2012 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 direct written premiums. A select
group of independent agencies actively markets our business, home and
auto insurance within their communities. These agents offer our standard
market and excess and surplus commercial lines policies in 39 states and our
personal lines policies in 31 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.
Three competitive advantages distinguish 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.
Robert J. Driehaus
1928–2012
Bob Driehaus retired as the company’s first
chief financial officer in 1997. At that time,
Bob was the longest serving
associate, having joined the
company in 1954 as a junior
accountant. He became
treasurer in 1961, a Cincinnati
Insurance director in 1969
and a Cincinnati Financial
director in 1982, serving until
1997 when he was named director emeritus.
Bob was instrumental in the formation of
Cincinnati Financial and the public company
structure that allowed us to grow to our current
size and capital strength.
Item 1.
Item 5.
Item 6.
Item 7.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
2012 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Part I ........................................................................................................................................................................ 3
Business .......................................................................................................................................... 3
Cincinnati Financial Corporation – Introduction............................................................................................... 3
Our Business and Our Strategy ...................................................................................................................... 3
Our Segments................................................................................................................................................ 12
Other .............................................................................................................................................................. 23
Regulation ...................................................................................................................................................... 24
Risk Factors .................................................................................................................................. 26
Unresolved Staff Comments ......................................................................................................... 33
Properties ...................................................................................................................................... 33
Legal Proceedings......................................................................................................................... 33
Mine Safety Disclosures ................................................................................................................ 33
Part II ..................................................................................................................................................................... 34
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ..................................................................................................... 34
Selected Financial Data ................................................................................................................ 37
Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 38
Introduction .................................................................................................................................................... 38
Executive Summary ....................................................................................................................................... 38
Critical Accounting Estimates ........................................................................................................................ 43
Recent Accounting Pronouncements ............................................................................................................ 50
Results of Operations .................................................................................................................................... 51
Liquidity and Capital Resources .................................................................................................................... 83
Safe Harbor Statement .................................................................................................................................. 98
Quantitative and Qualitative Disclosures About Market Risk ...................................................... 100
Introduction .................................................................................................................................................. 100
Fixed-Maturity Investments ......................................................................................................................... 101
Equity Investments ...................................................................................................................................... 102
Application of Asset Impairment Policy ....................................................................................................... 102
Financial Statements and Supplementary Data .......................................................................... 105
Responsibility for Financial Statements ...................................................................................................... 105
Management’s Annual Report on Internal Control Over Financial Reporting ............................................. 106
Report of Independent Registered Public Accounting Firm ........................................................................ 107
Consolidated Balance Sheets ..................................................................................................................... 108
Consolidated Statements of Comprehensive Income ................................................................................. 109
Consolidated Statements of Shareholders’ Equity ...................................................................................... 110
Consolidated Statements of Cash Flows .................................................................................................... 111
Notes to Consolidated Financial Statements .............................................................................................. 112
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 140
Item 9A. Controls and Procedures ............................................................................................................ 140
Item 9B. Other Information ........................................................................................................................ 140
Part III .................................................................................................................................................................. 141
Directors, Executive Officers and Corporate Governance .......................................................... 141
Executive Compensation ............................................................................................................ 143
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ........................................................................................................................................ 143
Certain Relationships and Related Transactions, and Director Independence .......................... 143
Principal Accounting Fees and Services ..................................................................................... 143
Part IV ................................................................................................................................................................. 143
Exhibits, Financial Statement Schedules .................................................................................... 143
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 7A.
Item 8.
Cincinnati Financial Corporation – 2012 10-K - 1
United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
OF 1934.
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _____________________ to _____________________.
For the fiscal year ended December 31, 2012.
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 (§229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of "large accelerated filer,” “accelerated filer" and
smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of voting stock held by nonaffiliates of the Registrant was $5,608,134,376 as of
June 30, 2012.
As of February 21, 2013, there were 163,227,008 shares of common stock outstanding.
Document Incorporated by Reference
Portions of the definitive Proxy Statement for Cincinnati Financial Corporation’s Annual Meeting of Shareholders
to be held on April 27, 2013, are incorporated by reference into Part III of this Form 10-K.
Cincinnati Financial Corporation – 2012 10-K - 2
Part I
Item 1. Business
CINCINNATI FINANCIAL CORPORATION – INTRODUCTION
We are an Ohio corporation formed in 1968. Our lead subsidiary, The Cincinnati Insurance Company, was
founded in 1950. Our main business is property casualty insurance marketed through independent
insurance agencies in 39 states. Our headquarters is in Fairfield, Ohio. At year-end 2012, we employed
4,057 associates, with 2,784 headquarters associates providing support to 1,273 field associates.
Cincinnati Financial Corporation owns 100 percent of three subsidiaries: The Cincinnati Insurance
Company, CSU Producer Resources Inc. and CFC Investment Company. In addition, the parent company
has an investment portfolio, owns the headquarters property and is responsible for corporate borrowings
and shareholder dividends.
The Cincinnati Insurance Company owns 100 percent of our four additional insurance subsidiaries. Our
standard market property casualty insurance group includes two of those subsidiaries – The Cincinnati
Casualty Company and The Cincinnati Indemnity Company. This group writes a broad range of business,
homeowner and auto policies. Other subsidiaries of The Cincinnati Insurance Company include
The Cincinnati Life Insurance Company, which provides life insurance, disability income policies and fixed
annuities, and The Cincinnati Specialty Underwriters Insurance Company, which offers excess and surplus
lines insurance products.
The two noninsurance subsidiaries of Cincinnati Financial Corporation are CSU Producer Resources, which
offers insurance brokerage services to our independent agencies so their clients can access our excess and
surplus lines insurance products; and CFC Investment Company, which offers commercial leasing and
financing services to our agencies, their clients and other customers.
Our filings with the U.S. Securities and Exchange Commission (SEC) are available, 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:
• providing insurance market stability through financial strength
• producing competitive, up-to-date products and services
• developing associates committed to superior service
A select group of independent agencies in 39 states actively markets our property casualty insurance within
their communities. At year-end 2012, standard market commercial lines and excess and surplus lines
policies were marketed in all of those states, while personal lines policies were marketed in 31 of those
states. Within our select group of agencies, we also seek to become the life insurance carrier of choice and
to help agents and their clients – our policyholders – by offering leasing and financing services.
Three competitive advantages distinguish our company, positioning us to build shareholder value and to be
successful overall:
• Commitment to our network of professional independent insurance agencies and to their
continued success
• Financial strength that lets us be a consistent market for our agents’ business, supporting stability
and confidence
Cincinnati Financial Corporation – 2012 10-K - 3
• Operating structure that supports local decision making, showcasing our claims excellence and allowing
independent agents, who represent multiple carriers
captive agents, who represent one carrier exclusively
focus on one or more states or regions (regional carrier)
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 approximately half of
overall U.S. property casualty insurance premiums and approximately two-thirds of commercial property
casualty insurance premiums, according to the Insurance Information Institute.
We are committed exclusively to the independent agency channel. The independent agencies that we
choose to market our standard lines insurance products share our philosophies. They do business person to
person; offer broad, value-added services; maintain sound balance sheets; and manage their agencies
professionally, targeting long-term success. We develop our relationships with agencies that are active in
their local communities, providing important knowledge of local market trends, opportunities and challenges.
In addition to providing standard market property casualty insurance products, we operate our own excess
and surplus lines insurance brokerage firm and insurance carrier so that we can offer our excess and
surplus lines products exclusively to the independent agencies who market our other property casualty
insurance products. 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. Insurers operating in the excess and surplus lines
marketplace generally market business through excess and surplus lines insurance brokers, whether they
are small specialty insurers or specialized divisions of larger insurance organizations. We established an
excess and surplus lines operation in response to requests to help meet the needs of agency clients when
insurance is unavailable in the standard market. By providing superior service, we can help our agencies
grow while also profitably growing our property casualty business.
At year-end 2012, our 1,408 property casualty agency relationships were marketing our standard market
insurance products from 1,758 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 2011, our 1,312 agency
relationships had 1,648 reporting locations. At year-end 2010, our 1,245 agency relationships had
1,544 reporting locations.
We made 140, 133 and 93 new agency appointments in 2012, 2011 and 2010, respectively. Of these new
appointments, 109, 93 and 70, 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 96, 67 and 65 and a net increase in reporting agency locations of 110,
104 and 81 in 2012, 2011 and 2010, respectively.
Cincinnati Financial Corporation – 2012 10-K - 4
On average, we have a 12.6 percent share of the standard lines property casualty insurance purchased
through our reporting agency locations, according to data from agency surveys. Our share is 17.7 percent in
reporting agency locations that have represented us for more than 10 years; 8.5 percent in agencies that
have represented us for six to 10 years; 4.3 percent in agencies that have represented us for two to five
years; and 1.2 percent in agencies that have represented us for one year or less.
Our largest single agency relationship accounted for approximately 0.9 percent of our total property casualty
earned premiums in 2012. No aggregate locations under a single ownership structure accounted for more
than 2.1 percent of our earned premiums in 2012.
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 potential exists for short-term financial performance variability due to our exposures to potential
catastrophes or significant capital market losses, the rating agencies consistently have asserted that we
have built appropriate financial strength and flexibility to manage that variability. We remain committed to
strategies that emphasize being a consistent, stable market for our agents’ business 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. For example, we maintain a diversified investment portfolio by reviewing and applying
diversification parameters and tolerances.
• Our $9.093 billion fixed-maturity portfolio is diversified and exceeds total insurance reserves.
The portfolio had an average rating of A2/A, and its fair value exceeded total insurance reserve liability
by nearly 40 percent at December 31, 2012. No corporate bond exposure accounted for more than 0.7
percent of our fixed-maturity portfolio, and no municipal exposure accounted for more than 0.2 percent.
• The strength of our fixed-maturity portfolio provides an opportunity to invest for potential capital
appreciation by purchasing equity securities. Our $3.373 billion equity portfolio minimizes
concentrations in single stocks or industries. At December 31, 2012, no single security accounted for
more than 4.2 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, 2012, we held $1.182 billion of our cash
and invested assets at the parent company level, of which $958 million, or 81.0 percent, was invested in
common stocks, and $90 million, or 7.6 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, 2012, this ratio at 14.1 percent was well below the target limit as capital
remained strong while debt levels did not change from year-end 2011. Long-term debt at year-end 2012
totaled $790 million and our short-term debt was $104 million. The long-term debt consists of
three nonconvertible, noncallable debentures, two due in 2028 and one in 2034. Ratings for our long-term
debt are discussed in Item 7, Liquidity and Capital Resources, Additional Sources of Liquidity, Page 84.
At year-end 2012 and 2011, 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 2012 with a 0.9-to-1 ratio of property casualty premiums to surplus, a key measure of
property casualty insurance company capacity and security. A lower ratio indicates more security for
policyholders and greater capacity for growth by an insurer. We believe our ratio provides ample
flexibility to diversify risk by expanding our operations into new geographies and product areas. The
estimated industry average ratio was 0.8-to-1 at year-end 2012.
• We ended 2012 with an 11.1 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
11.1 percent at year-end 2012. A higher ratio indicates an insurer’s stronger security for policyholders
and capacity to support business growth.
Cincinnati Financial Corporation – 2012 10-K - 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,
2012
2011
$
$
$
3,914
3,928
487
8.1
0.9
276
290
29
10.1
2,626
11.1
199
199
20
10.2
0.5
3,747
3,754
474
7.9
0.8
281
288
36
7.9
2,454
11.8
186
186
13
13.9
0.4
The consolidated property casualty insurance group’s ratio of investments in common stock to statutory
surplus was 58.1 percent at year-end 2012 compared with 54.5 percent at year-end 2011.
Cincinnati Financial Corporation’s senior debt is rated by four independent rating firms. In addition, the
rating firms award our property casualty and life operations insurance financial strength ratings based on
their quantitative and qualitative analyses. These ratings assess an insurer’s ability to meet financial
obligations to policyholders and do not necessarily address all of the matters that may be important to
shareholders. Ratings may be subject to revision or withdrawal at any time by the ratings agency, and each
rating should be evaluated independently of any other rating.
All of our insurance subsidiaries continue to be highly rated. During 2012, three of the four ratings firms
affirmed our insurance financial strength ratings and continued their stable outlook on the ratings. No other
rating agency actions occurred during 2012.
As of February 25, 2013, our insurance financial strength ratings were:
Rating
agency
Standard market property
casualty insurance subsidiary
Insurer Financial Strength Ratings
Life insurance
subsidiary
Excess and surplus
insurance subsidiary
Date of most recent
affirmation or action
A. M. Best Co.
Fitch Ratings
A+
A+
A1
Moody's Investors
Service
Standard & Poor's
Ratings Services
A
Rating
Tier
2 of 16
Superior
A
Excellent
Rating
Tier
3 of 16
Rating
Tier
A
Excellent 3 of 16 Stable outlook (12/19/12)
Strong
5 of 21
A+
Strong
5 of 21
Good
5 of 21
Strong
6 of 21
-
A
-
-
Strong
6 of 21
-
-
-
-
-
-
-
-
-
Stable outlook (11/20/12)
Negative outlook (10/21/11)
Stable outlook (7/30/12)
On December 19, 2012, A.M. Best affirmed our financial strength ratings that it had assigned in
December 2008, continuing its stable outlook. A.M. Best cited our superior risk-adjusted capitalization,
conservative loss reserving standards and growing use of predictive analytic modeling tools along with our
historically strong operating performance. Concerns noted included geographic concentration and
weakened underwriting results in recent years, primarily from above-average catastrophe-related losses.
A.M. Best acknowledged the strong franchise value of our insurance subsidiaries and the financial flexibility
of the holding company.
On November 20, 2012, Fitch Ratings affirmed our insurer financial strength ratings that it had assigned in
August 2009, continuing its stable outlook. Fitch cited ratings strengths including our conservative operating
subsidiary capitalization supported by strong holding company cash and marketable securities position and
moderate holding company leverage, and well-managed reserves. Fitch added that we have implemented
predictive modeling tools that are anticipated to improve underwriting expertise and loss ratios over time.
Rating concerns noted principally related to challenges from competitive market conditions and exposure to
regional natural catastrophes and other weather-related losses.
On July 30, 2012, Standard & Poor’s Ratings Services affirmed our insurer financial ratings that it had
assigned in July 2010, continuing its stable outlook. S&P said its rating was based on our strong competitive
position, which is reinforced by a loyal and productive agency force and a low-cost infrastructure. S&P also
Cincinnati Financial Corporation – 2012 10-K - 6
cited our very strong capitalization and high degree of financial flexibility. S&P noted that our strengths are
partially offset by deteriorating property casualty underwriting results due to weather-related losses, and
earnings volatility stemming from regional concentration and low reinsurance utilization.
Our debt ratings are discussed in Item 7, Liquidity and Capital Resources, Additional Sources of Liquidity,
Page 84.
Operating Structure
We offer our broad array of insurance products through the independent agency distribution channel. We
recognize that locally based independent agencies have relationships in their communities and local
marketplace intelligence that can lead to policyholder satisfaction, loyalty and profitable business. Several of
our strategic initiatives are intended not only to help us compete but also to enhance support of agencies
that represent us, thereby contributing to agency success. We seek to be a consistent and predictable
property casualty carrier that agencies can rely on to serve their clients. For our standard market business,
field and headquarters underwriters make risk-specific decisions about both new business and renewals.
In our 10 highest volume states for consolidated property casualty premiums, 1,039 reporting agency
locations wrote 65.4 percent of our 2012 consolidated property casualty earned premium volume compared
with 992 locations and 66.5 percent in 2011.
Consolidated Property Casualty Insurance Earned Premiums by State
(Dollars in millions)
Year ended December 31, 2012
Ohio
Illinois
Indiana
Pennsylvania
Georgia
North Carolina
Michigan
Virginia
Kentucky
Tennessee
Year ended December 31, 2011
Ohio
Illinois
Indiana
Pennsylvania
Georgia
North Carolina
Michigan
Virginia
Kentucky
Wisconsin
Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
$
$
640
263
228
196
170
163
153
128
122
120
591
250
208
184
154
149
134
123
114
103
19.1 %
7.9
6.8
5.9
5.1
4.9
4.6
3.8
3.7
3.6
19.5 %
8.3
6.9
6.1
5.1
4.9
4.4
4.1
3.8
3.4
235
127
110
91
88
91
134
65
43
55
233
124
107
85
80
85
118
66
43
51
$
$
2.7
2.1
2.1
2.2
1.9
1.8
1.1
2.0
2.8
2.2
2.5
2.0
1.9
2.2
1.9
1.8
1.1
1.9
2.7
2.0
Field Focus
We rely on our force of 1,273 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 support
agencies and field associates with underwriting, accounting, technology assistance and training and other
services. 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, excess and surplus lines, machinery and equipment, bond, premium audit and life insurance.
The field team provides many services for agencies and policyholders; for example, our loss control field
representatives and others specializing in machinery and equipment risks perform inspections and
recommend specific actions to improve the safety of the policyholder’s operations and the quality of the
agent’s account.
Agents work with us to carefully select risks and help assure pricing adequacy. They appreciate the time our
associates invest in creating solutions for their clients while protecting profitability, whether that means
working on an individual case or customizing policy terms and conditions that preserve flexibility, choice and
other sales advantages. We seek to develop long-term relationships by understanding the unique needs of
their clients, who are also our policyholders.
Cincinnati Financial Corporation – 2012 10-K - 7
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 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 data from their agency management
systems to process business transactions from their offices
• allow policyholders to directly access, from their systems and mobile devices, pertinent policy
information online in order to further improve efficiency for our agencies
• automate our internal processes so our associates can spend more time serving agents
and policyholders
•
reduce duplicated effort or friction points in technology processes, introducing more efficiency that
reduces company and agency costs
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, educational courses about our products and services, accounting services,
and electronic libraries for property and casualty coverage forms, state rating manuals and
marketing materials.
Superior Claims Service
Our claims philosophy reflects our belief that we prosper as a company by responding to claims person to
person, paying covered claims promptly, preventing false claims from unfairly adding to overall premiums
and building financial strength to meet future obligations.
Our 770 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 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 with 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 well suited to gathering facts to uncover potential fraud. While we believe our job is
to pay what is due under each policy contract, we also want to prevent false claims from unfairly increasing
overall premiums. Our SIU also operates a computer forensics lab, using sophisticated software to recover
data and mitigate the cost of computer-related claims for business interruption and loss of records.
Cincinnati Financial Corporation – 2012 10-K - 8
Insurance Products
We actively market property casualty insurance in 39 states through a select group of independent
insurance agencies. For most agencies that represent us, we believe we offer insurance solutions for
approximately 75 percent of the typical insurable risks of their clients. Our standard market commercial lines
products and our excess and surplus lines are marketed in all 39 states while our standard market personal
lines products are marketed in 31, offering insurance coverage that includes business property and liability,
automobile and homeowner as well as umbrella liability. We discuss our commercial lines, personal lines
and excess and surplus lines insurance operations and products in Commercial Lines Property Casualty
Insurance Segment, Page 13, 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 life insurance, disability and fixed annuity products offered by our life
insurance subsidiary round out and protect accounts and improve account persistency. At the same time,
our life operation increases diversification of revenue and profitability sources for both the agency and
our company.
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 noninsurance financial services.
CFC Investment Company offers equipment and vehicle leases and loans for independent insurance
agencies, their commercial clients and other businesses. We also provide commercial real estate loans or
other financial assistance to help agencies operate, expand and perpetuate their businesses. We believe
that providing these services enhances agency relationships with the company and their clients, increasing
loyalty while diversifying the agency’s revenues.
We’re studying opportunities to begin developing our consumer brand. Our goal is to better support our
independent agents as we serve their clients, who are our current and prospective policyholders. As part of
that study, we are running a small consumer advertising campaign in 2013.
Cincinnati Financial Corporation – 2012 10-K - 9
STRATEGIC INITIATIVES
Management has identified strategies that can position us for long-term success. The board of directors and
management expect execution of our strategic plan to create significant value for shareholders over time.
We broadly group these strategies into two areas of focus – improving insurance profitability and driving
premium growth – correlating with important ways we measure our progress toward our long-term
financial objectives. A primary profitability long-term target is to produce a GAAP combined ratio over any
five-year period that is consistently within the range of 95 percent to 100 percent. A primary premium growth
long-term target is to profitably grow to reach $5 billion of property casualty and life insurance annual direct
written premiums by the end of 2015.
Effective capital management is an important part of creating shareholder value, serving as a foundation to
support other strategies focused on profitable growth of our insurance business, with the overall objective of
long-term benefit for shareholders. Our capital management philosophy is intended to preserve and build
our capital while maintaining appropriate liquidity. A strong capital position provides the capacity to support
premium growth, and liquidity provides for our investment in the people and infrastructure needed to
implement our other strategic initiatives. Our strong capital and liquidity also provide financial flexibility for
shareholder dividends or other capital management actions.
Our strategies seek to position us to compete successfully in the markets we have targeted while optimizing
the balance of risk and returns. We believe successful implementation of key initiatives that support our
strategies will help us better serve our agent customers, reduce volatility in our financial results and achieve
our long-term objectives despite shorter-term effects of difficult economic, market or pricing cycles. We
describe our expectations for the results of these initiatives in Item 7, Executive Summary of Management’s
Discussion and Analysis, Page 38.
Improve Insurance Profitability
Implementation of the initiatives described below is intended to enhance underwriting expertise and
knowledge for our property casualty business, improving our ability to manage our business while also
providing greater efficiency. By improving our capabilities to determine individual insurance policy pricing
with better alignment to risk attributes, we can increase our effectiveness in managing profit margins. By
improving internal processes and further developing performance metrics, we can further improve efficiency
and effectiveness. 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. Important
initiatives for 2013 to improve insurance profitability include:
• Enhance underwriting expertise and knowledge – We continue to increase our use of information and
develop our skills for improved underwriting performance, focusing on areas that will benefit most from
additional effort. We also continue to expand our pricing capabilities by using predictive analytics,
expecting cumulative benefits of these efforts to improve loss ratios over time. Expanded capabilities
include streamlining and optimizing data to improve accuracy, timeliness and ease of use. Development
of additional business data to support more accurate underwriting, more granular pricing and other
business decision-making also continues through a multi-year, phased project. Project deliverables
include enhancing our data management program in phases, including further developing our data
warehouse used in our property casualty and life insurance operations.
Initiatives enhancing our ability to more profitably underwrite property coverages for various lines of
business are an area of emphasis for 2013. A multi-department, multi-disciplinary taskforce has been
reviewing our property book of business and continues to seek ways to improve profitability, similar to
the approach we used to improve workers’ compensation results. Several profit improvement initiatives
have been completed, such as filing with regulators certain modified deductible features of policy forms
and revised underwriting guidelines. These features will be applied over time to existing policies as they
renew. Other initiatives still in progress should also improve property-related underwriting results over
time. Some of the more important commercial lines initiatives include increased specialization among
selected claims and loss control associates, who bring enhanced expertise for property risks; increased
commercial property inspections that give us enhanced underwriting knowledge for both new and
renewal business; wind and hail deductibles in areas prone to convective storm losses; and use of new
guidelines for underwriting hail risk. Some of the more important personal lines initiatives include
increased use of higher loss deductibles and actual cash value claims settlement for insured damage to
older roofs, and increased property inspections when homeowner policies renew, thereby providing
more opportunities for underwriting or pricing actions on a case-by-case basis.
Initiatives for 2013 also include improving or expanding pricing precision with ongoing enhancement of
analytics and predictive modeling tools. We continue to further integrate such tools with policy
administration systems to help our underwriting associates better target profitability and discuss pricing
impacts with agency personnel. Use of enhanced pricing precision tools and techniques with our
existing policies as they renew should improve loss ratios over time, allowing us to ensure we are
competitive on the most desirable business and able to adapt more rapidly to changes in market
Cincinnati Financial Corporation – 2012 10-K - 10
•
conditions. We began using the second generation of our workers’ compensation predictive modeling
tool in the second half of 2012. Since late 2011, we have used pricing precision tools for our commercial
auto line of business and also for general liability and commercial property coverages in commercial
package accounts. Similar tools for small business policies written through our CinciPakTM product
began being used in several states in 2012 and will be implemented for many more states in 2013. We
also continue to enhance our model attributes used for personal auto and homeowner policies,
expanding our pricing points to add more precision to models used in past years. We plan to introduce
predictive modeling for dwelling fire policies in 2013. In addition, we are working to improve pricing
precision for homeowner policies in select states over time through by-peril rating that allows for pricing
in line with the unique combination and magnitude of hazards affecting a particular insured risk.
Improve internal processes – Improved processes support our strategic goals, reducing internal costs
and allowing us to focus more resources on providing agency services. Important process improvement
efforts include additional streamlining of policy processing between company and agency management
systems, such as reduction of data entry by leveraging existing internal and external data. This allows
for processing of some personal lines or small commercial lines business without intervention by an
underwriter, for risks that meet qualifying underwriting criteria, and routing of complex work items to the
most appropriate associate for optimal service. In 2013, we plan to expand this form of streamlined
processing to personal lines policy renewal transactions, following successful 2012 implementation for
new business policies. For small commercial lines policies that meet qualifying underwriting criteria, we
plan to expand streamlined processing of renewal transactions to most states by the end of 2013,
building on a pilot program implemented for a limited number of states and policy coverages. We also
plan to add workers’ compensation policy processing to our e-CLAS® CPP commercial lines policy
administration system.
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 within the
range of 95 percent to 100 percent for any five-year period. We also compare our statutory combined ratio
to the industry average to gauge our progress.
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 2011, we again earned that
rank in nearly 75 percent of the agencies that have represented Cincinnati Insurance for more than
five years, based on 2011 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. Our
strategy includes new initiatives and execution of prior year growth initiatives, including use of profitability
and growth models or plans at an agency level to facilitate coordination and decision-making. In addition to
estimating planned premium growth from existing agencies, these plans help project the number of
additional agencies needed to achieve premium targets. Our focus remains on the key components of agent
satisfaction based on factors agents tell us are most important. Significant 2013 initiatives to drive premium
growth include:
• Expansion of our marketing and service capabilities – We continue to enhance our generalist approach
to allow our appointed agencies to better compete in the marketplace by providing services an agent’s
clients want and need. During 2013, we continue to develop and coordinate targeted marketing,
including cross-selling opportunities, through our Target Markets department. This area focuses on
commercial product development, including identification of and promotional support for promising
classes of business. We offered 13 target markets programs to our agencies at the end of 2012, and
we plan to launch additional programs during 2013, in addition to expanding product offerings within
various programs.
We will pilot additional services in 2013 to select agencies that opt to use a customer care center we are
developing for small commercial business policies. Our services will include various policy
administration functions routinely provided by agencies, allowing agency personnel to focus more on
marketing efforts and on providing additional service to their clients as needed. We will also continue to
add field marketing representatives where needed for additional agency support in targeted areas,
including some specializing in personal lines or excess and surplus lines. Associates in our life
insurance segment plan to increase opportunities for agencies to cross-sell to their clients by providing
additional service, including realigned territories for field associates and more product education.
Cincinnati Financial Corporation – 2012 10-K - 11
• 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 2013, we are targeting approximately 65 appointments of
independent agencies that write in aggregate $750 million or more in property casualty business
annually with various insurance carriers. While this target is lower than in recent years, we believe it is
appropriate based on our long-term premium volume objective while also considering the geographic
marketing reach assessment and the multi-year nature of premium growth from past agency
appointments, as noted below. We are also targeting approximately 75 appointments of additional
independent agencies to offer only our life insurance products and service, in addition to ones among
the 65 noted above that also want to represent us for life insurance.
We seek to build a close, long-term relationship with each agency we appoint. The contribution of new
agencies to our property casualty premium growth should occur over several years, as time is required
to fully realize the benefits of our agency relationships. We generally earn a 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. We carefully
evaluate the marketing reach of each new appointment to ensure the territory can support both current
and new agencies. In counting new agency appointments, we include appointment of new agency
relationships with property casualty insurance group subsidiaries of The Cincinnati Insurance
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 140, 133 and 93 new appointments in 2012, 2011
and 2010, respectively, with 109, 93 and 70 representing new relationships.
We measure the overall success of our strategy to drive premium growth primarily through changes in net
written premiums. Other important indicators that we are successfully executing initiatives to drive premium
growth include tracking our progress toward our year-end 2015 direct written premiums target. We believe
we can grow premiums faster than the industry average over any five-year period, while also achieving our
long-term objective for underwriting profitability.
OUR SEGMENTS
Consolidated financial results primarily reflect the results of our five reporting segments. These segments
are defined based on financial information we use to evaluate performance and to determine the allocation
of assets.
• Commercial lines property casualty insurance
• Personal lines property casualty insurance
• Excess and surplus lines property casualty insurance
• Life insurance
•
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 137. Some of that information also is
discussed in this section of this report, where we explain the business operations of each segment.
The financial performance of each segment is discussed in Item 7, Management’s Discussion and Analysis
of Financial Condition and Results of Operations, which begins on Page 38.
Investments
Cincinnati Financial Corporation – 2012 10-K - 12
COMMERCIAL LINES PROPERTY CASUALTY INSURANCE SEGMENT
The commercial lines property casualty insurance segment contributed net earned premiums of
$2.383 billion to consolidated total revenues, or 58.0 percent of that total, and reported profit before income
taxes of $181 million in 2012. Commercial lines net earned premiums rose 8 percent in 2012 and 2 percent
in 2011, following a decline of 2 percent in 2010.
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 nondiscounted and discounted 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 builder’s risk,
cargo, electronic data processing equipment and a variety of mobile equipment, such as contractor’s
equipment. Various property coverages can be written as stand-alone policies or can be added to a
package policy. The commercial property business line includes property coverage written on both a
nondiscounted and discounted basis as part of commercial package policies.
• Commercial auto – Protects businesses against liability to others for both bodily injury and
property damage, medical payments to insureds and occupants of their vehicles, physical damage to
an insured’s own vehicle from collision and various other perils, and damages caused by
uninsured motorists.
• Workers’ compensation – Protects employers against specified benefits payable under state or federal
law for workplace injuries to employees. We write workers’ compensation coverage in all of our active
states except North Dakota, Ohio, Washington and Wyoming, where coverage is provided solely by the
state instead of by private insurers.
• Specialty packages – Includes coverages for property, liability and business interruption tailored to meet
the needs of specific industry classes such as artisan contractors, dentists, garage operators, financial
institutions, metalworkers, printers, religious institutions or smaller main street businesses.
Businessowners policies, which combine property, liability and business interruption coverages for small
businesses, are included in specialty packages.
• 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 (D&O) liability insurance, which covers liability for actual or alleged errors in
judgment, breaches of duty or other wrongful acts related to activities of for-profit or nonprofit
organizations. Approximately 81 percent of our D&O policies and 50 percent of the premium volume
in force for 2012 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, due to sudden and accidental mechanical
breakdown, steam explosion or artificially generated electrical current.
Our emphasis is on products that agents can market to small to midsized businesses in their communities.
Of our 1,758 reporting agency locations, 15 market only our surety and executive risk products and
26 market only our personal lines products. The remaining 1,717 locations, located in all states in which we
actively market, offer some or all of our standard market commercial insurance products.
Cincinnati Financial Corporation – 2012 10-K - 13
In 2012, our 10 highest volume commercial lines states generated 62.3 percent of our earned
premiums compared with 63.3 percent in 2011 and 64.3 percent in 2010 as we continued efforts to
geographically diversify our property casualty risks. Earned premiums in the 10 highest volume states
increased 7 percent in 2012 and increased 12 percent in the remaining 29 states. The number of reporting
agency locations in our 10 highest volume states increased to 1,035 in 2012 from 985 in 2011.
Commercial Lines Earned Premiums by State
(Dollars in millions)
Year ended December 31, 2012
Ohio
Illinois
Pennsylvania
Indiana
North Carolina
Michigan
Virginia
Georgia
Wisconsin
Tennessee
Year ended December 31, 2011
Ohio
Illinois
Pennsylvania
Indiana
North Carolina
Virginia
Michigan
Georgia
Wisconsin
Tennessee
Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
$
$
364
195
172
148
123
107
103
92
91
88
341
189
163
138
118
101
99
83
82
77
15.3 %
8.2
7.2
6.2
5.2
4.5
4.3
3.9
3.8
3.7
15.5 %
8.6
7.4
6.3
5.4
4.6
4.5
3.8
3.7
3.5
234
127
91
108
88
131
65
83
53
55
232
123
85
106
82
66
115
75
51
50
$
$
1.6
1.5
1.9
1.4
1.4
0.8
1.6
1.1
1.7
1.6
1.5
1.5
1.9
1.3
1.4
1.5
0.9
1.1
1.6
1.5
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, headquarters
underwriters also help oversee agency growth and profitability. They are responsible for formal issuance of
all new business and renewal policies as well as policy endorsements. Further, the headquarters
underwriters provide day-to-day customer service to agencies and marketing representatives by offering
product training, 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. Approximately 85 percent of our commercial in-force policies have annual premiums
of $10,000 or less, accounting in total for approximately one-third of our 2012 commercial lines premium
volume. The remainder of policies have annual premiums greater than $10,000, including in-force policies
with annual premiums greater than $100,000 that account for slightly less than 15 percent of our
2012 commercial lines premium volume.
