008, the committee approved a mix of stock options and restricted stock units for stock-based awards.
Stock options granted had similar terms but generally were awarded for fewer shares compared with
previous years to accommodate new awards of service based and performance-based restricted stock units,
while keeping the overall estimated cost of stock-based compensation in line with previous years.
Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial
Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” using the modified prospective transition
method. We elected to use the alternative method for determining the beginning balance of the additional
paid-in capital pool, as described in the Financial Accounting Standards Board (FASB) Staff Position 123(R)-3.
Refer to Note 17, Stock-based Associate Compensation Plans, Page 117 for more information regarding our
share-based compensation.
Employee Benefit Pension Plan
We sponsor a defined benefit pension plan that was modified during 2008. We froze entry into the pension
plan and only participants 40 years of age or older could elect to remain in the plan. Our pension expense is
based on certain actuarial assumptions and also is composed of several components that are determined
using the projected unit credit actuarial cost method. Refer to Note 13, Employee Retirement Benefits,
Page 113 for more information regarding our defined benefit pension plan.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 98
Property Casualty Insurance
Property casualty policy written premiums are deferred and recorded as earned premiums on a pro rata basis
over the terms of the policies. We record as unearned premium the portion of written premiums that apply to
unexpired policy terms. The expenses associated with issuing insurance policies – primarily commissions,
premium taxes and underwriting costs – are deferred and amortized over the terms of the policies. We
update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate our
deferred acquisition cost for recoverability.
Certain property casualty policies are not booked before the effective date. An actuarial estimate is made to
determine the amount of unbooked written premiums. The majority of the estimate is unearned and does not
have a material impact on earned premium.
We establish reserves to cover the expected cost of claims – or losses – and our expenses related to
investigating, processing and resolving claims. Although determining the appropriate amount of reserves is
inherently uncertain, we base our decisions on past experience and current facts. Reserves are based on
claims reported prior to the end of the year and estimates of unreported claims. We take into account the
fact that we may recover some of our costs through salvage and subrogation. We regularly review and update
reserves using the most current information available. Any resulting adjustments are reflected in current year
insurance losses and policyholder benefits.
The Cincinnati Insurance Companies actively write standard market property casualty insurance policies in
35 states. Our 10 largest states generated 68.7 percent and 69.1 percent of total property casualty
premiums in 2008 and 2007. Ohio, our largest state, accounted for 20.9 percent and 21.2 percent of total
earned premiums in 2008 and 2007. Agencies in Georgia, Illinois, Indiana, Michigan, North Carolina,
Pennsylvania and Virginia each contributed between 4 percent and 9 percent of premium volume in 2008.
The largest single agency relationship accounted for approximately 1.3 percent of the company's total agency
direct earned premiums in 2008.
Policyholder Dividends
Certain workers’ compensation policies include the possibility of an insured earning a return of a portion of
their premium in the form of a policyholder dividend. The dividend generally is calculated by determining the
profitability of a policy year along with the associated premium. We reserve for all probable future
policyholder dividend payments.
Life and Health Insurance
We offer several types of life and health insurance and we account for each according to the duration of the
contract. Short-duration contracts are written to cover claims that arise during a short, fixed term of coverage.
We generally have the right to change the amount of premium charged or cancel the coverage at the end of
each contract term. Group life insurance is an example. We record premiums for short-duration contracts
similarly to property casualty contracts.
Long-duration contracts are written to provide coverage for an extended period of time. Traditional long-
duration contracts require policyholders to pay scheduled gross premiums, generally not less frequently than
annually, over the term of the coverage. Premiums for these contracts are recognized as revenue when due.
Whole life insurance and disability income insurance are examples. Some traditional long-duration contracts
have premium payment periods shorter than the period over which coverage is provided. For these contracts,
the excess of premium over the amount required to pay expenses and benefits is recognized over the term of
the coverage rather than over the premium payment period. Ten-pay whole life insurance is an example.
We establish a liability for traditional long-duration contracts as we receive premiums. The amount of this
liability is the present value of future expenses and benefits less the present value of future net premiums.
Net premium is the portion of gross premium required to provide for all expenses and benefits. We estimate
future expenses and benefits and net premium using assumptions for expected expenses, mortality,
morbidity, withdrawal rates and investment income. We include a provision for adverse deviation, meaning
we allow for some uncertainty in making our assumptions. We establish our assumptions when the contract
is issued and we generally maintain those assumptions for the life of the contract. We use both our own
experience and industry experience, adjusted for historical trends, in arriving at our assumptions for expected
mortality, morbidity and withdrawal rates. We use our own experience and historical trends for setting our
assumption for expected expenses. We base our assumption for expected investment income on our own
experience, adjusted for current economic conditions.
When we issue a traditional long-duration contract, we capitalize acquisition costs. Acquisition costs are
costs which vary with, and are primarily related to, the production of new business. We then charge these
deferred policy acquisition costs to expenses over the premium paying period of the contract and we use the
same assumptions that we use when we establish the liability for the contract. We update our acquisition
cost assumptions periodically to reflect actual experience and we evaluate our deferred acquisition cost for
recoverability.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 99
Universal life contracts are long-duration contracts for which contractual provisions are not fixed, unlike
whole life insurance. Universal life contracts allow policyholders to vary the amount of premium, within limits,
without our consent. However we may vary the mortality and expense charges, within limits, and the interest
crediting rate used to accumulate policy values. We do not record universal life premiums as revenue.
Instead we recognize as revenue the mortality charges, administration charges and surrender charges when
received. Some of our universal life contracts assess administration charges in the early years of the contract
that are compensation for services we will provide in the later years of the contract. These administration
charges are deferred and are recognized over the period when we provide those future services.
For universal life long-duration contracts we maintain a liability equal to the policyholder account value. There
is no provision for adverse deviation. Some of our universal life policies contain no-lapse guarantee
provisions. For these policies, we establish a reserve in addition to the account balance, based on expected
no-lapse guarantee benefits and expected policy assessments.
When we issue a universal life long-duration contract we capitalize acquisition costs. We then charge these
capitalized costs to expenses over the term of coverage of the contract. When we charge deferred policy
acquisition costs to expenses, we use assumptions based on our best estimates of long-term experience.
We review and modify these assumptions on a regular basis.
Separate Accounts
We issue life contracts with guaranteed minimum returns, referred to as bank-owned life insurance contracts
(BOLIs). We legally segregate and record as separate accounts the assets and liabilities for some of our
BOLIs, based on the specific contract provisions. We guarantee minimum investment returns, account values
and death benefits for our separate account BOLIs. Our other BOLIs are general account products.
We carry the assets of separate account BOLIs at fair value. The liabilities on separate account BOLIs
primarily are the contract holders’ claims to the related assets and are carried at an amount equal to the
contract holders account value. At December 31, 2008, the contract holders account value exceeded the
current fair value of the BOLI invested assets and cash by approximately $40 million. If the BOLI projected
fair value is below the value we guaranteed, a liability would be established by a charge to the company’s
earnings.
Generally, investment income and realized investment gains and losses of the separate accounts accrue
directly to the contract holder and we do not include them in the Consolidated Statements of Income.
Revenues and expenses related to separate accounts consist of contractual fees and mortality, surrender
and expense risk charges. Also, each separate account BOLI includes a negotiated gain and loss sharing
arrangement with the company. A percentage of each separate account’s realized gain and loss representing
contract fees and assessments accrues to us and is transferred from the separate account to our general
account and is recognized as revenue or expense.
Reinsurance
We reduce risk and uncertainty by buying property casualty and life reinsurance. Reinsurance contracts do
not relieve us from our duty to policyholders, but rather help protect our financial strength to perform that
duty. All of our reinsurance contracts transfer the economic risk of loss.
We also serve in a limited way as a reinsurer for other insurance companies, reinsurers and involuntary state
pools. We record our transactions for such assumed reinsurance based on reports provided to us by the
ceding reinsurer.
Reinsurance assumed and ceded premiums are deferred and recorded as earned premiums on a pro rata
basis over the terms of the contract. We estimate loss amounts recoverable from our reinsurers based on the
reinsurance policy terms. Historically, our claims with reinsurers have been paid. We do not have an
allowance for uncollectible reinsurance.
Cash and Cash Equivalents
Cash and cash equivalents include commercial paper, money market funds, invested cash and other
overnight investments purchased with original maturities of less than three months, which are carried at
fair value.
Investments
Our portfolio investments are primarily in publicly traded fixed-maturity, equity and short-term investments,
classified as available for sale at fair value in the consolidated financial statements. Fixed-maturity
investments (taxable bonds, tax-exempt bonds, redeemable preferred stocks and collateralized mortgage
obligations) and equity investments (common and non-redeemable preferred stocks) are classified as
available for sale and recorded at fair value in the consolidated financial statements. The number of fixed-
maturity securities trading below 100 percent of book value can be expected to fluctuate as interest rates
rise or fall. Because of our strong surplus and long-term investment horizon, our intent is to hold fixed-
maturity investments until maturity, regardless of short-term fluctuations in fair values.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 100
Included within our other invested assets are life policy loans, venture capital fund investments, private
equity investments and investment in real estate. Life policy loans are carried at the receivable value which
approximates fair value. We use the equity method of accounting for venture capital fund investments. The
venture capital funds provide their financial statements to us and generally report investments on their
balance sheets at fair value. Our private equity investments within our invested assets are accounted for
under the cost method. Investment real estate consists of one office building that is carried at cost less
accumulated depreciation.
We include unrealized gains and losses on investments, net of taxes, in shareholders’ equity as accumulated
other comprehensive income. Realized gains and losses on investments are recognized in net income on a
specific identification basis.
Investment income consists mainly of interest and dividends. We record interest on an accrual basis and
record dividends at the ex-dividend date. We amortize premiums and discounts on fixed-maturity securities
using the effective interest method over the expected life of the security.
Facts and circumstances sometimes warrant investment write-downs. We record such other-than-temporary
declines as realized investment losses. When evaluating for other-than-temporary impairments, the asset
impairment committee considers the company's intent and ability to retain a security for a period adequate to
recover its cost.
Fair Value Disclosures
We account for our investment portfolio at fair value and apply fair value measurements as defined by
SFAS No. 157, “Fair Value Measurements,” to financial instruments. Fair value is applicable to SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,”
and SFAS No. 107, “Disclosures about Fair Value of Financial Instruments.”
We adopted the provisions of SFAS No. 157 on January 1, 2008. SFAS No. 157 defines fair value as the exit
price or the amount that would be 1) received to sell an asset or 2) paid to transfer a liability in an orderly
transaction between marketplace participants at the measurement date. When determining an exit price we
must, whenever possible, rely upon observable market data. Prior to the adoption of SFAS No. 157, we
considered various factors such as liquidity and volatility but primarily obtained pricing from various external
services, including broker quotes. We primarily base fair value for investments in equity and fixed-maturity
securities (including redeemable preferred stock and assets held in separate accounts) on quoted market
prices or on prices from FT Interactive Data, an outside resource that supplies global securities pricing,
dividend, corporate action and descriptive information to support fund pricing, securities operations,
research and portfolio management. When a price is not available from these sources, as in the case of
securities that are not publicly traded, we determine the fair value using various inputs including quotes from
independent brokers. The fair value of investments not priced by FT Interactive Data is less than 1 percent of
the fair value of our total investment portfolio.
For the purpose of SFAS No. 107 disclosure, we estimate the fair value for liabilities of investment contracts
and annuities. We also estimate the fair value for assets arising from policyholder loans on insurance
contracts. These estimates are developed using discounted cash flow calculations across a wide range of
economic interest rate scenarios with a provision for our own credit risk. We base fair value for long-term
senior notes and notes payable on the quoted market prices for such notes.
Derivative Financial Instruments and Hedging Activities
We account for derivative financial instruments as defined by SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended by SFAS No. 137, “Deferral of the Effective Date of
FASB Statement No. 133” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain
Hedging Activities” (collectively referred to as SFAS No. 133).
The hedging definitions included in SFAS No. 133 guide our recognition of the changes in the fair value of
derivative financial instruments as realized gains or losses in the consolidated statements of income or as a
component of accumulated other comprehensive income in shareholder’s equity in the period for which they
occur.
In 2006, CFC Investment Company (CFC-I) replaced $49 million of intercompany debt owed to CFC with a
short-term line of credit issued by PNC Bank. CFC-I entered into an interest-rate swap contract to hedge
against fluctuations of interest payments for certain variable-rate debt obligations ($49 million notional
amount) that expires August 29, 2009. In October 2006, we completed necessary requirements for the
interest-rate swap to qualify for hedge accounting treatment under the provisions of SFAS No. 133. At
December 31, 2008 and 2007, the fair value of the interest rate swap was $1.3 million and $1.2 million,
respectively. We do not expect any significant reclassification into consolidated net income for the year
ending December 31, 2009.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 101
Securities Lending Program
In 2007, we participated in a securities lending program under which certain fixed-maturity securities from
our investment portfolio were loaned to other institutions for short periods of time. We required cash
collateral in excess of the market value of the loaned securities. During the third quarter of 2008, we
terminated the program.
Lease/Finance
Our CFC Investment Company subsidiary provides auto and equipment direct financing (leases and loans) to
commercial and individual clients. We generally transfer ownership of the property to the client as the terms
of the leases expire. Our lease contracts contain bargain purchase options. We record income over the
financing term using the effective interest method.
