CinCinnati FinanCial Corporation
2010 ANNUAL REPORT
ON FORM 10-K
About the
CompAny
Cincinnati Financial Corporation stands among the 25 largest property casualty insurers in the
nation, based on premium volume. A select group of independent agencies actively markets our
business, home and auto insurance within their communities. These agents offer our standard
market commercial lines policies in 39 states, personal lines policies in 29 and excess and surplus
lines policies in 38 of those same states. Within this select group, we seek to become the life
insurance carrier of choice and to help agents and their clients – our policyholders – by offering
leasing and financing services.
For 60 years, three competitive advantages have distinguished our 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 the strength of our
claims service, field underwriting and field support services
These advantages help us to balance growth with underwriting discipline in a competitive
environment. 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.
TABLE OF CONTENTS
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Business
Cincinnati Financial Corporation – Introduction
Our Business and Our Strategy
Our Segments
Other
Regulation
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
(Removed and Reserved)
Market for the Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Executive Summary
Critical Accounting Estimates
Recent Accounting Pronouncements
Results of Operations
Liquidity and Capital Resources
Safe Harbor Statement
Quantitative and Qualitative Disclosures About Market Risk
Introduction
Fixed-Maturity Investments
Equity Investments
Application of Asset Impairment Policy
Financial Statements and Supplementary Data
Responsibility for Financial Statements
Management’s Annual Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
Index of Exhibits
3
3
3
3
12
22
22
24
30
30
30
30
31
31
34
36
36
36
40
48
48
78
92
93
93
94
95
96
98
98
99
100
101
102
103
104
105
131
131
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132
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146
Cincinnati Financial Corporation – 2010 10-K – Page 1
United States Securities and Exchange Commission
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2010.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
Form 10-K
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 No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 if Regulation S-T(§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
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.
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 Accelerated filer Non-accelerated filer Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of voting stock held by nonaffiliates of the Registrant was $3,793,569,013 as of June 30, 2010.
As of February 21, 2011, there were 163,000,007 shares of common stock outstanding.
Portions of the definitive Proxy Statement for Cincinnati Financial Corporation’s Annual Meeting of Shareholders to be held on
April 30, 2011, are incorporated by reference into Part III of this Form 10-K.
Document Incorporated by Reference
Cincinnati Financial Corporation – 2010 10-K – Page 2
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 property casualty insurance marketed through independent
insurance agents in 39 states. Our headquarters is in Fairfield, Ohio. At year-end 2010, we employed
4,060 associates, with 2,838 headquarters associates providing support to 1,222 field associates.
At year-end 2010, Cincinnati Financial Corporation owned 100 percent of three subsidiaries: The Cincinnati
Insurance Company, CSU Producer Resources Inc., and CFC Investment Company. In addition, the parent
company has an investment portfolio, owns the headquarters property and is responsible for corporate
borrowings and shareholder dividends.
The Cincinnati Insurance Company owns 100 percent of our four additional insurance subsidiaries. Our
standard market property casualty insurance group includes two of those subsidiaries – The Cincinnati
Casualty Company and The Cincinnati Indemnity Company. This group writes a broad range of business,
homeowner and auto policies. Other subsidiaries of The Cincinnati Insurance Company include The Cincinnati
Life Insurance Company, which provides life insurance, disability income policies and annuities, and The
Cincinnati Specialty Underwriters Insurance Company, which began offering excess and surplus lines
insurance products in January 2008.
The two non-insurance subsidiaries of Cincinnati Financial Corporation are CSU Producer Resources, which
offers insurance brokerage services to our independent agencies so their clients can access our excess and
surplus lines insurance products; and CFC Investment Company, which offers commercial leasing and
financing services to our agencies, their clients and other customers.
Our filings with the U.S. Securities and Exchange Commission (SEC) are available, free of charge, on our
website, www.cinfin.com/investors, as soon as possible after they have been filed with the SEC. These filings
include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934. In the following pages we reference various websites. These websites, including our
own, are not incorporated by reference in this Annual Report on Form 10-K.
Periodically, we refer to estimated industry data so that we can give information about our performance
versus the overall insurance industry. Unless otherwise noted, the industry data is prepared by A.M. Best Co.,
a leading insurance industry statistical, analytical and insurer financial strength and credit rating
organization. Information from A.M. Best is presented on a statutory accounting basis. When we provide our
results on a comparable statutory accounting basis, we label it as such; all other company data is presented
in accordance with accounting principles generally accepted in the United States of America (GAAP).
OUR BUSINESS AND OUR STRATEGY
INTRODUCTION
The Cincinnati Insurance Company was founded over 60 years ago by four independent insurance agents.
They established the mission that continues to guide all of the companies in the Cincinnati Financial
Corporation family – to grow profitably and enhance the ability of local independent insurance agents to
deliver quality financial protection to the people and businesses they serve by:
•
•
• developing associates committed to superior service
A select group of agencies in 39 states actively markets our property casualty insurance within their
communities. Standard market commercial lines policies are marketed in all of those states, while personal
lines policies are marketed in 29 of those states. Excess and surplus lines policies are available in 38 of
those 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.
producing competitive, up-to-date products and services
providing market stability through financial strength
Cincinnati Financial Corporation – 2010 10-K – Page 3
Three competitive advantages distinguish our company, positioning us to build shareholder value and to be
successful overall:
• Commitment to our network of professional independent insurance agencies and to their continued
success
•
Financial strength that lets us be a consistent market for our agents’ business, supporting stability
and confidence
• Operating structure that supports local decision making, showcasing our claims excellence and allowing
independent agents, who represent multiple carriers
focus on one or more states or regions (regional carrier)
captive agents, who represent one carrier exclusively, or
target a certain segment of the market (for example, personal insurance)
choose to sell a limited product line or only one type of insurance (monoline carrier)
us to balance growth with underwriting discipline
Independent Insurance Agency Marketplace
The U.S. property casualty insurance industry is a highly competitive marketplace with more than 2,000 stock
and mutual companies operating independently or in groups. No single company or group dominates across
all product lines and states. Standard market insurance companies (carriers) can market a broad array of
products nationally or:
•
•
•
Standard market property casualty insurers generally offer insurance products through one or more
distribution channels:
•
•
• direct marketing to consumers
For the most part, we compete with standard market insurance companies that market through independent
insurance agents. Agencies marketing our commercial lines products typically represent six to 12 standard
market insurance carriers for commercial lines products, including both national and regional carriers, most
of which are mutual companies. Our agencies typically represent four to six standard personal lines carriers,
and we also compete with carriers that market personal lines products through captive agents and direct
writers. Distribution through independent insurance agents or brokers represents nearly 60 percent of overall
U.S. property casualty insurance premiums and approximately 80 percent of commercial property casualty
insurance premiums, according to studies by the Independent Insurance Agents and Brokers of America.
We are committed exclusively to the independent agency channel. The independent agencies that we choose
to market our standard lines insurance products share our philosophies. They do business person to person;
offer broad, value-added services; maintain sound balance sheets; and manage their agencies
professionally. We develop our relationships with agencies that are active in their local communities,
providing important knowledge of local market trends, opportunities and challenges.
In addition to providing standard market property casualty insurance products, we opened our own excess
and surplus lines insurance brokerage firm so that we could offer our excess and surplus lines products
exclusively to the independent agencies who market our other property casualty insurance products. We also
market life insurance products through the agencies that market our property casualty products and through
other independent agencies that represent The Cincinnati Life Insurance Company without also representing
our other subsidiaries. Offering insurance solutions beyond our standard market property casualty insurance
products helps our agencies meet the broader needs of their clients, and also serves to increase and
diversify agency revenues and profitability.
The excess and surplus lines market exists due to a regulatory distinction. Generally, excess and surplus
lines insurance carriers provide insurance that is unavailable in the standard market due to market
conditions or characteristics of the insured person or organization that are caused by nature, the insured's
claim history or the characteristics of their business. We established an excess and surplus lines operation in
response to requests to help meet the needs of agency clients when insurance is unavailable in the standard
market. By providing superior service, we can help our agencies grow while also profitably growing our
property casualty business. Insurers operating in the excess and surplus lines marketplace generally market
business through excess and surplus lines insurance brokers, whether they are small specialty insurers or
specialized divisions of larger insurance organizations.
At year-end 2010, our 1,245 property casualty agency relationships were marketing our standard market
insurance products out of 1,544 reporting locations. An increasing number of agencies have multiple,
separately identifiable locations, reflecting their growth and consolidation of ownership within the
independent agency marketplace. The number of reporting agency locations indicates our agents’ regional
scope and the extent of our presence within our 39 active states. At year-end 2009, our 1,180 agency
relationships had 1,463 reporting locations. At year-end 2008, our 1,133 agency relationships had
1,387 reporting locations.
Cincinnati Financial Corporation – 2010 10-K – Page 4
We made 93, 87 and 76 new agency appointments in 2010, 2009 and 2008, respectively. Of these new
appointments, 70, 65 and 52, respectively, were new relationships. The remainder included new branch
offices opened by existing Cincinnati agencies and appointment of agencies that merged with a Cincinnati
agency. These new appointments and other changes in agency structures or appointment status led to a net
increase in agency relationships of 65, 47 and 41 and a net increase in reporting agency locations of 81,
76 and 60 in 2010, 2009 and 2008, respectively.
On average, we have a 12.4 percent share of the standard lines property casualty insurance purchased
through our reporting agency locations. Our share is 17.7 percent in reporting agency locations that have
represented us for more than 10 years; 6.7 percent in agencies that have represented us for six to 10 years;
4.1 percent in agencies that have represented us for one to five years; and 0.8 percent in agencies that have
represented us for less than one year.
Our largest single agency relationship accounted for approximately 1.2 percent of our total property casualty
earned premiums in 2010. No aggregate locations under a single ownership structure accounted for more
than 2.2 percent of our earned premiums in 2010.
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 segments of the insurance marketplace that we serve. This
strength supports the consistent, predictable performance that our policyholders, agents, associates and
shareholders have always expected and received, helping us withstand significant challenges.
While the prospect exists for short-term financial performance variability due to our exposures to potential
catastrophes or significant capital market losses, the rating agencies consistently have asserted that we
have built appropriate financial strength and flexibility to manage that variability. We remain committed to
strategies that emphasize being a consistent, stable market for our agents’ business over short-term benefits
that might accrue by quick, opportunistic reaction to changes in market conditions.
We use various principles and practices such as diversification and enterprise risk management to maintain
strong capital. This includes maintaining a diversified investment portfolio by reviewing and applying
diversification parameters and tolerances.
• Our $8.383 billion fixed-maturity portfolio is diversified and exceeds total insurance reserves. At
December 31, 2010, no corporate bond exposure accounted for more than 0.8 percent of our fixed-
maturity portfolio and no municipal exposure accounted for more than 0.3 percent. The portfolio had an
average rating of A2/A and its fair value exceeded total insurance reserve liability by approximately
35 percent.
•
The strength of our fixed-maturity portfolio provides an opportunity to invest for potential capital
appreciation by purchasing equity securities. Our $3.041 billion equity portfolio minimizes
concentrations in single stocks or industries. At December 31, 2010, no single security accounted for
more than 6 percent of our portfolio of publicly traded common stocks, and no single sector accounted
for more than 16 percent.
Strong liquidity increases our flexibility through all periods to maintain our cash dividend and to continue to
invest in and expand our insurance operations. At December 31, 2010, we held $1.042 billion of our cash
and invested assets at the parent company level, of which $763 million, or 73.2 percent, was invested in
common stocks, and $38 million, or 3.6 percent, was cash or cash equivalents.
We minimize reliance on debt as a source of capital, maintaining the ratio of debt-to-total-capital below
20 percent. At December 31, 2010, this ratio at 14.3 percent was well below the target limit as capital
remained strong while debt levels were unchanged from year-end 2009. Our long-term debt consists of
three non-convertible, non-callable debentures, two due in 2028 and one in 2034.
At year-end 2010 and 2009, risk-based capital (RBC) for our standard and excess and surplus lines property
casualty operations and life operations was very strong, far exceeding regulatory requirements.
• We ended 2010 with a 0.8-to-1 ratio of property casualty premiums to surplus, a key measure of
property casualty insurance company capacity and security. A lower ratio indicates more security for
policyholders and greater capacity for growth by an insurer. Our low ratio, compared with historical
averages, gives us ample flexibility to diversify risk by expanding our operations into new geographies
and product areas. The estimated industry average ratio was 0.7-to-1 for 2010.
• We ended 2010 with a 14.1 percent ratio of life statutory adjusted risk-based surplus to liabilities, a key
measure of life insurance company capital strength. The estimated industry average ratio was
12.0 percent for 2010. A higher ratio indicates an insurer’s stronger security for policyholders and
capacity to support business growth.
Cincinnati Financial Corporation – 2010 10-K – Page 5
(Dollars in millions) Statutory Information
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
Excess and surplus 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
$
$
$
At December 31,
2010
2009
$
$
$
3,777
3,793
450
8.4
0.8
303
318
35
9.1
2,266
14.1
172
172
10
16.6
0.3
3,648
3,664
437
8.4
0.8
300
316
40
7.9
1,960
16.3
168
168
8
21.4
0.2
The consolidated property casualty insurance group’s ratio of investments in common stock to statutory
surplus was 55.3 percent at year-end 2010 compared with 58.4 percent at year-end 2009. The life
insurance company’s ratio was 29.6 percent compared with 32.2 percent a year ago.
Cincinnati Financial Corporation’s senior debt is rated by four independent rating firms. In addition, the rating
firms award our property casualty and life operations 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 ratings agency, and each rating should be
evaluated independently of any other rating.
All of our insurance subsidiaries continue to be highly rated. During 2010, Standard & Poor’s Rating Services
lowered our ratings as described below. No other rating agency actions occurred during 2010.
As of February 25, 2011, our insurer financial strength ratings were:
Insurer Financial Strength Ratings
Rating
Agency
A. M. Best Co.
Standard Market Property
Casualty Insurance Subsidiary
Rating
Tier
2 of 16
Superior
A+
Life Insurance
Subsidiary
A
Excellent
Rating
Tier
3 of 16
Fitch Ratings
A+
Strong
5 of 21
A+
Strong
5 of 21
A1
Moody's Investors
Service
Standard & Poor's
Ratings Services
A
Good
5 of 21
Strong
6 of 21
-
A
-
-
Strong
6 of 21
Excess and Surplus
Insurance
Subsidiary
Rating
Tier
Date of Most Recent
Affirmation or Action
A
Excellent
3 of 16 Stable outlook (12/13/10)
-
-
-
-
-
-
-
-
-
Stable outlook (9/2/10)
Stable outlook (9/25/08)
Stable outlook (7/19/10)
On December 13, 2010, A.M. Best affirmed our ratings that it had assigned in February 2010, continuing
its stable outlook. A.M. Best cited our superior risk-adjusted capitalization, conservative reserving
philosophy and successful distribution within our targeted regional markets. Concerns noted by A.M. Best
included geographic concentration, underwriting losses that began in 2008 and common stock leverage
of approximately 50 percent of statutory surplus. A.M. Best said its concerns are offset by our
conservative underwriting and reserving philosophies, with loss reserves more than fully covered by a
highly rated, diversified bond portfolio, and by strategic initiatives to improve underwriting results.
On September 2, 2010, Fitch Ratings affirmed our ratings that it had assigned in August 2009,
continuing its stable outlook. Fitch noted that ratings strengths include conservative capitalization,
moderate holding company leverage, ample liquidity and competitive advantages from our
distribution system. Fitch said the ratings recognize our steps taken to rebalance our common stock
portfolio to reduce volatility of capital and earnings. Fitch noted concerns principally related to
challenges from competitive market conditions and exposure to regional natural catastrophes and
weather-related losses.
Cincinnati Financial Corporation – 2010 10-K – Page 6
On July 19, 2010, Standard & Poor’s Ratings Services lowered the insurer financial strength ratings to
A (Strong) from A+ (Strong) on our standard market property casualty companies and our life insurance
subsidiary, and raised its outlook to stable. S&P said its actions reflected the recent decline in our
earnings and deterioration of underwriting performance from historical levels. Standard & Poor’s noted
our very strong capitalization and strong competitive position, supported by a very loyal and productive
agency force and low-cost infrastructure. S&P also cited our improved enterprise risk management,
including a more conservative and risk-averse investment portfolio, which supports capital stability.
Our debt ratings are discussed in Item 7, Liquidity and Capital Resources, Additional Sources of Liquidity,
Page 79.
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 and local marketplace
intelligence 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, 956 reporting agency locations
wrote 67.1 percent of our 2010 consolidated property casualty earned premium volume compared with
933 locations and 68.1 percent in 2009.
Property Casualty Insurance Earned Premiums by State
(Dollars in millions)
Year ended December 31, 2010
Ohio
Illinois
Indiana
Pennsylvania
Georgia
North Carolina
Michigan
Virginia
Kentucky
Tennessee
Year ended December 31, 2009
Ohio
Illinois
Indiana
Pennsylvania
Georgia
North Carolina
Michigan
Virginia
Wisconsin
Kentucky
Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
$
$
599
243
197
176
149
143
126
121
106
102
611
253
201
174
148
138
129
121
103
100
20.5 %
8.3
6.8
6.0
5.1
4.9
4.3
4.1
3.6
3.5
21.0 %
8.7
6.9
6.0
5.1
4.8
4.4
4.2
3.5
3.5
224
122
105
83
77
80
116
60
41
48
224
119
104
82
71
75
109
60
49
40
$
$
2.7
2.0
1.9
2.1
1.9
1.8
1.1
2.0
2.6
2.1
2.7
2.1
1.9
2.1
2.1
1.8
1.2
2.0
2.1
2.5
Field Focus
We rely on our force of 1,222 field associates to provide service and be accountable to our agencies for
decisions we make at the local level. These associates live in the communities our agents serve, working
from offices in their homes and providing 24/7 availability to our agents. 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 underwriting new commercial
lines business. 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 loss control field representatives and others
specializing in machinery and equipment risks perform inspections and recommend specific actions to
improve the safety of the policyholder’s operations and the quality of the agent’s account.
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
Cincinnati Financial Corporation – 2010 10-K – Page 7
other sales advantages. We seek to develop long-term relationships by understanding the unique needs of
their clients, who are also our policyholders.
We also are responsive to agent needs for well designed property casualty products. Our commercial lines
products are structured to allow flexible combinations of property and liability coverages in a single package
with a single expiration date and several payment options. This approach brings policyholders convenience,
discounts and a reduced risk of coverage gaps or disputes. At the same time, it increases account retention
and saves time and expense for the agency and our company.
We seek to employ technology solutions and business process improvements that:
•
allow our field and headquarters associates to collaborate with each other and with agencies
more efficiently
•
•
•
provide our agencies the ability to access our systems and client data to process business transactions
from their offices
allow policyholders to directly access pertinent policy information online in order to further improve
efficiency for our agencies
automate our internal processes so our associates can spend more time serving agents and
policyholders, and
reduce duplicated effort, introducing more efficient processes that reduce company and agency costs
•
Agencies access our systems and other electronic services via their agency management systems or
CinciLink®, our secure agency-only website. CinciLink provides an array of web-based services and content
that makes doing business with us easier, such as commercial and personal lines rating and processing
systems, policy loss information, sales and marketing materials, educational courses about 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 763 locally based field claims associates work from their homes, assigned to specific agencies.
They respond personally to policyholders and claimants, typically within 24 hours of receiving an agency’s
claim report. We believe we have a competitive advantage because of the person-to-person approach and
the resulting high level of service that our field claims representatives provide. We also help our agencies
provide prompt service to policyholders by giving agencies authority to immediately pay most first-party
claims under standard market policies up to $2,500. We believe this same local approach to handling
claims is a competitive advantage for our agents providing excess and surplus lines coverage in their
communities. Handling of these claims includes guidance from headquarters-based excess and surplus lines
claims managers.
Our property casualty claims operation uses CMS, our claims management system, 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 also can access selected CMS information such as activity
notes on open claims.
Catastrophe response teams are comprised of volunteers from our experienced field claims staff, and we
give them 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 by rotating storm
teams, headquarters and local field claims representatives. When hurricanes or other weather events are
predicted, we can identify through mapping technologies the expected number of our policyholders that may
be impacted by the event and choose to have catastrophe response team members travel to strategic
locations near the expected impact area. They are 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 (SIU) with former law enforcement and claims professionals whose
qualifications make them uniquely suited to gathering facts to uncover potential fraud. While we believe our
job is to pay what is due under each policy contract, we also want to prevent false claims from unfairly
Cincinnati Financial Corporation – 2010 10-K – Page 8
increasing overall premiums. Our SIU also operates a computer forensics lab, using sophisticated software to
recover data and mitigate the cost of computer-related claims for business interruption and loss of records.
Insurance Products
We actively market property casualty insurance in 39 states through a select group of independent insurance
agencies. For most agencies that represent us, we believe we offer insurance solutions for approximately
75 percent of the typical insurable risks of their clients. Our standard market commercial lines products are
marketed in all 39 states while our standard market personal lines products are marketed in 29. At year-end
2010, CSU Producer Resources marketed our excess and surplus lines products in 38 states to agencies
that represent Cincinnati Insurance. We discuss our commercial lines, personal lines and excess and surplus
lines insurance operations and products in Commercial Lines Property Casualty Insurance Segment,
Page 12, Personal Lines Property Casualty Insurance Segment, Page 15, and Excess and Surplus Lines
Property Casualty Insurance Segment, Page 16.
The Cincinnati Specialty Underwriters Insurance Company began excess and surplus lines insurance
operations in January 2008. We structured this operation to exclusively serve the needs of the independent
agencies that currently market our standard market insurance policies. When all or a portion of a current or
potential client’s insurance program requires excess and surplus lines coverages, those agencies can write
the whole account with Cincinnati, gaining benefits not often found in the broader excess and surplus lines
market. Agencies have access to The Cincinnati Specialty Underwriters Insurance Company’s product line
through CSU Producer Resources, the wholly owned insurance brokerage subsidiary of parent-company
Cincinnati Financial Corporation.
We also support the independent agencies affiliated with our property casualty operations in their 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 underserved through our property casualty agencies. We are careful to solicit business from these
other agencies in a manner that does not compete with the life insurance marketing and sales efforts of our
property casualty agencies. Our life insurance operation emphasizes up-to-date products, responsive
underwriting, high quality service and competitive pricing.
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 for travel-related expenses to classes held at our headquarters, most programs are offered at no cost
to our agencies. While that approach may be extraordinary in our industry today, the result is quality service
for our policyholders and increased success for our independent agencies.
In addition to broad education and training support, we make available non-insurance financial services.
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 the company and their clients, increasing loyalty while diversifying the agency’s
revenues.
STRATEGIC INITIATIVES
Management has identified strategies that can position us for long-term success. The board of directors and
management expect execution of our strategic plan to create significant value for shareholders over time. We
broadly group these strategies into two areas of focus – improving insurance profitability and driving
premium growth – correlating with the primary ways we measure our progress toward our long-term
financial objectives.
Effective capital management is an important part of creating shareholder value, serving as a foundation to
support other strategies focused on profitable growth of our insurance business, with the overall objective of
long-term benefit for shareholders. Our capital management philosophy is intended to preserve and build our
capital while maintaining appropriate liquidity. A strong capital position provides the capacity to support
premium growth, and liquidity provides for our investment in the people and infrastructure needed to
implement our other strategic initiatives. Our strong capital and liquidity also provide financial flexibility for
shareholder dividends or other capital management actions.
Our strategies seek to position us to compete successfully in the markets we have targeted while optimizing
the balance of risk and returns. We believe successful implementation of key initiatives that support our
Cincinnati Financial Corporation – 2010 10-K – Page 9
strategies will help us better serve our agent customers, reduce volatility in our financial results and achieve
our long-term objectives despite shorter-term effects of difficult economic, market or pricing cycles. We
describe our expectations for the results of these initiatives in Item 7, Executive Summary of the
Management’s Discussion and Analysis, Page 36.
Improve Insurance Profitability
Implementation of the three initiatives below is intended to improve pricing capabilities for our property
casualty business, improving our ability to manage our business while also enhancing our efficiency. By
improving pricing capabilities through the use of analytics tools, we can better manage profit margins. By
improving agency-level planning, we can develop and execute growth and profitability plans that enhance our
ability to achieve objectives at all levels in the organization. By improving internal processes and further
developing performance metrics, we can be more efficient and effective. These initiatives also support the
ability of the agencies that represent us to grow profitably by allowing them to serve clients faster and more
efficiently manage expenses. The primary initiatives for 2011 to improve insurance profitability are:
•
Improve pricing precision using predictive analytics – We continue efforts to expand our pricing
capabilities by using predictive analytics and expect cumulative benefits of these efforts to improve loss
ratios over time. Development of additional business data to support accurate underwriting, pricing and
other business decisions also continues. A phased project that will continue over the next several years
will deploy a full data management program, including a data warehouse for our property casualty and
life insurance operations, providing enhanced granularity of pricing data. Specific initiatives that are key
to improving pricing precision are summarized below.
o Commercial lines – In the second half of 2009, we began to use predictive modeling tools that align
individual insurance policy pricing to risk attributes for our workers’ compensation line of business.
During fourth-quarter 2010, we completed development of predictive models for our commercial
auto line of business and also for general liability and commercial property coverages in commercial
package accounts. We plan in 2011 to integrate these models into our policy processing systems.
Underwriters using these tools will be able to target profitability and to provide pricing impacts to
agency personnel. Additional reports to monitor use and results at several levels should also
contribute to improved pricing.
•
•
o Personal lines – Prior to 2010, we began to use predictive modeling tools for our homeowner line of
business, and in late 2010 we began using similar analytics for personal auto. We believe we are
successfully attracting more of our agents’ preferred business, based on the average quality of our
book of business. Quality has improved as measured by the mix of business by insurance score.
During 2011, we will continue to develop the models by calibrating pricing precision to allow us to
write more business profitably. Further educational support for agency personnel and enhanced
reporting to monitor results for all users will also be developed. These tools enable us to increase
the speed of introducing new rates and model attributes, more rapidly adapting to changes in
market conditions.
Improve agency-level planning for profitability and growth – Additional use of analytics tools will help us
better understand business in more detail and communicate additional quantitative and qualitative
information to agents and associates. Development of models at an agency level to predict profitability,
along with enhanced reporting of related metrics, should facilitate coordination and consistent decision-
making. During 2011, we expect to enhance our agency planning processes to develop multi-year
profitability and growth plans. Evaluating agency and state-level plans through models that aggregate
company-level results will help determine if executing plans formulated at those levels, in aggregate, are
adequate to reach our broader performance objectives.
Improve internal processes and further deploy performance metrics – Improving processes supports our
strategic goals and can reduce internal costs. Use of additional measurements to track progress and
accountability for results will improve our overall effectiveness. Completion of development for additional
coverages in our commercial lines policy administration system is expected to facilitate important
internal process improvement initiatives for 2011. One important initiative aims to develop business
rules and parameters for personal lines accounts that will allow processing of some business without
intervention by an underwriter, for risks that meet qualifying underwriting criteria. The objective is to
streamline processing for our agents and associates, permitting more time for risks that need additional
service or attention. The initiative also includes developing technology to integrate automated steps into
the current process plus changes in workflow, including auditing for compliance with eligibility
requirements. We expect in the future a similar streamlined process will eventually be developed for
parts of our commercial lines business.
We measure the overall success of our strategy to improve insurance profitability primarily through
our GAAP combined ratio for property casualty results, which we believe can be consistently below
100 percent for 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 2010, we again earned that
Cincinnati Financial Corporation – 2010 10-K – Page 10
rank in approximately 75 percent of the agencies that have represented Cincinnati Insurance for more than
five years, based on 2009 premiums. We are working to increase the percentage of agencies where we
achieve that rank.
Drive Premium Growth
Implementation of the operational initiatives below is intended to further penetrate each market we serve
through our independent agency network. We expect strategies aimed at specific market opportunities, along
with service enhancements, to help our agents grow and increase our share of their business. The primary
initiatives to drive premium growth are:
• Gain a larger share of agency business – We will continue to execute on prior year growth initiatives and
add new initiatives to improve our penetration in each market we serve through our independent
agencies. Our focus remains on the key components of agent satisfaction based on factors agents tell us
are most important.
o
Innovate our small business strategy – Additional focus on attributes that agencies weigh heavily in
carrier selection for their clients is a key component of this initiative. Those attributes include
technology ease of use and integration with agency management systems, flexible billing, product
breadth and pricing, and service and marketing support for new business. The initiative includes
refining workflows for the entire policy process and providing additional policyholder services. We
also are developing and coordinating targeted marketing, including cross-selling opportunities,
through our Target Markets department. This area focuses on new commercial product
development, including identification and promotional support for promising classes of business.
Small business policies are already an important part of our commercial lines property casualty
insurance segment. Nearly 90 percent of our commercial in-force policies have annual premiums of
$10,000 or less, accounting in total for approximately one-third of our 2010 commercial lines
premium volume. Profitably growing our book of small business is expected to provide significant
growth opportunities for the agencies that represent us while also benefiting the company. Small
business does not typically trend quite as severely with pricing cycles, producing a more stable block
of premium. This strategy also is expected to improve profitability due to lower expenses through
more automation of data gathering and use of predictive analytics.
o New agency appointments – We continue to appoint new agencies to develop additional points of
distribution, focusing on markets where our market share is less than 1 percent while also
considering economic and catastrophe risk factors. In 2011, we are targeting approximately
120 appointments of independent agencies, with a significant portion in the five states we entered
since late 2008. We seek to build a close, long-term relationship with each agency we appoint. We
carefully evaluate the marketing reach of each new appointment to ensure the territory can support
both current and new agencies. In counting new agency appointments, we include appointment of
new agency relationships with The Cincinnati Insurance Companies. For those that we believe will
produce a meaningful amount of new business premiums, we also count appointments of agencies
that merge with a Cincinnati agency and new branch offices opened by existing Cincinnati agencies.
We made 93, 87 and 76 new appointments in 2010, 2009 and 2008, respectively, with 70, 65 and
52 representing new relationships. One-quarter of the agencies appointed during 2010 were in the
five states we entered since late 2008: Texas, Colorado, Wyoming, Connecticut and Oregon. The
contribution of those states to our property casualty premium growth should occur over several years
as time is required to fully realize the benefits of our agency relationships. We generally earn a
10 percent share of an agency’s business within 10 years of its appointment. We also help our
agents grow their business by attracting more clients in their communities through unique
Cincinnati-style service.
•
Improve consumer relationships we undertake on behalf of our agencies – Improved interactions with
consumers who are clients and prospects of our agents can drive more business to agents and help
them grow. Through this initiative, we expect to identify the various ways we interact with consumers on
behalf of our agencies and ensure that we do so in a manner that reinforces the value of the
independent agent while establishing the value and service of a Cincinnati policy. By understanding and
monitoring trends that drive consumer purchasing decisions, we can create positive interactions. We
expect online policyholder services to continue evolving and will continue to work with agencies to meet
the needs of their clients.
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. On a
compound annual growth rate basis over the five-year period 2006 through 2010, our property casualty net
written premiums registered negative 0.7 percent, compared with an estimated negative 0.5 percent for the
industry. Our premium mix is more heavily weighted in commercial lines, relative to the industry, and
premium growth rates for the commercial lines segment of the industry have lagged the personal lines
segment in recent years.
Cincinnati Financial Corporation – 2010 10-K – Page 11
Investments
Life insurance
OUR SEGMENTS
Consolidated financial results primarily reflect the results of our five reporting segments. In the fourth quarter
of 2010, we revised our reportable operating segments to include excess and surplus lines. This segment
includes results of The Cincinnati Specialty Underwriters Insurance Company and CSU Producer Resources.
Historically, the excess and surplus lines results were reflected in Item 7, Other. We began offering excess
and surplus lines insurance products in 2008. The line continues to grow since inception and separating it
into a reportable segment allows readers to view this business in a manner similar to how it is managed
internally when making operating decisions. Prior period data included in this annual report has been
recasted to represent this new segment. These segments are defined based on financial information we use
to evaluate performance and to determine the allocation of assets.
• Commercial lines property casualty insurance
• Personal lines property casualty insurance
• Excess and surplus lines property casualty insurance
•
•
We also evaluate results for our consolidated property casualty operations, which is the total of our
commercial lines, personal lines and excess and surplus lines 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 127. 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 36.
COMMERCIAL LINES PROPERTY CASUALTY INSURANCE SEGMENT
The commercial lines property casualty insurance segment contributed net earned premiums of
$2.154 billion to consolidated total revenues, or 57.1 percent of that total, and reported a gain before
income taxes of $15 million in 2010. Commercial lines net earned premiums declined 2 percent in 2010,
5 percent in 2009 and 4 percent in 2008.
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 – 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 against other acts or failures to act under specified circumstances; and excess insurance
and umbrella liability, including personal umbrella liability written as an endorsement to commercial
umbrella coverages. The commercial casualty business line includes liability coverage written on both a
discounted and nondiscounted basis as part of commercial package policies.
• Commercial property – Provides coverage for loss or damage to buildings, inventory and equipment
caused by covered causes of loss such as fire, wind, hail, water, theft and vandalism, as well as business
interruption resulting from a covered loss. Commercial property also includes crime insurance, which
provides coverage for losses such as embezzlement or misappropriation of funds by an employee,
among others; and inland marine insurance, which provides coverage for 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 nondiscounted and
discounted basis as part of commercial package policies.
• Commercial auto – Protects businesses against liability to others for both bodily injury and property
damage, medical payments to insureds and occupants of their vehicles, physical damage to an insured’s
own vehicle from collision and various other perils, and damages caused by uninsured motorists.
• Workers’ compensation – Protects employers against specified benefits payable under state or federal
law for workplace injuries to employees. We write workers’ compensation coverage in all of our active
states except North Dakota, Ohio and Washington, where coverage is provided solely by the state instead
of by private insurers.
• Specialty packages – Includes coverages for property, liability and business interruption tailored to meet
the needs of specific industry classes such as artisan contractors, dentists, garage operators, financial
Cincinnati Financial Corporation – 2010 10-K – Page 12
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 actual or alleged errors in judgment,
breaches of duty or other wrongful acts related to activities of for-profit or nonprofit organizations.
Approximately 70 percent of new policies and almost 40 percent of director and officer new
business premiums written in 2010 were for nonprofit entities. Our director and officer liability policy
can optionally include EPLI coverage.
• Machinery and equipment – Specialized coverage provides protection for loss or damage to boilers and
machinery, including production and computer equipment, 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 midsized businesses in their communities.
Of our 1,544 reporting agency locations, 16 market only our surety and executive risk products and
11 market only our personal lines products. The remaining 1,517 locations, located in all states in which we
actively market, offer some or all of our standard market commercial insurance products.
In 2010, our 10 highest volume commercial lines states generated 64.3 percent of our earned
premiums compared with 65.3 percent in the prior year as we continued efforts to geographically diversify
our property casualty risks. Earned premiums in the 10 highest volume states decreased 4 percent in
2010 and increased 1 percent in the remaining 29 states. The number of reporting agency locations in our
10 highest volume states increased to 954 in 2010 from 933 in 2009.
Commercial Lines Earned Premiums by State
(Dollars in millions)
Year ended December 31, 2010
Ohio
Illinois
Pennsylvania
Indiana
North Carolina
Virginia
Michigan
Georgia
Wisconsin
Tennessee
Year ended December 31, 2009
Ohio
Illinois
Pennsylvania
Indiana
North Carolina
Michigan
Virginia
Georgia
Wisconsin
Iowa
Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
$
$
347
187
157
133
120
100
96
82
81
79
359
202
157
140
127
102
101
85
83
79
16.1 %
8.7
7.3
6.2
5.6
4.6
4.5
3.8
3.8
3.7
16.3 %
9.2
7.1
6.4
5.8
4.6
4.6
3.9
3.8
3.6
223
120
83
104
78
60
115
75
48
48
223
117
82
103
74
108
60
71
49
46
$
$
1.6
1.6
1.9
1.3
1.5
1.7
0.8
1.1
1.7
1.6
1.6
1.7
1.9
1.4
1.7
0.9
1.7
1.2
1.7
1.7
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 offering product training,
Cincinnati Financial Corporation – 2010 10-K – Page 13
answering underwriting questions, helping to determine underwriting eligibility and assisting with the
mechanics of premium determination.
Our emphasis on small to midsized businesses is reflected in the mix of our commercial lines premium
volume by policy size. Nearly 90 percent of our commercial in-force policies have annual premiums of
$10,000 or less, accounting in total for approximately one-third of our 2010 commercial lines premium
volume. The remainder for policies with annual premiums greater than $10,000 includes in-force policies
with annual premiums greater than $100,000 that account for slightly less than 15 percent of our
2010 commercial lines premium volume.
Our commercial lines packages are typically offered on a three-year policy term for most insurance
coverages, a key competitive advantage. In our experience, multi-year packages appeal to the quality-
conscious insurance buyers who we believe are typical clients of our independent agents. Customized
insurance programs on a three-year term complement the long-term relationships these policyholders
typically have with their agents and with the company. By reducing annual administrative efforts, multi-year
policies lower expenses for our company and for our agents. The commitment we make to policyholders
encourages long-term relationships and reduces their need to annually re-evaluate their insurance carrier or
agency. We believe that the advantages of three-year policies in terms of improved policyholder convenience,
increased account retention and reduced administrative costs outweigh the potential disadvantage of these
policies, even in periods of rising rates.
Although we offer three-year policy terms, premiums for some coverages within those policies are adjustable
at anniversary for the next annual period, and policies may be canceled at any time at the discretion of the
policyholder. Contract terms often provide that rates for property, general liability, inland marine and crime
coverages, as well as policy terms and conditions, are fixed for the term of the policy. 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 2010 commercial
premiums were subject to annual rating or were written on a one-year policy term.
Staying abreast of evolving market conditions is a critical function, accomplished in both an informal and
a formal manner. Informally, our field marketing representatives, underwriters and Target Markets
department associates 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 Target Markets department analyzes opportunities
and develops new products and services, new coverage options and improvements to existing
insurance products.
We support our commercial lines operations with a variety of technology tools. e-CLAS® CPP for commercial
package and auto coverages now has rolled out to all of our appointed agencies in 30 states. It is being
developed for additional coverages and states that will be deployed over time. Since the initial deployment of
e-CLAS in late 2009, approximately one-third of our non-workers’ compensation commercial lines policies in
force at the end of 2010 have been processed through e-CLAS. Due to the three-year policy term for much of
our commercial lines business, some policies will not be due for renewal processing in e-CLAS until 2012. In
addition to increasing efficiency for our associates, the system allows our agencies to quote and print
commercial package policies in their offices, increasing their ease of doing business with us. The e-CLAS
platform also makes use of our real-time agency interface, CinciBridge®, which allows the automated
movement of key underwriting data from an agency’s management system to e-CLAS. This reduces agents’
data entry tasks and allows seamless quoting, rating and issuance capability.
Cincinnati Financial Corporation – 2010 10-K – Page 14
PERSONAL LINES PROPERTY CASUALTY INSURANCE SEGMENT
The personal lines property casualty insurance segment contributed net earned premiums of $721 million to
consolidated total revenues, or 19.1 percent of the total, and reported a loss before income taxes of
$54 million in 2010. Personal lines net earned premiums grew 5 percent in 2010, after declining less than
1 percent in 2009 and 3 percent in 2008.
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 – Protects against liability to others for both bodily injury and property damage, medical
payments to insureds and occupants of their vehicle, physical damage to an insured’s own vehicle from
collision and various other perils, and damages caused by uninsured motorists. In addition, many states
require policies to provide first-party personal injury protection, frequently referred to as
no-fault coverage.
• Homeowners – Protects against losses to dwellings and contents from a wide variety of perils, as well as
liability arising out of personal activities both on and off the covered premises. The company also offers
coverage for condominium unit owners and renters.
• Other personal lines – This includes the variety of other types of insurance products we offer to
individuals such as dwelling fire, inland marine, personal umbrella liability and watercraft coverages.
At year-end, we marketed personal lines insurance products through 1,123 or approximately 73 percent of
our 1,544 reporting agency locations. The 1,123 personal lines agency locations are in 29 of the 39 states in
which we offer standard market commercial lines insurance and represent nearly 80 percent of the reporting
agency locations in the 29 states. During 2010, we largely completed an initiative that began in 2008 to
appoint for personal lines existing agencies marketing only our commercial lines insurance products. We
continue to evaluate opportunities to expand our marketing of personal lines to other states. Primary factors
considered in the evaluation of a potential new state include weather-related catastrophe history and the
legal climate. The number of reporting agency locations in our 10 highest volume states increased 5 percent
to 749 in 2010 from 711 in 2009.
In 2010, our 10 highest volume personal lines states generated 82.2 percent of our earned premiums
compared with 84.1 percent in the prior year. Earned premiums in the 10 highest volume states increased
3 percent in 2010 while increasing 18 percent in the remaining states, reflecting progress toward our
long-term objective of geographic diversification through new states for our personal lines operation.
Personal Lines Earned Premiums by State
(Dollars in millions)
Year ended December 31, 2010
Ohio
Georgia
Indiana
Illinois
Alabama
Kentucky
Michigan
Tennessee
North Carolina
Virginia
Year ended December 31, 2009
Ohio
Georgia
Indiana
Illinois
Alabama
Kentucky
Michigan
Tennessee
Florida
Virginia
Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
$
$
246
63
59
52
42
40
28
22
20
20
248
61
57
48
41
36
26
20
20
19
34.1 %
8.8
8.2
7.2
5.9
5.5
3.8
3.1
2.8
2.8
36.1 %
8.9
8.4
7.1
5.9
5.3
3.8
2.9
2.9
2.8
199
69
82
86
38
37
90
43
67
38
202
63
79
84
36
35
80
36
10
35
$
$
1.2
0.9
0.7
0.6
1.1
1.1
0.3
0.5
0.3
0.5
1.2
1.0
0.7
0.6
1.1
1.0
0.3
0.6
2.0
0.5
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. At year-end, we had
Cincinnati Financial Corporation – 2010 10-K – Page 15
seven full-time personal lines marketing representatives who have underwriting authority and visit agencies
on a regular basis. They focus primarily on key states targeted for growth, reinforcing the advantages of our
personal lines products and offering training in the use of our processing system.
Competitive advantages of our personal lines operation include broad coverage forms, flexible underwriting,
superior claims service, generous credit structure and customizable endorsements for both the personal auto
and homeowner policies. Our personal lines products are processed through Diamond, our web-based real-
time personal lines policy processing system that supports and allows streamlined processing. Diamond
incorporates features frequently requested by our agencies such as pre-filling of selected data for improved
efficiency, easy-to-use screens, 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.
EXCESS AND SURPLUS LINES PROPERTY CASUALTY INSURANCE SEGMENT
The excess and surplus lines property casualty segment contributed net earned premiums of $49 million to
consolidated total revenues, or 1.3 percent of the total, and reported a loss before income taxes of $8 million
in 2010, its third year of operation. Excess and surplus lines net earned premium increased 81 percent in
2010. Net earned premiums increased 440 percent to $27 million in 2009.
Our excess and surplus lines policies typically cover business risks with unique characteristics, such as the
nature of the business or its claim history, that are difficult to profitably insure in the standard commercial
lines market. Excess and surplus lines insurers have more flexibility in coverage terms and rates compared
with standard lines companies, generally resulting in policies with higher rates and terms and conditions
customized for specific risks, including restricted coverage where appropriate. We target small to midsized
risks, seeking to avoid those we consider exotic in nature. Our average excess and surplus lines policy size is
approximately $5,000 in annual premiums, and policyholders in many cases also have standard market
insurance with one of The Cincinnati Insurance Companies. Approximately 80 percent of our 2010 premium
volume for the excess and surplus lines segment provided commercial casualty coverages and about
20 percent provided commercial property coverages. Those coverages are described below.
• Commercial casualty – Covers businesses for third-party liability from accidents occurring on their
premises or arising out of their operations, including products and completed operations. The majority of
these policies have coverage limits of $1 million or less. Miscellaneous errors and omissions and
professional coverage for liability from actual or alleged errors in judgment, breaches of duty or other
wrongful acts related to activities of insured businesses is also available, as is excess liability coverage
that adds another layer of protection to other liability insurance policies. Typical businesses covered
include contractors, consultants, bars or taverns, and manufacturers. Policies covering liability at special
events are also available.
• Commercial property – Insures loss or damage to buildings, inventory, equipment and business income
from causes of loss such as fire, wind, hail, water, theft and vandalism. Examples of property we
commonly insure with excess and surplus lines policies include temporarily vacant buildings, restaurants
and relatively higher-hazard manufacturing classes.
At the end of 2010, we marketed excess and surplus lines insurance products in 38 of the 39 states in which
we offer standard market commercial lines insurance. Offering excess and surplus lines helps agencies
representing The Cincinnati Insurance Companies meet the insurance needs of their clients when coverage is
unavailable in the standard market. By providing outstanding service, we can help agencies grow and prosper
while also profitably growing our property casualty business.
In 2010, our 10 highest volume excess and surplus lines states generated 65.1 percent of our earned
premiums compared with 74.2 percent in the prior year.