Our commercial lines packages typically are offered on a three-year policy term for most insurance
coverages, a key competitive advantage. In our experience, multi-year packages appeal to the quality-
conscious insurance buyers who we believe are typical clients of our independent agents. Customized
insurance programs on a three-year term complement the long-term relationships these policyholders
typically have with their agents and with the company. By reducing annual administrative efforts, multi-year
policies lower expenses for our company and for our agents. The commitment we make to policyholders
encourages long-term relationships and reduces their need to annually re-evaluate their insurance carrier or
agency. We believe that the advantages of three-year policies in terms of improved policyholder
convenience, increased account retention and reduced administrative costs outweigh the potential
disadvantage of these policies, even in periods of rising rates.
Although we offer three-year policy terms, premiums for some coverages within those policies are
adjustable at anniversary for the next annual period, and policies may be canceled at any time at the
discretion of the policyholder. Contract terms often provide that rates for property, general liability, inland
marine and crime coverages, as well as policy terms and conditions, are fixed for the term of the policy.
Cincinnati Financial Corporation – 2012 10-K - 14
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
2012 commercial premiums were subject to annual rating or were written on a one-year policy term.
We believe our commercial lines segment premiums reflect a higher concentration, relative to industry
commercial lines premiums, in contractor-related businesses. Since economic activity related to
construction, which can heavily influence insured exposures of contractors, may experience cycles that
vary significantly with the economy as a whole, our commercial lines premium trends could vary from
commercial lines premium trends for the property casualty insurance industry. In 2012, we estimated that
policyholders with a contractor-related Insurance Services Office (ISO) general liability code accounted for
approximately 34 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 47 percent of our workers’
compensation premiums.
Understanding evolving market conditions is a critical function for our success, accomplished in both an
informal and a formal manner. Informally, our field marketing representatives, underwriters and Target
Markets department associates are routinely in receipt of market intelligence from the agencies with which
they work, providing us with feedback. Our commercial lines product management group and field marketing
representatives obtain competitive intelligence through various means. This market information helps
identify the top competitors by line of business or specialty program and also identifies our market strengths
and weaknesses. The information obtained encompasses pricing, breadth of coverage and
underwriting/eligibility issues.
In addition to reviewing our competitive position, our product management group and our underwriting audit
group review compliance with our underwriting standards as well as the pricing adequacy of our commercial
insurance programs and coverages. Further, our Target Markets department analyzes opportunities
and develops new products and services, new coverage options and improvements to existing
insurance products.
We support our commercial lines operations with a variety of technology tools. e-CLAS CPP for commercial
package and auto coverages now has rolled out to all of our appointed agencies in 36 states. It is being
developed for additional coverages and remaining states that will be deployed over time. Since the initial
deployment of e-CLAS in late 2009, approximately three-quarters of our non-workers’ compensation
commercial lines policies in force at the end of 2012 have been processed through e-CLAS. In addition to
increasing efficiency for our associates, the system allows our agencies options to quote and produce
commercial package policies in paper or electronic format from their offices and to bill policies through their
agencies or through us. These features increase their ease of doing business with us. The e-CLAS platform
also makes use of our real-time agency interface, CinciBridge®, which allows the automated movement
of key underwriting data from an agency’s management system to e-CLAS. This reduces agents’ data entry
tasks and allows seamless quoting, rating and issuance capability.
PERSONAL LINES PROPERTY CASUALTY INSURANCE SEGMENT
The personal lines property casualty insurance segment contributed net earned premiums of $868 million to
consolidated total revenues, or 21.1 percent of the total, and reported a loss before income taxes of
$43 million in 2012. Personal lines net earned premiums rose 14 percent in 2012, 6 percent in 2011 and
5 percent in 2010.
We prefer to write personal lines coverage in accounts that include both auto and homeowner coverages as
well as coverages that are part of our other personal business line. At the end of 2012, for example,
76 percent of our homeowner policies were accompanied by a personal auto policy in the same account.
As a result of our account-based approach, we believe that our personal lines business is best measured
and evaluated on a segment basis. However, we provide line of business data to summarize growth and
profitability trends separately for three business lines:
• Personal auto – Protects against liability to others for both bodily injury and property damage, medical
payments to insureds and occupants of their vehicle, physical damage to an insured’s own vehicle from
collision and various other perils, and damages caused by uninsured motorists. In addition, many states
require policies to provide first-party personal injury protection, frequently referred to as
no-fault coverage.
• Homeowner – Protects against losses to dwellings and contents from a wide variety of perils, as well as
liability arising out of personal activities both on and off the covered premises. We also offer coverage
for condominium unit owners and renters.
Cincinnati Financial Corporation – 2012 10-K - 15
• 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 1,321 or approximately 75 percent of
our 1,758 reporting agency locations. The 1,321 personal lines agency locations are in 31 of the 39 states in
which we offer standard market commercial lines insurance. 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.
In 2012, our 10 highest volume personal lines states generated 80.6 percent of our earned premiums
compared with 80.7 percent in 2011 and 82.2 percent in 2010. Earned premiums in the six highest volume
states increased 10 percent in 2012 while increasing 22 percent in the remaining states, reflecting progress
toward our long-term objective of geographic diversification through new states for our personal lines
operation. The number of reporting agency locations in our 10 highest volume states increased 6 percent to
847 in 2012 from 798 in 2011.
Personal Lines Earned Premiums by State
(Dollars in millions)
Year ended December 31, 2012
Ohio
Georgia
Indiana
Illinois
Alabama
Kentucky
Michigan
North Carolina
Tennessee
Minnesota
Year ended December 31, 2011
Ohio
Georgia
Indiana
Illinois
Kentucky
Alabama
Michigan
North Carolina
Tennessee
Virginia
Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
$
$
265
72
71
62
49
47
42
37
29
24
242
66
64
56
44
42
32
28
22
20
30.6 %
8.2
8.2
7.2
5.7
5.4
4.8
4.3
3.4
2.8
31.7 %
8.6
8.4
7.4
5.7
5.5
4.2
3.7
2.8
2.7
208
78
88
95
43
37
114
81
50
53
207
71
85
90
38
41
97
77
45
47
$
$
1.3
0.9
0.8
0.7
1.1
1.3
0.4
0.5
0.6
0.5
1.2
0.9
0.8
0.6
1.2
1.0
0.3
0.4
0.5
0.4
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 2012, we
had 11 full-time personal lines field marketing representatives who have underwriting authority and visit
agencies on a regular basis. They focus primarily on key states targeted for growth, reinforcing the
advantages of our personal lines products and offering training in the use of our processing system.
All of our personal lines policies are written for a one-year term. Competitive advantages of our personal
lines operation include broad coverage forms, flexible underwriting, superior claims service and
endorsements allowing customization of coverage for both 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 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 $93 million to
consolidated total revenues, or 2.3 percent of the total, and reported a loss before income taxes of $1 million
in 2012, its fifth year of operation. Excess and surplus lines net earned premium increased 33 percent in
2012, 43 percent in 2011 and 81 percent in 2010.
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
Cincinnati Financial Corporation – 2012 10-K - 16
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. All of our excess and surplus lines policies are
written for a maximum term of one year. Approximately 85 percent of our 2012 premium volume for the
excess and surplus lines segment provided commercial casualty coverages and about 15 percent provided
commercial property coverages. Those coverages are described below.
• Commercial casualty – Covers businesses for third-party liability from accidents occurring on their
premises or arising out of their operations, including products and completed operations. The majority of
these policies have coverage limits of $1 million or less. Miscellaneous errors and omissions and
professional coverage for liability from actual or alleged errors in judgment, breaches of duty or other
wrongful acts related to activities of insured businesses is also available, as is excess liability coverage
that adds another layer of protection to the insured’s other liability insurance policies. Typical
businesses covered include contractors, consultants, bars or taverns and manufacturers. Policies
covering liability at special events are also available.
• Commercial property – Insures loss or damage to buildings, inventory, equipment and business income
from causes of loss such as fire, wind, hail, water, theft and vandalism. Examples of property we
commonly insure with excess and surplus lines policies include temporarily vacant buildings, restaurants
and relatively higher-hazard manufacturing classes.
At the end of 2012, we marketed excess and surplus lines insurance products in each of the 39 states in
which we offer standard market commercial lines insurance. Offering excess and surplus lines helps
agencies representing The Cincinnati Insurance Companies meet the insurance needs of their clients when
coverage is unavailable in the standard market. By providing outstanding service, we can help agencies
grow and prosper while also profitably growing our property casualty business.
In 2012, our 10 highest volume excess and surplus lines states generated 62.2 percent of our earned
premiums compared with 62.8 percent in 2011 and 65.1 percent in 2010.
Excess and Surplus Lines Earned Premiums by State
(Dollars in millions)
Year ended December 31, 2012
Ohio
Indiana
Texas
Georgia
Illinois
Missouri
Michigan
Alabama
Pennsylvania
Kentucky
Year ended December 31, 2011
Ohio
Indiana
Illinois
Georgia
Texas
Missouri
Pennsylvania
Michigan
Kentucky
North Carolina
Earned
premiums
% of total
earned
$
$
11
9
7
6
6
5
4
4
3
3
9
7
5
5
4
4
3
3
3
3
11.5 %
9.3
7.5
6.8
6.4
4.9
4.4
4.1
3.7
3.6
12.4 %
9.7
6.8
6.6
6.3
5.4
4.2
4.0
3.7
3.7
Agencies representing The Cincinnati Insurance Companies produce over $2 billion in annual premiums for
all carriers writing excess and surplus lines policies for their clients. We estimate that approximately half of
that premium volume matches the targeted business types and coverages we offer through our excess and
surplus lines segment. We structured the operations of this segment to meet the needs of these agencies
and to market exclusively through them.
Agencies have access to The Cincinnati Specialty Underwriters Insurance Company’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 nonadmitted business.
Cincinnati Financial Corporation – 2012 10-K - 17
We seek to earn a share of each agency’s best excess and surplus lines accounts by offering several
unique benefits. Agency producers have direct access through CSU Producer Resources to a group of our
underwriters who focus exclusively on excess and surplus lines business. Those underwriters can tap
into broader Cincinnati services to provide policyholders additional value and help agents build the
relationship through experienced and responsive loss control and claims handling. CSU Producer
Resources gives extra support to our independent agency producers by remitting surplus lines taxes and
stamping fees and retaining admitted market diligent search affidavits, where required. Agencies marketing
through CSU Producer Resources instead of a competing brokerage generally receive a higher commission
because use of our internal brokerage subsidiary eliminates some of the intermediary costs. This business
is also factored in their profit-sharing agreement with The Cincinnati Insurance Companies.
We use a web-based excess and surplus lines policy administration system to quote, bind, issue and deliver
policies electronically to agents. This system provides integration to existing document management and
data management systems, allowing for real-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 independent
agency producers within minutes of underwriting approval and policy issue. In 2012, more than 95 percent
of policies were issued within 24 hours of a request to bind a policy.
LIFE INSURANCE SEGMENT
The life insurance segment contributed $178 million of net earned premiums, representing 4.3 percent of
consolidated total revenues, and negative $3 million of income before income taxes in 2012. Life insurance
segment profitability is discussed in detail in Item 7, Life Insurance Results of Operations, Page 77.
Life insurance net earned premiums grew 8 percent in 2012, 4 percent in 2011 and 10 percent in 2010.
The Cincinnati Life Insurance Company supports our agency-centered business model. Cincinnati Life helps
meet the needs of our agencies, including increasing and diversifying agency revenues. We primarily focus
on life products that feature a steady stream of premium payments and that have the potential for
generating revenue growth through increasing demand. By diversifying revenue and profitability for both the
agency and our company, this strategy enhances the already strong relationship built by the combination of
the property casualty and life companies.
Life Insurance Business Lines
Four lines of business – term life insurance, universal life insurance, worksite products and whole life
insurance – account for 96.5 percent of the life insurance segment’s revenues:
• Term life insurance – policies under which a death benefit is payable only if the insured dies during
a specific period of time. For policies without a return of premium provision, no benefit is payable if
the insured person survives to the end of the term. For policies in force with a return of premium
provision, a benefit equal to the sum of all paid base premiums is payable if the insured person
survives to the end of the term. Premiums are fixed, and they must be paid as scheduled. The policies
are fully underwritten.
• Universal life insurance – long-duration life insurance policies. Contract premiums are neither fixed nor
guaranteed; however, the contract does specify a minimum interest crediting rate and a maximum cost
of insurance charge and expense charge. Premiums are not fixed and may be varied by the contract
owner. The cash values, available as a loan collateralized by the cash surrender value, are not
guaranteed and depend on the amount and timing of actual premium payments and the amount of
actual contract assessments. The policies are fully underwritten.
• Worksite products – term life insurance, return of premium term life insurance, whole life insurance,
universal life and disability insurance offered to employees through their employer. Premiums are
collected by the employer using payroll deduction. Policies are issued using a simplified underwriting
approach and on a guaranteed issue basis. Worksite insurance products provide our property casualty
agency force with excellent cross-serving opportunities for both commercial and personal accounts.
Agents report that offering worksite marketing to employees of their commercial accounts provides a
benefit to the employees at no cost to the employer. Worksite marketing also connects agents with new
customers who may not have previously benefited from receiving the services of a professional
independent insurance agent.
• Whole life insurance – policies that provide life insurance for the entire lifetime of the insured. The death
benefit is guaranteed never to decrease and premiums are guaranteed never to increase.
While premiums are fixed, they must be paid as scheduled. These policies provide guaranteed
cash values that are available as loans collateralized by the cash surrender value. The policies are
fully underwritten.
Cincinnati Financial Corporation – 2012 10-K - 18
In addition, Cincinnati Life markets:
• Disability income insurance that provides monthly benefits to offset the loss of income when the insured
person is unable to work due to accident or illness.
• Deferred annuities that provide regular income payments that commence after the end of a specified
period or when the annuitant attains a specified age. During the deferral period, any payments made
under the contract accumulate at the crediting rate declared by the company but not less than a
contract-specified guaranteed minimum interest rate. A deferred annuity may be surrendered during the
deferral period for a cash value equal to the accumulated payments plus interest less the surrender
charge, if any.
•
Immediate annuities that provide some combination of regular income and lump sum payments in
exchange for a single premium.
Life Insurance Distribution
Our life insurance subsidiary is licensed in 49 states and the District of Columbia. At year-end 2012, almost
87 percent of our 1,758 agency reporting locations offered Cincinnati Life products to their clients. We also
develop life business from approximately 600 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.
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 quality, personal life insurance coverage to personal and commercial clients of our
agencies.
• Term life insurance is our largest life insurance product line. We continue to introduce new term
products with features our agents indicate are important, such as a return of premium benefit.
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.
In 2012 and 2011, the principal geographic distribution of life insurance premiums, based on information
contained in statements filed with state insurance departments, is reflected in the table below.
Life Insurance Premiums by State
(Dollars in millions)
Year ended December 31, 2012
Ohio
Pennsylvania
Indiana
Illinois
Michigan
Year ended December 31, 2011
Ohio
Pennsylvania
Indiana
Illinois
Michigan
Earned
premiums
% of total
earned
$
$
44
18
17
16
12
42
17
15
16
12
18.4 %
7.5
7.1
6.7
5.0
18.9 %
7.7
6.8
7.2
5.4
Cincinnati Financial Corporation – 2012 10-K - 19
INVESTMENTS SEGMENT
Revenues of the investments 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 $12.466 billion and $11.735 billion at year-end 2012 and 2011,
respectively. The overall portfolio remained in an unrealized gain position as equity and fixed income
markets experienced strong returns in 2012.
The cash we generate from insurance operations historically has been invested in two broad categories
of investments:
• Fixed-maturity investments – Includes taxable and tax-exempt bonds and redeemable preferred stocks.
During 2012 and 2011, purchases and market value gains more than offset sales and calls.
• Equity investments – Includes common and nonredeemable preferred stocks. During 2012,
purchases and fair value gains more than offset sales. During 2011, purchases and fair value gains
partially offset sales.
(In millions)
Taxable fixed maturities
Tax-exempt fixed maturities
Common equities
Preferred equities
Total
$
$
Cost or
amortized cost
5,473
2,749
2,270
99
10,591
At December 31, 2012
Percent
of total
51.7 % $
26.0
21.4
0.9
100.0 % $
Fair value
6,137
2,956
3,238
135
12,466
Percent
of total
49.2 % $
23.7
26.0
1.1
100.0 % $
Cost or
amortized cost
5,369
2,715
2,088
74
10,246
At December 31, 2011
Percent
of total
52.4 % $
26.5
20.4
0.7
100.0 % $
Fair value
5,847
2,932
2,854
102
11,735
Percent
of total
49.8 %
25.0
24.3
0.9
100.0 %
When allocating cash to various asset classes, we consider market-based factors such as risk adjusted
after-tax yields as well as internal measures based on regulatory and rating agency guidance. During 2012,
approximately one-half of new cash flow was invested in equity securities, exceeding our long-term historic
average. This was our first year since 2007 of positive net investment into common stocks. In 2011, we had
net dispositions in all asset classes except investment grade corporate bonds. The primary driver of this was
routine portfolio management as well as less new cash available for investment as a result of our unusual
level of catastrophe activity.
At year-end 2012, less than 1 percent of the value of our investment portfolio was made up of securities that
are classified as Level 3 assets and that require management’s judgment to develop pricing or valuation
techniques. We generally obtain at least two outside valuations for these assets and generally use the more
conservative estimate. These investments include private placements, small issues and various thinly
traded securities. See Item 7, Fair Value Measurements, Page 48, and Item 8, Note 3 of the Consolidated
Financial Statements, Page 121, for additional discussion of our valuation techniques.
In addition to securities held in our investment portfolio, at year-end 2012, other invested assets included
$37 million of life policy loans and $31 million of venture capital fund investments.
Cincinnati Financial Corporation – 2012 10-K - 20
Fixed-Maturity Investments
By maintaining a well diversified fixed-maturity portfolio, we attempt to manage overall interest rate,
reinvestment, credit and liquidity risk. We pursue a buy-and-hold strategy and do not attempt to make
large-scale changes to the portfolio in anticipation of rate movements. By investing new money on a regular
basis and analyzing risk-adjusted after-tax yields, we work to achieve a laddering effect to our portfolio that
may mitigate some of the effects of adverse interest rate movements.
Fixed-Maturity Portfolio Ratings
At year-end 2012, this portfolio’s fair value was 110.6 percent of amortized cost, up from last year as a
result of both a general decline in interest rates and further credit spread tightening.
The portfolio grew in 2012 due to a combination of market performance and purchases, most heavily
concentrated in the investment grade corporate sector. The majority of our nonrated securities are
tax-exempt municipal bonds from smaller municipalities that chose not to pursue a credit rating. Credit
ratings at year-end 2012 and 2011 for the fixed-maturity portfolio were:
(In millions)
At December 31, 2012
Fair
value
Percent
of total
At December 31, 2011
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
Daa, Da, D
Non-rated
Total
$
$
5,544
3,180
168
20
2
1
178
9,093
61.0 % $
35.0
1.8
0.2
0.0
0.0
2.0
100.0 % $
5,507
2,842
195
33
5
2
195
8,779
62.7 %
32.4
2.2
0.4
0.1
0.0
2.2
100.0 %
Our fixed-maturity portfolio as of December 31, 2012, included approximate maturing amounts with pretax
average yields-to-book value as follows: 6.6 percent maturing in 2013 with a 4.5 percent yield, 7.4 percent in
2014 with a 4.9 percent yield, and 8.8 percent in 2015 with a 4.5 percent yield. Additional maturity periods
for our fixed-maturity portfolio are shown in Item 8, Note 2 of the Consolidated Financial Statements,
Page 118. Attributes of the fixed-maturity portfolio include:
Weighted average yield-to-amortized cost
Weighted average maturity
Effective duration
At December 31,
2012
2011
5.0 %
6.3 yrs
4.2 yrs
5.3 %
6.7 yrs
4.4 yrs
Taxable Fixed Maturities
The fair values of our taxable fixed-maturity portfolio for the last two years were:
(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
Commercial mortgage backed securities
Total
At December 31,
2012
2011
$
$
5,388
334
182
164
31
7
3
28
6,137
$
$
5,100
320
198
160
59
7
3
-
5,847
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 2012. Investment grade corporate bonds had an average rating
of Baa1 by Moody’s or BBB+ by Standard & Poor’s and represented 87.8 percent of the taxable
fixed-maturity portfolio’s fair value at year end 2012, compared with 87.2 percent in 2011.
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 31.2 percent of fair
value of this portfolio at year-end 2012, compared with 29.3 percent, at year-end 2011. 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. No other sector exceeded
10 percent of our investment-grade corporate bond portfolio at year-end 2012.
Cincinnati Financial Corporation – 2012 10-K - 21
Most of the $334 million of securities issued by states, municipalities and political subdivisions included in
our taxable fixed-maturity portfolio at the end of 2012 were Build America Bonds.
Tax-Exempt Fixed Maturities
Our tax-exempt fixed-maturity portfolio’s fair value was $2.956 billion at December 31, 2012. The portfolio is
well diversified among approximately 1,000 municipal bond issuers. No single municipal issuer accounted
for more than 0.8 percent of the tax-exempt fixed-maturity portfolio at year-end 2012. Municipal bond
holdings in our larger states were:
(In millions)
At December 31, 2012
Texas
Indiana
Michigan
Illinois
Ohio
Washington
Wisconsin
Pennsylvania
Florida
Arizona
Colorado
New Jersey
New York
Kansas
Minnesota
All other states
Total
At December 31, 2011
Texas
Indiana
Michigan
Illinois
Ohio
Washington
Wisconsin
Pennsylvania
Florida
Arizona
Colorado
Kansas
New Jersey
New York
Utah
All other states
Total
State issued general
obligation bonds
$
-
-
-
-
-
3
3
-
-
-
-
-
-
-
-
2
8 $
$
-
-
-
-
-
3
2
-
-
-
-
-
-
-
-
1
6 $
$
$
$
$
Local issued general
obligation bonds
Special revenue
bonds
Total
Percent of
total
398 $
15
260
226
135
174
106
83
21
55
45
38
29
28
36
285
1,934 $
425 $
16
257
226
132
174
115
76
21
51
40
27
30
18
21
264
1,893 $
95 $
286
12
20
96
39
27
8
65
26
19
17
24
21
6
253
1,014 $
99 $
316
12
23
107
39
25
8
61
27
15
20
17
24
19
221
1,033 $
493
301
272
246
231
216
136
91
86
81
64
55
53
49
42
540
2,956
524
332
269
249
239
216
142
84
82
78
55
47
47
42
40
486
2,932
16.7 %
10.2
9.2
8.3
7.8
7.3
4.6
3.1
2.9
2.7
2.2
1.9
1.8
1.7
1.4
18.2
100.0 %
17.9 %
11.3
9.2
8.5
8.2
7.4
4.8
2.9
2.8
2.7
1.9
1.6
1.6
1.4
1.4
16.4
100.0 %
At year-end 2012, our tax-exempt fixed-maturity portfolio, with a fair value of $2.956 billion, had an average
rating of Aa2/AA. Over 68 percent or $2.020 billion of the portfolio is insured, and approximately 96 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. The top three revenue resources of the $1.014 billion in special revenue bonds owned
at year-end 2012 were 37 percent from leasing, 24 percent from water and sewer and 9 percent from
higher education.
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 our insurance
reserves are adequately covered by our fixed-maturity investments. We believe our strategy of primarily
investing in a diversified selection of larger capitalization, high quality, dividend-increasing companies
generally results in reduced volatility relative to the broader equity markets.
Cincinnati Financial Corporation – 2012 10-K - 22
At year-end 2012 and 2011, no holding had a fair value equal to or greater than 5 percent of our publicly
traded common stock portfolio. Pepsico Inc. (NYSE:PEP) was our largest single common stock investment
at year end, comprising 4.2 percent of the publicly traded common stock portfolio and 1.1 percent of the
entire investment portfolio.
At year-end 2012, 29.6 percent of our common stock holdings (measured by fair value) were held at
the parent company level. The distribution of the portfolio among industry sectors is shown in the
table below.
Common Stock Portfolio Industry Sector Distribution
Sector:
Information technology
Industrials
Healthcare
Energy
Consumer staples
Financial
Consumer discretionary
Materials
Utilities
Telecomm services
Total
Percent of Publicly Traded Common Stock Portfolio
At December 31, 2012
At December 31, 2011
Cincinnati
Financial
S&P 500 Industry
Weightings
Cincinnati
Financial
S&P 500 Industry
Weightings
16.0 %
12.9
12.2
12.0
11.7
11.2
9.7
5.7
4.8
3.8
100.0 %
19.1 %
10.1
12.0
11.0
10.6
15.6
11.5
3.6
3.4
3.1
100.0 %
16.9 %
11.8
12.0
14.0
12.3
8.5
9.4
5.7
5.5
3.9
100.0 %
19.0 %
10.7
11.8
12.3
11.5
13.4
10.7
3.5
3.9
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. We purchased $27 million in this portfolio in 2012 and sold $2 million. We made no purchases or
sales for this portfolio during 2011.
Additional information about the composition of investments is included in Item 8, Note 2 of the
Consolidated Financial Statements, Page 118. 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 noninvestment operations of the parent company and its noninsurer subsidiary
CFC Investment Company. This subsidiary offers commercial leasing and financing services to our
agencies, their clients and other customers. At year-end 2012, CFC Investment Company had
2,562 accounts and $75 million in receivables, compared with 2,217 accounts and $76 million in receivables
at year-end 2011.
Cincinnati Financial Corporation – 2012 10-K - 23
REGULATION
The business of insurance primarily is regulated by state law. All of our insurance company subsidiaries are
domiciled in the state of Ohio except The Cincinnati Specialty Underwriters Insurance Company, which is
domiciled in Delaware. Each insurance subsidiary is governed by the insurance laws and regulations in its
respective state of domicile. We also are subject to state regulatory authorities of all states in which we write
insurance. The state laws and regulations that have the most significant effect on our insurance operations
and financial reporting are discussed below.
•
Insurance Holding Company Regulation – We are regulated as an insurance holding company system
in the respective states of domicile of our primary standard market property casualty company
subsidiary and its surplus lines and life insurance subsidiaries. These regulations require that we
annually furnish financial and other information about the operations of the individual companies within
the holding company system. All transactions within a holding company affecting insurers must be fair
and equitable. Notice to the state insurance commissioner is required prior to the consummation of
transactions affecting the ownership or control of an insurer and prior to certain material transactions
between an insurer and any person or entity in its holding company group. In addition, some of those
transactions cannot be consummated without the commissioner’s prior approval. Recent amendments
to the Model Insurance Holding Company System Regulatory Act and Regulation, adopted by the
National Association of Insurance Commissioners (NAIC), and passed by a number of state legislatures,
requires insurance holding company systems to provide regulators with more information about the risks
posed by any noninsurance company subsidiaries in the holding company system.
• Subsidiary Dividends – The Cincinnati Insurance Company is 100 percent owned by Cincinnati
Financial Corporation. The dividend-paying capacity of The Cincinnati Insurance Company and its
100 percent owned subsidiaries is regulated by the laws of the applicable state of domicile. Under these
laws, our insurance subsidiaries must provide a 10-day advance informational notice to the insurance
commissioner for the domiciliary state prior to payment of any dividend or distribution to its
shareholders. Generally, the most our insurance subsidiary can pay without prior regulatory approval is
the greater of 10 percent of policyholder surplus or 100 percent of statutory net income for the prior
calendar year.
The insurance company subsidiaries must give 30 days’ notice to and obtain prior approval from the
state insurance commissioner before the payment of an extraordinary dividend as defined by the
state’s insurance code. You can find information about the dividends paid by our insurance subsidiary in
2012 in Item 8, Note 9 of the Consolidated Financial Statements, Page 127.
Insurance Operations – All of our insurance subsidiaries are subject to licensing and supervision by
departments of insurance in the states in which they do business. The nature and extent of such
regulations vary, but generally are rooted in statutes that delegate regulatory, supervisory and
administrative powers to state insurance departments. Such regulations, supervision and administration
of the insurance subsidiaries include, among others, the standards of solvency that must be met and
maintained; the licensing of insurers and their agents and brokers; the nature and limitations on
investments; deposits of securities for the benefit of policyholders; regulation of standard market policy
forms and premium rates; policy cancellations and nonrenewals; periodic examination of the affairs of
insurance companies; annual and other reports required to be filed on the financial condition of insurers
or for other purposes; requirements regarding reserves for unearned premiums, losses and other
matters; the nature of and limitations on dividends to policyholders and shareholders; the nature and
extent of required participation in insurance guaranty funds; the involuntary assumption of hard-to-place
or high-risk insurance business, primarily workers’ compensation insurance; and the collection,
remittance and reporting of certain taxes and fees. Our primary insurance regulators have adopted the
Model Audit Rule for annual statutory financial reporting. This regulation closely mirrors the Sarbanes-
Oxley Act on matters such as auditor independence, corporate governance and internal controls over
financial reporting. The regulation permits the audit committee of Cincinnati Financial Corporation’s
board of directors to also serve as the audit committee of each of our insurance subsidiaries for
purposes of this regulation.
Insurance Guaranty Associations – Each state has insurance guaranty association laws under which
the associations may assess life and property casualty insurers doing business in the state for certain
obligations of insolvent insurance companies to policyholders and claimants. Typically, states assess
each member insurer in an amount related to the insurer’s proportionate share of business written by all
member insurers in the state. Our insurance companies received a savings of less than $1 million from
guaranty association refunds in both 2012 and 2011. We cannot predict the amount and timing of any
future assessments or refunds on our insurance subsidiaries under these laws.
•
•
Cincinnati Financial Corporation – 2012 10-K - 24
• Shared Market and Joint Underwriting Plans – State insurance regulation requires insurers to participate
in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms
that generally provide applicants with various basic insurance coverages when they are not available in
voluntary markets. Such mechanisms are most commonly instituted for automobile and workers’
compensation insurance, but many states also mandate participation in FAIR Plans or Windstorm Plans,
which provide basic property coverages. Participation is based upon the amount of a company’s
voluntary market share in a particular state for the classes of insurance involved. Underwriting results
related to these organizations could be adverse to our company.
• Statutory Accounting – For public reporting, insurance companies prepare financial statements in
accordance with GAAP. However, certain data also must be calculated according to statutory
accounting rules as defined in the NAIC’s Accounting Practices and Procedures Manual. While not a
substitute for any GAAP measure of performance, statutory data frequently is used by industry
analysts and other recognized reporting sources to facilitate comparisons of the performance of
insurance companies.
•
•
Insurance Reserves – State insurance laws require that property casualty and life insurers annually
analyze the adequacy of reserves. Our appointed actuaries must submit an opinion that reserves are
adequate for policy claims-paying obligations and related expenses.
Investment Regulation – Insurance company investments must comply with laws and regulations
pertaining to the type, quality and concentration of investments. Such laws and regulations permit
investments in federal, state and municipal obligations, corporate bonds, preferred and common equity
securities, mortgage loans, real estate and certain other investments, subject to specified limits and
other qualifications. At December 31, 2012, the company believes it was in compliance with these laws
and regulations in all material respects.
• Risk-Based Capital Requirements – The NAIC’s risk-based capital (RBC) requirements for property
casualty and life insurers serve as an early warning tool for the NAIC and state regulators to identify
companies that may be undercapitalized and may merit further regulatory action. The NAIC has a
standard formula for annually assessing RBC. The formula for calculating RBC for property casualty
companies takes into account asset and credit risks but places more emphasis on underwriting factors
for reserving and pricing. The formula for calculating RBC for life insurance companies takes into
account factors relating to insurance, business, asset and interest rate risks.
Although the federal government and its regulatory agencies generally do not directly regulate the business
of insurance, federal legislation and administrative rules adopted 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 nonpublic information to underwrite insurance and
process claims. We also are subject to other federal laws, such as the Terrorism Risk Insurance Act (TRIA),
anti-money laundering statute (AML), the Nonadmitted and Reinsurance Reform Act (NRRA), and the rules
and regulations of the Office of Foreign Assets Control (OFAC).
Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) created
the Federal Insurance Office to monitor the insurance industry and gather information to identify issues or
gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry of the
United States financial system, and to recommend to the Financial Stability Oversight Council that it
designate an insurer as a systemically significant entity requiring additional supervision by the Federal
Reserve Board. We do not expect Dodd-Frank to result in federal oversight of our operations as a
systemically significant entity.
We do not expect to have any material effects on our expenditures, earnings or competitive position as a
result of compliance with any federal, state, or local provisions enacted or adopted relating to the protection
of the environment. We currently do not have any material estimated capital expenditures for environmental
control facilities.