We capitalize and amortize lease or loan origination costs over the life of the financing using the effective
interest method. These costs may include, but are not limited to: finder fees, broker fees, filing fees and the
cost of credit reports. We account for these leases and loans as direct financing-type leases.
Asset Management
Our CinFin Capital Management subsidiary generated revenue from management fees. We set those fees
based on the market value of assets under management, and we recorded our revenue as it was earned.
CinFin Capital Management will cease operations effective February 28, 2009.
Land, Building and Equipment
We record building and equipment at cost less accumulated depreciation. Certain equipment held under
capital leases also is classified as property and equipment with the related lease obligations recorded as
liabilities. Our depreciation is based on estimated useful lives (ranging from three years to 39½ years) using
straight-line and accelerated methods. Depreciation expense was $35 million in 2008 and $38 million in
both 2007 and 2006. We monitor land, building and equipment for potential impairments. Potential
impairments may include a significant decrease in the market values of the assets, considerable cost
overruns on projects or a change in legal factors or business climate, or other factors that indicate that the
carrying amount may not be recoverable. There were no recorded land, building and equipment impairments
for 2006 through 2008.
We capitalize and amortize costs for internally developed computer software during the application
development stage. These costs generally consist of external consulting, payroll and payroll-related costs.
Income Taxes
We calculate deferred income tax liabilities and assets using tax rates in effect for the time when temporary
differences in book and taxable income are estimated to reverse. We recognize deferred income taxes for
numerous temporary differences between our taxable income and book-basis income and other changes in
shareholders’ equity. Such temporary differences relate primarily to unrealized gains and losses on
investments and differences in the recognition of deferred acquisition costs and insurance reserves. We
charge deferred income taxes associated with unrealized appreciation and depreciation (except the amounts
related to the effect of income tax rate changes) to shareholders’ equity in accumulated other
comprehensive income. We charge deferred taxes associated with other differences to income.
There are no amounts in our FIN 48 liability that would change the effective tax rate if recognized. Although
no penalties currently are accrued, if incurred, they would be recognized as a component of income tax
expense. Accrued interest expense is recognized as other operating expense in the consolidated statements
of income.
Pending Accounting Standards
• SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of
Accounting Research Bulletin (ARB) No. 51,” was issued in December 2007. SFAS No. 160 establishes
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The provisions of SFAS No. 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. Management does not expect adoption of
this statement to have a material impact on our results of operations and financial position.
• SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of
SFAS No. 133,” was issued in March 2008. SFAS No. 161 requires that disclosure of objectives for using
derivative instruments include discussion of underlying risk and accounting designation. SFAS No. 161
also requires cross-referencing within the footnotes to assist the users of financial statements in
identifying significant information about derivative instruments. The effective date of SFAS No. 161 is the
company’s fiscal year beginning January 1, 2009. We do not expect adoption of this statement to have
any impact on our results of operations and financial position.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 102
• SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of
FASB Statement No. 60,” was issued in May 2008. SFAS No. 163 applies to financial guarantee
insurance and reinsurance contracts issued by enterprises that are similar to financial guarantee
insurance such as mortgage guaranty insurance and credit insurance on trade receivables. The effective
date is for financial statements issued for fiscal years beginning after December 15, 2008. The company
does not have financial guarantee insurance products and we do not expect adoption of this statement
to have any impact on our results of operations and financial position.
Adopted Accounting Standards
•
In October 2008, FASB issued FASB Staff Position (FSP) 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active.” FSP No. 157-3 provides key
considerations when determining fair value for financial assets that are not active. In February 2008, the
FASB issued FSP No. 157-2, “Fair Value Measurement.” FSP No. 157-2 and FSP No. 157-3 are
amendments of SFAS No. 157, issued in September 2006. SFAS No. 157 defines fair value, establishes
a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs
used to measure fair value and enhances disclosure about fair value measurements. SFAS No. 157 was
effective for fiscal years beginning after November 15, 2007. We partially adopted SFAS No. 157 in the
first quarter of 2008. We elected to defer SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities until January 1, 2009, as permitted under FSP No. 157-2. We did not have a cumulative-effect
adjustment to beginning retained earnings as a result of the adoption of SFAS No. 157.
•
•
•
In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial
Liabilities – including an amendment of SFAS No. 115.” SFAS No. 159 permits an entity to choose to
measure many financial instruments and certain other items at fair value (on an instrument-by-
instrument basis) at specified election dates. The objective is to improve financial reporting by providing
an entity with the opportunity to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge accounting provisions. We have
not elected to value any assets or liabilities not otherwise measured at fair value under SFAS No. 159.
We continue to evaluate the impact of making that election in the future.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles.” SFAS No. 162 identifies sources of GAAP and provides a framework, or hierarchy, for
principles to be used for non-governmental entities. This statement was effective on
November 15, 2008, and did not have an impact on our results of operations and financial position.
In January 2009, the FASB issued FSP No. EITF 99-20-1, “Amendments to the Impairment Guidance of
EITF Issue No. 99-20.” The FSP removes the exclusive reliance upon market participant assumptions
about future cash flows when evaluating impairment of securities within its scope. The FSP requires
companies to follow impairment guidance in SFAS No. 115, “Accounting for Certain Investments in Debt
and Equity Securities.” FSP No. EITF 99-20-1 is effective for interim and annual reporting periods ending
after December 15, 2008. The adoption of the FSP did not have a material impact on our results of
operations and financial position.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 103
INVESTMENTS
2.
The following table analyzes investment income, realized investment gains and losses and the change in
unrealized investment gains and losses:
(In millions)
Investment income summarized by investment category:
Interest on fixed maturities
Dividends on equity securities
Other investment income
Total
Less investment expenses
Total
Realized investment gains and losses summary:
Fixed maturities:
Gross realized gains
Gross realized losses
Other-than-temporary impairments
Equity securities:
Gross realized gains
Gross realized losses
Other-than-temporary impairments
Securities with embedded derivatives
Other
Total
Change in unrealized investment gains and losses and other summary:
Fixed maturities
Equity securities
Adjustment to deferred acquisition costs and life policy reserves
Pension obligations
Other
Income taxes on above
Total
Years ended December 31,
2007
2006
2008
$
$
$
$
$
$
326 $
204
14
544
7
537 $
4 $
(36)
(163)
1,020
(280)
(347)
(38)
(22)
138 $
(296) $
(2,455)
19
(15)
(34)
977
(1,804) $
308 $
294
15
617
9
608 $
8 $
(18)
(14)
438
(24)
(2)
(11)
5
382 $
7 $
(1,904)
(1)
12
0
663
(1,223) $
300
262
15
577
7
570
27
(2)
(1)
656
(5)
0
7
2
684
(23)
200
2
0
2
(54)
127
At December 31, 2008, contractual maturity dates for fixed-maturity and short-term investments were:
(In millions)
Maturity dates occurring:
Less than 1 year
Years 1 - 5
Years 6 - 10
Years 11 - 20
Over 20 years
Total
Amortized
cost
Fair
value
% of Fair
value
$
$
170 $
1,257
2,780
1,770
165
6,142 $
168
1,217
2,619
1,753
154
5,911
2.8 %
20.6
44.3
29.7
2.6
100.0 %
Actual maturities may differ from contractual maturities when there is a right to call or prepay obligations with
or without call or prepayment penalties.
At December 31, 2008, investments with book value of $80 million and fair value of $81 million were on
deposit with various states in compliance with regulatory requirements.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 104
The following table analyzes cost or amortized cost, gross unrealized gains, gross unrealized losses and fair
value for our investments:
(In millions)
At December 31,
2008
Fixed maturities:
States, municipalities and political subdivisions
Convertibles and bonds with warrants attached
Public utilities
United States government
Government-sponsored enterprises
Foreign government
All other corporate bonds and short-term investments
Total
Equity securities
2007
Fixed maturities:
States, municipalities and political subdivisions
Convertibles and bonds with warrants attached
Public utilities
United States government
Government-sponsored enterprises
Foreign government
All other corporate bonds and short-term investments
Total
Equity securities
Cost or
amortized
cost
Gross unrealized
gains
losses
Fair
value
$
$
$
$
$
$
2,704 $
102
341
4
391
3
2,597
6,142 $
2,077 $
2,518 $
238
163
4
894
3
2,064
5,884 $
2,975 $
60
0
5
1
0
0
39
105 $
1,079 $
48 $
2
5
0
2
0
56
113 $
3,414 $
31 $
0
19
0
2
0
284
336 $
260 $
2 $
14
1
0
0
0
31
48 $
140 $
2,733
102
327
5
389
3
2,352
5,911
2,896
2,564
226
167
4
896
3
2,089
5,949
6,249
At year-end 2008, no investment accounted for more than 10 percent of shareholders’ equity. At year-end
2007, our Fifth Third Bancorp common stock holding, with fair value of $1.691 billion and a cost of
$185 million, was our only investment for which the fair value exceeded 10 percent of shareholders’ equity.
We sold 55.4 million shares of our holdings of Fifth Third common stock in 2008, 5.5 million shares in 2007,
and the remaining 12 million shares sold in January 2009.
This table reviews unrealized losses and fair values by investment category and by the duration of the
securities’ continuous unrealized loss position:
(In millions)
At December 31,
2008
Fixed maturities:
Less than 12 months
Fair
value
Unrealized
losses
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
States, municipalities and political subdivisions
Public utilities
Government-sponsored enterprises
All other corporate bonds and short-term investments
Total
Equity securities
Total
2007
Fixed maturities:
States, municipalities and political subdivisions
Convertibles and bonds with warrants attached
Public utilities
Government-sponsored enterprises
All other corporate bonds and short-term investments
Total
Equity securities
Total
$
$
$
$
592 $
195
141
1,367
2,295
820
3,115 $
39 $
70
13
0
384
506
729
1,235 $
26 $
15
2
215
258
219
477 $
1 $
14
0
0
13
28
140
168 $
94 $
38
0
254
386
79
465 $
205 $
0
41
20
393
659
0
659 $
5 $
5
0
68
78
41
119 $
1 $
0
1
0
18
20
0
20 $
686 $
233
141
1,621
2,681
899
3,580 $
244 $
70
54
20
777
1,165
729
1,894 $
31
20
2
283
336
260
596
2
14
1
0
31
48
140
188
When evaluating for other-than-temporary impairments, our asset impairment committee considers the
company's intent and ability to retain a security for a period adequate to recover its cost.
During 2008, we impaired 126 securities. As a result, at December 31, 2008, 142 fixed-maturity
investments with a total unrealized loss of $78 million had been in an unrealized loss position for 12 months
or more. Of that total, there were no fixed maturity investments trading below 70 percent of book value.
At December 31, 2007, 184 fixed-maturity investments with a total unrealized loss of $20 million had been
in an unrealized loss position for 12 months or more. Of that total, three securities were trading below
70 percent of book value with a total unrealized loss of $6 million. The remainder were trading between
70 percent to less than 100 percent of book value.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 105
Securities Lending Program
During the third quarter of 2008, we terminated a securities lending program that we initiated in 2006.
As a result, no securities were on loan at year-end 2008 compared with $745 million at year-end 2007.
In conjunction with the program termination, we chose to retain a small portfolio of collateralized mortgage
obligations rather than sell them at what we felt were distressed prices in an illiquid market. The CMOs were
an investment made by one of the short-duration funds, which subsequently dissolved and distributed the
assets to its investors.
All $30 million of the CMOs in the portfolio are collateralized by Alt-A mortgages that originated between
2004 and 2006. As of December 31, 2008, we owned investment grade CMOs with a fair value and book
value of $27 million and $39 million, respectively. Of this $27 million investment-grade fair value, $21
million were rated AAA by Standard & Poor’s. Our non-investment grade CMOs had a fair value and book
value of $3 million and $4 million, respectively. We do not intend to make additional investments in this
asset category.
3.
We adopted SFAS No. 157 in the first quarter of 2008. Our investment portfolio is subject to SFAS No. 157
disclosure requirements for interim and year-end reporting.
Fair Value Hierarchy
In accordance with SFAS No. 157, we categorized our financial instruments, based on the priority of the
observable and market-based data for each valuation technique, 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.
Financial instruments are categorized based upon the following characteristics or inputs to the valuation
techniques:
FAIR VALUE MEASUREMENTS
•
•
•
Level 1 – Financial assets and liabilities for which inputs are observable and are obtained from reliable
quoted prices for identical assets or liabilities in actively traded markets. This is the most reliable fair
value measurement and includes, for example, active exchange-traded equity securities.
Level 2 – Financial assets and liabilities for which values are based on quoted prices in markets that are
not active or for which values are based on similar assets and liabilities that are actively traded. Also
includes pricing models for which the inputs are corroborated by market data.
Level 3 – Financial assets and liabilities for which values are based on prices or valuation techniques
that require inputs that are both unobservable and significant to the overall fair value measurement.
Level 3 inputs include the following:
○ Quotes from brokers or other external sources that are not considered binding;
○ Quotes from brokers or other external sources where it cannot be determined that market
participants would in fact transact for the asset or liability at the quoted price;
○ Quotes from brokers or other external sources where the inputs are not deemed observable.
We conduct a thorough review of fair value hierarchy classifications on a quarterly basis. Reclassification of
certain financial instruments may occur when input observability changes. As noted below in the Level 3
disclosure table, reclassifications are reported as transfers in/out of the Level 3 category as of the beginning
of the quarter in which the reclassification occurred.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 106
The following table illustrates the fair value hierarchy for those assets measured at fair value on a recurring
basis as of December 31, 2008. We do not have any material liabilities carried at fair value.