Cincinnati Financial Corporation – 2010 10-K – Page 16
Excess and Surplus Lines Earned Premiums by State
(Dollars in millions)
Year ended December 31, 2010
Ohio
Indiana
Illinois
Georgia
Missouri
Michigan
Pennsylvania
North Carolina
Texas
Kentucky
Year ended December 31, 2009
Ohio
Indiana
Illinois
Georgia
Michigan
North Carolina
Missouri
Wisconsin
Minnesota
Virginia
Earned
premiums
% of total
earned
$
$
7
5
4
4
2
2
2
2
2
2
4
4
3
2
1
1
1
1
1
1
13.2 %
11.0
8.3
7.3
4.7
4.7
4.2
4.1
3.9
3.7
16.4 %
13.8
11.5
8.3
5.3
4.8
3.9
3.7
3.3
3.2
Agencies representing The Cincinnati Insurance Companies write over $2 billion in annual premiums for
excess and surplus lines business for all carriers in total that they represent. We estimate that approximately
half of that premium volume matches the targeted business types and coverages we offer through our
excess and surplus lines segment. We structured the operations of this segment to meet the needs of these
agencies and market exclusively through them.
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 The Cincinnati Specialty Underwriters Insurance Company and maintains appropriate agent and
surplus lines licenses to process non-admitted business.
We seek to earn a share of each agency’s best excess and surplus lines accounts by offering several unique
benefits. Agency producers have direct access through CSU Producer Resources to a group of our
underwriters who focus exclusively on excess and surplus lines business. Those underwriters can tap into
agencies’ broader Cincinnati relationships to bring their policyholders services such as experienced and
responsive loss control and claims handling. CSU Producer Resources gives extra support to our producers by
remitting surplus lines taxes and stamping fees and retaining admitted market diligent search affidavits,
where required. Agencies marketing through CSU Producer Resources generally receive a higher commission
because use of our internal brokerage subsidiary eliminates some of the intermediary costs. This business is
also factored in their profit-sharing agreement with The Cincinnati Insurance Companies.
We use a web-based excess and surplus lines 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 real-time processing of policies and billing. It provides a specimen
policy detailing coverages when a policy is quoted and delivers electronic copies of policies to producers
within minutes of underwriting approval and policy issue. In 2010, more than 95 percent of policies were
issued within 24 hours of a request to bind a policy. Also in 2010, we received the Celent Model Insurer
Award, recognizing our efficient use of technology. We successfully leveraged our policy administration
system to quickly enter a new market, developing our miscellaneous errors and omissions product in only
three months and then issuing the first 50 policies within two weeks.
LIFE INSURANCE SEGMENT
The life insurance segment contributed $158 million of net earned premiums, representing 4.2 percent of
consolidated total revenues, and $7 million of income before income taxes in 2010. Life insurance segment
profitability is discussed in detail in Item 7, Life Insurance Results of Operations, Page 73. Life insurance net
earned premiums grew 10 percent in 2010, 13 percent in 2009 and less than 1 percent in 2008.
The Cincinnati Life Insurance Company supports our agency-centered business model. Cincinnati Life helps
meet the needs of our agencies, including increasing and diversifying agency revenues. We primarily focus on
life products that produce revenue growth through a steady stream of premium payments. By diversifying
Cincinnati Financial Corporation – 2010 10-K – Page 17
revenue and profitability for both the agency and our company, this strategy enhances the already strong
relationship built by the combination of the property casualty and life companies.
Life Insurance Business Lines
Four lines of business – term insurance, universal life insurance, worksite products and whole life insurance
– account for approximately 96.9 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 inforce with a return of premium provision,
a benefit equal to the sum of all paid base premiums is payable if the insured person survives to the end
of the term. Premiums are fixed and they must be paid as scheduled. The policies are fully underwritten.
• Universal life insurance – long-duration life insurance policies. Contract premiums are neither fixed nor
guaranteed; however, the contract does specify a minimum interest crediting rate and a maximum cost
of insurance charge and expense charge. Premiums are not fixed and may be varied by the contract
owner. The cash values, available as a loan collateralized by the cash surrender value, are not
guaranteed and depend on the amount and timing of actual premium payments and the amount of
actual contract assessments. The policies are fully underwritten. Contracts with death benefit
guarantees are available for individuals as well as for two lives on contracts called survivor universal life.
• Worksite products – term insurance, return of premium term insurance, whole life insurance, universal
life and disability insurance offered to employees through their employer. Premiums are collected by the
employer using payroll deduction. Policies are issued using a simplified underwriting approach and on a
guaranteed issue basis. Worksite insurance products provide our property casualty agency force with
excellent cross-serving opportunities for both commercial and personal accounts. Agents report that
offering worksite marketing to employees of their commercial accounts provides a benefit to the
employees at no cost to the employer. Worksite marketing also connects agents with new customers who
may not have previously benefited from receiving the services of a professional independent
insurance agent.
• Whole life insurance – policies that provide life insurance for the entire lifetime of the insured. The death
benefit is guaranteed never to decrease and premiums are guaranteed never to increase.
While premiums are fixed, they must be paid as scheduled. These policies provide guaranteed
cash values that are available as loans collateralized by the cash surrender value. The policies are
fully underwritten.
In addition, Cincinnati Life markets:
• Disability income insurance that provides monthly benefits to offset the loss of income when the insured
person is unable to work due to accident or illness.
• Deferred annuities that provide regular income payments that commence after the end of a specified
period or when the annuitant attains a specified age. During the deferral period, any payments made
under the contract accumulate at the crediting rate declared by the company but not less than a
contract-specified guaranteed minimum interest rate. A deferred annuity may be surrendered during the
deferral period for a cash value equal to the accumulated payments plus interest less the surrender
charge, if any.
•
Immediate annuities that provide some combination of regular income and lump sum payments in
exchange for a single premium.
Life Insurance Distribution
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 2010, almost 90 percent of our
1,544 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.
When marketing through our property casualty agencies, we have specific competitive advantages:
• Because our property casualty operations are held in high regard, property casualty agency management
is predisposed to consider selling our life products.
• Marketing efforts for both our property casualty and life insurance businesses are directed by our field
marketing department, which assures consistency of communication and operations. Life field marketing
representatives are available to meet face-to-face with agency personnel and their clients as well.
• Our life headquarters underwriters and other associates are available to the agents and field team to
assist in the placement of business. Fewer and fewer of our competitors provide direct, personal support
between the agent and the insurance carrier.
Cincinnati Financial Corporation – 2010 10-K – Page 18
We continue to emphasize the cross-serving opportunities of our life insurance, including term and worksite
products, for the property casualty agency’s personal and commercial accounts. In both the property casualty
and independent life agency distribution systems, we enjoy the advantages of offering competitive, up-to-
date products, providing close personal attention in combination with financial strength and stability.
• We primarily offer products addressing the needs of businesses with key person and buy-sell coverages.
We offer personal and commercial clients of our agencies quality, personal life insurance coverage.
•
Term insurance is our largest life insurance product line. We continue to introduce new term products
with features our agents indicate are important, such as a return of premium benefit, and we have
restructured our underwriting classifications to better meet the needs of their clients.
Because of our strong capital position, we can offer a competitive product portfolio including guaranteed
products, giving our agents a marketing edge. Our life insurance company maintains strong insurer financial
strength ratings: A.M. Best – A (Excellent), Fitch – A+ (Strong) and Standard & Poor’s – A (Strong), as
discussed in Financial Strength, Page 5. Our life insurance company has chosen not to establish a
Moody’s rating.
INVESTMENT SEGMENT
Revenues of the investment segment are primarily from net investment income and from realized investment
gains and losses from investment portfolios managed for the holding company and each of the operating
subsidiaries.
Our investment department operates under guidelines set forth in our investment policy statement along with
oversight of the investment committee of our board of directors. These guidelines set parameters for risk
tolerances governing, among other items, the allocation of the portfolio as well as security and sector
concentrations. These parameters are part of an integrated corporate risk management program.
The fair value of our investment portfolio was $11.424 billion and $10.562 billion at year-end 2010 and
2009, respectively. The overall portfolio remained in an unrealized gain position as strong returns in the
equity and corporate bond markets more than offset a decline in the municipal bond market.
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 2010 and 2009, purchases and market value gains served to more than offset sales and calls.
• Equity investments – Includes common and nonredeemable preferred stocks. During 2010, purchases
and fair value gains more than offset sales. During 2009, sales slightly offset fair value appreciation of
equity securities.
• Short-term investments – Primarily commercial paper.
(In millions)
At December 31, 2010
At December 31, 2009
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
$
$
5,139
2,749
2,211
75
0
10,174
50.5 % $
27.0
21.7
0.8
0.0
100.0 % $
5,533
2,850
2,940
101
0
11,424
48.4 % $
25.0
25.7
0.9
0.0
100.0 % $
4,644
2,870
1,941
75
6
9,536
48.6 % $
30.1
20.4
0.8
0.1
100.0 % $
4,863
2,992
2,608
93
6
10,562
46.0 %
28.3
24.7
0.9
0.1
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. During 2010, approximately one-quarter of new cash flow was
invested in equity securities, consistent with our long-term average. We consider internal measures, as well
as insurance department regulations and rating 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 2010, less than 1 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 generally obtain at least two outside valuations for these assets and
generally use the more conservative estimate. These investments include private placements, small issues
and various thinly traded securities. See Item 7, Fair Value Measurements, Page 46, and Item 8, Note 3 of
the Consolidated Financial Statements Page 114, for additional discussion of our valuation techniques.
In addition to securities held in our investment portfolio, at year-end 2010, other invested assets included
$40 million of life policy loans, $28 million of venture capital fund investments, $5 million of investment in
real estate and $11 million of other invested assets.
Fixed-maturity and Short-term Investments
By maintaining a well diversified fixed-maturity portfolio, we attempt to manage overall interest rate,
reinvestment, credit and liquidity risk. We pursue a buy-and-hold strategy and do not attempt to make large-
Cincinnati Financial Corporation – 2010 10-K – Page 19
scale changes to the portfolio in anticipation of rate movements. By investing new money on a regular basis
and analyzing risk-adjusted after-tax yields, we work to achieve a laddering effect to our portfolio that may
mitigate some of the effects of adverse interest rate movements.
Fixed-maturity and Short-term Portfolio Ratings
As of year-end 2010, this portfolio’s fair value was 106.3 percent of book value, up from last year due to both
a decline in the general level of treasury rates and a continued tightening of credit spreads.
The portfolio grew in 2010 due to a large volume of purchases. These purchases were most concentrated in
the investment grade corporate bond market. Although the average rating of our bond portfolio remained
unchanged, the number of bonds rated Aaa/AAA decreased and the number of bonds rated Aa/AA increased.
The rating distribution change was driven by net redemptions of U.S. agency (government-sponsored
enterprises) bonds due to call activity and an increase in purchases of Build America Bonds. 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 at year-end 2010 for the fixed-maturity and short-term portfolios were:
(In millions)
At December 31, 2010
Fair
value
Percent
of total
At December 31, 2009
Fair
value
Percent
of 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
Daa, Da, D
Non-rated
Total
$
$
5,216
2,656
241
42
19
0
1
208
8,383
62.2 % $
31.7
2.9
0.5
0.2
0.0
0.0
2.5
100.0 % $
4,967
2,302
279
44
29
3
0
237
7,861
63.2 %
29.3
3.5
0.6
0.4
0.0
0.0
3.0
100.0 %
Our fixed-maturity portfolio as of December 31, 2010, included approximate maturing amounts with pretax
average yields-to-book value as follows: 3.4 percent maturing in 2011 with a 5.9 percent yield, 5.4 percent in
2012 with a 5.5 percent yield, and 8.6 in 2013 percent with a 4.7 percent yield, Additional maturity periods
for our fixed-maturity portfolio are shown in Item 8, Note 2 of the Consolidated Financial Statements,
Page 111. Attributes of the fixed-maturity portfolio include:
Weighted average yield-to-book value
Weighted average maturity
Effective duration
Taxable Fixed Maturities
Our $5.533 billion taxable fixed-maturity portfolio (at fair value) at year-end included:
At December 31,
2010
2009
5.5 %
6.2 yrs
5.0 yrs
5.9 %
7.5 yrs
5.3 yrs
(In millions)
Investment-grade corporate
States, municipalities and political subdivisions
Below investment-grade corporate
Government sponsored enterprises
Convertibles and bonds with warrants attached
United States government
Foreign government
Collateralized mortgage obligations
Short-term investments
Total
At December 31,
2010
2009
$
$
4,695
293
268
200
69
5
3
-
-
5,533
$
$
3,941
137
309
347
91
4
3
31
6
4,869
While our strategy typically is to buy and hold fixed-maturity investments to maturity, we monitor credit
profiles and fair value movements when determining holding periods for individual securities. With the
exception of U.S. agency issues, no individual issuer's securities accounted for more than 1.1 percent of the
taxable fixed-maturity portfolio at year-end 2010. Investment grade corporate bonds had an average rating of
Baa1 by Moody’s or BBB+ by Standard & Poor’s and represented 84.8 percent of the taxable fixed maturity
portfolio’s fair value at year end 2010, compared with 80.9 percent in 2009.
The investment-grade corporate bond portfolio is most heavily concentrated in the financial-related sectors,
including banking, financial services and insurance. The financial sectors represented 28.9 percent of fair
value of this portfolio at year-end 2010, compared with 25.3 percent, at year-end 2009. 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. Energy was the only other
Cincinnati Financial Corporation – 2010 10-K – Page 20
sector that exceeded 10 percent of our investment-grade corporate bond portfolio, at 10.0 percent of fair
value at year-end 2010.
Most of the $293 million of securities issued by states, municipalities and political subdivisions securities
included in our taxable fixed maturity portfolio at the end of 2010 were Build America Bonds.
Tax-exempt Fixed Maturities
Our tax-exempt fixed maturity portfolio’s fair value was $2.850 billion at December 31, 2010. We traditionally
have purchased municipal bonds focusing on general obligation and essential services, such as sewer, water
or others. The portfolio is well diversified among approximately 1,000 municipal bond issuers. No single
municipal issuer accounted for more than 0.7 percent of the tax-exempt fixed maturity portfolio at year-end
2010. Municipal bond holdings in our larger states were:
(In millions)
At December 31, 2010
Texas
Indiana
Michigan
Illinois
Ohio
Washington
Wisconsin
Florida
Pennsylvania
Arizona
Colorado
New Jersey
Kansas
New York
Utah
All other states
Total
At December 31, 2009
Texas
Indiana
Michigan
Illinois
Ohio
Washington
Wisconsin
Florida
Arizona
Pennsylvania
Colorado
Kansas
New Jersey
Missouri
New York
All other states
Total
State issued general
obligation bonds
$
-
-
-
-
-
-
-
-
-
-
-
-
-
3
-
-
3 $
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3
-
3 $
$
$
$
$
Local issued
general obligation
bonds
Special revenue
bonds
Total
Percent of
total
425 $
21
245
219
131
166
116
19
67
46
37
28
24
15
20
233
1,812 $
455 $
21
246
223
128
170
130
19
46
67
37
23
25
19
13
263
1,885 $
107 $
328
12
23
107
32
19
67
9
30
15
17
20
21
17
211
1,035 $
112 $
356
15
28
105
39
20
69
32
10
16
21
17
21
22
221
1,104 $
532
349
257
242
238
198
135
86
76
76
52
45
44
39
37
444
2,850
567
377
261
251
233
209
150
88
78
77
53
44
42
40
38
484
2,992
18.7 %
12.2
9.0
8.5
8.4
6.9
4.7
3.0
2.7
2.7
1.8
1.6
1.5
1.4
1.3
15.6
100.0 %
19.0 %
12.6
8.7
8.4
7.8
7.0
5.0
2.9
2.6
2.6
1.8
1.5
1.4
1.3
1.3
16.1
100.0 %
At year-end 2010, our tax-exempt fixed maturity portfolio, with a fair value of $2.850 billion, had an average
rating of Aa2/AA. Almost 80 percent or $2.245 billion of the portfolio is insured, and approximately
93 percent of the insured portion carried an underlying rating of at least A3 or A- by Moody’s or Standard &
Poor’s at year end. We strongly prefer general obligation or essential services bonds, which we believe
provide a superior risk profile.
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 cash allocation for common stock purchases is implemented only after we ensure that insurance
reserves are adequately covered by our fixed-maturity investments. We believe our strategy of primarily
investing in a diversified selection of larger capitalization, high quality, dividend-increasing companies
generally results in reduced volatility relative to the broader equity markets.
Cincinnati Financial Corporation – 2010 10-K – Page 21
At December 31, 2010, one holding had a fair value equal to or greater than 5 percent of our publicly traded
common stock portfolio compared with two holdings at that level at year-end 2009. The Procter & Gamble
Company (NYSE:PG) is our largest single common stock investment, comprising 5.2 percent of the publicly
traded common stock portfolio and 1.3 percent of the investment portfolio.
At year-end 2010, 26.0 percent of our common stock holdings (measured by fair value) were held at
the parent company level.
Common Stock Portfolio Industry Sector Distribution
Sector:
Consumer staples
Healthcare
Information technology
Energy
Industrials
Financial
Consumer discretionary
Materials
Utilities
Telecomm services
Total
Percent of Publicly Traded Common Stock Portfolio
At December 31, 2010
At December 31, 2009
Cincinnati
Financial
S&P 500 Industry
Weightings
Cincinnati
Financial
S&P 500 Industry
Weightings
15.4 %
14.1
13.0
12.9
11.7
11.7
8.3
5.2
4.2
3.5
100.0 %
10.6 %
10.9
18.7
12.0
11.0
16.1
10.6
3.7
3.3
3.1
100.0 %
15.5 %
18.0
11.0
11.0
9.2
10.2
9.6
5.1
6.7
3.7
100.0 %
11.4 %
12.6
19.8
11.5
10.2
14.4
9.6
3.6
3.7
3.2
100.0 %
Preferred Stocks
We evaluate preferred stocks in a manner similar to our evaluation of fixed-maturity investments, seeking
attractive relative yields. We generally focus on investment-grade preferred stocks issued by companies with
strong histories of paying common dividends, providing us with another layer of protection. When possible,
we seek out preferred stocks that offer a dividend received deduction for income tax purposes. Events in the
fall of 2008 and into early 2009 led us to re-evaluate the riskiness of all preferred securities, particularly
those of banking institutions. As a result, during 2009 we downsized this portfolio by $82 million of fair value
to $93 million. We made no additional purchases or sales for this portfolio during 2010.
Short-Term Investments
At December 31, 2010, we had no short-term investments, compared with $6 million at year-end 2009. Our
short-term investments consisted primarily of commercial paper, demand notes or bonds purchased within
one year of maturity.
Additional information about the composition of investments is included in Item 8, Note 2 of the
Consolidated Financial Statements, Page 111. A detailed listing of our portfolio is updated on our website,
www.cinfin.com/investors, each quarter when we report our quarterly financial results.
OTHER
We report as Other the non-investment operations of the parent company and its subsidiary CFC Investment
Company. This subsidiary offers commercial leasing and financing services to our agencies, their clients and
other customers. As of year-end 2010, CFC Investment Company had 2,227 accounts and $73 million in
receivables, compared with 2,286 accounts and $75 million in receivables at year-end 2009.
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, 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.
Cincinnati Financial Corporation – 2010 10-K – Page 22
• Subsidiary Dividends – The Cincinnati Insurance Company is 100 percent owned by Cincinnati Financial
Corporation. The dividend-paying capacity of The Cincinnati Insurance Company and its 100 percent
owned subsidiaries is regulated by the laws of the applicable state of domicile. Under these laws, our
insurance subsidiaries must provide a 10-day advance informational notice to the insurance
commissioner for the domiciliary state prior to payment of any dividend or distribution to its
shareholders. Generally, the most our insurance subsidiary can pay without prior regulatory approval is
the greater of 10 percent of policyholder surplus or 100 percent of statutory net income for the prior
calendar year. Dividends exceeding these limitations may be paid only with approval of the insurance
department of the domiciliary state.
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
2010 in Item 8, Note 9 of the Consolidated Financial Statements, Page 118.
•
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 standard market policy
forms and premium rates; policy cancellations and non-renewals; periodic examination of the affairs of
insurance companies; annual and other reports required to be filed on the financial condition of insurers
or for other purposes; requirements regarding reserves for unearned premiums, losses and other
matters; the nature of and limitations on dividends to policyholders and shareholders; the nature and
extent of required participation in insurance guaranty funds; the involuntary assumption of hard-to-place
or high-risk insurance business, primarily workers’ compensation insurance; and the collection,
remittance and reporting of certain taxes and fees. In 2010, our primary insurance regulators adopted
the Model Audit Rule for annual statutory financial reporting. This regulation closely mirrors the
Sarbanes-Oxley Act on matters such as auditor independence, corporate governance and internal
controls over financial reporting. The regulation permits the audit committee of Cincinnati Financial
Corporation’s board of directors to also serve as the audit committee of each of our insurance
subsidiaries for purposes of this regulation.
The legislative and regulatory climate in Florida continues to create uncertainty for the insurance
industry. In February 2007, we adopted a marketing stance of continuing to service existing accounts
while writing no new business relationships in Florida. This remained our stance through 2009, 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 cautiously resumed writing
additional commercial lines new 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 2010, our property casualty net written premiums from Florida agencies
were 1.7 percent of net written premiums, compared with 1.9 percent in 2009.
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 canceled and has not rescheduled the hearing noticed in the subpoena for
October 18, 2007. Although inactive, these subpoenas remain outstanding as of December 31, 2010.
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 received a savings of less than $3 million from
guaranty associations in 2010 and a savings of less than $2 million in 2009. 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’
Cincinnati Financial Corporation – 2010 10-K – Page 23
compensation insurance, but many states also mandate participation in FAIR Plans or Windstorm Plans,
which provide basic property coverages. Participation is based upon the amount of a company’s
voluntary market share in a particular state for the classes of insurance involved. Underwriting results
related to these organizations could be adverse to our company.
• Statutory Accounting – For public reporting, insurance companies prepare financial statements in
accordance with GAAP. However, certain data also must be calculated according to statutory accounting
rules as defined in the NAIC’s Accounting Practices and Procedures Manual. While not a substitute for
any GAAP measure of performance, statutory data frequently is used by industry analysts and other
recognized reporting sources to facilitate comparisons of the performance of insurance companies.
•
Insurance Reserves – State insurance laws require that property casualty and life insurers annually
analyze the adequacy of reserves. Our appointed actuaries must submit an opinion that reserves are
adequate for policy claims-paying obligations and related expenses.
• Risk-Based Capital Requirements – The NAIC’s risk-based capital (RBC) requirements for property
casualty and life insurers serve as an early warning tool for the NAIC and state regulators to identify
companies that may be undercapitalized and may merit further regulatory action. The NAIC has a
standard formula for annually assessing RBC. The formula for calculating RBC for property casualty
companies takes into account asset and credit risks but places more emphasis on underwriting factors
for reserving and pricing. The formula for calculating RBC for life insurance companies takes into account
factors relating to insurance, business, asset and interest rate risks.
Although the federal government and its regulatory agencies generally do not directly regulate the business
of insurance, federal legislation and administrative rules adopted to implement them do affect our business.
Privacy laws, such as the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act and the Health Insurance
Portability and Accounting Act (HIPAA) are the federal laws that most affect our day-to-day operations. These
apply to us because we gather and use personal non-public information to underwrite insurance and process
claims. We also are subject to other federal laws, such as the Terrorism Risk Insurance Act (TRIA), anti-money
laundering statute (AML), and the rules and regulations of the Office of Foreign Assets Control (OFAC).
Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) created the
Federal Insurance Office to monitor the insurance industry and gather information to identify issues or gaps
in the regulation of insurers that could contribute to a systemic crisis in the insurance industry of the United
States financial system, and to recommend to the Financial Stability Oversight counsel that it designate an
insurer as a systemically significant entity requiring additional supervision by the Federal Reserve Board.
Although rules have not yet been proposed or implemented to govern the determination that a non-bank
financial company, such as an insurance company, presents systemic risk, we do not expect such rules,
when adopted, to result in federal oversight of our operations as a systemically significant entity.
We do not expect to have any material effects on our expenditures, earnings or competitive position as a
result of compliance with any federal, state, or local provisions enacted or adopted relating to the protection
of the environment. We currently do not have any material estimated capital expenditures for environmental
control facilities.
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 36, for a discussion of those strategies.
If any risks or uncertainties discussed here develop into actual events, they could have a material adverse
effect on our business, financial condition or results of operations. In that case, the market price of our
common stock could decline materially.
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’
Cincinnati Financial Corporation – 2010 10-K – Page 24
products instead of ours, which may lead to us having a less desirable mix of business and could affect our
results of operations.
Certain events or conditions could diminish our agents’ desire to produce business for us and the
competitive advantage that our independent agencies enjoy, including:
• Downgrade of the financial strength ratings of our insurance subsidiaries. We believe our strong insurer
financial strength ratings, in particular the A+ (Superior) 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 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 3, for additional discussion of our
financial strength ratings.
• Concerns that doing business with us is difficult or not profitable, perceptions that our level of service is
no longer a distinguishing characteristic in the marketplace, perceptions that our products do not meet
the needs of our agents’ clients or perceptions that our business practices are not compatible with
agents’ business models.
• 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 pay their accounts due to us, changes in the strategy or operations of
agencies or the choice of agencies to reduce their writings of our products could affect our results of
operations if we were unable to replace them with agencies that produce adequate and profitable premiums.
Further, policyholders may choose a competitor’s product rather than our own because of real or perceived
differences in price, terms and conditions, coverage or service. If the quality of the independent agencies
with which we do business were to decline, that also might cause policyholders to purchase their insurance
through different agencies or channels. Consumers, especially in the personal insurance segments, 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, terrorism or
pandemic events or risk concentrations.
In the normal course of our business, we provide coverage against perils for which estimates of losses are
highly uncertain, in particular catastrophic and terrorism events. Catastrophes can be caused by a number of
events, including hurricanes, tornadoes, windstorms, earthquakes, hailstorms, explosions, severe winter
weather and fires. Due to the nature of these events, we are unable to predict precisely the frequency or
potential cost of catastrophe occurrences. Various scientists and other experts believe that changing climate
conditions have added to the unpredictability, frequency and severity of such natural disasters in certain
parts of the world and have created additional uncertainty as to future trends and exposures. We cannot
predict the impact that changing climate conditions may have on our results of operations nor can we predict
how any legal, regulatory or social responses to concerns about climate change may impact our business.
The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area
affected by the event and the severity of the event. Our ability to appropriately manage catastrophe risk
depends partially on catastrophe models, the accuracy of which may be affected by inaccurate or
incomplete data, the uncertainty of the frequency and severity of future events and the uncertain impact of
climate change.
The geographic regions in which we market insurance are exposed to numerous natural catastrophes,
such as:
• Hurricanes in the gulf, eastern and southeastern coastal regions.
• Earthquakes in the New Madrid fault zone, which lies within the central Mississippi valley, extending from
northeast Arkansas through southeast Missouri, western Tennessee and western Kentucky to southern
Illinois, southern Indiana and parts of Ohio.
Tornado, wind and hail in the Midwest, South, Southeast, Southwest and the mid-Atlantic.
•
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, small co-op utilities, small shopping malls and small colleges throughout our 39 active states
and, because of the number of associates located there, our Fairfield headquarters. Additionally, our life
insurance subsidiary could be adversely affected in the event of a terrorist event or an epidemic such as the
avian or swine flu, particularly if the epidemic were to affect a broad range of the population beyond just the
very young or the very old. Our associate health plan is self-funded and could similarly be affected.
Cincinnati Financial Corporation – 2010 10-K – Page 25
Our results of operations would be adversely affected if the level of losses we experience over a period of
time were to exceed our actuarially determined expectations. In addition, our financial condition may be
adversely affected if we were required to sell securities prior to maturity or at unfavorable prices to pay an
unusually high level of loss and loss expenses. Securities pricing might be even less favorable if a number of
insurance or other companies and other investors needed to sell securities during a short period of time
because of unusually high losses from catastrophic events.
Our geographic concentration ties our performance to business, economic, environmental and regulatory
conditions in certain states. We market our standard market property casualty insurance products in
39 states, but our business is concentrated in the Midwest and Southeast. We also have exposure in states
where we do not actively market insurance when clients of our independent agencies have businesses or
properties in multiple states.
The Cincinnati Insurance Company also participates in three assumed reinsurance treaties with two
reinsurers that spread the risk of very high catastrophe losses among many insurers. In 2010, the largest
treaty had exposure of up to $7 million of assumed losses in three layers, from $1.0 billion to $1.7 billion,
from a single event under an assumed reinsurance treaty for Munich Re Group. Amounts related to the other
two 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, while also 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 beyond our control,
such as inflation; economic growth; interest rates; world political conditions; changes in laws and regulations;
terrorism attacks or threats; adverse events affecting other companies in our industry or the industries in
which we invest; market events leading to credit constriction; and other widespread unpredictable events.
These events may adversely affect the economy generally and could cause our investment income or the
value of securities we own to decrease. A significant decline in our investment income could have an adverse
effect on our net income, and thereby on our shareholders’ equity and our policyholders’ surplus. For
example, a significant increase in the general level of interest rates could lead to falling bond values. For
more detailed discussion of risks associated with our investments, please refer to Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, Page 93.
We issue life contracts with guaranteed minimum returns, referred to as bank-owned life insurance contracts
(BOLIs). BOLI investment assets must meet certain criteria established by the regulatory authorities in the
jurisdiction for which the group contract holder is subject. Therefore, sales of investments may be mandated
to maintain compliance with these regulations, possibly requiring gains or losses to be recorded. We could
experience losses if the assets in the accounts were less than liabilities at the time of maturity or
termination. We discuss other risks associated with our separate account BOLIs in Item 7, Critical Accounting
Estimates, Separate Accounts, Page 47.
Our investment performance also could suffer because of the types of investments, industry groups and/or
individual securities in which we choose to invest. Market value changes related to these choices could
cause a material change in our financial condition or results of operations.
At year-end 2010, common stock holdings made up 25.5 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 75, and Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Page 93,
for discussion of our investment activities.
Deterioration in the banking sector or in banks with which we have relationships could affect our results of
operations. Our ability to maintain or obtain short-term lines of credit could be affected if the banks from
which we obtain these lines are purchased, fail or are otherwise negatively affected. We may lose premium if
a bank that owns appointed agencies were to change its strategies. We could experience increased losses in
our director and officer liability line of business if claims were made against insured financial institutions.
Cincinnati Financial Corporation – 2010 10-K – Page 26
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, properly analyze and use data to make decisions and take
appropriate action; the data must be sufficient, reliable and accessible; we need to develop appropriate
rating methodologies and formulae; and we may need to identify and respond to trends quickly. Inflation
trends, especially outside of historical norms, may make it more difficult to determine adequate pricing. If
rates are not accurate, we may not generate enough premiums to offset losses and expenses or we may not
be competitive in the marketplace.
Our ability to set appropriate rates could be hampered if a state or states where we write business refuses to
allow rate increases that we believe are necessary to cover the risks insured. At least one state requires us to
purchase reinsurance from a mandatory reinsurance fund. Such reinsurance funds can create a credit risk
for insurers if not adequately funded by the state and, in some cases, the existence of a reinsurance fund
could affect the prices charged for our policies. The effect of these and similar arrangements could reduce
our profitability in any given period or limit our ability to grow our business.
The insurance industry is cyclical and intensely competitive. From time to time, the insurance industry goes
through prolonged periods of intense competition during which it is more difficult to attract new business,
retain existing business and maintain profitability. Competition in our insurance business is based on many
factors, including:
• Competitiveness of premiums charged
• Relationships among carriers, agents, brokers and policyholders
• Underwriting and pricing methodologies that allow insurers to identify and flexibly price risks
• Compensation provided to agents
• Underwriting discipline
•
Terms and conditions of insurance coverage
• Speed with which products are brought to market
• Product and marketing innovations, including advertising
•
• 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 were incorrect or we were unable to compete effectively because of one or more of these
factors, our premium writings could decline and our results of operations and financial condition could be
materially adversely affected.
Please see the discussion of our Commercial Lines, Personal Lines, Excess and Surplus Lines and Life
Insurance Segments in Item 1, Page 12, Page 15 and Page 16, for a discussion of our competitive position in
the insurance marketplace.
Technological competence and innovation
Cincinnati Financial Corporation – 2010 10-K – Page 27
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 105, 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.
Inflationary scenarios, especially scenarios outside of historical norms, may make it more difficult to estimate
loss reserves. Accordingly, our loss reserves for past periods could prove to be inadequate to cover our actual
losses and related expenses. Any changes in these estimates are reflected in our results of operations during
the period in which the changes are made. An increase in our loss reserves would decrease earnings, while a
decrease in our loss reserves would increase earnings.
The process used to determine our loss reserves is discussed in Item 7, Critical Accounting Estimates,
Property Casualty Insurance Loss and Loss Expense Reserves and Life Insurance Policy Reserves, Page 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. Inflationary scenarios may cause the cost of claims, especially medical claims, to rise,
impacting reserve adequacy and our results of operations.
Our ability to obtain or collect on our reinsurance protection could affect our business,
financial condition, results of operations and cash flows.
We buy property casualty and life reinsurance coverage to mitigate the liquidity risk and earnings volatility
risk of an unexpected rise in claims severity or frequency from catastrophic events or a single large loss. The
availability, amount and cost of reinsurance depend on market conditions and may vary significantly. If we
were unable to obtain reinsurance on acceptable terms and in appropriate amounts, our business and
financial condition could be adversely affected.
In addition, we are subject to credit risk with respect to our reinsurers. Although we purchase reinsurance to
manage our risks and exposures to losses, this reinsurance does not discharge our direct obligations under
the policies we write. We would remain liable to our policyholders even if we were unable to recover what we
believe we are entitled to receive under our reinsurance contracts. Reinsurers might refuse or fail to pay
losses that we cede to them, or they might delay payment. For long-tail claims, the creditworthiness of our
reinsurers may change before we can recover amounts to which we are entitled. A reinsurer’s insolvency,
inability or unwillingness to make payments under the terms of its reinsurance agreement with our
insurance subsidiaries could have a material adverse effect on our financial position, results of operations
and cash flows.
We participated in USAIG, a joint underwriting association of individual insurance companies that collectively
functions as a worldwide insurance market for all types of aviation and aerospace accounts. Our participation
was terminated after policy year 2002. At year-end 2010, 19 percent, or $110 million, of our total
reinsurance receivables were related to USAIG, primarily for events of September 11, 2001, offset by
$118 million of amounts ceded to other pool participants and reinsurers. If the pool participants and
reinsurers were unable to fulfill their financial obligations and all security collateral that supports the
participants’ obligations became worthless, we could be liable for an additional pool liability of $230 million
and our financial position and results of operations could be materially affected. Currently all pool
participants and reinsurers are financially solvent.
Please see Item 7, 2011 Reinsurance Programs, Page 90, 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 associates’ ability to perform necessary business functions, such as
processing new and renewal policies and claims. We increasingly rely on technology and systems to
accomplish these business functions in an efficient and uninterrupted fashion. Our inability to access our
headquarters facilities or a failure of technology, telecommunications or other systems could significantly
Cincinnati Financial Corporation – 2010 10-K – Page 28
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, laws and regulations on our business
are uncertain.
As industry practices and legal, judicial, legislative, regulatory, political, social and other environmental
conditions change, unexpected and unintended issues related to insurance pricing, claims and coverage,
may emerge. These issues may adversely affect our business by impeding our ability to obtain adequate
rates for covered risks, extending coverage beyond our underwriting intent 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 sometime after we have issued the insurance policies that could be affected by the
changes. As a result, the full extent of liability under our insurance contracts may not be known for many
years after a policy is issued.
We are required to adopt new or revised accounting standards issued by recognized authoritative
organizations, including the Financial Accounting Standards Board and the SEC. Future changes required to
be adopted could change the current accounting treatment that we apply and could result in material
adverse effects on our results of operations and financial condition.
The National Association of Insurance Commissioners (NAIC), state insurance regulators and state legislators
continually re-examine existing laws and regulations governing insurance companies and insurance holding
companies, specifically focusing on modifications to statutory accounting principles, interpretations of
existing laws, regulations relating to product forms and pricing methodologies and the development of new
laws and regulations that affect a variety of financial and nonfinancial components of our business. Any
proposed or future legislation, regulation or NAIC initiatives, if adopted, may be more restrictive on our ability
to conduct business than current regulatory requirements or may result in higher costs.
Federal laws and regulations, including those that may be enacted in the wake of the financial and credit
crises, may have adverse affects on our business, potentially including a change from a state-based system
of regulation to a system of federal regulation, the repeal of the McCarran Ferguson Act, and/or measures
under the Dodd-Frank Act that establish the Federal Insurance Office and provide for a determination that a
non-bank financial company presents systemic risk and therefore should be subject to heightened
supervision by the Federal Reserve Board. Adoption or implementation of any of these measures may restrict
our ability to conduct our insurance business, govern our corporate affairs or increase our cost of doing
business.
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, and also have implementation and operational risks. In
addition, we may have inaccurate expense projections, implementation schedules or expectations regarding
the effectiveness and user acceptance of the end product. These issues could escalate over time. If we were
unable to find and retain 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 9 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
Cincinnati Financial Corporation – 2010 10-K – Page 29
Properties
Unresolved Staff Comments
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
without liquidating securities. This could affect our financial position.
Please see Item 1, Regulation, Page 22, and Item 8, Note 9 of the Consolidated Financial Statements,
Page 118, for discussion of insurance holding company dividend regulations.
Item 1B.
None
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. The property,
including land, is carried in our financial statements at $159 million as of December 31, 2010, 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 $5 million as of December 31, 2010,
and is classified as an other invested asset. Unaffiliated tenants occupy approximately 5 percent. All
unoccupied space is currently available for lease.
The Cincinnati Insurance Company owns a building used for business continuity, with approximately
48,000 square feet of available space, located approximately six miles from our headquarters. The property,
including land, is carried on our financial statements at $11 million as of December 31, 2010, 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.
(Removed and Reserved)
Legal Proceedings
Cincinnati Financial Corporation – 2010 10-K – Page 30
Item 5.
Part II
Market for the Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of
Equity Securities
Cincinnati Financial Corporation had approximately 13,000 shareholders of record as of
December 31, 2010. This number does not represent the total number of shareholders because some
shares are beneficially held in “street name” by brokers and others on behalf of individual owners of our
shares. Many of our independent agent representatives and most of the 4,060 associates of our subsidiaries
own the company’s common stock.
Our common shares are traded under the symbol CINF on the Nasdaq Global Select Market.
(Source: Nasdaq Global Select Market)
Quarter:
High
Low
Period-end close
Cash dividends declared
$
1st
29.65 $
25.50
28.91
0.395
2010
2nd
30.38 $
25.65
25.87
0.395
3rd
29.39 $
25.25
28.82
0.40
4th
32.27 $
28.68
31.69
0.40
1st
29.66 $
17.84
22.87
0.39
2009
2nd
26.94 $
21.40
22.35
0.39
3rd
26.31 $
21.30
25.99
0.395
4th
26.89
25.05
26.24
0.395
We discuss the factors that affect our ability to pay cash dividends and repurchase shares in Item 7, Liquidity
and Capital Resources, Page 78. 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 118.
The following summarizes securities authorized for issuance under our equity compensation plans as of
December 31, 2010:
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, 2010
(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, 2010
(c)
9,689,800 $ 36.59
5,980,147
-
-
9,689,800 $ 36.59
-
5,980,147
The number of securities remaining available for future issuance includes: 5,627,553 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; 83,904 shares of stock options available for issuance under the Cincinnati Financial
Corporation Stock Option Plan VII and 268,690 shares available for issuance of share grants under the
Director’s Stock Plan of 2009. 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 125.
Period
January 1-31, 2010
February 1-28, 2010
March 1-31, 2010
April 1-30, 2010
May 1-31, 2010
June 1-30, 2010
July 1-31, 2010
August 1-31, 2010
September 1-30, 2010
October 1-31, 2010
November 1-30, 2010
December 1-31, 2010
Totals
Total number
of shares
purchased
0 $
0
0
0
332,748
45,000
0
0
0
0
0
0
377,748
Average
price paid
per share
0.00
0.00
0.00
0.00
26.49
26.49
0.00
0.00
0.00
0.00
0.00
0.00
26.49
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
0
0
0
0
332,748
45,000
0
0
0
0
0
0
377,748
9,044,097
9,044,097
9,044,097
9,044,097
8,711,349
8,666,349
8,666,349
8,666,349
8,666,349
8,666,349
8,666,349
8,666,349
Cincinnati Financial Corporation – 2010 10-K – Page 31
We did not sell any of our shares that were not registered under the Securities Act during 2010. The board of
directors has authorized share repurchases since 1996. Purchases are expected to be made generally
through open market transactions. The board gives management discretion to purchase shares at
reasonable prices in light of circumstances at the time of purchase, subject to U.S. Securities and Exchange
Commission (SEC) regulations. During 2010, we repurchased 377,748 shares at an average cost of
$26.49 per share.
On October 24, 2007, the board of directors expanded the existing repurchase authorization to
approximately 13 million shares. The prior repurchase program for 10 million shares was announced in
2005, replacing a program that had been in effect since 1999. No repurchase program has expired during
the period covered by the above table. Neither the 2005 nor 1999 program had an expiration date, but no
further repurchases will occur under the 1999 program.
Cincinnati Financial Corporation – 2010 10-K – Page 32
Cumulative Total Return
As depicted in the graph below, the five–year total return on a $100 investment made December 31, 2005,
assuming the reinvestment of all dividends, was a negative 10.3 percent for Cincinnati Financial
Corporation’s common stock compared with a negative 12.9 percent for the Standard & Poor’s Composite
1500 Property & Casualty Insurance Index and a 12.0 percent return for the Standard & Poor’s 500 Index.
The Standard & Poor’s Composite 1500 Property & Casualty Insurance Index includes 25 companies: Ace
Ltd., Allstate Corporation, Amerisafe Inc., W. R. Berkley Corporation, Berkshire Hathaway, Chubb Corporation,
Cincinnati Financial Corporation, Employers Holdings Inc., Fidelity National Financial Inc., First American
Financial Corporation, Hanover Insurance Group Inc., Infinity Property & Casualty Corporation, 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 and XL Capital Ltd.
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
$150
$125
$100
$75
$50
$25
$0
2005
2006
2007
2008
2009
2010
Cincinnati Financial Corporation
S&P 500 Index
S&P Composite 1500 Property & Casualty Insurance Index
Cincinnati Financial Corporation – 2010 10-K – Page 33
Item 6.
Selected Financial Data
(In millions except per share data)
Years ended December 31,
2010
2009
2008
2007
$
$
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
Gross loss and loss expense reserves
Life policy reserves
Long-term debt
Shareholders' equity
Book value per share
Value creation ratio
Consolidated Property Casualty Operations
Earned premiums
$
Unearned premiums
Gross loss and loss expense reserves
Investment income, net of expenses
Loss ratio
Loss expense ratio
Underwriting expense ratio
Combined ratio
$
$
$
$
$
$
$
$
3,082
518
159
3,772
377
2.32
2.31
1.59
1.585
163
11,508
488
15,095
4,200
2,034
790
5,032
30.91
3,054
501
336
3,903
432
2.66
2.65
1.57
1.565
163
10,643
481
14,440
4,142
1,783
790
4,760
29.25
11.1 %
19.7 %
$
2,924
1,551
4,137
348
56.5 %
12.4
32.8
101.7 %
2,911
1,507
4,096
336
58.6 %
13.1
32.8
104.5 %
$
$
$
$
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
(23.5) %
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
(5.7) %
3,125
1,562
3,925
393
46.6 %
12.0
31.7
90.3 %
Per share data adjusted to reflect all stock splits and dividends prior to December 31, 2010.
*
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 75.
Cincinnati Financial Corporation – 2010 10-K – Page 34
2006
2005
2004
2003
2002
2001
2000
$
$
$
$
$
$
$
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
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
$
$
$
3,020
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
$
$
$
2,748
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
$
$
$
2,478
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
$
$
$
2,152
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
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
16.7 %
1.4 %
4.4 %
14.5 %
(4.1) %
1.7 %
13.6 %
$
3,164
1,576
3,860
367
51.9 %
11.6
30.8
94.3 %
$
3,058
1,557
3,629
338
49.2 %
10.0
30.0
89.2 %
$
2,919
1,537
3,514
289
49.8 %
10.3
29.7
89.8 %
$
2,653
1,444
3,386
245
56.1 %
11.6
27.0
94.7 %
$
2,391
1,317
3,150
234
61.5 %
11.4
26.8
99.7 %
$
2,073
1,060
2,894
223
66.6 %
10.1
28.2
104.9 %
1,828
920
2,416
223
71.1 %
11.3
30.4
112.8 %
Cincinnati Financial Corporation – 2010 10-K – Page 35
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 105. 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 accounting basis. When we provide our results on a comparable statutory accounting basis, we
label it as such; all other company data is presented in accordance with accounting principles generally
accepted in the United States of America (GAAP).
EXECUTIVE SUMMARY
Through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property
casualty insurers in the nation, based on 2009 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 39 states as discussed in Item 1, Our Business and Our Strategy, Page 3.
Although recent years have been difficult 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 shareholders, agents, policyholders and associates.
To measure our progress, we have defined a measure of value creation that we believe captures the
contribution of our insurance operations, the success of our investment strategy and the importance
we place on paying cash dividends to shareholders. We refer to this measure as our value creation ratio,
or VCR, and it is made up of two primary components: (1) our rate of growth in book value per share
plus (2) the ratio of dividends declared per share to beginning book value per share. For the period
2010 through 2014, an annual value creation ratio averaging 12 percent to 15 percent is our primary
performance target. Management believes this non-GAAP measure is a useful supplement to GAAP
information. With heightened economic and market uncertainty since 2008, we believe the long-term nature
of this ratio is an appropriate way to measure our long-term progress in creating shareholder value.