Cincinnati Financial Corporation – 2012 10-K - 25
Item 1A. Risk Factors
Our business involves various risks and uncertainties that may affect achievement of our business
objectives. Many of the risks could have ramifications across our organization. For example, while risks
related to setting insurance rates and establishing and adjusting loss reserves are insurance activities,
errors in these areas could have an impact on our investment activities, growth and overall results.
The following discussion should be viewed as a starting point for understanding the significant risks we face.
It is not a definitive summary of their potential impacts or of our strategies to manage and control the risks.
Please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Page 38, for a discussion of those strategies.
If any risks or uncertainties discussed here develop into actual events, they could have a material adverse
effect on our business, financial condition or results of operations. In that case, the market price of our
common stock could decline materially.
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, nonexclusive insurance agents. These agents are not
obligated to promote our products and can and do sell our competitors’ products. We must offer insurance
products that meet the needs of these agencies and their clients. We need to maintain good relationships
with the agencies that market our products. If we do not, these agencies may market our competitors’
products instead of ours, which may lead to us having a less desirable mix of business and could affect our
results of operations.
Certain events or conditions could diminish our agents’ desire to produce business for us and the
competitive advantage that our independent agencies enjoy, including:
• Downgrade of the financial strength ratings of our insurance subsidiaries. We believe our strong insurer
financial strength ratings, in particular, the A+ (Superior) ratings from A.M. Best for our standard market
property casualty insurance group and each subsidiary, are an important competitive advantage. See
Item 1, Financial Strength, Page 5, for additional discussion of our financial strength ratings.
• Concerns that doing business with us is difficult or not profitable, perceptions that our level of service is
no longer a distinguishing characteristic in the marketplace, perceptions that our products do not meet
the needs of our agents’ clients or perceptions that our business practices are not compatible with
agents’ business models. Mergers and acquisitions could result in a concentration of a significant
amount of premium in one agency.
• Delays in the development, implementation, performance and benefits of technology systems and
enhancements or independent agent perceptions that our technology solutions do not match
their needs.
A reduction in the number of independent agencies marketing our products, the failure of agencies to
successfully market our products or pay their accounts to us, changes in the strategy or operations of
agencies or the choice of agencies to reduce their writings of our products could affect our results of
operations if we were unable to replace them with agencies that produce adequate and profitable premiums.
Further, policyholders may choose a competitor’s product rather than our own because of real or perceived
differences in price, terms and conditions, coverage or service. If the quality of the independent agencies
with which we do business were to decline, that also might cause policyholders to purchase their insurance
through different agencies or channels. Consumers, especially in the personal insurance segments, may
increasingly choose to purchase insurance from distribution channels other than independent insurance
agents, such as direct marketers. Increased advertising by insurers, especially direct marketers, could
cause consumers to shift their buying habits, bypassing independent agents altogether.
Our credit ratings or financial strength ratings of our insurance subsidiaries could be
downgraded.
A downgrade in one or more of our company’s credit or debt ratings could adversely impact our
borrowing costs or limit our access to capital. Financial strength ratings reflect a rating agency’s opinion of
our insurance subsidiaries’ financial strength, operating performance, strategic position and ability to meet
obligations to policyholders. Our ratings are subject to periodic review and there is no assurance that our
ratings will not be changed. Ratings agencies could change or expand their requirements or could find that
our insurance subsidiaries no longer meet the criteria established for current ratings. If our property casualty
insurer financial strength ratings were to be downgraded, our agents might find it more difficult to market
our products or might choose to emphasize the products of other carriers. See Item 7, Liquidity and
Capital Resources, Additional Sources of Liquidity, Page 84, for additional discussion of ratings for our
long-term debt.
Cincinnati Financial Corporation – 2012 10-K - 26
We could experience an unusually high level of losses due to catastrophic, terrorism or pandemic
events or risk concentrations.
In the normal course of our business, we provide coverage against perils for which estimates of losses are
highly uncertain, in particular catastrophic and terrorism events. Catastrophes can be caused by a number
of events, including hurricanes, tornadoes, windstorms, earthquakes, hailstorms, explosions, severe winter
weather and fires. Due to the nature of these events, we are unable to predict precisely the frequency or
potential cost of catastrophe occurrences. Various scientists and other experts believe that changing climate
conditions have added to the unpredictability, frequency and severity of such natural disasters in certain
parts of the world and have created additional uncertainty as to future trends and exposures. We cannot
predict the impact that changing climate conditions may have on our results of operations nor can we predict
how any legal, regulatory or social responses to concerns about climate change may impact our business.
Additionally, man-made events, such as hydraulic fracturing, could cause damage from earth movement or
create environmental hazards.
The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the
area affected by the event and the severity of the event. Our ability to appropriately manage catastrophe risk
depends partially on catastrophe models, the accuracy of which may be affected by inaccurate or
incomplete data, the uncertainty of the frequency and severity of future events and the uncertain impact of
climate change. Additionally, these models are recalibrated and changed over time, with more data
availability and changing opinions regarding the effect of current or emerging loss patterns and conditions.
Please see Item 7, 2013 Reinsurance Programs, Page 95, for a discussion of modeled losses considered in
evaluating our reinsurance strategy.
The geographic regions in which we market insurance are exposed to numerous natural catastrophes,
such as:
• Hurricanes in the gulf, eastern and southeastern coastal regions.
• Earthquakes in many regions, most particularly in the New Madrid fault zone, which lies within the
central Mississippi valley, extending from northeast Arkansas through southeast Missouri, western
Tennessee and western Kentucky to southern Illinois, southern Indiana and parts of Ohio.
• Tornado, wind and hail in the Midwest, South, Southeast, Southwest and the mid-Atlantic.
The occurrence of terrorist attacks in the geographic areas we serve could result in substantially higher
claims under our insurance policies than we have anticipated. While we do insure terrorism risk in all areas
we serve, we have identified our major terrorism exposure geographically as general commercial risks in the
Tier 1 cities of metropolitan Chicago area, and to a much lesser degree, Washington DC, Houston and
Los Angeles. We have a greater amount of business in less hazardous Tier 2 cities such as Atlanta,
Phoenix-Mesa, Minneapolis, Cleveland, St. Louis, Denver, Tampa-St. Petersburg, Pittsburgh and Cincinnati.
We have exposure to small co-op utilities, water utilities, wholesale fuel distributors, small shopping malls
and small colleges throughout our 39 active states and, because of the number of associates located there,
our Fairfield, Ohio headquarters. Additionally, our life insurance subsidiary could be adversely affected in
the event of a terrorist event or an epidemic such as the avian or swine flu, particularly if the epidemic were
to affect a broad range of the population beyond just the very young or the very old. Our associate health
plan is self-funded and could similarly be affected.
Our results of operations would be adversely affected if the level of losses we experience over a period of
time were to exceed our actuarially determined expectations. In addition, our financial condition may be
adversely affected if we were required to sell securities prior to maturity or at unfavorable prices to pay an
unusually high level of loss and loss expenses. Securities pricing might be even less favorable if a number
of insurance or other companies and other investors needed to sell securities during a short period of time
because of unusually high losses from catastrophic events.
Our geographic concentration ties our performance to business, economic, environmental and regulatory
conditions in certain states. We market our standard market property casualty insurance products in
39 states, but our business is concentrated in the Midwest and Southeast. We also have exposure in states
where we do not actively market insurance when clients of our independent agencies have businesses or
properties in multiple states.
The Cincinnati Insurance Company also participates in certain assumed reinsurance treaties with reinsurers
that spread the risk of very large catastrophe losses among many insurers. At the beginning of 2013,
two surplus share treaties were in effect with the largest treaty representing exposure for us of up to
$3 million of assumed losses from a single catastrophic event. If there is a high frequency of very large
catastrophe events during a coverage period of the treaty, our financial position and results of operations
could be materially affected. Please see Item 7, 2013 Reinsurance Programs, Page 95, for a discussion of
our reinsurance treaties.
Cincinnati Financial Corporation – 2012 10-K - 27
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. It could also reduce the availability of
reinsurance. If we cannot obtain adequate coverage at a reasonable cost, it could constrain where we can
write business or reduce the amount of business we can write in certain areas. We also may be exposed to
state guaranty fund assessments if other carriers in a state cannot meet their obligations to policyholders.
A catastrophe or epidemic event also could affect our operations by damaging our headquarters facility,
injuring associates and visitors at our Fairfield, Ohio, headquarters or disrupting our associates’ ability to
perform their assigned tasks.
Our ability to achieve our performance objectives could be affected by changes in the financial,
credit and capital markets or the general economy.
We invest premiums received from policyholders and other available cash to generate investment income
and capital appreciation, while also maintaining sufficient liquidity to pay covered claims and operating
expenses, service our debt obligations and pay dividends. The value of our invested assets is an important
component of shareholders’ equity, also known as book value. Changes in the valuation of invested assets
can significantly affect changes in book value per share, a key performance objective as discussed in Item
7, Executive Summary of the Management’s Discussion and Analysis, Page 38.
For fixed-maturity investments such as bonds, which represented approximately 72.5 percent of the fair
value of our invested assets at the end of 2012, the inverse relationship between interest rates and bond
prices leads to falling bond values during periods of increasing interest rates. A significant increase in the
general level of interest rates could have an adverse effect on our shareholders’ equity and our
policyholders’ surplus.
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 100.
We issue life contracts with guaranteed minimum returns, referred to as bank-owned life insurance
contracts (BOLIs). BOLI investment assets must meet certain criteria established by the regulatory
authorities in the jurisdiction for which the group contract holder is subject. Therefore, sales of investments
may be mandated to maintain compliance with these regulations, possibly requiring gains or losses to be
recorded. We could experience losses if the assets in the accounts were less than liabilities at the time of
maturity or termination.
Our investment performance also could suffer because of the types of investments, industry groups and/or
individual securities in which we choose to invest. Market value changes related to these choices could
cause a material change in our financial condition or results of operations.
At year-end 2012, common stock holdings made up 25.8 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 79, and Item 7A, Quantitative and Qualitative Disclosures About Market Risk,
Page 100, 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 acquired, fail or are otherwise negatively affected. We may lose premium
revenue if a bank that owns appointed agencies were to change its strategies. We could experience
increased losses in our director and officer liability line of business if claims were made against insured
financial institutions.
A deterioration of credit and market conditions could also impair our ability to access credit markets and
could affect existing or future lending arrangements.
Our overall results could be affected if a significant portion of our commercial lines policyholders, including
those purchasing surety bonds, are adversely affected by marked or prolonged economic downturns and
events such as a downturn in construction and related sectors, tightening credit markets and higher fuel
costs. Such events could make it more difficult for policyholders to finance new projects, complete projects
or expand their businesses, leading to lower premiums from reduced payrolls and sales and lower
Cincinnati Financial Corporation – 2012 10-K - 28
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. We may
overestimate or underestimate loss cost trends or these trends may unexpectedly change, leading to losing
business by pricing risks above our competitors or charging rates too low to maintain profitability. Inflation
trends, especially outside of historical norms, may make it more difficult to determine adequate pricing. If
rates are not accurate, we may not generate enough premiums to offset losses and expenses or we may
not be competitive in the marketplace.
Our ability to set appropriate rates could be hampered if a state or states where we write business refuses
to allow rate increases that we believe are necessary to cover the risks insured. At least one state requires
us to purchase reinsurance from a mandatory reinsurance fund. Such reinsurance funds can create a credit
risk for insurers if not adequately funded by the state and, in some cases, the existence of a reinsurance
fund could affect the prices charged for our policies. The effect of these and similar arrangements could
reduce our profitability in any given period or limit our ability to grow our business.
The insurance industry is cyclical and intensely competitive. From time to time, the insurance industry goes
through prolonged periods of intense competition during which it is more difficult to attract new business,
retain existing business and maintain profitability. Competition in our insurance business is based on many
factors, including:
• Competitiveness of premiums charged
• Relationships among carriers, agents, brokers and policyholders
• Underwriting and pricing methodologies that allow insurers to identify and flexibly price risks
• Compensation provided to agents
• Underwriting discipline
• Terms and conditions of insurance coverage
• Speed with which products are brought to market
• Product and marketing innovations, including advertising
• Technological competence and innovation
• Ability to control expenses
• Adequacy of financial strength ratings by independent ratings agencies such as A.M. Best
• Quality of services and tools provided to agents and policyholders
• Claims satisfaction and reputation
If our pricing were incorrect or we were unable to compete effectively because of one or more of these
factors, our premium writings could decline and our results of operations and financial condition could be
materially adversely affected. Large competitors could intentionally disrupt the market by targeting certain
lines or underpricing the market.
Please see the discussion of our Commercial Lines, Personal Lines, Excess and Surplus Lines and Life
Insurance Segments in Item 1, Page 13, Page 15, Page 16 and Page 18, for a discussion of our competitive
position in the insurance marketplace.
Our pricing and capital models could be flawed.
We use various predictive pricing models, stochastic models and/or forecasting techniques to help us to
understand our business, analyze risk and estimate future trends. The output of these models is used to
assist us in making underwriting, pricing, reinsurance, reserving and capital decisions and helps us set our
strategic direction. These models contain numerous assumptions and are subject to uncertainties and
Cincinnati Financial Corporation – 2012 10-K - 29
limitations inherent in any statistical analysis. Actual results might differ from modeled output, resulting
in pricing our products incorrectly, overestimating or underestimating reserves, or inaccurately forecasting
the impact of modeled events on our results. This could materially adversely impact the results of
our operations.
Our loss reserves, our largest liability, are based on estimates and could be inadequate to cover
our actual losses.
Our consolidated financial statements are prepared using GAAP. These principles require us to make
estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and
accompanying Notes. Actual results could differ materially from those estimates. For a discussion of the
significant accounting policies we use to prepare our financial statements, the material implications of
uncertainties associated with the methods, assumptions and estimates underlying our critical accounting
policies and the process used to determine our loss reserves, please refer to Item 8, Note 1 of the
Consolidated Financial Statements, Page 112, and Item 7, Critical Accounting Estimates, Property Casualty
Insurance Loss and Loss Expense Reserves and Life Insurance Policy Reserves, Page 43 and Page 47.
Our most critical accounting estimate is loss reserves. Loss reserves are the amounts we expect to pay for
covered claims and expenses we incur to settle those claims. The loss reserves we establish in our financial
statements represent an estimate of amounts needed to pay and administer claims arising from insured
events that have already occurred, including events that have not yet been reported to us. Loss reserves
are estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability.
Inflationary scenarios, especially scenarios outside of historical norms or regulatory changes that affect the
assumptions underlying our critical accounting estimates, may make it more difficult to estimate loss
reserves. Accordingly, our loss reserves for past periods could prove to be inadequate to cover our actual
losses and related expenses. Any changes in these estimates are reflected in our results of operations
during the period in which the changes are made. An increase in our loss reserves would decrease
earnings, while a decrease in our loss reserves would increase earnings.
Unforeseen losses, the type and magnitude of which we cannot predict, may emerge 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.
Please see Item 7, 2013 Reinsurance Programs, Page 95, for a discussion of selected
reinsurance transactions.
Cincinnati Financial Corporation – 2012 10-K - 30
Our business depends on the uninterrupted operation of our facilities, systems and
business functions.
Our business depends on our associates’ ability to perform necessary business functions, such as
processing new and renewal policies and claims. We increasingly rely on technology and systems to
accomplish these business functions in an efficient and uninterrupted fashion. Our inability to access our
headquarters facilities or a failure of technology, telecommunications or other systems could significantly
impair our ability to perform such functions on a timely basis or affect the accuracy of transactions. If
sustained or repeated, such a business interruption or system failure could result in a deterioration of our
ability to write and process new and renewal business, serve our agents and policyholders, pay claims in a
timely manner, collect receivables or perform other necessary business functions. If our disaster recovery
and business continuity plans did not sufficiently consider, address or reverse the circumstances of an
interruption or failure, this could result in a materially adverse effect on our operating results and financial
condition. This risk is exacerbated because approximately 70 percent of our associates work at our
Fairfield, Ohio, headquarters.
Our ability to successfully execute business functions also depends on hiring and retaining qualified
associates. Competition for high-quality executives and other key associates occurs within the insurance
industry and from other industries. We also must effectively develop and manage associates, including
providing training and resources. Such tools and information can allow them to effectively perform critical
business functions and adapt to changing business needs. If we were unable to attract and retain certain
associates, or if we fail to provide adequate training or resources, we could limit the success of executing
our strategic plans and vital business functions.
The effects of changes in industry practices, laws and regulations on our business are uncertain.
As industry practices and legal, judicial, legislative, regulatory, political, social and other environmental
conditions change, unexpected and unintended issues related to insurance pricing, claims and coverage,
may emerge. These issues may adversely affect our business by impeding our ability to obtain adequate
rates for covered risks, extending coverage beyond our underwriting intent, by increasing the number or size
of claims, by varying assumptions underlying our critical accounting estimates or by increasing duties owed
to policyholders beyond contractual obligations. In some instances, unforeseeable emerging and latent
claim and coverage issues may not become apparent until sometime after we have issued the insurance
policies that could be affected by the changes. As a result, the full extent of liability under our insurance
contracts may not be known for many years after a policy is issued and our pricing and reserve estimates
may not accurately reflect its effect.
We are required to adopt new or revised accounting standards issued by recognized authoritative
organizations, including the Financial Accounting Standards Board (FASB) and the SEC. Future changes
required to be adopted could change the current accounting treatment that we apply and could result in
material adverse effects on our results of operations and financial condition.
Our investment income benefits from tax rate preferences for municipal bond interest and dividend
income from equity securities. Market valuations for these securities also benefit from the tax-preference
aspect of current tax laws, affecting the value of our investment portfolio and also shareholders’ equity.
Future changes in tax laws could result in material adverse effects on our results of operations and
financial condition.
The NAIC, state insurance regulators and state legislators continually re-examine existing laws and
regulations governing insurance companies and insurance holding companies, specifically focusing on
modifications to statutory accounting principles, interpretations of existing laws, regulations relating to
product forms and pricing methodologies and the development of new laws and regulations that affect a
variety of financial and nonfinancial components of our business. Any proposed or future legislation,
regulation or NAIC initiatives, if adopted, may be more restrictive on our ability to conduct business than
current regulatory requirements or may result in higher costs.
Federal laws and regulations, including those that may be enacted in the wake of the financial and credit
crises, may have adverse effects on our business, potentially including a change from a state-based system
of regulation to a system of federal regulation, the repeal of the McCarran Ferguson Act, and/or measures
under the Dodd-Frank Act that establish the Federal Insurance Office and provide for a determination that a
nonbank financial company presents systemic risk and therefore should be subject to heightened
supervision by the Federal Reserve Board. It is not known how this federal office will coordinate and interact
with the NAIC and state insurance regulators. Adoption or implementation of any of these measures may
restrict our ability to conduct our insurance business, govern our corporate affairs or increase our cost of
doing business.
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 43 and Page 47, for a discussion of our reserving practices.
Cincinnati Financial Corporation – 2012 10-K - 31
Managing technology initiatives and meeting data security requirements are
significant challenges.
While technology can streamline many business processes and ultimately reduce the cost of operations,
technology initiatives present short-term cost, and also have implementation and operational risks. In
addition, we may have inaccurate expense projections, implementation schedules or expectations regarding
the effectiveness and user acceptance of the end product. These issues could escalate over time. If we
were unable to find and retain associates with key technical knowledge, our ability to develop and deploy
key technology solutions could be hampered.
We necessarily collect, use and hold data concerning individuals and businesses with whom we have a
relationship. Threats to data security, including unauthorized access and cyber attacks, rapidly emerge and
change, exposing us to additional costs for protection or remediation and competing time constraints to
secure our data in accordance with customer expectations and statutory and regulatory requirements.
While we take all commercially reasonable measures to keep our systems and data secure, it is difficult or
impossible to defend against every risk being posed by changing technologies as well as criminals’ intent on
committing cyber-crime. Increasing sophistication of cyber-criminals and terrorists make keeping up with
new threats difficult and could result in a breach. Patching and other measures to protect existing systems
and servers could be inadequate, especially on systems that are being retired. Controls employed by our
U.S., off-shore and cloud vendors could prove inadequate. We could also experience a breach by
intentional or negligent conduct on the part of associates or other internal sources. Our systems and those
of our third-party vendors may become vulnerable to damage or disruption due to circumstances beyond our
or their control, such as from catastrophic events, power anomalies or outages, natural disasters, network
failures, and viruses and malware.
A breach of our security that results in unauthorized access to our data could expose us to a disruption or
challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties,
significant increases in compliance costs, and reputational damage.
Our status as an insurance holding company with no direct operations could affect our ability to
pay dividends in the future.
Cincinnati Financial Corporation is a holding company that transacts substantially all of its business
through its subsidiaries. Our primary assets are the stock in our operating subsidiaries and our
investments. Consequently, our cash flow to pay cash dividends and interest on our long-term debt depends
on dividends we receive from our operating subsidiaries and income earned on investments held at the
parent-company level.
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. In
2013, 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 24, and Item 8, Note 9 of the Consolidated Financial Statements,
Page 127, for discussion of insurance holding company dividend regulations.
Cincinnati Financial Corporation – 2012 10-K - 32
Properties
Item 1B. Unresolved Staff Comments
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 $145 million as of December 31, 2012, and is
classified as land, building and equipment, net, for company use. John J. & Thomas R. Schiff & Co. Inc.,
a related party, occupies approximately 6,750 square feet (less than 1 percent). This property is used by all
segments reported in the Consolidated Financial Statements and accompanying Notes.
Cincinnati Financial Corporation also owns 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 $7 million as of December 31, 2012,
and is classified as land, building and equipment, net, for company use. Unaffiliated tenants occupy
approximately 5 percent. This property is used by all segments reported in the Consolidated Financial
Statements and accompanying Notes.
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 $10 million as of December 31, 2012, and is
classified as land, building and equipment, net, for company use. This property is used by all segments
reported in the Consolidated Financial Statements and accompanying Notes.
Item 3. Legal Proceedings
Neither the company nor any of our subsidiaries is involved in any material litigation other than ordinary,
routine litigation incidental to the nature of its business.
Item 4. Mine Safety Disclosures
This item is not applicable to the company.
Cincinnati Financial Corporation – 2012 10-K - 33
Part II
Item 5. Market for the Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of
Equity Securities
Cincinnati Financial Corporation had approximately 76,000 shareholders of record as of
December 31, 2012. While approximately 12,700 shareholders are registered, the majority of shareholders
are beneficial owners whose shares are held in “street name” by brokers and institutional accounts. We
believe many of our independent agent representatives and most of the 4,057 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
36.05 $
30.06
34.51
0.4025
2012
2nd
38.12 $
33.06
38.07
0.4025
3rd
40.22 $
36.50
37.87
0.4075
4th
40.96 $
36.96
39.16
0.4075
1st
34.33 $
31.43
32.79
0.40
2011
2nd
33.55 $
27.80
29.18
0.40
3rd
29.54 $
23.65
26.33
0.4025
4th
30.79
24.66
30.46
0.4025
We discuss the factors that affect our ability to pay cash dividends and repurchase shares in Item 7,
Liquidity and Capital Resources, Page 83. 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 127.
The following summarizes securities authorized for issuance under our equity compensation plans as of
December 31, 2012:
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, 2012
(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, 2012
(c)
7,937,331 $ 37.34
9,316,008
-
-
7,937,331 $ 37.34
-
9,316,008
The number of securities remaining available for future issuance includes: 7 million shares available for
issuance under the Cincinnati Financial Corporation 2012 Stock Compensation Plan (the 2012 Plan),
2,095,928 shares available for issuance under the Cincinnati Financial Corporation 2006 Stock
Compensation Plan (the 2006 Plan), and 220,080 shares available for issuance of share grants under the
Director’s Stock Plan of 2009. Both the 2012 Plan and 2006 Plan allow for issuance of stock options,
service-based, or performance-based restricted stock units, stock appreciation rights or other equity-based
grants. Awards other than stock options and stock appreciation rights granted from the 2012 and 2006 plans
are counted as three shares against the plan for each one share of common stock actually issued.
Additional information about stock-based associate compensation granted under our equity compensation
plans is available in Item 8, Note 17 of the Consolidated Financial Statements, Page 135.
Cincinnati Financial Corporation – 2012 10-K - 34
Period
January 1-31, 2012
February 1-29, 2012
March 1-31, 2012
April 1-30, 2012
May 1-31, 2012
June 1-30, 2012
July 1-31, 2012
August 1-31, 2012
September 1-30, 2012
October 1-31, 2012
November 1-30, 2012
December 1-31, 2012
Totals
Total number
of shares
purchased
0 $
0
0
0
0
0
1,220
108,148
65,182
10,509
100,926
25,539
311,524
Average
price paid
per share
0.00
0.00
0.00
0.00
0.00
0.00
38.17
38.81
38.99
39.12
39.71
40.49
39.28
Total number of shares
purchased as part of
publicly announced
plans or programs
Maximum number of
shares that may yet be
purchased under the
plans or programs
0
0
0
0
0
0
1,220
108,148
65,182
10,509
100,926
25,539
311,524
7,438,762
7,438,762
7,438,762
7,438,762
7,438,762
7,438,762
7,437,542
7,329,394
7,264,212
7,253,703
7,152,777
7,127,238
We did not sell any of our shares that were not registered under the Securities Act during 2012. The board
of directors has authorized share repurchases since 1996. Purchases are expected to be made generally
through open market transactions. During 2012, we acquired 311,524 shares for $12 million from associates
as consideration for options exercised. The board gives management discretion to purchase shares at
reasonable prices in light of circumstances at the time of purchase, subject to SEC regulations. We have
7,127,238 shares available for purchase under our programs at December 31, 2012.
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 – 2012 10-K - 35
Cumulative Total Return
As depicted in the graph below, the five-year total return on a $100 investment made December 31, 2007,
assuming the reinvestment of all dividends, was 29.6 percent for Cincinnati Financial Corporation’s common
stock compared with 8.4 percent for the Standard & Poor’s Composite 1500 Property & Casualty Insurance
Index and 8.6 percent for the Standard & Poor’s 500 Index.
The Standard & Poor’s Composite 1500 Property & Casualty Insurance Index includes 27 companies:
Ace Limited., The Allstate Corporation, Amerisafe Inc., Aspen Insurance Holdings Limited., W. R. Berkley
Corporation, Berkshire Hathaway Inc., The Chubb Corporation, Cincinnati Financial Corporation, Employers
Holdings Inc., Fidelity National Financial Inc., First American Financial Corporation, The Hanover Insurance
Group Inc., Infinity Property and Casualty Corporation, Meadowbrook Insurance Group, Inc., Mercury
General Corporation, The Navigators Group Inc., Old Republic International Corporation, ProAssurance
Corporation, The Progressive Corporation, RLI Corp., Safety Insurance Group Inc., Selective Insurance
Group Inc., Stewart Information Services Corporation, Tower Group Inc., The Travelers Companies Inc.,
United Fire & Casualty Company and XL Group Public Limited Company.
The Standard & Poor’s 500 Index includes a representative sample of 500 leading companies in a cross
section of industries of the U.S. economy. Although this index focuses on the large capitalization segment of
the market, it is widely viewed as a proxy for the total market.
Comparison of Five-Year Cumulative Total Return*
$150
$125
$100
$75
$50
$25
$0
2007
2008
2009
2010
2011
2012
Cincinnati Financial Corporation
S&P 500 Index
S&P Composite 1500 Property & Casualty Insurance Index
*$100 invested on December 31, 2007, in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Cincinnati Financial Corporation – 2012 10-K - 36
Item 6. Selected Financial Data
(In millions except per share data, shares outstanding in thousands)
Years ended December 31,
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
Weighted average shares outstanding, diluted
Consolidated Balance Sheet Data
Total investments
Deferred policy acquisition costs
Total assets
Gross loss and loss expense reserves
Life policy reserves
Long-term debt
Shareholders' equity
Book value per share
Shares outstanding
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
$
$
$
$
2012
2011
2010
2009
2008
$
$
$
$
$
$
$
$
$
$
$
$
3,522
531
42
4,111
421
2.59
2.57
1.62
1.615
163,661
12,534
470
16,548
4,230
2,295
790
5,453
33.48
162,874
3,194
525
70
3,803
164
1.01
1.01
1.605
1.6025
163,259
11,801
477
15,635
4,339
2,214
790
5,033
31.03
162,186
3,082
518
159
3,772
375
2.30
2.30
1.59
1.585
163,274
11,508
458
15,065
4,200
2,034
790
5,012
30.79
162,782
3,054
501
336
3,903
431
2.65
2.65
1.57
1.565
162,867
10,643
454
14,413
4,142
1,783
790
4,742
29.14
162,741
3,136
537
138
3,824
428
2.62
2.62
1.56
1.525
163,362
8,890
482
13,342
4,086
1,551
791
4,169
25.67
162,411
12.6 %
6.0 %
11.1 %
19.7 %
(23.5) %
$
3,344
1,790
4,169
351
53.8 %
10.1
32.2
96.1 %
$
3,029
1,631
4,280
350
64.4 %
12.6
32.3
109.3 %
$
2,924
1,551
4,137
348
56.5 %
12.4
32.9
101.8 %
$
2,911
1,507
4,096
336
58.6 %
13.1
32.8
104.5 %
3,010
1,542
4,040
350
57.7 %
10.6
32.2
100.5 %
On January 1, 2012, we retrospectively adopted ASU 2010-26, Accounting for Costs Associated with
Acquiring or Renewing Insurance Contracts. All prior years’ information has been restated.
Per share data adjusted to reflect all stock splits and dividends prior to December 31, 2012.
* 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 79.
Cincinnati Financial Corporation – 2012 10-K - 37
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, Page 37, and
Item 8, Consolidated Financial Statements and related Notes, beginning on Page 108. 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, followed by details on
critical accounting estimates. In several instances, we refer to estimated industry data so that we can
provide information on our performance within the context of the overall insurance industry. Unless
otherwise noted, the industry data is prepared by A.M. Best Co., a leading insurance industry statistical,
analytical and financial strength rating organization. Information from A.M. Best is presented on a
statutory accounting basis. When we provide our results on a comparable statutory accounting basis, we
label it as such; all other company data is presented in accordance with accounting principles generally
accepted in the United States of America (GAAP).
EXECUTIVE SUMMARY
Through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest
property casualty insurers in the nation, based on 2012 direct 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.
Recent years have been challenging for the U.S. economy, the insurance industry and our company. Our
long-term perspective has allowed us to address the immediate challenges of such times while also
focusing on the major decisions that best position the company for success through all market cycles.
We believe that this forward-looking view has consistently 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. This measure, intended
to be all-inclusive regarding changes in book value per share, uses originally reported book value per share
in cases where book value per share has been adjusted, such as the adoption of Accounting Standards
Updates with a cumulative effect of a change in accounting. VCR trends are shown in the table below.
Five-year
% average
Three-year
% average
One
year
Value creation ratio
as of December 31, 2012
as of December 31, 2011
as of December 31, 2010
12.6 %
9.9 %
6.0
11.1
12.3
2.4
5.2 %
1.5
3.7
For the period 2013 through 2017, an annual value creation ratio averaging 10 percent to 13 percent is our
primary performance target. For the period 2009 through 2012, our annual value creation ratio averaged
12.4 percent, within the 12 percent to 15 percent five-year target range established in early 2009, soon after
the U.S. credit crisis. Since the credit crisis, interest rates have generally declined and credit spreads have
tightened, increasing the VCR contribution from valuation gains from our fixed-maturity securities. As
indicated in the table below, those gains contributed between 2 percent and 3 percent to VCR in the past
three years. That contribution is not expected to occur in the next five-year period, but management
believes the company will produce strong underwriting results.
Cincinnati Financial Corporation – 2012 10-K - 38
(Dollars are per share)
Book value change per share
End of year book value
Less beginning of year book value
Change in book value
Change in book value per share
Net income before net realized gains
Change in net realized and unrealized gains, fixed-maturity securities
Change in net realized and unrealized gains, equity securities
Dividend declared to shareholders
Other
Total change in book value per share
2012
Years ended December 31,
2011
2010
$
$
$
$
33.48
31.03
2.45
2.41
0.84
0.86
(1.62)
(0.04)
2.45
$
$
$
$
31.03
30.79
0.24
0.74
0.83
0.39
(1.61)
(0.11)
0.24
$
$
$
$
30.79
29.14
1.65
1.67
0.65
0.84
(1.59)
0.08
1.65
We believe this non-GAAP measure is a useful supplement to GAAP information. With the continuation of
economic and market uncertainty in recent years, the long-term nature of this measure provides a
meaningful measure of our long-term progress in creating shareholder value. A reconciliation of this
non-GAAP measure to comparable GAAP measures is shown in the table below.