(In millions)
Available for sale securities:
Taxable fixed maturities
Taxable fixed maturities separate accounts
Tax-exempt fixed maturities
Common equities
Preferred equities
Collateralized mortgage obligations
Short-term investments
Top Hat Savings Plan
Total
Asset fair value measurements at reporting date using
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$
$
395 $
65
0
2,657
0
0
0
4
3,121 $
2,619 $
422
2,728
0
153
30
84
1
6,037 $
50 $
6
5
64
22
0
0
0
147 $
3,064
493
2,733
2,721
175
30
84
5
9,305
Level 3 Assets
Each financial instrument deemed to have significant unobservable inputs when determining valuation is
identified in the table below by security type with a summary of changes in fair value for the year ended
December 31, 2008.
(In millions)
Asset fair value measurements using significant unobservable inputs (Level 3)
Taxable
fixed
maturities
Taxable fixed
maturities- separate
accounts
Tax-exempt
fixed
maturities
Common
equities
Preferred
equities
Total
Beginning balance, January 1, 2008
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)
Included in other comprehensive income
Purchases, sales, issuances, and settlements
Transfers in and/or out of Level 3
Ending balance, December 31, 2008
$
$
85 $
(4)
(6)
(18)
(7)
50 $
3 $
(1)
1
0
3
6 $
5 $
0
0
0
0
5 $
59 $
0
5
0
0
64 $
58 $
(16)
(2)
(9)
(9)
22 $
210
(21)
(2)
(27)
(13)
147
Included within earnings for the Level 3 securities for the year ended December 31, 2008, was
approximately $19 million of impairment charges. Of the $19 million, approximately $16 million was for
impairment of preferred equities.
Unrealized gains or losses on Level 3 securities were included in accumulated other comprehensive income
and were not included in net realized investment gains or losses for the year ended December 31, 2008.
We transferred approximately $26 million out of Level 3 taxable fixed maturity securities and $19 million into
Level 3 taxable fixed maturity securities throughout the year. We also transferred approximately $16 million
out of Level 3 preferred equity securities and $7 million into Level 3 taxable preferred equity securities
throughout the year.
4.
This table summarizes components of our deferred policy acquisition costs asset:
DEFERRED ACQUISITION COSTS
(In millions)
Deferred policy acquisition costs asset at beginning of year
Capitalized deferred policy acquisition costs
Amortized deferred policy acquisition costs
Amortized shadow deferred policy acquisition costs
Deferred policy acquisition costs asset at end of year
Years ended December 31,
2007
2006
2008
$
$
461 $
649
(632)
31
509 $
453 $
666
(657)
(1)
461 $
429
706
(685)
3
453
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 107
5.
This table summarizes activity loss and loss expense reserves:
PROPERTY CASUALTY LOSS AND LOSS EXPENSES
(In millions)
Gross loss and loss expense reserves, January 1,
Less reinsurance receivable
Net loss and loss expense reserves, January 1,
Net incurred loss and loss expenses related to:
Current accident year
Prior accident years
Total incurred
Net paid loss and loss expenses related to:
Current accident year
Prior accident years
Total paid
Net loss and loss expense reserves, December 31,
Plus reinsurance receivable
Gross loss and loss expense reserves, December 31,
Years ended December 31,
2007
2006
2008
$
$
3,925 $
528
3,397
3,860 $
504
3,356
2,379
(323)
2,056
976
979
1,955
2,076
(244)
1,832
785
1,006
1,791
3,498
542
4,040 $
3,397
528
3,925 $
3,629
518
3,111
2,124
(116)
2,008
819
944
1,763
3,356
504
3,860
We use actuarial methods, models, and judgment to estimate, as of a financial statement date, the property
casualty loss and loss expense reserves required to pay for and settle all outstanding insured claims,
including incurred but not reported (IBNR) claims, as of that date. The actuarial estimate is subject to review
and adjustment by an inter-departmental committee that includes actuarial management and is familiar with
relevant company and industry business, claims, and underwriting trends, as well as general economic and
legal trends, that could affect future loss and loss expense payments.
Because of changes in estimates of insured events in prior years, we reduced loss and loss expenses by
$323 million, $244 million and $116 million in calendar years 2008, 2007 and 2006. These decreases are
partly due to the effects of settling reported (case) and unreported (IBNR) reserves established in prior years
for amounts less than expected. The reserve for loss and loss expenses in the consolidated balance sheets
also includes $46 million, $42 million and $36 million at December 31, 2008, 2007 and 2006, respectively,
for certain life and health losses.
6.
We establish the reserves for traditional life insurance policies based on expected expenses, mortality,
morbidity, withdrawal rates and investment yields, including a provision for uncertainty. Once these
assumptions are established, they generally are maintained throughout the lives of the contracts.
We use both our own experience and industry experience, adjusted for historical trends, in arriving at our
assumptions for expected mortality, morbidity and withdrawal rates as well as for expected expenses.
We base our assumptions for expected investment income on our own experience adjusted for current
economic conditions.
We establish reserves for the company’s universal life, deferred annuity and investment contracts equal to
the cumulative account balances, which include premium deposits plus credited interest less charges and
withdrawals. Some of our universal life policies contain no-lapse guarantee provisions. For these policies,
we establish a reserve in addition to the account balance, based on expected no-lapse guarantee benefits
and expected policy assessments.
Here is a summary of our life policy reserves:
LIFE POLICY RESERVES
(In millions)
Ordinary/traditional life
Universal life
Deferred annuities
Investment contracts
Other
Total
At December 31,
2008
2007
$
$
528 $
442
374
195
12
1,551 $
505
410
359
192
12
1,478
We provide an updated definition of fair value under SFAS No. 157 in Note 1, Summary of Significant
Accounting Policies, Page 98. At December 31, 2008, fair value for annuities and investment contracts was
approximately $460 million, using the updated definition. At December 31, 2007, fair value for annuities and
investment contracts was approximately $564 million.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 108
NOTES PAYABLE
7.
At December 31, 2008 and 2007, we had two lines of credit with commercial banks with an aggregate
borrowing capacity of $225 million. Our note payable balance was $49 million at year-end 2008, down from
$69 million at year-end 2007. We had no compensating balance requirements on short-term debt for either
2008 or 2007. Interest rates charged on borrowings ranged from 2.99 percent to 6.11 percent during 2008.
In 2006, our subsidiary, CFC Investment Company, entered into an interest-rate swap agreement that expires
August 29, 2009. The purpose of the interest-rate swap contract was to hedge against fluctuations of
interest payments for certain variable-rate debt obligations ($49 million notional amount). This swap is
reflected at fair value in the consolidated balance sheets as a component of shareholders’ equity in
accumulated other comprehensive income. The unrealized loss, net of tax, was $640,000 at year-end 2008
compared with $594,000 at year-end 2007. Management does not expect any significant amounts to be
reclassified into earnings as a result of interest rate changes in the next 12 months.
8.
This table summarizes the principal amounts of our long-term debt excluding unamortized discounts:
SENIOR DEBT
(In millions)
Interest rate Year of issue
6.900%
6.920%
6.125%
1998
2005
2004
Senior debentures, due 2028
Senior debentures, due 2028
Senior notes, due 2034
Total
At December 31,
2008
2007
$
$
28 $
392
375
795 $
28
392
375
795
The fair value of our senior debt approximated $595 million at year-end 2008 compared with $802 million at
year-end 2007. Fair value for 2008 was determined under SFAS No. 157 based on market pricing of these or
similar debt instruments that are actively trading. Fair value can vary with macro economic concerns.
Regardless of the fluctuations in fair value, the outstanding principal amount of our long-term debt remained
unchanged from year-end 2007. None of the notes are encumbered by rating triggers.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 109
SHAREHOLDERS’ EQUITY AND DIVIDEND RESTRICTIONS
9.
Our insurance subsidiary declared dividends to the parent company of $160 million in 2008, $420 million in
2007 and $275 million in 2006. State regulatory requirements restrict the dividends insurance subsidiaries
can pay. Generally, the most our insurance subsidiaries can pay without prior regulatory approval is the
greater of 10 percent of policyholder surplus or 100 percent of statutory net income for the prior calendar
year. Dividends exceeding these limitations may be paid only with approval of the insurance department of
the domiciliary state. During 2009, the total dividends that our lead insurance subsidiary may pay to our
parent company without regulatory approval will be approximately $336 million.
As of December 31, 2008, 7.3 million shares of common stock were available for future equity award grants.
Declared cash dividends per share were $1.56, $1.42 and $1.34 for the years ended December 31, 2008,
2007 and 2006, respectively.
Accumulated Other Comprehensive Income
The change in unrealized gains and losses on investments, pension obligations and derivatives included:
(In millions)
Accumulated unrealized gains on
securities available for sale at
January 1,
Cumulative effect of change in
accounting for hybrid financial
securities
Adjusted accumulated unrealized
gains on securities available for
sale at January 1,
(Decrease)/increase in unrealized
gains
Reclassification adjustment for
(gains) losses included in net
income
Adjustment to deferred
acquisition costs and
life policy reserves
Effect on other comprehensive
income
Accumulated unrealized gains on
securities available for sale at
December 31,
Accumulated unrealized losses
for pension obligations at
January 1,
Cumulative effect of change
in accounting for pension
obligations
Change in pension obligations
Accumulated unrealized losses
for pension obligations at
December 31,
Accumulated other
comprehensive income at
January 1,
Other comprehensive income (loss)
Cumulative effect of change in
accounting for pension obligations
Change in pension obligations
Accumulated other
comprehensive income
at December 31,
Before
tax
2008
Income
tax
Net
Years ended December 31,
2007
Income
tax
Before
tax
Net
Before
tax
2006
Income
tax
Net
$
3,336
$
1,161
$
2,175
$
5,241
$
1,830
$
3,411
$
5,060
$
1,776
$
3,284
0
0
0
(7)
(2)
(5)
0
0
0
3,336
1,161
2,175
5,234
1,828
3,406
5,060
1,776
3,284
(2,618)
(915)
(1,703)
(1,515)
(530)
(985)
880
298
582
(138)
(53)
(85)
(382)
(137)
(245)
(701)
(245)
(456)
(10)
(4)
(6)
(1)
0
(1)
(2,766)
(972)
(1,794)
(1,898)
(667)
(1,231)
2
181
1
54
1
127
570
$
189
$
381
$
3,336
$
1,161
$
2,175
$
5,241
$
1,830
$
3,411
(37)
$
(13)
$
(24)
$
(49)
$
(17)
$
(32)
$
0 $
0 $
0
0
(15)
0
(5)
0
(10)
0
12
0
4
0
8
(49)
0
(17)
0
(32)
0
(52)
$
(18)
$
(34)
$
(37)
$
(13)
$
(24)
$
(49)
$
(17)
$
(32)
$
3,299
(2,766)
$
1,148
(972)
$
2,151
(1,794)
$
5,185
(1,898)
$
1,811
(667)
$
3,374
(1,231)
$
5,060
181
$
1,776
54
3,284
127
0
(15)
0
(5)
0
(10)
0
12
0
4
0
8
(49)
0
(17)
0
(32)
0
$
$
$
$
$
518
$
171
$
347
$
3,299
$
1,148 $
2,151
$
5,192
$
1,813
$
3,379
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 110
REINSURANCE
10.
Our statements of income include earned consolidated property casualty insurance premiums on assumed
and ceded business:
(In millions)
Direct earned premiums
Assumed earned premiums
Ceded earned premiums
Net earned premiums
Years ended December 31,
2007
2008
2006
$
$
3,175 $
13
(178)
3,010 $
3,278 $
22
(175)
3,125 $
3,295
26
(158)
3,163
Our statements of income include incurred consolidated property casualty insurance loss and loss expenses
on assumed and ceded business:
(In millions)
Direct incurred loss and loss expenses
Assumed incurred loss and loss expenses
Ceded incurred loss and loss expenses
Net incurred loss and loss expenses
Years ended December 31,
2007
2008
2006
$
$
2,172 $
5
(126)
2,051 $
1,920 $
17
(107)
1,830 $
2,070
13
(77)
2,006
Our statements of income include earned life insurance premiums on assumed and ceded business:
(In millions)
Direct earned premiums
Assumed earned premiums
Ceded earned premiums
Net earned premiums
Years ended December 31,
2007
2008
2006
$
$
180 $
0
(54)
126 $
178 $
0
(53)
125 $
159
0
(44)
115
Our statements of income include life insurance contract holder benefits incurred on assumed and
ceded business:
(In millions)
Direct contract holders benefits incurred
Assumed contract holders benefits incurred
Ceded contract holders benefits incurred
Net incurred loss and loss expenses
Years ended December 31,
2007
2008
2006
$
$
175 $
0
(33)
142 $
173 $
0
(40)
133 $
162
0
(40)
122
INCOME TAXES
11.
Deferred tax assets and liabilities reflect temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amount recognized for tax purposes. The significant
components of deferred tax assets and liabilities included in the balance sheets at December 31 were
as follows:
(In millions)
Deferred tax assets:
Loss and loss expense reserves
Unearned premiums
Life policy reserves
Investments
Other
Total
Deferred tax liabilities:
Unrealized gains on investments and derivatives
Deferred acquisition costs
Investments
Other
Total
Net deferred tax asset (liability)
At December 31,
2007
2008
196 $
107
0
121
41
465
(182)
(149)
0
(8)
(339)
126 $
200
108
13
0
40
361
(1,158)
(145)
(7)
(28)
(1,338)
(977)
$
$
We believe it is more likely than not that our deferred tax assets will be realized. Significant factors we
considered in determining the probability of realizing the deferred tax benefits include our historical operating
results, the amount of our loss carryback potentials and the expectations of future earnings. The likelihood of
realizing our deferred tax asset will be reviewed periodically; any adjustments required to the valuation
allowance will be made in the period in which the developments they are based become known.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 111
The provision for federal income taxes is based upon filing a consolidated income tax return for the company
and subsidiaries. As of December 31, 2008, we had no operating or capital loss carry forwards.