Value creation ratio
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
One
year
Three-year
% average
Five-year
% average
11.1 %
19.7
(23.5)
2.4 %
(3.2)
(4.2)
3.7 %
1.7
(1.3)
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 negative 0.7 percent over the five-year period
2006 through 2010, slightly lower than the negative 0.5 percent estimated growth rate for the property
casualty insurance industry.
• 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 98.3 percent over the five-year period 2006 through 2010. Our combined ratio was below
100 percent in 2006 and 2007, but was above 100 percent for 2008 through 2010, when we averaged
102.3 percent, including an average catastrophe loss ratio that was 2.1 percentage points higher than
the average for the 10-year period prior to 2008. Performance as measured by the combined ratio is
discussed in Consolidated Property Casualty Insurance Results of Operations, Page 49. Our statutory
combined ratio averaged 98.2 percent over the five-year period 2006 through 2010 compared with an
estimated 99.5 percent for the property casualty industry.
Cincinnati Financial Corporation – 2010 10-K – Page 36
•
Investment contribution - We believe our investment philosophy and initiatives can drive investment
income growth and lead to a total return on our equity investment portfolio over a five-year period that
exceeds the five-year return of the Standard & Poor’s 500 Index.
o
Investment income growth, on a before-tax basis, declined at a compound annual rate of 0.3 percent
over the five-year period 2006 through 2010. It grew in each year except 2008 and 2009, when
we experienced a dramatic reduction in dividend payouts by financial services companies held in our
equity portfolio, a risk we addressed aggressively during 2008, completing that effort in early 2009.
o Over the five years ended December 31, 2010, our compound annual equity portfolio return was a
negative 3.0 percent compared with a compound annual total return of 2.3 percent for the Index.
Our equity portfolio underperformed the market for the five-year period primarily because of the
2008 decline in the market value of our previously large holdings in the financial services sector. For
the year 2010, our compound annual equity portfolio return was 11.0 percent, compared with
15.1 percent for the Index, as the broad market rally did not favor the higher quality, dividend-paying
stocks we prefer.
The board of directors is committed to rewarding shareholders directly through cash dividends and through
authorizing share repurchases. The board also has periodically declared stock dividends and splits. Through
2010, the company has increased the indicated annual cash dividend rate for 50 consecutive years, a record
we believe is matched by only 10 other publicly traded companies. The board regularly evaluates relevant
factors in dividend-related decisions, and the increase reflects confidence in our strong capital, liquidity and
financial flexibility, as well as progress through our initiatives to improve earnings performance. We discuss
our financial position in more detail in Liquidity and Capital Resources, Page 78.
Strategic Initiatives Highlights
Management has worked to identify a strategy that can lead to long-term success, with concurrence by the
board of directors. Our strategy is intended to position us to compete successfully in the markets we have
targeted while appropriately managing risk. We discuss our long-term, proven strategy in Item 1, Our
Business and Our Strategy, Page 3. We believe successful implementation of initiatives that support our
strategy will help us better serve our agent customers and reduce volatility in our financial results while we
also grow earnings and book value over the long-term, successfully navigating challenging economic, market
or industry pricing cycles.
•
Improve insurance profitability – Implementation of these initiatives is intended to improve pricing
capabilities for our property casualty business, increasing our ability to manage our business while also
enhancing our efficiency. Improved pricing capabilities through the use of technology and analytics can
lead to better profit margins. Improved planning for growth and profitability plans can enhance our ability
to achieve objectives at all levels in the organization. Improved internal processes with additional
performance metrics can help us be more efficient and effective. These initiatives also support the ability
of the agencies that represent us to grow profitably by allowing them to serve clients faster and to more
efficiently manage agency expenses.
• Drive premium growth – Implementation of these initiatives is intended to further penetrate each market
we serve through our independent agency network. Strategies aimed at specific market opportunities,
along with service enhancements, can help our agents grow and increase our share of their business.
Diversified growth also may reduce variability of losses from weather-related catastrophes.
We discuss these strategic initiatives, along with related metrics to assess progress, in Item 1, Strategic
Initiatives, Page 9,
Factors Influencing Our Future Performance
In 2010, our value creation ratio of 11.1 percent was slightly below our target annual average of 12 percent
to 15 percent for the period 2010 through 2014. In 2009, the ratio exceeded our target and in 2008, it was
below our target, as discussed in the review of our financial highlights below. For the year 2011, we believe
our value creation ratio may be below our long-term target for several reasons.
•
The rally in financial markets during 2009 and 2010 had a highly favorable impact on our value creation
ratio, offsetting much of the unfavorable impact of the sharp decline in financial markets during 2008.
Should financial markets decline during 2011, which could occur as part of typical market volatility
patterns, the related component of our 2011 value creation ratio could also register a weak or
negative result.
•
Lingering effects of soft insurance market pricing are expected to affect growth rates and earned
premium levels into 2011 and for some time into the future, depending on insurance market conditions.
Current conditions continue 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.
Cincinnati Financial Corporation – 2010 10-K – Page 37
•
The slowly recovering economy is expected to continue to affect policyholders by minimizing growth in
value of their business and personal insurable assets. Until the economy significantly strengthens, we
may experience only modest premium growth for the property casualty industry or our commercial lines
segment, which represented approximately 73 percent of our 2010 property casualty net written
premiums. Property casualty written premium growth also may lag as some of our growth initiatives
require more time to reach their full contribution.
• We will incur the cost of continued investment in our business, including technology, recent entry in new
states and process initiatives to create long-term value. In addition, we will not see the full advantage of
many of these investments for several years.
Our view of the value we can create over the next five years relies on two assumptions about the external
environment. First, we anticipate some firming of commercial insurance pricing by the end of 2011. Second,
we assume that the economy can continue on a growth track during 2011. If those assumptions prove to be
inaccurate, we may not be able to achieve our performance targets even if we accomplish our strategic
objectives.
Other factors that could influence our ability to achieve our target include:
• We expect the insurance marketplace to remain competitive, which is likely to cause carriers to
pursue strategies that they believe could lead to economies of scale, market share gains or the potential
for an improved competitive posture.
• We expect the independent insurance agency system to remain strong 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 2011 creates
additional risk for agencies. We expect the soft market to continue for much of 2011, or perhaps longer,
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 24, many potential risks to our business and our ability to
achieve our qualitative and quantitative objectives. These are real risks, but their probability of occurring may
not be high. We also believe that our risk management programs generally could mitigate their potential
effects, in the event they would occur. We continue to study emerging risks, including climate change risk
and its potential financial effects on our results of operation and those we insure. These effects include
deterioration in credit quality of our municipal or corporate bond portfolios and increased losses without
sufficient corresponding increases in premiums. As with any risk, we seek to identify the extent of the risk
exposure and possible actions to mitigate potential negative effects of risk, at an enterprise level.
We have formal risk management programs overseen by a senior officer and supported by a team of
representatives from business areas. The team provides reports to our chairman, our president and chief
executive officer and our board of directors, as appropriate, on risk assessments, risk metrics and risk plans.
Our use of operational audits, strategic plans and departmental business plans, as well as our culture of
open communications and our fundamental respect for our Code of Conduct, continue to help us manage
risks on an ongoing basis.
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 78.
Cincinnati Financial Corporation – 2010 10-K – Page 38
CORPORATE FINANCIAL HIGHLIGHTS
The value creation ratio discussed in the Executive Summary, Page 36, was 11.1 percent in 2010,
19.7 percent in 2009 and negative 23.5 percent in 2008. The book value per share growth component of
the value creation ratio was 5.7 percent during 2010 and 13.6 percent during 2009, largely reflecting
improved valuation of our investment portfolio in addition to earnings. In 2008, a decline in unrealized gains
on our investment portfolio was the most significant factor in the 27.9 percent decline in book value. Net
income declined 13 percent in 2010 after growing 1 percent in 2009, reflecting lower realized investment
gains. In 2008, net income was down 47 percent. Cash dividends declared per share rose approximately
1 percent in 2010, 1 percent in 2009 and 10 percent in 2008.
Balance Sheet Data
(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-total-capital ratio
At December 31,
2010
At December 31,
2009
$
$
11,508
15,095
49
790
5,032
30.91
10,643
14,440
49
790
4,760
29.25
14.3 %
15.0 %
Invested assets grew significantly during both 2010 and 2009 primarily due to strong performance in the
financial markets, reversing the trend of 2008 from lower fair values for portfolio investments, largely due to
economic factors. Entering 2011, the portfolio continues to be well-diversified and we believe it is well-
positioned to withstand short-term fluctuations. We discuss our investment strategy in Item 1, Investments
Segment, Page 19, and results for the segment in Investment Results of Operations, Page 75.
Our ratio of debt to total capital (debt plus shareholders’ equity) decreased in both 2010 and 2009 and is
comfortably within our target range.
Income Statement and Per Share Data
(Dollars in millions except share data)
Income statement data
Earned premiums
Investment income, net of expenses (pretax)
Realized investment gains and losses (pretax)
Total revenues
Net income
Per share data
Net income - diluted
Cash dividends declared
Twelve months ended December 31,
2009
2008
2010
$
$
$
3,082
518
159
3,772
377
2.31 $
1.59
$
3,054
501
336
3,903
432
2.65 $
1.57
3,136
537
138
3,824
429
2.62
1.56
Weighted average shares outstanding
163,274,491
162,866,863
163,362,409
2010-2009
Change %
2009-2008
Change %
1
3
(53)
(3)
(13)
(13)
1
0
(3)
(7)
143
2
1
1
1
0
Net income in 2010 was $55 million or 13 percent lower than in 2009, due primarily to the after-tax effects
of net realized investment gains that were $114 million lower, partially offset by a $53 million improvement
from property casualty underwriting results plus $9 million growth in investment income. Net income
increased $3 million in 2009, reflecting the after-tax net effect of three major contributing items: a
$132 million increase from net realized investment gains, partially offset by a $48 million decrease from
investment income and a $74 million decrease from property casualty underwriting results.
Weighted average shares outstanding may fluctuate from period to period due to repurchases of shares
under board authorizations or issuance of shares through equity compensation plans. Weighted average
shares outstanding on a diluted basis increased by less than 1 million in 2010, after declining by less than
1 million in 2009 and by 9 million in 2008.
As discussed in Investment Results of Operations, Page 75, security sales led to realized investment gains in
all three years, although 2008 gains were tempered by $510 million in other-than-temporary impairment
(OTTI) 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.
Cincinnati Financial Corporation – 2010 10-K – Page 39
Higher interest income drove 3 percent growth in 2010 pretax investment income. Lower income from
common stock dividends led to a 7 percent decline in 2009 pretax net investment income, improving on a
12 percent decline for 2008, which was the first decline for 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 sold or reduced.
Contribution from Insurance Operations
(Dollars in millions)
Consolidated property casualty highlights
Net written premiums
Earned premiums
Underwriting loss
GAAP combined ratio
Statutory combined ratio
Written premium to statutory surplus
Years ended December 31,
2009
2008
2010
2009-2008
2010-2009
Change % Change %
$
$
2,963
2,924
(47)
$
2,911
2,911
(128)
3,010
3,010
(16)
2
0
63
(3)
(3)
nm
101.7 %
101.8
0.8
104.5 %
104.4
0.8
Pt. Change
Pt. Change
100.6 %
100.4
0.9
(2.8)
(2.6)
0.0
3.9
4.0
(0.1)
Property casualty written premiums grew 2 percent in 2010, reversing the trend of 3 percent declines in both
2009 and 2008. Earned premiums also reversed the prior year trend, growing slightly in 2010. Trends and
related factors discussed in Commercial Lines, Personal Lines and Excess and Surplus Lines Insurance
Results of Operations, beginning on Page 54, Page 64 and Page 70, respectively.
Our property casualty insurance operations reported an underwriting loss in each of the last three years, but
the amount of loss in 2010 was less than half that of 2009. We measure property casualty underwriting
profitability primarily by the combined ratio. Our combined ratio measures the percentage of each earned
premium dollar spent on claims plus all expenses related to our property casualty operations. A lower ratio
indicates more favorable results and better underlying performance. Our combined ratio was over
100 percent in each of the last three years. Initiatives to improve our combined ratio are discussed in Item 1,
Strategic Initiatives, Page 9. In 2010, 2009 and 2008, favorable development on reserves for claims that
occurred in prior accident years helped offset other incurred loss and loss expenses. Reserve development is
discussed further in Property Casualty Loss and Loss Expense Obligations and Reserves, beginning on
Page 82. Losses from weather-related catastrophes are another important item influencing the combined
ratio and are discussed along with other factors in Commercial Lines, Personal Lines and Excess and Surplus
Lines Insurance Results of Operations, beginning on Page 54, Page 64 and Page 70, respectively.
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 73. Investment income and realized investment gains
from the life insurance investment portfolio are included in Investments 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 105 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.
Cincinnati Financial Corporation – 2010 10-K – Page 40
type of claim involved
circumstances surrounding each claim
PROPERTY CASUALTY INSURANCE LOSS AND LOSS EXPENSE RESERVES
We establish loss and loss expense reserves for our property casualty insurance business as balance sheet
liabilities. These reserves account for unpaid loss and loss expenses as of a financial statement date. Unpaid
loss and loss expenses are the estimated amounts necessary to pay for and settle all outstanding insured
claims, including incurred but not reported (IBNR) claims, as of that date.
For some lines of business that we write, a considerable and uncertain amount of time can elapse between
the occurrence, reporting and payment of insured claims. The amount we will actually have to pay for such
claims also can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss
and loss expense reserves our most significant estimate. Gross loss and loss expense reserves were
$4.137 billion at year-end 2010 compared with $4.096 billion at year-end 2009.
How Reserves Are Established
Our field claims representatives establish case reserves when claims are reported to the company to provide
for our unpaid loss and loss expense obligation associated with individual claims. Field claims managers
supervise and review all claims with case reserves less than $35,000. Experienced 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:
•
•
•
•
•
Case reserves of all sizes are subject to review on a 90-day cycle, or more frequently if new information
about a loss becomes available. As part of the review process, we monitor industry trends, cost trends,
relevant court cases, legislative activity and other current events in an effort to ascertain new or additional
loss exposures.
We also establish IBNR reserves to provide for all unpaid loss and loss expenses not accounted for by case
reserves:
•
potential for subrogation or salvage recoverable
For weather events designated as catastrophes, we calculate IBNR reserves directly as a result of an
estimated IBNR claim count and an estimated average claim amount for each event. Once case reserves
are established for a weather event we reduce the IBNR reserves. Our claims department management
coordinates the assessment of these events and prepares the related IBNR reserve estimates. Such an
assessment involves a comprehensive analysis of the nature of the 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 (PCS), a division of Insurance Services Office (ISO). PCS defines a catastrophe as
an event that causes countrywide damage of $25 million or more in insured property losses and affects
a significant number of policyholders and insureds.
policy provisions pertaining to each claim
general insurance reserving practices
•
•
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 84.
For all other claims and events, IBNR reserves are calculated as the difference between an actuarial
estimate of the ultimate cost of total loss and loss expenses incurred reduced by the sum of total loss
and loss expense payments and total case reserves estimated for individual claims. We discuss
below the development of actuarially based estimates of the ultimate cost of total loss and loss
expenses incurred.
Our actuarial staff applies significant judgment in selecting models and estimating model parameters when
preparing reserve analyses. In addition, 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 address these uncertainties in the reserving process in a variety of ways.
Cincinnati Financial Corporation – 2010 10-K – Page 41
company and industry pricing
company and industry exposure
paid and reported loss development methods
company and industry loss frequency and severity
paid and reported loss Bornhuetter-Ferguson methods
individual and multiple probabilistic trend family models
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:
•
•
•
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:
•
•
•
•
•
•
These trends and measures also support the estimation of ultimate accident year loss ratios needed
for applying the Bornhuetter-Ferguson methods and for assessing the reasonability of all IBNR reserve
estimates computed. Our actuarial staff reviews these trends and measures quarterly, updating parameters
derived from them as necessary.
Quarterly, our actuarial staff summarizes 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:
•
• new business activity
•
judicial decisions
•
•
•
•
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.
large loss activity and trends in large losses
general economic trends such as inflation
trends in litigiousness and legal expenses
past large loss events such as hurricanes
product and underwriting changes
company and industry premium
company in-force policy count
changes in claims practices
Cincinnati Financial Corporation – 2010 10-K – Page 42
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.
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 by property casualty line of business and in
total for 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
Cincinnati Financial Corporation – 2010 10-K – Page 43
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 83, for more details on our 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, 2010
Total
Commercial casualty
Commercial property
Commercial auto
Workers' compensation
Personal auto
Homeowners
At December 31, 2009
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
$
$
$
$
3,811 $
1,644 $
155
356
1,010
153
105
3,661 $
1,605 $
115
374
975
154
89
3,571 $
1,455 $
136
336
906
145
95
3,459 $
1,459 $
93
355
887
146
80
3,952
1,781 $
176
376
1,079
161
114
3,774
1,691 $
136
393
1,035
161
98
163 $
20
20
87
8
9
116 $
21
19
74
8
9
106
13
13
57
5
6
75
14
12
48
5
6
If actual unpaid loss and loss expenses fall within these ranges, our cash flow and fixed maturity investments
should provide sufficient liquidity to make the subsequent payments. To date, our cash flow has covered our
loss and loss expense payments, and we have never had to sell investments to make these payments. If this
were to become necessary, however, our fixed maturity investments should provide us with ample liquidity. At
year-end 2010, consolidated fixed maturity investments exceeded total insurance reserves (including life
policy reserves) by $2.149 billion.
LIFE INSURANCE POLICY RESERVES
We establish the reserves for traditional life insurance policies based on expected expenses, mortality,
morbidity, withdrawal rates and investment yields, including a provision for uncertainty. Once these
assumptions are established, they generally are maintained throughout the lives of the contracts. We use
both our own experience and industry experience adjusted for historical trends in arriving at our assumptions
for expected mortality, morbidity and withdrawal rates. We use our own experience and historical trends for
setting our assumptions for expected expenses. We base our assumptions for expected investment income
on our own experience adjusted for current economic conditions.
We establish reserves for our universal life, deferred annuity and investment contracts equal to the
cumulative account balances, which include premium deposits plus credited interest less charges and
withdrawals. Some of our universal life insurance policies contain no-lapse guarantee provisions. For these
policies, we establish a reserve in addition to the account balance based on expected no-lapse guarantee
benefits and expected policy assessments.
ASSET IMPAIRMENT
Our fixed-maturity and equity investment portfolios are our largest assets. The company’s asset impairment
committee continually monitors the holdings in these portfolios and all other assets for signs of other-than-
temporary or permanent impairment. The committee monitors significant decreases in the fair value of
invested assets, 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, signs indicating that the carrying amount may not be
recoverable, or changes in legal factors or in the business climate.
The application of our impairment policy resulted in OTTI charges that reduced our income before income
taxes by $36 million in 2010, $131 million in 2009 and $510 million in 2008. Impairment charges are
recorded for other-than-temporary declines in value, if, in the asset impairment committee’s judgment, the
value is not expected to be recouped within a designated recovery period. OTTI losses represent non-cash
charges to income and are reported as realized investment losses.
Our investment 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
Cincinnati Financial Corporation – 2010 10-K – Page 44
taking place in the overall economy and market, combined with events specific to the industry or operations
of the issuing organization. Managers review quantitative measurements such as a declining trend in fair
value, the extent of the fair value decline and the length of time the value of the security has been
depressed, as well as qualitative measures such as pending events, credit ratings and issuer liquidity. We are
even more proactive when these declines in valuation are greater than might be anticipated when viewed in
the context of overall economic and market conditions. We provide information about valuation of our
invested assets in Item 8, Note 2 of the Consolidated Financial Statements, Page 111.
All securities valued below 100 percent of book value are reported to the asset impairment committee for
evaluation. Securities valued between 95 percent and 100 percent of book value are reviewed but not
monitored separately by the committee.
When evaluating for OTTI, the committee considers the company’s intent and ability to retain a security for a
period adequate to recover its cost. Because of the company's financial strength and other factors discussed
below, management may not impair certain securities even when they are trading below book value.
When determining OTTI charges for our fixed-maturity portfolio, management places significant emphasis on
whether issuers of debt are current on contractual payments and whether future contractual amounts are
likely to be paid. Our fixed maturity invested asset impairment policy states that OTTI is considered to have
occurred (1) if we intend to sell the impaired fixed maturity security; (2) if it is more likely than not we will be
required to sell the fixed maturity security before recovery of its amortized cost basis; or (3) the present value
of the expected cash flows is not sufficient to recover the entire amortized cost basis. If we intend to sell or it
is more likely than not we will be required to sell, the book value of any such securities is reduced to fair
value as the new cost basis, and a realized loss is recorded in the quarter in which it is recognized. When we
believe that full collection of interest and/or principal is not likely, we determine the net present value of
future cash flows by using the effective interest rate implicit in the security at the date of acquisition as the
discount rate and compare that amount to the amortized cost and fair value of the security. The difference
between the net present value of the expected future cash flows and amortized cost of the security is
considered a credit loss and recognized as a realized loss in the quarter in which it occurred. The difference
between the fair value and the net present value of the cash flows of the security, the non-credit loss, is
recognized in other comprehensive income as an unrealized loss.
When determining OTTI charges for our equity portfolio, our invested asset impairment policy considers
qualitative and quantitative factors, including facts and circumstances specific to individual securities, asset
classes, the financial condition of the issuer, changes in dividend payment, the length of time fair value had
been less than book value, the severity of the decline in fair value below book value, the volatility of the
security and our ability and intent to hold each position until its forecasted recovery.
For each of our equity securities in an unrealized loss position at December 31, 2010, we applied the
objective quantitative and qualitative criteria of our invested asset impairment policy for OTTI. Our long-term
equity investment philosophy, emphasizing companies with strong indications of paying and growing
dividends, combined with our strong surplus, liquidity and cash flow, provide us the ability to hold these
investments through what we believe to be slightly longer recovery periods occasioned by the recession and
historic levels of market volatility. Based on the individual qualitative and quantitative factors, as discussed
above, we evaluate and determine an expected recovery period for each security. A change in the condition
of a security can warrant impairment before the expected recovery period. If the security has not recovered
cost within the expected recovery period, the security is impaired.
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 2010 in Item 7A, Application of Asset Impairment Policy, Page 96.
An other-than-temporary decline in the fair value of a security is recognized in net income as a realized
investment loss.
Securities considered to have a temporary decline would be expected to recover their book 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 (AOCI), net of tax, and have no impact on net income.
Cincinnati Financial Corporation – 2010 10-K – Page 45
FAIR VALUE MEASUREMENTS
Valuation of Financial Instruments
Valuation of financial instruments, primarily securities held in our investment portfolio, is a critical
component of our year-end financial statement preparation. Fair Value Measurements and Disclosures,
ASC 820-10, defines fair value as the exit price or the amount that would be (1) received to sell an asset or
(2) paid to transfer a liability in an orderly transaction between marketplace participants at the measurement
date. When determining an exit price, we must, whenever possible, rely upon observable market data. Prior
to the adoption of ASC 820-10, we considered various factors such as liquidity and volatility but primarily
obtained pricing from various external services, including broker quotes.
The fair value measurement and disclosure 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 ASC 820-10, 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, Fair Value Measurements, Page 114.
Level 1 and Level 2 Valuation Techniques
Over 99 percent of the $11.424 billion of securities in our investment portfolio measured at fair value
are classified as Level 1 or Level 2. Financial assets that fall within Level 1 and Level 2 are priced according
to observable data from identical or similar securities that have traded in the marketplace. Also within
Level 2 are securities that are valued by outside services or brokers where we have evaluated the pricing
methodology and determined that the inputs are observable.
Level 3 Valuation Techniques
Financial assets that fall within the Level 3 hierarchy are valued based upon unobservable market inputs,
normally because they are not actively traded on a public market. Level 3 corporate fixed-maturity securities
include certain private placements, small issues, general corporate bonds and medium-term notes.
Level 3 state, municipal and political subdivisions fixed-maturity securities include various thinly traded
municipal bonds. 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.
Pricing for securities classified as Level 3 could not be corroborated by similar securities priced using
observable inputs.
Management ultimately determined the pricing for each Level 3 security that we considered to be the
best exit price valuation. As of December 31, 2010, total Level 3 assets were less than 1 percent of our
investment portfolio measured at fair value. Broker quotes are obtained for thinly traded securities that
subsequently fall within the Level 3 hierarchy. We have generally obtained two non-binding quotes from
brokers and, after evaluating, our investment professionals typically selected the lower quote as the
fair value.
EMPLOYEE BENEFIT PENSION PLAN
We have a defined benefit pension plan that was modified during 2008; refer to Item 8, Note 13 of the
Consolidated Financial Statements, Page 121, for additional information. Contributions and pension costs
are developed from annual actuarial valuations. These valuations involve key assumptions including discount
rates, expected return on plan assets and compensation increase rates, which are updated annually. Any
adjustments to these assumptions are based on considerations of current market conditions. Therefore,
changes in the related pension costs or credits may occur in the future due to changes in assumptions.
Key assumptions used in developing the 2010 net pension obligation for our qualified plan were a
5.85 percent discount rate and rates of compensation increases ranging from 3.50 percent to 5.50 percent.
Key assumptions used in developing the 2010 net pension expense for our qualified plan were a
6.10 percent discount rate, an 8.00 percent expected return on plan assets and rates of compensation
increases ranging from 4.00 percent to 6.00 percent. See Note 13, Page 121 for additional information
on assumptions.
Cincinnati Financial Corporation – 2010 10-K – Page 46
In 2010, the net pension expense was $12 million. In 2011, we expect the net pension expense to be
$13 million.
Holding all other assumptions constant, a 0.5 percentage-point decrease in the discount rate would decrease
our 2011 income before income taxes by $1 million. A 0.5 percentage point decrease in the expected return
on plan assets would decrease our 2011 income before income taxes by $1 million.
The fair value of the plan assets was $30 million less than the accumulated benefit obligation at year-end
2010 and $42 million less at year-end 2009. The fair value of the plan assets was $62 million less than the
projected plan benefit obligation at year-end 2010 and $77 million less at year-end 2009. Market conditions
and interest rates significantly affect future assets and liabilities of the pension plan. On February 1, 2011,
we contributed $35 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 net 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. We
assess recoverability of deferred acquisition costs at the segment level, consistent with the ways we acquire,
service, manage and measure profitability. Our property casualty insurance operations consist of three
segments, commercial lines, personal lines and excess and surplus lines. For life insurance policies,
acquisition costs are amortized into income either over the premium-paying period of the policies or the life
of the policy, depending on the policy type. We analyze our acquisition cost assumptions periodically to
reflect actual experience; we evaluate our deferred acquisition cost for recoverability; and we regularly
conduct reviews for potential premium deficiencies or loss recognition.
CONTINGENT COMMISSION ACCRUAL
Another significant estimate relates to our accrual for property casualty contingent (profit-sharing)
commissions. We base the contingent commission accrual estimate on property casualty underwriting
results. 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 $77 million in 2010 contributed 2.6 percentage
points to the property casualty combined ratio. If contingent commissions paid were to vary from that amount
by 5 percent, it would affect 2011 net income by $3 million (after tax), or 2 cents 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 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 2011, the account holder would not pay a surrender
charge. The surrender charge is zero for 2011 and beyond.
Cincinnati Financial Corporation – 2010 10-K – Page 47
Life insurance
At year-end 2010, net unamortized realized losses amounted to $2 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 $7 million before tax in the separate account portfolio, which had a book value of $583 million
at year-end 2010.
RECENT ACCOUNTING PRONOUNCEMENTS
Information about recent accounting pronouncements is provided in Item 8, Note 1 of the Consolidated
Financial Statements, Page 105. 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 five reporting segments. These segments
are defined based on financial information we use to evaluate performance and to determine the allocation
of assets.
• Commercial lines property casualty insurance
• Personal lines property casualty insurance
• Excess and surplus lines property casualty insurance
•
•
We report as Other the non-investment operations of the parent company and its non-insurer subsidiary,
CFC Investment Company.
We measure profit or loss for our commercial lines, personal lines and excess and surplus 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 excess 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 Investment Results of Operations.
The calculations of segment data are described in more detail in Item 8, Note 18 of the Consolidated
Financial Statements, Page 127. The following sections review results of operations for each of the five
segments. Commercial Lines Insurance Results of Operations begins on Page 54, Personal Lines Insurance
Results of Operations begins on Page 64, Excess and Surplus Lines Insurance Results of Operations begins
on Page 70, Life Insurance Results of Operations begins on Page 73, and Investment Results of Operations
begins on Page 75. We begin with an overview of our consolidated property casualty operations.
Investments
Cincinnati Financial Corporation – 2010 10-K – Page 48
CONSOLIDATED PROPERTY CASUALTY INSURANCE RESULTS OF OPERATIONS
Our consolidated property casualty operations grew earned premiums slightly in 2010 and lowered its
underwriting loss, reversing the lower revenue and deteriorating profitability trends of 2008 and 2009. While
soft market conditions persisted for commercial lines, our largest operating segment, several profit
improvement and premium growth initiatives began to be evident in results for 2010.
In addition to the factors discussed in Commercial Lines, Personal Lines and Excess and Surplus Lines
Insurance Results of Operations, beginning on Page 54, Page 64 and Page 70, respectively, overall growth
and profitability for our consolidated property casualty insurance operations were affected by a number of
common factors. Targeted growth, seeking to grow premiums where we believe profit margins are
acceptable, has been an area of strategic focus in recent years. Development and use of enhanced
technology has also been emphasized, helping us to grow premiums as agencies embrace greater ease of
use of our policy administration software. Better technology also can improve efficiency for agencies and
associates, helping to lower expenses. Careful expense management, spending more in areas of strategic
importance and trimming costs in other areas, kept the 2010 expense ratio flat. Slightly lower losses from
weather-related catastrophes and a slowly recovering economy also benefited our operating results. The
table below highlights property casualty results of operations, with analysis and discussion in the sections
that follow.
Overview -- Three-Year Highlights
(Dollars in millions)
Earned premiums
Fee revenues
Total premiums and fee revenues
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident years catastrophe losses
Total loss and loss expenses
Underwriting expenses
Underwriting 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 years catastrophe losses
Total loss and loss expenses
Underwriting expenses
Combined ratio
$
$
Years ended December 31,
2009
2010
2008
2010-2009
Change %
2009-2008
Change %
2,924
4
2,928
2,154
165
(287)
(17)
2,015
960
(47)
$
$
73.6 %
5.6
(9.8)
(0.5)
68.9
32.8
101.7 %
2,911
3
2,914
2,102
172
(181)
(7)
2,086
956
(128)
$
$
72.2 %
5.9
(6.2)
(0.2)
71.7
32.8
104.5 %
3,010
3
3,013
2,174
205
(321)
(2)
2,056
973
(16)
0
33
0
2
(4)
(59)
(143)
(3)
0
63
(3)
0
(3)
(3)
(16)
44
(250)
1
(2)
nm
72.2 %
6.8
(10.7)
0.0
68.3
32.3
100.6 %
Pt. Change
1.4
(0.3)
(3.6)
(0.3)
(2.8)
0.0
(2.8)
Pt. Change
0.0
(0.9)
4.5
(0.2)
3.4
0.5
3.9
Combined ratio:
Contribution from catastrophe losses and prior years
reserve development
Combined ratio before catastrophe losses and prior
years reserve development
101.7 %
104.5 %
100.6 %
(4.7)
(0.5)
(3.9)
106.4 %
105.0 %
104.5 %
(2.8)
(4.2)
1.4
3.9
3.4
0.5
Performance highlights for consolidated property casualty operations include:
• Premiums – Higher 2010 renewal and new business written premiums were driven by growth in our
personal lines and excess and surplus lines segments. Changes in written and earned premiums over
the past three years generally reflected intense price competition partially offset by fairly stable policy
retention rates for renewal business and growth in new business. New business written premiums
increased in each of the past three years, largely due to the contribution of new agency appointments –
in both new and existing states of operation; the contribution of our excess and surplus lines business;
and more competitive personal lines pricing that included net rate increases since late 2009. Other
written premiums primarily include premiums ceded to our reinsurers as part of our reinsurance
program. The table below analyzes premium revenue components and trends. Premium trends by
segment are further discussed beginning on Page 12, Page 15 and Page 16, for the respective property
casualty segments.
Cincinnati Financial Corporation – 2010 10-K – Page 49
(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,
2009
2010
2008
2010-2009
Change %
$
$
2,692
414
(143)
2,963
(39)
2,924
$
$
2,665
405
(159)
2,911
0
2,911
$
$
2,828
368
(186)
3,010
0
3,010
1
2
10
2
nm
0
2009-2008
Change %
(6)
10
15
(3)
nm
(3)
• Combined ratio – The 2010 combined ratio improved 2.8 percentage points to 101.7 percent, lowering
the 2009 underwriting loss by more than half. The 1.4 percentage point increase in the ratio for current
accident year losses and loss expenses was offset by a larger benefit from net favorable reserve
development on prior accident years and lower catastrophe losses. Components of the combined ratio
are discussed below, followed by additional discussion by segment.
Our statutory combined ratio was 101.8 percent in 2010 compared with 104.4 percent in 2009 and
100.4 percent in 2008. As a comparison, the estimated property casualty industry combined ratio was
103.0 percent in 2010, 101.2 percent in 2009 and 105.1 percent in 2008.
Catastrophe losses contributed 5.1 percentage points to the combined ratio in 2010, down 0.6 points
from 2009. Catastrophe losses in 2008 contributed 6.8 percentage points, the highest catastrophe loss
ratio for our company since 1991, largely due to Hurricane Ike. Our 10-year historical annual average
contribution of catastrophe losses to the combined ratio was 4.4 percentage points as of
December 31, 2010. 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.
Cincinnati Financial Corporation – 2010 10-K – Page 50
Catastrophe Losses Incurred
(In millions, net of reinsurance)
Cause of loss
Dates
2010
Jan. 7-12
Feb. 9-11
Apr. 4-6
Apr. 30 - May 3
May 7-8
May 12-16
Jun. 4-6
Jun. 17-20
Jun. 21-24
Jun. 25-28
Jun. 30 - Jul. 1
Jul. 20-23
Oct. 4-6
Oct. 26-28
All other 2010 catastrophes
Development on 2009 and prior catastrophes
Calendar year incurred total
Freezing, wind
Ice, snow, wind
Flood, hail, tornado, wind
Flood, hail, tornado, wind
Hail, tornado, wind
Flood, hail, tornado, wind
Flood, hail, tornado, wind
Flood, hail, tornado, wind
Flood, hail, tornado, wind
Flood, hail, tornado, wind
Hail, wind
Flood, hail, tornado, wind
Flood, hail, wind
Flood, hail, tornado, wind
2009
Jan. 26-28
Feb. 10-13
Feb. 18-19
Apr. 9-11
May 7-9
Jun. 2-6
Jun. 10-18
Sep. 18-22
Other 2009 catastrophes
Development on 2008 and prior catastrophes
Calendar year incurred total
Flood, freezing, ice, snow
Flood, hail, wind
Hail, wind
Flood, hail, wind
Flood, hail, wind
Flood, hail, wind
Flood, hail, wind
Flood, hail, wind
2008
Jan. 4-9
Jan. 29-30
Feb. 5-6
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
Jul. 26
Sep. 12-14
Other 2008 catastrophes
Development on 2007 and prior catastrophes
Calendar year incurred total
Flood, freezing, hail, wind
Hail, wind
Flood, hail, wind
Hail, wind
Flood, hail, wind
Hail, wind
Flood, hail, wind
Hail, wind
Flood, hail, wind
Flood, hail, wind
Flood, hail, wind
Flood, hail, wind
Flood, hail, wind
Hurricane Ike
Region
South, Midwest
East, Midwest
South, Midwest
South
East, Midwest
South, Midwest
Midwest
Midwest, West
Midwest
Midwest
West
Midwest
South
Midwest
South, Midwest
South, Midwest
South
South, Midwest
South, Midwest
South, Midwest
South, Midwest
South
South, Midwest
Midwest
Midwest
South
South
South
South, Mid-Atlantic
Midwest
Midwest
Midwest
Midwest
Midwest
Midwest
South, Midwest
$
$
$
$
$
$
Commercial
lines
Personal
lines
Excess
and surplus
lines
Total
4 $
4
4
21
2
7
2
5
2
3
4
12
6
6
19
(12)
89 $
5 $
13
1
13
9
3
7
3
12
(12)
54 $
4 $
5
5
2
17
5
3
4
4
6
8
10
1
22
10
(3)
103 $
1 $
1
6
6
12
2
2
3
3
5
4
4
1
4
9
(5)
58 $
14 $
25
8
21
13
4
4
4
13
5
111 $
2 $
4
8
8
2
1
4
3
4
4
6
4
7
36
6
1
100 $
$
-
-
-
-
-
-
1
-
-
-
-
-
-
-
-
-
1 $
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
5
5
10
27
14
9
5
8
5
8
8
16
7
10
28
(17)
148
19
38
9
34
22
7
11
7
25
(7)
165
6
9
13
10
19
6
7
7
8
10
14
14
8
58
16
(2)
203
Cincinnati Financial Corporation – 2010 10-K – Page 51
Consolidated Property Casualty Insurance Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the
associated loss expenses. Most of the incurred losses and loss expenses shown in the three-year highlights
table on Page 49 are for the respective current accident years, and reserve development on prior accident
years is shown separately. Since less than half of our consolidated property casualty current accident year
incurred losses and loss expenses represents net paid losses, the majority represents reserves for our
estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate
previously reported reserves as we learn more about the development of the related claims. The table below
illustrates that development. For example, the 78.1 percent accident year 2009 loss and loss expense ratio
reported as of December 31, 2009, developed favorably by 6.5 percentage points to 71.6 percent due to
settling claims for less than previously estimated, or due to updated reserve estimates for unpaid claims, as
of December 31, 2010. Accident years 2009 and 2008 have both developed favorably, as indicated by the
progression over time for the ratios in the table.
(Dollars in millions)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
2,319
2010
$
$
2009
2,084
2,274
$
2008
2,148
2,224
2,379
2010
2009
2008
79.2 %
71.6 %
78.1
71.4 %
73.9
79.0
Catastrophe loss trends, discussed above, explain some of the accident year loss and loss expenses trend for
years 2008 through 2010. Catastrophe losses added 5.6 for 2010, 5.9 for 2009 and 6.8 percentage points
for 2008 to the respective consolidated property casualty accident year loss and loss expense ratios in the
table above.
The trend for our current accident year loss and loss expense ratio before catastrophe losses over the past
three years reflected normal loss cost inflation as well as softer pricing for much of our property casualty
business that began in 2005 and continued through 2010. Refinements made to the allocation of IBNR
reserves by accident year, totaling $69 million, contributed 2.3 percentage points to the 2008 ratio.
Reserve development on prior accident years continued to net to a favorable amount in 2010, as
$304 million was recognized, similar to $323 million in 2008. During 2009, the $188 million of net favorable
development recognized was lower, due primarily to unfavorable development of $48 million for our workers’
compensation line of business, as discussed in Commercial Lines Insurance Segment Reserves, Page 85.
Consolidated Property Casualty Insurance Losses by Size
(Dollars in millions)
New losses greater than $4,000,000
New losses $1,000,000-$4,000,000
New losses $250,000-$1,000,000
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 $1,000,000-$4,000,000
New losses $250,000-$1,000,000
Case reserve development above $250,000
Total large loss ratio
Other losses excluding catastrophe losses
Catastrophe losses
Total loss ratio
$
$
Years ended December 31,
2009
2008
2010
49
142
200
178
569
935
148
1,652
$
$
1.7 %
4.8
6.8
6.1
19.4
32.0
5.1
56.5 %
57
147
212
265
681
860
165
1,706
$
$
2.0 %
5.1
7.3
9.0
23.4
29.5
5.7
58.6 %
46
169
228
245
688
845
203
1,736
1.5 %
5.6
7.6
8.1
22.8
28.1
6.8
57.7 %
2010-2009
Change %
(14)
(3)
(6)
(33)
(16)
9
(10)
(3)
2009-2008
Change %
24
(13)
(7)
8
(1)
2
(19)
(2)
Pt. Change
Pt. Change
(0.3)
(0.3)
(0.5)
(2.9)
(4.0)
2.5
(0.6)
(2.1)
0.5
(0.5)
(0.3)
0.9
0.6
1.4
(1.1)
0.9
In 2010, total large losses incurred decreased by $112 million or 16 percent, helping to lower the
corresponding ratio by 4.0 percentage points. Large loss trends are further analyzed in the segment
discussion below. Our analysis indicated no unexpected concentration of these losses and reserve increases
by geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of
aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller
policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.
Beginning in 2009, we raised the casualty treaty retention to $6 million from $5 million and raised the
property treaty retention to $5 million from $4 million.
Cincinnati Financial Corporation – 2010 10-K – Page 52
Consolidated Property Casualty Insurance Underwriting Expenses
(Dollars in millions)
Commission expenses
Other underwriting expenses
Policyholder dividends
Total underwriting expenses
Ratios as a percent of earned premiums:
Commission expenses
Other underwriting expenses
Policyholder dividends
Total underwriting expense ratio
2010
Years ended December 31,
2009
2008
$
$
544
402
14
960
$
$
18.6 %
13.7
0.5
32.8 %
550
389
17
956
$
$
18.9 %
13.3
0.6
32.8 %
555
403
15
973
18.4 %
13.4
0.5
32.3 %
2010-2009
Change %
(1)
3
(18)
0
2009-2008
Change %
(1)
(3)
13
(2)
Pt. Change
Pt. Change
(0.3)
0.4
(0.1)
0.0
0.5
(0.1)
0.1
0.5
Commission expenses include our profit-sharing, or contingent commissions, which are primarily based on
the profitability of an agency’s business. The aggregate profit trend for agencies that earn these profit-based
commissions can differ from the aggregate profit trend for all agencies reflected in our consolidated property
casualty results. In 2010, lower contingent commissions drove the lower ratio for property casualty
commission expenses, and higher contingent commissions drove the increase in 2009.
In 2010, non-commission expenses were up $13 million or 3 percent, primarily due to a first-quarter 2010
provision for matters involving prior years and related to Note 16, Commitments and Contingent Liabilities,
Page 125. The increase outpaced earned premiums, which grew less than 1 percent. In 2009, non-
commission expenses declined $14 million, primarily due to a change in our pension plan that added
0.5 percentage points to the 2008 non-commission underwriting expense ratio.
Discussions below of our property casualty insurance segments provide additional detail about our results.
Cincinnati Financial Corporation – 2010 10-K – Page 53
COMMERCIAL LINES INSURANCE RESULTS OF OPERATIONS
Overview -- Three-Year Highlights
(Dollars in millions)
Earned premiums
Fee revenues
Total premiums and fee revenues
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident years 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 years catastrophe losses
Total loss and loss expenses
Underwriting expenses
Combined ratio
$
$
Years ended December 31,
2009
2010
2008
2010-2009
Change %
2009-2008
Change %
2,154
2
2,156
1,605
101
(257)
(12)
1,437
704
15
$
$
74.5 %
4.7
(11.9)
(0.6)
66.7
32.7
99.4 %
2,199
2
2,201
1,596
66
(135)
(12)
1,515
719
(33)
$
$
72.5 %
3.0
(6.1)
(0.5)
68.9
32.7
101.6 %
2,316
2
2,318
1,671
106
(270)
(3)
1,504
742
72
(2)
0
(2)
1
53
(90)
0
(5)
(2)
nm
(5)
0
(5)
(4)
(38)
50
(300)
1
(3)
nm
72.1 %
4.6
(11.7)
(0.1)
64.9
32.1
97.0 %
Pt. Change
2.0
1.7
(5.8)
(0.1)
(2.2)
0.0
(2.2)
Pt. Change
0.4
(1.6)
5.6
(0.4)
4.0
0.6
4.6
Combined ratio:
Contribution from catastrophe losses and prior years
reserve development
Combined ratio before catastrophe losses and prior
years reserve development
99.4 %
101.6 %
97.0 %
(7.8)
(3.6)
(7.2)
107.2 %
105.2 %
104.2 %
(2.2)
(4.2)
2.0
4.6
3.6
1.0
Performance highlights for the commercial lines segment include:
• Premiums – Pricing in the commercial lines marketplace again reflected very strong competition, driving
modest declines for both renewal and new business premiums. Our commercial lines net written
premium decrease for 2010 of 1 percent compared favorably with the estimated decline of 2 percent for
the overall commercial lines industry, similar to the 2009 comparison when our decline of 6 percent was
slightly better than the decrease estimated for the commercial lines segment of the industry at
8 percent. We believe our pace for new and renewal business in recent years is consistent with our
agents’ practice of selecting and retaining accounts with manageable risk characteristics that support
the lower prevailing prices. We also believe our favorable comparison to the industry in recent years
reflects our premium growth initiatives and the advantages we achieve through our field focus, which
provides us with quality intelligence on local market conditions. Our earned premiums declined in
2010 and 2009, following the pattern of our written premiums.