(Dollars are per share)
Book value change per share
Book value as originally reported December 31, 2011
Cumulative effect of a change in accounting for deferred policy
acquisition costs, net of tax
Book value as adjusted December 31, 2011
Value creation ratio
End of year book value - as originally reported
Less beginning of year book value - as originally reported
Change in book value - as originally reported
Dividend declared to shareholders
Total contribution to value creation ratio
Years ended December 31,
2011
2012
2010
$
$
$
$
$
31.16
(0.13)
31.03
31.16
30.91
0.25
1.605
1.855
$
$
$
$
$
$
33.48
31.16
2.32
1.62
3.94
30.91
29.25
1.66
1.59
3.25
Contribution to value creation ratio from change in book value*
Contribution to value creation ratio from dividends declared to shareholders**
Value creation ratio
%
7.4
5.2
12.6 %
%
0.8
5.2
6.0 %
%
5.7
5.4
11.1 %
* Change in book value divided by the beginning of year book value as originally reported
** Dividend declared to shareholders divided by beginning of year book value as originally reported
In 2012, our value creation ratio of 12.6 percent was within the range of our performance objective. It
improved significantly from 2011, as discussed in Corporate Financial Highlights below.
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.
Our long-term target for profitable premium growth, for our property casualty and life insurance
segments in aggregate, is to reach $5 billion of annual direct written premiums by the end of 2015. In
2012, our direct written premiums totaled $3.909 billion. The compound annual growth rate of our net
written premiums was 2.2 percent over the five-year period 2008 through 2012, higher than the
0.7 percent estimated growth rate for the property casualty insurance industry. The industry’s growth
rate excludes its mortgage and financial guaranty lines of business.
• Combined ratio – We believe our underwriting philosophy and initiatives can drive performance to
achieve our underwriting profitability target of a GAAP combined ratio over any five-year period that is
consistently within the range of 95 percent to 100 percent. Our GAAP combined ratio has averaged
102.4 percent over the five-year period 2008 through 2012. Our combined ratio was below 100 percent
in 2012, but above 100 percent for 2008 through 2011, when our average catastrophe loss ratio of
7.7 percentage points was 4.0 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 52. Our statutory combined ratio averaged 102.2 percent
over the five-year period 2008 through 2012 compared with an estimated 102.9 percent for the
property casualty industry. The industry’s ratio again excludes its mortgage and financial guaranty lines
of business.
Cincinnati Financial Corporation – 2012 10-K - 39
•
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, had a compound annual rate of 2.0 percent over
the three-year period 2010 through 2012. It has grown since 2009, when we experienced a dramatic
reduction in dividend payouts by financial services companies held in our equity portfolio.
o Over the five years ended December 31, 2012, our compound annual equity portfolio return was
0.8 percent compared with a compound annual total return of 1.7 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 2012,
our annual equity portfolio return was 10.9 percent, compared with 16.0 percent for the Index,
as the large-cap, dividend paying stocks that we prefer were outperformed by the broader
equity market.
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
2012, the company has increased the indicated annual cash dividend rate for 52 consecutive years, a
record we believe is matched by only nine other publicly traded companies. The board regularly evaluates
relevant factors in dividend-related decisions, and the 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 83.
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 enhance underwriting
expertise and knowledge, thereby increasing our ability to manage our business while also gaining
efficiency. Additional information and more focused action on underperforming product lines, plus
expanding pricing capabilities through the use of technology and analytics, can lead to better profit
margins. Improved internal processes with additional performance metrics can help us be more
efficient and effective. These initiatives also support the ability of the independent agencies that
represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage
agency expenses.
• Drive premium growth – Implementation of these initiatives is intended to further penetrate each market
we serve through our independent 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 10. Below is a review of highlights of our financial results for the past three years. Detailed
discussion of these topics appears in Results of Operations, Page 51, and Liquidity and Capital Resources,
Page 83.
Cincinnati Financial Corporation – 2012 10-K - 40
CORPORATE FINANCIAL HIGHLIGHTS
The value creation ratio discussed in the Executive Summary, Page 38, included contributions from the
major components shown in the table below.
Years ended December 31,
2012
2011
2010
Value creation ratio major components
Net income before net realized gains
Change in realized and unrealized gains, fixed-maturity securities
Change in net realized and unrealized gains, equity securities
Other
Value creation ratio
%
%
%
7.7
2.7
2.8
(0.6)
12.6
2.4
2.7
1.3
(0.4)
6.0
5.7
2.2
2.9
0.3
11.1
%
%
%
The 2012 value creation ratio benefited from improved operating results as well as a strong contribution
from generally higher valuations in securities markets. The contribution from operating results rose
5.3 percentage points in 2012, compared with 2011, while the contribution from realized gains plus the
change in unrealized gains from our investment portfolios rose 1.5 points. The 2011 value creation ratio was
depressed primarily due to unusually high catastrophe losses that lowered the ratio by 3.3 percentage
points compared with 2010, and also drove a 56 percent decline in net income. Higher valuations for our
investment portfolio in recent years benefited the value creation ratio in addition to earnings.
Balance Sheet Data
(Dollars in millions except share data)
Balance sheet data
Total investments
Total assets
Short-term debt
Long-term debt
Shareholders' equity
Book value per share
Debt-to-total-capital ratio
At December 31,
2012
At December 31,
2011
$
$
12,534
16,548
104
790
5,453
33.48
11,801
15,635
104
790
5,033
31.03
14.1 %
15.1 %
Invested assets grew 6 percent during 2012 on a fair value basis, with market gains outpacing an increase
in the cost basis of invested assets of approximately 3 percent. Entering 2013, we believe the portfolio
continues to be well diversified, and it is well positioned to withstand short-term fluctuations. We discuss
our investment strategy in Item 1, Investments Segment, Page 20, and results for the segment in
Investment Results of Operations, Page 79. Total assets rose 6 percent, primarily due to the increase in
invested assets.
The amount of our debt obligations did not change in 2012. Our ratio of debt to total capital (debt plus
shareholders’ equity) decreased by 1 percentage point in 2012 and remains comfortably within our
target range.
Income Statement and Per Share Data
(Dollars in millions except share data in thousands)
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,
2011
2010
2012
$
$
$
3,522
531
42
4,111
421
2.57 $
1.62
$
3,194
525
70
3,803
164
1.01 $
1.605
3,082
518
159
3,772
375
2.30
1.59
Weighted average shares outstanding
163,661
163,259
163,274
2012-2011
Change %
2011-2010
Change %
10
1
(40)
8
157
154
1
0
4
1
(56)
1
(56)
(56)
1
0
Net income in 2012 rose $257 million or 157 percent compared with 2011, due primarily to the after-tax
effects of property casualty underwriting results that improved by $270 million, including $44 million from
lower natural catastrophe losses, and net realized investment gains that were $17 million lower. Net income
decreased $211 million in 2011, compared with 2010, reflecting the after-tax net effect of two major
contributing items: a $149 million decline in property casualty underwriting results, including $165 million
from higher catastrophe losses, and a $58 million decline in net realized investment gains.
As discussed in Investment Results of Operations, Page 79, sales of securities that had appreciated in
value led to realized investment gains in all three years. Realized and unrealized investment gains and
losses are integral to our financial results over the long term. We have substantial discretion in the timing of
investment sales and, therefore, the gains or losses that are recognized in any period. That discretion
Cincinnati Financial Corporation – 2012 10-K - 41
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.
Higher dividend income was largely responsible for 1 percent growth in both 2012 and 2011 pretax
investment income. In addition to a larger common stock portfolio generating more dividend income in 2012,
both 2012 and 2011 benefited from higher average dividend payment rates.
Contribution from Insurance Operations
(Dollars in millions)
Consolidated property casualty highlights
Net written premiums
Earned premiums
Underwriting gain (loss)
GAAP combined ratio
Statutory combined ratio
Written premium to statutory surplus
$
Years ended December 31,
2011
2010
2012
$
3,482
3,344
137
$
3,098
3,029
(278)
2,963
2,924
(49)
2011-2010
2012-2011
Change % Change %
5
4
nm
12
10
nm
Pt. Change
Pt. Change
96.1 %
95.4
0.9
109.3 %
108.9
0.8
101.8 %
101.8
0.8
(13.2)
(13.5)
0.1
7.5
7.1
0.0
Property casualty net written premiums grew 12 percent in 2012 and earned premiums grew 10 percent,
largely due to higher pricing and premium growth initiatives. Trends and related factors are discussed in
Commercial Lines, Personal Lines and Excess and Surplus Lines Insurance Results of Operations,
beginning on Page 57, Page 68 and Page 74, respectively.
Our property casualty insurance operations generated an underwriting gain in 2012 after reporting an
underwriting loss in each of the preceding four years. The $415 million improvement for 2012, compared
with 2011, included a $68 million decrease in losses from natural catastrophe events. A 10 percent rise in
2012 earned premiums drove most of the improvement as noncatastrophe losses and underwriting
expenses in total for 2012 were within 1 percent of 2011. The $229 million change in underwriting loss for
2011, compared with 2010, was driven by a $254 million rise in losses from natural catastrophe events.
We measure property casualty underwriting profitability primarily by the combined ratio. Our combined ratio
measures the percentage of each earned premium dollar spent on claims plus all expenses related to our
property casualty operations. A lower ratio indicates more favorable results and better underlying
performance. Our combined ratio improved to under 100 percent in 2012 but was over 100 percent in each
of the prior three years. Initiatives to improve our combined ratio are discussed in Item 1, Strategic
Initiatives, Page 10. In 2012, 2011 and 2010, favorable development on reserves for claims that occurred in
prior accident years helped offset remaining incurred loss and loss expenses. Reserve development is
discussed further in Property Casualty Loss and Loss Expense Obligations and Reserves, beginning on
Page 88. 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 57, Page 68 and Page 74, respectively.
Our life insurance segment reported a small loss because most of its investment income is included in our
investments segment results. We discuss results for the segment in Life Insurance Results of Operations,
Page 77. In addition to investment income, realized investment gains from the life insurance investment
portfolio are also included in our investments segment results.
Factors Influencing Our Future Performance
Our view of the shareholder value we can create over the next five years relies largely on two assumptions
about the external environment. First, we anticipate continued firming of commercial and personal insurance
pricing throughout 2013. Second, we assume that the economy can maintain a growth track during 2013. 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 targets include:
• We expect the insurance marketplace to remain competitive, which is likely to cause carriers to
pursue strategies that they believe could lead to economies of scale, market share gains or the potential
for an improved competitive posture.
• We expect the independent insurance agency system to remain strong, with continued agency
consolidation. If soft insurance market conditions return in 2013, it will create additional risk
for agencies.
• We expect initiatives that make it easier for agents to do business with us will continue to be a
significant factor in agency relationships, with technology being a major driver. Policyholders will
increasingly demand online services and access from agents or carriers.
We discuss in our Item 1A, Risk Factors, Page 26, many potential risks to our business and our ability to
achieve our qualitative and quantitative objectives. These are real risks, but their probability of occurring
may not be high. We also believe that our risk management programs generally could mitigate their
Cincinnati Financial Corporation – 2012 10-K - 42
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 on those we insure. These
effects include deterioration in credit quality of our municipal or corporate bond portfolios and increased
losses without sufficient corresponding increases in premiums. As with any risk, we seek to identify the
extent of the risk exposure and possible actions to mitigate potential negative effects of risk, at an
enterprise level.
We have formal risk management programs overseen by an executive officer and supported by a team of
representatives from business areas. The team provides reports to our chairman, our president and chief
executive officer and our board of directors, as appropriate, on risk assessments, risk metrics and risk plans.
Our use of operational audits, strategic plans and departmental business plans, as well as our culture of
open communications and our fundamental respect for our Code of Conduct, continue to help us manage
risks on an ongoing basis.
For the year 2013, we believe our value creation ratio may be below our long-term target for
several reasons.
• The rally in financial markets during recent years had a favorable impact on our value creation ratio,
offsetting the unfavorable impact of the sharp decline in financial markets during 2008. Financial
markets continued to display volatility during 2012, and some predict more turbulence in 2013 from
effects of events such as the sovereign debt crisis in several European countries or other geopolitical
events that could also affect the U.S. economy and markets. Should financial markets decline during
2013, which could occur as part of typical market volatility patterns, the related component of our
2013 value creation ratio could also register a weak or negative result.
• A return of soft insurance market pricing in recent years could significantly affect growth rates and
earned premium levels into 2013 and for some time into the future, depending on insurance market
conditions. After several years of market conditions that weakened loss ratios and hampered near-term
profitability, conditions affecting property casualty markets improved in 2012. In the future, economic
factors, including inflation, may increase our claims and settlement expenses related to medical care,
litigation and construction.
• The slowly recovering economy helped increase the value of business and personal insurable assets
owned by policyholders in 2012. If the economy falters, we may experience low or no premium growth
for the property casualty industry. Property casualty written premium growth also may lag as some of
our growth initiatives require more time to reach their full contribution.
• We will incur the cost of continued investment in our business, including technology, recent entry in new
states and process initiatives to create long-term value. In addition, we will not see the full advantage of
some of these investments for several years.
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 112. In conjunction with that discussion,
material implications of uncertainties associated with the methods, assumptions and estimates underlying
the company’s critical accounting policies are discussed below. The audit committee of the board of
directors reviews the annual financial statements with management and the independent registered public
accounting firm. These discussions cover the quality of earnings, review of reserves and accruals,
reconsideration of the suitability of accounting principles, review of highly judgmental areas including critical
accounting policies, audit adjustments and such other inquiries as may be appropriate.
PROPERTY CASUALTY INSURANCE LOSS AND LOSS EXPENSE RESERVES
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
$4.169 billion at year-end 2012 compared with $4.280 billion at year-end 2011.
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
Cincinnati Financial Corporation – 2012 10-K - 43
type of claim involved
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:
•
•
circumstances surrounding each claim
• policy provisions pertaining to each claim
• potential for subrogation or salvage recoverable
• general insurance reserving practices
Case reserves of all sizes are subject to review on a 90-day cycle, or more frequently if new information
about a loss becomes available. As part of the review process, we monitor industry trends, cost trends,
relevant court cases, legislative activity and other current events in an effort to ascertain new or additional
loss exposures.
We also establish IBNR reserves to provide for all unpaid loss and loss expenses not accounted for by
case reserves:
• For weather events designated as catastrophes, we calculate bulk reserves directly as a result of an
estimated IBNR claim count and an estimated average claim amount for each event. Once case
reserves are established for a weather event, we reduce the bulk reserves. Our claims department
management coordinates the assessment of these events and prepares the related bulk reserve
estimates. Such an assessment involves a comprehensive analysis of the nature of the event, of
policyholder exposures within the affected geographic area and of available claims intelligence.
Depending on the nature of the event, available claims intelligence could include surveys of field claims
associates within the affected geographic area, feedback from a catastrophe claims team sent into the
area, as well as data on claims reported as of the financial statement date. To determine whether an
event is designated as a catastrophe, we generally use the catastrophe definition provided by Property
Claims Service (PCS), a division of Insurance Services Office (ISO). PCS defines a catastrophe as an
event that causes countrywide damage of $25 million or more in insured property losses and affects a
significant number of policyholders and insureds.
• For asbestos and environmental claims, we calculate IBNR reserves by deriving an actuarially-based
estimate of total unpaid loss and loss expenses. We then reduce the estimate by total case reserves.
We discuss the reserve analysis that applies to asbestos and environmental reserves in Asbestos and
Environmental Reserves, Page 88.
• For loss expenses that pertain primarily to salaries and other costs related to our claims department
associates, also referred to as adjusting and other expense or AOE for statutory accounting, we
calculate reserves based on an analysis of the relationship between paid losses and paid AOE.
Reserves for AOE are allocated to company, line of business and accident year based on a claim
count algorithm.
• For all other claims and events, IBNR reserves are calculated as the difference between an actuarial
estimate of the ultimate cost of total loss and loss expenses incurred reduced by the sum of total loss
and loss expense payments and total case reserves estimated for individual claims. We discuss
below the development of actuarially based estimates of the ultimate cost of total loss and loss
expenses incurred.
Our actuarial staff applies significant judgment in selecting models and estimating model parameters when
preparing reserve analyses. In addition, 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.
Our actuarial staff bases its IBNR reserve estimates for these losses primarily on the indications of methods
and models that analyze accident year data. Accident year is the year in which an insured claim, loss or loss
expense occurred. The specific methods and models that our actuaries have used for the past several
years are:
• paid and reported loss development methods
• paid and reported loss Bornhuetter-Ferguson methods
•
individual and multiple probabilistic trend family models
Our actuarial staff uses diagnostics provided by stochastic reserving software to evaluate the
appropriateness of the models and methods listed above. The software’s diagnostics have indicated that the
appropriateness of these models and methods for estimating IBNR reserves for our lines of business tends
Cincinnati Financial Corporation – 2012 10-K - 44
company and industry pricing
company in-force policy count
company and industry premium
company and industry exposure
company and industry loss frequency and severity
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:
•
•
•
• past large loss events such as hurricanes
•
•
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 their 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
• general economic trends such as inflation
•
trends in litigiousness and legal expenses
• product and underwriting changes
•
changes in claims practices
The determination of management's best estimate, like the preparation of the reserve analysis that supports
it, involves considerable judgment. Changes in reserving data or the trends and factors that influence
reserving data may signal fundamental shifts or may simply reflect single-period anomalies. Even if a
change reflects a fundamental shift, the full extent of the change may not become evident until years later.
Moreover, since our methods and models do not explicitly relate many of the factors we consider directly to
reserve levels, we typically cannot quantify the precise impact of such factors on the adequacy of reserves
prospectively or retrospectively.
Due to the uncertainties described above, our ultimate loss experience could prove better or worse than our
carried reserves reflect. To the extent that reserves are inadequate and increased, the amount of the
increase is a charge in the period that the deficiency is recognized, raising our loss and loss expense ratio
and reducing earnings. To the extent that reserves are redundant and released, the amount of the release is
a credit in the period that the redundancy is recognized, reducing our loss and loss expense ratio and
increasing earnings.
large loss activity and trends in large losses
Cincinnati Financial Corporation – 2012 10-K - 45
Key Assumptions - Loss Reserving
Our actuarial staff makes a number of key assumptions when using their methods and models to derive
IBNR reserve estimates. Appropriate reliance on these key assumptions essentially entails
determinations of the likelihood that statistically significant patterns in historical data may extend into the
future. The four most significant of the key assumptions used by our actuarial staff and approved by
management are:
• Emergence of loss and defense and cost containment expenses on an accident year basis. Historical
paid loss, reported loss and paid defense and cost containment expense data for the business lines we
analyze contain patterns that reflect how unpaid losses, unreported losses and unpaid defense and cost
containment expenses as of a financial statement date will emerge in the future on an accident year
basis. Unless our actuarial staff or management identifies reasons or factors that invalidate the
extension of historical patterns into the future, these patterns can be used to make projections
necessary for estimating IBNR reserves. Our actuaries significantly rely on this assumption in the
application of all methods and models mentioned above.
• Calendar year inflation. For long-tail and mid-tail business lines, calendar year inflation trends for
future paid losses and paid defense and cost containment expenses do not vary significantly from a
stable, long-term average. Our actuaries base reserve estimates derived from probabilistic trend family
models on this assumption.
• Exposure levels. Historical earned premiums, when adjusted to reflect common levels of product pricing
and loss cost inflation, can serve as a proxy for historical exposures. Our actuaries require this
assumption to estimate expected loss ratios and expected defense and cost containment expense
ratios used by the Bornhuetter-Ferguson reserving methods. They may also use this assumption to
establish exposure levels for recent accident years, characterized by “green” or immature data, when
working with probabilistic trend family models.
• Claims having atypical emergence patterns. Characteristics of certain subsets of claims, such as high
frequency, high severity, or mass tort claims, have the potential to distort patterns contained in historical
paid loss, reported loss and paid defense and cost containment expense data. When testing indicates
this to be the case for a particular subset of claims, our actuaries segregate these claims from the data
and analyze them separately. Subsets of claims that could fall into this category include hurricane
claims or claims for other weather events where total losses we incurred were very large, individual
large claims and asbestos and environmental claims.
These key assumptions have not changed since 2005, when our actuarial staff began using probabilistic
trend family models to estimate IBNR reserves.
Paid losses, reported losses and paid defense and cost containment expenses are subject to random as
well as systematic influences. As a result, actual paid losses, reported losses and paid defense and cost
containment 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 major property casualty lines 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
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 89, 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.
Cincinnati Financial Corporation – 2012 10-K - 46
(In millions)
At December 31, 2012
Total
Commercial casualty
Commercial property
Commercial auto
Workers' compensation
Personal auto
Homeowners
At December 31, 2011
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
$
$
$
$
3,813 $
1,512 $
222
351
931
182
120
3,905 $
1,613 $
209
349
966
176
121
3,598 $
1,341 $
199
333
845
174
112
3,677 $
1,432 $
175
333
875
168
107
3,918
1,588 $
245
370
1,018
191
127
4,056
1,750 $
229
365
1,056
184
129
123 $
23
19
87
9
8
159 $
27
16
90
8
11
80
15
12
57
6
5
103
18
10
59
5
7
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 operating
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 2012, consolidated fixed-maturity investments exceeded total
insurance reserves (including life policy reserves) by $2.568 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 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 receivable carrying amount
may not be recoverable; and changes in legal factors or in the business climate.
The application of our impairment policy resulted in other-than-temporary impairment (OTTI) charges that
reduced our income before income taxes by $33 million in 2012, $57 million in 2011 and $36 million in 2010.
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 noncash charges to income and are reported as realized investment losses.
Our internal investment portfolio managers monitor their assigned portfolios. If a security is valued below
cost or amortized cost, the portfolio managers undertake additional reviews. Such declines often occur in
conjunction with events taking place in the overall economy and market, combined with events specific to
the industry or operations of the issuing organization. Managers review quantitative measurements such as
a declining trend in fair value, the extent of the fair value decline and the length of time the value of the
security has been depressed, as well as qualitative measures such as pending events, credit ratings and
issuer liquidity. We are even more proactive when these declines in valuation are greater than might be
anticipated when viewed in the context of overall economic and market conditions. We provide information
about valuation of our invested assets in Item 8, Note 2, of the Consolidated Financial Statements,
Page 118.
Cincinnati Financial Corporation – 2012 10-K - 47
All securities valued below 100 percent of cost or amortized cost are reported to the asset impairment
committee for evaluation. Securities valued between 95 percent and 100 percent of cost or amortized cost
are reviewed but not monitored separately by the committee. When evaluating for OTTI, the committee
considers the company’s intent and ability to retain a security for a period adequate to recover its cost.
Because of the company's financial strength and other factors discussed below, management may not
impair certain securities even when they are fair valued below cost or amortized cost.
Securities that have previously been other-than-temporarily impaired are evaluated based on their adjusted
cost or amortized cost and further written down, if deemed appropriate. We provide detailed information
about securities fair valued in a continuous loss position at year-end 2012 in Item 7A, Application of Asset
Impairment Policy, Page 102.
When determining OTTI charges for our fixed-maturity portfolio, management places significant emphasis
on whether issuers of debt are current on contractual payments and whether future contractual amounts are
likely to be paid. Our fixed-maturity invested asset impairment policy states that OTTI is considered to have
occurred (1) if we intend to sell the impaired fixed-maturity security; (2) if it is more likely than not we will be
required to sell the fixed-maturity security before recovery of its amortized cost basis; or (3) if the present
value of the expected cash flows is not sufficient to recover the entire amortized cost basis. If we intend to
sell or it is more likely than not we will be required to sell, the amortized cost of any such securities is
reduced to fair value as the new amortized cost basis, and a realized loss is recorded in the quarter in which
it is recognized. When we believe that full collection of interest and/or principal is not likely, we determine
the net present value of future cash flows by using the effective interest rate implicit in the security at the
date of acquisition as the discount rate and compare that amount to the amortized cost and fair value of the
security. The difference between the net present value of the expected future cash flows and amortized cost
of the security is considered a credit loss and recognized as a realized loss in the quarter in which it occurs.
The difference between the fair value and the net present value of the cash flows of the security, the
noncredit loss, is recognized in other comprehensive income as an unrealized loss.
When determining OTTI charges for our equity portfolio, our invested asset impairment policy considers
qualitative and quantitative factors, including facts and circumstances specific to individual securities, asset
classes, the financial condition of the issuer, changes in dividend payment, the length of time fair value had
been less than cost, the severity of the decline in fair value below cost, the volatility of the security and our
ability and intent to hold each position until its forecasted recovery.
For each of our equity securities in an unrealized loss position at December 31, 2012, we applied the
objective quantitative and qualitative criteria of our invested asset impairment policy for OTTI. Our long-term
equity investment philosophy, emphasizing companies with strong indications of paying and growing
dividends, combined with our strong surplus, liquidity and cash flow, provide us the ability to hold these
investments through what we believe to be slightly longer recovery periods occasioned by the recession and
historic levels of market volatility. Based on the individual qualitative and quantitative factors, as discussed
above, we evaluate and determine an expected recovery period for each security. A change in the condition
of a security can warrant impairment before the expected recovery period. If the security has not recovered
cost within the expected recovery period, the security is other-than-temporarily impaired.
Securities considered to have a temporary decline would be expected to recover their cost or amortized
cost, which may be at maturity. Under the same accounting treatment as fair value gains, temporary
declines (changes in the fair value of these securities) are reflected in shareholders’ equity on our balance
sheet in accumulated other comprehensive income (AOCI), net of tax, and have no impact on net income.
FAIR VALUE MEASUREMENTS
Valuation of Financial Instruments
Valuation of financial instruments, primarily securities held in our investment portfolio, is a critical component
of our year-end financial statement preparation. Fair Value Measurements and Disclosures, Accounting
Standards Codification (ASC) 820-10, defines fair value as the exit price or the amount that would be
(1) received to sell an asset or (2) paid to transfer a liability in an orderly transaction between marketplace
participants at the measurement date. When determining an exit price, we must, whenever possible, rely
upon observable market data.
In accordance with ASC 820-10, we have categorized our financial instruments, based on the priority of the
inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within
different levels of the hierarchy, the categorization is based on the lowest level that is significant to the fair
value measurement of the instrument. While we consider pricing data from outside services, we ultimately
determine whether the data or inputs used by these outside services are observable or unobservable.
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, Page 121.
Cincinnati Financial Corporation – 2012 10-K - 48
Level 1 and Level 2 Valuation Techniques
Over 99 percent of the $12.466 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. Pricing for each Level 3 security is based
upon inputs that are market driven, including third-party reviews provided to the issuer or broker quotes. We
placed in the Level 3 hierarchy securities for which we were unable to obtain the pricing methodology or we
could not consider the price provided as binding. Pricing for securities classified as Level 3 could not be
corroborated by similar securities priced using observable inputs.
Management ultimately determined the pricing for each Level 3 security that we considered to be the
best exit price valuation. As of December 31, 2012, total Level 3 assets were less than 1 percent of our
investment portfolio measured at fair value. Broker quotes are obtained for thinly traded securities that
subsequently fall within the Level 3 hierarchy. We have generally obtained and evaluated two nonbinding
quotes from brokers; our investment professionals determine our best estimate of fair value.
EMPLOYEE BENEFIT PENSION PLAN
We have a defined benefit pension plan that was modified during 2008; refer to Item 8, Note 13 of the
Consolidated Financial Statements, Page 130, for additional information. Contributions and pension costs
are developed from annual actuarial valuations. These valuations involve key assumptions including
discount rates, expected return on plan assets and compensation increase rates, which are updated
annually. Any adjustments to these assumptions are based on considerations of current market conditions.
Therefore, changes in the related pension costs or credits may occur in the future due to changes in
assumptions.
Key assumptions used in developing the 2012 benefit obligation for our qualified plan were a 4.20 percent
discount rate and rates of compensation increases ranging from 2.75 percent to 3.25 percent. To determine
the discount rate, a hypothetical diversified portfolio of actual domestic Aa rated bonds was chosen to
provide payments approximately matching the plan’s expected benefit payments. A single interest rate was
determined based on the anticipated yield of the constructed portfolio.
Key assumptions used in developing the 2012 net pension expense for our qualified plan were a
5.10 percent discount rate, a 7.50 percent expected return on plan assets and rates of compensation
increases ranging from 3.50 percent to 5.50 percent. See Note 13, Page 130 for additional information
on assumptions.
In 2012, the net pension expense was $18 million. In 2013, we expect the net pension expense to remain
unchanged at $18 million.
Holding all other assumptions constant, a 0.5 percentage-point decrease in the discount rate would
decrease our 2013 income before income taxes by $1 million. A 0.5 percentage point decrease in the
expected return on plan assets would decrease our 2013 income before income taxes by $1 million.
The fair value of the plan assets was $44 million less than the accumulated benefit obligation at year-end
2012 and $20 million less at year-end 2011. The fair value of the plan assets was $82 million less than the
projected plan benefit obligation at year-end 2012 and $65 million less at year-end 2011. Market conditions
and interest rates significantly affect future assets and liabilities of the pension plan. During the third quarter
of 2012, we contributed $14 million to our qualified plan. We contributed $15 million to our qualified plan
during the first quarter of 2013.
DEFERRED POLICY ACQUISITION COSTS
We establish a deferred asset for expenses associated with successfully acquiring property casualty and life
insurance policies, primarily commissions, premium taxes and underwriting costs. Underlying assumptions
are updated periodically to reflect actual experience, and we evaluate our deferred acquisition cost
recoverability.
For property casualty policies, deferred acquisition costs are amortized over the terms of the policies. These
costs are principally agent commissions, premium taxes and certain underwriting costs related to successful
contract acquisition, which are deferred and amortized into net income as premiums are earned. We assess
recoverability of deferred acquisition costs at the segment level, consistent with the ways we acquire,
service, manage and measure profitability. Deferred acquisition costs track with the change in premiums.
Our property casualty insurance operations consist of three segments, commercial lines, personal lines and
excess and surplus lines.
Cincinnati Financial Corporation – 2012 10-K - 49
For life insurance policies, acquisition costs are amortized into income either over the premium-paying
period of the policies or the life of the policy, depending on the policy type. These costs are principally agent
commissions and underwriting costs related to successful contract acquisition. We analyze our acquisition
cost assumptions periodically to reflect actual experience; we evaluate our deferred acquisition cost for
recoverability; and we regularly conduct reviews for potential premium deficiencies or loss recognition.
Changes in the amounts or timing of estimated future profits could result in adjustments to the accumulated
amortization of these costs.
PROFIT-SHARING COMMISSION ACCRUAL
We establish an accrual for property casualty profit-sharing commissions. We calculate the profit-sharing
commission accrual estimate based on property casualty underwriting results. Profit-sharing commissions
are paid to agencies using a formula that takes into account agency profitability over one-year and three-
year periods and premium volume. Due to the complexity of the calculation, timing of the accrual
determination and the variety of allocation factors that can affect profit-sharing commissions for an individual
agency, the amount accrued can differ from the actual profit-sharing commissions paid. The profit-sharing
commission accrual of $102 million in 2012 contributed 3.1 percentage points to the property casualty
combined ratio. If profit-sharing commissions paid were to vary from that amount by 5 percent, it would
affect 2013 net income by $2 million (after tax), or 1 cent per share, and the combined ratio by
approximately 0.1 percentage point.
RECENT ACCOUNTING PRONOUNCEMENTS
Information about recent accounting pronouncements is provided in Item 8, Note 1, of the Consolidated
Financial Statements, Page 112. We have determined that recent accounting pronouncements have not had
nor are they expected to have any material impact on our consolidated financial statements.
Cincinnati Financial Corporation – 2012 10-K - 50
Investments
RESULTS OF OPERATIONS
Consolidated financial results primarily reflect the results of our five reporting segments. These segments
are defined based on financial information we use to evaluate performance and to determine the allocation
of assets.
• Commercial lines property casualty insurance
• Personal lines property casualty insurance
• Excess and surplus lines property casualty insurance
• Life insurance
•
We report as Other the noninvestment operations of the parent company and its noninsurer 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 137. The following sections provide analysis and discussion of results of
operations for each of the five segments. Commercial Lines Insurance Results of Operations begins on
Page 57, Personal Lines Insurance Results of Operations begins on Page 68, Excess and Surplus Lines
Insurance Results of Operations begins on Page 74, Life Insurance Results of Operations begins on
Page 77, and Investment Results of Operations begins on Page 79. We begin with an overview of our
consolidated property casualty operations.
Cincinnati Financial Corporation – 2012 10-K - 51
CONSOLIDATED PROPERTY CASUALTY INSURANCE RESULTS OF OPERATIONS
Earned and net written premiums for our consolidated property casualty operations grew in 2012,
reflecting better pricing and strategic initiatives for targeted growth. A key measure of property casualty
profitability is underwriting profit or loss. Our 2012 underwriting profit of $137 million represents a
$415 million improvement over the 2011 underwriting loss of $278 million. Part of the improvement was
due to a $68 million decrease in natural catastrophe losses, mostly from severe weather. More importantly,
underwriting results before catastrophe losses improved, demonstrating ongoing benefits from various
recent-year profit improvement and premium growth initiatives that were designed to improve results
over time.