The differences between the 35 percent statutory income tax rate and our effective income tax rate were as
follows:
Years ended December 31,
2007
2006
2008
Tax at statutory rate
Increase (decrease) resulting from:
Tax-exempt municipal bonds
Dividend received exclusion
Other
Effective rate
35.0 %
35.0 %
35.0 %
(6.2)
(8.9)
0.8
20.7 %
(2.7)
(4.7)
0.7
28.3 %
(2.2)
(3.9)
1.1
30.0 %
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of
SFAS No. 109
On January 1, 2007, we adopted the provisions of FIN 48. As of December 31, 2008, we had gross
unrecognized tax benefits (FIN 48 liability) of $2.1 million.
Below is the unrecognized tax benefit for December 31, 2008, and December 31, 2007:
(In millions)
Gross unrecognized tax benefits at January 1,
Gross increase in prior year positions
Gross decrease in prior year positions
Gross increase in current year positions
Settlements with tax authorities
Decrease for lapse in applicable statue of limitations
Gross unrecognized tax benefits at December 31,
2008
2007
$
$
14.2
2.9
0
1.8
(16.6)
(0.2)
2.1
$
$
24.8
0
(12.0)
1.4
0
0
14.2
The FIN 48 liability is carried in other liabilities in the consolidated balance sheets as of December 31, 2008.
There are no amounts in our FIN 48 liability that would change the effective tax rate if recognized. Although
no penalties currently are accrued, if incurred, they would be recognized as a component of income tax
expense. Accrued interest expense is recognized as other operating expense in the consolidated statements
of income. The accrued interest liability was $1.8 million as of December 31, 2007 with an accrued interest
receivable of $800,000 at December 31, 2008. The consolidated statements of income for the current year
reflect an immaterial amount of net IRS interest expense compared to net interest income of $1.5 million in
2007 from a reduction in the accrued interest liability and interest received on refund claims.
In May 2008, the IRS concluded the examination phase of its audit of our 2005 and 2006 tax years and
presented us with adjustments primarily related to the valuation of our loss reserves. In October 2008, we
reached agreement with the IRS settling all issues related to the 2005 and 2006 tax years. As a result of the
IRS agreement for tax years 2005 and 2006, management refined certain assumptions used to calculate the
unrecognized tax benefits associated with loss reserves, resulting in a revised measurement of the
unrecognized tax benefits for both the current and prior year.
Although we have not been notified by the IRS of the date of our next audit, it is reasonable to expect that it
will begin the audit of tax years 2007 and 2008 in the next 12 months. As a result, it is reasonably possible
that a change in the unrecognized tax benefits may occur once the examination phase of this next audit has
concluded. At this time, we can neither estimate the settlement date of, nor quantify an estimated range for
any potential change to, the unrecognized tax benefits relating to these years.
In addition to our Internal Revenue Service filings, we file income tax returns in various state jurisdictions.
Material amounts of income tax are paid to Ohio, Illinois and Florida. Although no state audits are currently
under way nor are we aware of any pending audits, tax years 2005 and forward remain open for examination.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 112
NET INCOME PER COMMON SHARE
12.
Basic earnings per share are computed based on the weighted average number of shares outstanding.
Diluted earnings per share are computed based on the weighted average number of common and dilutive
potential common shares outstanding. We have adjusted shares and earnings per share to reflect all stock
splits and dividends prior to December 31, 2008.
Here are calculations for basic and diluted earnings per share:
(In millions)
Numerator:
Net income—basic and diluted
Denominator:
Weighted-average common shares outstanding
Effect of stock based awards
Adjusted diluted weighted-average shares
Earnings per share:
Basic
Diluted
Number of anti-dilutive stock based awards
Exercise price of anti-dilutive stock based awards
Years ended December 31,
2007
2006
2008
429 $
855 $
930
163,150,329
212,080
163,362,409
170,595,204
1,572,248
172,167,452
173,423,395
2,027,946
175,451,341
2.63 $
2.62
5.01 $
4.97
5.36
5.30
9,781,652
25.08-45.26
$
1,870,579
44.79-45.26
$
1,336,150
45.26
$
$
$
EMPLOYEE RETIREMENT BENEFITS
The current sources of dilution of our common shares are certain equity-based awards as discussed in
Note 17 Stock-Based Associated Compensation Plans, Page 117. The above table shows the number of anti-
dilutive options shares at year-end 2008, 2007 and 2006. We did not include these options in the
computation of net income per common share (diluted) because their exercise would have an anti-dilutive
effect.
13.
We sponsor a defined benefit pension plan and a defined contribution plan (401(k) savings plan). During
2008, we changed the form of retirement benefit we offer some associates to a company match on
contribution to the 401(k) plan from the defined benefit pension plan. Effective June 30, 2008, we froze
entry into the pension plan for new associates. Only participants 40 years of age or older could elect to
continue to participate. For participants remaining in the pension plan, we will continue to contribute to fund
future benefit obligations. Benefits for the defined benefit pension plan are based on years of credited
service and compensation level. Contributions are based on the prescribed method defined in the Pension
Protection Act. Our pension expense is based on certain actuarial assumptions and also is composed of
several components that are determined using the projected unit credit actuarial cost method.
We also maintain a supplemental executive retirement plan (SERP) with liabilities of approximately $6 million
at both year-end 2008 and 2007. The SERP is included in the obligation and expense amounts in the tables
below. The company also makes available to a select group of associates the Cincinnati Financial
Corporation Top Hat Savings Plan, a non-qualified deferred compensation plan.
For any participant who left the pension plan, benefit accruals were frozen effective August 31, 2008. We
transferred $60 million of the pension plan’s accumulated benefit obligation to an intermediary spin-off plan
to facilitate the partial curtailment and settlement for these participants. For SERP participants who chose to
leave the defined benefit pension plan, benefit accruals were frozen in the SERP as of December 31, 2008.
During 2009, the frozen accrued benefit for those participants, collectively amounting to approximately
$1 million, will transfer to the Top Hat Savings Plan. Beginning in 2009, for these associates, the company
has begun matching deferrals to the Top Hat Savings Plan up to the first 6 percent of an associate’s
compensation that exceeds the compensation limit specified by the Internal Revenue Code of 1986, as
amended.
Pursuant to SFAS No. 88, ”Employers’ Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits,” we recognized expense of $3 million in the consolidated
statement of income associated with the partial termination of the qualified pension plan. In addition, we
recognized $27 million in the consolidated statement of income for a settlement loss associated with the
payout to the participants who left the pension plan of the obligation held in their behalf. Included in the
charge is the contribution of $24 million to complete funding of benefits that were distributed in 2008 to
participants leaving the pension plan.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 113
We began making matching contributions to our sponsored 401(k) plan during 2008, contributing $3 million
during the year. Associates who are not accruing benefits under the pension plan are eligible to receive the
company match of up to 6 percent of cash compensation. We also pay all operating expenses for the
401(k) plan. Participants vest in the company match for the 401(k) plan and Top Hat Savings plan after three
years of eligible service.
Defined Benefit Pension Plan Assumptions
Key assumptions used in developing the 2008 net pension obligation were a 6.00 percent discount rate and
rates of compensation increases ranging from 4 percent to 6 percent. To determine the discount rate, the
plan’s particular liability characteristics – the amounts, timing and interest sensitivity of expected benefit
payments – were evaluated and then matched to a yield curve based on actual high-quality corporate bonds
across a full maturity spectrum. Once the plan’s projected cash flows matched the yield curve, a present
value was developed, which was then calibrated to a single-equivalent discount rate. That discount rate,
when applied to a single sum, would generate the necessary cash flows to pay benefits when due. We
decreased the rate by 0.25 percentage points in 2008 due to market interest rate conditions. We based the
rates of compensation increase on the company’s historical data. Due to the curtailment, we re-measured
the net pension obligation of our qualified plan on September 1, 2008, using a 6.75 percent discount rate.
Key assumptions used in developing the 2008 net pension expense were a 6.25 percent discount rate,
an 8 percent expected return on plan assets and rates of compensation increases ranging from 4 percent to
6 percent. The 8 percent return on plan assets assumption was used for both the qualified plan and the
intermediary spin-off plan that was created on September 1, 2008, and is based partially on the fact that
substantially all of the investments held by the pension plan are common stocks that pay dividends. We
believe this rate is representative of the expected long-term rate of return on these assets. These
assumptions were consistent with the prior year, except that the discount rate was increased by
0.50 percentage points due to market interest rate conditions. Due to the plan changes described above, we
re-measured the net pension expense at September 1, 2008, using a 6.75 percent discount rate.
Here is a summary of the weighted-average assumptions we use to determine our net expense for the plan:
Discount rate
Expected return on plan assets
Rate of compensation increase
Qualified Pension Plan
2007
2006
2008
2008
SERP
2007
2006
6.25 %
8.00
4-6
5.75 %
8.00
4-6
5.50 %
8.00
5-7
6.25 %
5.75 %
5.50 %
n/a
4-6
n/a
4-6
n/a
5-7
Benefit obligation activity using an actuarial measurement date for our qualified and SERP plans at
December 31 follows:
(In millions)
Change in projected benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss/(gain)
Benefits paid
Curtailment
Settlement
Projected benefit obligation at end of year
Accumulated benefit obligation
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Settlement
Fair value of plan assets at end of year
Unfunded status:
Unfunded status at end of year
At December 31,
2007
2008
270
14
17
21
(11)
(27)
(78)
206
$
$
170 $
$
210
(36)
33
(11)
(78)
118 $
271
17
16
(29)
(5)
0
0
270
206
208
(4)
11
(5)
0
210
(88) $
(60)
$
$
$
$
$
$
The accumulated benefit obligation was $170 million and $206 million at December 31, 2008 and 2007,
respectively.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 114
A reconciliation follows of the funded status for our qualified and SERP plans at the end of the measurement
period to the amounts recognized in the balance sheet at December 31, 2008:
(In millions)
Amounts recognized in the balance sheet consists of:
Pension liability
Total
Amounts recognized in accumulated other comprehensive
income not yet recognized as a component of net
periodic benefit costs consist of:
Net actuarial loss
Prior service cost
Total
At December 31,
2008
2007
(88) $
(88) $
(60)
(60)
47 $
5
52 $
28
9
37
$
$
$
$
The weighted-average assumptions used to determine benefit obligations for our qualified and SERP plans at
December 31 follows:
(In millions)
Discount rate
Rate of compensation increase
At December 31,
2007
2008
6.00 %
4-6
6.25 %
4-6
We evaluate our pension plan assumptions annually and update them as necessary. The discount rate
assumptions for our benefit obligation track with high grade corporate bond yield and yearly adjustments
reflect any changes to those bond yields. Compensation increase assumptions reflect historical calendar year
compensation increases.
Here are the components of our net periodic benefit cost for our qualified and SERP pension plans at
December 31:
(In millions)
Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial loss, prior service cost and transition asset
Curtailment
Settlement
Net periodic benefit cost
Our pension plan asset allocations by category are:
Asset category:
Equity securities
Fixed maturities
Cash and cash equivalents
Total
Years ended December 31,
2007
2006
2008
$
$
14 $
17
(16)
2
3
27
47 $
17 $
16
(15)
3
0
0
21 $
16
14
(14)
3
0
0
19
At December 31,
2007
2008
83 %
4
13
100 %
94 %
3
3
100 %
The pension plan assets are managed to maximize total return over the long term while providing sufficient
liquidity and current return to satisfy the cash flow requirements of the plan. Reflecting the long-term time
horizon of pension obligations, we currently allocate 80 percent to 85 percent of the pension portfolio to
equity investments, which are priced from highly observable and actively traded markets. The remainder of
the portfolio is allocated to fixed-maturity investments and cash.
Our pension plan assets included 642,113 shares of the company’s common stock, which had a fair value of
$19 million and $25 million at December 31, 2008 and 2007, respectively. The defined benefit pension plan
did not purchase or sell any shares of our common stock during 2008 and 2007. The company paid
$1 million in cash dividends on our common stock to the pension plan in both 2008 and 2007.
In 2009, we expect to contribute approximately $33 million to our qualified plan. We expect to make the
following benefit payments for our qualified and SERP plans, which reflect expected future service:
(In millions)
For the years ended December 31,
Expected future benefit payments
2009
16
$
2010
7
$
2011
7
$
2012
12
$
2013
14
$
2014 - 2018
93
$
Years ended December 31,
The estimated costs to be amortized from accumulated other comprehensive income into net periodic
benefit cost over the next year for our plans are a $1 million actuarial gain and a $1 million prior service cost.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 115
14.
STATUTORY ACCOUNTING INFORMATION (UNAUDITED)
Insurance companies use statutory accounting practices (SAP) as prescribed by regulatory authorities.
The three primary differences between SAP and GAAP are:
• policy acquisition costs are expensed when incurred,
•
life insurance reserves are based upon different actuarial assumptions and
• deferred income taxes are valued and established using a different basis.