• Combined ratio – For our commercial lines segment, the 2010 combined ratio improved 2.2 percentage
points to 99.4 percent, and the segment generated a small underwriting profit. Modest increases in the
ratios for catastrophes and current accident year losses and loss expenses were offset by a larger
benefit from net favorable reserve development on prior accident years. That larger benefit was
accounted for almost entirely by our workers’ compensation and commercial casualty lines of business.
We continue to focus on sound underwriting fundamentals and obtaining adequate premiums for risks
insured by each individual policy. Predictive analytics for better pricing precision have been used for our
workers’ compensation line of business since the second half of 2009. We plan to deploy in 2011 similar
tools for our commercial auto, general liability and commercial property lines.
The small increase in the 2010 and 2009 ratios for current accident year before catastrophe losses
largely reflects loss cost trends that outpaced earned premium trends. The ratio increase for 2009 was
less than it would have been if 2008 had not included approximately $49 million, or 2.1 percentage
points, from refinements made to the allocation of IBNR reserves by accident year. We discuss factors
affecting the combined ratio and reserve development by line of business below.
Our commercial lines statutory combined ratio was 99.6 percent in 2010 compared with 101.8 percent
in 2009 and 96.6 percent in 2008. By comparison, the estimated industry commercial lines combined
ratio was 108.5 percent in 2010, 103.0 percent in 2009 and 107.4 percent in 2008. Industry
commercial lines estimates include mortgage and financial guaranty insurers, which saw a surge in
Cincinnati Financial Corporation – 2010 10-K – Page 54
claims following the historically high level of mortgage defaults in 2008, driving an unusually high
industry combined ratio for 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
Years ended December 31,
2009
2010
2008
$
$
1,978
289
(112)
2,155
(1)
2,154
$
$
2,013
298
(130)
2,181
18
2,199
$
$
2,156
312
(157)
2,311
5
2,316
2010-2009
2009-2008
Change % Change %
(7)
(4)
17
(6)
260
(5)
(2)
(3)
14
(1)
nm
(2)
Due to the highly competitive commercial lines markets of several years, we have focused on leveraging our
local relationships to benefit from the efforts of our agents and the teams that work with them. We seek to
maintain appropriate pricing discipline for both new and renewal business as management emphasizes the
importance of assessing account quality to our agencies and underwriters, for careful decisions on a case-by-
case basis whether to write or renew a policy. Rate credits may be used to retain renewals of quality business
and to earn new business, but we do so selectively in order to avoid commercial accounts that we believe
have insufficient profit margins. In recent years we experienced that typically the larger the account, the
higher the credits needed to write or retain it, with variations by geographic region and class of business.
In addition to targeting adequate premium per exposure, we also pursue non-pricing means of enhancing
longer-term profitability. Non-pricing means have included deliberate reviews to assess each risk, determine
limits of insurance and establish appropriate terms and conditions. We continue to adhere to our
underwriting guidelines, to re-underwrite books of business with selected agencies and to update policy
terms and conditions, leveraging the local presence of our field staff. Our field marketing representatives
continue to underwrite new business and meet with local agencies to reaffirm agreements regarding the
extent of frontline renewal underwriting that 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 their first-hand observations of risk quality.
In recent years, both renewal and new business premium volume reflected the effects of the economic
slowdown in many regions, as exposures declined and policyholders became increasingly focused on
reducing insurance costs and other expenses. Insured exposures for overall commercial lines were estimated
to be down somewhat for the year 2010, but appeared to be flattening by the end of the year. For
commercial accounts, we usually 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
also have other exposures requiring insurance, such as commercial auto or commercial property, in addition
to general liability and workers’ compensation. Premium levels for these other types of coverages generally
are not linked directly to sales or payroll volumes.
In 2010, we estimated that policyholders with a contractor-related ISO general liability code accounted for
approximately 33 percent of our general liability premiums, which are included in the commercial casualty
line of business, and that policyholders with a contractor-related National Council on Compensation
Insurance Inc. (NCCI) workers’ compensation code accounted for approximately 44 percent of our workers’
compensation premiums. The market seeking to insure contractors has been more adversely affected by the
economic slowdown than some other markets.
The 2 percent decline in 2010 agency renewal written premiums largely reflects pricing and exposure
declines, while policy retention rates remained fairly stable. Our headquarters underwriters talk regularly with
agents about renewal business. 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. We
measure average changes in commercial lines renewal pricing as the rate of change in renewal premium for
the new policy period compared with the premium for the expiring policy period, assuming no change in the
level of insured exposures or policy coverage between those periods for respective policies. For policies
renewed during both 2010 and 2009, the typical pricing decline on average was in the low-single-digit range.
For larger accounts, we typically experienced more significant premium declines and for smaller accounts we
sometimes saw little if any premium change at renewal. The 2009 average represented an improvement
from the mid-single-digit range average pricing decline experienced in 2008.
In addition to pricing pressures, premiums resulting from audits that confirmed or adjusted premiums based
on initial estimates of policyholder sales and payrolls affected premium trends in recent years. Written
premiums from audits decreased $29 million and $5 million, respectively, for the years 2010 and 2009,
Cincinnati Financial Corporation – 2010 10-K – Page 55
while earned premiums from audits decreased $40 million and $26 million. Compared with late 2009 and
early 2010, premiums from audits by the end of 2010 represented only a slight drag, or unfavorable effect,
on total commercial lines written and earned premiums, and we expect the effect to become favorable at
some point in 2011.
For new business, our field associates are frequently 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 providing their best quotes. Some of our new business comes from
accounts that are not new to the agent. We believe these seasoned accounts tend to be priced more
accurately than business that is less familiar to our agent because it was recently obtained from a competing
agent. As we appoint new agencies who choose to move accounts to us, we report these accounts as new
business to us.
New business premium volume in recent years has been significantly influenced by new agency
appointments. All agencies newly appointed since the beginning of 2009 generated commercial lines new
business written premiums of $40 million during 2010, up $26 million from 2009, while all other agencies
contributed the remaining $249 million, which was down 12 percent.
Many of the recently appointed agencies are in Texas, which we entered in late 2008, or Colorado, which we
entered in 2009. Those two states accounted for over 9 percent of the $289 million 2010 new business
volume. On a net written premium basis, agencies in Texas and Colorado contributed $40 million of
commercial lines volume during 2010, up $28 million from 2009. The size of the Texas insurance market,
relative to most other states, represents significant potential for long-term premium growth.
The table below summarizes the Texas and Colorado agents’ contribution to our commercial lines new
business and net written premiums. Net written premiums are earned over the term covered by insurance
policies and are an important leading indicator of earned premium revenue trends.
(Dollars in millions)
New business written premiums:
Texas
Colorado
Subtotal
All other states
Total
Net written premiums:
Texas
Colorado
Subtotal
All other states
Total
Years ended December 31,
2010
2009
Change
Change %
$
$
$
$
19
8
27
262
289
30
10
40
2,115
2,155
$
$
$
$
11
1
12
286
298
11
1
12
2,169
2,181
$
$
$
$
8
7
15
(24)
(9)
19
9
28
(54)
(26)
73
700
125
(8)
(3)
173
900
233
(2)
(1)
In both 2010 and 2009, other written premiums had less of a downward effect on commercial lines net
written premiums compared with the prior year. Written premiums ceded to reinsurers were approximately
the same for both years. Both 2010 and 2009 had a more favorable adjustment, compared with the prior
year, for estimated premiums of policies in effect but not yet processed. The adjustment for estimated
premiums had an immaterial effect on earned premiums.
Commercial Lines Insurance Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the
associated loss expenses. Most of the incurred losses and loss expenses shown in the three-year highlights
table above on Page 54 are for the respective current accident years, and reserve development on prior
accident years is shown separately. Since less than half of our consolidated property casualty current
accident year incurred losses and loss expenses represents net paid losses, the majority represents reserves
for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate
previously reported reserves as we learn more about the development of the related claims. The table below
illustrates that development. For example, the 75.5 percent accident year 2009 loss and loss expense ratio
reported as of December 31, 2009, developed favorably by 8.0 percentage points to 67.5 percent due to
settling claims for less than previously estimated, or due to updated reserve estimates for unpaid claims, as
of December 31, 2010. Accident years 2009 and 2008 for the commercial lines segment have both
developed favorably, as indicated by the progression over time for the ratios in the table.
(Dollars in millions)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
1,706
2010
$
$
2009
1,485
1,662
$
2008
1,582
1,644
1,777
2010
2009
2008
79.2 %
67.5 %
75.5
68.3 %
71.0
76.7
Cincinnati Financial Corporation – 2010 10-K – Page 56
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results of Operations,
Page 49, explain some of the movement in accident year loss and loss expense ratios among years 2008
through 2010. Catastrophe losses added 4.7 percentage points for 2010, 3.0 points for 2009 and 4.6 points
for 2008 to the respective commercial lines accident year loss and loss expense ratios in the table above.
The trend for our commercial lines current accident year loss and loss expense ratio before catastrophe
losses over the past three years reflected normal loss cost inflation as well as softer pricing that began in
2005 and continued through 2010, as discussed above in Commercial Lines Insurance Premiums. In
addition, previously discussed refinements made to the allocation of IBNR reserves by accident year
increased the 2008 ratio.
Commercial lines reserve development on prior accident years continued to net to a favorable amount in
2010, as $269 million was recognized, similar to $273 million in 2008. During 2009, the $147 million of net
favorable development recognized was lower, due primarily to unfavorable development of workers’
compensation reserves totaling $48 million, including strengthening of reserves by $49 million in first half of
the year, as discussed in Commercial Lines Insurance Results of Operations, Commercial Lines of Business
Analysis, Page 58.
Most of the commercial lines reserve development on prior accident years reported in years 2008 through
2010 occurred in our commercial casualty line of business. Development by line of business and other
trends for commercial lines loss and loss expenses and the related ratios are further analyzed in Commercial
Lines of Business Analysis, beginning on Page 58.
Commercial Lines Insurance Losses by Size
(Dollars in millions)
New losses greater than $4,000,000
New losses $1,000,000-$4,000,000
New losses $250,000-$1,000,000
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 $1,000,000-$4,000,000
New losses $250,000-$1,000,000
Case reserve development above $250,000
Total large loss ratio
Other losses excluding catastrophe losses
Catastrophe losses
Total loss ratio
$
$
Years ended December 31,
2009
2008
2010
44
120
148
164
476
587
89
1,152
$
$
2.0 %
5.6
6.9
7.6
22.1
27.3
4.1
53.5 %
52
130
164
245
591
565
54
1,210
$
$
2.4 %
5.9
7.5
11.2
27.0
25.7
2.5
55.2 %
41
153
184
229
607
547
103
1,257
1.8 %
6.6
8.0
9.9
26.3
23.4
4.5
54.2 %
2010-2009
Change %
(15)
(8)
(10)
(33)
(19)
4
65
(5)
2009-2008
Change %
27
(15)
(11)
7
(3)
3
(47)
(4)
Pt. Change
Pt. Change
(0.4)
(0.3)
(0.6)
(3.6)
(4.9)
1.6
1.6
(1.7)
0.6
(0.7)
(0.5)
1.3
0.7
2.3
(2.0)
1.0
In 2010, total large losses incurred decreased by $115 million or 19 percent, helping to lower the
corresponding ratio by 4.9 percentage points. The majority of the decrease was for claims related to general
liability coverages, largely included in our commercial casualty line of business. The 2009 decline of
$16 million or 3 percent for total large losses incurred was more than offset by a larger decline in commercial
lines earned premiums, causing an increase in the ratio. Our analysis indicated no unexpected concentration
of these losses and reserve increases by geographic region, policy inception, agency or field marketing
territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is
greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to
general inflationary trends in loss costs. In 2009, we raised the casualty treaty retention to $6 million from
$5 million and raised the property treaty retention to $5 million from $4 million.
Commercial Lines Insurance Underwriting Expenses
(Dollars in millions)
Commission expenses
Other underwriting expenses
Policyholder dividends
Total underwriting expenses
Ratios as a percent of earned premiums:
Commission expenses
Other underwriting expenses
Policyholder dividends
Total underwriting expense ratio
$
$
Years ended December 31,
2009
2008
2010
391
299
14
704
$
$
18.2 %
13.8
0.7
32.7 %
408
294
17
719
$
$
18.6 %
13.3
0.8
32.7 %
417
310
15
742
18.0 %
13.5
0.6
32.1 %
2010-2009
Change %
(4)
2
(18)
(2)
2009-2008
Change %
(2)
(5)
13
(3)
Pt. Change
Pt. Change
(0.4)
0.5
(0.1)
0.0
0.6
(0.2)
0.2
0.6
Cincinnati Financial Corporation – 2010 10-K – Page 57
Commercial lines commission expenses as a percent of earned premium declined during 2010, primarily due
to lower agency contingent commissions. Non-commission underwriting expenses rose 2 percent in 2010 but
were lower than the 2008 level. The 2010 ratio rose primarily due to lower earned premiums.
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.
For 2010, based on the total loss and loss expense ratio, commercial casualty, our largest line of business,
continued to be highly profitable. Workers’ compensation and specialty packages had 2010 total loss and
loss expense ratios significantly higher than we desired. As discussed below, we are taking actions to
improve pricing and reduce loss costs to benefit future profitability trends.
Commercial Casualty
(Dollars in millions)
Commercial casualty:
Net 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 years 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 years catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
$
$
686
693
555
0
(186)
0
369
$
$
704
712
542
0
(154)
0
388
$
$
764
763
576
0
(257)
0
319
(3)
(3)
2
nm
(21)
nm
(5)
(8)
(7)
(6)
nm
40
nm
22
80.1 %
76.2 %
75.4 %
0.0
(26.9)
0.0
0.0
(21.6)
0.0
0.0
(33.7)
0.0
53.2 %
54.6 %
41.7 %
Pt. Change
3.9
0.0
(5.3)
0.0
(1.4)
Pt. Change
0.8
0.0
12.1
0.0
12.9
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
2010
555
$
$
2009
2008
2010
2009
2008
$
437
542
436
488
576
80.1 %
61.4 %
76.2
57.1 %
63.9
75.4
Commercial casualty is our largest line of business and has in recent years maintained a very satisfactory
total loss and loss expense ratio. The rate of decline in commercial casualty premiums slowed in 2010,
despite ongoing pressure from market competition. Economic trends showed modest improvement during
the year, causing corresponding changes in underlying insured exposures, particularly for general liability
coverages where the premium amount is heavily influenced by economically-driven measures of risk
exposure such as sales volume.
The 2010 calendar year total loss and loss expense ratio improved somewhat, largely due to a higher level,
compared with 2009, of favorable development on prior accident year reserves. Factors contributing to
the higher level of favorable prior accident year reserve development included a moderation in trend for
future umbrella coverage payments and less volatility in the trend estimates for future commercial multiple
peril payments.
The 2010 current accident year loss and loss expense ratio before catastrophe losses deteriorated by
3.9 percentage points compared with accident year 2009, reflecting lower pricing per exposure and normal
loss cost inflation.
Cincinnati Financial Corporation – 2010 10-K – Page 58
Commercial Property
(Dollars in millions)
Commercial property:
Net 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 years 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 years catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
$
$
497
489
286
75
(3)
(7)
351
$
$
58.4 %
15.4
(0.6)
(1.4)
71.8 %
485
485
257
42
(5)
(11)
283
$
$
53.1 %
8.8
(1.1)
(2.2)
58.6 %
481
487
282
81
(7)
(3)
353
2
1
11
79
40
36
24
1
0
(9)
(48)
29
(267)
(20)
57.7 %
16.6
(1.3)
(0.4)
72.6 %
Pt. Change
5.3
6.6
0.5
0.8
13.2
Pt. Change
(4.6)
(7.8)
0.2
(1.8)
(14.0)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
2010
361
$
$
2009
2008
$
291
299
349
348
363
2010
73.8 %
2009
2008
60.2 %
61.9
71.6 %
71.5
74.3
Commercial property is our second largest line of business. Net written premiums for 2010 were up, largely
due to an $8 million or 14 percent increase in new business written premiums.
The 2010 calendar year total loss and loss expense ratio was higher than the very profitable level of 2009,
primarily due to higher catastrophe losses and large losses for fires and non-catastrophe weather.
The 2010 current accident year loss and loss expense ratio before catastrophe losses also was higher,
compared with accident year 2009, due to higher large losses for fires and non-catastrophe weather, in
addition to lower pricing per exposure and normal loss cost inflation. In 2011 we plan to improve pricing
precision for commercial property as we begin using predictive modeling tools. In addition, we have increased
our loss control staff and are studying methods for improving the effectiveness of conducting property
inspections for both new and renewal business.
Commercial Auto
(Dollars in millions)
Commercial auto:
Net 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 years 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 years catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
$
$
385
384
269
4
(32)
(1)
240
$
$
70.0 %
1.1
(8.2)
(0.3)
62.6 %
388
394
273
3
(20)
0
256
$
$
402
411
303
2
(8)
0
297
(1)
(3)
(1)
33
(60)
nm
(6)
(3)
(4)
(10)
50
(150)
nm
(14)
69.2 %
73.7 %
0.7
(5.0)
0.0
0.6
(2.0)
0.0
64.9 %
72.3 %
Pt. Change
0.8
0.4
(3.2)
(0.3)
(2.3)
Pt. Change
(4.5)
0.1
(3.0)
0.0
(7.4)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
2010
273
$
$
2009
2008
2010
2009
2008
$
253
276
283
292
305
71.1 %
64.2 %
69.9
68.9 %
71.0
74.3
The decline in commercial auto 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 for this line of business sooner than for
other lines. Commercial auto also experiences pricing pressure because it often represents the largest
portion of insurance costs for many commercial policyholder accounts.
Cincinnati Financial Corporation – 2010 10-K – Page 59
The calendar year total loss and loss expense ratio improved during 2010 due to a higher amount of
favorable development on prior accident year reserves. The ratio was at a profitable level for both
2009 and 2010.
The 2010 accident year loss and loss expense ratio was up slightly compared with accident year 2009, as a
lower level of large losses partially offset lower pricing per exposure and higher physical damage losses.
Workers’ Compensation
(Dollars in millions)
Workers' compensation:
Net 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 years 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 years catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
$
$
310
311
331
0
(39)
0
292
$
$
323
326
355
0
48
0
403
$
$
382
375
342
0
(3)
0
339
(4)
(5)
(7)
nm
nm
nm
(28)
(15)
(13)
4
nm
nm
nm
19
106.5 %
0.0
(12.6)
0.0
93.9 %
108.8 %
0.0
14.7
0.0
123.5 %
91.1 %
0.0
(0.7)
0.0
90.4 %
Pt. Change
(2.3)
0.0
(27.3)
0.0
(29.6)
Pt. Change
17.7
0.0
15.4
0.0
33.1
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
2010
331
$
$
2009
2008
2010
2009
2008
$
302
355
335
331
342
106.5 %
92.4 %
108.8
89.3 %
88.1
91.1
Workers’ compensation net written premiums for 2010 were down $13 million, largely due to an $8 million
or 17 percent decrease in new business written premiums. Premiums resulting from audits of initially
recorded premiums, based on policyholder payroll levels, also lowered net written premiums, reflecting the
slow economy of recent years. Net written premiums declined sharply in 2009, primarily due to economically-
related lower insured exposures and more selective underwriting resulting in the non-renewal of a number of
policies in our worst pricing tiers.
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
was at an unprofitable level in each of the last three years, and management continues to work to improve
financial performance for this line. During 2009, we began using a predictive modeling tool to improve risk
selection and pricing adequacy. Predictive modeling increases pricing adequacy and precision so that our
agents can better compete for the most desirable workers’ compensation business. We also added to our
staff of loss control field representatives, premium audit field representatives and field claims
representatives specializing in workers’ compensation risks. In early 2010, we implemented direct reporting
of workers’ compensation claims, allowing us to quickly obtain detailed information to promptly assign the
appropriate level of claims handling expertise to each case. Obtaining more information sooner for specific
claims allows for medical care appropriate to the nature of each injury, benefiting injured workers, employers
and agents while ultimately lowering overall loss costs.
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.
The calendar year total loss and loss expense ratio improved during 2010 primarily due to $39 million of
favorable development on prior accident year reserves. Most of the favorable reserve development was for
accident year 2009; approximately half of the favorable development was for losses and the other half was
for loss adjustment expenses related to reserves for our claims staff to settle outstanding claims. In 2009,
we recognized $48 million in unfavorable reserve development on accident years 2005 and prior as
discussed below.
Our workers’ compensation reserve analyses completed during the first half of 2009 indicated that loss
cost inflation was higher than previously estimated, leading us to make more conservative assumptions
about future loss cost inflation when estimating loss reserves, thereby significantly increasing losses
incurred. The higher estimates of loss cost inflation derived from analyses during 2009 affected reserves
Cincinnati Financial Corporation – 2010 10-K – Page 60
estimated for many prior accident years, resulting in $48 million of net unfavorable development on prior
accident year reserves.
The 2010 accident year loss and loss expense ratio of 106.5 percent was down slightly from accident year
2009 of 108.8 percent estimated as of December 31, 2009. We believe the improvement is due to
initiatives begun early in 2010 as mentioned above. Reserve development is further discussed in
Commercial Lines Insurance Segment Reserves, beginning on Page 85.
Specialty Packages
(Dollars in millions)
Specialty packages:
Net 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 years 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 years catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
$
$
149
149
91
22
2
(4)
111
$
$
61.1 %
14.5
1.8
(2.6)
74.8 %
148
147
84
21
1
(1)
105
$
$
56.9 %
14.2
0.3
(0.8)
70.6 %
145
144
87
23
(3)
(1)
106
1
1
8
5
100
(300)
6
2
2
(3)
(9)
nm
0
(1)
60.8 %
15.6
(2.5)
(0.4)
73.5 %
Pt. Change
4.2
0.3
1.5
(1.8)
4.2
Pt. Change
(3.9)
(1.4)
2.8
(0.4)
(2.9)
2009
2008
2010
2009
2008
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
2010
113
$
$
$
105
105
75.6 %
71.1 %
71.1
106
106
110
Specialty packages premiums were up slightly over the three-year period.
The calendar year and accident year loss and loss expense ratios reflected a high level of catastrophe losses
for each year in the three-year period. Losses for 2010 also reflected a higher level of large losses for fires
and non-catastrophe weather, increasing both the calendar year and accident year ratios for 2010.
In addition, pricing reductions and normal loss cost inflation continued to put upward pressure on the ratios.
Our adverse loss experience has been primarily driven by our Religious Institutions Program as our other
specialty programs have generally performed adequately. We are working to improve this program, including
enhanced pricing precision through predictive models and greater attention as management of the program
shifts to our Target Markets department. Improved pricing precision and additional loss control actions will be
used later for the other programs in our Specialty Packages line of business as well.
Surety and Executive Risk
73.8 %
73.9
76.4
(Dollars in millions)
Surety and executive risk:
Net 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 years 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 years catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
$
$
93
95
64
0
3
0
67
$
$
101
104
76
0
(3)
0
73
$
$
107
107
71
0
7
0
78
(8)
(9)
(16)
nm
nm
nm
(8)
(6)
(3)
7
nm
nm
nm
(6)
66.5 %
73.2 %
66.1 %
0.0
3.4
0.0
0.0
(2.7)
0.0
0.0
6.5
0.0
69.9 %
70.5 %
72.6 %
Pt. Change
(6.7)
0.0
6.1
0.0
(0.6)
Pt. Change
7.1
0.0
(9.2)
0.0
(2.1)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
2010
64
$
$
2009
2008
2010
2009
2008
$
90
76
63
69
71
66.5 %
86.7 %
73.2
59.0 %
64.5
66.1
Cincinnati Financial Corporation – 2010 10-K – Page 61
Surety and executive risk premiums declined in both 2010 and 2009, primarily due to our non-renewal of
many policies as we improved the quality of the financial institution portion of this book of business.
Director and officer liability coverage accounted for 59.8 percent of surety and executive risk net written
premiums in 2010 compared with 60.5 percent in 2009 and 63.0 percent in 2008. We have actively
managed the potentially high risk of writing director and officer liability by:
• Marketing primarily to nonprofit organizations, which accounted for approximately 72 percent of the
policies and 40 percent of the premium volume for director and officer liability new business written
in 2010.
• Closely monitoring our for-profit policyholders – At year-end 2010, our in-force director and officer liability
policies provided coverage to 13 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 15 of our
bank and savings and loan policyholders have assets greater than $2 billion; only 23 have assets from
$1 billion to $2 billion; and 54 have assets from $500 million to $1 billion.
• Writing on a claims-made basis, which normally restricts coverage to losses reported during the
policy term.
• Providing limits no higher than $10 million with facultative or treaty reinsurance in place in 2011 to
cover losses greater than $6 million.
The calendar year total loss and loss expense ratio improved during 2010 due to lower losses for accident
year 2010 that were partially offset by unfavorable development on prior accident year reserves.
The 2010 accident year loss and loss expense ratio improved compared with accident year 2009 due in part
to a lower level of large losses. Both the calendar year and current accident year loss and loss expense ratios
for 2009 were relatively high, primarily due to director and officer large losses from claims related to prior
lending practices at financial institutions. To address the potential risk inherent in the financial institutions
book of our surety and executive risk business line moving forward, we continue to work with our agents to
limit the number of new director and officer policies for financial institutions, in addition to using credit rating
and other metrics to carefully re-underwrite in-force policies when they are considered for renewal.
Machinery and Equipment
(Dollars in millions)
Machinery and equipment:
Net 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 years 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 years catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
$
$
35
33
9
0
(2)
0
7
$
$
28.2 %
0.0
(6.0)
(0.3)
21.9 %
32
31
9
0
(2)
0
7
$
$
30
29
11
0
1
0
12
9
6
0
nm
0
nm
0
7
7
(18)
nm
nm
nm
(42)
26.9 %
36.1 %
0.3
(5.8)
0.2
0.9
5.5
0.0
21.6 %
42.5 %
Pt. Change
1.3
(0.3)
(0.2)
(0.5)
0.3
Pt. Change
(9.2)
(0.6)
(11.3)
0.2
(20.9)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
2010
$
9
$
2009
2008
2010
2009
2008
$
7
9
10
10
11
28.2 %
23.3 %
27.2
33.2 %
35.6
37.0
Machinery and equipment premiums continued to rise over the three year period, reflecting our superior
service, including experienced specialist who support agencies in writing this line of business. The calendar
year and accident year loss and loss expense ratios were low for 2010 and 2009, although they can fluctuate
substantially due to the relatively small size of this business line.
Cincinnati Financial Corporation – 2010 10-K – Page 62
Commercial Lines Insurance Outlook
Industrywide commercial lines written premiums are projected to increase less than 1 percent in 2011 with
the industry statutory combined ratio estimated at approximately 110 percent. As discussed in Item 1,
Commercial Lines Property Casualty Insurance Segment, Page 12, over the past several years, renewal and
new business pricing has come under steadily increasing pressure, reinforcing the need for more pricing
analytics and careful risk selection. While competition remains intense, pricing changes seem to be leveling
off. Despite challenging market conditions, we believe we can manage our business and execute strategic
initiatives to offset market pressures to some extent and still profitably grow our commercial lines segment.
We intend to continue marketing our products to a broad range of business classes with a package
approach, while improving our pricing precision. We intend to maintain our underwriting selectivity and
carefully manage our rate levels as well as our programs that seek to accurately match exposures with
appropriate premiums. We will continue to evaluate each risk individually and to make decisions about rates,
the use of three-year commercial policies and other policy conditions on a case-by-case basis, even in lines
and classes of business that are under competitive pressure. Nonetheless, we expect commercial lines
profitability to remain under pressure in 2011, in part due to small average pricing declines on policies
renewed during 2010 for which premiums will be earned during 2011.
In Item 1, Strategic Initiatives, Page 9, we discuss the initiatives we are implementing to achieve our
corporate performance objectives. We discuss factors influencing future results of our property casualty
insurance operations in the Executive Summary, Page 36.
Cincinnati Financial Corporation – 2010 10-K – Page 63
PERSONAL LINES INSURANCE RESULTS OF OPERATIONS
Overview -- Three-Year Highlights
(Dollars in millions)
Earned premiums
Fee revenues
Total premiums and fee revenues
Loss and loss expenses from:
Current accident year before catastrophe losses
Current accident year catastrophe losses
Prior accident years before catastrophe losses
Prior accident years catastrophe losses
Total loss and loss expenses
Underwriting expenses
Underwriting 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 years catastrophe losses
Total loss and loss expenses
Underwriting expenses
Combined ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
$
$
721
2
723
508
63
(29)
(5)
537
240
(54)
$
$
685
1
686
485
106
(45)
5
551
215
(80)
$
$
689
1
690
498
99
(51)
1
547
224
(81)
5
100
5
5
(41)
36
nm
(3)
12
33
(1)
0
(1)
(3)
7
12
400
1
(4)
1
70.4 %
8.8
(4.1)
(0.7)
74.4
33.3
107.7 %
70.9 %
15.4
(6.6)
0.7
80.4
31.4
111.8 %
72.2 %
14.4
(7.3)
0.1
79.4
32.5
111.9 %
Pt. Change
(0.5)
(6.6)
2.5
(1.4)
(6.0)
1.9
(4.1)
Pt. Change
(1.3)
1.0
0.7
0.6
1.0
(1.1)
(0.1)
Combined ratio:
Contribution from catastrophe losses and prior years
reserve development
Combined ratio before catastrophe losses and prior
years reserve development
107.7 %
111.8 %
111.9 %
4.0
9.5
7.2
103.7 %
102.3 %
104.7 %
(4.1)
(5.5)
1.4
(0.1)
2.3
(2.4)
Performance highlights for the personal lines segment include:
• Premiums – Earned premiums and net written premiums increased in 2010, due to higher renewal and
new business premiums that reflected improved pricing, including rate changes effective late 2009 for
most states and representing a net rate increase on average. During 2009, we adjusted pricing in an
effort to return to consistent profitability in our personal lines segment. Net written premiums grew
slightly, driven by new business growth that included expansion into new states where we previously
offered only commercial lines policies. Industry average written premium growth was estimated at
approximately 3 percent in 2010, up from negative 1 percent in both 2009 and 2008.
• Combined ratio – The combined ratio improved 4.1 percentage points in 2010, mostly due to lower
weather-related catastrophe losses and partly due to improved pricing. The improvement was partially
offset by a higher underwriting expense ratio and a lower benefit from net favorable reserve development
on prior accident years. The 2010 level of catastrophe losses, with an 8.1 percent ratio, returned to near
longer-term historical averages, just 0.4 percentage points below the 10-year average of 8.5 percent.
The ratio for catastrophe losses in 2009, at 16.1 percent, was approximately twice the 10-year historical
average but was only 1.6 percentage points higher than 2008. The current accident year loss and loss
expense ratio, before catastrophe losses, improved slightly during 2010 and reflected better
underwriting and pricing. For 2009, it trended up slightly, once refinements made to the IBNR reserve
allocation in 2008 were taken into account. The 2008 ratio included approximately $20 million, or
2.9 percentage points, from refinements made to the allocation of IBNR reserves by accident year.
Our personal lines statutory combined ratio was 107.1 percent in 2010, 111.4 percent in 2009 and
111.6 percent in 2008. By comparison, the estimated industry personal lines combined ratio was
99.5 percent in 2010, 100.6 percent in 2009 and 103.6 percent in 2008. Our concentration of business
in areas hard-hit by catastrophe events contributed to recent results that differed from the overall
industry, an issue we are addressing in part through geographic expansion as noted below. The
contribution of catastrophe losses to our personal lines statutory combined ratio was 8.1 percentage
points in 2010, 16.1 percent points in 2009 and 14.5 percentage points in 2008, compared with an
estimated 5.5, 4.9 and 7.5 percentage points, respectively, for the industry.
Cincinnati Financial Corporation – 2010 10-K – Page 64
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,
2009
2010
2008
$
$
685
90
(25)
750
(29)
721
$
$
642
75
(26)
691
(6)
685
$
$
672
42
(29)
685
4
689
2010-2009
2009-2008
Change % Change %
(4)
79
10
1
nm
(1)
7
20
4
9
(383)
5
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 policy retention and new business levels have remained at higher levels following
introduction in recent years of a limited program of policy credits for personal auto and homeowner pricing in
most of the states in which we operate. The program provided credits for eligible new and renewal
policyholders identified as above-average quality risks. Additional pricing and credit changes were
implemented in early 2009, further improving pricing for the best accounts, which should help us retain and
attract more of our agents’ preferred business.
The 7 percent increase in 2010 agency renewal written premiums reflected various rate changes that were
implemented beginning in October 2009. Increases for the homeowner line of business averaging
approximately 5 percent, with some individual policy rate increases in the double-digit range, should improve
loss ratios as the increases are earned. Similar rate changes, with a slightly higher average rate increase,
were implemented in the fourth quarter of 2010 for states representing the majority of our personal lines
business. Rate changes for our personal auto line of business implemented during the fourth quarter of
2010 represented an average rate increase in the low-single-digit range. The 2010 personal auto rate
changes reflected enhanced pricing precision enabled by the recent deployment of predictive models.
Predictive modeling tools also influenced policy pricing and various rate changes during 2008 through
2010 for our homeowner line of business.
In 2010, our personal lines new business premiums written by our agencies grew 20 percent. We believe the
main drivers for the growth were more attractive pricing, plus ease of use and efficiency gained by agencies
from the new version of our Diamond personal lines policy processing system deployed in early 2010. New
business also rose strongly in 2009 as the number of agency locations writing our personal lines rose by
133, or 14.4 percent, following an increase of 136 agency locations in 2008. Since early 2008, we have
worked to improve our geographic diversification by expanding our personal lines operation to several states
less prone to catastrophes. Seven states where we began writing business or significantly expanded our
personal lines product offerings and automation capabilities, beginning in 2008, accounted for $13 million of
the 2009 increase in our personal lines new business written premiums. Those seven states are Arizona,
Idaho, Maryland, Montana, North Carolina, South Carolina, and Utah.
For the three-year period, other written premiums, primarily premiums that are ceded to reinsurers and that
lower our net written premiums, remained relatively stable. Additional premiums ceded to reinsurers to
reinstate our catastrophe reinsurance treaty contributed $9 million to other written premiums 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. Most of the incurred losses and loss expenses shown in the three-year
highlights table above on Page 64 are for the respective current accident years, and reserve development on
prior accident years is shown separately. Since approximately two-thirds of our personal lines current
accident year incurred losses and loss expenses represent net paid losses, the remaining one-third
represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time,
and we re-estimate previously reported reserves as we learn more about the development of the related
claims. The table below illustrates that development. For example, the 86.3 percent accident year 2009 loss
and loss expense ratio reported as of December 31, 2009, developed favorably by 1.8 percentage points to
84.5 percent due to settling claims for less than previously estimated, or due to updated reserve estimates
for unpaid claims, as of December 31, 2010. Accident years 2009 and 2008 for the personal lines segment
have both developed favorably, as indicated by the progression over time for the ratios in the table.
(Dollars in millions)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
2010
571
$
$
2009
2008
2010
2009
2008
$
579
591
562
575
597
79.2 %
84.5 %
86.3
81.5 %
83.4
86.6
Cincinnati Financial Corporation – 2010 10-K – Page 65
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results of Operations,
Page 49, explain some of the movement in accident year loss and loss expense ratios among the years
2008 through 2010. Catastrophe losses added 8.8 percentage points for 2010, 15.4 points for 2009 and
14.4 points for 2008 to the respective personal lines accident year loss and loss expense ratios in the table
above. Catastrophe losses were unusually high during 2009 and 2008, and also are inherently volatile, as
discussed above and in Consolidated Property Casualty Insurance Results of Operations, Page 49.
The trend for our personal lines current accident year loss and loss expense ratio before catastrophe losses
over the past three years reflected normal loss cost inflation, better risk selection and improved pricing, as
discussed above in Personal Lines Insurance Premiums. Higher non-catastrophe weather-related losses also
affected trends, particularly for 2008 and 2009, and large losses described below also were a factor. In
addition, previously discussed refinements made to the allocation of IBNR reserves by accident year
increased the 2008 ratio.
Personal lines reserve development on prior accident years continued to net to a favorable amount in 2010,
as $34 million was recognized, somewhat lower than $40 million in 2009 and $50 million in 2008. Most of
the personal lines reserve development on prior accident years for years 2008 through 2010 occurred in our
other personal line of business, primarily for personal umbrella liability coverage. Development by line of
business and other trends for personal lines loss and loss expenses and the related ratios are further
analyzed in Personal Lines of Business Analysis, beginning on Page 67, and in Personal Lines Insurance
Segment Reserves, Page 87.
Personal Lines Insurance Losses by Size
(Dollars in millions)
New losses greater than $4,000,000
New losses $1,000,000-$4,000,000
New losses $250,000-$1,000,000
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 $1,000,000-$4,000,000
New losses $250,000-$1,000,000
Case reserve development above $250,000
Total large losses incurred
Other losses excluding catastrophe losses
Catastrophe losses
Total loss ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
$
$
5
20
41
11
77
336
58
471
$
$
0.7 %
2.8
5.7
1.6
10.8
46.5
8.1
65.4 %
5
17
48
19
89
281
111
481
$
$
0.7 %
2.5
6.9
2.8
12.9
41.1
16.2
70.2 %
5
16
44
16
81
295
100
476
0.7 %
2.3
6.4
2.3
11.7
42.8
14.5
69.0 %
2009-2008
Change %
0
8
7
25
10
(4)
10
1
0
18
(15)
(42)
(13)
20
(48)
(2)
Pt. Change
Pt. Change
0.0
0.3
(1.2)
(1.2)
(2.1)
5.4
(8.1)
(4.8)
0.0
0.2
0.5
0.5
1.2
(1.7)
1.7
1.2
In 2010, total large losses incurred decreased by $12 million or 13 percent, helping to lower the
corresponding ratio by 2.1 percentage points. The majority of the decrease was for claims related to our
personal auto line of business. In 2009 the total large losses incurred ratio was higher than it was in 2008,
primarily due to more homeowner fire losses. Our analysis indicated no unexpected concentration of these
losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing
territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is
greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to
general inflationary trends in loss costs.
Personal Lines Insurance Underwriting Expenses
(Dollars in millions)
Commission expenses
Other underwriting expenses
Total underwriting expenses
Ratios as a percent of earned premiums:
Commission expenses
Other underwriting expenses
Total underwriting expense ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
137
78
215
$
$
137
87
224
6
22
12
2009-2008
Change %
0
(10)
(4)
Pt. Change
Pt. Change
19.9 %
11.5
31.4 %
19.8 %
12.7
32.5 %
0.2
1.7
1.9
0.1
(1.2)
(1.1)
$
$
145
95
240
$
$
20.1 %
13.2
33.3 %
Personal lines commission expense as a percent of earned premium increased slightly in 2010 and
2009, primarily due to higher agency contingent commissions.
Cincinnati Financial Corporation – 2010 10-K – Page 66
Other underwriting expenses grew $17 million or 22 percent, primarily due to a first-quarter 2010 provision
for matters involving prior years and related to Note 16, Commitments and Contingent Liabilities, Page 125.
They declined in 2009 primarily due to lower depreciation expense on previously capitalized software
expenditures. An unusual expense of $3 million due to a pension charge was included in the 2008 ratio.
Personal Lines of Business Analysis
We prefer to write personal lines coverages within accounts that include both auto and homeowner
coverages as well as coverages from the other personal business line. As a result, we believe that the
personal lines segment is best measured and evaluated on a segment basis. However, we provide
line-of-business data to 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.
For 2010, the homeowner line of business had a total loss and loss expense ratio significantly higher than
desired. As discussed below, we are taking actions to improve pricing and reduce loss costs that we expect to
benefit future profitability trends.
Personal Auto
(Dollars in millions)
Personal auto:
Net 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 years 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 years catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
$
$
352
337
239
3
(7)
0
235
$
$
70.9 %
1.1
(2.1)
(0.1)
69.8 %
324
319
224
3
(6)
0
221
$
$
70.2 %
1.0
(2.0)
(0.2)
69.0 %
320
325
226
4
(12)
0
218
9
6
7
0
(17)
nm
6
1
(2)
(1)
(25)
50
nm
1
69.4 %
1.2
(3.4)
0.0
67.2 %
Pt. Change
0.7
0.1
(0.1)
0.1
0.8
Pt. Change
0.8
(0.2)
1.4
(0.2)
1.8
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
2010
242
$
$
2009
2008
2010
2009
2008
$
225
227
225
227
230
72.0 %
70.4 %
71.2
69.2 %
69.8
70.6
Net written premiums for personal auto increased significantly in 2010, in part due to strong new
business growth.
The calendar year total 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
precision is being improved through use of the recently deployed predictive modeling tool. In addition to using
the tool as part of rate changes implemented in the fourth quarter of 2010, we expect another round of rate
changes, representing another net increase in rates on average, effective late 2011.
The 2010 current accident year loss and loss expense ratio before catastrophe losses deteriorated slightly
compared with accident year 2009, primarily due to earned pricing changes.
Cincinnati Financial Corporation – 2010 10-K – Page 67
Homeowner
(Dollars in millions)
Homeowner:
Net 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 years 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 years catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
$
$
299
289
208
56
(2)
(4)
258
$
$
275
276
202
96
(5)
5
298
$
$
277
277
194
89
(9)
1
275
9
5
3
(42)
60
nm
(13)
(1)
0
4
8
44
400
8
72.0 %
19.3
(0.9)
(1.4)
89.0 %
73.0 %
34.7
(1.6)
1.7
107.8 %
69.9 %
32.1
(3.2)
0.4
99.2 %
Pt. Change
(1.0)
(15.4)
0.7
(3.1)
(18.8)
Pt. Change
3.1
2.6
1.6
1.3
8.6
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
2010
264
$
$
2009
2008
2010
2009
2008
$
295
298
279
281
283
91.3 %
106.9 %
107.7
100.5 %
101.5
102.0
Net written premiums for homeowner increased significantly in 2010, in part due to strong new business
growth. Premiums ceded for reinsurance, which reduce premium revenue, were $18 million in 2010,
$22 million in 2009, and $26 million in 2008, including a 2008 reinstatement premium of $8 million. 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 and to achieve long-term profitability. Implementation of predictive modeling has provided additional
pricing points to target profitability. Various rate changes were implemented in both late October 2010 and
2009, including rate increases that respond in part to weather-related loss trends as well as other trends in
loss costs. The 2009 increases for the homeowner line of business averaged approximately 6 percent in
affected states and 5 percent overall, although some individual policies experienced renewal increases in the
double-digit range. The average effect of the 2010 rate changes were approximately the same as 2009 and
should lower loss ratios as the rate increases are earned. We also continue our gradual geographic
diversification into states less prone to catastrophe losses, which we believe will reduce variability in the long-
term future catastrophe loss ratio. These actions are important steps we are taking to improve homeowner
results.
The calendar year total loss and loss expense ratio over the past three years fluctuated with catastrophe
losses, non-catastrophe weather-related losses and other large losses. A $5 million increase in 2010 large
losses, compared with 2009, contributed 1.7 percentage points to the homeowner loss ratio. The 2010
catastrophe loss effect of 17.9 percentage points returned to a level near historical averages. In 2008 and
2009, our catastrophe loss ratio averaged 34.5 percent, compared with a 10-year average through 2007 of
17.4 percent.
The current accident year loss and loss expense ratio before catastrophe losses remained high in 2010, in
part due to the same non-catastrophe weather related losses and other large losses that affected the
calendar year result.
Cincinnati Financial Corporation – 2010 10-K – Page 68
Other Personal
(Dollars in millions)
Other personal:
Net 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 years 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 years catastrophe losses
Total loss and loss expense ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
$
$
99
95
61
4
(20)
(1)
44
$
$
92
90
60
7
(34)
0
33
$
$
88
87
79
6
(30)
(1)
54
8
6
2
(43)
41
nm
33
5
3
(24)
17
(13)
nm
(39)
64.1 %
3.8
(20.8)
(0.5)
46.6 %
66.9 %
7.7
(38.3)
0.6
36.9 %
89.9 %
6.9
(34.4)
(0.2)
62.2 %
Pt. Change
(2.8)
(3.9)
17.5
(1.1)
9.7
Pt. Change
(23.0)
0.8
(3.9)
0.8
(25.3)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
2010
65
$
$
2009
2008
2010
2009
2008
$
59
67
58
67
85
67.9 %
65.9 %
74.6
67.1 %
76.8
96.8
Other personal premiums increased in 2010 and 2009, generally tracking with the growth in our personal
auto and homeowner lines before the effects of reinsurance. Most of our other personal coverages are
endorsed to homeowner or auto policies.
The calendar year and accident year loss and loss expense ratio for other personal continued to improve in
2010 and has been at a very profitable level the past two years. Reserve development on prior accident
years can fluctuate significantly for this business line because personal umbrella liability coverage is a major
component of other personal losses.
Personal Lines Insurance Outlook
A.M. Best projects industrywide personal lines written premiums may rise approximately 3 percent in 2011,
with an industry statutory combined ratio estimated at 98.5 percent. With our improvement in new business
levels and our strong policy retention rate, along with rate increases effected in late 2010, we expect our
growth rate to be higher than the industry projection for 2011. In Item 1, Strategic Initiatives, Page 9, we
discuss the initiatives we are implementing to address the unsatisfactory performance of our personal lines
segment, in particular the homeowner line of business. We also describe steps to enhance our response to
the changing marketplace. Our personal lines pricing 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 36.