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 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,
2011
2012
2010
2012-2011
Change %
2011-2010
Change %
3,344
6
3,350
2,160
373
(357)
(39)
2,137
1,076
137
$
$
64.6 %
11.1
(10.7)
(1.1)
63.9
32.2
96.1 %
3,029
4
3,033
2,213
407
(280)
(5)
2,335
976
(278)
$
$
73.0 %
13.4
(9.3)
(0.1)
77.0
32.3
109.3 %
2,924
4
2,928
2,154
165
(287)
(17)
2,015
962
(49)
10
50
10
(2)
(8)
(28)
(680)
(8)
10
nm
4
0
4
3
147
2
71
16
1
nm
73.6 %
5.6
(9.8)
(0.5)
68.9
32.9
101.8 %
Pt. Change
(8.4)
(2.3)
(1.4)
(1.0)
(13.1)
(0.1)
(13.2)
Pt. Change
(0.6)
7.8
0.5
0.4
8.1
(0.6)
7.5
Combined ratio:
Contribution from catastrophe losses and prior years
reserve development
Combined ratio before catastrophe losses and prior
years reserve development
96.1 %
109.3 %
101.8 %
(13.2)
(0.7)
4.0
(4.7)
96.8 %
105.3 %
106.5 %
(4.7)
(8.5)
7.5
8.7
(1.2)
Performance highlights for consolidated property casualty operations include:
• Premiums – Strong growth in renewal and new business written premiums drove double-digit increases
in 2012 earned premiums and net written premiums. The 2012 rate of growth for earned and net written
premiums more than doubled that of 2011 as premium volume rose significantly in each of our property
casualty segments. Higher and more precise pricing continues to benefit operating results and is further
discussed in the results of operations sections below by segment. A fifth straight year of higher new
business premiums reflected our premium growth initiatives from recent years that continue to favorably
affect current year growth, particularly as newer agency relationships mature over time. Agents
appointed during 2011 or 2012 produced an increase in standard lines new business of $35 million
during 2012, compared with 2011. A higher level of insured exposures, reflecting improvement in some
areas of the economy, also favorably affected premium growth, primarily in our commercial lines
segment. The contributions to premiums from audits, which are significantly affected by economic
trends, are further discussed in Commercial Lines Insurance Results of Operations beginning on
Page 57.
Other written premiums – primarily premiums ceded to our reinsurers as part of our reinsurance
program – contributed $49 million to the $384 million of growth in 2012 net written premiums. The
change in other written premiums was primarily due to $42 million of ceded premiums in 2011 to
reinstate coverage layers of our property catastrophe reinsurance treaty. There were no material ceded
premium effects during 2012 or 2010 from unusual items such as reinstatement.
Cincinnati Financial Corporation – 2012 10-K - 52
The table below analyzes premium revenue components and trends. Premium trends by segment
are further discussed beginning on Page 58, Page 69 and Page 74, for the respective property
casualty segments.
(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,
2011
2012
2010
2012-2011
Change %
2011-2010
Change %
$
$
3,138
501
(157)
3,482
(138)
3,344
$
$
2,867
437
(206)
3,098
(69)
3,029
$
$
2,692
414
(143)
2,963
(39)
2,924
9
15
24
12
(100)
10
7
6
(44)
5
(77)
4
• Combined ratio – The 2012 combined ratio improved 13.2 percentage points compared with 2011,
largely reflecting better pricing and other efforts that are lowering loss ratios before catastrophe losses.
Lower catastrophe losses contributed 3.3 percentage points to the improved 2012 combined ratio. In
2011, additional ceded premiums to reinstate coverage layers of our property catastrophe reinsurance
treaty contributed 1.4 percentage points to the 2011 combined ratio.
The combined ratio before catastrophe losses and prior year reserve development also improved
significantly in 2012, benefiting from recent-year initiatives to improve pricing precision and loss
experience related to claims and loss control practices.
Our statutory combined ratio was 95.4 percent in 2012 compared with 108.9 percent in 2011 and
101.8 percent in 2010. The estimated statutory combined ratio for the property casualty industry, with
the industry’s ratio excluding its mortgage and financial guaranty lines of business, was 106.2 percent in
2012, 106.5 percent in 2011 and 101.0 percent in 2010. The contribution of catastrophe losses to our
statutory combined ratio was 10.0 percentage points in 2012, 13.3 percentage points in 2011 and
5.1 percentage points in 2010, compared with an estimated 9.4, 9.6 and 4.5 percentage points,
respectively, for the industry. Components of the combined ratio are discussed below, followed by
additional discussion by segment.
Catastrophe loss trends are an important factor in assessing trends for overall underwriting results.
Our 10-year historical annual average contribution of catastrophe losses to the combined ratio was
6.1 percentage points at December 31, 2012. Our five-year average was 8.2 percentage points, below
the 10.0 percent experienced for the year 2012. Incurred losses from a May 20-27, 2011, storm system
that included Joplin, Missouri, represent the single-largest catastrophe event in our company’s history.
Cincinnati Financial Corporation – 2012 10-K - 53
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.
Commercial
lines
Personal
lines
Excess
and surplus
lines
Total
$
$
Catastrophe Losses Incurred
(In millions, net of reinsurance)
Event
Dates
2012
Feb. 28-29
Mar. 2-3
Mar. 18-25
Apr. 28-29
Jun. 11-13
Jun. 24-28
Jun. 28-Jul. 2
Jul. 2-4
Sep. 7-8
Sep. 21-22
Oct. 28-31
All other 2012 catastrophes
Development on 2011 and prior catastrophes
Calendar year incurred total
Hail, wind, tornado
Hail, wind, tornado
Hail, lightning, wind
Hail, lightning, wind
Hail, lightning, wind
Fire
Hail, lightning, wind
Hail, lightning, wind
Hail, lightning, wind
Hail, lightning, wind
Sandy
Region
Midwest
Midwest, South
Northeast, South
Midwest, South
West, South
West
Midwest, Northeast, South
Midwest, Northeast
Midwest, Northeast, South
Midwest
Midwest, Northeast, South
2011
Jan. 31-Feb. 3
Feb. 21
Feb. 27-28
Mar. 11
Mar. 26-28
Apr. 3-5
Apr. 8-11
Apr. 14-16
Apr. 19-20
Apr. 22-28
May 20-27
May 29-Jun. 1
Jun. 16-22
Jul. 1-4
Jul. 10-14
Aug. 18-19
Aug. 26-28
Sep. 3-6
All other 2011 catastrophes
Development on 2010 and prior catastrophes
Calendar year incurred total
Freezing, wind
Earthquake
Hail, wind, tornado
Earthquake
Hail, wind
Hail, wind, tornado
Hail, wind, tornado
Hail, wind, tornado
Hail, wind
Hail, wind, tornado
Hail, wind, tornado
Hail, wind, tornado
Hail, wind, tornado
Hail, wind, tornado
Hail, wind, tornado
Hail, wind, tornado
Hurricane, wind, tornado
Tornado, wind
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
Freezing, wind
Freezing, wind
Hail, wind, tornado
Hail, wind, tornado
Hail, wind, tornado
Hail, wind, tornado
Hail, wind, tornado
Hail, wind, tornado
Hail, wind, tornado
Hail, wind, tornado
Hail, wind
Hail, wind, tornado
Hail, wind
Hail, wind, tornado
South, Midwest
New Zealand
Midwest
Japan
South
South, Midwest
South, Midwest
South, Midwest
South, Midwest
South, Midwest
South, Midwest
East, Midwest
South, Midwest
Midwest
Midwest, West
Midwest
East
South
South, Midwest
East, Midwest
South, Midwest
South
East, Midwest
South, Midwest
Midwest
Midwest, West
Midwest
Midwest
West
Midwest
South
Midwest
$
$
$
$
$
$
19
30
2
53
9
7
39
7
5
1
20
19
(17)
194
4
4
3
7
1
15
11
10
13
45
42
2
7
3
4
9
22
9
14
2
227
4
4
4
21
2
7
2
5
2
3
4
12
6
6
19
(12)
89
$
$
$
$
$
$
6
48
4
26
-
-
42
5
1
5
10
13
(22)
138
3
-
6
-
6
23
8
4
11
31
51
1
6
2
6
1
6
5
11
(7)
174
1
1
6
6
12
2
2
3
3
5
4
4
1
4
9
(5)
58
$
$
$
$
$
$
$
-
-
-
1
-
-
-
-
1
-
-
-
-
2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1
-
1
-
-
-
-
-
-
1
-
-
-
-
-
-
-
-
-
1
$
$
$
25
78
6
80
9
7
81
12
7
6
30
32
(39)
334
7
4
9
7
7
38
19
14
24
76
93
3
13
5
10
10
28
14
26
(5)
402
5
5
10
27
14
9
5
8
5
8
8
16
7
10
28
(17)
148
Cincinnati Financial Corporation – 2012 10-K - 54
Consolidated Property Casualty Insurance Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the
associated loss expenses. Most of the incurred losses and loss expenses shown in the consolidated
property casualty insurance results three-year highlights table on Page 52 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
86.4 percent accident year 2011 loss and loss expense ratio reported as of December 31, 2011, developed
favorably by 4.9 percentage points to 81.5 percent due to claims settling for less than previously estimated,
or due to updated reserve estimates for unpaid claims, as of December 31, 2012. Accident years 2011 and
2010 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, 2012
as of December 31, 2011
as of December 31, 2010
2,533
2012
$
$
2011
2,467
2,620
$
2010
2,072
2,140
2,319
2012
2011
2010
75.7 %
81.5 %
86.4
70.9 %
73.2
79.2
Catastrophe loss trends, discussed above, explain much of the movement in current accident year loss and
loss expense ratios for years 2010 through 2012. Catastrophe losses added 11.1 percentage points for
2012, 13.4 points for 2011 and 5.6 points for 2010 to the respective consolidated property casualty accident
year loss and loss expense ratios in the table above.
The 64.6 percent ratio for current accident year loss and loss expenses before catastrophe losses for
2012 declined 8.4 percentage points compared with the 73.0 percent accident year 2011 ratio measured
as of December 31, 2011. Large losses described below and the corresponding ratios for new losses above
$250,000 caused a 1.9 percentage-point decrease in the 2012 ratio. The effect of the $42 million ceded
premiums to reinstate coverage layers of our property catastrophe reinsurance treaty increased the
2011 ratio by 1.0 percentage point. A refinement to our line of business allocation process for loss expenses
reduced the 2011 accident year loss and loss expenses before catastrophes ratio by approximately
1.5 percentage points. We believe the remaining 7.0 percentage points of the reduction is largely due to
initiatives to improve pricing precision and loss experience related to claims and loss control practices,
somewhat offset by normal loss cost inflation.
The refined allocation in 2011 had no effect on earnings or consolidated property casualty ratios reported on
a calendar year basis. The allocation refinement pertained to the portion of loss expenses referred to as
AOE, with the refined allocation to lines of business based on claim counts rather than the previous basis of
claim dollar amounts. As a result of the allocation refinement, loss expense reserves for AOE at
December 31, 2011, increased by $23 million for our personal lines insurance segment and decreased by
$23 million for our commercial lines insurance segment. Discussion of AOE reserves is included in Critical
Accounting Estimates, How Reserves Are Established, Page 43.
Reserve development on prior accident years continued to net to a favorable amount in 2012, as
$396 million was recognized, higher than $285 million in 2011 and $304 million in 2010. Approximately
63 percent of our reserve development on prior accident years recognized during 2012 occurred in our
commercial casualty and workers’ compensation lines of business. In 2011, those lines of business were
responsible for approximately 80 percent of the favorable reserve development. As discussed in
Consolidated Property Casualty Insurance Development of Estimated Reserves by Accident Year, Page 92,
those lines are considered long-tail lines with potential for revisions inherent in estimating reserves.
Development recognized during 2010 was primarily from our commercial casualty line of business.
Development by line of business is further analyzed in Consolidated Property Casualty Insurance
Development of Estimated Reserves by Accident Year, Page 92.
Cincinnati Financial Corporation – 2012 10-K - 55
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 net 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 net loss ratio
Years ended December 31,
2011
2010
2012
2012-2011
Change %
$
$
68
161
205
250
684
794
321
1,799
$
$
2.0 %
4.8
6.1
7.5
20.4
23.8
9.6
53.8 %
56
173
217
210
656
898
395
1,949
$
$
1.9 %
5.7
7.2
6.9
21.7
29.6
13.1
64.4 %
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 %
2011-2010
Change %
14
22
9
18
15
(4)
167
18
21
(7)
(6)
19
4
(12)
(19)
(8)
Pt. Change
Pt. Change
0.1
(0.9)
(1.1)
0.6
(1.3)
(5.8)
(3.5)
(10.6)
0.2
0.9
0.4
0.8
2.3
(2.4)
8.0
7.9
In 2012, total large losses incurred increased by $28 million or 4 percent, net of reinsurance. The
corresponding ratio decreased 1.3 percentage points, as earned premium growth more than doubled the
rate of growth in total large losses. Large loss trends are further analyzed in the segment discussion and
analysis that follows discussion of consolidated property casualty results. Our analysis of large losses
incurred indicated no unexpected concentration of these losses and reserve increases by geographic
region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate
loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and
we continue to monitor the volatility in addition to general inflationary trends in loss costs.
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
2012
Years ended December 31,
2011
2010
2012-2011
Change %
$
$
635
425
16
1,076
$
$
19.0 %
12.7
0.5
32.2 %
565
395
16
976
$
$
18.7 %
13.1
0.5
32.3 %
544
404
14
962
18.6 %
13.8
0.5
32.9 %
2011-2010
Change %
4
(2)
14
1
12
8
0
10
Pt. Change
Pt. Change
0.3
(0.4)
0.0
(0.1)
0.1
(0.7)
0.0
(0.6)
Consolidated property casualty commission expenses rose $70 million or 12 percent, with profit-sharing
commissions for agencies rising by $34 million. Commission expenses as a percent of earned premium
increased during 2012, reflecting a 10 percent increase in earned premiums that was lower than the
12 percent increase in commission expenses.
Commission expenses include our profit-sharing commissions, which are primarily based on one-year and
three-year profitability of an agency’s business. The aggregate profit trend for agencies that earn these
profit-based commissions can differ from the aggregate profit trend for all agencies reflected in our
consolidated property casualty results. In 2011, the ratio for property casualty profit-sharing commissions
declined slightly while the ratio for total commissions rose slightly, netting to a small increase of
0.1 percentage point.
Other underwriting expenses as a percent of earned premium for 2012 decreased, as higher earned
premiums offset an 8 percent increase in expenses. In 2011, other underwriting expenses were
down $9 million or 2 percent, primarily due to a first-quarter 2010 provision for matters involving
contingent liabilities.
Salaries, benefits and payroll taxes for our associates account for approximately half of our property
casualty other underwriting expenses. Most of our associates either provide direct service to the property
casualty portion of our agencies’ business or provide support to those associates. Since the end of 2009,
the total number of associates, on a consolidated basis, declined 3 percent, reflecting careful management
of our noncommission expenses. The total number of field associates providing direct service to agencies
rose by 6 percent, reflecting our emphasis on providing excellent service in addition to territory expansion.
Discussions below of our property casualty insurance segments provide additional detail about our results.
Cincinnati Financial Corporation – 2012 10-K - 56
COMMERCIAL LINES INSURANCE RESULTS OF OPERATIONS
Overview – Three-Year Highlights
(Dollars in millions)
Earned premiums
Fee revenues
Total 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,
2011
2012
2010
2012-2011
Change %
2011-2010
Change %
2,383
4
2,387
1,501
211
(275)
(17)
1,420
786
181
$
$
62.9 %
8.9
(11.6)
(0.7)
59.5
33.0
92.5 %
2,197
3
2,200
1,579
225
(236)
2
1,570
732
(102)
$
$
71.8 %
10.3
(10.8)
0.1
71.4
33.4
104.8 %
2,154
2
2,156
1,605
101
(257)
(12)
1,437
705
14
8
33
9
(5)
(6)
(17)
nm
(10)
7
nm
2
50
2
(2)
123
8
nm
9
4
nm
74.5 %
4.7
(11.9)
(0.6)
66.7
32.7
99.4 %
Pt. Change
(8.9)
(1.4)
(0.8)
(0.8)
(11.9)
(0.4)
(12.3)
Pt. Change
(2.7)
5.6
1.1
0.7
4.7
0.7
5.4
Combined ratio:
Contribution from catastrophe losses and prior years
reserve development
Combined ratio before catastrophe losses and prior
years reserve development
92.5 %
104.8 %
99.4 %
(12.3)
(3.4)
(0.4)
(7.8)
95.9 %
105.2 %
107.2 %
(3.0)
(9.3)
5.4
7.4
(2.0)
Performance highlights for the commercial lines segment include:
• Premiums – Earned premiums and net written premiums rose in 2012, primarily due to a $166 million
increase in renewal written premiums that continued to reflect improved pricing. Premium growth
initiatives that helped new business written premiums grow $45 million in 2012 also contributed to
earned and net written premium growth. Other written premiums also helped increase 2012 earned and
net written premiums, largely due to the effect in 2011 of $24 million for ceded premiums to reinstate
coverage layers of our property catastrophe reinsurance treaty.
• Combined ratio – The 2012 combined ratio improved 12.3 percentage points, largely due to a lower
ratio for current accident year losses and loss expenses before catastrophe losses that benefited from
recent-year initiatives to improve pricing precision and loss experience related to claims and loss control
practices. Initiatives to improve commercial lines underwriting profitability complement our business
practices that continue to leverage the local presence of our field staff, who meet with local agencies to
assess each risk, determine limits of insurance and establish appropriate terms and conditions. Our field
marketing representatives continue to underwrite new business while loss control, machinery and
equipment and field claims representatives continue to conduct on-site inspections. Field claims
representatives also assist underwriters by preparing full reports on their first-hand observations of
risk quality.
Our commercial lines statutory combined ratio was 92.1 percent in 2012 compared with 104.2 percent in
2011 and 99.6 percent in 2010. The estimated commercial lines combined ratios for the industry were
109.0 percent in 2012, 106.7 percent in 2011 and 102.7 percent in 2010, with the industry’s ratio
excluding its mortgage and financial guaranty lines of business. The contribution of catastrophe losses
to our commercial lines statutory combined ratio was 8.2 percentage points in 2012, 10.4 percent points
in 2011 and 4.1 percentage points in 2010, compared with an estimated 9.3, 7.4 and 3.5 percentage
points, respectively, for the industry.
Cincinnati Financial Corporation – 2012 10-K - 57
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,
2011
2012
2010
2012-2011
Change %
2011-2010
Change %
$
$
2,229
352
(122)
2,459
(76)
2,383
$
$
2,063
307
(152)
2,218
(21)
2,197
$
$
1,978
289
(112)
2,155
(1)
2,154
8
15
20
11
(262)
8
4
6
(36)
3
nm
2
We continue to increase our use of predictive analytics tools to improve pricing precision in response to
highly competitive commercial lines markets. These tools better align individual insurance policy pricing to
risk attributes, and provide our underwriters with enhanced abilities to target profitability and to discuss
pricing impacts with agency personnel. We also continue to leverage our local relationships with agents
through the efforts of our teams that work closely with them. We believe our field focus is unique and has
several advantages, including providing us with quality intelligence on local market conditions. We seek to
maintain appropriate pricing discipline for both new and renewal business as management emphasizes the
importance of our agencies and underwriters assessing account quality to make careful decisions on a
case-by-case basis whether to write or renew a policy. Rate credits may be used to retain renewals of
quality business and to earn new business, but we do so selectively in order to avoid commercial accounts
that we believe have insufficient profit margins.
Our 8 percent increase in 2012 agency renewal written premiums largely reflected higher pricing and
improving economic conditions. We measure average changes in commercial lines renewal pricing as the
rate of change in renewal premium for the new policy period compared with the premium for the
expiring policy period, assuming no change in the level of insured exposures or policy coverage between
those periods for respective policies. In 2012, our standard commercial lines policies averaged an estimated
pricing change that increased in a mid-single-digit range. The average pricing change for policies renewed
during 2011 was slightly positive, near the low end of the low-single-digit range. For policies renewed during
both 2010 and 2009, the typical pricing change was a decline, on average in the low-single-digit range,
representing an improvement from the mid-single-digit range average pricing decline experienced in 2008.
In recent years prior to 2011, our agency renewal written premium trends included an unfavorable effect
from the economic downturn and slow recovery in various regions. In 2012 and 2011, the effect was
favorable. Changes in the economy affect insured exposures that directly relate to premium amounts for any
given policy. For commercial accounts, we usually calculate initial estimates for general liability premiums
based on estimated sales or payroll volume, while we calculate workers’ compensation premiums based on
estimated payroll volume. A change in sales or payroll volume generally indicates a change in demand for a
business’s goods or services, as well as a change in its exposure to risk. Policyholders who experience
sales or payroll volume changes due to economic factors may also have other exposures requiring
insurance, such as commercial auto or commercial property, in addition to general liability and workers’
compensation. Premium levels for these other types of coverages generally are not linked directly to sales
or payroll volumes.
Premiums resulting from audits of actual sales or payrolls that confirmed or adjusted initial premium
estimates significantly affected premium trends in recent years. On an earned premium basis, audits
contributed $35 million of the $186 million earned premiums increase in 2012 and $46 million of the
$43 million earned premiums increase in 2011. On a net written premium basis, audits contributed
$30 million of the $241 million net written premiums increase in 2012 and $34 million of the $63 million net
written premiums increase in 2011.
In 2012, our commercial lines new business premiums written by our agencies grew 15 percent, up from
6 percent 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 may be less familiar to our agent in cases where 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 appointed since the beginning of 2011 generated commercial lines new
business written premiums of $39 million during 2012, up $26 million from 2011, while all other agencies
contributed the remaining $313 million, up $19 million from 2011.
Cincinnati Financial Corporation – 2012 10-K - 58
Other written premiums, primarily premiums that are ceded to reinsurers and that lower our net written
premiums, had a more favorable effect in 2012 than in 2011. The $30 million change for 2012, compared
with 2011, was largely due to $24 million of additional ceded premiums in 2011 for our property catastrophe
reinsurance treaty, a result of reinstatement premiums following two large catastrophe events during 2011,
as discussed in Consolidated Property Casualty Insurance Results of Operations, Page 52.
Commercial Lines Insurance Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the
associated loss expenses. Most of the incurred losses and loss expenses shown in the commercial lines
segment three-year highlights table on Page 57 are for the respective current accident years, and reserve
development on prior accident years is shown separately. Since less than half of our commercial lines
insurance segment 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
82.1 percent accident year 2011 loss and loss expense ratio reported as of December 31, 2011, developed
favorably by 4.2 percentage points to 77.9 percent due to claims settling for less than previously estimated,
or due to updated reserve estimates for unpaid claims, as of December 31, 2012. Accident years 2011 and
2010 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, 2012
as of December 31, 2011
as of December 31, 2010
1,712
2012
$
$
2011
1,711
1,804
$
2010
1,508
1,557
1,706
2012
2011
2010
71.8 %
77.9 %
82.1
70.0 %
72.3
79.2
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results of Operations,
Page 52, explain much of the movement in current accident year loss and loss expense ratios for accident
years 2010 through 2012. Catastrophe losses added 8.9 percentage points for 2012, 10.3 points for 2011
and 4.7 points for 2010 to the respective commercial lines accident year loss and loss expense ratios in the
table above.
The 62.9 percent ratio for current accident year loss and loss expenses before catastrophe losses for
2012 declined 8.9 percentage points compared with the 71.8 percent accident year 2011 ratio measured as
of December 31, 2011. Large losses, described below, and the corresponding ratios for new losses above
$250,000 caused a 2.6 percentage-point decrease in the 2012 ratio. A refined line of business allocation
process for loss expenses reduced the 2011 ratio by approximately 3 percentage points, and was partially
offset by a 0.8-percentage-point effect of the $24 million ceded premiums to reinstate coverage layers of our
property catastrophe reinsurance treaty. We believe the remainder of the reduction is largely due to
initiatives to improve pricing precision and loss experience related to claims and loss control practices,
somewhat offset by normal loss cost inflation.
Commercial lines reserve development on prior accident years continued to net to a favorable amount in
2012, as $292 million was recognized, higher than $234 million in 2011. More than 85 percent of our
commercial lines reserve development on prior accident years recognized during 2012 occurred in our
commercial casualty and workers’ compensation lines of business, with approximately 60 percent occurring
in commercial casualty. Development recognized during 2011 was also mostly from our commercial
casualty and workers’ compensation lines of business. In 2010, favorable development was mostly from our
commercial casualty line of business. Development by line of business and other trends for commercial
lines loss and loss expenses and the related ratios are further analyzed in Commercial Lines of Business
Analysis, beginning on Page 60, and in Consolidated Property Casualty Insurance Development of
Estimated Reserves by Accident Year, Page 92.
Cincinnati Financial Corporation – 2012 10-K - 59
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 net 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 net loss ratio
Years ended December 31,
2011
2010
2012
2012-2011
Change %
$
$
68
122
138
234
562
426
187
1,175
$
$
2.9 %
5.1
5.8
9.8
23.6
17.9
7.8
49.3 %
56
148
156
187
547
517
223
1,287
$
$
2.6 %
6.7
7.1
8.5
24.9
23.5
10.2
58.6 %
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 %
2011-2010
Change %
27
23
5
14
15
(12)
151
12
21
(18)
(12)
25
3
(18)
(16)
(9)
Pt. Change
Pt. Change
0.3
(1.6)
(1.3)
1.3
(1.3)
(5.6)
(2.4)
(9.3)
0.6
1.1
0.2
0.9
2.8
(3.8)
6.1
5.1
In 2012, total large losses incurred increased by $15 million or 3 percent, net of reinsurance. The
corresponding ratio decreased 1.3 percentage points, as earned premium growth more than doubled the
rate of growth in total large losses. An increase in large losses for commercial auto and general liability
claims more than offset decreases for commercial fire and workers’ compensation claims. In 2011 the total
large losses incurred ratio was higher than it was in 2010, primarily due to higher incurred losses for fires
and commercial auto claims. Our analysis indicated no unexpected concentration of these losses and
reserve increases by geographic region, policy inception, agency or field marketing territory. We believe the
inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our
portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends
in loss costs.
Commercial Lines Insurance Underwriting Expenses
Years ended December 31,
2011
2012-2011
Change %
2010
2012
(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
$
$
442
328
16
786
$
$
18.6 %
13.7
0.7
33.0 %
415
301
16
732
$
$
18.9 %
13.8
0.7
33.4 %
391
300
14
705
18.2 %
13.8
0.7
32.7 %
2011-2010
Change %
6
0
14
4
7
9
0
7
Pt. Change
Pt. Change
(0.3)
(0.1)
0.0
(0.4)
0.7
0.0
0.0
0.7
Commercial lines commission expenses as a percent of earned premium decreased slightly during 2012,
largely due to higher earned premiums that offset the effect of higher agency profit-sharing commissions.
Other underwriting expenses as a percent of earned premium for 2012 also decreased slightly, as higher
earned premiums offset an increase in expenses.
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 analyze growth and
profitability trends separately for each line. The accident year loss data provides current estimates of
incurred loss and loss expenses and corresponding ratios over the most recent three accident years.
Accident year data classifies losses according to the year in which the corresponding loss events occur,
regardless of when the losses are actually reported, recorded or paid.
For 2012, commercial casualty, our largest line of business representing over 30 percent of earned
premiums for our commercial lines segment, continued to be very profitable, based on the total loss and
loss expense ratio. Commercial property and specialty packages had 2012 total loss and loss expense
ratios significantly higher than we desired, largely due to unusually high weather-related losses in recent
years. As discussed below, we are taking actions to improve pricing and reduce loss costs to benefit future
profitability trends. Profitability trends for workers’ compensation continued to improve, reflecting the results
of initiatives to improve pricing and reduce loss costs. An approach similar to the one we used to improve
workers’ compensation results is being used to address profitability challenges for commercial auto and
Cincinnati Financial Corporation – 2012 10-K - 60
property-oriented lines of business. The executive risk portion of bond and executive risk showed
improvement in 2012, after experiencing several years of unfavorable effects from the U.S. credit crisis of
2008. Since the credit crisis, many of our financial institution policies have been nonrenewed, reducing
exposure for this portion of our bond and executive risk business.
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,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
$
$
793
767
492
0
(177)
0
315
$
$
710
711
496
0
(132)
0
364
$
$
686
693
555
0
(186)
0
369
12
8
(1)
nm
(34)
nm
(13)
3
3
(11)
nm
29
nm
(1)
64.1 %
69.7 %
80.1 %
0.0
(23.1)
0.0
0.0
(18.5)
0.0
0.0
(26.9)
0.0
41.0 %
51.2 %
53.2 %
Pt. Change
(5.6)
0.0
(4.6)
0.0
(10.2)
Pt. Change
(10.4)
0.0
8.4
0.0
(2.0)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2012
as of December 31, 2011
as of December 31, 2010
2012
492
$
$
2011
2010
2012
2011
2010
$
450
496
419
438
555
64.1 %
63.3 %
69.7
60.4 %
63.2
80.1
Commercial casualty is our largest line of business and has in recent years maintained a very satisfactory
total loss and loss expense ratio. Premiums grew in 2012, compared with 2011, largely due to higher pricing
and premium growth initiatives that helped new business written premiums grow nearly 20 percent. During
2011, our underwriters began fully using predictive modeling tools for general liability coverages in our
commercial package accounts, and we believe these tools are improving our pricing precision.
Improving economic conditions also contributed to growth through higher premiums from audits that
confirmed or adjusted initial premium estimates. As discussed in the commercial lines insurance premiums
section of Commercial Lines Insurance Results of Operations, Page 57, economic trends cause
corresponding changes in underlying insured exposures, including general liability coverage where the
premium amount is heavily influenced by economically-driven measures of risk exposure such as
sales volume.
The 2012 total loss and loss expense ratio improved by 10.2 percentage points, largely due to lower current
accident year losses and loss expenses and higher earned premiums. Favorable development on prior
accident year reserves continued in 2012 at a significant level, reflecting further moderation in loss cost
trends, particularly for umbrella liability coverage included in many commercial package accounts.
Development trends are further discussed in Consolidated Property Casualty Insurance Development of
Estimated Reserves by Accident Year, Page 92.
The 2011 current accident year loss and loss expense ratio before catastrophe losses improved by
10.4 percentage points compared with accident year 2010, largely reflecting higher earned premiums from
improving economic trends and pricing that offset normal loss cost inflation. In addition, the refined line of
business allocation process for loss expenses reduced the 2011 ratio by approximately 4 percentage points.
Cincinnati Financial Corporation – 2012 10-K - 61
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,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
$
$
573
545
251
173
(17)
(9)
398
$
$
46.1 %
31.7
(3.1)
(1.8)
72.9 %
512
497
309
146
(21)
3
437
$
$
62.1 %
29.4
(4.1)
0.7
88.1 %
497
489
286
75
(3)
(7)
351
12
10
(19)
18
19
nm
(9)
3
2
8
95
(600)
nm
25
58.4 %
15.4
(0.6)
(1.4)
71.8 %
Pt. Change
(16.0)
2.3
1.0
(2.5)
(15.2)
Pt. Change
3.7
14.0
(3.5)
2.1
16.3
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2012
as of December 31, 2011
as of December 31, 2010
2012
424
$
$
2011
2010
$
439
455
347
352
361
2012
77.8 %
2011
2010
88.2 %
91.5
71.0 %
72.0
73.8
Commercial property net written premiums and earned premiums rose in 2012, reflecting higher pricing and
premium growth initiatives that helped new business written premiums increase nearly 25 percent.
The 2012, total loss and loss expense ratio improved, largely due to lower current accident year losses and
loss expenses and higher earned premiums. The ratio components from catastrophe losses were nearly the
same in 2012 as in 2011, and favorable development on prior accident year reserves before catastrophe
losses decreased slightly.
In 2012 we formed a multi-department, multi-disciplinary taskforce that has been reviewing our property
book of business and continues to seek ways to improve profitability, similar to the approach we used to
improve workers’ compensation results. Several profit improvement initiatives are already underway and
some are already completed. Some of the more important initiatives include increasing specialization among
selected claims and loss control associates, increasing the number of commercial property inspections for
both new and renewal business, applying wind and hail deductibles in areas prone to convective storm
losses and implementing new guidelines for underwriting and pricing hail risk.
In 2011, we began fully using predictive modeling tools for property coverages in our commercial package
accounts to improve our pricing precision. We believe these initiatives will improve profitability over time.
The 2011 total loss and loss expense ratio rose 16.3 percentage points primarily due to a 16.1 point
increase in catastrophe losses. In addition, the ratio increased 5.2 percentage points from higher large
losses related to fires, and it also rose from other weather-related losses that were not identified as part of
designated catastrophe events for the property casualty industry, typically referred to as noncatastrophe
weather losses. The effect of the $13 million ceded to reinstate coverage layers of our property catastrophe
reinsurance treaty increased the 2011 ratio by 2.2 percentage points. The refined line of business allocation
process for loss expenses reduced the 2011 total loss and loss expense ratio by 3.5 percentage points and
also had the effect of decreasing the ratio for current accident year before catastrophe losses.
The 2011 current accident year loss and loss expense ratio before catastrophe losses also rose, compared
with accident year 2010, largely due to higher large losses from fires and increased losses from
noncatastrophe weather.