Statutory net income and capital and surplus as determined in accordance with SAP prescribed or permitted
by insurance regulatory authorities for four legal entities, our insurance subsidiary and its three insurance
subsidiaries, are as follows:
(In millions)
SAP Net Income
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Specialty Underwriters Insurance Company
The Cincinnati Life Insurance Company
$
194 $
16
2
(38)
(70)
658 $
12
1
0
39
572
15
2
0
28
Years ended December 31,
2007
2008
2006
$
Capital and Surplus
At December 31,
2008
2007
3,360 $
263
66
174
290
4,307
278
66
196
477
TRANSACTIONS WITH AFFILIATED PARTIES
COMMITMENTS AND CONTINGENT LIABILITIES
Statutory capital and surplus for our insurance subsidiary, The Cincinnati Insurance Company, includes
capital and surplus of its four insurance subsidiaries.
15.
We paid certain officers and directors, or insurance agencies of which they are shareholders, commissions of
approximately $6 million, $7 million and $7 million on premium volume of approximately $38 million,
$37 million and $40 million for 2008, 2007 and 2006, respectively.
16.
In the ordinary course of conducting business, the company and its subsidiaries are named as defendants in
various legal proceedings. Most of these proceedings are claims litigation involving the company’s insurance
subsidiaries in which the company is either defending or providing indemnity for third-party claims brought
against insureds who are litigating first-party coverage claims. The company accounts for such activity
through the establishment of unpaid loss and loss adjustment expense reserves. We believe that the
ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of
provisions made for potential losses and costs of defense, will be immaterial to our consolidated financial
condition, results of operations and cash flows.
The company and its subsidiaries also are occasionally involved in other legal actions, some of which assert
claims for substantial amounts. These actions include, among others, putative state class actions seeking
certification of a state or national class. Such putative class actions have alleged, for example, improper
reimbursement of medical providers paid under workers’ compensation insurance policies. The company’s
insurance subsidiaries also are occasionally parties to individual actions in which extra-contractual damages,
punitive damage, or penalties are sought, such as claims alleging bad faith in the handling of insurance
claims.
On a quarterly basis, we review the outstanding lawsuits seeking such recourse. Based on our year-end
review, we believe we have valid defenses to each. As a result, we believe the ultimate liability, if any, with
respect to these lawsuits, after consideration of provisions made for estimated losses, will be immaterial to
our consolidated financial position.
Nonetheless, given the potential for large awards in certain of these actions and the inherent unpredictability
of litigation, an adverse outcome could have a material adverse effect on the company’s consolidated results
of operations or cash flows in particular quarterly or annual periods.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 116
STOCK-BASED ASSOCIATE COMPENSATION PLANS
17.
We currently have four equity compensation plans that together permit us to grant various types of equity
awards. The Cincinnati Financial Corporation 2006 Stock Compensation Plan gives us the flexibility to make
grants to associates of any type of stock-based awards, subject to performance-based criteria, to directly link
compensation to performance. We currently grant incentive stock options, non-qualified stock options,
service-based restricted stock units and performance-based restricted stock units under our plans. We also
have a Holiday Stock Plan that permits annual awards of one share of common stock to each full time
associate for each year of service up to a maximum of 10 shares. One of our equity compensation plans
permits us to grant common stock to our outside directors.
We use the modified-prospective-transition method under which we recognize:
• Compensation cost for all stock options granted subsequent to January 1, 2006, based on the grant-date
fair value estimated in accordance with the provisions of SFAS No. 123(R)
• Compensation cost for all non-vested stock options granted prior to January 1, 2006, that vested
subsequent to that date, based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123 and
• Compensation cost for all non-vested stock options and performance-based restricted stock units that
have non-substantive vesting requirements, such as those to associates who are eligible for retirement.
Our pretax and after-tax share-based compensation costs are summarized below:
(In millions)
Share-based compensation cost
Income tax benefit
Share-based compensation cost after tax
Years ended December 31,
2007
2006
2008
$
$
15 $
4
11 $
14 $
3
11 $
17
3
14
The total intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006,
was $1 million, $8 million and $22 million, respectively. (Intrinsic value is the market price less the exercise
price.) Options vested during the years ended December 31, 2008 and 2007, had no intrinsic value. The
intrinsic value of options vested during the year ended December 31, 2006 was $10 million.
As of December 31, 2008, we had $22 million of unrecognized total compensation cost related to non-
vested stock options and restricted stock unit awards. That cost will be recognized over a weighted-average
period of 2.2 years.
Stock options are granted to associates at an exercise price that is equal to the fair market value as reported
on the NASDAQ Global Select Market for the grant date and are exercisable over 10 year periods. The stock
options generally vest ratably over a three-year period. In determining the share-based compensation
amounts for 2008, 2007 and 2006, the fair value of each option granted in those years was estimated on
the date of grant using the binomial option-pricing model. We make assumptions in four areas to develop the
binomial option-pricing model:
• Weighted-average expected term is based on historical experience of similar awards with consideration
for current exercise trends.
• Expected volatility is based on our stock price over a historical period which approximates the expected
term.
• Dividend yield is determined by dividing the per share dividend by the stock price on the date of grant.
• Risk-free rates are the implied yield currently available on U.S. Treasury issues with a remaining term
approximating the expected term.
The following weighted average assumptions were used for grants in determining fair value of share-based
compensation:
Weighted - average expected term
Expected volatility
Dividend yield
Risk-free rates
Weighted-average fair value of options granted during the period
$
2008
7-9 years
Years ended December 31,
2007
5-7 years
20.58-28.52% 18.29 - 24.14%
3.99-6.22%
3.29-3.84%
6.50
3.33%
4.8-4.81%
9.43
$
$
2006
5-7 years
20.25 - 27.12%
3.22%
4.5-4.61%
10.09
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 117
Here is a summary of options information:
(Dollars in millions, shares in thousands)
2008
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of period
Options exercisable at end of period
Weighted-
average
exercise
Aggregate
intrinsic
value
Shares
10,480 $
1,592
(120)
(1,163)
10,789
36.86
32.46
31.40
36.52
36.31 $
8,431 $
36.23 $
3
1
Cash received from the exercise of options was $4 million, $19 million and $27 million for the years ended
December 31, 2008, 2007 and 2006, respectively. SFAS No. 123(R) also requires us to classify certain tax
benefits related to share-based compensation deductions as cash from financing activities. We did not
realize a tax benefit on options exercised for the year ended December 31, 2008. We realized a $2 million
tax benefit on options exercised for the year ended December 31, 2007, and a $3 million benefit for the year
ended December 31, 2006.
Options outstanding and exercisable consisted of the following at December 31, 2008:
(Shares in thousands)
Range of exercise prices
$25.00 to $29.99
$30.00 to $34.99
$35.00 to $39.99
$40.00 to $44.99
$45.00 to $49.99
Total
Options outstanding
Weighted-average
remaining contractual
life
$
5.50 yrs
2.57 yrs
5.93 yrs
6.60 yrs
7.03 yrs
4.95 yrs
Weighted-
average
exercise price
26.77
32.92
38.53
42.55
45.26
36.31
Shares
1,640
3,722
2,242
1,914
1,271
10,789
Options exercisable
Weighted-
average
exercise price
26.97
32.92
38.40
42.01
45.26
36.23
Shares
816 $
3,722
1,493
1,546
854
8,431
The weighted-average remaining contractual life for exercisable awards as of December 31, 2008, was
3.9 years. As of December 31, 2008, 7.3 million shares of common stock were available for future equity
award grants. We currently issue new shares for option exercises.
Restricted Stock Units
Service-based and performance-based restricted stock units are granted to associates at fair market value
on the date of grant. Service-based restricted stock units vest as a unit three years after the date of grant.
If certain performance targets are attained, performance-based restricted stock units vest on the first day of
March after a three-calendar year performance period. Quarterly, management reviews and determines the
likelihood that the company will achieve the performance targets for the outstanding groups of service-based
restricted stock units.
As of December 31, 2008, management assumed that performance targets used for restricted stock unit
awards granted during November 2008 would be met and we recognized related compensation cost.
Management concluded that the company would not meet performance targets for all other restricted stock
unit awards and did not recognize related compensation costs except for certain awards to retirement eligible
associates. For the 2007 performance-based restricted stock awards, we recognize compensation cost
during the performance period for retirement-eligible associates. We recognize that cost regardless of
whether the performance criteria has been met. The fair value of the restricted stock unit awards was
determined based on the fair value on the date of grant less the present value of the dividends that holders
of restricted stock units will not receive on the shares underlying the restricted stock units during the vesting
period.
Here is a summary of restricted stock unit information for 2008:
(Shares in thousands)
Nonvested at January 1, 2008
Granted
Exercised
Forfeited
Nonvested at December 31, 2008
Service - based
nonvested shares
162 $
459
(2)
(9)
610
Weighted -
average grant-
date fair value
40.74
28.52
37.57
37.20
31.60
Performance -
based nonvested
shares
35 $
102
(1)
0
136
Weighted -
average grant-
date fair value
40.74
27.09
40.74
0.00
30.49
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 118
SEGMENT INFORMATION
18.
We operate primarily in two industries, property casualty insurance and life insurance. We regularly review
four different reporting segments to make decisions about allocating resources and assessing performance:
• Commercial lines property casualty insurance
• Personal lines property casualty insurance
•
Life insurance
Investment operations
•
We report as “Other” the non-investment operations of the parent company and its subsidiaries
CFC Investment Company and CinFin Capital Management Company (excluding client investment activities),
as well as other income of our standard market property casualty insurance operations and consolidated
eliminations. Beginning in 2008, we also are including results of The Cincinnati Specialty Underwriters
Insurance Company and CSU Producer Resources in Other. In 2007, an immaterial level of expenses from
The Cincinnati Specialty Underwriters Insurance Company was included in the commercial lines property
casualty insurance segment while an immaterial level of expenses for CSU Producer Resources was included
in Other.
Revenues come primarily from unaffiliated customers:
• All three insurance segments record revenues from insurance premiums earned. Life insurance segment
revenues also include separate account investment management fees.
• Our investment operations’ revenues are pretax net investment income plus realized investment gains
and losses.
• Other revenues are primarily finance/lease income and, for 2008, earned premiums from The Cincinnati
Specialty Underwriters Insurance Company.
Income or loss before income taxes for each segment is reported based on the nature of that business area’s
operations:
•
•
•
Income before income taxes for the insurance segments is defined as underwriting income or loss.
○ For commercial lines and personal lines insurance segments, we calculate underwriting income or
loss by recording premiums earned minus loss and loss expenses and underwriting expenses
incurred.
○ For the life insurance segment, we calculate underwriting income or loss by recording premiums
earned and separate account investment management fees, minus contract holder benefits and
expenses incurred, plus investment interest credited to contract holders.
Income before income taxes for the investment operations segment is net investment income plus
realized investment gains and losses for investments of the entire company, minus investment interest
credited to contract holders of the life insurance segment.
Loss before income taxes for the Other category is primarily due to interest expense from debt of the
parent company, operating expenses of our headquarters and, for 2008, loss and loss expenses and
underwriting expenses from The Cincinnati Specialty Underwriters Insurance Company.
Identifiable assets are used by each segment in its operations. We do not separately report the identifiable
assets for the commercial or personal lines segments because we do not use that measure to analyze the
segments. We include all investment assets, regardless of ownership, in the investment operations segment.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 119
This table summarizes segment information:
(In millions)
Revenues:
Commercial lines insurance
Commercial casualty
Commercial property
Commercial auto
Workers' compensation
Specialty packages
Surety and executive risk
Machinery and equipment
Total commercial lines insurance
Personal lines insurance
Personal auto
Homeowner
Other personal lines
Total personal lines insurance
Life insurance
Investment operations
Other
Total
Income (loss) before income taxes:
Insurance underwriting results:
Commercial lines insurance
Personal lines insurance
Life insurance
Investment operations
Other
Total
Identifiable assets:
Property casualty insurance
Life insurance
Investment operations
Other
Total
Years ended December 31,
2007
2006
2008
763 $
487
411
375
144
107
29
2,316
325
277
87
689
128
675
16
3,824 $
70 $
(82)
4
612
(64)
540 $
827 $
497
440
373
146
100
28
2,411
342
285
87
714
129
990
15
4,259 $
261 $
43
3
931
(46)
1,192 $
831
491
453
366
141
93
27
2,402
385
289
88
762
118
1,254
14
4,550
208
(27)
(1)
1,200
(51)
1,329
December 31,
2008
December 31,
2007
2,676 $
1,091
8,907
695
13,369 $
2,281
938
12,322
1,096
16,637
$
$
$
$
$
$
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 120
QUARTERLY SUPPLEMENTARY DATA (UNAUDITED)
19.
This table includes unaudited quarterly financial information for the years ended December 31, 2008
and 2007:
(Dollars in millions except per share data)
2008
Revenues *
Income (loss) before income taxes
Net income (loss)
Net income (loss) per common share—basic
Net income (loss) per common share—diluted
2007
Revenues *
Income before income taxes
Net income
Net income per common share—basic
Net income per common share—diluted
1st
2nd
Quarter
3rd
4th
Full year
$
$
704 $
(100)
(42)
(0.26)
(0.26)
1,029 $
271
194
1.12
1.11
917 $
64
63
0.38
0.38
1,267 $
508
351
2.04
2.02
1,186 $
356
247
1.51
1.50
980 $
160
124
0.72
0.72
1,017 $
220
161
0.99
0.99
983 $
253
186
1.12
1.11
3,824
540
429
2.63
2.62
4,259
1,192
855
5.01
4.97
Note: The sum of the quarterly reported per share amounts may not equal the full year as each is computed independently.