Cincinnati Financial Corporation – 2010 10-K – Page 69
EXCESS AND SURPLUS LINES INSURANCE RESULTS OF OPERATIONS
Overview – Three-Year Highlights
(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 years catastrophe losses
Total loss and loss expenses
Underwriting expenses
Underwriting 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 years catastrophe losses
Total loss and loss expenses
Underwriting expenses
Combined ratio
Years ended December 31,
2009
2010
2008
2010-2009
Change %
2009-2008
Change %
$
49
$
27
$
$
41
1
(1)
-
41
16
(8)
$
83.8 %
1.2
(1.3)
0.0
83.7
31.7
115.4 %
21
-
(1)
-
20
22
(15)
$
75.4 %
0.2
(0.9)
0.0
74.7
80.2
154.9 %
5
5
-
-
-
5
7
(7)
81
95
nm
0
nm
105
(27)
47
440
320
nm
nm
nm
300
214
nm
109.1 %
0.4
0.0
0.0
109.5
156.5
266.0 %
Pt. Change
8.4
1.0
(0.4)
0.0
9.0
(48.5)
(39.5)
Pt. Change
(33.7)
(0.2)
(0.9)
0.0
(34.8)
(76.3)
(111.1)
Combined ratio:
Contribution from catastrophe losses and prior years
reserve development
Combined ratio before catastrophe losses and prior
years reserve development
115.4 %
154.9 %
266.0 %
(39.5)
(111.1)
(0.1)
(0.7)
0.4
0.6
(1.1)
115.5 %
155.6 %
265.6 %
(40.1)
(110.0)
Performance highlights for the excess and surplus lines segment include:
• Premiums – Higher earned premiums in 2010 reflected very strong net written premium growth during
2009, the second full year of operations for our excess and surplus lines segment. Net written premiums
grew in 2010 primarily due to more initial opportunities to renew accounts that were written for the first
time as new business during the previous year. The 2010 volume of those initial opportunities to renew
nearly doubled the volume of 2009 because new business written premiums in 2009 approximately
doubled new business premiums written in 2008. New business written premiums grew modestly in
2010, at a much slower rate than in 2009, partly due to increased competition in the excess and surplus
lines market, including standard market companies writing policies for risks that were formerly insurable
only in the excess and surplus lines market.
• Combined ratio – The combined ratio improved in 2010, primarily due to lower underwriting expenses.
The total loss and loss expense ratio increased primarily due to higher large losses, claims exceeding
$250,000 of insured loss, that outpaced growth in earned premiums.
Excess and Surplus Lines Insurance Premiums
(Dollars in millions)
Renewal written premiums
New business written premiums
Other written premiums
Net written premiums
Unearned premium change
Earned premiums
Years ended December 31,
2009
2010
2008
2010-2009
Change %
$
$
29
35
(6)
58
(9)
49
$
$
10
32
(3)
39
(12)
27
$
$
-
14
-
14
(9)
5
190
9
(100)
49
25
81
2009-2008
Change %
nm
129
nm
179
(33)
440
The $19 million increase in renewal premiums in 2010 was primarily a result of the opportunity to renew
more policies that represented new business in 2009, when new business written premiums grew by
$18 million. Renewal pricing changes also accounted for some of the increase, as our excess and surplus
lines policies averaged estimated price increases that were flat to slightly up in the second half of 2010. We
measure average changes in excess and surplus lines renewal pricing as the rate of change in renewal
premium for the new policy period compared with the premium for the expiring policy period, assuming no
change in the level of insured exposures or policy coverage between those periods for respective policies.
New business written premium growth in 2009 was largely a result of introducing new coverages, and also
increased understanding by agencies representing The Cincinnati Insurance Companies of competitive
advantages described in Excess and Surplus Lines Property Casualty Insurance Segment, Page 16. For most
Cincinnati Financial Corporation – 2010 10-K – Page 70
of 2008, only general liability coverages were available. In late 2008, property and professional liability
coverages were first offered, followed by excess liability in late 2009.
Other written premiums are primarily premiums that are ceded to reinsurers and that lower our net written
premiums. Changes in ceded premium volume tend to follow a pattern similar to changes in the total of
renewal and new business written premiums.
Competition for new business increased during 2010 as we observed more instances of business being
written by standard market commercial lines insurers seeking additional growth opportunities. In many cases
we saw policy terms and conditions being offered that were less restrictive than those we observed in the
past for similar risks, without a corresponding premium for the broadened insurance coverage. As a result,
we declined to write many of those new business and some renewal business opportunities, leading to a
significantly slower rate of new business growth for 2010 at 9 percent compared with 129 percent in 2009.
Excess and Surplus Lines Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the
associated loss expenses. Most of the incurred losses and loss expenses shown in the three-year highlights
table above on Page 70 are for the respective current accident years, and reserve development on prior
accident years is shown separately. Since less than 20 percent of our 2010 excess and surplus lines current
accident year incurred losses and loss expenses represents net paid losses, a large majority represents
reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-
estimate previously reported reserves as we learn more about the development of the related claims. The
table below illustrates that development. For example, the 75.6 percent accident year 2009 loss and loss
expense ratio reported as of December 31, 2009, developed favorably by 2.1 percentage points to 73.5
percent due to settling claims for less than previously estimated, or due to updated reserve estimates for
unpaid claims, as of December 31, 2010. Accident years 2009 and 2008 for the excess and surplus lines
segment have both developed favorably, as indicated by the progression over time for the ratios in the table.
(Dollars in millions)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2010
as of December 31, 2009
as of December 31, 2008
2010
42
$
$
2009
2008
2010
2009
2008
$
20
20
4
5
5
85.0 %
73.5 %
75.6
102.8 %
104.5
109.5
Catastrophe losses partially explain some of the accident year loss and loss expenses trend for years 2008
through 2010. Catastrophe losses added 1.2 percentage points for 2010, 0.2 for 2009 and 0.4 percentage
points for 2008 to the respective excess and surplus lines accident year loss and loss expense ratios in the
table above.
The 2010 increase of 8.4 percentage points in the current accident year loss and loss expense ratio before
catastrophe losses was driven by higher large losses. New losses of $250,000 or more per claim totaled
$12 million in 2010, compared with less than $1 million in 2009, and accounted for 23.5 percentage points
of the ratio. No unexpected concentration of these losses was indicated from our analysis by risk category,
geographic region, policy inception, agency or field marketing territory.
Our first excess and surplus lines policies were written in 2008 and reserves for estimated unpaid losses and
loss expenses were $5 million as of December 31, 2008, for losses that occurred in 2008. As of December
31, 2010, an estimated $2 million remained unpaid for those same loss events that occurred in 2008. Due
to the limited history of settled claims for our excess and surplus lines business it is difficult to draw
meaningful inferences about claim settlement patterns or trends in loss and loss expense experience based
on data in the table above.
Excess and surplus lines reserve development on prior accident years netted to a favorable amount in 2010,
$1 million, resulting in a loss and loss expenses ratio effect similar to 2009. Development trends are further
analyzed in Excess and Surplus Lines Insurance Segment Reserves, Page 89.
We believe the adequacy of loss and loss expenses reserves for our excess and surplus lines business is
strong. We establish case reserves in a manner consistent with standard lines coverages, despite the more
restrictive terms and conditions for excess and surplus lines policies.
Cincinnati Financial Corporation – 2010 10-K – Page 71
Excess and Surplus Lines Insurance Underwriting Expenses
(Dollars in millions)
Commission expenses
Other underwriting expenses
Total underwriting expenses
Ratios as a percent of earned premiums:
Commission expenses
Other underwriting expenses
Total underwriting expense ratio
Years ended December 31,
2009
2008
2010
2010-2009
Change %
5
17
22
$
$
1
6
7
60
(53)
(27)
2009-2008
Change %
400
183
214
Pt. Change
Pt. Change
18.0 %
62.2
80.2 %
16.8 %
139.7
156.5 %
(1.5)
(47.0)
(48.5)
1.2
(77.5)
(76.3)
$
$
8
8
16
$
$
16.5 %
15.2
31.7 %
Excess and surplus lines commission expense at 16.5 percent of earned premiums for 2010 is expected to
remain near that level in the future.
Non-commission underwriting expenses declined in 2010 primarily due to the reduction of various start-up
costs during 2008 and 2009 as our excess and surplus lines began operations in 2008. The primary
category of expense reduction was development costs for our rating and policy administration system.
Excess and Surplus Lines Outlook
The general trends of 2010 for the excess and surplus lines markets are expected to continue in 2011,
according to several industry reports. Competition is expected to remain strong, in part due to standard
market insurance companies insuring businesses that previously were written by excess and surplus lines
insurers. Soft market conditions for commercial lines business overall is the driver of this trend, and industry
observers generally expect little change in the foreseeable future. The slowly recovering U.S. economy,
another major factor in demand for insurance products, is also expected to contribute to modestly declining
or relatively flat premium volume during 2011 for the excess and surplus lines industry.
Industry reports suggest that opportunities for managing profitability and growth exist through greater use of
technology. Technology and data are also being used by excess and surplus lines insurance companies to
identify new exposures in emerging businesses that need insurance protection or other value-added services.
Our strategy of providing superior service is expected to continue to grow our excess and surplus lines
segment and achieve profitability despite challenging market conditions. We intend to continue carefully
selecting and pricing risks, providing prompt delivery of insurance quotes and policies and outstanding
claims and loss control service from local field representatives who also handle the standard lines business
for their assigned agencies. These local representatives are supported by headquarters underwriters and
claims managers who specialize in excess and surplus lines.
Cincinnati Financial Corporation – 2010 10-K – Page 72
LIFE INSURANCE RESULTS OF OPERATIONS
Overview -- Three-Year Highlights
(In millions)
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
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
$
$
158
1
159
170
(79)
61
152
7
$
$
143
-
143
160
(69)
50
141
2
$
$
126
2
128
142
(63)
45
124
4
10
nm
11
6
(14)
22
8
250
13
(100)
12
13
(10)
11
14
(50)
Performance highlights for the life insurance segment include:
• Revenues – Driven by higher term life insurance premiums, earned premiums have grown at a double-
digit rate the past two years. Gross in-force policy face amounts increased to $74.124 billion at year-end
2010 from $69.815 billion at year-end 2009 and $65.888 billion at year-end 2008.
• Profitability – The life insurance segment frequently reports only a small profit or loss because most of its
investment income is included in investment segment results. We include only investment income
credited to contract holders (interest assumed in life insurance policy reserve calculations) in life
insurance segment results. The segment reported a $7 million profit in 2010.
Life Insurance Premiums
(Dollars in millions)
Term life insurance
Universal life insurance
Other life insurance, annuity, and
disability income products
Net earned premiums
Years ended December 31,
2009
2008
2010
2010-2009
Change %
$
$
$
96
35
27
$
86
28
29
158
$
143
$
76
24
26
126
12
25
(7)
10
2009-2008
Change %
13
17
12
13
We market term, whole and universal life products, fixed annuities and disability income products.
In addition, we offer term, whole and universal life and disability insurance to employees at their worksite.
These products provide our property casualty agency force with excellent cross-serving opportunities for both
commercial and personal accounts.
Earned premiums increased in 2010 largely because of growth in our term and universal life insurance
business. Earned premiums from term insurance grew $10 million, or 12 percent, and earned premiums
from universal life insurance grew $7 million, or 25 percent.
Separate account investment management fee income contributed $1 million to total revenue in 2010,
compared with less than $1 million contribution in 2009 and $2 million in 2008. These fees increased
primarily because of the net realized capital gain and 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 31 life field marketing representatives work in partnership with
our 117 property casualty field marketing representatives. Approximately 69 percent of our term and
other life insurance product premiums were generated through our property casualty insurance
agency relationships.
Life Insurance Profitability
Although we exclude most of our life insurance company investment income from investment
segment results, we recognize that assets under management, capital appreciation and investment
income are integral to evaluation of the success of the life insurance segment because of the long
duration of life products. On a basis that includes investment income and realized gains or losses from
life insurance-related invested assets, the life insurance company reported a net profit of $39 million in
2010, compared with a net profit of $22 million in 2009 and a net loss of $19 million in 2008. The life
insurance company portfolio had after-tax net realized investment gains of $2 million in 2010, compared
with after-tax net realized investment losses of $13 million in 2009, which included $15 million in OTTI
charges. Net realized investment losses were $58 million in 2008, including $66 million in OTTI charges.
Realized investment gains and losses are discussed under Investment Results of Operations, Page 75.
Cincinnati Financial Corporation – 2010 10-K – Page 73
Life segment expenses consist principally of:
• Contract holders’ benefits incurred, related to traditional life and interest-sensitive products, accounted
for 73.6 percent of 2010 total benefits and expenses compared with 76.4 percent in 2009 and
75.7 percent in 2008. Total contract holders’ benefits rose due to net death claims that increased but
remained within our range of pricing expectations.
• Operating expenses incurred, net of deferred acquisition costs, accounted for 26.4 percent of 2010 total
benefits and expenses compared with 23.6 percent in 2009 and 24.3 percent in 2008. Unlocking of
actuarial assumptions for our universal life contracts was the primary reason for increased operating
expenses in 2010. Expenses in 2010 were also up from increased commissions due to growth in term
life insurance and fixed annuities.
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
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
During 2010, the life insurance market continued to stabilize from the turmoil it experienced during the
financial crisis. Of particular interest to us, 2010 saw decreased rate volatility for term insurance as the cost
of reserve financing moderated, albeit at rates substantially higher than before the financial crisis. This
higher cost of reserve financing has led a number of large term writers to replace their term portfolios with
term-like universal life products. These companies have sacrificed a simple design and the high redundant
reserve requirement with a much more complex design and a lower reserve requirement. We believe this
offers us a competitive advantage, and we expect to see continued growth in our term business because of
our commitment to offering our distribution the most straight-forward products possible, at a reliable and
competitive rate.
Our property casualty agencies remain the main distribution system for our life insurance segment, and we
continue to emphasize securing an increasing share of the life insurance premium produced by these
agencies. While other life insurers continue to expand nontraditional distribution channels such as direct
sales, we intend to market through agencies affiliated with our property casualty insurance operations or
independent life-only agencies. In 2010, our property casualty agencies produced 69 percent and our
life-only agencies 31 percent of our life insurance premium. Term insurance continues to fit well with the
sales goals of both our property casualty and life-only agencies and remains our largest product line. We
continue to emphasize the cross-serving opportunities of our worksite products for our property casualty
agencies’ commercial accounts, and in 2010 we introduced a new worksite term product with a return of
premium feature. Also in 2010, we introduced a second-to-die universal life product. We believe this product
helps satisfy an important need that is heightened by an aging boomer population and a fluctuating federal
estate tax situation.
We expect annuity sales to moderate somewhat in 2011 as we introduce a new product with a lower
guaranteed rate of interest. Such a product affords us more protection during prolonged periods of low
interest rates. New annuity suitability regulations also are a headwind on annuity sales due to the added
burden on the agent and the resulting increased acquisition costs.
We made good progress in improving our operational technology in 2010. We remain on track to complete a
major administration system consolidation project in 2011. Online illustrations were introduced and are
already contributing to savings. Finally, we have other initiatives underway that will make it easier for our
agents to do business with us, from flexible compensation arrangements to electronic applications. We fully
expect all of these initiatives to contribute additional revenue and/or reduced expenses in 2012 and beyond.
Cincinnati Financial Corporation – 2010 10-K – Page 74
INVESTMENT RESULTS OF OPERATIONS
Overview -- Three-Year Highlights
Investment Results
(In millions)
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
Total investment income, net of expenses, pre-tax
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 profit
$
$
518 $
(79)
185
10
(36)
159
598 $
501 $
(69)
440
27
(131)
336
768 $
537
(63)
686
(38)
(510)
138
612
3
(14)
(58)
(63)
73
(53)
(22)
(7)
(10)
(36)
nm
74
143
25
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 increased 3 percent in 2010, primarily because of
additional net purchases in our fixed-maturity portfolio that offset declining yields. Pretax investment
income declined 7 percent in 2009, primarily because of prior year dividend cuts in our common stock
portfolio. After-tax investment income increased 2 percent in 2010 compared with a decrease of
11 percent in 2009. The steeper decline in 2009 after-tax investment income, compared with the pretax
basis, was primarily due to a change in mix of investment income as dividends have tax-advantages
relative to interest on corporate bonds.
• Realized investment gains and losses – We reported realized investment gains in all three years, largely
due to investment sales that were discretionary in timing and amount. Those sales were somewhat offset
by OTTI charges. The $510 million impairment for the write-down of 126 securities in 2008 largely offset
gains from investment sales.
Investment Income
The primary drivers of investment income were:
•
Interest income rose 5 percent in 2010 primarily due to investing our typical allocation of net cash flow
from operations in fixed-maturity securities. It increased significantly in 2009 as we increased our
allocation of investments to fixed-maturity securities.
• Dividend income declined 1 percent in 2010 after declining 51 percent in 2009. In early 2009, we
reduced the size of our preferred stock portfolio, which generally provides higher yields, in response to
the market conditions related to the banking crisis. During 2008, we reduced the size of our common
stock portfolio by more than 50 percent in response to actual or anticipated dividend reductions as well
as for the implementation of a risk management program.
In 2010, we continued to invest available cash flow in both fixed income and equity securities in a manner
that we believe balances current income needs with longer-term invested assets growth goals.
(In millions)
Investment income:
Interest
Dividends
Other
Investment expenses
Total investment income, net of expenses, pre-tax
Income taxes
Total investment income, net of expenses, after-tax
Effective tax rate
Average invested assets plus cash and cash equivalents
Average yield pre-tax
Average yield after-tax
Years ended December 31,
2009
2008
2010
2010-2009
Change %
2009-2008
Change %
5
(1)
(43)
0
3
(7)
2
23
(51)
(50)
(14)
(7)
(11)
(11)
$
$
$
423 $
99
4
(8)
518
(126)
392 $
402 $
100
7
(8)
501
(118)
383 $
326
204
14
(7)
537
(106)
431
24.4%
23.6%
19.7%
11,547 $
10,550 $
11,193
4.5%
3.4%
4.7%
3.6%
4.8%
3.9%
Cincinnati Financial Corporation – 2010 10-K – Page 75
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 OTTI
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 given
period. However, such gains or losses usually have little, if any, effect on total shareholders’ equity because
most equity and fixed maturity investments are carried at fair value, with the unrealized gain or loss included
as a component of other comprehensive income. At year-end 2010, the fixed maturities fair value was
106.3 percent of book value compared with 104.5 percent at year-end 2009.
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.
Net realized investment gains and losses totaling $185 million for the year ended December 31, 2010,
reflected:
• $174 million in realized gains from equity sales, including $128 million from the sale of Verisk Analytics
Inc. (NYSE: VRSK).
• $13 million in net gains from fixed-maturity sales and calls.
• $10 million in gains from changes in fair value of securities with embedded derivatives.
• $36 million in OTTI charges to write down holdings of equities and fixed maturities.
The $13 million in net gains from fixed-maturity sales included a $1 million gain in short-term investments
due to the final receipt from the Reserve Primary Fund that exceeded the impaired basis. The net gains also
included $12 million in losses due to sales of all of the remaining holdings of collateralized mortgage
obligations, which occurred during the first quarter of 2010.
The $440 million net realized investment gain in 2009, was primarily due to $624 million from sales of
various equity holdings, including Pfizer Inc. (NYSE: PFE), Exxon Mobil Corporation (NYSE: XOM), The Procter
& Gamble Company (NYSE: PG), Fifth Third Bancorp (NASDAQ: FITB), and Piedmont Natural Gas Company
Inc. (NYSE: PNY). Realized losses of $162 million from the sale of several equity securities partially offset
realized investment gains.
In 2008, most of the gain was due to sales of holdings of common and preferred stocks of financial services
issuers, to reduce 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.
We generally purchase fixed income securities with the intention to hold until maturity. Securities that no
longer meet our investment criteria, usually due to a change in credit fundamentals, are divested.
Change in the Valuation of Securities with Embedded Derivatives
We have a small portfolio of convertible preferred stocks and bonds, which have an embedded derivative
component. In 2010 we recorded $10 million in fair value realized gains compared with $27 million in
2009 and a $38 million fair value decline for 2008. These changes in fair value were due to the application
of ASC 815-15-25, which allows us to account for the entire hybrid financial instrument at fair value, with
changes recognized in realized investment gains and losses. The changes in fair values are recognized in net
income in the period they occur. See the discussion of Derivative Financial Instruments and Hedging
Activities in Item 8, Note 1 of the Consolidated Financial Statements, Page 105, for details on the accounting
for convertible security embedded options.
Other-than-temporary Impairment Charges
In 2010, we recorded $36 million in write-downs of 15 securities that we deemed had experienced an
other-than-temporary decline in fair value compared with $131 million for 50 securities in 2009 and
$510 million for 126 securities in 2008. The factors we consider when evaluating impairments are discussed
in Critical Accounting Estimates, Asset Impairment, Page 44. The OTTI charges in 2010 were less than
1 percent of our investment portfolio at year-end compared with 1 percent for 2009 and 5 percent for 2008.
OTTI charges also include unrealized losses of holdings that we intend to sell but have not yet completed
a transaction.
Cincinnati Financial Corporation – 2010 10-K – Page 76
OTTI charges from the investment portfolio by the asset class we described in Item 1, Investments Segment,
Page 19, are summarized below:
(Dollars in millions)
Taxable fixed maturities:
Impairment amount
New book value
Percent to total book value owned
Number of securities impaired
Percent to number of securities owned
Tax-exempt fixed maturities:
Impairment amount
New book value
Percent to total book value owned
Number of securities impaired
Percent to number of securities owned
Common equities:
Impairment amount
New book value
Percent to total book value owned
Number of securities impaired
Percent to number of securities owned
Preferred equities:
Impairment amount
New book value
Percent to total book value owned
Number of securities impaired
Percent to number of securities owned
Total:
Impairment amount
New book value
Percent to total book value owned
Number of securities impaired
Percent to number of securities owned
$
$
$
$
$
$
$
$
$
$
Years ended December 31,
2009
2008
2010
$
$
(1)
9
0 %
5
0 %
$
$
(2)
5
0 %
4
0 %
(33)
120
$
$
5 %
4
6 %
$
$
0
0
0 %
2
8 %
(36)
134
$
$
1 %
15
1 %
(61)
81
$
$
2 %
37
3 %
$
$
(1)
3
0 %
2
0 %
(59)
48
$
$
2 %
8
16 %
$
$
(10)
5
7 %
3
12 %
(131)
137
$
$
1 %
50
2 %
(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 %
OTTI charges from the investment portfolio by industry are summarized as follows:
(In millions)
Fixed maturities:
Financial
Services cyclical
Real estate
Consumer cyclical
Other
Total fixed maturities
Common equities:
Industrials
Consumer discretionary
Material
Health
Financial
Information technology
Total common equities
Preferred equities:
Financial
Other
Total preferred equities
Total
Years ended December 31,
2010
2009
2008
0
0
(1)
0
(2)
(3)
0
0
0
(21)
0
(12)
(33)
0
0
0
(36)
$
$
$
(30)
(14)
(11)
(5)
(2)
(62)
(35)
(10)
(8)
(6)
0
0
(59)
(10)
0
(10)
(131)
$
(72)
(17)
(49)
(14)
(11)
(163)
0
0
0
(30)
(184)
0
(214)
(132)
(1)
(133)
(510)
$
$
The decrease in OTTI charges for both 2010 and 2009 was largely due to the improvement in values as asset
markets rebounded. The higher level of OTTI charges in 2008 was largely due to write-downs of holdings of
Cincinnati Financial Corporation – 2010 10-K – Page 77
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.
Investments Outlook
We continue to focus on portfolio strategies to balance near-term income generation and long-term book
value growth. In 2011, we expect to continue to allocate a portion of cash available for investment to equity
securities, taking into consideration corporate liquidity and income requirements, as well as insurance
department regulations and rating agency comments. We discuss our portfolio strategies in Item 1,
Investments Segment, Page 19.
We believe that a weak or prolonged recovery from current economic conditions could heighten the risk of
renewed pressure on securities markets, which could lead to additional OTTI charges. Our asset impairment
committee continues to monitor the investment portfolio. The current asset impairment policy is described in
Critical Accounting Estimates, Asset Impairment, Page 44.
OTHER
Revenues in 2010 for our Other businesses nearly equaled 2009. Other includes non-investment operations
of the parent company and its subsidiary, CFC Investment Company, and former subsidiary CinFin Capital
Management Company. Losses before income taxes for Other were largely driven by interest expense from
debt of the parent company.
(In millions)
Interest and fees on loans and leases
Money management fees
Other revenues
Total revenues
Interest expense
Operating expenses
Total expenses
Other loss
Years ended December 31,
2010
2009
2008
2009-2008
2010-2009
Change % Change %
$
$
7
-
1
8
54
11
65
(57)
$
$
7
-
2
9
55
14
69
(60)
$
$
8
2
(2)
8
53
15
68
(60)
0
nm
(50)
(11)
(2)
(21)
(6)
5
(13)
(100)
nm
13
4
(7)
1
0
TAXES
We had $124 million of income tax expense in 2010 compared with $150 million in 2009 and $111 million
in 2008. The effective tax rate for 2010 was 24.8 percent compared with 25.7 percent in 2009 and
20.7 percent in 2008.
The change in our effective tax rate was primarily due to changes in pretax income from underwriting
results, changes in investment income and the amount of realized investment gains and losses. Changes to
tax-exempt interest and the dividend received deduction in the current year compared with prior years also
contributed to the change.
Historically, we have pursued a strategy of investing some portion of cash flow in tax-advantaged
fixed-maturity and equity securities to minimize our overall tax liability and maximize after-tax earnings. See
Tax-Exempt Fixed Maturities, Page 21 for further discussion on municipal bond purchases in our
fixed-maturity investment portfolio. 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 an
immaterial amount of tax-advantaged fixed-maturity investments. For our insurance subsidiaries, the
dividend received deduction, after the dividend proration of the 1986 Tax Reform Act, exempts approximately
60 percent of dividends from qualified equities from federal tax. For our non-insurance subsidiaries, the
dividend received deduction exempts 70 percent of dividends from qualified equities. Details about our
effective tax rate are found on Note 11, Income Taxes, Page 120.
LIQUIDITY AND CAPITAL RESOURCES
We seek to maintain prudent levels of liquidity and financial strength for the protection of our policyholders,
creditors and shareholders. We manage liquidity at two levels to meet the short- and long-term cash
requirements of business obligations and growth needs. The first is the liquidity of the parent company. The
second is the liquidity of our insurance subsidiary. The management of liquidity at both levels is essential
because each has different funding needs and sources, and each is subject to certain regulatory guidelines
and requirements.
Cincinnati Financial Corporation – 2010 10-K – Page 78
Parent Company Liquidity
The parent company’s primary means of meeting liquidity requirements are dividends from our insurance
subsidiary, investment income and 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 81. Other uses of parent company cash
include dividends to shareholders, common stock repurchases and general operating expenses described
under Other Commitments, Page 81. As of December 31, 2010, the parent company had $1.042 billion in
cash and marketable securities, providing strong liquidity to fund uses of cash.
The table below shows a summary, by the direct method, of the major sources and uses of liquidity by the
parent company. Dividends received in 2010 from our insurance subsidiary returned to a level near the
average of recent years. No dividends were received from our insurance subsidiary in 2009, in order to
maintain strong statutory surplus and financial strength ratings. We expect sources of liquidity to increase in
2011 and beyond, primarily from improved profitability from our property casualty operations, funding a
potentially larger dividend to the parent company. The majority of expenditures for the parent company have
been consistent during the last three years, and we expect future expenditures to remain fairly stable. Share
repurchases are discretionary, depending on cash availability and capital management decisions.
(In millions)
Sources of liquidity:
Insurance subsidiary dividends received
Other operating subsidiaries' dividends received
Investment income received
Uses of liquidity:
Debt interest payments
Pension payments
Shareholders dividend payments
Purchase (issuance) of treasury shares
Years ended December 31,
2009
2008
2010
$
$
270 $
0
41
52 $
25
252
10
0 $
0
41
52 $
34
249
(1)
220
10
81
53
34
250
138
Insurance Subsidiary Liquidity
Our insurance subsidiary’s primary means of meeting liquidity requirements are collection of premiums,
investment income, and sale proceeds from investments held at the subsidiary level. Property casualty
insurance premiums generally are received before losses are paid under the policies purchased with those
premiums. Our insurance subsidiary’s expenditures are property casualty loss and loss expenses,
commissions, salaries and other ongoing operating expenses. Over the past three years, cash receipts from
property casualty along with investment income, have been more than sufficient to pay claims and operating
expenses. Excess cash flow was partially used to pay dividends to the parent company. We are not aware of
any known trends that would materially change historical cash flow results. We discuss the factors that
affected insurance operations in Commercial Lines and Personal Lines Insurance Results of Operations,
Page 54 and Page 64.
This table shows a summary of operating cash flow for property casualty insurance (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 less investment expense paid
Insurance operating cash flow
Years ended December 31,
2009
2008
2010
$
$
2,971 $
(1,858)
(954)
159
350
509 $
2,957 $
(1,910)
(951)
96
317
413 $
3,060
(1,947)
(988)
125
360
485
Additional Sources of Liquidity
Investment income is a primary source of liquidity for both the parent company and our insurance subsidiary
operations. For both, cash in excess of operating requirements and dividends are invested in fixed-maturity
and equity securities. Equity securities provide the potential for future increases in dividend income and for
capital appreciation. In Item 1, Investments Segment, Page 19, we discuss our investment strategy, portfolio
allocation and quality.
Income from our investments is the most important investment contribution to cash flow. While we have
never sold investments to make claim 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. In addition to possible
sales of investments, proceeds of call or maturities of fixed maturities also can provide liquidity. During the
next five years, $2.804 billion, or 35.4 percent, of our fixed-maturity portfolio will mature. At year-end 2010,
total unrealized gains in the investment portfolio, before deferred income taxes, were $1.250 billion. Further,
Cincinnati Financial Corporation – 2010 10-K – Page 79
financial resources of the parent company also could be made available to our insurance subsidiaries, if
circumstances required. This flexibility would include our ability to access the capital markets and short-term
bank borrowings.
We had $790 million of long-term debt and $49 million in borrowings on our short-term lines of credit at
year-end 2010. 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 118. None of the notes are encumbered by rating triggers:
• $391 million aggregate principal amount of 6.92% senior debentures due 2028.
• $28 million aggregate principal amount of 6.9% senior debentures due 2028.
• $374 million aggregate principal amount of 6.125% senior debentures due 2034.
The company’s senior debt is rated investment grade by independent rating firms. On July 19, 2010,
Standard & Poor’s lowered counterparty credit rating for our senior debt from BBB+ to BBB. Three other
rating agencies made no changes to our debt ratings in 2010. Our debt ratings from the other rating
agencies are: a from A.M. Best, BBB+ from Fitch Ratings and A3 from Moody’s Investors Service.
Short-Term Debt
At December 31, 2010, we had two lines of credit with commercial banks amounting to $225 million,
with $49 million borrowed. There was no change in the amount of the $49 million short-term debt during
2010 or 2009. Access to these lines of credit requires compliance with various covenants, including
maintaining a minimum consolidated net worth and not exceeding a 20 percent debt-to-capital ratio. As of
December 31, 2010, we were well within compliance with all of the covenants under the credit agreements
and believe we will remain in compliance.
Our $75 million unsecured line of credit with PNC Bank, N.A. was established more than five years ago and
was renewed effective August 30, 2010, for a one-year term to expire on August 28, 2011. CFC Investment
Company also is a borrower under this line of credit. PNC Bank is a subsidiary of The 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. CFC Investment
Company also is a borrower under this line of credit. At year-end 2010, there was $49 million outstanding on
this line of credit. The Huntington National Bank, a subsidiary of Huntington Bancshares Inc.
(NASDAQ:HBAN), is the lead participant with a $75 million share. U.S. Bancorp (NYSE:USB), Bank of America
Corporation (NYSE:BAC) and Northern Trust Corporation (NASDAQ:NTRS) also participate, each providing
$25 million of capacity.
This line of credit includes a swing line sub-facility for same-day borrowing in the amount of $35 million.
The credit agreement provides alternative interest charges based on the type of borrowing and our
debt rating. The interest rate charged for an advancement is adjusted LIBOR plus the applicable margin.
Based on our debt ratings at year-end 2010, interest for Eurodollar rate advances is adjusted LIBOR plus
33 basis points, and for floating rate advances is adjusted LIBOR. Utilization and commitment fees
based on Cincinnati Financial Corporation’s year-end 2010 debt rating are 5 basis points and 8 basis
points, respectively.
Capital Resources
Capital resources represent our overall financial strength to support writing and growing our insurance
businesses. At December 31, 2010, we had total shareholders’ equity of $5.032 billion, an increase of
$272 million, or 6 percent, from the prior year. Our total debt was $839 million, unchanged from a year ago.
We seek to maintain a solid financial position and provide capital flexibility by keeping our ratio of debt to
total capital moderate. We target a ratio below 20 percent. At year-end 2010, the ratio was 14.3 percent
compared with 15.0 percent at year-end 2009. The decrease in the debt-to-total-capital ratio was due
entirely to the increase in shareholders’ equity at year-end 2010.
At the discretion of the board of directors, the company can return cash directly to shareholders:
• Dividends to shareholders –The ability of the company to continue paying cash dividends is subject to
factors the board of directors may deem relevant. While the board and management believe there is
merit to sustaining the company’s record of dividend increases, our first priority is the company’s
financial strength. Over the past 10 years, the company has paid an average of 46.9 percent of net
income as dividends. Through 2010, the board had increased our cash dividend for 50 consecutive
years. The board decision in August 2010 to increase the dividend demonstrated confidence in the
company’s strong capital, liquidity, financial flexibility and initiatives to improve earnings performance.
Cincinnati Financial Corporation – 2010 10-K – Page 80
• Common stock repurchase – Generally, our board believes that share repurchases can help fulfill our
commitment to enhancing shareholder value. Consequently, the board has authorized the repurchase of
outstanding shares, giving management discretion to purchase shares at reasonable prices in light of
circumstances at the time of purchase, pursuant to U.S. Securities and Exchange Commission (SEC)
regulations.
Consistent with our approach since mid-2008, we chose to preserve capital and repurchased a minimal
amount of shares. Recent repurchases have been intended to partially offset the issuance of shares through
equity compensation plans, primarily due to vesting of service-based restricted stock units of equity awards
granted in the past. During the first half of 2008, we repurchased 3.8 million shares. In the past, repurchases
have occurred when we believed that stock prices on the open market were favorable for such repurchases.
Our corporate Code of Conduct restricts repurchases during certain time periods. The details of the
repurchase authorizations and activity are described in Item 5, Market for the Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities, Page 31.
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.
Contractual Obligations
As of December 31, 2010, we estimate our future contractual obligations as follows:
(In millions)
Payment due by period
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
Capital lease obligations
Computer hardware and software
Other invested assets
Total
Year
2011
Years
2012-2013
Years
2014-2015
There-
after
$
$
1,306 $
108
52
0
49
77
11
21
4
1,628 $
1,325 $
160
104
0
0
0
7
24
5
1,625 $
583 $
212
104
0
0
0
1
5
0
905 $
923 $
3,368
786
793
0
0
0
0
0
5,870 $
Total
4,137
3,848
1,046
793
49
77
19
50
9
10,028
Our two 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 beginning on Pages 82 and 89, respectively. Other future contractual obligations include:
•
Interest on long- and short-term debt – We expect total interest expense to be approximately $52 million
in 2011. We discuss outstanding debt in Additional Sources of Liquidity, Page 79.
• Property casualty 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
2011 contingent commission payments of approximately $77 million. We discuss commission expense
trends in Commercial Lines and Personal Lines Insurance Results of Operations, Page 54 and
Page 64, respectively.
• Computer hardware and software – We expect to spend $45 million over the next three years for current
material commitments for computer hardware and software, including maintenance contracts on
hardware and other known obligations. We discuss below the non-contractual expenses we anticipate for
computer hardware and software in 2011.
Other Commitments
As of December 31, 2010, we believe our most significant other commitments are:
• Qualified pension plan – In 2011, we made a voluntary cash contribution of $35 million to our qualified
pension plan. We currently estimate a $13 million net pension expense and a $8 million expense for
company 401(k) contributions. Going forward, we anticipate a lower cash pension contribution.
• Commissions – We expect commission payments to generally track with written premiums.
• Other operating expenses – Many of our operating expenses are not contractual obligations but reflect
the ongoing expenses of our business. In addition to contractual obligations for hardware and software
discussed above, we anticipate capitalizing approximately $8 million in spending for key technology
initiatives in 2011. Capitalized development costs related to key technology initiatives totaled $7 million
in 2010, $28 million in 2009 and $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.
Cincinnati Financial Corporation – 2010 10-K – Page 81
Liquidity and Capital Resources Outlook
A long-term perspective governs our liquidity and capital resources decisions, with the goal of benefiting
our policyholders, agents, shareholders and associates over time. While our insurance results for 2010
and 2009 did not meet our combined ratio objective of being consistently below 100 percent, our
improved capital position since year-end 2008 provided adequate cushion. We have taken the necessary
steps to protect our capital and 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 strong liquidity. As of
December 31, 2010, we had $385 million in cash and cash equivalents. That strong liquidity and our
consistent cash flows gives us the flexibility to meet current obligations and commitments while building
value by prudently investing where we see potential for both current income and long-term return.
In any year, we consider the most likely source of pressure on liquidity would be an unusually high level of
catastrophe loss payments within a short period of time. There could also be additional obligations for our
insurance operations due to increasing severity or frequency of non-catastrophe 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 2011 Reinsurance Programs,
Page 90. We also monitor the financial condition of our reinsurers because an insolvency could place in
jeopardy a portion of our $572 million in outstanding reinsurance recoverables as of December 31, 2010.
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.
Further, parent company liquidity could be constrained by State of Ohio regulatory requirements that restrict
the dividends insurance subsidiaries can pay. During 2011, total dividends that our insurance subsidiary can
pay to our parent company without regulatory approval are approximately $378 million.
Off-Balance-Sheet Arrangements
We do not use any special-purpose financing vehicles or have any undisclosed off-balance-sheet
arrangements (as that term is defined in applicable SEC rules) that are reasonably likely to have a current or
future material effect on the company’s financial condition, results of operation, liquidity, capital
expenditures or capital resources. Similarly, the company holds no fair-value contracts for which a lack of
marketplace quotations would necessitate the use of fair-value techniques.
Property Casualty Loss and Loss Expense Obligations and Reserves
Gross Property Casualty Loss and Loss Expense Payments
Our estimate of future gross property casualty loss and loss expense payments of $4.137 billion is lower than
loss and loss expense reserves of $4.200 billion as of year-end 2010. The $63 million difference is due to
life and health loss reserves, as discussed in Item 8, Note 5 of the Consolidated Financial Statements,
Page 117.
While we believe that historical performance of property casualty and life loss payment patterns is a
reasonable source for projecting future claim payments, there is inherent uncertainty in this estimate of
contractual obligations. We believe that we could meet our obligations under a significant and unexpected
change in the timing of these payments because of the liquidity of our invested assets, strong financial
position and access to lines of credit.
Our estimates of gross property casualty loss and loss expense payments do not include
reinsurance receivables or ceded losses. As discussed in 2011 Reinsurance Programs, Page 90, we
purchase reinsurance to mitigate our property casualty risk exposure. Ceded property casualty reinsurance
unpaid receivables of $326 million at year-end 2010 are an offset to our gross property casualty loss and
loss expense obligations. Our reinsurance program mitigates the liquidity risk of a single large loss or an
unexpected rise in claim severity or frequency due to a catastrophic event. Reinsurance does not relieve
us of our obligation to pay covered claims. The financial strength of our reinsurers is important because
our ability to recover losses under our reinsurance agreements depends on the financial viability of
the reinsurers.
We direct our associates and agencies to settle claims and pay losses as quickly as is practical and we made
$1.865 billion of net claim payments during 2010. At year-end 2010, net property casualty reserves reflected
$2.076 billion in unpaid amounts on reported claims (case reserves), $877 million in loss expense reserves
and $858 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 of establishing loss and loss expense reserves and our belief that reserves are
Cincinnati Financial Corporation – 2010 10-K – Page 82
adequate in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves,
Page 82.
The historical pattern of using premium receipts for the payment of loss and loss expenses has enabled us to
extend slightly the maturities of our investment portfolio beyond the estimated settlement date of the loss
reserves. The effective duration of our consolidated fixed-maturity portfolio was 5.0 years at year-end 2010.
By contrast, the duration of our loss and loss expense reserves was approximately three and one-half years.
We believe this difference in duration does not affect our ability to meet current obligations because cash
flow from operations is sufficient to meet these obligations. In addition, investment holdings could be sold, if
necessary, to meet higher than anticipated loss and loss expenses.
Range of Reasonable Reserves
The company established a reasonably likely range for net loss and loss expense reserves of $3.571 billion
to $3.952 billion at year-end 2010, with the company carrying net reserves of $3.811 billion. The likely range
was $3.459 billion to $3.774 billion at year-end 2009, with the company carrying net reserves of
$3.661 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 117.
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 2010
and 2009. However, actual unpaid loss and loss expenses could nonetheless fall outside of the
indicated ranges.
Management’s best estimate of total loss and loss expense reserves as of year-end 2010 was consistent
with the corresponding actuarial best estimate. Management’s best estimate of total loss and loss expense
reserves as of year-end 2009 also was consistent with the corresponding actuarial best estimate.
Development of Reserves for Loss and Loss Expenses
We reconcile the beginning and ending balances of our reserves for loss and loss expenses at
December 31, 2010, 2009 and 2008, in Item 8, Note 5 of the Consolidated Financial Statements, Page 117.
The reconciliation of our year-end 2009 reserve balance to net incurred losses one year later recognizes
approximately $304 million of favorable reserve development.
The table on the following page shows the development of estimated reserves for loss and loss expenses for
the past 10 years.
• Section A shows our total property casualty loss and loss expense reserves recorded at the balance
sheet date for each of the indicated calendar years on a gross and net basis. Those reserves represent
the estimated amount of unpaid loss and loss expenses for claims arising in the indicated calendar year
and all prior accident years at the balance sheet date, including losses that were incurred but not yet
reported to the company.
• 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, 2010, we had paid $1.797 billion of
loss and loss expenses in calendar years 2001 through 2010 for losses that occurred in accident years
2000 and prior. An estimated $237 million of losses remained unpaid as of year-end 2010
(net re-estimated reserves of $2.034 billion from Section C less cumulative net paid loss and loss
expenses of $1.797 billion).
• Section C shows the re-estimated amount of the previously reported reserves based on experience as of
the end of each succeeding year. The estimate is increased or decreased as we learn more about the
development of the related claims.
• Section D, cumulative net reserve development, represents the aggregate change in the estimates for all
years subsequent to the year the reserves were initially established. For example, reserves established
at December 31, 2000, had developed favorably by $148 million over 10 years, net of reinsurance,
which was reflected in income over the 10 years. The table shows favorable reserve development as a
negative number. Favorable reserve development on prior accident years, which represents a negative
expense, is favorable to income. The “One year later” line in the table shows the effects on income
before income taxes in 2010, 2009 and 2008 of changes in estimates of the reserves for loss and loss
expenses for all accident years. The effect was favorable to pretax income for those three years by
$304 million, $188 million, and $323 million, respectively. Our annual review has led us to add to
income in each of the past 22 years due to favorable development of reserves on prior accident years.
Cincinnati Financial Corporation – 2010 10-K – Page 83
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 2010 but incurred in 2004 are included in the
cumulative deficiency or redundancy amount for 2004 and each subsequent year. In addition, this table
presents calendar year data, not accident or policy year development data, which readers may be more
accustomed to analyzing. Conditions and trends that affected development of reserves in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future reserve
development based on this data.
Differences between the property casualty reserves reported in the accompanying consolidated balance
sheets (prepared in accordance with GAAP) and those same reserves reported in the annual statements
(filed with state insurance departments in accordance with statutory accounting practices – SAP), relate
principally to the reporting of reinsurance recoverables, which are recognized as receivables for GAAP and as
an offset to reserves for SAP.