Cincinnati Financial Corporation – 2012 10-K - 62
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,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
$
$
444
426
301
5
0
(1)
305
$
$
70.7 %
1.3
(0.1)
(0.2)
71.7 %
405
394
294
7
(27)
0
274
$
$
74.5 %
1.9
(6.9)
(0.2)
69.3 %
385
384
269
4
(32)
(1)
240
10
8
2
(29)
100
nm
11
5
3
9
75
16
nm
14
70.0 %
1.1
(8.2)
(0.3)
62.6 %
Pt. Change
(3.8)
(0.6)
6.8
0.0
2.4
Pt. Change
4.5
0.8
1.3
0.1
6.7
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2012
as of December 31, 2011
as of December 31, 2010
2012
306
$
$
2011
2010
2012
2011
2010
$
295
301
258
259
273
72.0 %
75.0 %
76.4
67.3 %
67.5
71.1
Net written premiums and earned premiums for commercial auto rose in 2012, primarily due to higher
pricing. Higher new business written premiums accounted for only $4 million of the $39 million increase in
net written premiums, in part reflecting our efforts to increase pricing.
The 2012 total loss and loss expense ratio increased, primarily due to lower favorable development on prior
accident year reserves that was partially offset by an improved ratio for current accident year losses and
loss expenses.
In early 2013, we formed a multi-department, multi-disciplinary taskforce that has been reviewing our
commercial auto business to determine ways to improve profitability, similar to the approach we used to
improve workers’ compensation results.
The 2011 total loss and loss expense ratio rose 6.7 percentage points, largely due to a 3.6-point increase
from higher large losses. The refined line of business allocation process for loss expenses contributed
1.7 percentage points to the 2011 total loss and loss expense ratio and also contributed to the increase in
the ratio for the current accident year before catastrophe losses.
The 2011 current accident year loss and loss expense ratio before catastrophe losses rose 4.5 percentage
points, compared with accident year 2010, primarily due to a rise in loss cost trends that may relate to the
improving economy, combined with pricing that improved more slowly. Noncatastrophe weather losses also
had a slight adverse effect on the ratio.
Cincinnati Financial Corporation – 2012 10-K - 63
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,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
$
$
341
344
286
0
(74)
0
212
$
$
312
318
307
0
(97)
0
210
$
$
310
311
331
0
(39)
0
292
9
8
(7)
nm
24
nm
1
1
2
(7)
nm
(149)
nm
(28)
83.0 %
96.6 %
0.0
(21.5)
0.0
0.0
(30.5)
0.0
61.5 %
66.1 %
106.5 %
0.0
(12.6)
0.0
93.9 %
Pt. Change
(13.6)
0.0
9.0
0.0
(4.6)
Pt. Change
(9.9)
0.0
(17.9)
0.0
(27.8)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2012
as of December 31, 2011
as of December 31, 2010
2012
286
$
$
2011
2010
2012
2011
2010
$
280
307
271
299
331
83.0 %
87.9 %
96.6
87.1 %
96.3
106.5
Workers’ compensation net written premiums and earned premiums rose in 2012, primarily due to higher
pricing. Improving economic conditions contributed to growth through higher premiums from audits that
confirmed or adjusted initial premium estimates. As discussed in the commercial lines insurance premiums
section of Commercial Lines Insurance Results of Operations, Page 57, economic trends cause
corresponding changes in underlying insured exposures, including workers’ compensation coverage
where the premium amount is heavily influenced by economically-driven measures of risk exposure such as
payroll volume.
The 2012 total loss and loss expense ratio improved 4.6 percentage points compared with 2011, reflecting
lower current accident year losses and loss expenses that were partially offset by a lower amount of
favorable development on prior accident year reserves. We continue to see loss emergence that was less
than expected for nearly every accident year, resulting in another year of net favorable development.
Development trends are further discussed in Consolidated Property Casualty Insurance Development of
Estimated Reserves by Accident Year, Page 92.
The 2011 total loss and loss expense ratio was 27.8 percentage points lower, reflecting both higher
favorable development on prior accident year reserves and lower current accident year losses and loss
expenses. The refined line of business allocation process for loss expenses reduced the 2011 total loss and
loss expense ratio by 11.5 percentage points and also had the effect of decreasing the ratio for current
accident year before catastrophe losses.
The 2011 current accident year loss and loss expense ratio declined 9.9 percentage points compared with
accident year 2010, estimated as of December 31, 2010. In addition to the favorable effect of the refined line
of business allocation process for loss expenses, the loss portion of the ratio improved, reflecting initiatives
discussed below.
Since we pay a lower commission rate on workers’ compensation business, relative to our other commercial
lines of business, this line has a higher calendar year loss and loss expense ratio breakeven point than our
other commercial business lines. We believe various initiatives in recent years contributed to improved
profitability. During 2009, we began using a predictive modeling tool to improve risk selection and pricing
precision. In 2010, we added to our staff of loss control field representatives, premium audit field
representatives and field claims representatives specializing in workers’ compensation risks. We also
implemented direct reporting of workers’ compensation claims, allowing us to quickly obtain detailed
information from policyholders to promptly assign the appropriate level of claims handling expertise to each
case. Obtaining more information sooner for specific claims allows for medical care appropriate to the
nature of each injury, benefiting injured workers, employers and agents while ultimately lowering overall
loss costs.
The workers’ compensation business line includes our longest tail exposures, making initial estimates of
accident year loss and loss expenses incurred more uncertain. Due to the lengthy payout period of workers’
compensation claims, small shifts in medical cost inflation and payout periods could have a significant effect
on our potential future liability compared with our current projections.
Cincinnati Financial Corporation – 2012 10-K - 64
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,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
$
$
153
151
95
33
(6)
(7)
115
$
$
137
138
98
72
6
(1)
175
$
$
149
149
91
22
2
(4)
111
12
9
(3)
(54)
(200)
(600)
(34)
(8)
(7)
8
227
200
75
58
63.4 %
22.0
(4.2)
(4.5)
76.7 %
70.9 %
51.8
3.9
(0.6)
126.0 %
61.1 %
14.5
1.8
(2.6)
74.8 %
Pt. Change
(7.5)
(29.8)
(8.1)
(3.9)
(49.3)
Pt. Change
9.8
37.3
2.1
2.0
51.2
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2012
as of December 31, 2011
as of December 31, 2010
2012
128
$
$
2011
2010
2012
2011
2010
$
162
170
112
114
113
85.4 %
117.2 %
122.7
75.1 %
76.7
75.6
Specialty packages net written premiums and earned premiums rose in 2012, primarily due to lower ceded
premiums. In 2011, ceded premiums included $10 million to reinstate coverage layers of our property
catastrophe reinsurance treaty. New business written premiums from agencies accounted for less than
$1 million of the $16 million increase in net written premiums, in part reflecting our efforts to increase
price adequacy.
The 2012 total loss and loss expense ratio improved 49.3 percentage points primarily due to a 33.7-point
decrease in catastrophe losses. The 2012 current accident year loss and loss expense ratio before
catastrophe losses also improved, compared with accident year 2011, largely due to higher earned
premiums that included higher pricing. In 2011, we began fully using predictive modeling tools for auto,
general liability and property coverages for some commercial package accounts included in specialty
packages. In 2012, we began using predictive modeling tools to improve our pricing precision for certain
additional business policies included in our specialty packages line of business. Initiatives for our property
book of business, described in the commercial property section above, should also benefit our specialty
packages line of business. We believe these initiatives will improve profitability over time.
The 2011 total loss and loss expense ratio rose 51.2 percentage points primarily due to a 39.3-point
increase in catastrophe losses. It also rose from other weather-related losses that were not identified as part
of designated catastrophe events for the property casualty industry, typically referred to as noncatastrophe
weather losses. The effect of the $10 million in premiums ceded to reinstate coverage layers of our property
catastrophe reinsurance treaty increased the 2011 ratio by 8.4 percentage points.
The 2011 current accident year loss and loss expense ratio before catastrophe losses also increased,
compared with accident year 2010, largely due to noncatastrophe weather and the effects of
reinstatement premiums.
Cincinnati Financial Corporation – 2012 10-K - 65
Surety and Executive Risk
(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,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
$
$
114
111
67
0
0
0
67
$
$
104
103
65
0
34
0
99
$
$
93
95
64
0
3
0
67
10
8
3
nm
(100)
nm
(32)
12
8
2
nm
nm
nm
48
59.9 %
63.7 %
66.5 %
0.0
0.4
0.0
0.0
33.0
0.0
0.0
3.4
0.0
60.3 %
96.7 %
69.9 %
Pt. Change
(3.8)
0.0
(32.6)
0.0
(36.4)
Pt. Change
(2.8)
0.0
29.6
0.0
26.8
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2012
as of December 31, 2011
as of December 31, 2010
2012
67
$
$
2011
2010
2012
2011
2010
$
75
65
92
85
64
59.9 %
73.6 %
63.7
96.2 %
88.5
66.5
Net written premiums and earned premiums for surety and executive risk rose in 2012, with approximately
one-third of the increase from renewal premiums that reflected higher pricing. Premiums ceded to reinsurers
had less of a downward effect, by approximately $6 million, on net written premiums and earned premiums
in both 2012 and 2011, compared with the respective prior year. Ceded premiums were reduced largely due
to better than expected loss experience in recent years, resulting in lower rates charged by reinsurers.
The 2012 total loss and loss expense ratio improved 36.4 percentage points due to a 32.6-point decrease
from unfavorable development on prior accident year reserves, returning to a level close to 2010.
The 2011 total loss and loss expense ratio rose 26.8 percentage points due to a 29.6-point increase
from unfavorable development on prior accident year reserves. Included in the unfavorable development
was $13 million or 13.1 percentage points for the refined line of business allocation process for loss
expenses. The refined allocation had a negligible effect on the ratio for the current accident year before
catastrophe losses. Most of the remainder of unfavorable development on prior accident year reserves was
for four claims from accident year 2008, two for director and officer liability and two for fidelity bonding due
to fraud or lending practices at financial institutions.
The 2011 current accident year loss and loss expense ratio before catastrophe losses improved
2.8 percentage points, compared with accident year 2010, reflecting an improved loss climate for
financial institutions.
We continue to address the potential risk inherent in the financial institutions portion of our surety and
executive risk business line as we work with our agents to identify the strongest financial institutions, in
addition to using credit rating and other metrics to carefully re-underwrite in-force policies when they are
considered for renewal.
We have actively managed the potentially high risk of writing director and officer liability by:
• Marketing primarily to nonprofit organizations, accounting for approximately 81 percent of the policies
and 50 percent of the premium volume in force for 2012 director and officer liability business.
• Closely monitoring our for-profit policyholders – At year-end 2012, our director and officer liability
policies in force provided coverage to 13 nonfinancial publicly traded companies, including two Fortune
1000 companies. We also provided this coverage to approximately 450 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 11 of our
banks have assets greater than $2 billion; only 24 have assets from $1 billion to $2 billion; and 69 have
assets from $500 million to $1 billion. The remaining 292 banks have assets below $500 million.
• 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 2013 to cover
losses greater than $7 million.
Cincinnati Financial Corporation – 2012 10-K - 66
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,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
$
$
41
39
9
0
(1)
0
8
$
$
38
36
10
0
1
0
11
$
$
35
33
9
0
(2)
0
7
8
8
(10)
nm
(200)
nm
(27)
9
9
11
nm
nm
nm
57
22.5 %
26.9 %
0.0
(1.9)
0.0
0.1
1.2
0.0
20.6 %
28.2 %
28.2 %
0.0
(6.0)
(0.3)
21.9 %
Pt. Change
(4.4)
(0.1)
(3.1)
0.0
(7.6)
Pt. Change
(1.3)
0.1
7.2
0.3
6.3
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2012
as of December 31, 2011
as of December 31, 2010
2012
9
$
$
2011
2010
2012
2011
2010
$
10
10
10
10
9
22.5 %
26.6 %
27.0
29.3 %
30.5
28.2
Machinery and equipment premiums continued to rise over the three-year period, reflecting higher pricing
and our superior service, including experienced local specialists who support agencies in writing this line of
business. The total and accident year loss and loss expense ratios remain at profitable levels, although they
can fluctuate substantially due to the relatively small size of this business line.
Commercial Lines Insurance Outlook
Net written premiums for the commercial lines industry, excluding the mortgage and financial guaranty lines
of business, are projected to increase approximately 4 percent in 2013, with the industry statutory combined
ratio estimated at approximately 103 percent. Over the past several years, renewal and new business
pricing has experienced significant competitive pressure, reinforcing the need for more pricing analytics and
careful risk selection. While competition remains intense, industrywide commercial lines market pricing
turned positive toward the end of 2011 and continued to firm in 2012, according to several industry surveys.
Average renewal pricing for our commercial lines segment also turned positive. Opinions vary, according to
a variety of reports that focus on the commercial lines market, regarding the sustainability of improved
pricing. According to A.M. Best, commercial lines pricing is anticipated to continue to improve during 2013,
but will moderate slightly compared with rate increases in 2012. 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. We believe our initiatives to improve
pricing precision and lower loss costs will continue to benefit commercial lines profitability during 2013, and
that recent-year premium growth initiatives will continue to increase commercial lines premiums.
In Item 1, Strategic Initiatives, Page 10, we discuss the initiatives we are implementing to achieve our
corporate performance objectives. We discuss factors influencing future results of our property casualty
insurance operations in the Executive Summary, Page 38.
Cincinnati Financial Corporation – 2012 10-K - 67
PERSONAL LINES INSURANCE RESULTS OF OPERATIONS
Overview – Three-Year Highlights
(Dollars in millions)
Earned premiums
Fee revenues
Total 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,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
868
2
870
591
160
(77)
(22)
652
261
(43)
$
$
68.2 %
18.4
(8.9)
(2.5)
75.2
30.1
105.3 %
762
1
763
584
181
(35)
(7)
723
222
(182)
$
$
76.7 %
23.6
(4.5)
(0.9)
94.9
29.1
124.0 %
721
2
723
508
63
(29)
(5)
537
241
(55)
14
100
14
1
(12)
(120)
(214)
(10)
18
76
6
(50)
6
15
187
(21)
(40)
35
(8)
(231)
70.4 %
8.8
(4.1)
(0.7)
74.4
33.4
107.8 %
Pt. Change
(8.5)
(5.2)
(4.4)
(1.6)
(19.7)
1.0
(18.7)
Pt. Change
6.3
14.8
(0.4)
(0.2)
20.5
(4.3)
16.2
Combined ratio:
Contribution from catastrophe losses and prior years
reserve development
Combined ratio before catastrophe losses and prior
years reserve development
105.3 %
124.0 %
107.8 %
7.0
18.2
4.0
98.3 %
105.8 %
103.8 %
(18.7)
(11.2)
(7.5)
16.2
14.2
2.0
Performance highlights for the personal lines segment include:
• Premiums – Earned premiums and net written premiums grew significantly in 2012, primarily due to
higher renewal written premiums that included price increases. The 2012 growth in earned and net
written premiums was aided by the suppressing effect in 2011 from $18 million for ceded premiums to
reinstate coverage layers of our property catastrophe reinsurance treaty.
• Combined ratio – The 2012 combined ratio improved 18.7 percentage points compared with 2011, in
part due to natural catastrophe losses that were 6.8 percentage points lower, plus better pricing and a
decrease in other weather-related losses. Such losses, typically referred to as noncatastrophe weather
losses, were not identified as part of designated catastrophe events for the property casualty industry.
Additional ceded premiums to reinstate coverage layers of our property catastrophe reinsurance treaty
and the effect of a refined line of business allocation process for loss expenses each contributed
approximately 3 points to the 2011 combined ratio.
Our personal lines statutory combined ratio was 104.0 percent in 2012, 124.2 percent in 2011 and
107.1 percent in 2010. By comparison, the estimated industry personal lines combined ratio was
105.0 percent in 2012, 106.1 percent in 2011 and 100.4 percent in 2010. Our concentration of business
in areas affected by catastrophe events contributed to recent-year results that differed from the overall
industry, an issue we are addressing in part through gradual geographic expansion. The contribution of
catastrophe losses to our personal lines statutory combined ratio was 15.9 percentage points in 2012,
22.7 percentage points in 2011 and 8.1 percentage points in 2010, compared with an estimated
9.5, 10.4 and 5.3 percentage points, respectively, for the industry.
As discussed below in Personal Lines Insurance Premiums, in recent years we have increased our use
of pricing precision and implemented numerous rate increases to improve our personal lines segment
results. Since early 2008, we have worked to improve our geographic diversification by expanding our
personal lines operation to several states less prone to catastrophes, including the western states of
Arizona, Idaho, Montana and Utah. We have also nonrenewed approximately 2,300 homeowner policies
in Florida and Alabama that we believe were the most exposed to losses from hurricane damage. Our
progress in geographic diversification is demonstrated by higher premium growth rates in our smaller
states, in terms of personal lines premium volume. Personal lines earned premiums in the six states
with our largest personal lines volume increased 10 percent in 2012 while increasing 22 percent in the
remaining states. Our new business written premiums rose 17 percent in 2012, with those six states
declining 2 percent, while rising 34 percent in all other states.
Cincinnati Financial Corporation – 2012 10-K - 68
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,
2011
2012
2010
2012-2011
Change %
2011-2010
Change %
$
$
836
111
(29)
918
(50)
868
$
$
755
95
(49)
801
(39)
762
$
$
685
90
(25)
750
(29)
721
11
17
41
15
(28)
14
10
6
(96)
7
(34)
6
Personal lines insurance is a strategic component of our overall relationship with most of our agencies and
is an important component of our agencies’ relationships with their clients. We believe agents recommend
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. We also
believe our efforts to continue improving pricing precision are helping us attract and retain more of our
agencies’ preferred business, while also obtaining higher rates for more thinly-priced business.
The 11 percent increase in 2012 agency renewal written premiums reflected various rate changes during
recent years. In October 2012, we began our fourth round of increases for the homeowner line of business,
averaging approximately 9 percent, with some individual policy rate increases lower or higher based on
attributes of risk that characterize the insured exposure. That followed rate changes over successive years
averaging approximately 7 percent annually that were implemented beginning the fourth quarter of 2009 for
states representing the majority of our personal lines business. Beginning in the first half of 2013, we are
implementing rate changes for our personal auto line of business in the majority of the 31 states where we
market personal lines policies. The average rate change is an increase in the low-single-digit range, with
some individual policies experiencing lower or higher rates based on enhanced pricing precision enabled by
predictive models. Rate changes for personal auto implemented beginning late 2011 and 2010 also
represented an annual average rate increase in the low-single-digit range.
In 2012, our personal lines new business premiums written by our agencies grew 17 percent, following
2011 growth at a rate of 6 percent. We believe the increased growth rate reflects the contribution from new
agency appointments in addition to the effect of higher pricing from rate increases.
Other written premiums primarily consist of premiums that are ceded to reinsurers and that lower our net
written premiums. Other written premiums contributed $20 million to 2012 net written premium growth. The
change in 2012 other written premiums, compared with 2011, was driven by additional ceded premiums in
2011 for our property catastrophe reinsurance treaty.
Personal Lines Insurance Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as
the associated loss expenses. Most of the incurred losses and loss expenses shown in the personal
lines segment three-year highlights table on Page 68 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
100.3 percent accident year 2011 loss and loss expense ratio reported as of December 31, 2011, developed
favorably by 7.8 percentage points to 92.5 percent due to claims settling for less than previously estimated,
or due to updated reserve estimates for unpaid claims, as of December 31, 2012. Accident years 2011 and
2010 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, 2012
as of December 31, 2011
as of December 31, 2010
2012
751
$
$
2011
2010
2012
2011
2010
$
705
765
529
545
571
86.6 %
92.5 %
100.3
73.4 %
75.6
79.2
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results of Operations,
Page 52, explain much of the movement in current accident year loss and loss expense ratios for accident
years 2010 through 2012. Catastrophe losses added 18.4 percentage points for 2012, 23.6 points for 2011
and 8.8 points for 2010 to the respective personal lines accident year loss and loss expense ratios in the
table above. Personal lines catastrophe losses for 2012 and 2011 were much higher than our 8.7 percent
10-year annual average for the years 2001 through 2010. Personal lines catastrophe losses also are
inherently volatile, as discussed above and in Consolidated Property Casualty Insurance Results of
Operations, Page 52.
Cincinnati Financial Corporation – 2012 10-K - 69
The 68.2 percent ratio for current accident year loss and loss expenses before catastrophe losses for
2012 improved 8.5 percentage points compared with the 76.7 percent accident year 2011 ratio measured as
of December 31, 2011. The effect of the $18 million ceded in 2011 to reinstate coverage layers of our
property catastrophe reinsurance treaty increased the 2011 ratio by 1.8 percentage points. Noncatastrophe
weather losses for our homeowner line of business alone were approximately $10 million lower during 2012
compared with 2011, reducing the 2012 ratio for personal lines by approximately 1 percentage point,
compared with 2011. Higher new large losses incurred described below increased the 2012 ratio by
0.6 percentage points, offsetting much of the benefit of lower noncatastrophe losses. We believe the
majority of the 8.5 percentage points of improvement was largely due to initiatives to improve pricing
precision, somewhat offset by normal loss cost inflation.
Personal lines reserve development on prior accident years continued to net to a favorable amount in 2012,
as $99 million was recognized, higher than $42 million in 2011 and $34 million in 2010. The homeowner line
of business represented more than half of the 2012 increase. Approximately 50 percent of our personal lines
reserve development on prior accident years recognized during 2012 occurred in our homeowner line of
business and nearly 30 percent occurred in our other personal line of business. Development recognized
during 2011 was mostly from those same lines of business and in 2010 was most of it was from 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 71, and in Consolidated Property Casualty
Insurance Development of Estimated Reserves by Accident Year, Page 92.
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 net 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 net loss ratio
$
$
Years ended December 31,
2011
2010
2012
0
35
53
10
98
346
132
576
$
$
0.0 %
4.1
6.1
1.2
11.4
39.8
15.2
66.4 %
0
25
48
19
92
365
171
628
$
$
0.0 %
3.3
6.3
2.5
12.1
47.9
22.5
82.5 %
5
20
41
11
77
336
58
471
0.7 %
2.8
5.7
1.6
10.8
46.5
8.1
65.4 %
2012-2011
Change %
nm
40
10
(47)
7
(5)
(23)
(8)
Pt. Change
0.0
0.8
(0.2)
(1.3)
(0.7)
(8.1)
(7.3)
(16.1)
2011-2010
Change %
(100)
25
17
73
19
9
195
33
Pt. Change
(0.7)
0.5
0.6
0.9
1.3
1.4
14.4
17.1
In 2012, personal lines total large losses incurred increased by $6 million or 7 percent, net of reinsurance.
The corresponding ratio decreased 0.7 percentage points, as earned premium growth doubled the rate of
growth in total large losses. The majority of the 2012 increase was for homeowner fire claims. In 2011 total
large losses increased over 2010, primarily due to higher personal auto 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,
2011
2010
2012
2012-2011
Change %
176
85
261
$
$
20.3 %
9.8
30.1 %
139
83
222
$
$
145
96
241
27
2
18
18.2 %
10.9
29.1 %
20.1 %
13.3
33.4 %
Pt. Change
2.1
(1.1)
1.0
2011-2010
Change %
(4)
(14)
(8)
Pt. Change
(1.9)
(2.4)
(4.3)
Personal lines commission expense as a percent of earned premium increased in 2012, primarily due
to higher agency profit-sharing commissions. In 2011, lower agency profit-sharing commission drove
the decrease.
Cincinnati Financial Corporation – 2012 10-K - 70
Other underwriting expenses as a percent of earned premium decreased in 2012, as earned premium
growth outpaced a modest increase in expenses. Other underwriting expenses decreased in 2011, primarily
due to a first-quarter 2010 provision for matters involving contingent liabilities.
Personal Lines of Business Analysis
We prefer to write personal lines coverages within accounts that include both auto and homeowner
coverages as well as coverages from the other personal business line. As a result, we believe that the
personal lines segment is best measured and evaluated on a segment basis. However, we provide
line-of-business data to analyze growth and profitability trends separately for each line. The accident year
loss data provides current estimates of incurred loss and loss expenses and corresponding ratios over the
most recent three accident years. Accident year data classifies losses according to the year in which the
corresponding loss events occur, regardless of when the losses are actually reported, recorded or paid.
For 2012, the homeowner line of business continued to have a total loss and loss expense ratio significantly
higher than desired. As discussed in the overview section of Personal Lines Insurance Results of
Operations, Page 68, and 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,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
$
$
425
404
294
12
(17)
(2)
287
$
$
72.8 %
2.8
(4.1)
(0.5)
71.0 %
385
368
282
11
(3)
(1)
289
$
$
76.7 %
3.0
(0.8)
(0.2)
78.7 %
352
337
239
3
(7)
0
235
10
10
4
9
(467)
(100)
(1)
9
9
18
267
57
nm
23
70.9 %
1.1
(2.1)
(0.1)
69.8 %
Pt. Change
(3.9)
(0.2)
(3.3)
(0.3)
(7.7)
Pt. Change
5.8
1.9
1.3
(0.1)
8.9
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2012
as of December 31, 2011
as of December 31, 2010
2012
306
$
$
2011
2010
2012
2011
2010
$
278
293
239
241
242
75.6 %
75.6 %
79.7
71.0 %
71.6
72.0
Net written premiums for personal auto increased in 2012, reflecting rate increases in recent years, ongoing
high levels of policy retention, premium growth initiatives and a higher level of insured exposures.
The total loss and loss expense ratio improved 7.7 percentage points, largely due to a 3.9 point decrease in
the ratio for the current accident year before catastrophe losses that included a 2.1 point decline in paid
losses. Catastrophe losses that declined 0.5 percentage points and a larger amount of favorable reserve
development on prior accident years also contributed to the improved total loss and loss expense ratio.
Large losses above $250,000 per claim were approximately 40 percent higher in both 2012 and 2011,
compared with 2010, contributing to the higher total loss and loss expense ratio for the past two years.
The 2011 total loss and loss expense ratio rose 8.9 percentage points, in part due to a 1.8 point increase
from catastrophe losses plus a 2.4 point increase from losses above $250,000. The refined line of business
allocation process for loss expenses added another 8.5 percentage points to the 2011 total loss and loss
expense ratio and also contributed to the increase in the ratio for the current accident year before
catastrophe losses.
As discussed in Personal Lines Insurance Premiums, Page 69, we continue to implement rate changes to
continue to improve results for our personal auto line of business.
Cincinnati Financial Corporation – 2012 10-K - 71
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,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
$
$
378
353
238
137
(34)
(18)
323
$
$
312
294
231
158
(14)
(6)
369
$
$
299
289
208
56
(2)
(4)
258
21
20
3
(13)
(143)
(200)
(12)
4
2
11
182
(600)
(50)
43
67.4 %
38.8
(9.7)
(5.1)
91.4 %
78.7 %
53.6
(4.5)
(2.0)
125.8 %
72.0 %
19.3
(0.9)
(1.4)
89.0 %
Pt. Change
(11.3)
(14.8)
(5.2)
(3.1)
(34.4)
Pt. Change
6.7
34.3
(3.6)
(0.6)
36.8
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2012
as of December 31, 2011
as of December 31, 2010
2012
375
$
$
2011
2010
2012
2011
2010
$
349
389
242
248
264
106.2 %
118.9 %
132.3
83.8 %
86.1
91.3
Net written premiums for homeowner rose $66 million or 21 percent in 2012, with higher renewal premiums
driving almost two-thirds of the increase. Lower ceded premiums for reinsurance contributed $19 million of
the increase in net written premiums. Premiums ceded for reinsurance, which reduce premium revenue,
were $21 million in 2012, $40 million in 2011 and $18 million in 2010. The total ceded premiums for
2011 increased primarily from premiums to reinstate coverage layers of our property catastrophe
reinsurance treaty.
We continue efforts to improve pricing precision through predictive analytics, which we believe will help to
achieve long-term profitability. Rate increases in recent years, discussed in Personal Lines Insurance
Premiums, Page 69, should help lower loss ratios as the rate increases are earned. Those rate changes
were implemented beginning in October of 2012, 2011, 2010 and 2009 and averaged approximately
9 percent, 8 percent, 7 percent and 6 percent, respectively. In 2013, we are increasing our use of higher
loss deductibles and actual cash value claims settlement for insured damage to older roofs. In addition, we
are increasing the number of property inspections conducted when homeowner policies renew, providing
more opportunities for underwriting or pricing actions on a case-by-case basis. We also continue our
gradual expansion into states less prone to catastrophe losses, which we believe will reduce variability in
the long-term future catastrophe loss ratio. In recent years, we have nonrenewed approximately
2,300 policies in Florida and Alabama that we believe were the most exposed to losses from hurricane
damage. Together these actions represent important steps we are taking to improve homeowner results.
The total loss and loss expense ratio over the past three years largely fluctuated with catastrophe losses,
noncatastrophe weather-related losses and other large losses. For the five-year period 2008 through
2012, the homeowner catastrophe loss ratio averaged 34.5 percent, approximately double the 17.4 percent
10-year average for the years 1998 through 2007. The 34.4 percentage-point improvement in the 2012 total
loss and loss expense ratio included a decrease of 17.9 points for catastrophe losses, compared with 2011.
Noncatastrophe weather losses were approximately $10 million lower during 2012, improving the 2012 loss
ratio by 7.0 percentage points compared with 2011. The effect of the $16 million ceded premiums to
reinstate coverage layers of our property catastrophe reinsurance treaty added 6.4 percentage points the
2011 ratio.
The current accident year loss and loss expense ratio before catastrophe losses for 2012 decreased
11.3 percentage points compared with the 2011 ratio, largely due to the same noncatastrophe weather-
related losses and reinsurance reinstatement effects noted above that raised the 2011 total loss and loss
expense ratio.
Favorable development on prior accident year reserves rose in 2012, primarily due to reduction in case
reserves for losses. Development trends are further discussed in Consolidated Property Casualty Insurance
Development of Estimated Reserves by Accident Year, Page 92.
Cincinnati Financial Corporation – 2012 10-K - 72
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,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
$
$
115
111
59
11
(26)
(2)
42
$
$
104
100
71
12
(18)
0
65
$
$
99
95
61
4
(20)
(1)
44
11
11
(17)
(8)
(44)
nm
(35)
5
5
16
200
10
nm
48
53.8 %
10.1
(23.5)
(1.4)
39.0 %
70.7 %
11.7
(17.9)
(0.5)
64.0 %
64.1 %
3.8
(20.8)
(0.5)
46.6 %
Pt. Change
(16.9)
(1.6)
(5.6)
(0.9)
(25.0)
Pt. Change
6.6
7.9
2.9
0.0
17.4
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2012
as of December 31, 2011
as of December 31, 2010
2012
70
$
$
2011
2010
2012
2011
2010
$
78
83
48
56
65
63.9 %
77.3 %
82.4
50.2 %
58.0
67.9
Other personal premiums increased in 2012 and 2011, generally tracking with the growth in our personal
auto and homeowner lines before the effects of reinsurance. Most of our other personal coverages are
endorsed to homeowner or auto policies. In addition to umbrella liability coverage, our other personal lines
policies provide property-oriented coverages such as dwelling fire and inland marine.
Loss and loss expense ratios returned to a more profitable level, reversing the aberration of 2011 that was
driven by higher catastrophes and noncatastrophe weather. Reserve development on prior accident years
recognized during 2012 was somewhat higher than in recent years, although it can fluctuate significantly for
this business line because personal umbrella liability coverage is a major component of other personal
losses. Development trends are further discussed in Consolidated Property Casualty Insurance
Development of Estimated Reserves by Accident Year, Page 92.
Personal Lines Insurance Outlook
A.M. Best projects industrywide personal lines written premiums may grow approximately 5 percent in 2013,
with an industry statutory combined ratio estimated at approximately 101 percent. Due to rate increases and
a stable policy retention rate, plus the effect of an accelerated pace for recent-year new agency
appointments, we believe our growth rate will likely be higher than the industry projection for 2013. In Item 1,
Strategic Initiatives, Page 10, and Personal Lines Results of Operations, beginning on Page 68, we discuss
various actions we are taking to address the unsatisfactory performance of our personal lines segment, in
particular the homeowner line of business. Our personal lines pricing trends need to exceed loss trends to
improve personal lines profitability, thereby helping to achieve our corporate financial targets. We discuss
our overall outlook for our property casualty insurance operations in the Executive Summary, Page 38.