*
Revenues include realized investment gains and losses, which are integral to our financial results over the long term may
cause this value to fluctuate substantially because we have substantial discretion in the timing of investment sales. Also,
applicable accounting standards require us to recognize gains and losses from certain changes in fair values of securities and
embedded derivatives without actual realization of those gains and losses. We discuss realized investment gains for the past
three years in Item 7, Investments Results of Operations, Page 66.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 121
Item 9.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
We had no disagreements with the independent registered public accounting firm on accounting and
financial disclosure during the last two fiscal years.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures – The company maintains disclosure controls and
procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (Exchange Act)).
Any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. The company’s management, with the participation of
the company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the
design and operation of the company’s disclosure controls and procedures as of December 31, 2008. Based
upon that evaluation, the company’s chief executive officer and chief financial officer concluded that the
design and operation of the company’s disclosure controls and procedures provided reasonable assurance
that the disclosure controls and procedures are effective to ensure that:
•
•
information required to be disclosed in the company’s reports under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and
such information is accumulated and communicated to the company’s management, including its chief
executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required
disclosures.
Changes in Internal Control over Financial Reporting – During the three months ended December 31, 2008,
there were no changes in our internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. Management’s Annual
Report on Internal Control Over Financial Reporting and the Audit Report of the Independent Registered
Public Accounting Firm are set forth in Item 8, Pages 92 and 93.
Item 9B. Other Information
None
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 122
Part III
Our Proxy Statement will be filed with the SEC in preparation for the 2009 Annual Meeting of Shareholders
no later than April 3, 2009. As permitted in Paragraph G(3) of the General Instructions for Form 10-K, we are
incorporating by reference to that statement portions of the information required by Part III as noted in
Item 10 through Item 14 below.
Item 10.
a)
Directors and Executive Officers of the Registrant
Information about our directors and executive officers is in the Proxy Statement under “Security
Ownership of Principal Shareholders and Management,” “Information About Nondirector Executive
Officers” and “Information About the Board of Directors.”
Information about Section 16(a) beneficial ownership reporting compliance appears in the Proxy
Statement under “Section 16(a) Beneficial Ownership Reporting Compliance.”
Information about the “Code of Ethics for Senior Financial Officers” appeared in the 2004 Proxy
Statement as an appendix and is available in the Investors section of our Web site, www.cinfin.com.
Our code of ethics applies to those who are responsible for preparing and disclosing our financial
information. This includes our chief executive officer, chief financial officer and others performing similar
functions or reporting directly to these officers.
Information about our audit committee membership and our financial expert compliance appears in the
Proxy Statement under “Corporate Governance” and “Report of the Audit Committee.”
b)
c)
d)
e) The procedures under which shareholders may recommend director nominees have not changed during
the reporting period. Information on the nominating committee processes appears in the Proxy
Statement under “Corporate Governance” and “Consideration of Director Nominees.”
Executive Compensation
Item 11.
Information on executive compensation appears in the Proxy Statement under “Compensation of Named
Executive Officers and Directors,” which includes the “Report of the Compensation Committee” and the
“Compensation Discussion and Analysis.”
Item 12.
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
a)
b)
Information on the security ownership of certain beneficial owners and management appears in the
Proxy Statement under “Security Ownership of Principal Shareholders and Management.”
Information on securities authorized for issuance under equity compensation plans appears in Part II,
Item 5, Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities, Page 32, as securities authorized for issuance under equity compensation plans.
Additional information on share-based compensation under our equity compensation plans is available in
Item 8, Note 17 of the Consolidated Financial Statements, Page 117.
Certain Relationships and Related Transactions
Item 13.
Information about certain relationships and related transactions appears in the Proxy Statement under
“Certain Relationships and Transactions” and “Compensation Committee Interlocks and Insider
Participation.”
Principal Accountant Fees and Services
Item 14.
Information about independent registered public accounting firm fees and services and audit committee
pre-approval policies and procedures appears in the Proxy Statement under “Audit-related Matters,” which
includes the “Report of the Audit Committee,” “Fees Billed by the Independent Registered Public Accounting
Firm” and “Services Provided by the Independent Registered Public Accounting Firm.”
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 123
Part IV
Exhibits and Financial Statement Schedules
Item 15.
a) Financial Statements – information contained in Part II, Item 8, of this report, Page 94 to Page 97
b) Exhibits – see Index of Exhibits, Page 136
c) Financial Statement Schedules
Schedule I – Summary of Investments -- Other than Investments in Related Parties, Page 125
Schedule II – Condensed Financial Statements of Registrant, Page 127
Schedule III – Supplementary Insurance Information, Page 130
Schedule IV – Reinsurance, Page 132
Schedule V – Valuation and Qualifying Accounts, Page 133
Schedule VI – Supplementary Information Concerning Property Casualty Insurance Operations, Page 134
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 124
SCHEDULE I
(In millions)
Cincinnati Financial Corporation and Subsidiaries
Summary of Investments - Other than Investments in Related Parties
Type of investment
Fixed maturities:
United States government:
The Cincinnati Insurance Company
The Cincinnati Life Insurance Company
Total
Government-sponsored enterprises:
The Cincinnati Insurance Company
The Cincinnati Life Insurance Company
Total
Foreign government:
The Cincinnati Insurance Company
Total
States, municipalities and political subdivisions:
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Specialty Underwriters Insurance Company
The Cincinnati Life Insurance Company
Total
Public utilities:
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Specialty Underwriters Insurance Company
The Cincinnati Life Insurance Company
Cincinnati Financial Corporation
Total
Convertibles and bonds with warrants attached:
The Cincinnati Insurance Company
The Cincinnati Life Insurance Company
Cincinnati Financial Corporation
Total
All other corporate bonds:
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Specialty Underwriters Insurance Company
The Cincinnati Life Insurance Company
Cincinnati Financial Corporation
Total
Total fixed maturities
Cost or
amortized cost
At December 31, 2008
Fair
value
Balance sheet
$
1 $
3
4
1 $
4
5
192
199
391
3
3
2,433
153
39
74
5
2,704
156
4
1
6
173
1
341
91
3
8
102
192
197
389
3
3
2,460
155
40
72
6
2,733
150
4
1
6
165
1
327
91
3
8
102
1,179
20
8
56
1,199
51
2,513
6,058 $
1,053
19
8
53
1,092
43
2,268
5,827 $
$
1
4
5
192
197
389
3
3
2,460
155
40
72
6
2,733
150
4
1
6
165
1
327
91
3
8
102
1,053
19
8
53
1,092
43
2,268
5,827
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 125
SCHEDULE I (CONTINUED)
Cincinnati Financial Corporation and Subsidiaries
Summary of Investments - Other than Investments in Related Parties
(In millions)
Type of investment
Equity securities:
Common stocks:
Public utilities:
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Life Insurance Company
CinFin Capital Management Company
Cincinnati Financial Corporation
Total
Banks, trust and insurance companies:
The Cincinnati Insurance Company
The Cincinnati Life Insurance Company
Cincinnati Financial Corporation
Total
Industrial, miscellaneous and all other:
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Specialty Underwriters Insurance Company
The Cincinnati Life Insurance Company
CinFin Capital Management Company
Cincinnati Financial Corporation
Total
Nonredeemable preferred stocks:
The Cincinnati Insurance Company
The Cincinnati Life Insurance Company
Total
Total equity securities
Short-term investments:
The Cincinnati Insurance Company
Cincinnati Financial Corporation
Total short-term investments
Other invested assets:
Real estate:
Cincinnati Financial Corporation
Policy loans:
The Cincinnati Life Insurance Company
Limited partnerships:
Cincinnati Financial Corporation
Private equity held at cost:
Cincinnati Financial Corporation
Total other invested assets
Total investments
Cost or
amortized cost
At December 31, 2008
Fair
value
Balance sheet
$
$
$
$
$
$
$
75 $
2
10
1
52
140
27
6
20
53
1,013
17
6
12
105
4
539
1,696
181
7
188
2,077 $
19 $
65
84 $
6
37
32
8
83
8,302
114 $
4
19
1
110
248
95
12
136
243
1,493
59
17
11
83
4
563
2,230
167
8
175
2,896 $
19 $
65
84 $
—
—
—
—
—
—
$
$
$
114
4
19
1
110
248
95
12
136
243
1,493
59
17
11
83
4
563
2,230
167
8
175
2,896
19
65
84
6
37
32
8
83
8,890
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 126
SCHEDULE II
(In millions)
Cincinnati Financial Corporation (parent company only)
Condensed Balance Sheets
ASSETS
Investments
Fixed maturities, at fair value
Equity securities, at fair value
Short-term investments, at fair value
Investment real estate, net
Other invested assets
Cash and cash equivalents
Securities lending collateral invested
Equity in net assets of subsidiaries
Investment income receivable
Land, building and equipment, net, for company use (accumulated depreciation:
2008—$64; 2007—$67)
Prepaid federal income tax
Other assets
Due from subsidiaries
Total assets
LIABILITIES
Dividends declared but unpaid
Securities lending payable
Deferred federal income tax
6.92% senior debentures due 2028
6.9% senior debentures due 2028
6.125% senior notes due 2034
Other liabilities
Total liabilities
SHAREHOLDERS' EQUITY
Common stock
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock at cost
Total shareholders' equity
Total liabilities and shareholders' equity
At December 31,
2008
2007
$
52 $
809
65
6
40
344
0
3,711
4
171
0
12
33
5,247 $
63 $
0
21
392
28
372
189
1,065
393
1,069
3,579
347
(1,206)
4,182
5,247 $
$
$
$
88
1,961
0
0
31
16
9
4,831
18
169
5
14
66
7,208
59
9
296
392
28
371
124
1,279
393
1,049
3,404
2,151
(1,068)
5,929
7,208
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included
in Part II, Item 8, Page 91.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 127
SCHEDULE II (CONTINUED)
Cincinnati Financial Corporation (parent company only)
Condensed Statements of Income
(In millions)
REVENUES
Dividends from subsidiaries
Investment income, net of expenses
Realized gains on investments
Other revenue
Total revenues
EXPENSES
Interest expense
Depreciation expense
Other expenses
Total expenses
INCOME BEFORE INCOME TAXES AND EARNINGS OF SUBSIDIARIES
PROVISION (BENEFIT) FOR INCOME TAXES
Current
Deferred
Total provision for income taxes
NET INCOME BEFORE EARNINGS OF SUBSIDIARIES
Increase in undistributed earnings of subsidiaries
Years ended December 31,
2007
2006
2008
$
170 $
67
54
14
305
420 $
100
97
10
627
51
6
19
76
229
23
(20)
3
226
203
49
3
15
67
560
34
(2)
32
528
327
275
98
410
10
793
51
3
18
72
721
153
(11)
142
579
351
930
NET INCOME
$
429 $
855 $
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included
in Part II, Item 8, Page 91.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 128
SCHEDULE II (CONTINUED)
(In millions)
Cincinnati Financial Corporation (parent company only)
Condensed Statements of Cash Flows
Years ended December 31,
2007
2006
2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Realized (gains) on investments
Changes in:
Investment income receivable
Current federal income taxes
Deferred income taxes
Other assets
Other liabilities
Undistributed earnings of subsidiaries
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of fixed-maturities
Call or maturity of fixed-maturities
Sale of equity securities
Purchase of fixed-maturities
Purchase of equity securities
Change in short-term investments, net
Investment in buildings and equipment, net
Change in other invested assets, net
Change in securities lending collateral, net
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Change in notes payable
Payment of cash dividends to shareholders
Purchase/issuance of treasury shares
Proceeds from stock options exercised
Net transfers to subsidiaries
Change in securities lending payable, net
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
429 $
855 $
930
6
(54)
14
92
(20)
4
8
(203)
276
0
24
629
0
(125)
(64)
(14)
(9)
9
450
(20)
(250)
(138)
4
15
(9)
(398)
328
16
344 $
2
(97)
(2)
(21)
(2)
0
12
(327)
420
9
37
186
(1)
(231)
0
(49)
(6)
(9)
(64)
20
(240)
(307)
20
120
9
(378)
(22)
38
16 $
1
(410)
1
48
(11)
2
16
(351)
226
4
36
511
(42)
(351)
3
(26)
(8)
0
127
0
(228)
(119)
30
(5)
0
(322)
31
7
38
$
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included
in Part II, Item 8, Page 91.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 129
Cincinnati Financial Corporation and Subsidiaries
Supplementary Insurance Information
SCHEDULE III
(In millions)
Deferred policy acquisition costs:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance
Life insurance
Total
Future policy benefits, losses, claims and expense losses:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance
Life insurance
Total (1)
Unearned premiums:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance
Life insurance
Total (1)
Other policy claims and benefits payable:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance
Life insurance
Total (1)
Premium revenues:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance
Life insurance
Consolidated eliminations
Total
Years ended December 31,
2007
2006
2008
$
$
$
$
$
$
$
$
$
$
229 $
77
6
312
197
509 $
3,654 $
381
5
4,040
1,580
5,620 $
1,166 $
367
9
1,542
2
1,544 $
0 $
0
0
0
17
17 $
2,316 $
689
5
3,010
126
0
3,136 $
234 $
78
0
312
149
461 $
3,533 $
392
0
3,925
1,505
5,430 $
1,191 $
371
0
1,562
2
1,564 $
0 $
0
0
0
15
15 $
2,411 $
714
0
3,125
125
0
3,250 $
235
80
0
315
138
453
3,414
446
0
3,860
1,430
5,290
1,195
382
0
1,577
2
1,579
0
0
0
0
15
15
2,402
762
0
3,164
115
(1)
3,278
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 130
SCHEDULE III (CONTINUED)
Cincinnati Financial Corporation and Subsidiaries
Supplementary Insurance Information
(In millions)
Investment income, net of expenses:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance (3)
Life insurance
Total
Benefits, claims losses and settlement expenses:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance
Life insurance
Consolidated eliminations
Total
Amortization of deferred policy acquisition costs:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance
Life insurance
Total (2)
Other operating expenses:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance
Life insurance
Total (2)
Written premiums:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance
Accident health insurance
Consolidated eliminations
Total
Years ended December 31,
2007
2006
2008
$
$
$
$
$
$
$
$
$
$
0 $
0
0
350
119
469 $
1,504 $
547
5
2,056
142
(5)
2,193 $
462 $
145
3
610
22
632 $
280 $
79
2
361
23
384 $
2,311 $
685
14
3,010
3
0
3,013 $
0 $
0
0
393
114
507 $
1,395 $
437
0
1,832
133
(2)
1,963 $
477 $
150
0
627
30
657 $
248 $
83
0
331
22
353 $
2,413 $
704
0
3,117
3
0
3,120 $
0
0
0
367
108
475
1,466
542
0
2,008
122
(2)
2,128
504
160
0
664
21
685
224
87
0
311
30
341
2,442
736
0
3,178
3
(1)
3,180
Notes to Schedule III:
(1) The sum of future policy benefits, losses, claims and expense losses, unearned premium and other policy claims and
benefits payable is equal to the sum of Loss and loss expense reserves, Life policy reserves and Unearned premiums
reported in the company’s consolidated balance sheets.