Development of Estimated Reserves for Loss and Loss Expenses
(In millions)
2000
2001
Calendar year ended December 31,
2002
2004
2003
2005
2006
2007
2008
2009
2010
A. Originally reported reserves for unpaid loss and loss expenses:
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
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
Net reserves re-estimated—latest
Re-estimated recoverable—latest
Gross liability re-estimated—latest
Cumulative gross redundancy
$
$
$
$
$
$
$
$
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
$
$
4,096
435
3,661
$
$
4,137
326
3,811
697 $
758 $
799 $
817 $
907 $
944 $
1,116
1,378
1,526
1,623
1,680
1,717
1,750
1,778
1,797
2,120 $
2,083
2,052
2,010
1,999
1,992
1,994
1,986
2,018
2,034
(62) $
(99)
(130)
(172)
(183)
(190)
(188)
(196)
(164)
(148)
1,194
1,455
1,614
1,717
1,778
1,819
1,855
1,879
2,307 $
2,263
2,178
2,153
2,127
2,122
2,111
2,147
2,165
(45) $
(89)
(174)
(199)
(225)
(230)
(241)
(205)
(187)
1,235
1,519
1,716
1,823
1,889
1,940
1,973
1,293
1,626
1,823
1,945
2,031
2,077
1,426
1,758
1,963
2,096
2,163
1,502
1,845
2,059
2,176
2,528 $
2,377
2,336
2,299
2,276
2,259
2,298
2,318
2,649 $
2,546
2,489
2,452
2,414
2,469
2,491
2,817 $
2,743
2,657
2,578
2,645
2,662
2,995 $
2,871
2,724
2,776
2,788
(80) $
(231)
(272)
(309)
(332)
(349)
(310)
(290)
(196) $
(299)
(356)
(393)
(431)
(376)
(354)
(160) $
(234)
(320)
(399)
(332)
(315)
(116) $
(240)
(387)
(335)
(323)
$
979 $
994 $
926
1,523
1,857
1,529
1,006
1,547
1,896
2,096
3,112 $
2,893
2,898
2,907
3,074 $
3,042
3,005
3,310 $
3,197
3,357
(244) $
(463)
(458)
(449)
(323) $
(355)
(392)
(188) $
(301)
(304)
2,034 $
250
2,284 $
2,165 $
482
2,647 $
2,318 $
514
2,832 $
2,491 $
495
2,986 $
2,662 $
514
3,176 $
2,788 $
478
3,266 $
2,907 $
471
3,378 $
3,005 $
457
3,462 $
3,197 $
489
3,686 $
3,357
393
3,750
(117) $
(218) $
(318) $
(400) $
(338) $
(363) $
(482) $
(463) $
(354) $
(346)
Asbestos and Environmental Reserves
We carried $134 million of net loss and loss expense reserves for asbestos and environmental claims as of
year-end 2010, compared with $118 million for such claims as of year-end 2009. These amounts constitute
3.5 percent and 3.2 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
Cincinnati Financial Corporation – 2010 10-K – Page 84
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
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 developed in a reasonably stable fashion since 2004. Since
our exposure to such claims is limited, we believe the paid survival ratio method is sufficient. Reserves for
asbestos and environmental claims increased in 2010 as a result of changes in the identification of asbestos
and environmental losses and is not related to new or additional asbestos and environmental exposures.
Commercial Lines Insurance Segment Reserves
For the business lines in the commercial lines insurance segment, the following table shows the components
of gross reserves among case, IBNR and loss expense reserves. Total gross reserves for the segment in total
grew less than 1 percent from year-end 2009.
(In millions)
At December 31, 2010
Commercial casualty
Commercial property
Commercial auto
Workers' compensation
Specialty packages
Surety and executive risk
Machinery and equipment
Total
At December 31, 2009
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
$
$
$
$
966 $
130
258
476
80
130
1
2,041 $
1,044 $
84
266
452
68
128
2
2,044 $
321 $
13
41
465
2
2
3
847 $
309 $
15
47
458
5
(2)
3
835 $
533 $
32
60
147
10
57
1
840 $
540 $
31
65
143
10
55
1
845 $
1,820
175
359
1,088
92
189
5
3,728
1,893
130
378
1,053
83
181
6
3,724
48.8 %
4.7
9.6
29.2
2.5
5.1
0.1
100.0 %
50.8 %
3.5
10.1
28.3
2.2
4.9
0.2
100.0 %
Cincinnati Financial Corporation – 2010 10-K – Page 85
The following table shows net reserve changes at year-end 2010, 2009 and 2008 by commercial line of
business and accident year:
(In millions)
As of December 31, 2010
2009 accident year
2008 accident year
2007 accident year
2006 accident year
2005 accident year
2004 accident year
2003 and prior accident years
Deficiency/(redundancy)
Reserves estimated as of December 31, 2009
Reserves re-estimated as of December 31, 2010
Deficiency/(redundancy)
As of December 31, 2009
2008 accident year
2007 accident year
2006 accident year
2005 accident year
2004 accident year
2003 accident year
2002 and prior accident years
Deficiency/(redundancy)
Reserves estimated as of December 31, 2008
Reserves re-estimated as of December 31, 2009
Deficiency/(redundancy)
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)
Commercial
casualty
Commercial
property
Commercial
auto
Workers'
compensation
Specialty
packages
Surety & Machinery &
exec risk
equipment
Totals
$
$
$
$
$
$
$
$
$
$
$
$
(105) $
(51)
(33)
(5)
0
(4)
12
(186) $
$
1,605
1,419
(186) $
(89) $
(36)
(33)
(17)
3
9
9
(154) $
$
1,559
1,405
(154) $
(93) $
(55)
(48)
(27)
(19)
(4)
(11)
(257) $
$
1,565
1,308
(257) $
(8) $
0
(1)
0
(1)
0
0
(10) $
$
115
105
(10) $
(15) $
0
4
(1)
(2)
(1)
(1)
(16) $
$
136
120
(16) $
$
0
(7)
(2)
1
0
0
(2)
(10) $
$
121
111
(10) $
(22) $
(9)
(5)
3
(1)
1
0
(33) $
$
374
341
(33) $
(13) $
(5)
(4)
1
0
1
0
(20) $
$
385
365
(20) $
(7) $
5
(1)
(4)
1
(2)
0
(8) $
$
383
375
(8) $
(54) $
5
(1)
5
(5)
0
11
(39) $
$
975
936
(39) $
(11) $
5
2
6
6
6
34
48
$
842
890
48
$
$
(21) $
0
5
4
6
1
3
(2) $
$
777
775
(2) $
$
0
0
(2)
0
(1)
1
0
(2) $
$
81
79
(2) $
(4) $
2
0
2
1
0
(1)
0
$
82
82
0
$
$
$
1
(1)
(2)
(2)
0
0
0
(4) $
$
76
72
(4) $
14
(6)
(1)
(3)
(1)
0
0
3
153
156
3
$
$
$
$
(2) $
9
(3)
(5)
0
0
(2)
(3) $
$
130
127
(3) $
14
(2)
(2)
(3)
(1)
1
0
7
94
101
7
$
$
$
$
(1) $
(1)
0
0
0
0
0
(2) $
$
5
3
(2) $
$
0
(1)
(1)
0
0
0
0
(2) $
$
7
5
(2) $
0
1
0
0
0
0
0
1
8
9
1
$
$
$
$
(176)
(62)
(43)
0
(9)
(2)
23
(269)
3,308
3,039
(269)
(134)
(26)
(35)
(14)
8
15
39
(147)
3,141
2,994
(147)
(106)
(59)
(50)
(31)
(13)
(4)
(10)
(273)
3,024
2,751
(273)
Overall favorable development for commercial lines reserves of $269 million in 2010 illustrated the potential
for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty and
workers’ compensation. Favorable reserve development of $186 million for the commercial casualty line
accounted for approximately 70 percent of the segment total in 2010, while favorable reserve development
of $39 million for the workers’ compensation line accounted for approximately 15 percent of the segment
total in 2010. Drivers of significant reserve development are discussed below.
• Moderation in commercial casualty trend selections – We saw moderating loss cost trends continue in
several commercial casualty coverages, most notably for umbrella coverage. A number of factors seem
to have played a role, including a slow economic recovery, favorable court decisions, policy form
restrictions, and claims department initiatives. Accordingly, it is not entirely clear whether these
moderating loss cost trends will persist, and our actuaries have responded cautiously to these changes,
electing to recognize improvements in trends used for estimating reserves in a progressive, incremental
fashion.
• Commercial casualty loss emergence – As in 2009, commercial multiple peril liability coverages
contributed to favorable reserve development because both paid loss and reported loss emergence
deviated favorably from projections. Actual paid losses in calendar year 2010 fell short of the amount
projected at year-end 2009 by more than $20 million. Reported losses for accident years 2007 through
2009 also developed more favorably than expected, while reported loss development related to other
accident years aligned more closely with expectations.
• Commercial auto loss emergence – Similar to commercial casualty, commercial auto liability contributed
to favorable development because both paid and reported loss emergence during calendar year 2010
was substantially less than expected. As of December 31, 2009 we expected reported loss emergence in
the next 12 calendar months to be approximately $26 million; actual emergence was $17 million. Paid
loss emergence was approximately 15 percent lower than expected at the prior year-end.
Cincinnati Financial Corporation – 2010 10-K – Page 86
• Workers’ compensation trends and initiatives – Favorable calendar year development was $39 million.
Accident year 2009 contributed $54 million in favorable development while accident years 2003 and
prior developed adversely by $11 million. Higher than anticipated trend continues to plague the older
accident years causing us to raise our paid loss trend estimate for the second year in a row. However,
projections of ultimate loss for accident years 2004-2008 held steady. The improvement in accident year
2009 is likely an early manifestation of several claims initiatives begun in the first part of 2010, as
discussed in Commercial Lines Insurance Results of Operations, Commercial Lines of Business Analysis,
Page 58.
An examination of factors contributing to the remaining $9 million of commercial lines favorable reserve
development, not accounted for by the commercial casualty, commercial auto and workers’ compensation
lines, did not turn up any abnormal or unexpected variations. 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 components
of gross reserves among case, IBNR and loss expense reserves. Total gross reserves for the segment in total
were fairly stable, up approximately 1 percent from year-end 2009.
(In millions)
At December 31, 2010
Personal auto
Homeowner
Other personal
Total
At December 31, 2009
Personal auto
Homeowner
Other personal
Total
Loss reserves
Case
reserves
IBNR
reserves
Loss
expense
reserves
Total
gross
reserves
Percent
of total
$
$
$
$
126 $
73
37
236 $
130 $
56
45
231 $
(1) $
21
43
63 $
(4) $
26
42
64 $
28 $
17
9
54 $
28 $
17
9
54 $
153
111
89
353
154
99
96
349
43.4 %
31.4
25.2
100.0 %
44.2 %
28.4
27.4
100.0 %
Cincinnati Financial Corporation – 2010 10-K – Page 87
The following table shows net reserve changes at year-end 2010, 2009 and 2008 by personal line of
business and accident year:
(In millions)
As of December 31, 2010
2009 accident year
2008 accident year
2007 accident year
2006 accident year
2005 accident year
2004 accident year
2003 and prior accident years
Deficiency/(redundancy)
Reserves estimated as of December 31, 2009
Reserves re-estimated as of December 31, 2010
Deficiency/(redundancy)
As of December 31, 2009
2008 accident year
2007 accident year
2006 accident year
2005 accident year
2004 accident year
2003 accident year
2002 and prior accident years
Deficiency/(redundancy)
Reserves estimated as of December 31, 2008
Reserves re-estimated as of December 31, 2009
Deficiency/(redundancy)
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)
Personal
auto
Homeowner
Other
personal
Totals
$
$
$
$
$
$
$
$
$
$
$
$
(2)
(2)
1
(1)
(1)
(1)
(1)
(7)
154
147
(7)
(3)
(3)
(1)
1
0
0
0
(6)
165
159
(6)
11
(4)
(9)
(5)
(3)
(1)
(1)
(12)
189
177
(12)
$
$
$
$
$
$
$
$
$
$
$
$
(3)
(3)
0
0
0
0
0
(6)
89
83
(6)
(2)
3
0
0
0
(1)
0
0
82
82
0
(1)
(3)
(1)
(2)
(1)
0
0
(8)
77
69
(8)
$
$
$
$
$
$
$
$
$
$
$
$
(8)
(8)
(3)
(2)
2
(1)
(1)
(21)
89
68
(21)
(17)
(12)
(10)
(1)
5
2
(1)
(34)
106
72
(34)
(8)
(5)
(8)
(3)
(4)
(1)
(1)
(30)
107
77
(30)
$
$
$
$
$
$
$
$
$
$
$
$
(13)
(13)
(2)
(3)
1
(2)
(2)
(34)
332
298
(34)
(22)
(12)
(11)
0
5
1
(1)
(40)
353
313
(40)
2
(12)
(18)
(10)
(8)
(2)
(2)
(50)
373
323
(50)
Favorable development for personal lines segment reserves illustrates the potential for revisions inherent in
estimating reserves. Several factors discussed in Commercial Lines Insurance Segment Reserves, Page 85,
that contributed to commercial lines segment reserve development in 2010 also contributed to personal
lines favorable reserve development, most notably the factors related to umbrella coverage in the other
personal line of business.
In consideration of the data’s credibility, we analyze commercial and personal umbrella liability reserves
together and then allocate the derived total reserve estimate to the commercial and personal coverages.
Consequently, all of the umbrella factors that contributed to commercial lines reserve development also
contributed to personal lines reserve development through the other personal line, of which personal
umbrella coverages are a part.
Cincinnati Financial Corporation – 2010 10-K – Page 88
Excess and Surplus Lines Insurance Segment Reserves
For the excess and surplus lines insurance segment, the following table shows the components of gross
reserves among case, IBNR and loss expense reserves. Total gross reserves were up from year-end 2009
primarily due to the increase in premiums and exposures for this segment, as we discussed in Excess and
Surplus Lines Insurance Results of Operations, Page 70. Favorable development during 2010 of $1 million
for excess and surplus lines insurance segment reserves illustrates the potential for revisions inherent in
estimating reserves. Factors affecting the modest favorable reserve development included the lack of a
sufficiently long experience period on which to base reserve estimates.
(In millions)
Loss reserves
Case
reserves
IBNR
reserves
Loss
expense
reserves
Total
gross
reserves
At December 31, 2010
Excess and surplus lines
At December 31, 2009
Excess and surplus lines
$
29 $
10 $
17 $
56
22
5 $
7 $
10 $
$
Life Insurance Policyholder Obligations and Reserves
Gross Life Insurance Policyholder Obligations
Our estimates of life, annuity and disability policyholder obligations reflect future estimated cash payments to
be made to policyholders for future policy benefits, policyholders’ account balances and separate account
liabilities. These estimates include death and disability income claims, policy surrenders, policy maturities,
annuity payments, minimum guarantees on separate account products, commissions and premium taxes
offset by expected future deposits and premiums on in-force contracts.
Our estimates of gross life, annuity and disability obligations do not reflect net recoveries from reinsurance
agreements. Ceded life reinsurance receivables were $228 million at year-end 2010. As discussed in
2011 Reinsurance Programs, Page 90, we purchase reinsurance to mitigate our life insurance risk exposure.
At year-end 2010, ceded death benefits represented approximately 47.2 percent of our total policy face
amounts in force.
These estimated cash outflows are undiscounted with respect to interest. As a result, the sum of the cash
outflows for all years of $3.848 billion (total of life insurance obligations) exceeds the liabilities recorded in
life policy reserves and separate accounts for future policy benefits and claims of $2.692 billion (total of life
insurance policy reserves and separate account policy reserves). Separate account policy reserves make up
all but $3 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 $2.034 billion at year-end 2010, compared with $1.783 billion at year-end
2009. The increase was primarily due to reserves for deferred annuities. We establish reserves for traditional
life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates and investment
yields, including a provision for uncertainty. Once these assumptions are established, they generally are
maintained throughout the lives of the contracts. We use both our own experience and industry experience
adjusted for historical trends in arriving at our assumptions for expected mortality, morbidity and withdrawal
rates. We use our own experience and historical trends for setting our assumptions for expected expenses.
We base our assumptions for expected investment income on our own experience adjusted for current
economic conditions.
We establish reserves for our universal life, deferred annuity and investment contracts equal to the
cumulative account balances, which include premium deposits plus credited interest less charges and
withdrawals. Some of our universal life insurance policies contain no-lapse guarantee provisions. For these
policies, we establish a reserve in addition to the account balance based on expected no-lapse guarantee
benefits and expected policy assessments.
We regularly review our life insurance business to ensure that any deferred acquisition cost associated with
the business is recoverable and that our actuarial liabilities (life insurance segment reserves) make sufficient
provision for future benefits and related expenses.
Cincinnati Financial Corporation – 2010 10-K – Page 89
2011 REINSURANCE PROGRAMS
A single large loss or an unexpected rise in claims severity or frequency due to a catastrophic event
could present us with a liquidity risk. In an effort to control such losses, we avoid marketing property casualty
insurance in specific geographic areas and monitor our exposure in certain coastal regions. An example of
this would be our recent depopulation of homeowner policies in the southeastern coastal region. This area
was identified as a major contributor to our catastrophe probable maximum loss estimates and has
subsequently been greatly reduced. We also continually review aggregate exposures to huge disasters and
purchase reinsurance protection to cover these exposures. We use the Risk Management Solutions (RMS)
and Applied Insurance Research (AIR) models to evaluate exposures to a once-in-a-100 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.
To help determine appropriate reinsurance coverage for hurricane, earthquake, and tornado/hail exposures,
we use the RMS and AIR models to estimate the probable maximum loss from a single event occurring in a
one‐year period. The models are proprietary in nature, and the vendors that provide them periodically update
the models, sometimes resulting in significant changes to their estimate of probable maximum loss. As of the
end of 2010, both models indicated a hurricane event represents our largest amount of exposure to losses.
The table below summarizes estimated probabilities and the corresponding probable maximum loss from a
single event occurring in a one‐year period for that exposure, and indicates the effect of such losses on
consolidated shareholders’ equity as of December 31, 2010. Net losses are net of reinsurance and income
taxes. The modeled losses according to RMS in the table are based on their RiskLink version
10.0 catastrophe model and utilize a near‐term storm catalog methodology. The near-term storm catalog
theory is a more conservative approach and places a higher weighting on the increased hurricane activity of
the past several years, thus producing higher probable maximum loss projections than a longer term view.
The modeled losses according to AIR in the table are based on their AIR Clasic/2 version 12 catastrophe
model and utilize a long-term methodology. The AIR storm catalog includes decades of documented weather
events used in simulations for probably maximum loss projections.
(Dollars in millions)
Probability
2.0% of a 1 in 50 year event
1.0% of a 1 in 100 year event
0.4% of a 1 in 250 year event
0.2% of a 1 in 500 year event
$
Gross
Losses
$
369
548
882
1,195
RMS
Net
Losses
53
89
306
509
Percent
of total
equity
1.0 % $
1.8
6.1
10.1
Gross
Losses
$
329
514
842
1,031
AIR
Net
Losses
51
67
280
402
Percent
of total
equity
1.0 %
1.3
5.6
8.0
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 2011 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 $6 million of each loss. Losses between
$6 million and $25 million are reinsured at 100 percent. The ceded premium is estimated at $32 million
for 2011, compared with $36 million in 2010 and $35 million in 2009. The lower ceded premium for
2011 compared with 2010 is largely due to raising our loss retention of each loss from $5 million to $6
million.
• Casualty per occurrence treaty – The casualty treaty provides capacity up to $25 million. Similar to the
property treaty, it provides sufficient capacity to cover the vast majority of casualty accounts we insure
and also includes protection for extra-contractual liability coverage losses. We retain the first $6 million
of each loss. Losses between $6 million and $25 million are reinsured at 100 percent. The ceded
Cincinnati Financial Corporation – 2010 10-K – Page 90
premium is estimated at $37 million in 2011, similar to the $37 million paid in 2010 and $38 million
in 2009.
• Casualty excess treaties – We purchase a casualty reinsurance treaty that provides an additional
$25 million in protection for certain casualty losses. This treaty, along with the casualty per occurrence
treaty, provides a total of $50 million of protection for workers’ compensation, extra-contractual liability
coverage and clash coverage losses, which would apply when a single occurrence involves multiple
policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The ceded
premium is estimated at approximately $2 million in 2011, similar to the premium we paid in
2010 and 2009.
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 approximately $1 million for
2011, similar to the premium we paid in 2010 and 2009.
• 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
2011 treaty, ceded premiums are estimated at $49 million, similar to the $49 million in 2010 and
$50 million in 2009. We retain the first $45 million of any loss and varying shares of losses up to
$500 million:
o 38.5 percent of losses between $45 million and $70 million
o 17.6 percent of losses between $70 million and $105 million
o 5.0 percent of losses between $105 million and $200 million
o 11.3 percent of losses between $200 million and $300 million
o 6.5 percent of losses between $300 million and $400 million
o 5.0 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 $88 million compared with $104 million in 2010. The largest catastrophe loss in our
history was Hurricane Ike in September 2008, which was estimated to be $142 million before
reinsurance at December 31, 2010. 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 agreement. For risks with
property values exceeding $65 million, we negotiate the purchase of facultative coverage on an individual
certificate basis. For casualty coverage on individual risks with limits exceeding $25 million, facultative
reinsurance coverage is placed on an individual certificate basis. For risks with property or casualty limits
which are between $25 million and $27 million, we sometimes forego facultative reinsurance and retain an
additional $2 million of loss exposure.
Terrorism coverage at various levels has been secured in most of our reinsurance agreements. The broadest
coverage for this peril is found in the property and casualty working treaties, the property per risk treaty and
the casualty per occurrence treaty, which provide coverage for commercial and personal risks. Our property
catastrophe treaty provides terrorism coverage for personal risks, and coverage for commercial risks with
total insured values of $10 million or less. For insured values between $10 million and $25 million, there
also may be coverage in the property working treaty.
A form of reinsurance is also provided through The Terrorism Risk Insurance Act of 2002 (TRIA). TRIA was
originally signed into law on November 26, 2002, and extended on December 22, 2005, in a revised form,
and extended again on December 26, 2007. 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 2010 was $369 million (20 percent of 2009 subject premiums),
and we estimate it is $366 million (20 percent of 2010 subject premiums) in 2011.
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.
Cincinnati Financial Corporation – 2010 10-K – Page 91
The Cincinnati Specialty Underwriters Insurance Company, which began issuing insurance policies in 2008,
has separate property and casualty reinsurance treaties for 2011 through The Cincinnati Insurance
Company. Primary components of the treaties include:
• Property per risk treaty – The property treaty provides limits up to $5 million, which is adequate capacity
for the risk profile we insure. It also includes protection for extra-contractual liability coverage losses. The
Cincinnati Specialty Underwriters Insurance Company retains the first $1 million of any policy loss.
Losses between $1 million and $5 million are reinsured at 100 percent by The Cincinnati
Insurance Company.
• Casualty treaties – The casualty treaty is written on an excess of loss basis and provide limits up to
$6 million, which is adequate capacity for the risk profile we insure. A second treaty layer of $5 million
excess of $6 million is written to provide coverage for extra contractual obligations or clash exposures.
The maximum retention for any one casualty loss is $1 million by The Cincinnati Specialty Underwriters
Insurance Company. Losses between $1 million and $11 million are reinsured at 100 percent by The
Cincinnati Insurance Company.
• Basket retention – The Cincinnati Specialty Underwriters Insurance Company has purchased this
coverage to limit our retention to $1 million in the event that the same occurrence results in both a
property and a casualty loss.
• Property catastrophe treaty – As a subsidiary of The Cincinnati Insurance Company, The Cincinnati
Specialty Underwriters Insurance Company has been added as a named insured under our corporate
property catastrophe treaty. All terms and conditions of this treaty apply to policies underwritten by
The Cincinnati Specialty Underwriters Insurance Company.
For property risks with limits exceeding $5 million or casualty risks with limits exceeding $6 million,
underwriters place facultative reinsurance coverage on an individual certificate basis.
Cincinnati Life, our life insurance subsidiary, purchases reinsurance under separate treaties with many of the
same reinsurers that write the property casualty working treaties. 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 for covered net losses in excess of $9 million. Our recovery is
capped at $75 million for losses involving our associates. 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.
SAFE HARBOR STATEMENT
This is our “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Our business is
subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by
the forward-looking statements in this report. Some of those risks and uncertainties are discussed in Item 1A, Risk
Factors, Page 24. 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:
• Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns,
environmental events, terrorism incidents or other causes
Increased frequency and/or severity of claims
Inadequate estimates or assumptions used for critical accounting estimates
•
•
• Recession or other economic conditions resulting in lower demand for insurance products or increased
payment delinquencies
• Delays in adoption and implementation of underwriting and pricing methods that could increase our pricing
•
accuracy, underwriting profit and competitiveness
Inability to defer policy acquisition costs for any business segment if pricing and loss trends would lead
management to conclude that segment could not achieve sustainable profitability
• Declines 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 or recession, that lead to:
o Significant or prolonged decline in the value of a particular security or group of securities and impairment
of the asset(s)
o Significant decline in investment income due to reduced or eliminated dividend payouts from a particular
security or group of securities
o Significant rise in losses from surety and director and officer policies written for financial institutions
Cincinnati Financial Corporation – 2010 10-K – Page 92
•
•
•
•
•
•
•
•
Prolonged low interest rate environment or other factors that limit the company’s ability to generate growth in
investment income or interest rate fluctuations that result in declining values of fixed-maturity investments,
including declines in accounts in which we hold bank-owned life insurance contract assets
Increased competition that could result in a significant reduction in the company’s premium volume
Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could
alter our competitive advantages
Inability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased, financial
strength of reinsurers and the potential for non-payment or delay in payment by reinsurers
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:
o Downgrades of the company’s financial strength ratings
o Concerns that doing business with the company is too difficult
o Perceptions that the company’s level of service, particularly claims service, is no longer a distinguishing
characteristic in the marketplace
o Delays or inadequacies in the development, implementation, performance and benefits of technology
projects and enhancements
Actions of insurance departments, state attorneys general or other regulatory agencies, including a change to a
federal system of regulation from a state-based system, that:
o Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business
o Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules
and regulations
o Add assessments for guaranty funds, other insurance-related assessments or mandatory reinsurance
arrangements; or that impair our ability to recover such assessments through future surcharges or other
rate changes
Increase our provision for federal income taxes due to changes in tax law
Increase our other expenses
Limit our ability to set fair, adequate and reasonable rates
o
o
o
o Place us at a disadvantage in the marketplace
o Restrict our ability to execute our business model, including the way we compensate agents
Adverse outcomes from litigation or administrative proceedings
Events or actions, including unauthorized intentional circumvention of controls, that reduce the company’s
future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act
of 2002
• Unforeseen departure of certain executive officers or other key employees due to retirement, health or
other causes that could interrupt progress toward important strategic goals or diminish the effectiveness of
certain longstanding relationships with insurance agents and others
Events, such as an epidemic, natural catastrophe or terrorism, that could hamper our ability to assemble our
workforce at our headquarters location
•
• Difficulties with technology or data security breaches that could negatively affect our ability to conduct
business and our relationships with agents, policyholders and others
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 measures affecting corporate financial reporting and governance. The ultimate changes and
eventual effects, if any, of these initiatives are uncertain.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
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
Cincinnati Financial Corporation – 2010 10-K – Page 93
• Regulatory – the potential for a decrease in value due to the impact of legislative proposals or changes in
laws or regulations
• Economic – the potential for a decrease in value due to changes in general economic factors (recession,
inflation, deflation, etc.)
• Revaluation – the potential for a decrease in value due to a change in relative value (change in market
multiple) of the market brought on by general economic factors
•
Interest-rate – the potential for a decrease in value of a security or portfolio due to its sensitivity to
changes (increases or decreases) in the general level of interest rates
• Company-specific risk – the potential for a particular issuer to experience a decline in value due to the
impact of sector or market risk on the holding or because of issues specific to the firm
•
Fraud – the potential for a negative impact on an issuer’s performance due to actual or alleged illegal or
improper activity of individuals it employs
• Credit – the potential for deterioration in an issuer’s financial profile due to specific company issues,
problems it faces in the course of its operations or industry-related issues
• Default – the possibility that an issuer will not make a required payment (interest payment or return of
principal) on its debt. Generally this occurs after its financial profile has deteriorated (credit risk) and it
no longer has the means to make its payments
The investment committee of the board of directors monitors the investment risk management process
primarily through its executive oversight of our investment activities. We take an active approach to
managing market and other investment risks, including the accountabilities and controls over these
activities. Actively managing these market risks is integral to our operations and could require us to change
the character of future investments purchased or sold or require us to shift the existing asset portfolios to
manage exposure to market risk within acceptable ranges.
Sector risk is the potential for a negative impact on a particular industry due to its sensitivity to factors that
make up market risk. Market risk affects general supply/demand factors for an industry and affects
companies within that industry to varying degrees.
Risks associated with the five asset classes described in Item 1, Investments Segment, Page 19, can be
summarized as follows (H – high, A – average, L – low):
Political
Regulatory
Economic
Revaluation
Interest rate
Fraud
Credit
Default
Taxable
Tax-exempt
fixed maturities
A
A
A
A
H
A
A
A
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. We address this risk by attempting to
construct a generally laddered maturity schedule that allows us to reinvest cash flows at prevailing rates.
Although the potential for a worsening financial condition, and ultimately default, does exist with investment-
grade corporate bonds, we address this risk by performing credit analysis and monitoring as well as
maintaining a diverse portfolio of holdings.
The primary risk related to high-yield corporate bonds is credit risk or the potential for a deteriorating
financial structure. A weak financial profile can lead to rating downgrades from the credit rating agencies,
which can put further downward pressure on bond prices. Interest rate risk, while significant, is less of a
factor with high-yield corporate bonds, as valuation is related more directly to underlying operating
performance than to general interest rates. This puts more emphasis on the financial results achieved by the
issuer rather than on general economic trends or statistics within the marketplace. We address this concern
by analyzing issuer- and industry-specific financial results and by closely monitoring holdings within this
asset class.
The primary risks related to tax-exempt bonds are interest rate risk and political risk associated with the
specific economic environment within the political boundaries of the issuing municipal entity. We address
these concerns by focusing on municipalities’ general-obligation debt and on essential-service bonds.
Essential-service bonds derive a revenue stream from municipal services that are vital to the people living in
Cincinnati Financial Corporation – 2010 10-K – Page 94
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 19.
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 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, 2010
At December 31, 2009
-200
9,260
8,705
$
$
$
$
Interest Rate Shift in Basis Points
0
100
-100
8,814
8,279
$
$
8,383
7,855
$
$
7,964
7,428
$
$
200
7,568
7,024
The effective duration of the fixed maturity portfolio was 5.0 years at year-end 2010, compared with
5.3 years at year-end 2009. A 100 basis point movement in interest rates would result in an approximately
5.0 percent change in the fair value of the fixed maturity portfolio. Generally speaking, the higher a bond is
rated, the more directly correlated movements in its fair value are to changes in the general level of interest
rates, exclusive of call features. The fair values of average- to lower-rated corporate bonds are additionally
influenced by the expansion or contraction of credit spreads.
In the dynamic financial planning model, the selected interest rate change of 100 to 200 basis points
represents our views of a shift in rates that is quite possible over a one-year period. The rates modeled
should not be considered a prediction of future events as interest rates may be much more volatile in the
future. The analysis is not intended to provide a precise forecast of the effect of changes in rates on our
results or financial condition, nor does it take into account any actions that we might take to reduce exposure
to such risks.
EQUITY 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 $3.041 billion in fair value and accounted for approximately 60 percent of
the unrealized appreciation of the entire portfolio at year-end 2010. See Item 1, Investments Segment,
Page 19, for additional details on our holdings.
The primary risks related to preferred stocks are similar to those related to investment grade corporate
bonds. Rising interest rates adversely affect market values due to the normal inverse relationship between
interest rates and bond prices. Credit risk exists due to the subordinate position of preferred stocks in the
capital structure. We minimize this risk by primarily purchasing investment grade preferred stocks of issuers
with a strong history of paying a common stock dividend.
Cincinnati Financial Corporation – 2010 10-K – Page 95
SHORT-TERM INVESTMENTS
Our short-term investments historically consisted primarily of commercial paper, demand notes or bonds
purchased within one year of maturity. In 2009, we made short-term investments primarily with funds to be
used to make upcoming cash payments, such as taxes.
APPLICATION OF ASSET IMPAIRMENT POLICY
As discussed in Item 7, Critical Accounting Estimates, Asset Impairment, Page 44, our fixed-maturity and
equity investment portfolios are evaluated differently for other-than-temporary impairments. The company’s
asset impairment committee monitors a number of significant factors for indications that the value of
investments trading below the carrying amount may not be recoverable. The application of our impairment
policy resulted in OTTI charges that reduced our income before income taxes by $36 million in 2010, $131
million in 2009 and $510 million in 2008. Impairments are discussed in Item 7, Investment Results of
Operations, Page 75.
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
2010, 316 of the 2,671 securities we owned were trading below 100 percent of book value compared with
355 of the 2,505 securities we owned at year-end 2009 and 944 of the 2,233 securities we owned at
year-end 2008.
The 316 holdings trading below book value at year-end 2010 represented 10.6 percent of invested assets
and $49 million in unrealized losses.
• 312 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
312 securities was $1.124 billion at year-end 2010, and they accounted for $26 million in
unrealized losses.
• 4 of these holdings were trading between 70 percent and 90 percent of book value. The fair value of
these holdings was $101 million, and they accounted for $23 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.
• No securities were trading below 70 percent of book value at year-end 2010.
The following table summarizes the length of time securities in the investment portfolio have been in a
continuous unrealized gain or loss position.
(In millions)
At December 31, 2010
Fixed maturities:
States, municipalities and political subdivisions
Government-sponsored enterprises
Corporate securities
Subtotal
Equity securities:
Common equities
Preferred equities
Subtotal
Total
At December 31, 2009
Fixed maturities:
States, municipalities and political subdivisions
Government-sponsored enterprises
Short-term investments
Collateralized mortgage obligations
Corporate bonds
Total
Equity securities
Total
Less than 12 months
Fair
value
Unrealized
losses
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
$
$
$
$
325 $
133
354
812
337
5
342
1,154 $
196 $
347
1
-
397
941
65
1,006 $
$
9
1
6
16
28
-
28
44 $
4 $
7
-
-
19
30
3
33 $
9 $
-
39
48
-
23
23
71 $
29 $
-
-
27
309
365
415
780 $
$
1
-
3
4
-
1
1
5 $
2 $
-
-
6
17
25
26
51 $
334 $
133
393
860
337
28
365
1,225 $
225 $
347
1
27
706
1,306
480
1,786 $
10
1
9
20
28
1
29
49
6
7
-
6
36
55
29
84
Cincinnati Financial Corporation – 2010 10-K – Page 96
The following table summarizes the investment portfolio:
(Dollars in millions)
At December 31, 2010
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, 2009
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
0 $
0 $
0 $
0 $
207
1,118
0
1,325
0
100
1,153
0
1,253
0
5
64
0
69
0
4
20
0
24
0
0
0
0
0
694
4,445
0
5,139
0
186
2,563
0
2,749
0
365
1,846
0
2,211
0
29
46
0
75
0
0
0
0
0
680
4,853
0
5,533
0
180
2,670
0
2,850
0
337
2,603
0
2,940
0
28
73
0
101
0
0
0
0
0
(14)
408
0
394
0
(6)
107
0
101
0
(28)
757
0
729
0
(1)
27
0
26
0
0
0
0
0
0
316
2,355
0
2,671 $
9 $
346
2,150
0
2,505 $
0
1,274
8,900
0
10,174 $
0
1,225
10,199
0
11,424 $
8 $
1,862
7,666
0
9,536 $
5 $
1,781
8,776
0
10,562 $
0
(49)
1,299
0
1,250 $
(3) $
(81)
1,110
0
1,026 $
0
14
267
23
304
0
8
111
3
122
0
14
75
1
90
0
2
4
0
6
0
0
0
0
0
0
38
457
27
522
1
79
391
31
502
Cincinnati Financial Corporation – 2010 10-K – Page 97
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, 2010, 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 its
findings to the board of directors. The audit committee recommends to the board the annual appointment of
the independent registered public accounting firm. The audit committee reviews with this firm the scope of
the audit assignment and the adequacy of internal controls and procedures.
Deloitte & Touche LLP, our independent registered public accounting firm, audited the consolidated financial
statements of Cincinnati Financial Corporation and subsidiaries for the year ended December 31, 2010. Its
report is on Page 100. 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 – 2010 10-K – Page 98
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The management of Cincinnati Financial Corporation and its subsidiaries is responsible for establishing and
maintaining adequate internal controls, designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America (GAAP). The company’s internal
control over financial reporting includes those policies and procedures that:
• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and the directors of the company;
and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the company’s assets that could have a material effect on the financial statements.
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, 2010, as required by Section 404 of the Sarbanes Oxley Act of 2002.
Management’s assessment was 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, 2010. The assessment led management to conclude that, as of
December 31, 2010, 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, 2010. This report appears on Page 100.
/S/ Kenneth W. Stecher
Kenneth W. Stecher
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 25, 2011
Cincinnati Financial Corporation – 2010 10-K – Page 99
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, 2010 and 2009, and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2010. 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, 2010,
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 statement schedules, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in
Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on these financial statements and financial statement schedules and an opinion on the company’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 the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of,
the company’s principal executive and principal financial officers, or persons performing similar functions, and
effected by the company’s board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that: (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, 2010 and 2009, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2010, 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, 2010,
based on the criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
As discussed in Note 1 to the consolidated financial statements, the company changed its method of
accounting for the recognition and presentation of other-than-temporary impairments in 2009.
/S/ Deloitte & Touche LLP
Cincinnati, Ohio
February 25, 2011
Cincinnati Financial Corporation – 2010 10-K – Page 100
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2010—$7,888; 2009—$7,514)
Equity securities, at fair value (cost: 2010—$2,286; 2009—$2,016)
Short-term investments, at fair value (amortized cost: 2010—$0; 2009—$6)
Other invested assets
Total investments
Cash and cash equivalents
Investment income receivable
Finance receivable
Premiums receivable
Reinsurance receivable
Prepaid reinsurance premiums
Deferred policy acquisition costs
Land, building and equipment, net, for company use (accumulated depreciation:
2010—$352; 2009—$335)
Other assets
Separate accounts
Total assets
LIABILITIES
Insurance reserves
Loss and loss expense reserves
Life policy reserves
Unearned premiums
Other liabilities
Deferred income tax
Note payable
Long-term debt
Separate accounts
Total liabilities
Commitments and contingent liabilities (Note 16)
SHAREHOLDERS' EQUITY
Common stock, par value—$2 per share; (authorized: 2010—500 million shares,
2009—500 million shares; issued: 2010—196 million shares, 2009—196 million shares)
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock at cost (2010—34 million shares, 2009—34 million shares)
Total shareholders' equity
Total liabilities and shareholders' equity
Accompanying notes are an integral part of these consolidated financial statements.
December 31,
2010
December 31,
2009
$
$
$
$
8,383
3,041
-
84
11,508
385
119
73
1,015
572
18
488
229
67
621
15,095
4,200
2,034
1,553
556
260
49
790
621
10,063
$
$
$
7,855
2,701
6
81
10,643
557
118
75
995
675
15
481
251
45
585
14,440
4,142
1,783
1,509
670
152
49
790
585
9,680
—
—
393
1,091
3,980
769
(1,201)
5,032
15,095
$
393
1,081
3,862
624
(1,200)
4,760
14,440
Cincinnati Financial Corporation – 2010 10-K – Page 101
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share data)
REVENUES
Earned premiums
Investment income, net of expenses
Fee revenues
Other revenues
Realized investment gains (losses), net
Other-than-temporary impairments on fixed maturity securities
Other-than-temporary impairments on fixed maturity securities transferred to Other
Comprehensive Income
Other realized investment gains (losses), net
Total realized investment gains (losses), net
Total revenues
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits
Underwriting, acquisition and insurance expenses
Other operating expenses
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 consolidated financial statements.
Years ended December 31,
2009
2010
2008
3,082
518
4
9
(3)
-
162
159
3,772
2,180
1,021
16
54
3,271
501
94
30
124
377
2.32
2.31
$
$
$
3,054
501
3
9
(62)
-
398
336
3,903
2,242
1,004
20
55
3,321
582
79
71
150
432
2.66
2.65
$
$
$
3,136
537
3
10
(163)
-
301
138
3,824
2,193
1,016
22
53
3,284
540
238
(127)
111
429
2.63
2.62
$
$
$
Cincinnati Financial Corporation – 2010 10-K – Page 102
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions)
Common Stock
Outstanding
Shares
Amount
Paid-In
Capital
Accumulated
Other
Retained Comprehensive Treasury
Income
Earnings
Stock
Total
Share-
holders'
Equity
Balance December 31, 2007
166
$
393
$
1,049
$
3,404
$
2,151
$
(1,068)
$
5,929
Net income
Other comprehensive loss, net
Total comprehensive loss
Dividends declared
Stock options exercised
Stock-based compensation
Purchases
Other
Balance December 31, 2008
Balance December 31, 2008
Net income
Other comprehensive income, net
Total comprehensive income
Cumulative effect of change in
accounting for other-than-temporary
impairments as of April 1, 2009, net of tax
Dividends declared
Stock options exercised
Stock-based compensation
Other
Balance December 31, 2009
Balance December 31, 2009
Net income
Other comprehensive income, net
Total comprehensive income
Dividends declared
Stock options exercised
Stock-based compensation
Purchases
Other
Balance December 31, 2010
-
-
-
-
-
(4)
-
162
$
162
$
-
-
-
-
-
-
-
162
$
162
$
-
-
-
1
-
-
-
163
$
-
-
-
-
-
-
-
393
393
-
-
-
-
-
-
-
393
393
-
-
-
-
-
-
-
393
$
$
$
$
$
-
-
-
4
15
-
1
1,069
$
429
-
(254)
-
-
-
-
3,579
$
-
(1,804)
-
-
-
-
-
-
-
347
$
-
-
-
(139)
1
(1,206)
$
429
(1,804)
(1,375)
(254)
4
15
(139)
2
4,182
1,069
$
3,579
$
347
$
(1,206)
$
4,182
-
-
432
-
-
383
-
-
-
-
-
10
2
1,081
$
106
(255)
-
-
-
3,862
$
(106)
-
-
-
-
624
$
-
-
1
-
5
(1,200)
$
432
383
815
-
(255)
1
10
7
4,760
1,081
$
3,862
$
624
$
(1,200)
$
4,760
-
-
-
(2)
11
-
1
1,091
$
377
-
(259)
-
-
-
-
3,980
$
-
145
-
-
-
-
-
769
$
-
-
-
2
-
(10)
7
(1,201)
$
377
145
522
(259)
-
11
(10)
8
5,032
Accompanying notes are an integral part of these consolidated financial statements.
Cincinnati Financial Corporation – 2010 10-K – Page 103
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
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
Stock-based compensation
Interest credited to contract holders
Deferred income tax (benefit) expense
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
Current income tax receivable/payable
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 holders' funds deposited
Contract holders' funds withdrawn
Change in securities lending payable
Excess tax benefits on share-based compensation
Other
Net cash used in financing activities
Net change 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: 2010—$0; 2009—$0; 2008—$3)
Income taxes paid
Non-cash activities:
Conversion of securities
Equipment acquired under capital lease obligations
Accompanying notes are an integral part of these consolidated financial statements.
Cincinnati Financial Corporation – 2010 10-K – Page 104
Years ended December 31,
2009
2010
2008
$
377
$
432
$
429
41
(159)
11
48
30
(1)
80
(23)
3
58
113
44
(18)
(73)
531
199
886
273
29
(1,483)
(396)
7
(17)
(27)
-
-
(529)
(252)
(10)
-
-
170
(74)
-
2
(10)
(174)
(172)
557
385
53
167
5
-
$
$
$
38
(336)
10
43
71
(20)
148
(12)
10
56
110
(35)
5
5
525
187
659
1,247
30
(2,135)
(796)
78
(42)
(34)
(9)
-
(815)
(249)
-
-
-
162
(66)
-
-
(9)
(162)
(452)
1,009
557
55
74
90
15
$
$
$
32
(138)
15
34
(127)
26
43
(17)
5
119
67
(20)
(25)
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)
-
(4)
(1,210)
783
226
1,009
53
197
25
2
$
$
$
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Operations
Cincinnati Financial Corporation operates through our insurance group and two complementary
subsidiary companies.
The Cincinnati Insurance Company leads our standard market property casualty insurance group that also
includes two subsidiaries: The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This
group markets a broad range of standard market business, homeowner and auto policies. The group
provides quality customer service to our select group of 1,245 independent insurance agencies with
1,544 reporting locations across 39 states. Other subsidiaries of The Cincinnati Insurance Company include
The Cincinnati Life Insurance Company, which markets life and disability income insurance and annuities,
and The Cincinnati Specialty Underwriters Insurance Company, which began offering excess and surplus lines
property and casualty insurance products in 2008.
The two 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, and CFC Investment Company (CFC-I), which offers commercial leasing and financing services to
our agents, their clients and other customers.
Basis of Presentation
Our consolidated financial statements include the accounts of the parent and its subsidiaries, each of which
are wholly owned, and are presented in conformity with accounting principles generally accepted in the
United States of America (GAAP). All significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires us to make estimates and
assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual
results could differ from those estimates.
In the first quarter of 2010, we changed our presentation of earned premiums in our consolidated
statements of income. We have summarized property casualty and life earned premiums to a single caption,
“Earned premiums.” See Note 10, Reinsurance, Page 119, for further detail on property casualty and life
earned premiums.
In the second quarter of 2010, we changed our presentation of long-term debt in our consolidated balance
sheets. We have summarized the long-term debt to a single caption, “Long-term debt.” See Note 8, Senior
Debt, Page 118, for further detail on interest rates, year of issue and maturity of our long-term debt.
In the fourth quarter of 2010, we revised our reportable segments to establish a separate reportable
segment for excess and surplus lines. This segment includes results of The Cincinnati Specialty Underwriters
Insurance Company and CSU Producer Resources. Historically, the excess and surplus lines results were
reflected in Other. We began offering excess and surplus lines insurance products in 2008. Separating
excess and surplus lines into a reportable segment allows readers to view this business in a manner similar
to how it is managed internally when making operating decisions. Prior period data included in this annual
report has been recasted to represent this new segment.
In the fourth quarter of 2010, we changed our presentation of other income in our consolidated statements
of income. We have allocated the portion that primarily represents premium installment fees into a separate
single caption, “Fee revenues.” Also, the remaining amount from the historic single caption, “Other income,”
is presented as “Other revenues.”