Cincinnati Financial Corporation – 2012 10-K - 73
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 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,
2011
2012
2010
2012-2011
Change %
2011-2010
Change %
$
93
$
70
$
$
68
2
(5)
0
65
29
(1)
$
72.8 %
2.1
(5.6)
0.1
69.4
31.6
101.0 %
50
1
(9)
0
42
22
6
$
71.0 %
2.1
(12.9)
0.1
60.3
31.9
92.2 %
49
41
1
(1)
0
41
16
(8)
33
36
100
44
nm
55
32
nm
43
22
0
nm
nm
2
38
nm
83.8 %
1.2
(1.3)
0.0
83.7
33.5
117.2 %
Pt. Change
1.8
0.0
7.3
0.0
9.1
(0.3)
8.8
Pt. Change
(12.8)
0.9
(11.6)
0.1
(23.4)
(1.6)
(25.0)
Combined ratio:
Contribution from catastrophe losses and prior years
reserve development
Combined ratio before catastrophe losses and prior
years reserve development
101.0 %
92.2 %
117.2 %
(3.4)
(10.7)
(0.1)
104.4 %
102.9 %
117.3 %
8.8
7.3
1.5
(25.0)
(10.6)
(14.4)
Our excess and surplus lines segment includes results of The Cincinnati Specialty Underwriters Insurance
Company and CSU Producer Resources Inc. The year 2012 represented our fifth full year of operations for
our excess and surplus lines segment. Performance highlights for the excess and surplus lines
segment include:
• Premiums – Earned premiums continued to climb in 2012, a result of strong growth in net written
premiums, similar to 2011. Growth of net written premiums in 2012 was driven by higher renewal written
premiums that included rising average renewal price increases. New business written premiums for
2012 rose compared with 2011, reflecting higher pricing in an excess and surplus lines market that
continued to experience strong competition.
• Combined ratio – The combined ratio rose 8.8 percentage points in 2012, primarily due to unusually
large net favorable reserve development on prior accident years during 2011. Most of this increase was
from higher loss expenses. The loss ratio component rose 2.5 points, including 1.3 points from higher
large losses, as shown on the Excess and Surplus Lines Insurance Losses by Size table on Page 76.
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,
2011
2012
2010
2012-2011
Change %
2011-2010
Change %
$
$
73
38
(6)
105
(12)
93
$
$
49
35
(5)
79
(9)
70
$
$
29
35
(6)
58
(9)
49
49
9
(20)
33
(33)
33
69
0
17
36
0
43
The $24 million increase in 2012 renewal premiums reflected the opportunity to renew many policies for the
first time as well as higher renewal pricing. Average renewal pricing rose in the high-single-digit range
during each quarter of 2012, improving over the mid-single-digit range for the last quarter of 2011. We
measure average changes in excess and surplus lines renewal pricing as the rate of change in renewal
premium for the new policy period compared with the premium for the expiring policy period, assuming no
change in the level of insured exposures or policy coverage between those periods for respective policies.
New business written premiums for the year 2012 rose 9 percent, compared with 2011, primarily due to
higher pricing as the excess and surplus lines market remained competitive, including activity by standard
market companies writing policies for risks formerly insurable only in the excess and surplus lines market.
We observed many cases where competing carriers offered policy terms and conditions that were less
restrictive than those we observed in the past for similar risks, without a corresponding premium for the
broadened insurance coverage. Therefore, we declined to write many of those new business opportunities
and also some renewal business opportunities.
Cincinnati Financial Corporation – 2012 10-K - 74
Other written premiums are primarily premiums that are ceded to reinsurers and that lower our net written
premiums. Ceded premium volume for 2012 increased relative to 2011, reflecting higher written premiums
subject to reinsurance. Beginning in 2011, treaty reinsurance for our excess and surplus lines segment was
provided by The Cincinnati Insurance Company, except for our corporate property catastrophe treaty, where
The Cincinnati Specialty Underwriters Insurance Company is a named insured under the treaty. In previous
years, all reinsurance for our excess and surplus lines segment was provided by third-party reinsurers that
generally provided less favorable pricing. Reinsurance arrangements are further discussed in
2013 Reinsurance Programs, Page 95.
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 our excess and surplus
lines segment three-year highlights table on Page 74 are for the respective current accident years, and
reserve development on prior accident years is shown separately. Since less than 20 percent of our
2012 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 unpaid losses and loss expenses. These
reserves develop over time, and we re-estimate previously reported reserves as we learn more about the
development of the related claims. The table below illustrates that development. For example, the
85.0 percent accident year 2010 loss and loss expense ratio reported as of December 31, 2010, developed
favorably by 13.9 percentage points to 71.1 percent due to claims settling for less than previously estimated,
or due to updated reserve estimates for unpaid claims, as of December 31, 2012. Accident years 2011 and
2010 for this segment have both developed favorably, as indicated by the progression over time of the ratios
in the table.
(Dollars in millions)
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident Year:
as of December 31, 2012
as of December 31, 2011
as of December 31, 2010
2012
70
$
$
2011
2010
2012
2011
2010
$
51
51
35
38
42
74.9 %
73.0 %
73.1
71.1 %
77.6
85.0
Catastrophe losses for our commercial lines and personal lines segments were lower in 2012 compared
with 2011. For the excess and surplus lines segment, catastrophe losses were higher, but the resulting ratio
for the catastrophe loss component of the loss and loss expense ratio remained level due to higher earned
premiums. Catastrophe losses added 2.1 percentage points for 2012 and 2011, following 1.2 percentage
points for 2010, to the respective excess and surplus lines accident year loss and loss expense ratios in the
table above.
The 2012 increase of 1.8 percentage points in the current accident year loss and loss expense ratio before
catastrophe losses was primarily due to trends in large losses incurred relative to earned premium trends,
as shown in the table below. New losses of $250,000 or more per claim totaled $18 million in 2012,
compared with $13 million in 2011. Relative to growth in earned premiums, the increase in new large losses
raised the ratio by 1.2 percentage points.
Excess and surplus lines reserve development on prior accident years continued to net a favorable amount
in 2012 as $5 million was recognized, compared with $9 million in 2011. The 2011 favorable development
was primarily due to beginning to place more reliance on claims experience emergence patterns from our
excess and surplus lines business for IBNR loss and loss expense estimates, with relatively less reliance on
historical claims experience emergence patterns from similar lines of business for our standard commercial
lines business.
We believe the loss and loss expenses reserves for our excess and surplus lines business are adequate.
We establish case reserves in a manner consistent with standard lines coverages, despite the more
restrictive terms and conditions for excess and surplus lines policies. Our first excess and surplus lines
policies were written in 2008. After two years of operation, reserves for estimated unpaid losses and loss
expenses were $18 million as of December 31, 2009, for losses that occurred in 2008 and 2009. As of
December 31, 2012, only an estimated $5 million remained unpaid for loss events that occurred in 2008 and
2009. The inherent uncertainty in estimating reserves is discussed in Property Casualty Insurance Loss and
Loss Expense Reserves, Page 43. Development trends are further analyzed in Consolidated Property
Casualty Insurance Development of Estimated Reserves by Accident Year, Page 92.
Cincinnati Financial Corporation – 2012 10-K - 75
Excess and Surplus 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 net 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 net loss ratio
$
$
Years ended December 31,
2011
2010
2012
0
4
14
6
24
22
2
48
$
$
0.0 %
4.7
14.9
5.9
25.5
23.9
2.1
51.5 %
0
0
13
4
17
16
1
34
$
$
0.0 %
0.0
18.4
5.8
24.2
22.6
2.2
49.0 %
0
3
9
3
15
13
1
29
0.0 %
5.1
18.4
14.2
37.7
27.0
1.2
65.9 %
2012-2011
Change %
nm
nm
8
50
41
38
100
41
2011-2010
Change %
nm
(100)
44
33
13
23
0
17
Pt. Change
Pt. Change
0.0
4.7
(3.5)
0.1
1.3
1.3
(0.1)
2.5
0.0
(5.1)
0.0
(8.4)
(13.5)
(4.4)
1.0
(16.9)
In 2012, total large losses incurred increased by $7 million or 41 percent, net of reinsurance, exceeding
earned premium growth at 33 percent, helping to raise the corresponding ratio by 1.3 percentage points,
compared with 2011. The ratio for the year 2011 trended in the opposite direction, as earned premium
growth significantly outpaced the rate of growth in total large losses. Our analysis indicated no unexpected
concentration of these losses and reserve increases by risk category, geographic region, policy inception,
agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our
portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor
the volatility in addition to general inflationary trends in loss costs.
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,
2011
2010
2012
2012-2011
Change %
$
$
17
12
29
$
$
12
10
22
$
$
8
8
16
42
20
32
2011-2010
Change %
50
25
38
18.2 %
13.4
31.6 %
17.0 %
14.9
31.9 %
16.5 %
17.0
33.5 %
1.2
(1.5)
(0.3)
0.5
(2.1)
(1.6)
Pt. Change
Pt. Change
Excess and surplus lines commission expense as a percent of earned premiums rose in 2012, primarily due
to higher agency profit-sharing commissions.
Other underwriting expenses declined in 2012 and 2011 as a percent of earned premiums primarily
due to earned premiums rising faster than expenses.
Excess and Surplus Lines Outlook
The excess and surplus lines markets are expected to see continued firming in 2013, 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. While soft
market conditions for commercial lines business overall is the driver of this trend, firming is expected
primarily for property coverage due to industry catastrophe losses and for select casualty classes of
business where loss costs are exceeding rates, such as habitational and lessors-risk classes. The slowly
recovering U.S. economy, another major factor in demand for insurance products, is also expected to
contribute to modestly increasing premium volume during 2012 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 – 2012 10-K - 76
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 (loss)
Years ended December 31,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
$
$
178
1
179
185
(82)
79
182
(3)
$
$
165
2
167
189
(81)
62
170
(3)
$
$
158
1
159
170
(79)
62
153
6
8
(50)
7
(2)
(1)
27
7
0
4
100
5
11
(3)
0
11
(150)
Performance highlights for the life insurance segment include:
• Revenues – Earned premiums rose 8 percent for the year 2012. The largest life insurance product
line, term life insurance, continued to grow earned premiums at a strong pace, up 10 percent in
2012. Gross in-force policy face amounts rose 5 percent to $81.467 billion at year-end 2012 from
$77.691 billion at year-end 2011 and $74.124 billion at year-end 2010.
• Profitability – The life insurance segment frequently reports only a small profit or loss because most
of its investment income is included in investment segment results. We include only investment
income credited to contract holders (interest assumed in life insurance policy reserve calculations)
in life insurance segment results. The segment reported a $3 million loss in 2012 and 2011,
following a $6 million profit in 2010, and has averaged a $1 million profit over the past six years.
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,
2011
2010
2012
2012-2011
Change %
$
$
$
115
34
29
$
105
32
28
178
$
165
$
96
35
27
158
10
6
4
8
2011-2010
Change %
9
(9)
4
4
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 rose by $13 million in 2012, primarily due to growth in our term life insurance business.
Earned premiums from term life insurance grew $10 million, or 10 percent.
Separate account investment management fee income contributed $1 million to total revenue in 2012,
compared with $2 million in 2011 and $1 million in 2010.
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 32 life field marketing representatives work in partnership with
our 127 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 $38 million in
2012, compared with a net profit of $20 million in 2011 and a net profit of $38 million in 2010. The life
insurance company portfolio had after-tax net realized investment gains of $4 million in 2012, compared with
after-tax net realized investment losses of $12 million in 2011, which included $20 million in OTTI charges.
Net realized investment gains after taxes were $2 million in 2010. Realized investment gains and losses are
discussed under Investment Results of Operations, Page 79.
Cincinnati Financial Corporation – 2012 10-K - 77
Life segment expenses consist principally of:
• Contract holders’ benefits incurred, related to traditional life and interest-sensitive products,
accounted for 70.1 percent of 2012 total benefits and expenses compared with 75.3 percent in 2011
and 73.4 percent in 2010. Total contract holders’ benefits decreased as the increase in life policy
reserves was lower in 2012 compared with 2011. Partially offsetting the lower policy reserve
increase were net death claims that increased over 2011, but remained within our range of pricing
expectations.
• Operating expenses incurred, net of deferred acquisition costs, accounted for 29.9 percent of 2012
total benefits and expenses compared with 24.7 percent in 2011 and 26.6 percent in 2010.
Expenses in 2012 increased, primarily due to the unlocking of actuarial assumptions for our
universal life insurance contracts.
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.
Life Insurance Outlook
We expect 2013 to be another challenging year for the life insurance industry as interest rates appear unlikely to
move significantly from their historic lows. Interest rate margins will continue to compress as maturing fixed
income assets are replaced with lower yielding securities. Application activity was relatively flat in 2012 at
approximately 1 percent growth and 2013 ushered in higher taxes on all Americans, meaning less disposable
income to purchase life insurance.
Despite all of this, we retain a positive outlook for 2013. Our core product line, term life insurance, is not as
sensitive to interest rates as other products. And because of our distribution system, we are able to grow our
business as the footprint of our property and casualty parent expands. We also see the historically low
ownership of life insurance as a great opportunity and believe that independent agents are the perfect
messengers to communicate the value and stability that our products offer.
We look for continued price increases on life products that have a heavy investment component. The term life
insurance market looks to have stabilized for the time being and will likely remain little changed as companies
wait to see how aggressively state legislatures move to pass a new principles-based reserve approach that was
recently adopted by the National Association of Insurance Commissioners. Principles-based reserves, once
effective, could prompt a wave of repricing activity, with rate reductions for term life insurance. While its ultimate
passage is still not certain, industry consensus is that the beginning of 2015 would be the earliest
implementation date for the new reserve law.
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 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
2012, our property casualty agencies produced approximately 69 percent and our life-only agencies 31 percent
of our life insurance premium.
Improvements in our operational technology continue to make it easier for our agents to do business with
us. We recently introduced electronic enrollment software for our voluntary worksite marketing segment. We
look for that segment to continue to grow as more and more employers are looking to supplement their
employee benefit programs with voluntary options. We also plan to roll-out application functionality for the
iPad, which we expect to increase agent use of our electronic application process. Finally, we recently
introduced a new commission system which will allow for more flexible compensation agreements with our
independent agency force.
Cincinnati Financial Corporation – 2012 10-K - 78
INVESTMENT RESULTS OF OPERATIONS
Overview – Three-Year Highlights
Investment Results
(In millions)
Years ended December 31,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
Total investment income, net of expenses, pretax
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
$
$
531 $
(82)
74
1
(33)
42
491 $
525 $
(81)
128
(1)
(57)
70
514 $
518
(79)
185
10
(36)
159
598
1
(1)
(42)
nm
42
(40)
(4)
1
(3)
(31)
nm
(58)
(56)
(14)
The investments segment contributes investment income and realized gains and losses to results of
operations. Investments provide our primary source of pretax and after-tax profits.
•
Investment income – Pretax investment income increased 1 percent in 2012, primarily because of
higher dividends that reflected rising dividend rates and a greater asset allocation of available funds into
equity securities. Interest income declined slightly due to both a decrease in asset allocation into
fixed-maturity securities and the continuing investment yield effects of the low interest rate environment.
Average yields in the investment income table below are based on the average invested asset and cash
amounts indicated in the table, using fixed-maturity securities valued at amortized cost and all other
securities at fair value.
Pretax investment income increased 1 percent in 2011, primarily because of a higher average dividend
payment rate for common stocks in our equity portfolio.
• Realized investment gains and losses – We reported realized investment gains in all three years, largely
due to investment sales that were discretionary in timing and amount. Those gains were somewhat
offset by OTTI charges.
We believe it is useful to analyze our overall investment performance by using total investment return over
several years. Total investment return considers changes in unrealized gains and losses, which are not
included in net income, in addition to net investment income and realized investment gains and losses that
are included in net income. Changes in unrealized gains and losses shown in the table below include other
invested assets. Considering investment gains and losses, both realized and unrealized, over several years
helps evaluate performance since gains and losses may experience typical variability during shorter periods
of time.
The table below shows total return based on calculation assumptions that simplify cash flow timing that is
commonly used in total return measures. This simplified calculation uses data shown in our consolidated
financial statements or notes to those statements. Added to invested asset amounts from our consolidated
balance sheets are 50 percent of annual amounts pertaining to invested asset categories included in net
cash used in investing activities from our consolidated statements of cash flows. The cash flow amounts are
reduced by realized gains on investments, with the net result reduced by 50 percent to represent estimated
new cash invested during each respective year. All new cash is assumed to be invested at the midpoint of
the year.
Total investment return rose in 2012, compared with 2011, primarily due to higher amounts of the change in
unrealized investment gains and losses. The contribution from the combination of net investment gains, both
realized and the change in unrealized, rose 0.9 percentage points and offset a 0.1 point decrease in the
contribution of investment income. As discussed above, investment income yields have been pressured by
the low interest rate environment.
Cincinnati Financial Corporation – 2012 10-K - 79
(In millions)
Beginning balance prior year:
Invested assets beginning balance
Fixed maturities
Equity securities
Other invested assets
Average net acquisitions (dispositions)
Estimated annual average invested assets
Invested assets total return
Total investment income net of expenses
Total realized investment gains and losses
Total invested assets change in unrealized gains
Total
Years ended December 31,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
$
$
$
$
8,779
2,956
66
11,801
187
11,988
531
42
391
964
$
$
$
$
8,383
3,041
84
11,508
64
11,572
525
70
240
835
$
$
$
$
7,861
2,701
81
10,643
350
10,993
518
159
228
905
5
(3)
(21)
3
194
4
1
(40)
63
15
7
13
4
8
(82)
5
1
(56)
5
(8)
Total return on invested assets before tax
8.0
%
7.2
%
8.2
%
Investment Income
The primary drivers of investment income were:
•
Interest income declined 1 percent in 2012 as the average fixed-maturity pretax yield declined by
approximately 16 basis points, offsetting a larger fixed-maturity portfolio that rose 2 percent on an
amortized cost basis. It was essentially flat in 2011 as a larger portfolio offset declining average yield.
• Dividend income rose $11 million or 11 percent in 2012 after rising 5 percent in 2011. Increases in
dividend payment rates for many of the holdings in our common stock portfolio during 2012, plus a
greater asset allocation of available funds into equity securities drove the increase in dividend
income. In addition, several of our common stock holdings in total issued an additional $5 million in
2012 dividends not typically paid in the fourth quarter, as a result of anticipated dividend tax rate
changes effective for 2013.
(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,
2011
2010
2012
2012-2011
Change %
2011-2010
Change %
$
$
$
420
115
3
(7)
531
(129)
402
$
$
424
104
4
(7)
525
(129)
396
$
$
423
99
4
(8)
518
(126)
392
24.2%
24.6%
24.4%
11,847
$
11,471
$
11,129
4.48%
3.39%
4.58%
3.45%
4.65%
3.52%
(1)
11
(25)
0
1
0
2
0
5
0
13
1
(2)
1
Effective fixed-maturity tax rate
26.9%
26.7%
26.4%
Average fixed-maturity at amortized cost
$
8,153
$
7,986
$
7,704
Average fixed-maturity yield pre-tax
Average fixed-maturity yield after-tax
5.15%
3.77%
5.31%
3.89%
5.49%
4.04%
In 2012, 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 asset growth goals. While our
bond portfolio more than covers our insurance reserve liabilities, we believe our diversified common stock
portfolio of mainly blue chip, dividend-paying companies represents one of our best investment opportunities
for the long term. We position our portfolio with consideration to both the challenges presented by the
current low interest rate environment and the risks presented by potential future inflation. As bonds in our
generally laddered portfolio mature or are called over the near term, we will be challenged to replace their
current yield. Approximately 23 percent of our fixed-maturity investments mature during 2013 through
2015 with an average pretax yield-to-amortized cost of 4.6 percent, including 6.6 percent of the portfolio
maturing during 2013 and yielding 4.5 percent, 7.4 percent of the portfolio maturing during 2014 and yielding
4.9 percent and 8.8 percent of the portfolio maturing during 2015 and yielding 4.5 percent.
Cincinnati Financial Corporation – 2012 10-K - 80
We discussed our portfolio strategies in Item 1, Investments Segment, Page 20. We discuss risks related to
our investment income and our fixed-maturity and equity investment portfolios in Item 7a, Quantitative
and Qualitative Disclosures About Market Risk, Page 100.
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.
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 $42 million for the year ended December 31, 2012,
included:
• $37 million in net realized gains from equity security sales.
• $35 million in gains from fixed-maturity security sales and calls.
• $3 million in other net realized gains, including changes in the valuation of securities with embedded
derivatives described below.
• $33 million in OTTI charges to write down holdings of equity and fixed-maturity securities.
The $128 million net realized investment gains and losses in 2011 were primarily due to $111 million in net
realized gains from equity security sales.
In 2010, most of the $185 million net realized investment gains and losses were due to a $128 million gain
from the sale of Verisk Analytics Inc. (NYSE: VRSK).
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.
Changes in the Fair Value of Securities with Embedded Derivatives
We have a small portfolio of convertible preferred stocks and bonds that have an embedded derivative
component. In 2012, we recorded $1 million in fair value realized losses compared with fair value realized
gains of $1 million in 2011 and $10 million in 2010. 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.
Cincinnati Financial Corporation – 2012 10-K - 81
Other-than-temporary Impairment Charges
In 2012, we recorded $33 million in write-downs for 13 securities that we deemed had experienced an
other-than-temporary decline in fair value compared with $57 million for 12 securities in 2011 and
$36 million for 15 securities in 2010. The factors we consider when evaluating impairments are discussed in
Critical Accounting Estimates, Asset Impairment, Page 47. The OTTI charges in 2012, 2011 and 2010 were
each 1 percent or less of our investment portfolio at year-end. OTTI charges also include unrealized losses
of holdings that we intend to sell but have not yet completed a transaction.
OTTI charges from the investment portfolio by the asset classes we described in Item 1, Investments
Segment, Page 20, are summarized below:
(Dollars in millions)
Taxable fixed maturities:
Impairment amount
New amortized cost
Percent to total amortized cost owned
Number of securities other-than-temporarily impaired
Percent to number of securities owned
Tax-exempt fixed maturities:
Impairment amount
New amortized cost
Percent to total amortized cost owned
Number of securities other-than-temporarily impaired
Percent to number of securities owned
Common equities:
Impairment amount
New cost
Percent to total cost owned
Number of securities other-than-temporarily impaired
Percent to number of securities owned
Preferred equities:
Impairment amount
New cost
Percent to total cost owned
Number of securities other-than-temporarily impaired
Percent to number of securities owned
Total:
Impairment amount
New cost or amortized cost
Percent to total cost or amortized cost owned
Number of securities other-than-temporarily impaired
Percent to number of securities owned
Years ended December 31,
2011
2010
2012
$
$
$
$
$
$
$
$
$
$
$
$
(1)
0
0 %
1
0 %
$
$
0
0
0 %
1
0 %
(32)
153
$
$
7 %
11
15 %
$
$
0
0
0 %
0
0 %
(33)
153
$
$
1 %
13
0 %
$
$
$
$
(4)
6
0 %
6
0 %
(1)
9
0 %
3
0 %
(52)
56
$
$
3 %
3
4 %
$
$
0
0
0 %
0
0 %
(57)
71
$
$
1 %
12
1 %
(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 %
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:
Consumer discretionary
Industrials
Material
Energy
Health
Financial
Information technology
Total common equities
Total
Years ended December 31,
2012
2011
2010
$
$
0
(1)
0
0
0
(1)
(14)
(8)
(7)
(2)
(1)
0
0
(32)
(33)
$
$
(1)
(1)
0
(1)
(2)
(5)
0
0
0
0
(2)
(50)
0
(52)
(57)
$
$
0
0
(1)
0
(2)
(3)
0
0
0
0
(21)
0
(12)
(33)
(36)
Cincinnati Financial Corporation – 2012 10-K - 82
Investments Outlook
The general market view is that, in light of Federal Reserve commentary, interest rates are likely to remain
well below historic averages for at least the next two years. This will continue to apply pressure on
investment income.
We continue to focus on portfolio strategies to balance near-term income generation and long-term book
value growth. In 2013, 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 20.
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 47.
OTHER
Revenues in 2012 for our Other operations increased $1 million, compared with 2011, while expenses
remained at the same level. Other includes noninvestment operations of the parent company and its
subsidiary, CFC Investment 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
Other revenues
Total revenues
Interest expense
Operating expenses
Total expenses
Other loss
Years ended December 31,
2012
2011
2010
$
$
7
2
9
54
14
68
(59)
$
$
7
1
8
54
14
68
(60)
$
$
2011-2010
2012-2011
Change % Change %
0
0
0
0
27
5
(5)
0
100
13
0
0
0
2
7
1
8
54
11
65
(57)
TAXES
We had $145 million of federal income tax expense in 2012 compared with $9 million in 2011 and
$123 million in 2010. Our corporate effective tax rate for 2012 was 25.6 percent compared with 5.2 percent
in 2011 and 24.7 percent in 2010.
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
Item 1, Tax-Exempt Fixed Maturities, Page 22, 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 noninsurance 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 noninsurance
subsidiaries, the dividend received deduction exempts 70 percent of dividends from qualified equities.
Details about our effective tax rate are found on Note 11, Page 129.
LIQUIDITY AND CAPITAL RESOURCES
We seek to maintain prudent levels of liquidity and financial strength for the protection of our policyholders,
creditors and shareholders. We manage liquidity at two levels to meet the short- and long-term cash
requirements of business obligations and growth needs. The first is the liquidity of the parent company.
The second is the liquidity of our insurance subsidiary. The management of liquidity at both levels is
essential because each has different funding needs and sources, and each is subject to certain regulatory
guidelines and requirements.
Parent Company Liquidity
The parent company’s primary sources of cash inflows are dividends from our insurance subsidiary,
investment income, maturity of fixed income securities and sale proceeds from investments. The parent
company’s cash outflows are primarily interest and principal payments on long- and short-term debt,
dividends to shareholders, common stock repurchases, pension contributions, investment purchases and
general operating expenses. As of December 31, 2012, the parent company had $1.151 billion in cash and
marketable securities, providing strong liquidity to fund cash outflows, as needed.
Cincinnati Financial Corporation – 2012 10-K - 83
The payment of dividends to shareholders is largely based upon receiving subsidiary dividends. Otherwise,
we could sell investments or use our line of credit to support the payment.
The table below shows a summary, by the direct method, of the major sources and uses of cash flow by the
parent company. Dividends received from subsidiaries in 2012 were $115 million more than 2011 due to
lower catastrophe losses that increased net cash provided by operating activities. We expect 2013 sources
of cash flows to be similar to 2012, assuming similar catastrophe losses. 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
Short-term debt
Investment income received
Uses of liquidity:
Debt interest payments
Pension payments
Shareholders' dividend payments
Purchase of treasury shares
Years ended December 31,
2011
2010
2012
$
$
285 $
-
42
53 $
14
256
-
170 $
55
41
53 $
35
255
32
270
-
41
52
25
252
10
Insurance Subsidiary Liquidity
Our insurance subsidiary’s primary sources of cash inflows are collection of premiums, investment income,
maturity of fixed income securities and sale proceeds from investments. Property casualty insurance
premiums generally are received before losses are paid under the policies purchased with those premiums.
Our insurance subsidiary’s cash outflows are primarily property casualty loss and loss expenses,
commissions, salaries, taxes, operating expenses and investment purchases. Over the past three years,
premium receipts and investment income have been more than sufficient to pay claims and operating
expenses. Excess cash flows were partially used to pay dividends to the parent company. We are not aware
of any known trends that would materially change historical cash flow results over the next 12 months, other
than fluctuations in catastrophe claims and other large losses either individually or in aggregate.
The table below shows a summary of operating cash flow for property casualty insurance (direct method).
Lower operating cash flow for 2011 reflected the unusually high level of catastrophe losses.
(In millions)
Premiums collected
Loss and loss expenses paid
Commissions and other underwriting expenses paid
Cash flow from underwriting activities
Investment income received
Cash flow from operating activities
Years ended December 31,
2011
2010
2012
$
$
3,451 $
(2,229)
(1,035)
187
360
547 $
3,080 $
(2,241)
(1,005)
(166)
357
191 $
2,978
(1,865)
(954)
159
350
509
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 shareholder dividends is invested in
fixed-maturity and equity securities. Equity securities provide the potential for future increases in dividend
income and for capital appreciation.
Cash generated from investment income 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.
However, we follow a buy-and-hold investment philosophy, seeking to compound cash flows over the
long-term. In addition to possible sales of investments, proceeds of call or maturities of fixed-maturity
securities also can provide liquidity. During the next five years, $3.747 billion, or 41.2 percent, of our
fixed-maturity portfolio will mature. At year-end 2012, total unrealized gains in the investment portfolio,
before deferred income taxes, were $1.875 billion. Liquidity sourced from our investment portfolio is not
materially at risk from European-based securities, as our total exposure to such securities at the end of
2012 was $504 million on a fair value basis, or 4.0 percent of our total invested assets. We own no
European sovereign debt. Our European-based securities are summarized by country in Item 7A,
Qualitative and Quantitative Disclosures About Market Risk, Page 100.
Further, 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.
Cincinnati Financial Corporation – 2012 10-K - 84
Our debt totaled $894 million at year-end 2012, consisting of $790 million of noncallable long-term debt and
$104 million in borrowings on our short-term line of credit. We generally have minimized our reliance on
debt financing although we may use the line to fund short-term cash needs.
Long-Term Debt
We provide details of our three long-term notes in Item 8, Note 8, of the Consolidated Financial Statements,
Page 127. None of the notes are encumbered by rating triggers. The total principal amount of our long-term
debt at December 31, 2012, was $793 million and included:
• $391 million aggregate principal amount of 6.92% senior debentures due 2028.
• $28 million aggregate principal amount of 6.9% senior debentures due 2028.
• $374 million aggregate principal amount of 6.125% senior debentures due 2034.
The company’s senior debt is rated investment grade by independent rating firms. None of the four rating
agencies made changes to our debt ratings in 2012. Our debt ratings at February 25, 2013, were: a- from
A.M. Best, BBB+ from Fitch Ratings, A3 from Moody’s Investors Service and BBB from Standard & Poor’s
Ratings Services.
Short-Term Debt
At December 31, 2012, we had a $225 million line of credit with commercial banks, with $104 million
borrowed. There was no change in the amount of the $104 million short-term debt during 2012. During
2011, there was a $55 million increase to the previous balance of $49 million in short-term debt by the
parent company, primarily to fund share repurchases. Access to this line of credit requires compliance with
various covenants, including maintaining a minimum consolidated net worth and not exceeding 30 percent
debt to capital, as defined by the agreement. The minimum consolidated net worth requirement is $3 billion
plus 50 percent of consolidated net income and net cash proceeds from issuance of equity securities after
March 31, 2012. At December 31, 2012, we were well within compliance with all covenants under the credit
agreements and believe we will remain in compliance.
Our $225 million unsecured revolving line of credit is administered by PNC Bank, N.A., a subsidiary of The
PNC Financial Services Group Inc. (NYSE:PNC). It was established in 2012 and will expire in May 2017.
Our subsidiary CFC Investment Company also is a borrower under this line of credit. PNC Bank is the lead
participant bookrunner with a $65 million share. Fifth Third Bancorp (Nasdaq:FITB) is the syndication agent
with a $65 million share. U.S. Bancorp (NYSE:USB), BB&T Corp (NYSE:BBT) and Huntington Bancshares,
Inc. (Nasdaq:HBAN) each provide $25 million of capacity, and Northern Trust Corporation (Nasdaq:NTRS),
provides $20 million of capacity.
The credit agreement provides alternative interest charges based on the type of borrowing and our
debt rating. The interest rate charged is adjusted LIBOR plus an applicable margin.
Capital Resources
Capital resources consisting of shareholders’ equity and total debt represent our overall financial strength to
support writing and growing our insurance businesses. At December 31, 2012, we had total capital of
$6.347 billion. Shareholders’ equity was $5.453 billion, an increase of $420 million, or 8 percent, from the
prior year. Our total debt was $894 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 2012, the ratio was 14.1 percent compared with
15.1 percent at year-end 2011.
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 deem relevant. While the board and management believe there is merit to
sustaining the company’s long record of dividend increases, our first priority is the company’s financial
strength. Over the past 10 years, the company has paid an average of 57 percent of net income as
dividends. Through 2012, the board had increased our cash dividend for 52 consecutive years. The
board decision in August 2012 to increase the dividend demonstrated confidence in the company’s
strong capital, liquidity, financial flexibility and initiatives to improve earnings performance.
• Common stock repurchase – Generally, our board believes that share repurchases can help fulfill our
commitment to enhancing shareholder value. Consequently, the board has authorized the repurchase of
outstanding shares, giving management discretion to purchase shares at reasonable prices in light of
circumstances at the time of purchase.
Our approach since mid-2008 has been to preserve capital and repurchase a minimal amount of shares.
Those repurchases were intended to partially offset the issuance of shares through equity compensation
plans, primarily due to vesting of service-based restricted stock units of equity awards granted in the past.
Our corporate Code of Conduct restricts repurchases during certain time periods. The details of the
repurchase authorizations and activity are described in Item 5, Market for the Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities, Page 34.