(2) The sum of amortization of deferred policy acquisition costs and other operating expenses is equal to the sum of
Commissions; Other operating expenses; Taxes, licenses and fees; and Increase in deferred acquisition costs expenses
shown in the consolidated statements of income, less other expenses not applicable to the above insurance segments.
(3) This segment information is not regularly allocated to segments and reviewed by company management in making
decisions about resources to be allocated to the segments or to assess their performance.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 131
SCHEDULE IV
(Dollars in millions)
Gross amounts:
Life insurance in force
Earned premiums
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance
Life insurance
Consolidated eliminations
Total
Ceded amounts to other companies:
Life insurance in force
Earned premiums
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total
Life insurance
Total
Assumed amounts from other companies:
Life insurance in force
Earned premiums
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance
Life insurance
Total
Net amounts:
Life insurance in force
Earned premiums
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance
Life insurance
Consolidated eliminations
Total
Percentage of amounts assumed to net:
Life insurance in force
Earned premiums
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total property casualty insurance
Life insurance
Total
Cincinnati Financial Corporation and Subsidiaries
Reinsurance
Years ended December 31,
2007
2006
2008
$
$
$
$
$
$
$
$
$
$
$
$
65,887
2,449
721
5
3,175
180
0
3,355
33,710
144
34
0
178
54
232
1
11
2
0
13
0
13
32,178
2,316
689
5
3,010
126
0
3,136
$
$
$
$
$
$
$
$
$
$
$
$
61,873
2,536
742
0
3,278
178
0
3,456
32,959
144
31
0
175
53
228
2
20
2
0
22
0
22
28,916
2,411
714
0
3,125
125
0
3,250
$
$
$
$
$
$
$
$
$
$
$
$
56,968
2,513
783
0
3,296
159
(1)
3,454
31,744
134
24
0
158
44
202
3
24
2
0
26
0
26
25,227
2,402
762
0
3,164
115
(1)
3,278
0.0 %
0.5 %
0.3
0.0
0.4
0.0
0.4
0.0 %
0.8 %
0.3
0.0
0.7
0.0
0.7
0.0 %
1.1 %
0.4
0.0
0.9
0.0
0.9
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 132
SCHEDULE V
(In millions)
Allowance for doubtful receivables:
Balance at beginning of period
Additions charged to costs and expenses
Deductions
Balance at end of period
Cincinnati Financial Corporation and Subsidiaries
Valuation and Qualifying Accounts
2008
At December 31,
2007
2006
$
$
4 $
3
(3)
4 $
3 $
3
(2)
4 $
3
3
(3)
3
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 133
SCHEDULE VI
Cincinnati Financial Corporation and Subsidiaries
Supplementary Information Concerning Property Casualty Insurance Operations
(In millions)
Deferred policy acquisition costs:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total
Reserves for unpaid claims and claim adjustment expenses:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total
Reserve discount deducted
Unearned premiums:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total
Earned premiums:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total
Investment income:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total (1)
Loss and loss expenses incurred related to current accident year:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total
Loss and loss expenses incurred related to prior accident years:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total
Amortization of deferred policy acquisition costs:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total
Paid loss and loss expenses:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total
Written premiums:
Commercial lines insurance
Personal lines insurance
Surplus lines insurance
Total
Years ended December 31,
2007
2006
2008
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
229 $
77
6
312 $
3,654 $
381
5
4,040 $
0 $
1,166 $
367
9
1,542 $
2,316 $
689
5
3,010 $
0 $
0
0
350 $
1,777 $
597
5
2,379 $
(273) $
(50)
0
(323) $
462 $
145
3
610 $
1,387 $
568
0
1,955 $
2,311 $
685
14
3,010 $
234 $
78
0
312 $
3,533 $
392
0
3,925 $
0 $
1,191 $
371
0
1,562 $
2,411 $
714
0
3,125 $
0 $
0
0
393 $
1,598 $
478
0
2,076 $
(204) $
(40)
0
(244) $
477 $
150
0
627 $
1,299 $
492
0
1,791 $
2,413 $
704
0
3,117 $
235
80
0
315
3,414
446
0
3,860
0
1,195
382
0
1,577
2,402
762
0
3,164
0
0
0
367
1,564
560
0
2,124
(98)
(18)
0
(116)
504
160
0
664
1,218
545
0
1,763
2,442
736
0
3,178
Note to Schedule VI:
(1) This segment information is not regularly allocated to segments and not reviewed by company management in making
decisions about resources to be allocated to the segments or to assess their performance.
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 134
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Cincinnati Financial Corporation
/S/ Eric N. Mathews
By:
Title:
Date:
Eric N. Mathews, CPCU, AIAF
Principal Accounting Officer, Vice President, Assistant Secretary and Assistant Treasurer
February 27, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/S/ John J. Schiff, Jr.
John J. Schiff, Jr.
/S/ Kenneth W. Stecher
Kenneth W. Stecher
/S/ Steven J. Johnston
Steven J. Johnston
/S/ William F. Bahl
William F. Bahl
/S/ James E. Benoski
James E. Benoski
/S/ Gregory T. Bier
Gregory T. Bier
/S/ Kenneth C. Lichtendahl
Kenneth C. Lichtendahl
/S/ W. Rodney McMullen
W. Rodney McMullen
/S/ Gretchen W. Price
Gretchen W. Price
/S/ Thomas R. Schiff
Thomas R. Schiff
/S/ Douglas S. Skidmore
Douglas S. Skidmore
/S/ John F. Steele, Jr.
John F. Steele, Jr.
/S/ Larry R. Webb
Larry R. Webb
/S/ E. Anthony Woods
E. Anthony Woods
Title
Chairman of the Board
President, Chief Executive Officer and
Director
Chief Financial Officer, Senior Vice
President, Secretary and Treasurer
Date
February 27, 2009
February 27, 2009
February 27, 2009
Director
February 27, 2009
Vice Chairman of the Board
February 27, 2009
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 135
INDEX OF EXHIBITS
Exhibit No.
Exhibit Description
3.1A
3.1B
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
Amended Articles of Incorporation of Cincinnati Financial Corporation (incorporated by reference to the
company’s 1999 Annual Report on Form 10-K dated March 23, 2000) (File No. 000-04604)
Amendment to Article Fourth of Amended Articles of Incorporation of Cincinnati Financial Corporation
(incorporated by reference to Exhibit 3(i) filed with the company’s Current Report on Form 8-K dated
July 15, 2005)
Regulations of Cincinnati Financial Corporation (incorporated by reference to the company’s Definitive
Proxy Statement dated March 2, 1992, Exhibit 2) (File No. 000-04604)
Indenture with The Bank of New York Trust Company (incorporated by reference to the company’s Current
Report on Form 8-K dated November 2, 2004, filed with respect to the issuance of the company’s 6.125%
Senior Notes due November 1, 2034)
Supplemental Indenture with The Bank of New York Trust Company (incorporated by reference to the
company’s Current Report on Form 8-K dated November 2, 2004, filed with respect to the issuance of the
company’s 6.125% Senior Notes due November 1, 2034)
Second Supplemental Indenture with The Bank of New York Trust Company (incorporated by reference to
the company’s Current Report on Form 8-K dated May 9, 2005, filed with respect to the completion of the
company’s exchange offer and rescission offer for its 6.90% senior debentures due 2028)
Form of 6.125% Exchange Note Due 2034 (included in Exhibit 4.2)
Form of 6.92% Debentures Due 2028 (included in Exhibit 4.3)
Indenture with the First National Bank of Chicago (subsequently assigned to The Bank of New York Trust
Company) (incorporated by reference to the company’s registration statement on Form S-3 effective
May 22, 1998 (File No. 333-51677))
Form of 6.90% Debentures Due 2028 (included in Exhibit 4.6)
Agreement with Messer Construction (incorporated by reference to the company’s 2004 Annual Report on
Form 10-K dated March 11, 2005)
2003 Non-Employee Directors’ Stock Plan (incorporated by reference to the company’s Definitive Proxy
Statement dated March 21, 2005)
Cincinnati Financial Corporation Stock Option Plan No. VI (incorporated by reference to the company’s
Definitive Proxy Statement dated March 1, 1999) (File No. 000-04604)
Cincinnati Financial Corporation Stock Option Plan No. VII (incorporated by reference to the company’s
Definitive Proxy Statement dated March 8, 2002) (File No. 000-04604)
Standard Form of Nonqualified and Incentive Option Agreements for Stock Option Plan No. VI
(incorporated by reference to the company’s 2004 Annual Report on Form 10-K dated March 11, 2005)
Cincinnati Financial Corporation 2006 Incentive Compensation Plan (incorporated by reference to the
company’s Definitive Proxy Statement dated March 30, 2007)
Cincinnati Financial Corporation 2006 Stock Compensation Plan (incorporated by reference to the
company’s Definitive Proxy Statement dated March 30, 2007)
Standard Form of Combined Incentive/Nonqualified Stock Option for Stock Option Plan VI (incorporated by
reference to Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated July 15, 2005)
Director and Named Executive Officer Compensation Summary (incorporated by reference to the
company’s definitive Proxy Statement dated March 20, 2008) as amended by the summaries contained in
Item 5.02(e) of the company’s Current Reports on Form 8-K dated July 22, 2008 and November 14, 2008
which are also incorporated herein by reference
Cincinnati Financial Corporation Supplemental Retirement Plan (incorporated by reference to
Exhibit 10.17 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006)
Standard Form of Incentive Stock Option Agreement for Stock Option Plan VII (incorporated by reference
to Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated October 20, 2006)
Standard Form of Nonqualified Stock Option Agreement for Stock Option Plan VII (incorporated by
reference to Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated October 20, 2006)
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 136
Exhibit No.