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, 2010.
Stock-Based Compensation
We grant qualified and non-qualified stock-based compensation under authorized plans. The stock options
vest ratably over three years following the date of grant and are exercisable over 10-year periods. In 2010,
the committee approved a mix of stock options and restricted stock units for stock-based awards. See
Note 17, Stock-Based Associate Compensation Plans, Page 125, for further details.
Cincinnati Financial Corporation – 2010 10-K – Page 105
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 121 for more information regarding our defined benefit pension plan.
Property Casualty Insurance
Property casualty written premiums are deferred and recorded as earned premiums on a pro rata basis over
the terms of the policies. We record as unearned premiums the portion of written premiums that applies to
unexpired policy terms. The expenses associated with issuing insurance policies – primarily commissions,
premium taxes and underwriting costs – are deferred and amortized over the terms of the policies. We
assess recoverability of deferred acquisition costs at the segment level, consistent with the ways we acquire,
service and manage insurance and measure profitability. We analyze our acquisition cost assumptions
periodically to reflect actual experience and we test for potential premium deficiencies.
A premium deficiency is recorded when the sum of expected loss and loss adjustment expenses, expected
policyholder dividends, unamortized acquisition costs and maintenance costs exceeds the total of unearned
premiums and anticipated investment income. A premium deficiency is first recognized by charging any
unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If the premium
deficiency is greater than unamortized acquisition costs, a liability is accrued for the excess deficiency. We
did not record a premium deficiency for the three years ended 2010, 2009 and 2008.
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 consolidated property casualty companies actively write property casualty insurance through
independent agencies in 39 states. Our 10 largest states generated 67.1 percent and 68.1 percent of total
earned premiums in 2010 and 2009. Ohio, our largest state, accounted for 20.5 percent and 21.0 percent of
total earned premiums in 2010 and 2009. Georgia, Illinois, Indiana, Michigan, North Carolina, Pennsylvania
and Virginia each accounted for between 4 percent and 9 percent of total earned premiums in 2010. Our
largest single agency relationship accounted for approximately 1.2 percent of the company's total earned
premiums in 2010.
Policyholder Dividends
Certain workers’ compensation policies include the possibility of a policyholder earning a return of a portion
of its premium in the form of a policyholder dividend. The dividend generally is calculated by determining
the profitability of a policy year along with the associated premium. We reserve for all probable future
policyholder dividend payments. We incur policyholder dividends as underwriting, acquisition and
insurance expenses.
Contingent Commission Accrual
We base the contingent commission accrual estimate on property casualty underwriting results.
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.
The contingent commission accrual of $77 million in 2010 contributed 2.6 percentage points to the property
casualty combined ratio. Contingent commission accruals for 2009 and 2008 were $81 million and
$75 million, respectively.
Life and Health Insurance
We offer several types of life insurance and disability income insurance, and we account for each according
to the duration of the contract. Short-duration 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.
Cincinnati Financial Corporation – 2010 10-K – Page 106
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 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 that 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.
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, 2010, the current fair value of the BOLI invested assets
and cash exceeded the current fair value of the contract holders’ account value by approximately
$15 million. If the BOLI projected fair value were to fall 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 capital gain and loss
sharing arrangement with the company. A percentage of each separate account’s realized capital gain and
loss representing contract fees and assessments accrues to us and is transferred from the separate account
to our general account and is recognized as revenue or expense.
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.
Cincinnati Financial Corporation – 2010 10-K – Page 107
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.
Both reinsurance assumed and ceded premiums are deferred and recorded as earned premiums on a pro
rata basis over the terms of the contract. We estimate loss amounts recoverable from our reinsurers based
on the reinsurance policy terms. Historically, our claims with reinsurers have been paid. We do not have an
allowance for uncollectible reinsurance.
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid instruments that include liquid debt instruments with original
maturities of less than three months. These are carried at cost and approximate fair value.
Investments
Our portfolio investments are primarily in publicly traded fixed-maturity, equity and short-term investments.
Fixed-maturity investments (taxable bonds, tax-exempt bonds and redeemable preferred stocks) 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 general intent is to hold fixed-maturity
investments until maturity, regardless of short-term fluctuations in fair values.
On April 1, 2009, we adopted a subsection of Accounting Standards Codification (ASC) 320, Recognition and
Presentation of Other-Than-Temporary Impairments (OTTI). Our invested asset impairment policy states that
fixed maturities the company (1) intends to sell or (2) are more likely than not will be required to sell before
recovery of their amortized cost basis are deemed to be other-than-temporarily impaired. The book value of
any such securities is reduced to fair value as the new cost basis, and a realized loss is recorded in the
period in which it is recognized. When these two criteria are not met, and the company believes that full
collection of interest and/or principal is not likely, we determine the net present value of future cash flows by
using the effective interest rate implicit in the security at the date of acquisition as the discount rate and
compare that amount to the amortized cost and fair value of the security. The difference between the net
present value of the expected future cash flows and amortized cost of the security is considered a credit loss
and recognized as a realized loss in the period in which it occurred. The difference between the fair value and
the net present value of the cash flows of the security, the non credit loss, is recognized in other
comprehensive income as an unrealized loss. With the adoption of this subsection of ASC 320 in the second
quarter of 2009, we recognized a cumulative effect adjustment of $106 million, net of tax, to reclassify the
non-credit component of previously recognized impairments by increasing retained earnings and reducing
accumulated other comprehensive income (AOCI).
ASC 320 does not allow retrospective application of the new other-than-temporary impairment model.
Our consolidated statements of income for the year ended December 31, 2010 and 2009, are not measured
on the same basis as December 31, 2008 and, accordingly, these amounts are not comparable.
When determining OTTI charges for our equity portfolio, our invested asset impairment policy considers
qualitative and quantitative factors, including facts and circumstances specific to individual securities, asset
classes, the financial condition of the issuer, changes in dividend payment, the length of time fair value had
been less than book value, the severity of the decline in fair value below book value, the volatility of the
security and our ability and intent to hold each position until its forecasted recovery.
Included within our other invested assets are $40 million of life policy loans, $28 million of venture capital
fund investments and $5 million of investments 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. Investment in real estate consists of one office building
that is carried at cost less accumulated depreciation.
We include the non credit portion of fixed maturities and all other unrealized gains and losses on
investments, net of taxes, in shareholders’ equity as AOCI. Realized gains and losses on investments are
recognized in net income based on the trade date accounting method.
Investment income consists mainly of interest and dividends. We record interest on an accrual basis and
record dividends at the ex-dividend date. We amortize premiums and discounts on fixed-maturity securities
using the effective interest method over the expected life of the security.
Fair Value Disclosures
We account for our investment portfolio at fair value and apply fair value measurements as defined by
ASC 820, Fair Value Measurements and Disclosures, to financial instruments. Fair value is applicable to
ASC 320, Investments-Debt and Equity Securities, ASC 815, Derivatives and Hedging, and ASC 825,
Financial Instruments.
Cincinnati Financial Corporation – 2010 10-K – Page 108
Fair Value Measurements defines fair value as the exit price or the amount that would be (1) received to sell
an asset or (2) paid to transfer a liability in an orderly transaction between marketplace participants at the
measurement date. When determining an exit price, we rely upon observable market data whenever
possible. We primarily base fair value for 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. See Note 3, Fair Value Measurements, Page 114, for further details.
For the purpose of ASC 825 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
on the quoted market prices for such notes. We base fair value for notes payable on our year-end
outstanding balance.
Derivative Financial Instruments and Hedging Activities
We account for derivative financial instruments as defined by ASC 815, Derivatives and Hedging. The
hedging definitions included in ASC 815 guide our recognition of the changes in the fair value of derivative
financial instruments as realized gains or losses in the consolidated statements of income or as a
component of AOCI in shareholder’s equity in the period for which they occur.
Securities Lending Program
During the third quarter of 2008, we terminated our securities lending program.
Lease/Finance
Our leasing subsidiary provides auto and equipment direct financing (leases and loans) to commercial and
individual clients. We generally transfer ownership of the property to the client as the terms of the leases
expire. Our lease contracts contain bargain purchase options. We record income over the financing term
using the effective interest method. Finance receivables are reviewed for impairment on a quarterly basis.
Impairment of our finance receivables are considered insignificant to our consolidated financial condition,
results of operations and cash flows.
We capitalize and amortize lease or loan origination costs over the life of the financing using the effective
interest method. These costs may include, but are not limited to: finder fees, broker fees, filing fees and the
cost of credit reports. We account for these leases and loans as direct financing-type leases.
Land, Building and Equipment
We record land at cost, and 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 $40 million in
2010, $48 million in 2009, and $35 million in 2008. We monitor land, building and equipment for potential
impairments. Potential impairments may include a significant decrease in the fair 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 2010, 2009 or 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 financial statement income and taxable income are expected to reverse. We recognize
deferred income taxes for numerous temporary differences between our taxable income and financial
statement income and other changes in shareholders’ equity. Such temporary differences relate primarily to
unrealized gains and losses on investments and differences in the recognition of deferred acquisition costs
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
AOCI. We charge deferred taxes associated with other differences to income.
See Note 11, Income Taxes, Page 120, for further detail on our uncertain tax positions. Although no Internal
Revenue Service (IRS) penalties currently are accrued, if incurred, they would be recognized as a component
of income tax expense. Accrued IRS interest expense is recognized as other operating expense in the
consolidated statements of income.
Cincinnati Financial Corporation – 2010 10-K – Page 109
Subsequent Events
There were no subsequent events requiring adjustment to the financial statements or disclosure.
Pending Accounting Standards
•
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures. ASU 2010-
06 applies to all entities that are required to make disclosures about recurring or nonrecurring fair value
measurements. ASU 2010-06 requires separate disclosures of the activity in the Level 3 category
related to any purchases, sales, issuances and settlements on a gross basis. The effective date of the
disclosures regarding Level 3 category purchases, sales, issuances and settlements is for interim and
annual periods beginning after December 15, 2010. The portion of ASU 2010-06 that we have not
yet adopted will not have a material impact on our company’s financial position, cash flows or results
of operations as it focuses on additional disclosures.
In April 2010, the FASB issued ASU 2010-15, How Investments Held through Separate Accounts Affect
an Insurer’s Consolidation Analysis of Those Investments. ASU 2010-15 applies to all insurance entities
that have separate accounts that meet the definition and requirements set in the Accounting Standards
Codification Manual. ASU 2010-15 clarifies that an insurance entity should not consider any separate
account interests held for the benefit of contract holders in an investment to be the insurer’s interests.
The insurance entity should not combine those interests with its general account interest in the same
investment when assessing the investment for consolidation. The insurance entity may combine those
interests when the separate account interests are held for the benefit of a related-party policyholder as
defined in the Variable Interest Subsections of Consolidation topic in the Codification Manual. The
effective date of the amendments in this update is for interim and annual periods beginning after
December 15, 2010, with early adoption permitted. The amendments in this update do not modify the
disclosures currently required by GAAP and are not expected to have a material impact on our company’s
financial position, cash flows or results of operations.
In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or
Renewing Insurance Contracts. ASU 2010-26 modifies the definitions of the type of costs incurred by
insurance entities that can be capitalized in the successful acquisition of new and renewal insurance
contracts. ASU 2010-26 requires incremental direct costs of successful contract acquisition as well as
certain costs related to underwriting, policy issuance and processing, medical and inspection and sales
force contract selling for successful contract acquisition to be capitalized. These incremental direct costs
and other costs are those that are essential to the contract transaction and would not have been
incurred had the contract transaction not occurred. The effective date of ASU 2010-26 is for interim and
annual reporting periods beginning after December 15, 2011. The ASU has not yet been adopted, and
we are currently evaluating the impact this ASU will have on our company’s financial position, cash flows
or results of operations.
Adopted Accounting Standards
•
In February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics. ASU 2010-08
does not change any of the fundamentals of GAAP, but it does explain certain clarifications made to the
guidance on embedded derivatives and hedging. We have adopted ASU 2010-08, effective for the first
reporting period after issuance and for fiscal years beginning after December 15, 2009. It did not have a
material impact on our company’s financial position, cash flows or results of operations.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events. ASU 2010-09 removes the
requirement for U.S. Securities and Exchange Commission (SEC) filers to disclose the date through which
subsequent events have been evaluated in both issued and revised financial statements. We have
adopted ASU 2010-09, effective for the first reporting period after issuance. It did not have a material
impact on our company’s financial position, cash flows or results of operations.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. ASU 2010-20 will improve transparency in financial
reporting for companies that hold financing receivables, which include loans, lease receivables and other
long-term receivables. The additional disclosures required by ASU 2010-20 are effective for interim and
annual reporting periods ending on or after December 15, 2010. The ASU did not have a material impact
on our company’s financial position, cash flows or results of operations.
•
•
•
•
Cincinnati Financial Corporation – 2010 10-K – Page 110
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,
2009
2008
2010
$
$
$
$
$
$
423 $
99
4
526
8
518 $
25 $
(12)
(3)
174
0
(33)
10
(2)
159 $
154 $
70
(9)
3
5
(78)
145 $
402 $
100
7
509
8
501 $
15 $
(30)
(62)
624
(162)
(69)
27
(7)
336 $
734 $
(134)
(24)
(14)
28
(207)
383 $
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)
At December 31, 2010, contractual maturity dates for fixed-maturity and short-term investments were:
(Dollars 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
$
$
277 $
2,527
3,619
1,236
229
7,888 $
283
2,682
3,923
1,258
237
8,383
3.4 %
32.0
46.8
15.0
2.8
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, 2010, investments with book value of $81 million and fair value of $85 million were on
deposit with various states in compliance with regulatory requirements.
Cincinnati Financial Corporation – 2010 10-K – Page 111
The following table analyzes cost or amortized cost, gross unrealized gains, gross unrealized losses and
fair value for our invested assets, along with the amount of cumulative non-credit OTTI losses transferred to
AOCI in accordance with ASC 320-10-65, Recognition and Presentation of Other-Than-Temporary
Impairments, for securities that also had a credit impairment:
Cost or
amortized
cost
Gross unrealized
Fair
value
losses
gains
OTTI in
AOCI
(In millions)
At December 31, 2010
Fixed maturities:
States, municipalities and political subdivisions
Convertibles and bonds with warrants attached
United States government
Government-sponsored enterprises
Foreign government
Corporate securities
Subtotal
Equity securities:
Common equities
Preferred equities
Subtotal
Total
At December 31, 2009
Fixed maturities:
States, municipalities and political subdivisions
Convertibles and bonds with warrants attached
United States government
Government-sponsored enterprises
Foreign government
Short-term investments
Collateralized mortgage obligations
Corporate bonds
Total
Equity securities
$
$
$
$
$
3,043 $
69
4
201
3
4,568
7,888
2,211
75
2,286
10,174 $
3,007 $
91
4
354
3
6
37
4,018
7,520 $
2,016 $
110 $
-
1
-
-
404
515
757
27
784
1,299 $
128 $
-
-
-
-
-
-
268
396 $
714 $
$
10
-
-
1
-
9
20
28
1
29
49 $
6 $
-
-
7
-
-
6
36
55 $
29 $
3,143 $
69
5
200
3
4,963
8,383 $
2,940
101
3,041
11,424
3,129 $
91
4
347
3
6
31
4,250
7,861 $
2,701
-
-
-
-
-
-
-
NA
-
-
-
-
-
-
-
-
-
NA
The unrealized investment gains at December 31, 2010, were largely due to a net gain position in our fixed
income portfolio of $495 million and a net gain position in our common stock portfolio of $729 million.
The two primary contributors to the net gain position were The Procter & Gamble Company (NYSE:PG) and
Exxon Mobil Corporation (NYSE:XOM) common stocks, which had a combined net gain position of
$237 million. At December 31, 2010, we had $69 million fair value of hybrid securities included in fixed
maturities that follow ASC 815-15-25, Accounting for Certain Hybrid Financial Instruments. The hybrid
securities are carried at fair value, and the changes in fair value are included in realized investment gains
and losses.
The table below provides fair values and unrealized losses by investment category and by the duration of the
securities’ continuous unrealized loss position:
(In millions)
At December 31, 2010
Fixed maturities:
States, municipalities and political subdivisions
Government-sponsored enterprises
Corporate securities
Subtotal
Equity securities:
Common equities
Preferred equities
Subtotal
Total
At December 31, 2009
Fixed maturities:
States, municipalities and political subdivisions
Government-sponsored enterprises
Short-term investments
Collateralized mortgage obligations
Corporate bonds
Total
Equity securities
Total
Less than 12 months
Fair
value
Unrealized
losses
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
$
$
$
$
325 $
133
354
812
337
5
342
1,154 $
196 $
347
1
-
397
941
65
1,006 $
$
9
1
6
16
28
-
28
44 $
4 $
7
-
-
19
30
3
33 $
9 $
-
39
48
-
23
23
71 $
29 $
-
-
27
309
365
415
780 $
$
1
-
3
4
-
1
1
5 $
2 $
-
-
6
17
25
26
51 $
334 $
133
393
860
337
28
365
1,225 $
225 $
347
1
27
706
1,306
480
1,786 $
10
1
9
20
28
1
29
49
6
7
-
6
36
55
29
84
Net realized gains were $159 million for the year ended December 31, 2010 compared with net realized
gains of $336 million and $138 million in 2009 and 2008, respectively. The net realized investment gains
Cincinnati Financial Corporation – 2010 10-K – Page 112
for the year ended December 31, 2010 were largely due to the sale of Verisk (NYSE: VRSK), contributing
$128 million.
Other-than-temporary Impairment Charges
The following table provides the amount of OTTI charges:
(In millions)
Fixed maturities
Equity securities
Total
Years ended December 31,
2009
2010
2008
3
33
36
$
$
62
69
131
$
$
163
347
510
$
$
For the year ended December 31, 2010 and 2009, there were no credit losses on fixed-maturity securities
for which a portion of OTTI has been recognized in other comprehensive income.
During 2010, we impaired 15 securities. At December 31, 2010, 17 fixed-maturity investments with a total
unrealized loss of $4 million had been in an unrealized loss position for 12 months or more. Of that total,
no fixed maturity investments were trading below 70 percent of book value. Three equity investments with a
total unrealized loss of $1 million had been in an unrealized loss position for 12 months or more as of
December 31, 2010. Of that total, no equity investments were trading below 70 percent of book value.
During 2009, we impaired 50 securities. At December 31, 2009, 121 fixed-maturity investments with a total
unrealized loss of $25 million had been in an unrealized loss position for 12 months or more. Of that total,
eight fixed maturity investments were trading below 70 percent of book value with a total unrealized loss of
$2 million. Ten equity investments with a total unrealized loss of $26 million had been in an unrealized loss
position for 12 months or more as of December 31, 2009. Of that total, no equity investments were trading
below 70 percent of book value.
During 2008, we impaired 126 securities. 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, no fixed-maturity investments were trading below 70 percent of book value. Six equity investments with
a total unrealized loss of $41 million had been in an unrealized loss position for 12 months or more as of
December 31, 2008, with two trading below 70 percent of book value.
When determining OTTI charges for our fixed-maturity portfolio, management places significant emphasis on
whether issuers of debt are current on contractual payments and whether future contractual amounts are
likely to be paid. As required by ASC 320 effective April 1, 2009, our invested asset impairment policy for
fixed-maturity securities states that OTTI is considered to have occurred (1) if we intend to sell the impaired
fixed maturity security; (2) if it is more likely than not we will be required to sell the fixed maturity security
before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not
sufficient to recover the entire amortized cost basis. If we intend to sell or it is more likely than not we will be
required to sell, the book value of any such securities is reduced to fair value as the new cost basis, and a
realized loss is recorded in the period in which it is recognized. When we believe that full collection of interest
and/or principal is not likely, we determine the net present value of future cash flows by using the effective
interest rate implicit in the security at the date of acquisition as the discount rate and compare that amount
to the amortized cost and fair value of the security. The difference between the net present value of the
expected future cash flows and amortized cost of the security is considered a credit loss and recognized as a
realized loss in the period in which it occurred. The difference between the fair value and the net present
value of the cash flows of the security, the non-credit loss, is recognized in other comprehensive income as
an unrealized loss.
With the adoption of ASC 320 in the second quarter of 2009, we recognized a cumulative effect adjustment
of $106 million, net of tax, to reclassify the non-credit component of previously recognized impairments by
increasing retained earnings and reducing AOCI. ASC 320 does not allow retrospective application of the new
OTTI model. Our consolidated statements of income for the year ended December 31, 2010 and 2009, are
not measured on the same basis as December 31, 2008, and, accordingly, these amounts are not
comparable.
When determining OTTI charges for our equity portfolio, our invested asset impairment policy considers
qualitative and quantitative factors, including facts and circumstances specific to individual securities, asset
classes, the financial condition of the issuer, changes in dividend payment, the length of time fair value had
been less than book value, the severity of the decline in fair value below book value, the volatility of the
security and our ability and intent to hold each position until its forecasted recovery.
For each of our equity securities in an unrealized loss position at December 31, 2010, we applied the
objective quantitative and qualitative criteria of our invested asset impairment policy for OTTI. Our long-term
equity investment philosophy, emphasizing companies with strong indications of paying and growing
dividends, combined with our strong surplus, liquidity and cash flow, provides us the ability to hold these
investments through what we believe to be slightly longer recovery periods occasioned by the recession and
historic levels of market volatility. Based on the individual qualitative and quantitative factors, as discussed
above, we evaluate and determine an expected recovery period for each security. A change in the condition
Cincinnati Financial Corporation – 2010 10-K – Page 113
of a security can warrant impairment before the expected recovery period. If the security has not recovered
cost within the expected recovery period, the security is impaired.
3.
FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
In accordance with fair value measurements and disclosures, we categorized our financial instruments,
based on the priority of the observable and market-based data for 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. Our valuation techniques have not changed since December 31, 2009, and ultimately management
determines fair value.
Financial instruments are categorized based upon the following characteristics or inputs to the
valuation techniques:
•
Level 1 – Financial assets and liabilities for which inputs are observable and are obtained from reliable
quoted prices for identical assets or liabilities in active markets. This is the most reliable fair value
measurement and includes, for example, active exchange-traded equity securities.
Level 2 – Financial assets and liabilities for which values are based on quoted prices in markets that are
not active or for which values are based on similar assets and liabilities that are actively traded. This also
includes pricing models for which the inputs are corroborated by market data.
Level 3 – Financial assets and liabilities for which values are based on prices or valuation techniques
that require inputs that are both unobservable and significant to the overall fair value measurement.
Level 3 inputs include the following:
o Quotes from brokers or other external sources that are not considered binding;
o 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;
o 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 or out of the Level 3 category as of the
beginning of the quarter in which the reclassification occurred.
Cincinnati Financial Corporation – 2010 10-K – Page 114
The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring
basis for the years ended December 31, 2010 and 2009. We do not have any material liabilities carried at
fair value. There were also no significant transfers between Level 1 and Level 2.
(In millions)
Asset fair value measurements at December 31, 2010 using:
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
Fixed maturities, available for sale:
Corporate securities
Convertibles and bonds with warrants attached
Foreign government
United States government
Government-sponsored enterprises
States, municipalities and political subdivisions
Subtotal
Common equities, available for sale
Preferred equities, available for sale
Taxable fixed maturities separate accounts
Top Hat Savings Plan
Total
(In millions)
Fixed maturities, available for sale:
Corporate securities
Foreign government
U.S. Treasury and U.S. government agencies
Collateralized mortgage obligations
States, municipalities and political subdivisions
Taxable fixed maturities separate accounts
Subtotal
Common equities, available for sale
Preferred equities, available for sale
Short-term investments
Top Hat Savings Plan
Total
$
$
$
$
$
-
-
-
5
-
-
5
2,940
-
-
9
2,954
-
-
4
-
-
-
4
2,474
-
-
7
2,485
$
$
4,943
69
3
-
200
3,139
8,354
-
96
606
-
9,056
$
$
20
-
-
-
-
4
24
-
5
2
-
31
$
$
4,963
69
3
5
200
3,143
8,383
2,940
101
608
9
12,041
4,314
3
347
31
3,125
555
8,375
134
88
6
-
8,603
$
$
27
-
-
-
4
-
31
-
5
-
-
36
$
$
4,341
3
351
31
3,129
555
8,410
2,608
93
6
7
11,124
Asset fair value measurements at December 31, 2009 using:
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$
Each financial instrument that was 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, 2010 and 2009. As of December 31, 2010 and 2009, total Level 3 assets were
less than 1 percent of financial assets measured at fair value. At December 31, 2010, total fair value of
assets priced with broker quotes and other non-observable market inputs for the fair value measurements
and disclosures was $31 million.
Cincinnati Financial Corporation – 2010 10-K – Page 115
The following tables explain changes to Level 3 securities during 2010 and 2009:
(In millions)
Beginning balance, January 1, 2010
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 into Level 3
Transfers out of Level 3
Ending balance, December 31, 2010
(In millions)
Beginning balance, January 1, 2009
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, 2009
$
$
$
$
Asset fair value measurements using significant unobservable inputs (Level 3)
States,
municipalities
and political
subdivisions
fixed maturities
4
Taxable fixed
maturities-
separate accounts
$
-
Common
equities
$
-
Preferred
equities
5
$
$
$
Corporate
fixed
maturities
27
-
2
(3)
4
(10)
20
$
-
-
2
-
-
2
$
-
-
-
-
-
4
$
-
-
-
-
-
-
$
-
-
-
-
-
5
$
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
50 $
-
-
5
(28)
27
$
6 $
5 $
64 $
22 $
-
-
-
(6)
-
$
-
-
(1)
-
4
$
-
(3)
(61)
-
-
$
(3)
5
(4)
(15)
5
$
Total
36
-
2
(1)
4
(10)
31
Total
147
(3)
2
(61)
(49)
36
For the year ended December 31, 2010, one Level 3 corporate fixed-maturity security was purchased for
$5 million and two corporate fixed-maturity securities were sold for approximately $1 million. There were also
two corporate fixed-maturity securities that matured during the period for approximately $7 million. As a
result of these purchases, sales, issuances and settlements, corporate fixed-maturity securities decreased
$3 million.
4.
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 costs for
recoverability. The table below shows the deferred policy acquisition costs and asset reconciliation, including
the amortized deferred policy acquisition costs.
DEFERRED ACQUISITION COSTS
(In millions)
Deferred policy acquisition costs asset, beginning of year
Capitalized deferred policy acquisition costs
Amortized deferred policy acquisition costs
Amortized shadow deferred policy acquisition costs
Deferred policy acquisition costs asset, end of year
Years ended December 31,
2009
2008
2010
$
$
481 $
676
(653)
(16)
488 $
509 $
650
(638)
(40)
481 $
461
649
(632)
31
509
There were no premium deficiencies recorded in the reported consolidated statements of income, as the sum
of the anticipated loss and loss adjustment expenses, policyholder dividends, maintenance expenses and
underwriting expenses did not exceed the related unearned premiums and anticipated investment income.
Cincinnati Financial Corporation – 2010 10-K – Page 116
5.
PROPERTY CASUALTY LOSS AND LOSS EXPENSES
This table summarizes our consolidated property casualty loss and loss expense reserves:
(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,
2009
2010
2008
4,096 $
435
3,661
2,319
(304)
2,015
939
926
1,865
3,811
326
4,137 $
4,040 $
542
3,498
2,274
(188)
2,086
929
994
1,923
3,661
435
4,096 $
3,925
528
3,397
2,379
(323)
2,056
976
979
1,955
3,498
542
4,040
$
$
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. The amount we will actually have to
pay for claims can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss
and loss expense reserves our most significant estimate.
Because of changes in estimates of insured events in prior years, we decreased the provision for prior
accident years’ loss and loss expenses by $304 million, $188 million and $323 million in calendar years
2010, 2009 and 2008. 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 $63 million
at December 31, 2010, and $46 million for both 2009 and 2008, for certain life and health loss reserves.
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.
LIFE POLICY RESERVES
(In millions)
Ordinary/traditional life
Universal life
Deferred annuities
Investment contracts
Other
Total gross reserves
At December 31,
2010
2009
628 $
459
730
200
17
2,034 $
579
450
539
197
18
1,783
$
$
Reserves for deferred annuities and other investment contracts were $930 million and $736 million at
December 31, 2010, and December 31, 2009, respectively. Fair value for these deferred annuities and
investment contracts was $933 million and $737 million at December 31, 2010, and December 31, 2009,
respectively. Fair values of liabilities associated with certain investment contracts are calculated based upon
internally developed models because active, observable markets do not exist for those items. To determine
the fair value, we make the following significant assumptions: (1) the discount rates used to calculate the
present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial
issuers as of December 31, 2010, to account for non-performance risk; (2) the rate of interest credited to
Cincinnati Financial Corporation – 2010 10-K – Page 117
NOTES PAYABLE
policyholders is the portfolio net earned interest rate less a spread for expenses and profit; and (3) additional
lapses occur when the credited interest rate is exceeded by an assumed competitor credited rate, which is a
function of the risk-free rate of the economic scenario being modeled. The fair value of life policy loans
outstanding principal and interest approximated $46 million, compared with book value of $40 million
reported in the consolidated balance sheets at December 31, 2010. The fair value of life policy loans
outstanding principal and interest approximated $44 million, compared with book value of $40 million
reported in the consolidated balance sheets as of December 31, 2009.
7.
At December 31, 2010 and 2009, we had two lines of credit with commercial banks with an aggregate
borrowing capacity of $225 million. Our note payable balance, which approximates fair value, was
$49 million at year-end 2010 and at year-end 2009. The $75 million line of credit expires August of 2011.
The $150 million line of credit with a $49 million balance expires July of 2012. We had no compensating
balance requirements on short-term debt for either 2010 or 2009. The interest rate charged on our
borrowings was a fixed 2.58 percent during 2010.
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
Book value
Principal amount
December 31,
2010
December 31,
2009
December 31,
2010
December 31,
2009
$
$
28 $
391
371
790 $
28 $
391
371
790 $
28 $
391
374
793 $
28
391
374
793
SHAREHOLDERS’ EQUITY AND DIVIDEND RESTRICTIONS
The fair value of our senior debt approximated $783 million at year-end 2010 compared with $740 million at
year-end 2009. Fair value for 2010 and 2009 was determined under ASC 820 based on market pricing of
these or similar debt instruments that are actively trading. Fair value can vary with macroeconomic concerns.
Regardless of the fluctuations in fair value, the outstanding principal amount of our long-term debt remained
unchanged from year-end 2009. None of the notes are encumbered by rating triggers.
9.
Our insurance subsidiary declared dividends to the parent company of $220 million in 2010, $50 million in
2009 and $160 million in 2008. State regulatory requirements restrict the dividends insurance subsidiaries
can pay. Generally, the most our insurance subsidiary can pay without prior regulatory approval is the greater
of 10 percent of policyholder surplus or 100 percent of statutory net income for the prior calendar year.
Dividends exceeding these limitations may be paid only with approval of the insurance department of the
domiciliary state. During 2011, the total that our lead subsidiary may pay in dividends is approximately
$378 million.
As of December 31, 2010, 6 million shares of common stock were available for future equity award grants.
Declared cash dividends per share were $1.59, $1.57 and $1.56 for the years ended
December 31, 2010, 2009 and 2008, respectively.
Cincinnati Financial Corporation – 2010 10-K – Page 118
Accumulated Other Comprehensive Income
The change in AOCI includes changes in unrealized gains and losses on investments and pension obligations
as follows:
(In millions)
Accumulated unrealized gains on investments
available for sale and other at January 1,
(Decrease)/increase in unrealized gains
Cumulative effect of change in accounting for
other-than-temporary impairments
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 investments
available for sale and other at December 31,
Accumulated unrealized losses for pension
obligations at January 1,
Change in pension obligations
Accumulated unrealized losses for pension
obligations at December 31,
Accumulated other comprehensive income at
January 1,
Unrealized investment gains and losses and
other adjustments
Change in pension obligations
Accumulated other comprehensive income
at December 31,
Before
tax
2010
Income
tax
Net
Years ended December 31,
2009
Income
tax
Before
tax
Net
Before
tax
2008
Income
tax
Net
$
1,012
$
345
$
667
$
570
$
189
$
381
$
3,336
$
1,161
$
2,175
387
136
251
936
330
606
(2,618)
(915)
(1,703)
0
0
0
(163)
(57)
(106)
0
0
0
(159)
(56)
(103)
(336)
(119)
(217)
(138)
(53)
(85)
(8)
220
(3)
77
(5)
143
5
442
2
156
3
286
(10)
(2,766)
(4)
(972)
(6)
(1,794)
$
1,232
$
422
$
810
$
1,012
$
345
$
667
$
570
$
189
$
381
$
$
$
(66)
$
(23)
$
(43)
$
(52)
$
(18)
$
(34)
$
(37) $
(13) $
3
1
2
(14)
(5)
(9)
(15)
(5)
(24)
(10)
(63)
$
(22)
$
(41)
$
(66)
$
(23)
$
(43)
$
(52)
$
(18)
$
(34)
946
$
322
$
624
$
518
$
171
$
347
$
3,299
$
1,148
$
2,151
220
3
77
1
143
2
442
(14)
156
(5)
286
(9)
(2,766)
(15)
(972)
(5)
(1,794)
(10)
$
1,169
$
400
$
769
$
946
$
322
$
624
$
518
$
171
$
347
REINSURANCE
10.
Our consolidated 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,
2009
2010
2008
$
$
3,080 $
10
(166)
2,924 $
3,068 $
12
(169)
2,911 $
3,175
13
(178)
3,010
Our consolidated 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,
2009
2010
2008
$
$
2,003 $
11
(4)
2,010 $
2,135 $
10
(63)
2,082 $
2,172
5
(126)
2,051
For the year ended December 31, 2010, a reserve reduction occurred in our USAIG pool. Therefore, direct
and ceded incurred loss and loss expenses were reduced by $33 million, so there was no effect on net
incurred loss and loss expenses.
Our consolidated 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,
2009
2010
2008
$
$
211 $
0
(53)
158 $
196 $
0
(53)
143 $
180
0
(54)
126
Cincinnati Financial Corporation – 2010 10-K – Page 119
Our consolidated statements of income include life insurance contract holders’ 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,
2009
2010
2008
$
$
233 $
0
(63)
170 $
201 $
0
(41)
160 $
175
0
(33)
142
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 consolidated balance sheets at
December 31 were as follows:
(In millions)
Deferred tax assets:
Loss and loss expense reserves
Unearned premiums
Investments
Other
Total
Deferred tax liabilities:
Unrealized investment gains and losses
Deferred acquisition costs
Other
Total
Net deferred tax liability
At December 31,
2010
2009
182 $
107
31
34
354
(411)
(157)
(46)
(614)
(260) $
182
104
40
31
357
(332)
(152)
(25)
(509)
(152)
$
$
The provision for federal income taxes is based upon filing a consolidated income tax return for the company
and its subsidiaries. As of December 31, 2010, 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,
2009
2008
2010
Tax at statutory rate
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds
Dividend received exclusion
Other
Effective rate
35.0 %
35.0 %
35.0 %
(7.2)
(3.8)
0.8
24.8 %
(6.5)
(3.4)
0.6
25.7 %
(6.2)
(8.9)
0.8
20.7 %
Unrecognized Tax Benefits
As a result of positions taken in our federal tax returns filed with the IRS, we believe it is more likely than not
that tax positions for which we previously carried a liability for unrecognized tax benefits will be sustained
upon examination by the IRS.
Below is the unrecognized tax benefit for the years ended December 31:
(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
Gross unrecognized tax benefits at December 31,
Years ended December 31,
2009
2010
2008
$
$
0 $
0
0
0
0
0 $
2 $
0
(2)
0
0
0 $
14
3
0
2
(17)
2
In December 2010, we reached agreement with the IRS settling all issues related to the 2007 and 2008 tax
years. As a result of this IRS agreement, there is no liability for unrecognized tax benefits as of
December 31, 2010. Tax year 2009 has not been audited by the IRS and remains open for examination.
In addition to our IRS filings, we file income tax returns with immaterial amounts in various state jurisdictions.
Cincinnati Financial Corporation – 2010 10-K – Page 120
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, 2010.
Here are calculations for basic and diluted earnings per share:
(In millions except per share data)
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,
2009
2008
2010
377 $
432 $
429
162,777,695
496,796
163,274,491
162,595,041
271,822
162,866,863
163,150,329
212,080
163,362,409
2.32 $
2.31
2.66 $
2.65
2.63
2.62
9,538,350
26.58-45.26
$
9,875,411
25.08-45.26
$
9,781,652
25.08-45.26
$
$
$
EMPLOYEE RETIREMENT BENEFITS
The current sources of dilution of our common shares are certain equity-based awards as discussed in
Note 17 Stock-Based Associate Compensation Plans, Page 125. The above table shows the number of
anti-dilutive stock-based awards at year-end 2010, 2009 and 2008. We did not include these stock-based
awards in the computation of net income per common share (diluted) because their exercise would have
anti-dilutive effects.
13.
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
contributions to the 401(k) plan from the defined benefit pension plan. In addition, we froze entry into the
pension plan for new associates as of June 30, 2008. Only participants 40 years of age or older as of
August 31, 2008, could elect to continue to participate. For participants who left the pension plan, benefit
accruals were frozen as of August 31, 2008. We transferred $60 million of the pension plan’s accumulated
benefit obligation during 2008 to an intermediary spin-off plan to facilitate the partial curtailment and
settlement for these participants. For participants remaining in the pension plan, we continue to contribute to
fund future benefit obligations. Benefits for the defined benefit pension plan are based on years of credited
service and compensation level. Contributions are based on the prescribed method defined in the Pension
Protection Act. Our pension expense is based on certain actuarial assumptions and also is composed of
several components that are determined using the projected unit credit actuarial cost method.
Matching contributions to our sponsored 401(k) plan, which we began making during 2008, totaled $8
million, $7 million and $3 million during the years 2010, 2009 and 2008. 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.
We also maintain a supplemental executive retirement plan (SERP) with liabilities of approximately $6 million
at year-end 2010 and $5 million at year-end 2009, which are included in the obligation and expense
amounts. 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 SERP participants who chose to leave the defined benefit pension plan, SERP benefit accruals were
frozen as of December 31, 2008. During 2009, the frozen accrued SERP benefit for those participants,
collectively amounting to approximately $1 million, transferred to the Top Hat Savings Plan. Beginning in
2009, for these associates, the company began matching deferrals to the Top Hat Savings Plan up to the first
6 percent of an associate’s compensation that exceeds the compensation limit specified by the Internal
Revenue Code of 1986, as amended.
Pursuant to ASC 715-30 we recognized expense of $3 million during 2008 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 during 2008 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 – 2010 10-K – Page 121
Defined Benefit Pension Plan Assumptions
Key assumptions used in developing the 2010 net pension obligation were a 5.85 percent discount rate for
the qualified plan and a 5.55 percent discount rate for our SERP and rates of compensation increases
ranging from 3.50 percent to 5.50 percent. To determine the discount rate for each plan, a hypothetical
diversified portfolio of actual domestic Aa rated bonds were chosen to provide payments approximately
matching the plan’s expected benefit payments. A single interest rate for each plan was determined based
on the anticipated yield of the constructed portfolio. We decreased the rate by 0.25 percentage points for the
qualified plan and by 0.55 percentage points for the SERP due to market interest rate conditions at year-end
2010. Compensation increase assumptions reflect anticipated rates of inflation, real return on wage growth
and merit and promotional increases.
Key assumptions used in developing the 2010 net pension expense were a 6.10 percent discount rate;
an 8.00 percent expected return on plan assets and rates of compensation increases ranging from
4.00 percent to 6.00 percent. The 8.00 percent return on plan assets assumption is consistent with current
expectations of inflation and based partially on the fact that our common stock holdings 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
0.10 percentage points due to market interest rate conditions at the beginning of the year. We based the
rates of compensation increase on the company’s historical data.
The weighted-average assumptions used to determine benefit obligations at December 31 follows:
Discount rate
Rate of compensation increase
Qualified Pension Plan
2010
2009
SERP
2010
2009
5.85 %
6.10 %
5.55 %
6.10 %
3.50-5.50
4.00-6.00
3.50-5.50
4.00-6.00
Benefit obligation activity using an actuarial measurement date for our qualified plan and SERP at
December 31 follows:
(In millions)
Change in projected benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss
Benefits paid
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
Fair value of plan assets at end of year
Unfunded status:
Unfunded status at end of year
At December 31,
2010
2009
221
10
14
6
(6)
0
245
$
$
213 $
$
144
20
25
(6)
183 $
206
10
12
2
(7)
(2)
221
186
118
0
33
(7)
144
(62) $
(77)
$
$
$
$
$
$
A reconciliation follows of the funded status for our qualified plan and SERP at the end of the measurement
period to the amounts recognized in the consolidated balance sheets at December 31:
(In millions)
Pension amounts recognized in the consolidated balance sheets consists of:
Other liabilities
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,
2010
2009
(62) $
(62) $
(77)
(77)
60 $
3
63 $
63
3
66
$
$
$
$
We evaluate our pension plan assumptions annually and update them as necessary. The discount rate
assumptions for our benefit obligation generally track with high grade corporate bond yields and yearly
adjustments reflect any changes to those bond yields. We believe the expected return on plan assets is
Cincinnati Financial Corporation – 2010 10-K – Page 122
representative of the expected long-term rate of return on these assets. Our compensation increase
assumptions reflect anticipated rates of inflation, real return on wage growth and merit and
promotional increases.
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
2009
2008
2010
2010
SERP
2009
2008
6.10 %
8.00
6.00 %
8.00
6.25 %
8.00
6.10 %
6.00 %
6.25 %
n/a
n/a
n/a
4.00-6.00 4.00-6.00 4.00-6.00 4.00-6.00 4.00-6.00 4.00-6.00
Here are the components of our net periodic benefit cost, as well as other changes in plan assets and benefit
obligations recognized in other comprehensive income for our qualified plan and SERP at December 31:
(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
(In millions)
Current year actuarial loss
Recognition of actuarial (loss) gain
Recognition of prior service cost
Total recognized in other comprehensive income
$
$
$
$
Years ended December 31,
2009
2008
2010
10 $
14
(14)
2
0
0
12 $
10 $
12
(12)
1
0
0
11 $
14
17
(16)
2
3
27
47
Years ended December 31,
2009
2008
2010
0 $
(2)
(1)
(3) $
15 $
0
(1)
14 $
73
(54)
(4)
15
The total recognized in net periodic benefit cost and other comprehensive income was $9 million, $25 million
and $62 million for the years ended December 31, 2010, 2009 and 2008, respectively. The estimated costs
to be amortized from AOCI into net periodic benefit cost over the next year for our plans are a $3 million
actuarial loss and a $1 million prior service cost.
Defined Benefit Pension Plan Assets
The pension plan assets are managed to maximize total return over the long term while providing sufficient
liquidity and current return to satisfy the cash flow requirements of the plan. The plan’s day-to-day
investment decisions are managed by our internal investment department; however, overall investment
strategies are agreed upon by our employee benefits committee.
Excluding cash, during 2010 we allocated approximately 70 percent of the pension portfolio to highly
observable domestic equity investments, which reflect the long-term time horizon of pension obligations. The
remainder of the portfolio is allocated approximately 16 percent to domestic fixed-maturity investments and
approximately 12 percent to taxable municipal bonds. The remaining 2 percent is allocated to preferred
equities. At December 31, 2010, we had $9 million of cash on hand, with carrying value approximating fair
value. Our shift to fixed maturities during the year was to increase the duration of the portfolio, diversify the
types of credit risk and to better match our liability risks which is consistent with our strategy. Our corporate
and municipal bond portfolio is investment grade. The plan does not engage in derivative transactions.
Investments in securities traded on a national securities exchange are valued at the last reported sales price
on the last business day of the year. Investments in securities that are traded in active markets are valued on
quoted market prices at December 31, 2010 and 2009. Investments in securities that are not actively traded
are valued based on pricing models for which the inputs have been corroborated by market data at
December 31, 2010 and 2009.
The plan, which ultimately determines fair value, categorized its financial instruments, based on the priority
of the observable and market-based data for 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.
Refer to Note 3, Fair Value Measurements, Page 114 for valuation techniques and categorization of financial
instruments within the pension plan assets. The methods described may produce a fair value calculation that
may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe
our valuation methods are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a
different fair value measurement.
Cincinnati Financial Corporation – 2010 10-K – Page 123
The following table illustrates the fair value hierarchy for those assets measured at fair value on a recurring
basis for period ended December 31, 2010 and 2009. The pension plan does not have any assets
categorized as Level 3. There have been no transfers between Level 1 and Level 2 for the period ended
December 31, 2010 and 2009.
(In millions)
Asset fair value measurements at December 31, 2010 using:
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable inputs
(Level 3)
Total
Fixed maturities, available for sale:
Corporate securities
States, municipalities and political subdivisions
Total fixed maturities, available for sale
Common equities, available for sale
Preferred equities, available for sale
Total
(In millions)
Money market fund
Fixed maturities, available for sale:
Corporate securities
States, municipalities and political subdivisions
Total fixed maturities, available for sale
Common equities, available for sale
Preferred equities, available for sale
Total
$
$
$
$
$
-
-
-
122
4
126
$
27 $
21
48
-
-
48
$
$
$
-
-
-
-
-
-
27
21
48
122
4
174
Asset fair value measurements at December 31, 2009 using:
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable inputs
(Level 3)
Total
23 $
$
-
$
-
-
-
-
89
3
115 $
28
1
29
-
-
29 $
-
-
-
-
-
-
$
23
28
1
29
89
3
144
Our pension plan assets included 642,113 shares of the company’s common stock, which had a fair value of
$20 million and $17 million at December 31, 2010 and 2009, respectively. The defined benefit pension plan
did not purchase or sell any shares of our common stock during 2010 and 2009. The company paid
$1 million in cash dividends on our common stock to the pension plan in both 2010 and 2009.