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
Exhibit Description
Standard Form of Incentive Stock Option Agreement for the 2006 Stock Compensation Plan (incorporated
by reference to Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated
October 20, 2006)
Standard Form of Nonqualified Stock Option Agreement for the 2006 Stock Compensation Plan
(incorporated by reference to Exhibit 10.4 filed with the company’s Current Report on Form 8-K dated
October 20, 2006)
Restricted Stock Unit Agreement for John J. Schiff, Jr., dated January 31, 2007(incorporated by reference
to Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated January 31, 2007)
Restricted Stock Unit Agreement for James E. Benoski, dated January 31, 2007 (incorporated by
reference to Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated January 31, 2007)
Restricted Stock Unit Agreement for Jacob F. Scherer, Jr., dated January 31, 2007 (incorporated by
reference to Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated January 31, 2007)
Restricted Stock Unit Agreement for Kenneth W. Stecher, dated January 31, 2007 (incorporated by
reference to Exhibit 10.4 filed with the company’s Current Report on Form 8-K dated January 31, 2007)
Restricted Stock Unit Agreement for Thomas A. Joseph, dated January 31, 2007 (incorporated by
reference to Exhibit 10.5 filed with the company’s Current Report on Form 8-K dated January 31, 2007)
Form of Restricted Stock Unit Agreement for the Cincinnati Financial Corporation 2006 Stock
Compensation Plan (service-based) (incorporated by reference to Exhibit 10.6 filed with the company’s
Current Report on Form 8-K dated January 31, 2007, as amended)
Form of Restricted Stock Unit Agreement for use under the Cincinnati Financial Corporation 2006 Stock
Compensation Plan (performance-based) (incorporated by reference to Exhibit 10.1 filed with the
company's Current Report on Form 8-K dated November 14, 2007)
Form of Incentive Compensation Agreement for the Cincinnati Financial Corporation 2006 Incentive
Compensation Plan (performance-based) (incorporated by reference to Exhibit 10.1 filed with the
company's Current Report on Form 8-K dated March 19, 2007)
Credit Agreement by and among Cincinnati Financial Corporation, CFC Investment Company, The
Huntington National Bank and LaSalle Bank National Association, among others, dated July 2, 2007
(incorporated by reference to Exhibit 10.01 filed with the company's Current Report on Form 8-K dated
June 30, 2007)
Second Amended and Restated Discretionary Line of Credit Note with PNC Bank, National Association
dated July 12, 2007 (incorporated by reference to Exhibit 10.27 filed with the company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2007) as renewed pursuant to the Offer and Acceptance of
terms to renew $75 million unsecured line of credit with PNC Bank, N.A., effective June 30, 2008
(incorporated by reference to Exhibit 10.01 filed with the company's Current Report on Form 8-K dated
July 9, 2008)
Secondary Block Trade Agreement between The Cincinnati Insurance Company and UBS Securities LLC,
dated October 23, 2007 (incorporated by reference to Exhibit 10.29 filed with the company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2007)
Purchase Agreement (Tranche 1 of 4) between Cincinnati Financial Corporation and UBS AG, London
Branch, acting through UBS Securities LLC as agent, dated October 24, 2007 (incorporated by reference
to Exhibit 10.30 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007)
Purchase Agreement (Tranche 2 of 4) between Cincinnati Financial Corporation and UBS AG, London
Branch, acting through UBS Securities LLC as agent, dated October 24, 2007 (incorporated by reference
to Exhibit 10.31 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007)
Purchase Agreement (Tranche 3 of 4) between Cincinnati Financial Corporation and UBS AG, London
Branch, acting through UBS Securities LLC as agent, dated October 24, 2007 (incorporated by reference
to Exhibit 10.32 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007)
Purchase Agreement (Tranche 4 of 4) between Cincinnati Financial Corporation and UBS AG, London
Branch, acting through UBS Securities LLC as agent, dated October 24, 2007 (incorporated by reference
to Exhibit 10.33 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007)
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 137
Exhibit No.
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
11
14
21
23
31A
31B
32
Exhibit Description
Stock Purchase Agreement between Cincinnati Financial Corporation and the E. Perry Webb Marital Trust,
dated September 5, 2007 (incorporated by reference to Exhibit 10.34 filed with the company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2007)
Restricted Stock Unit Agreement for John J. Schiff, Jr. dated February 18, 2008 (incorporated by reference
to Exhibit 10.1 filed with the company's Current Report on Form 8-K dated February 20, 2008)
Restricted Stock Unit Agreement for James E. Benoski dated February 18, 2008 (incorporated by
reference to Exhibit 10.2 filed with the company's Current Report on Form 8-K dated February 20, 2008)
Restricted Stock Unit Agreement for Jacob F. Scherer, Jr. dated February 18, 2008 (incorporated by
reference to Exhibit 10.3 filed with the company's Current Report on Form 8-K dated February 20, 2008)
Restricted Stock Unit Agreement for Kenneth W. Stecher dated February 18, 2008 (incorporated by
reference to Exhibit 10.4 filed with the company's Current Report on Form 8-K dated February 20, 2008)
Restricted Stock Unit Agreement for Thomas A. Joseph dated February 18, 2008 (incorporated by
reference to Exhibit 10.5 filed with the company's Current Report on Form 8-K dated February 20, 2008)
Form of Performance based Restricted Stock Unit Agreement for the Cincinnati Financial Corporation
2006 Stock Compensation Plan (performance-based) (incorporated by reference to Exhibit 10.6 filed with
the company's Current Report on Form 8-K dated February 20, 2008)
Unwritten arrangement with Lehman Brothers Inc. to sell 35,000,000 shares of Fifth Third stock held by
the Cincinnati Financial Corporation (incorporated by reference to the further description of the
arrangement set forth on the company’s Current Report on Form 8-K dated July 25, 2008)
Amended and Restated Cincinnati Financial Corporation Top Hat Savings Plan dated November 14, 2008
Statement re: Computation of per share earnings for the year ended December 31, 2008, 2007 and
2006, contained in Part II, Item 8, Note 12 to the Consolidated Financial Statements
Cincinnati Financial Corporation Code of Ethics for Senior Financial Officers (incorporated by reference to
the company’s Definitive Proxy Statement data March 18, 2004 (File No. 000-04604))
Cincinnati Financial Corporation subsidiaries contained in Part I, Item 1 of this report
Consent of Independent Registered Public Accounting Firm
Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 – Chief Executive Officer
Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 – Chief Financial Officer
Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 138
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
We consent to the incorporation by reference in Registration Statement No. 333-85953 (on Form S-8),
No. 333-24815 (on Form S-8), No. 333-24817 (on Form S-8), No. 333-49981 (on Form S-8),
No. 333-103509 (on Form S-8), No. 333-103511 (on Form S-8), No. 333-121429 (on Form S-4),
No. 333-123471 (on Form S-4), No. 333-126714 (on Form S-8), as amended, and No. 333-155373
(on Form S-3), of Cincinnati Financial Corporation of our report dated February 27, 2009, relating to the
consolidated financial statements and financial statement schedules of Cincinnati Financial Corporation and
subsidiaries and the effectiveness of internal control over financial reporting, appearing in this Annual Report
on Form 10-K of Cincinnati Financial Corporation for the year ended December 31, 2008.
/S/ Deloitte & Touche LLP
Cincinnati, Ohio
February 27, 2009
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 139
EXHIBIT 31A
Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002
I, Kenneth W. Stecher, certify that:
1. I have reviewed this Annual Report on Form 10-K of Cincinnati Financial Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting , or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principals;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls
over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: February 27, 2009
/S/ Kenneth W. Stecher
Kenneth W. Stecher
Director, President and Chief Executive Officer
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 140
EXHIBIT 31B
Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002
I, Steven J. Johnston, certify that:
1. I have reviewed this Annual Report on Form 10-K of Cincinnati Financial Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting , or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principals;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls
over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: February 27, 2009
/S/ Steven J. Johnston
Steven J. Johnston, FCAS, MAAA, CFA
Chief Financial Officer, Senior Vice President, Secretary and Treasurer
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 141
EXHIBIT 32
Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002
The certification set forth below is being submitted in connection with this report on Form 10-K for the
purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and
Section 1350 of Chapter 63 of Title 18 of the United States Code.
Kenneth W. Stecher, the chief executive officer, and Steven J. Johnston, the chief financial officer, of
Cincinnati Financial Corporation each certifies that, to the best of his knowledge:
1. the report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
2. the information contained in the report fairly presents, in all material respects, the financial condition
and results of operations of Cincinnati Financial Corporation.
Date: February 27, 2009
/S/ Kenneth W. Stecher
Kenneth W. Stecher
Director, President and Chief Executive Officer
/S/ Steven J. Johnston
Steven J. Johnston, FCAS, MAAA, CFA
Chief Financial Officer, Senior Vice President, Secretary and Treasurer
Cincinnati Financial Corporation – 2008 Annual Report on 10-K – Page 142
Cincinnati Financial Corporation
Officers and Directors
(as of February 27, 2009)
Directors
William F. Bahl, CFA, CIC
Chairman
Bahl & Gaynor Investment Counsel Inc.
Director since 1995 (1)(3)(4)(5*)
James E. Benoski
Vice Chairman of the Board
Cincinnati Financial Corporation
Director since 2000 (3)(4)
Gregory T. Bier, CPA (Ret.)
Managing Partner (Ret.), Cincinnati Office
Deloitte & Touche LLP
Director since 2006 (1)(4)
Kenneth C. Lichtendahl
President and Chief Executive Officer
Tradewinds Beverage Company
Director since 1988 (1*)(5)
W. Rodney McMullen
Vice Chairman
The Kroger Co.
Director since 2001 (2*)(3)(4)
Gretchen W. Price
Chief Financial Officer
philosophy inc.
(skin care and cosmetics)
Director since 2002 (1)(2)(5)
John J. Schiff, Jr., CPCU
Chairman of the Board
Cincinnati Financial Corporation
Director since 1968 (3*)(4*)
Thomas R. Schiff
Chairman and Chief Executive Officer
John J. & Thomas R. Schiff & Co. Inc.
(insurance agency)
Director since 1975 (4)
Douglas S. Skidmore
President and Chief Executive Officer
Skidmore Sales & Distributing Company Inc.
(food distribution)
Director since 2004 (1)(5)
Kenneth W. Stecher
President and Chief Executive Officer
Cincinnati Financial Corporation
Director since 2008 (3)(4)
John F. Steele, Jr.
Chairman and Chief Executive Officer
Hilltop Basic Resources Inc.
(aggregates/concrete supplier)
Director since 2005 (1)
Larry R. Webb, CPCU
President
Webb Insurance Agency Inc.
Director since 1979 (3)
E. Anthony Woods
Chairman and Chief Executive Officer
SupportSource LLC
(health care consulting)
Director since 1998 (2)(3)(4)
(1) Audit Committee
(2) Compensation Committee
(3) Executive Committee
(4) Investment Committee; also
Richard M. Burridge, CFA, adviser
(5) Nominating Committee
* Committee Chair
Officers
John J. Schiff, Jr., CPCU
Chairman of the Board
Kenneth W. Stecher
President and Chief Executive Officer
Steven J. Johnston, FCAS, MAAA, CFA
Chief Financial Officer, Senior Vice President,
Secretary and Treasurer
Martin F. Hollenbeck, CFA, CPCU
Senior Vice President, Assistant Secretary and
Assistant Treasurer
Eric N. Mathews, CPCU, AIAF
Principal Accounting Officer, Vice President,
Assistant Secretary and Assistant Treasurer
Directors Emeriti
Vincent H. Beckman
Michael Brown
Robert J. Driehaus
John E. Field, CPCU
Jackson H. Randolph
Lawrence H. Rogers II
John Sawyer
Robert C. Schiff
Frank J. Schultheis
David B. Sharrock
John M. Shepherd
Thomas J. Smart
Alan R. Weiler, CPCU
William H. Zimmer
W.F. Bahl
J.E. Benoski
G.T. Bier
K.C. Lichtendahl
W.R. McMullen
G.W. Price
J.J. Schiff, Jr.
T.R. Schiff
D.S. Skidmore
K.W. Stecher
J.F. Steele, Jr.
L.R. Webb
E.A. Woods
Printed on Recycled Paper
Shareholder Information
Cincinnati Financial Corporation had approximately 12,000 shareholders of record and approximately 37,000 beneficial
shareholders as of December 31, 2008. Many of the company's independent agent representatives and most of the 4,179 associates
of its subsidiaries own the company’s common stock.
Common Stock Price and Dividend Data
Common shares are traded under the symbol CINF on the NASDAQ Global Select Market.
(Source: Nasdaq Global Select Market)
__________________________________________________________________________________________________
2008
___________________________________________________________________________________________________
2007
Quarter:
1st
High close . . . . . . . . . . . . . . . . . . . . . . $ 39.71 $ 39.97 $ 33.60 $ 31.71
18.80
Low close . . . . . . . . . . . . . . . . . . . . . . .
29.07
Period-end close . . . . . . . . . . . . . . . . .
0.39
Cash dividends declared . . . . . . . . .
21.83
28.44
0.39
35.10
38.04
0.39
25.40
25.40
0.39
__________________
__________________
__________________
__________________
2nd
3rd
4th
___________________
1st
$ 45.92
42.24
42.40
0.355
__________________
2nd
$ 47.62
42.57
43.40
0.355
__________________
3rd
$ 44.79
36.91
43.31
0.355
__________________
4th
$ 44.84
38.37
39.54
0.355
Annual Meeting
Shareholders are invited to attend the Annual Meeting of Shareholders of Cincinnati Financial Corporation at 9:30 a.m. on
Saturday, May 2, 2009, at the Cincinnati Art Museum in Eden Park, Cincinnati, Ohio. You may listen to an audio webcast of the
event by visiting www.cinfin.com/investors.
Independent Registered Public Accounting Firm
Deloitte & Touche LLP
250 East Fifth Street
Cincinnati, Ohio 45202-5109
Contact Information
Communications directed to Steven J. Johnston, FCAS, MAAA, CFA, senior vice president, chief financial officer and secretary,
are shared with the appropriate individual(s). Or, you may directly access services:
Investors: Investor Relations responds to investor inquiries about Cincinnati Financial Corporation and its performance.
Heather J. Wietzel – Vice President, Investor Relations
513-870-2768 or investor_inquiries@cinfin.com
Shareholders: Shareholder Services provides stock transfer services, fulfills requests for shareholder materials and assists
registered shareholders who wish to update account information or enroll in shareholder plans.
Jerry L. Litton – Assistant Vice President, Shareholder Services
513-870-2639 or shareholder_inquiries@cinfin.com
Media: Corporate Communications assists media representatives seeking information or comment from Cincinnati
Financial Corporation or its subsidiaries.
Joan O. Shevchik, CPCU, CLU – Senior Vice President, Corporate Communications
513-603-5323 or media_inquiries@cinfin.com
CINCINNATI FINANCIAL CORPORATION
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Specialty Underwriters Insurance Company
The Cincinnati Life Insurance Company
CSU Producer Resources Inc.
CFC Investment Company
Mailing Address:
P.O. Box 145496
Cincinnati, Ohio 45250-5496
Street Address:
6200 South Gilmore Road
Fairfield, Ohio 45014-5141
Phone: 513-870-2000
Fax: 513-870-2066
www.cinfin.com