On February 1, 2011, we contributed $35 million to our qualified plan. We also expect to pay $2 million to
the SERP during 2011. We expect to make the following benefit payments for our qualified plan and SERP,
reflecting expected future service:
(In millions)
For the years ended December 31,
Expected future benefit payments
2011
17
$
2012
20
$
2013
21
$
2014
16
$
2015
16
$
2016 - 2020
121
$
Years ended December 31,
expensing of policy acquisition costs,
valuation of unrealized investment gains and losses,
STATUTORY ACCOUNTING INFORMATION (UNAUDITED)
14.
Insurance companies use statutory accounting practices (SAP) as prescribed by regulatory authorities. The
primary differences between SAP and GAAP include:
•
•
•
• deferred income taxes based on differences in statutory and taxable income.
Statutory net income and capital and surplus are determined in accordance with SAP prescribed or permitted
by insurance regulatory authorities for five legal entities, our insurance subsidiary and its four insurance
subsidiaries. Statutory capital and surplus for our insurance subsidiary, The Cincinnati Insurance Company,
includes capital and surplus of its four insurance subsidiaries. The statutory net income and statutory surplus
are presented below:
actuarial assumptions for life insurance reserves and
Cincinnati Financial Corporation – 2010 10-K – Page 124
(In millions)
SAP Net Income (Loss)
Years ended December 31,
2009
2008
2010
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Specialty Underwriters Insurance Company
The Cincinnati Life Insurance Company
$
318 $
10
2
1
15
339 $
29
8
(7)
15
194
16
2
(38)
(70)
$
Capital and Surplus
At December 31,
2010
2009
3,777 $
269
70
172
303
3,648
254
67
168
300
TRANSACTIONS WITH AFFILIATED PARTIES
COMMITMENTS AND CONTINGENT LIABILITIES
15.
We paid certain officers and directors, or insurance agencies of which they are shareholders, commissions of
approximately $6 million, $6 million and $6 million on premium volume of approximately $36 million,
$36 million and $38 million for 2010, 2009 and 2008, 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, is immaterial to our consolidated financial
condition, results of operations and cash flows.
The company and its subsidiaries also are occasionally involved in other legal actions, some of which assert
claims for substantial amounts. These actions include, among others, putative class actions seeking
certification of a state or national class. Such putative class actions have alleged, for example, improper
reimbursement of medical providers paid under workers’ compensation insurance policies, erroneous coding
of municipal tax locations and excessive premium charges for uninsured motorist coverage. The company’s
insurance subsidiaries also are occasionally parties to individual actions in which extra-contractual damages,
punitive damages or penalties are sought, such as claims alleging bad faith in the handling of
insurance claims. From time to time, the company also becomes aware of incidents that could result in
liability, with or without litigation or regulatory action, for example, data processing errors by third-party
vendors servicing certain of our employee benefit plans.
On a quarterly basis, we review these outstanding matters. Under current accounting guidance, we establish
accruals when it is probable that a loss has been incurred and we can reasonably estimate its potential
exposure. The company accounts for such probable and estimable losses, if any, through the establishment
of legal expense reserves. Based on our quarterly review, we believe that our accruals for probable and
estimable losses are reasonable and that the amounts accrued do not have a material effect on our
consolidated financial condition or results of operations. However, if any one or more of these matters results
in a judgment against us or settlement for an amount that is significantly greater than the amount accrued,
the resulting liability could have a material effect on the company’s consolidated results of operations or
cash flows. Based on our quarterly review, for any other matter for which the risk of loss is more than remote
we are unable to reasonably estimate the potential loss or establish a reasonable range of loss.
STOCK-BASED ASSOCIATE COMPENSATION PLANS
17.
We currently have four equity compensation plans that together permit us to grant various types of equity
awards. We currently grant incentive stock options, non-qualified stock options, service-based restricted
stock units and performance-based restricted stock units, including some with market-based performance
objectives, under our shareholder-approved plans. We also have a Holiday Stock Plan that permits annual
awards of one share of common stock to each full-time associate for each full calendar year of service up to
a maximum of 10 shares. One of our equity compensation plans permits us to grant stock to our outside
directors as a component of their annual compensation.
Stock-based compensation cost after tax was $8 million, $7 million and $11 million for the years ended
December 31, 2010, 2009 and 2008, respectively. Options exercised during the year ended December 31,
2010 and 2009, had intrinsic value less than $1 million. The total intrinsic value of options exercised during
the year ended December 31, 2008, was $1 million. (Intrinsic value is the market price less the exercise
price.) Options vested during the year ended December 31, 2010, had total intrinsic value of $1 million.
Options vested during the years ended 2009 and 2008 had intrinsic value less than $1 million.
As of December 31, 2010, we had $11 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 1.8 years.
Stock options are granted to associates at an exercise price that is equal to the fair value as reported on the
NASDAQ Global Select Market for the grant date and are exercisable over 10-year periods. The stock options
Cincinnati Financial Corporation – 2010 10-K – Page 125
generally vest ratably over a three-year period. In determining the share-based compensation amounts, we
estimate the fair value of each option granted on the date of grant using 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 that approximates the
expected term.
• Dividend yield is determined by dividing the annualized per share dividend by the stock price on the date
of grant.
• Risk-free rates are the implied yield currently available on U.S. Treasury issues with a remaining term
approximating the expected term.
During 2010, we granted stock-based awards to associates and issued our common stock to eligible
associates under our Holiday Bonus Plan. No stock based awards were granted to associates during 2009.
The following weighted average assumptions were used for option grants issued during 2010 and 2008 in
determining fair value:
Weighted - average expected term
Expected volatility
Dividend yield
Risk-free rates
Weighted-average fair value of options granted during the period
Here is a summary of options information:
(Dollars in millions, shares in thousands)
Outstanding at January 1, 2010
Granted
Exercised
Forfeited
Outstanding at December 31, 2010
Options exercisable at end of period
2010
8 years
27.11-27.16%
5.41-5.94%
3.49-3.52%
5.13
$
2009
n/a
n/a
n/a
n/a
n/a
2008
7-9 years
20.58-28.52%
3.99-6.22%
3.29-3.84%
6.50
$
Weighted-
average
exercise price
36.67
26.60
26.74
28.99
36.59 $
37.92 $
Shares
9,875 $
902
(11)
(1,076)
9,690
8,298 $
Aggregate
intrinsic
value
9
3
Cash received from the exercise of options was less than $1 million for the years ended December 31, 2010
and 2009 and $4 million for the year ended December 31, 2008. We did not realize a tax benefit on options
exercised for the years ended December 31, 2010, 2009 and 2008.
Options outstanding and exercisable consisted of the following at December 31, 2010:
(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
$
8.42 yrs
1.12 yrs
4.39 yrs
4.52 yrs
4.91 yrs
4.19 yrs
Weighted-
average
exercise price
26.59
33.41
38.75
42.55
45.26
36.59
Shares
1,677
2,931
1,973
1,868
1,241
9,690
Options exercisable
Weighted-
average
exercise price
26.57
33.41
38.75
42.55
45.26
37.92
Shares
526 $
2,931
1,732
1,868
1,241
8,298
The weighted-average remaining contractual life for exercisable awards as of December 31, 2010, was
3.5 years. A total of 16.9 million shares are authorized to be granted under the shareholder-approved plans.
At December 31, 2010, 6.0 million shares were available for future issuance under the plans. During 2009,
our shareholders approved the Directors’ Stock Plan of 2009, which authorizes 300,000 shares to be
granted to our directors. During 2010 we granted 31,310 shares of common stock to our directors for
2009 board service fees. We currently issue new shares or use treasury shares for stock-based
compensation award issues or exercises.
Restricted Stock Units
Service and performance-based restricted stock units are granted to associates at fair value of the shares 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. Service-based restricted stock
units cliff vest three years after the date of grant.
Cincinnati Financial Corporation – 2010 10-K – Page 126
If certain performance conditions 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 conditions for the outstanding groups of performance
restricted stock units and recognizes related compensation costs in accordance with ASC 718,
Compensation, Stock Compensation.
We have market-based awards for which we recognize compensation costs in accordance with ASC 718.
These awards vest according to the level of total shareholder return achieved compared to a peer group over
a three-year period. These awards are valued using a Monte-Carlo valuation on the date of grant, which uses
a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the
volatility of each peer and the correlations of each peer being modeled. Compensation cost is recognized
regardless of whether the market-based performance objective has been satisfied, resulting in shares not
being issued. We make assumptions to develop the Monte-Carlo model as follows:
• Correlation coefficients are based upon the price data used to calculate the historical volatilities.
The correlation coefficients are used to model the way in which each entity tends to move in relation to
each other.
• Expected volatility is based on our stock price over a historical period that approximates the
expected term. We have used the historical volatilities over a range of 2.76-2.86 years for 2010 grants
and 3.13 years for 2008 grants.
• Dividend yield has been modeled assuming that the holder of the award is not entitled to receive
dividends that are paid during the performance period. Dividend yield range from 5.41%-5.94% for
2010 grants and 5.87% for 2008 grants.
• Risk-free rates are equal to the yield, as of the measurement date, of the zero-coupon U.S. Treasury bill
that is commensurate with the performance period. Risk free rates used range from 1.43%-1.50% for
2010 grants and 1.58% for 2008 grants.
Here is a summary of restricted stock unit information for 2010:
(Shares in thousands)
Nonvested at January 1, 2010
Granted
Exercised
Forfeited
Cancelled
Nonvested at December 31, 2010
Service-based
nonvested shares
597 $
290
(158)
(13)
0
716
Weighted-
average grant-
date fair value
31.60
22.27
40.34
25.97
0.00
26.00
Performance-based
nonvested shares
121 $
52
0
0
(24)
149
Weighted-
average grant-
date fair value
29.93
23.97
0.00
0.00
40.74
26.08
Life insurance
Investment operations
SEGMENT INFORMATION
18.
We operate primarily in two industries, property casualty insurance and life insurance. We regularly review
our reporting segments to make decisions about allocating resources and assessing performance:
• Commercial lines property casualty insurance
• Personal lines property casualty insurance
• Excess and Surplus lines property casualty insurance
•
•
As discussed in Note 1, we revised our reportable segments during the fourth quarter of 2010 to establish a
separate reportable segment for excess and surplus lines. This will allow readers to view this business in a
manner similar to how it is managed internally when making operating decisions. This new segment includes
results of The Cincinnati Specialty Underwriters Insurance Company and CSU Producer Resources.
Historically, the excess and surplus lines results were reflected in Other. Prior period data included in this
annual report has been adjusted to represent this new segment.
We report as Other the non-investment operations of the parent company and its non-insurer subsidiary,
CFC Investment Company. Also included in 2009 and 2008 results for this segment are the operations of a
former subsidiary, CinFin Capital Management.
Revenues come primarily from unaffiliated customers:
• All four insurance segments record revenues from insurance premiums earned. Life insurance segment
revenues also include separate account investment management fees.
•
Fee revenues for the commercial and personal insurance segments primarily represent installment fees.
Previously the fee revenues were reflected in Other. Prior period data included in this annual report has
been adjusted to reflect this new presentation.
Cincinnati Financial Corporation – 2010 10-K – Page 127
• Our investment operations’ revenues are pretax net investment income plus realized investment gains
and losses.
• Other revenues are primarily finance/lease income.
Income or loss before income taxes for each segment is reported based on the nature of that business
area’s operations:
•
Income before income taxes for the insurance segments is defined as underwriting income or loss.
o For commercial lines, personal lines and excess and surplus insurance segments, we calculate
underwriting income or loss by recording premiums earned minus loss and loss expenses and
underwriting expenses incurred.
o For the life insurance segment, we calculate underwriting income or loss by recording premiums
earned and separate account investment management fees, minus contract holders’ benefits
and expenses incurred, plus investment interest credited to contract holders.
•
•
Income before income taxes for the investment operations segment is net investment income plus
realized investment gains and losses for investments of the entire company, minus investment interest
credited to contract holders of the life insurance segment.
Loss before income taxes for the Other category is primarily due to interest expense from debt of the
parent company and operating expenses of our headquarters.
Identifiable assets are used by each segment in its operations. We do not separately report the identifiable
assets for the commercial, personal or excess and surplus lines segments because we do not use that
measure to analyze the segments. We include all investment assets, regardless of ownership, in the
investment operations segment.
Cincinnati Financial Corporation – 2010 10-K – Page 128
This table summarizes segment information:
(In millions)
Years ended December 31,
2009
2008
2010
Revenues:
Commercial lines insurance
Commercial casualty
Commercial property
Commercial auto
Workers' compensation
Specialty packages
Surety and executive risk
Machinery and equipment
Commercial lines insurance premiums
Fee revenue
Total commercial lines insurance
Personal lines insurance
Personal auto
Homeowner
Other personal lines
Personal lines insurance premiums
Fee revenue
Total personal lines insurance
Excess and surplus lines insurance
Life insurance
Investment operations
Other
Total
Income (loss) before income taxes:
Insurance underwriting results:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Life insurance
Investment operations
Other
Total
Identifiable assets:
Property casualty insurance
Life insurance
Investment operations
Other
Total
$
$
$
$
$
$
693 $
489
384
311
149
95
33
2,154
2
2,156
337
289
95
721
2
723
49
159
677
8
3,772 $
15 $
(54)
(8)
7
598
(57)
501 $
712 $
485
394
326
147
104
31
2,199
2
2,201
319
276
90
685
1
686
27
143
837
9
3,903 $
(33) $
(80)
(15)
2
768
(60)
582 $
763
487
411
375
144
107
29
2,316
2
2,318
325
277
87
689
1
690
5
128
675
8
3,824
72
(81)
(7)
4
612
(60)
540
December 31,
2010
December 31,
2009
2,008 $
1,214
11,543
330
15,095 $
2,237
1,176
10,684
343
14,440
Cincinnati Financial Corporation – 2010 10-K – Page 129
QUARTERLY SUPPLEMENTARY DATA (UNAUDITED)
19.
This table includes unaudited quarterly financial information for the years ended December 31, 2010
and 2009:
(Dollars in millions except per share data)
2010
Revenues *
Income before income taxes
Net income
Net income per common share—basic
Net income per common share—diluted
2009
Revenues *
Income (loss) before income taxes
Net income (loss)
Net income (loss) per common share—basic
Net income (loss) per common share—diluted
1st
2nd
Quarter
3rd
4th
Full year
$
$
887 $
85
68
0.42
0.42
890 $
34
35
0.22
0.22
878 $
21
27
0.17
0.17
874 $
(50)
(19)
(0.12)
(0.12)
1,071 $
221
156
0.95
0.95
1,007 $
244
171
1.05
1.05
936 $
174
126
0.78
0.77
1,133 $
355
245
1.50
1.50
3,772
501
377
2.32
2.31
3,903
582
432
2.66
2.65
Note: The sum of the quarterly reported per share amounts may not equal the full year as each is computed independently.
*
Revenues including realized investment gains and losses, which are integral to our financial results over the long term, may cause
this value to fluctuate substantially because we have substantial discretion in the timing of investment sales. Also, applicable
accounting standards require us to recognize gains and losses from certain changes in fair values of securities and embedded
derivatives without actual realization of those gains and losses. We discuss realized investment gains for the past three years in
Item 7, Investments Results of Operations, Page 75.
Cincinnati Financial Corporation – 2010 10-K – Page 130
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, 2010. 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, 2010,
there were no changes in our internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. Management’s Annual
Report on Internal Control Over Financial Reporting and the Report of the Independent Registered Public
Accounting Firm are set forth in Item 8, Pages 99 and 100.
Item 9B. Other Information
None
Cincinnati Financial Corporation – 2010 10-K – Page 131
Part III
Our Proxy Statement will be filed with the SEC in preparation for the 2010 Annual Meeting of Shareholders
no later than March 31, 2011. As permitted in Paragraph G(3) of the General Instructions for Form 10-K, we
are incorporating by reference to that statement portions of the information required by Part III as noted in
Item 10 through Item 14 below.
Item 10.
Directors, Executive Officers and Corporate
Governance
a)
b)
c)
The following sections of our Proxy Statement for our Annual Meeting of Shareholders to be held
April 30, 2011, are incorporated herein by reference: “Security Ownership of Principal Shareholders
and Management,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Information about
the Board of Directors,” and “Governance of Your Company,”
Information about the “Code of Ethics for Senior Financial Officers” appeared in the 2004 Proxy
Statement as an appendix and is available at www.cinfin.com/investors. Our Code of Ethics applies
to those who are responsible for preparing and disclosing our financial information. This includes our
chief executive officer, chief financial officer and others performing similar functions or reporting
directly to these officers.
Set forth below is information concerning the company’s executive officers who are not also
directors of the company, as of February 25, 2011.
Name and Age
as of
February 25
Donald J. Doyle, Jr.,
CPCU, AIM (44)
Craig W. Forrester, CLU
(52)
Martin F. Hollenbeck,
CFA, CPCU (51)
Steven J. Johnston, FCAS,
MAAA, CFA (51)
Thomas A. Joseph, CPCU
(55)
Primary Title(s) and Business Responsibilities
Since February 2006
Senior vice president of The Cincinnati Insurance Company.
Responsible since 2007 for excess and surplus lines underwriting
and operations; responsible until 2007 for internal audit.
Senior vice president and chief technology officer of
The Cincinnati Insurance Company. Responsible for information
technology hardware systems and new technologies.
President and chief operating officer since 2008 of CFC
Investment Company, a subsidiary. President from 2008 to 2009
of CinFin Capital Management Company, a former subsidiary.
Chief investment officer since 2009, senior vice president,
assistant secretary and assistant treasurer since 2008 of
Cincinnati Financial Corporation. Chief investment officer and
senior vice president since 2009 of The Cincinnati Insurance
Company; vice president until 2009. Responsible for investment
operations and leasing and financing services; responsible until
2009 for asset management services operations.
Senior vice president, chief financial officer and secretary since
2008 of Cincinnati Financial Corporation and The Cincinnati
Insurance Company. Treasurer since 2008 of Cincinnati
Financial. From 2006 to 2008, consulted on risk management,
economic capital and executive compensation modeling, and
agency valuation. Until 2006, chief financial officer, senior vice
president and treasurer of State Auto Financial Corporation.
President since 2008 of The Cincinnati Casualty Company.
Senior vice president of The Cincinnati Insurance Company.
Responsible for property casualty reinsurance and for personal
lines underwriting and operations; responsible until 2008 for
commercial lines underwriting operations except machinery and
equipment.
Executive
Officer
Since
2008
2003
2008
2008
2003
Cincinnati Financial Corporation – 2010 10-K – Page 132
Name and Age
as of
February 25
John S. Kellington (49)
Eric N. Mathews, CPCU,
AIAF (55)
Martin J. Mullen, CPCU
(55)
David H. Popplewell,
FALU, LLIF (66)
Jacob F. Scherer, Jr. (58)
Primary Title(s) and Business Responsibilities
Since February 2006
Senior vice president and chief information officer of The
Cincinnati Insurance Company. Responsible for enterprise
strategic technology and all technology activities. From 2007 to
2010, senior vice president of ACORD Corporation, a nonprofit
group that develops global insurance standards. Until 2007,
senior vice president and chief technology officer of Ohio
Casualty Group.
Principal accounting officer since 2008 and vice president,
assistant secretary and assistant treasurer. Senior vice president of
The Cincinnati Insurance Company.
Senior vice president and chief claims officer since 2008 of The
Cincinnati Insurance Company; vice president until 2008.
Responsible for headquarters and field claims operations, special
investigations unit and claims administration; responsible until
2008 for casualty claims.
President and chief operating officer of The Cincinnati Life
Insurance Company. Responsible for life insurance underwriting
and operations.
Executive vice president since 2008 of The Cincinnati Insurance
Company; senior vice president until 2008. Responsible for sales
and marketing, including new commercial lines business,
relationships with independent agencies and, since 2008,
meetings and travel.
Joan O. Shevchik, CPCU,
CLU (60)
Senior vice president of The Cincinnati Insurance Company.
Responsible for corporate communications.
Charles P. Stoneburner II,
CPCU, AIM (58)
Timothy L. Timmel (62)
Senior vice president since 2008 of The Cincinnati Insurance
Company; vice president until 2008. Responsible for commercial
lines underwriting and operations, loss control, premium audit
and staff underwriting; responsible until 2008 for field claims
operations.
Senior vice president of The Cincinnati Insurance Company.
Responsible for operations including corporate communications,
government relations, learning and development, legal, personnel
and, since 2008, administrative services, data entry, facilities,
maintenance, printing, regulatory and consumer relations,
security and information security; also responsible until 2008 for
field claims operations.
Executive
Officer
Since
2010
2001
2008
1997
1995
2003
2008
1997
Executive Compensation
Item 11.
The “Compensation of Named Executive Officers and Directors,” section of our Proxy Statement for our
Annual Meeting of Shareholders to be held April 30, 2011, which includes the “Report of the Compensation
Committee,” “Compensation Committee Interlocks and Insider Participation,” and the “Compensation
Discussion and Analysis,” is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The “Security Ownership of Principal Shareholders and Management” section of our Proxy Statement
for our Annual Meeting of Shareholders to be held April 30, 2011, is incorporated herein by
reference.
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 31. Additional information on share-based compensation under
our equity compensation plans is available in Item 8, Note 17 of the Consolidated Financial
Statements, Page 125.
a)
b)
Cincinnati Financial Corporation – 2010 10-K – Page 133
Item 13.
Certain Relationships and Related Transactions, and
Director Independence
The following sections of our Proxy Statement for our Annual Meeting of Shareholders to be held
April 30, 2011, are incorporated by reference: “Governance of Your Company — Director Independence” and
“Governance of Your Company — Certain Relationships and Transactions.”
Principal Accountant Fees and Services
Item 14.
The “Audit-Related Matters,” section of our Proxy Statement for our Annual Meeting of Shareholders to be
held April 30, 2011, which includes the “Proposal 2—Ratification of Selection of Independent Registered
Public Accounting Firm,” “Report of the Audit Committee,” “Fees Billed by the Independent Registered Public
Accounting Firm,” “Services Provided by the Independent Registered Public Accounting Firm,” is incorporated
herein by reference.
Item 15.
a)
b)
c)
Part IV
Exhibits, Financial Statement Schedules
Financial Statements – information contained in Part II, Item 8, of this report, Page 101 to Page 104
Exhibits – see Index of Exhibits, Page 146
Financial Statement Schedules
Schedule I – Summary of Investments -- Other than Investments in Related Parties, Page 135
Schedule II – Condensed Financial Statements of Parent Company, Page 137
Schedule III – Supplementary Insurance Information, Page 140
Schedule IV – Reinsurance, Page 142
Schedule V – Valuation and Qualifying Accounts, Page 143
Schedule VI – Supplementary Information Concerning Property Casualty Insurance Operations,
Page 144
Cincinnati Financial Corporation – 2010 10-K – Page 134
Cincinnati Financial Corporation and Subsidiaries
Summary of Investments - Other than Investments in Related Parties
SCHEDULE I
(In millions)
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 Casualty Company
The Cincinnati Specialty Underwriters 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
CSU Producers Resources Inc.
The Cincinnati Life Insurance Company
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
CSU Producers Resources Inc.
Cincinnati Financial Corporation
Total
Total fixed maturities
Cost or
amortized cost
At December 31, 2010
Fair
value
Balance sheet
$
$
0 $
4
4
1 $
4
5
70
3
3
125
201
3
3
2,543
148
36
114
1
201
3,043
61
4
4
69
2,353
53
21
96
1,830
8
207
4,568
7,888 $
70
3
3
124
200
3
3
2,636
152
38
116
1
200
3,143
61
4
4
69
2,552
58
22
103
1,983
8
237
4,963
8,383 $
1
4
5
70
3
3
124
200
3
3
2,636
152
38
116
1
200
3,143
61
4
4
69
2,552
58
22
103
1,983
8
237
4,963
8,383
Cincinnati Financial Corporation – 2010 10-K – Page 135
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:
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
Nonredeemable preferred stocks:
The Cincinnati Insurance Company
The Cincinnati Life Insurance Company
Total
Total equity securities
Other invested assets:
Real estate:
Cincinnati Financial Corporation
Policy loans:
The Cincinnati Life Insurance Company
Limited partnerships:
Cincinnati Financial Corporation
Other investments:
Cincinnati Financial Corporation
Total other invested assets
Total investments
Cost or
amortized cost
At December 31, 2010
Fair
value
Balance sheet
$
$
$
$
$
1,416 $
41
11
30
100
613
2,211
68
7
75
2,286 $
5
40
28
11
84
10,258
1,977 $
64
13
33
90
763
2,940
88
13
101
3,041 $
—
—
—
—
—
—
$
$
$
1,977
64
13
33
90
763
2,940
88
13
101
3,041
5
40
28
11
84
11,508
Cincinnati Financial Corporation – 2010 10-K – Page 136
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
Investment real estate, net
Other invested assets
Cash and cash equivalents
Equity in net assets of subsidiaries
Investment income receivable
Land, building and equipment, net, for company use (accumulated depreciation:
2010—$77; 2009—$71)
Prepaid income tax
Other assets
Due from subsidiaries
Total assets
LIABILITIES
Dividends declared but unpaid
Deferred federal income tax
Long-term debt
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,
2010
2009
$
$
$
$
241 $
763
5
39
38
4,695
5
159
15
15
54
6,029 $
65 $
42
790
100
997
393
1,091
3,980
769
(1,201)
5,032
6,029 $
261
683
6
36
54
4,441
5
165
18
14
53
5,736
64
16
790
106
976
393
1,081
3,862
624
(1,200)
4,760
5,736
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and
Notes included in Part II, Item 8, Page 105.
Cincinnati Financial Corporation – 2010 10-K – Page 137
SCHEDULE II (CONTINUED)
Cincinnati Financial Corporation (parent company only)
Condensed Statements of Income
(In millions)
REVENUES
Investment income, net of expenses
Realized gains on investments
Other revenue
Total revenues
EXPENSES
Interest expense
Other expenses
Total expenses
INCOME BEFORE INCOME TAXES AND EARNINGS OF SUBSIDIARIES
PROVISION (BENEFIT) FOR INCOME TAXES
NET INCOME BEFORE EARNINGS OF SUBSIDIARIES
Increase in equity of subsidiaries
NET INCOME
Years ended December 31,
2009
2008
2010
$
41 $
17
14
72
52
24
76
(4)
(7)
3
374
41 $
135
15
191
52
27
79
112
32
80
352
$
377 $
432 $
67
54
14
135
51
25
76
59
3
56
373
429
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and
Notes included in Part II, Item 8, Page 105.
Cincinnati Financial Corporation – 2010 10-K – Page 138
SCHEDULE II (CONTINUED)
Cincinnati Financial Corporation (parent company only)
Condensed Statements of Cash Flows
(In millions)
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
Dividends from subsidiaries
Changes in:
Increase in equity of subsidiaries
Investment income receivable
Current federal income taxes
Deferred income taxes
Other assets
Other liabilities
Net cash (used in) 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 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
Other
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
Years ended December 31,
2009
2008
2010
$
377 $
432 $
7
(17)
220
(374)
0
3
2
0
(12)
206
32
21
85
(27)
(92)
0
0
0
0
19
0
(252)
(10)
(2)
21
2
0
(241)
(16)
54
38 $
8
(135)
50
(352)
(1)
(104)
24
(2)
(22)
(102)
22
15
408
(206)
(246)
65
(1)
(5)
0
52
0
(249)
1
0
8
0
0
(240)
(290)
344
54 $
$
429
6
(54)
170
(373)
14
92
(20)
4
8
276
0
24
629
0
(125)
(64)
(14)
(9)
9
450
(20)
(250)
(138)
4
15
0
(9)
(398)
328
16
344
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and
Notes included in Part II, Item 8, Page 105.
Note to Schedule II:
We have changed our presentation related to equity in net income of subsidiaries. We have reclassified dividends from
subsidiaries in the condensed statements of income to be included within a single line, “Increase in equity of
subsidiaries.” We have changed presentation in the condensed statements of cash flows to show separately “Dividends
from subsidiaries” and “Increase in equity of subsidiaries” within cash flows from operating activities. We also have
condensed various lines for presentation purposes. Prior year amounts have been reclassified to conform to current
year presentation.
Cincinnati Financial Corporation – 2010 10-K – Page 139
Cincinnati Financial Corporation and Subsidiaries
Supplementary Insurance Information
SCHEDULE III
(In millions)
Deferred policy acquisition costs:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total property casualty insurance
Life insurance
Total
Gross future policy benefits, losses, claims and expense losses:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total property casualty insurance
Life insurance
Total (1)
Gross unearned premiums:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total property casualty insurance
Life insurance
Total (1)
Other policy claims and benefits payable:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total property casualty insurance
Life insurance
Total (1)
Earned premiums:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total property casualty insurance
Life insurance
Consolidated eliminations
Total
Years ended December 31,
2009
2008
2010
$
$
$
$
$
$
$
$
$
$
217 $
84
9
310
178
488 $
3,728 $
353
56
4,137
2,073
6,210 $
1,116 $
401
34
1,551
2
1,553 $
0 $
0
0
0
24
24 $
2,154 $
721
49
2,924
158
0
3,082 $
219 $
78
6
303
178
481 $
3,725 $
349
22
4,096
1,817
5,913 $
1,112 $
372
23
1,507
2
1,509 $
0 $
0
0
0
12
12 $
2,199 $
685
27
2,911
143
0
3,054 $
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
Cincinnati Financial Corporation – 2010 10-K – Page 140
SCHEDULE III (CONTINUED)
Cincinnati Financial Corporation and Subsidiaries
Supplementary Insurance Information
(In millions)
Investment income, net of expenses:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total property casualty insurance (2)
Life insurance
Total
Benefits, claims losses and settlement expenses:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total property casualty insurance
Life insurance
Consolidated eliminations
Total
Amortization of deferred policy acquisition costs:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total property casualty insurance
Life insurance
Total (3)
Other underwriting and insurance expenses:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total property casualty insurance
Life insurance
Total (3)
Net written premiums:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total property casualty insurance
Accident health insurance
Consolidated eliminations
Total
Years ended December 31,
2009
2008
2010
$
$
$
$
$
$
$
$
$
$
0 $
0
0
348
129
477 $
1,437 $
537
41
2,015
170
(5)
2,180 $
454 $
148
14
616
37
653 $
250 $
92
2
344
24
368 $
2,155 $
750
58
2,963
3
0
2,966 $
0 $
0
0
336
122
458 $
1,515 $
551
20
2,086
160
(4)
2,242 $
458 $
143
10
611
27
638 $
261 $
71
11
343
23
366 $
2,181 $
691
39
2,911
3
0
2,914 $
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
Notes to Schedule III:
(1) The sum of gross future policy benefits, losses, claims and expense losses, gross unearned premium and other policy
claims and benefits payable is equal to the sum of Loss and loss expense reserves, Life policy reserves and Unearned
premiums reported in the company’s consolidated balance sheets, Page 101.
(2) This segment information is not regularly allocated to segments and reviewed by company management in making
decisions about resources to be allocated to the segments or to assess their performance.
(3) The sum of amortization of deferred policy acquisition costs and other underwriting and insurance expenses is equal
to underwriting, acquisition and insurance expenses in the consolidated statements of income.
Cincinnati Financial Corporation – 2010 10-K – Page 141
SCHEDULE IV
(Dollars in millions)
Gross amounts:
Life insurance in force
Earned premiums
Commercial lines insurance
Personal lines insurance
Excess and 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
Excess and surplus lines insurance
Total
Life insurance
Total
Assumed amounts from other companies:
Life insurance in force
Earned premiums
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total property casualty insurance
Life insurance
Total
Net amounts:
Life insurance in force
Earned premiums
Commercial lines insurance
Personal lines insurance
Excess and 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
Excess and surplus lines insurance
Total property casualty insurance
Life insurance
Total
Cincinnati Financial Corporation and Subsidiaries
Reinsurance
Years ended December 31,
2009
2008
2010
$
$
$
$
$
$
$
$
$
$
$
$
74,123
2,281
746
53
3,080
211
0
3,291
35,016
136
26
4
166
53
219
1
9
1
0
10
0
10
39,108
2,154
721
49
2,924
158
0
3,082
$
$
$
$
$
$
$
$
$
$
$
$
69,814
2,324
715
28
3,067
196
0
3,263
34,232
137
31
1
169
53
222
1
12
1
0
13
0
13
35,583
2,199
685
27
2,911
143
0
3,054
$
$
$
$
$
$
$
$
$
$
$
$
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
0.0 %
0.4 %
0.2
0.0
0.4
0.0
0.4
0.0 %
0.5 %
0.2
0.0
0.4
0.0
0.4
0.0 %
0.5 %
0.3
0.0
0.4
0.0
0.4
Cincinnati Financial Corporation – 2010 10-K – Page 142
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
2010
At December 31,
2009
2008
$
$
3 $
2
(2)
3 $
4 $
2
(3)
3 $
4
3
(3)
4
Cincinnati Financial Corporation – 2010 10-K – Page 143
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
Excess and surplus lines insurance
Total
Reserves for unpaid claims and claim adjustment expenses:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total
Reserve discount deducted
Unearned premiums:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total
Earned premiums:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total
Investment income:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total (1)
Loss and loss expenses incurred related to current accident year:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total
Loss and loss expenses incurred related to prior accident years:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total
Amortization of deferred policy acquisition costs:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total
Paid loss and loss expenses:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total
Net written premiums:
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Total
Years ended December 31,
2009
2008
2010
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
217 $
84
9
310 $
3,728 $
353
56
4,137 $
0 $
1,116 $
401
34
1,551 $
2,154 $
721
49
2,924 $
0 $
0
0
348 $
1,706 $
571
42
2,319 $
(269) $
(34)
(1)
(304) $
454 $
148
14
616 $
1,330 $
526
9
1,865 $
2,155 $
750
58
2,963 $
219 $
78
6
303 $
3,725 $
349
22
4,096 $
0 $
1,112 $
372
23
1,507 $
2,199 $
685
27
2,911 $
0 $
0
0
336 $
1,662 $
591
21
2,274 $
(147) $
(40)
(1)
(188) $
458 $
143
10
611 $
1,348 $
573
2
1,923 $
2,181 $
691
39
2,911 $
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
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 – 2010 10-K – Page 144
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 25, 2011
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.
Title
Date
Chairman of the Board
February 25, 2011
/S/ Kenneth W. Stecher
President, Chief Executive Officer and Director
February 25, 2011
Kenneth W. Stecher
/S/ Steven J. Johnston
Steven J. Johnston
/S/ William F. Bahl
William F. Bahl
/S/ Gregory T. Bier
Gregory T. Bier
/S/ Linda W. Clement-Holmes
Linda W. Clement-Holmes
/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
Chief Financial Officer, Senior Vice President,
Secretary and Treasurer
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 25, 2011
February 25, 2011
February 25, 2011
February 25, 2011
February 25, 2011
February 25, 2011
February 25, 2011
February 25, 2011
February 25, 2011
February 25, 2011
February 25, 2011
February 25, 2011
Cincinnati Financial Corporation – 2010 10-K – Page 145
INDEX OF EXHIBITS
Exhibit No.
3.1
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
10.13
10.14
10.15
10.16
10.17
10.18
10.19
Exhibit Description
Amended and Restated Articles of Incorporation of Cincinnati Financial Corporation
Regulations of Cincinnati Financial Corporation (incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2010, Exhibit 3.2) (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)
Cincinnati Financial Corporation Directors’ Stock Plan of 2009 (incorporated by reference to the company’s
definitive Proxy Statement dated March 20, 2009)
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)
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 Annual Incentive Compensation Plan of 2009 (incorporated by reference to
the company’s definitive Proxy Statement dated March 20, 2009)
Cincinnati Financial Corporation 2006 Stock Compensation Plan (incorporated by reference to the company’s
definitive Proxy Statement dated March 30, 2007)
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 18, 2010)
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)
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)
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)
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)
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)
Cincinnati Financial Corporation – 2010 10-K – Page 146
Exhibit No.
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
11
Exhibit Description
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 18, 2008)
Form of Incentive Compensation Agreement for the Cincinnati Financial Corporation Incentive Compensation
Plan of 2009 (incorporated by reference to Exhibit 10.1 filed with the company's Current Report on Form 8-K
dated March 16, 2009)
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)
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
(incorporated by reference to Exhibit 10.38 filed with the company’s Annual Report on Form 10-K dated
February 27, 2009)
Restricted Stock Unit Agreement for John J. Schiff, Jr. dated November 14, 2008 (incorporated by reference
to Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated November 14, 2008)
Restricted Stock Unit Agreement for James E. Benoski dated November 14, 2008 (incorporated by reference
to Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated November 14, 2008)
Restricted Stock Unit Agreement for Kenneth W. Stecher dated November 14, 2008 (incorporated by
reference to Exhibit 10.4 filed with the company’s Current Report on Form 8-K dated November 14, 2008)
Restricted Stock Unit Agreement for Steven J. Johnston dated November 14, 2008 (incorporated by
reference to Exhibit 10.5 filed with the company’s Current Report on Form 8-K dated November 14, 2008)
Restricted Stock Unit Agreement for Thomas A. Joseph dated November 14, 2008 (incorporated by reference
to Exhibit 10.6 filed with the company’s Current Report on Form 8-K dated November 14, 2008)
Restricted Stock Unit Agreement for J.F. Scherer dated November 14, 2008 (incorporated by reference to
Exhibit 10.7 filed with the company’s Current Report on Form 8-K dated November 14, 2008)
Incentive Compensation Award Agreement for Kenneth W. Stecher dated March 16, 2009 under Incentive
Compensation Plan of 2009 (incorporated by reference to Exhibit 10.2 filed with the company’s Current
Report on Form 8-K dated March 16, 2009)
Incentive Compensation Award Agreement for Steven J. Johnston dated March 16, 2009 under Incentive
Compensation Plan of 2009 (incorporated by reference to Exhibit 10.3 filed with the company’s Current
Report on Form 8-K dated March 16, 2009)
Credit Agreement by and among Cincinnati Financial Corporation, CFC Investment Company, and PNC Bank,
National Association, dated August 27, 2010 (incorporated by reference to Exhibit 10.1 filed with the
company’s Current Report on Form 8-K dated August 27, 2010) (which supersedes that certain Offer and
Acceptance of terms to renew $75 million unsecured line of credit with PNC Bank, National Association,
effective June 30, 2009, that was filed with and described in the company’s Current Report on Form 8-K
dated July 7, 2009) (incorporated by reference to Exhibit 10.1 filed with the company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2009).
Swap Agreement by and among Cincinnati Financial Corporation, CFC Investment Company and PNC Bank,
National Association, dated August 31, 2009 (incorporated by reference to Exhibit 10.2 filed with the
company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
Letter Agreement by and among Cincinnati Financial Corporation , CFC Investment Company and PNC Bank,
National Association, dated August 27, 2010 renewing $75 Million committed line of credit pursuant to the
Credit Agreement referenced in Exhibit 10.39 above (incorporated by reference to Exhibit 10.1 filed with the
Company’s Current Report on Form 8-K dated August 27, 2010)
Statement re: Computation of per share earnings for the years ended December 31, 2010, 2009, and 2008
contained in Part II, Item 8, Note 12 to the Consolidated Financial Statements
Cincinnati Financial Corporation – 2010 10-K – Page 147
Exhibit No.
14
21
23
31A
31B
32
Exhibit Description
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 – 2010 10-K – Page 148
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 25, 2011, 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 (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to the company’s change in method of
accounting for the recognition and presentation of other-than-temporary impairments in 2009), appearing in
this Annual Report on Form 10-K of Cincinnati Financial Corporation for the year ended December 31, 2010.
/S/ Deloitte & Touche LLP
Cincinnati, Ohio
February 25, 2011
Cincinnati Financial Corporation – 2010 10-K – Page 149
EXHIBIT 31A
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES OXLEY ACT OF 2002
I, Kenneth W. Stecher, certify that:
1.
2.
I have reviewed this Annual Report on Form 10-K of Cincinnati Financial Corporation;
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;
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;
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:
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;
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 principles;
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
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
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):
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
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.
3.
4.
5.
a)
b)
c)
d)
a)
b)
Date: February 25, 2011
/S/ Kenneth W. Stecher
Kenneth W. Stecher
President and Chief Executive Officer
Cincinnati Financial Corporation – 2010 10-K – Page 150
EXHIBIT 31B
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES OXLEY ACT OF 2002
I, Steven J. Johnston, certify that:
1.
2.
I have reviewed this Annual Report on Form 10-K of Cincinnati Financial Corporation;
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;
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;
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:
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;
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 principles;
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
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
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):
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
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.
3.
4.
5.
a)
b)
c)
d)
a)
b)
Date: February 25, 2011
/S/ Steven J. Johnston
Steven J. Johnston, FCAS, MAAA, CFA
Chief Financial Officer, Senior Vice President, Secretary and Treasurer
Cincinnati Financial Corporation – 2010 10-K – Page 151
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.
2.
the report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
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 25, 2011
/S/ Kenneth W. Stecher
Kenneth W. Stecher
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 – 2010 10-K – Page 152
CinCinnAti FinAnCiAl CorporAtion DireCtors AnD oFFiCers
(as of March 3, 2011)
Directors
William F. Bahl, CFA, CIC
Chairman of the Board
Bahl & Gaynor Investment Counsel Inc.
(Independent registered investment adviser)
Director since 1995 (1)(4)(5*)
Gregory T. Bier, CPA (Ret.)
Managing Partner (Ret.), Cincinnati Office
Deloitte & Touche LLP
(Independent registered public accounting firm)
Director since 2006 (4)
Linda W. Clement-Holmes
Chief Diversity Officer and
Senior Vice President
Global Business Services
Procter & Gamble Company
(Consumer products)
Director since 2010 (1)
Kenneth C. Lichtendahl
Senior Advisor (former President and Chief
Executive Officer)
Tradewinds Beverage Company
(Ready-to-drink tea and juice manufacturer)
Director Since 1988 (1*)(5)
W. Rodney McMullen
President and Chief Operating Officer
The Kroger Company
(Retail grocery chain)
Director since 2001 (2*)(3)(4)
Gretchen W. Price
Executive Vice President and
Chief Financial Officer
Philosophy Inc.
(Prestige beauty brand)
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.
(Independent insurance agency)
Director since 1975 (4)
Douglas S. Skidmore
President and Chief Executive Officer
Skidmore Sales & Distributing Company Inc.
(Food ingredient distributor)
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.
(Supplier of aggregates and concrete)
Director since 2005 (1)(3)
Larry R. Webb, CPCU
President
Webb Insurance Agency Inc.
(Independent insurance agency)
Director since 1979 (3)
E. Anthony Woods
Chairman and Chief Executive Officer
SupportSource LLC
(Management, financial and investment
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
Chief Investment Officer, Senior Vice President,
Assistant Secretary and Assistant Treasurer
Eric N. Mathews, CPCU, AIAF
Principal Accounting Officer, Vice President,
Assistant Secretary and Assistant Treasurer
W.F. Bahl
G.T. Bier
L.W. Clement-
Holmes
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
Directors Emeriti
Michael Brown
Robert J. Driehaus
Jackson H. Randolph
Lawrence H. Rogers II
John Sawyer
Frank J. Schultheis
David B. Sharrock
John M. Shepherd
Thomas J. Smart
Alan R. Weiler, CPCU
William H. Zimmer
in remembrAnCe
Director Emeritus John E. Field, CPCU, served
from 1995 to 2004. He contributed an
independent agent perspective,
understanding that businesses prosper when
their leaders foster vibrant local communities.
John passed away on March 8, 2011.
shAreholDer
inFormAtion
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)
___________________________________________________________________________________
2010
___________________________________________________________________________________
2009
_________________
1st
Quarter:
1st
High . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29.65 $ 30.38 $ 29.39 $ 32.27 $ 29.66
17.84
Low . . . . . . . . . . . . . . . . . . . . . . . . . . .
22.87
Period-end close. . . . . . . . . . . . . . . .
0.39
Cash dividends declared . . . . . . . .
28.68
31.69
0.40
25.65
25.87
0.395
25.25
28.82
0.40
25.50
28.91
0.395
2nd
4th
3rd
_________________
_________________
_________________
_________________
_________________
2nd
$ 26.94
21.40
22.35
0.39
_________________
3rd
$ 26.31
21.30
25.99
0.395
_________________
4th
$ 26.89
25.05
26.24
0.395
ANNUAL MEETiNg
Shareholders are invited to attend the Annual Meeting of Shareholders of Cincinnati Financial Corporation at
9:30 a.m. on Saturday, April 30, 2011, 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 Cincinnati Financial Corporation’s secretary, Steven J. Johnston, FCAS, MAAA, CFA,
chief financial officer, are shared with the appropriate individual(s). Or, you may directly access services:
investors: Investor Relations responds to investor inquiries about the company and its performance.
Dennis E. McDaniel, CPA, CMA, CFM, CPCU – Vice President, Investor Relations Officer
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 the
company 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
Please recycle.