Cincinnati Financial Corporation – 2012 10-K - 85
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, 2012, 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
Operating property
Capital lease obligations
Computer hardware and software
Qualified pension plan contribution
Other invested assets
Total
Year
2013
1,375
77
52
-
104
102
3
17
15
15
5
1,765
$
$
Years
2014-2015
1,326
130
104
-
-
-
1
17
26
-
7
1,611
$
$
Years
2016-2017
574
171
104
-
-
-
-
3
-
-
5
857
$
$
$
$
There-
after
Total
894
3,857
682
793
-
-
-
-
-
-
-
6,226
$
$
4,169
4,235
942
793
104
102
4
37
41
15
17
10,459
Our two most significant contractual obligations are discussed in conjunction with related insurance
reserves in Property Casualty Loss and Loss Expense Obligations and Reserves and Life Insurance
Policyholder Obligations and Reserves beginning on Pages 88 and 94, respectively. Other future
contractual obligations include:
•
Interest on long-term debt – We expect total interest expense to be $52 million in 2013. We discuss
outstanding debt in Additional Sources of Liquidity, Page 84.
• Property casualty profit-sharing commissions – Profit-sharing commissions are paid to agencies
using a formula that takes into account agency profitability and premium volume. We estimate
2013 profit-sharing commission payments of approximately $102 million.
• Computer hardware and software – We expect to spend $41 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 noncontractual expenses we anticipate
for computer hardware and software in 2013.
Other Commitments
At December 31, 2012, we believe our most significant other commitments are:
• 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 $5 million in spending for key technology
initiatives in 2013. Capitalized development costs related to key technology initiatives totaled $4 million
in 2012 and $5 million in 2011. These activities are conducted at our discretion, and we have no
material contractual obligations for activities planned as part of these projects.
Liquidity and Capital Resources Outlook
A long-term perspective governs our liquidity and capital resources decisions, with the goal of benefitting
our policyholders, agents, shareholders and associates over time. Our 2012 insurance results met our
combined ratio objective of being consistently within the range of 95 percent to 100 percent, although it was
not met in 2011. Our capital position has improved significantly since year-end 2009, providing adequate
financial cushion when short-term operating results do not meet our objectives.
At December 31, 2012, we had $487 million in cash and cash equivalents. That strong liquidity and our
consistent cash flows give 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, as occurred in the second quarter of 2011. We
responded with a reduced insurance subsidiary dividend to our parent company in 2011. There could also
be additional obligations for our insurance operations due to increasing severity or frequency of
noncatastrophe claims. To address the risk of unusually large insurance loss obligations including
catastrophe events, we maintain property casualty reinsurance contracts with highly rated reinsurers, as
discussed under 2013 Reinsurance Programs, Page 95. We also monitor the financial condition of our
Cincinnati Financial Corporation – 2012 10-K - 86
reinsurers because insolvency could place in jeopardy a portion of our $615 million in outstanding
reinsurance recoverable at December 31, 2012.
We do not expect future pension contributions to constrain our liquidity. The fair value of plan assets is
84 percent of the accumulated benefit obligation at December 31, 2012.
Continued economic weakness also has the potential to affect our liquidity and capital resources in a
number of different ways, potentially including: delinquent payments from agencies, defaults on interest
payments by fixed-maturity holdings in our portfolio, dividend reductions by holdings in our equity portfolio or
declines in the market value of holdings in our portfolio.
Further, parent company liquidity could be constrained by Ohio regulatory requirements that restrict the
dividends insurance subsidiaries can pay. During 2013, our insurance subsidiary can pay $391 million in
dividends to our parent company without regulatory approval.
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.
Cincinnati Financial Corporation – 2012 10-K - 87
Property Casualty Loss and Loss Expense Obligations and Reserves
For the business lines in the commercial and personal lines insurance segments, and in total for the excess
and surplus lines segment, the following table details gross reserves among case, IBNR and loss expense
reserves, net of salvage and subrogation. Reserving practices are discussed in Critical Accounting
Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 43.
Our estimate of future gross property casualty loss and loss expense payments of $4.169 billion is lower
than loss and loss expense reserves of $4.230 billion reported on our balance sheet at December 31, 2012.
The $61 million difference is due to certain life and health loss reserves.
The decrease in total gross reserves was largely due to a $93 million reduction in case reserves for our
commercial casualty and workers’ compensation lines of business in total. The majority of the $40 million
decrease in IBNR reserves was from a $31 million reduction in for our commercial property and homeowner
lines of business in total, in part due to lower catastrophe losses. Total gross reserves for our excess and
surplus lines insurance segment rose $45 million, reflecting a 33 percent increase in earned premiums.
Property Casualty Gross Reserves
(In millions)
At December 31, 2012
Commercial lines insurance
Commercial casualty
Commercial property
Commercial auto
Workers' compensation
Specialty packages
Surety and executive risk
Machinery and equipment
Subtotal
Personal lines insurance
Personal auto
Homeowner
Other personal
Subtotal
Excess and surplus lines
Total
At December 31, 2011
Commercial lines insurance
Commercial casualty
Commercial property
Commercial auto
Workers' compensation
Specialty packages
Surety and executive risk
Machinery and equipment
Subtotal
Personal lines insurance
Personal auto
Homeowner
Other personal
Subtotal
Excess and surplus lines
Total
Loss reserves
Case
reserves
IBNR
reserves
Loss
expense
reserves
Total
gross
reserves
Percent
of total
$
$
$
816 $
197
252
433
129
121
1
1,949
140
81
39
260
61
2,270 $
875 $
190
260
467
100
126
1
2,019
129
76
41
246
348 $
22
35
473
3
6
2
889
(10)
21
42
53
35
977 $
365 $
35
30
464
9
5
3
911
(3)
39
52
88
503 $
38
66
97
27
74
2
807
53
27
5
85
30
922 $
535 $
36
62
108
32
77
1
851
52
27
5
84
43
2,308 $
18
1,017 $
$
20
955 $
1,667
257
353
1,003
159
201
5
3,645
183
129
86
398
126
4,169
1,775
261
352
1,039
141
208
5
3,781
178
142
98
418
81
4,280
40.0 %
6.2
8.5
24.1
3.8
4.8
0.1
87.5 #
4.4
3.1
2.1
9.6
2.9
100.0 %
41.5 %
6.1
8.2
24.3
3.3
4.9
0.1
88.4
4.2
3.3
2.3
9.8
1.8
100.0 %
Asbestos and Environmental Reserves
We carried $67 million of net loss and loss expense reserves for asbestos and environmental claims and
$54 million of reserves for mold claims at year-end 2012, compared with $74 million and $62 million,
respectively, for such claims at year-end 2011. The asbestos and environmental claims amounts for each
respective year constituted 1.8 percent and 1.9 percent of total loss and loss expense reserves at these
year-end dates.
We believe our exposure to asbestos and environmental claims is limited, largely because our reinsurance
retention was $500,000 or below prior to 1987. We also were predominantly a personal lines company in the
1960s and 1970s, when asbestos and pollution exclusions were not widely used by commercial lines
insurers. During the 1980s and early 1990s, commercial lines grew as a percentage of our overall business
and our exposure to asbestos and environmental claims grew accordingly. Over that period, we endorsed to
or included in most policies an asbestos and environmental exclusion.
Additionally, since 2002, we have revised policy terms where permitted by state regulation to limit our
exposure to mold claims prospectively and further reduce our exposure to other environmental claims
Cincinnati Financial Corporation – 2012 10-K - 88
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 reviewed additional reserving methods and elected to use a
weighted average of a paid survival ratio method and report year method to estimate reserves for IBNR
asbestos and environmental claims. The result is a decrease of approximately 10 percent in the indicated
reserve as derived from the 2003 survival ratio analysis alone. Our exposure to such claims is limited; we
believe moving to weighted average of both methods produces a sufficient level of reserves.
Gross Property Casualty Loss and Loss Expense Payments
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 2013 Reinsurance Programs, Page 95, we
purchase reinsurance to mitigate our property casualty risk exposure. Ceded property casualty reinsurance
unpaid receivables of $356 million at year-end 2012 are an offset to our gross property casualty loss and
loss expense obligations. Our reinsurance program mitigates the liquidity risk of a single large loss or an
unexpected rise in claim severity or frequency due to a catastrophic event. Reinsurance does not relieve
us of our obligation to pay covered claims. The financial strength of our reinsurers is important because
our ability to recover losses under our reinsurance agreements depends on the financial viability of
the reinsurers.
We direct our associates and agencies to settle claims and pay losses as quickly as is practical, and we
made $2.229 billion of net claim payments during 2012. At year-end 2012, total net property casualty
reserves of $3.813 billion reflected $2.015 billion in unpaid amounts on reported claims (case reserves),
$888 million in loss expense reserves and $910 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 adequate in Critical Accounting Estimates, Property Casualty
Insurance Loss and Loss Expense Reserves, Page 43.
The historical pattern of using premium receipts for the payment of loss and loss expenses has enabled us
to extend slightly the maturities of our investment portfolio beyond the estimated settlement date of the loss
reserves. The effective duration of our consolidated property casualty fixed-maturity portfolio was 4.2 years
at year-end 2012. By contrast, the duration of our loss and loss expense reserves was approximately
4.32 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 $3.598 billion
to $3.918 billion at year-end 2012, with the company carrying net reserves of $3.813 billion. The likely range
was $3.677 billion to $4.056 billion at year-end 2011, with the company carrying net reserves of
$3.905 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.
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 46.
The ranges reflect our assessment of the most likely unpaid loss and loss expenses at year-end 2012
and 2011. However, actual unpaid loss and loss expenses could nonetheless fall outside of the
indicated ranges.
Cincinnati Financial Corporation – 2012 10-K - 89
Management’s best estimate of total loss and loss expense reserves as of year-end 2012 was consistent
with the corresponding actuarial best estimate. Management’s best estimate of total loss and loss expense
reserves as of year-end 2011 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, 2012, 2011 and 2010, in Item 8, Note 4 of the Consolidated Financial Statements, Page 125.
The reconciliation of our year-end 2011 reserve balance to net incurred losses one year later recognizes
approximately $396 million of favorable reserve development.
The table below 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, 2012, we had paid $2.040 billion of
loss and loss expenses in calendar years 2003 through 2012 for losses that occurred in accident years
2002 and prior. An estimated $263 million of losses remained unpaid as of year-end 2012
(net re-estimated reserves of $2.303 billion from Section C less cumulative net paid loss and loss
expenses of $2.040 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, 2002, had developed favorably by $305 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 2012, 2011 and 2010 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 $396 million, $285 million, and $304 million, respectively.
In evaluating the development of our estimated reserves for loss and loss expenses for the past 10 years,
note that each amount includes the effects of all changes in amounts for prior periods. For example,
payments or reserve adjustments related to losses settled in 2012 but incurred in 2006 are included in the
cumulative deficiency or redundancy amount for 2006 and each subsequent year. In addition, this table
presents calendar year data, not accident or policy year development data, which readers may be more
accustomed to analyzing. Conditions and trends that affected development of reserves in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future reserve
development based on this data.
Differences between the property casualty reserves reported in the accompanying consolidated balance
sheets (prepared in accordance with GAAP) and those same reserves reported in the annual statements
(filed with state insurance departments in accordance with statutory accounting practices – SAP), relate
principally to the reporting of reinsurance recoverables, which are recognized as receivables for GAAP and
as an offset to reserves for SAP.
Cincinnati Financial Corporation – 2012 10-K - 90
Development of Estimated Reserves for Loss and Loss Expenses
(In millions)
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
A. Originally reported reserves for unpaid loss and loss expenses:
Gross of reinsurance
Reinsurance recoverable
Net of reinsurance
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
$
$
4,280
375
3,905
$
$
4,169
356
3,813
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
$
799 $
817 $
907 $
944 $
1,235
1,519
1,716
1,823
1,889
1,940
1,973
2,015
2,040
1,293
1,626
1,823
1,945
2,031
2,077
2,132
2,170
1,426
1,758
1,963
2,096
2,163
2,238
2,291
1,502
1,845
2,059
2,176
2,282
2,355
$
979 $
994 $
926 $
1,523
1,857
2,102
2,264
1,529
1,912
2,174
1,511
1,921
1,006
1,547
1,896
2,096
2,247
2,360
1,035 $
1,663
1,106
$
2,528 $
2,377
2,336
2,299
2,276
2,259
2,298
2,318
2,323
2,303
2,649 $
2,546
2,489
2,452
2,414
2,469
2,491
2,496
2,482
2,817 $
2,743
2,657
2,578
2,645
2,662
2,665
2,657
2,995 $
2,871
2,724
2,776
2,788
2,790
2,792
3,112 $
2,893
2,898
2,907
2,900
2,890
3,074 $
3,042
3,005
2,957
2,925
3,310 $
3,197
3,124
3,043
3,357 $
3,251
3,076
3,526 $
3,283
3,509
$
(80) $
(231)
(272)
(309)
(332)
(349)
(310)
(290)
(285)
(305)
(196) $
(299)
(356)
(393)
(431)
(376)
(354)
(349)
(363)
(160) $
(234)
(320)
(399)
(332)
(315)
(312)
(320)
(116) $
(240)
(387)
(335)
(323)
(321)
(319)
(244) $
(463)
(458)
(449)
(456)
(466)
(323) $
(355)
(392)
(440)
(472)
(188) $
(301)
(374)
(455)
(304) $
(410)
(585)
(285) $
(528)
(396)
$
$
$
2,303 $
515
2,818 $
2,482 $
491
2,973 $
2,657 $
510
3,167 $
2,792 $
476
3,268 $
2,890 $
466
3,356 $
2,925 $
449
3,374 $
3,043 $
487
3,530 $
3,076 $
388
3,464 $
3,283 $
319
3,602 $
3,509
381
3,890
(332) $
(413) $
(347) $
(361) $
(504) $
(551) $
(510) $
(632) $
(535) $
(390)
Cincinnati Financial Corporation – 2012 10-K - 91
Consolidated Property Casualty Insurance Development of Estimated Reserves by Accident Year
The following table shows net reserve changes at year-end 2012, 2011 and 2010 by property casualty
segment and accident year:
(In millions)
As of December 31, 2012
2011 accident year
2010 accident year
2009 accident year
2008 accident year
2007 accident year
2006 accident year
2005 and prior accident years
Deficiency/(redundancy)
As of December 31, 2011
2010 accident year
2009 accident year
2008 accident year
2007 accident year
2006 accident year
2005 accident year
2004 and prior accident years
Deficiency/(redundancy)
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)
Comm.
lines
Pers.
lines
Incremental development
E&S
lines
Totals
$
$
$
$
$
$
(93) $
(49)
(80)
(45)
(18)
(12)
5
(292) $
(148) $
(16)
(23)
(36)
(8)
(3)
0
(234) $
(176) $
(62)
(43)
0
(9)
(2)
23
(269) $
(60) $
(16)
(11)
(5)
(3)
(1)
(3)
(99) $
(26) $
(10)
(2)
(3)
(2)
(1)
2
(42) $
(13) $
(13)
(2)
(3)
1
(2)
(2)
(34) $
$
0
(3)
(2)
0
0
0
0
(5) $
(4) $
(5)
0
0
0
0
0
(9) $
(1) $
0
0
0
0
0
0
(1) $
(153)
(68)
(93)
(50)
(21)
(13)
2
(396)
(178)
(31)
(25)
(39)
(10)
(4)
2
(285)
(190)
(75)
(45)
(3)
(8)
(4)
21
(304)
Overall favorable development for consolidated property casualty reserves of $396 million in 2012 illustrated
the potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial
casualty and workers’ compensation. As noted in Critical Accounting Estimates, Key Assumptions - Loss
Reserving, Page 46, 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. The table showing reserves
by segment and lines of business in Property Casualty Loss and Loss Expense Obligations and Reserves,
Page 88, shows the components of gross reserves among case, IBNR and loss expense reserves.
Favorable reserve development of $177 million for the commercial casualty line accounted for
approximately 60 percent of the commercial lines insurance segment total in 2012, while favorable reserve
development of $74 million for the workers’ compensation line accounted for approximately 25 percent of
the segment total in 2012. Drivers of significant reserve development are discussed below.
• Moderation in commercial casualty trend selections – We saw moderating loss cost trends continue in
several commercial casualty coverages, most notably for umbrella liability coverage. A number of
factors seem to have played a role, including a slow economic recovery, favorable court decisions,
policy form restrictions and claims department initiatives. Accordingly, it is not entirely clear whether
these moderating loss cost trends will persist, and our actuaries have responded cautiously to these
changes, electing to recognize improvements in trends used for estimating reserves in a progressive,
incremental fashion.
• Commercial auto loss emergence – Commercial auto developed slightly unfavorably during calendar
year 2012. This line has become troublesome for the industry as a whole, perhaps due to an improving
economy. We continue to watch it closely.
• Workers’ compensation trends and initiatives – We continue to see favorable calendar year
development for this line. Loss emergence during 2012 was less than expected for nearly every
accident year. The trend for payments to be made in future calendar years is down slightly. However,
we are watching this line closely, as a sudden increase in trend for future payments has a highly
leveraged effect. Initiatives to improve profitability of our workers’ compensation line of business are
discussed in Commercial Lines Insurance Results of Operations, Commercial Lines of Business
Analysis, Page 60.
Favorable development of personal lines segment reserves illustrates the potential for revisions inherent in
estimating reserves. We continued to see favorable reserve development related to umbrella liability
Cincinnati Financial Corporation – 2012 10-K - 92
coverage in the other personal line of business. Among the factors that appeared to be causing moderating
loss cost trends were a slow economic recovery, favorable court decisions, policy form restrictions and
claims department initiatives.
In consideration of the data’s credibility, we analyze commercial and personal umbrella liability reserves
together and then allocate the derived total reserve estimate to the commercial and personal coverages.
Consequently, all of the umbrella factors that contributed to commercial lines reserve development also
contributed to personal lines reserve development through the other personal line, of which personal
umbrella coverages are a part.
For our homeowner line of business, the $52 million favorable reserve development on prior accident years
recorded during 2012 was primarily due to a reduction in case reserves for losses, including an $18 million
reduction for catastrophe losses. Total homeowner favorable reserve development included $39 million for
accident year 2011 and $7 million for accident year 2010.
For the excess and surplus lines insurance segment, the table showing reserves by segment and lines of
business in Property Casualty Loss and Loss Expense Obligations and Reserves, Page 88, shows the
components of gross reserves among case, IBNR and loss expense reserves. Total gross reserves were up
$45 million from year-end 2011 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 74. Favorable
development during 2012 of $5 million for excess and surplus lines insurance segment reserves, shown in
the table above, illustrates the potential for revisions inherent in estimating reserves. During 2011, we began
to rely more heavily on development patterns from our own excess and surplus lines business, contributing
to the modest decrease in reserves, especially for the defense and cost containment portion of loss
expense reserves.
Cincinnati Financial Corporation – 2012 10-K - 93
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 $235 million at year-end 2012. As discussed in
2013 Reinsurance Programs, Page 95, we purchase reinsurance to mitigate our life insurance risk
exposure. At year-end 2012, ceded death benefits represented approximately 44.6 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 $4.235 billion (total of life insurance obligations) exceeds the liabilities recorded in
life policy and investment contract reserves and separate accounts for future policy benefits and claims of
$2.943 billion (total of life insurance policy reserves and separate account policy reserves). Separate
account policy reserves make up all but $27 million of separate accounts liabilities.
We have made significant assumptions to determine the estimated undiscounted cash flows of these
policies and contracts that include mortality, morbidity, timing of claims, future lapse rates and interest
crediting rates. Due to the significance of the assumptions used, the amounts presented could materially
differ from actual results.
Life Insurance Reserves
Gross life policy reserves were $2.295 billion at year-end 2012, compared with $2.214 billion at year-end
2011. The increase was primarily due to reserves for traditional life insurance contracts. We establish
reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal
rates and investment yields, including a provision for uncertainty. Once these assumptions are established,
they generally are maintained throughout the lives of the contracts. We use both our own experience and
industry experience adjusted for historical trends in arriving at our assumptions for expected mortality,
morbidity and withdrawal rates. We use our own experience and historical trends for setting our
assumptions for expected expenses. We base our assumptions for expected investment income on our own
experience adjusted for current economic conditions.
We establish reserves for our universal life, deferred annuity and investment contracts equal to the
cumulative account balances, which include premium deposits plus credited interest less charges and
withdrawals. Some of our universal life insurance policies contain no-lapse guarantee provisions. For these
policies, we establish a reserve in addition to the account balance based on expected no-lapse guarantee
benefits and expected policy assessments.
We regularly review our life insurance business to ensure that any deferred acquisition cost associated with
the business is recoverable and that our actuarial liabilities (life insurance segment reserves) make sufficient
provision for future benefits and related expenses.
Cincinnati Financial Corporation – 2012 10-K - 94
2013 REINSURANCE PROGRAMS
A single large loss or an unexpected rise in claims severity or frequency due to a catastrophic event
could present us with a liquidity risk. In an effort to control such losses, we avoid marketing property
casualty insurance in specific geographic areas and monitor our exposure in certain coastal regions.
An example of this is the reduction of our homeowner policies in the southeastern U.S. coastal region in
recent years. This area was identified as a major contributor to our catastrophe probable maximum
loss estimates and has subsequently been greatly reduced. We also continually review aggregate
exposures to huge disasters and purchase reinsurance protection to cover these exposures. We use the
Risk Management Solutions (RMS) and Applied Insurance Research (AIR) models to evaluate exposures to
a once-in-a-100-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 or multiple
events occurring in a one-year period. The models are proprietary in nature, and the vendors that provide
them periodically update the models, sometimes resulting in significant changes to their estimate of
probable maximum loss. As of the end of 2012, both models indicated that a hurricane event represents our
largest amount of exposure to losses. The table below summarizes estimated probabilities and the
corresponding probable maximum loss from a single hurricane event occurring in a one-year period, and
indicates the effect of such losses on consolidated shareholders’ equity as of December 31, 2012. Net
losses are net of reinsurance and income taxes.
(Dollars in millions)
Probability as of December 31, 2012
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
$
555
825
1,258
1,673
RMS
Net
Losses
75
222
504
774
Percent
of total
equity
1.4 % $
4.1
9.2
14.2
Gross
Losses
$
340
502
737
920
AIR
Net
Losses
68
73
165
284
Percent
of total
equity
1.2 %
1.3
3.0
5.2
The modeled losses according to RMS in the table are based on its RiskLink version 11.0 catastrophe
model and use 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 its AIR Clasic/2 version 13 catastrophe model and use a
long-term methodology. The AIR storm catalog includes decades of documented weather events used in
simulations for probable maximum loss projections.
Reinsurance mitigates the risk of highly uncertain exposures and limits the maximum net loss that can arise
from large risks or risks concentrated in areas of exposure. Management’s decisions about the appropriate
structure of reinsurance protection and level of risk retention are affected by various factors, including
changes in our underwriting practices, capacity to retain risks and reinsurance market conditions.
Reinsurance does not relieve us of our obligation to pay covered claims. The financial strength of our
reinsurers is important because our ability to recover for losses covered under any reinsurance agreement
depends on the financial viability of the reinsurer.
Currently participating on our standard market property and casualty per-risk and per-occurrence
programs are Hannover Reinsurance Company, Munich Reinsurance America, Partner Reinsurance
Company of the U.S. and Swiss Reinsurance America Corporation, all of which had A.M. Best insurer
financial strength ratings of A+ (Superior) or better as of December 31, 2012. Our property catastrophe
program is subscribed through a broker by reinsurers from the United States, Bermuda, London and the
European markets. The largest participant in our property catastrophe program, representing approximately
46 percent of total participation, is the Lloyds of London placement that features numerous syndicates,
with R.J. Kiln & Company Limited and the Catlin Syndicate taking the largest participations. Other primary
participants in our property catastrophe program include Liberty Syndicates, Alterra, Argo Re and
MAPFRE RE.
Cincinnati Financial Corporation – 2012 10-K - 95
The following table shows our five largest property casualty reinsurance receivable amounts by reinsurer
at year-end 2012 and 2011. USAIG is a joint underwriting association of individual insurance companies
that collectively functions as a worldwide aviation insurance market. We terminated our participation in
the association after policy year 2002. The A.M. Best insurer financial strength ratings as of
December 31, 2012, are also shown for each those reinsurers.
2012
2011
(Dollars in millions)
Name of reinsurer
USAIG
Munich Reinsurance America
Swiss Reinsurance America Corporation
General Reinsurance Corporation
Partner Reinsurance Company of the U. S.
Total
Receivable
A.M. Best
Rating
Total
Receivable
A.M. Best
Rating
$
106
80
78
33
24
$
NA
A+
A+
A++
A+
108
47
71
36
19
NA
A+
A+
A++
A+
Primary components of the 2013 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 $7 million of each loss. Losses between
$7 million and $25 million are reinsured at 100 percent. The ceded premium is estimated at $37 million
for 2013, compared with $37 million in 2012 and $32 million in 2011. Lower 2013 rates were
essentially offset by estimates of higher levels of property coverage direct written premiums that are
subject to the treaty.
• Property excess treaty – For 2013, we made our initial purchase of a property reinsurance treaty that
provides an additional $10 million in protection for property losses. This treaty, along with the property
per risk treaty, provides a total of $35 million of protection. The ceded premium is estimated at
approximately $5 million in 2013, and should lower premiums for facultative reinsurance that was
formerly obtained for certain individual risks with insured values in excess of $25 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 $7 million
of each loss. Losses between $7 million and $25 million are reinsured at 100 percent. The ceded
premium is estimated at $29 million in 2013, compared with approximately $37 million in 2012 and in
2011. Lower 2013 rates for this treaty were partially offset by estimates of higher levels of liability
coverage direct written premiums that are subject to the treaty.
• Casualty excess treaty – We purchase a casualty reinsurance treaty that provides an additional
$45 million in protection for certain casualty losses. This treaty, along with the casualty per occurrence
treaty, provides a total of $75 million of protection for workers’ compensation, extra-contractual liability
coverage and clash coverage losses, which would apply when a single occurrence involves multiple
policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The ceded
premium is estimated at approximately $3 million in 2013, similar to the premium we paid in
2012 and 2011.
• Property catastrophe treaty – To protect against catastrophic events such as wind and hail, hurricanes
or earthquakes, we purchased property catastrophe reinsurance with a limit up to $600 million.
The treaty contains one reinstatement provision. For the 2013 treaty, ceded premiums are estimated at
$60 million, up slightly from approximately $59 million in 2012, primarily due to minor changes in our
share of losses described below. We retain the first $75 million of any loss, plus varying shares of
losses up to $600 million:
o 61.3 percent of losses between $75 million and $100 million
o 6.8 percent of losses between $100 million and $200 million
o 5.0 percent of losses between $200 million and $300 million
o 5.0 percent of losses between $300 million and $400 million
o 5.0 percent of losses between $400 million and $600 million
• Beginning in 2013 we added an alternative reinsurance structure to protect against certain catastrophic
events. For certain exposures in the United States, we arranged for the purchase of collateralized
reinsurance funded through the issuance of collateralized risk-linked securities, known as catastrophe
bonds. The catastrophe bond arrangements generally provide reinsurance coverage for specific types
of losses in specific geographic locations. They are generally designed to supplement coverage
provided under the North American catastrophe treaty. Effective January 2013, we have a catastrophe
bond arrangement providing up to $72 million in reinsurance protection. It expires in January 2014 and
provides coverage for severe convective storm losses in certain key core regions as well as
supplemental coverage in the event of an earthquake occurring along the New Madrid fault line.
Cincinnati Financial Corporation – 2012 10-K - 96
After reinsurance, our maximum exposure to a catastrophic event that causes $700 million in covered
losses that qualified, in 2013 only, for the collateralized reinsurance described above would be $145 million
compared with $219 million in 2012. The largest catastrophe loss event in our history occurred during 2011
from a May 20-27 storm system that included a tornado in Joplin, Missouri, and also significant losses from
hail in the Dayton, Ohio, area. Our losses from that storm were estimated at December 31, 2012, to be
$231 million before reinsurance.
Individual risks with insured values in excess of $35 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 $35 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
that are between $35 million and $37 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 2012 was $383 million (20 percent of 2011 subject premiums),
and we estimate it is $416 million (20 percent of 2012 subject premiums) in 2013.
Reinsurance protection for the company’s surety business is covered under separate treaties with many of
the same reinsurers that write the property casualty working treaties.
The Cincinnati Specialty Underwriters Insurance Company has separate property and casualty reinsurance
treaties for 2013 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.
Cincinnati Specialty Underwriters retains the first $500,000 of any policy loss. Losses between
$500,000 and $5 million are reinsured at 100 percent by Cincinnati Insurance.
• Casualty treaties – The casualty treaty is written on an excess of loss basis and provide limits up to
$6 million, which is adequate capacity for the risk profile we insure. A second treaty layer of $5 million
excess of $6 million is written to provide coverage for extra contractual obligations or clash exposures.
The maximum retention for any one casualty loss is $1 million by Cincinnati Specialty Underwriters.
Losses between $1 million and $11 million are reinsured at 100 percent by Cincinnati Insurance.
• Basket retention – Cincinnati Specialty Underwriters has purchased this coverage to limit our retention
to $1 million in the event that the same occurrence results in both a property and a casualty loss.
• Property catastrophe treaty – As a subsidiary of Cincinnati Insurance, Cincinnati Specialty Underwriters
has been added as a named insured under our corporate property catastrophe treaty, and for our
collateralized reinsurance funded through the issuance of catastrophe bonds. All terms and conditions
of this reinsurance coverage apply to policies underwritten by Cincinnati Specialty Underwriters.
For property risks with limits exceeding $5 million or casualty risks with limits exceeding $6 million,
underwriters place facultative reinsurance coverage on an individual certificate basis.
Cincinnati Life, our life insurance subsidiary, purchases reinsurance under separate treaties with many of
the same reinsurers that write the property casualty working treaties. For our core term life insurance line of
business, we retain no more than a $500,000 exposure on a single policy, ceding the balance using excess
over retention mortality coverage and retaining the policy reserve. Because of the conservative nature of
statutory reserving principles, retaining the policy reserve unduly depresses our statutory earnings and
requires a large commitment of our capital. Our corporate retention is $1 million on a single life. For term life
insurance business written prior to 2005, we retain 10 percent to 25 percent of each term policy, not to
exceed $500,000, ceding the balance of mortality risk and policy reserve.
Cincinnati Financial Corporation – 2012 10-K - 97
We also have catastrophe reinsurance coverage on our life insurance operations that reimburses us
for covered net losses in excess of $9 million. Our recovery is capped at $75 million for losses involving
our associates.
Assumed Reinsurance
The Cincinnati Insurance Company’s reinsurance program for 2013 includes participation in two assumed
reinsurance treaties with R.J. Kiln & Company Limited, a reinsurer that spreads its losses to its property
book of business among many reinsurers. The exposure to loss is usually triggered as a result of very high
catastrophe losses. The First Surplus treaty has exposure for us of up to nearly $2 million of assumed
losses from a single event and the Second Surplus treaty has exposure for us of up to nearly $3 million of
assumed losses from a single event. The treaties with Kiln Group Limited were in place during 2012 at
similar exposure levels.
SAFE HARBOR STATEMENT
This is our “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Our business
is subject to certain risks and uncertainties that may cause actual results to differ materially from those
suggested by the forward-looking statements in this report. Some of those risks and uncertainties are
discussed in Item 1A, Risk Factors, Page 26.
Factors 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
• Declines in overall stock market values negatively affecting the company’s equity portfolio and book value
• Events resulting in capital market or credit market uncertainty, followed by prolonged periods of economic
instability or recession, that lead to:
o Significant or prolonged decline in the value of a particular security or group of securities and impairment
of the asset(s)
o Significant decline in investment income due to reduced or eliminated dividend payouts from a particular
security or group of securities
o Significant rise in losses from surety and director and officer policies written for financial institutions or
other insured entities
• Prolonged low interest rate environment or other factors that limit the company’s ability to generate growth in
investment income or interest rate fluctuations that result in declining values of fixed-maturity investments,
including declines in accounts in which we hold bank-owned life insurance contract assets
•
Increased competition that could result in a significant reduction in the company’s premium volume
• Delays or performance inadequacies from ongoing development and implementation of underwriting and
pricing methods or technology projects and enhancements expected to increase our pricing accuracy,
underwriting profit and competitiveness
• Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could
•
alter our competitive advantages
Inability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased, financial
strength of reinsurers and the potential for nonpayment or delay in payment by reinsurers
• Difficulties with technology or data security breaches, including cyber attacks, that could negatively affect our
•
ability to conduct business and our relationships with agents, policyholders and others
Inability to defer policy acquisition costs for any business segment if pricing and loss trends would lead
management to conclude that segment could not achieve sustainable profitability
• Events or conditions that could weaken or harm the company’s relationships with its independent agencies
and hamper opportunities to add new agencies, resulting in limitations on the company’s opportunities for
growth, such as:
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
• Actions of insurance departments, state attorneys general or other regulatory agencies, including a change to
a federal system of regulation from a state-based system, that:
o
Impose new obligations on us that increase our expenses or change the assumptions underlying our
critical accounting estimates
o Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules
and regulations
o Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business
Cincinnati Financial Corporation – 2012 10-K - 98
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
o
o
o Limit our ability to set fair, adequate and reasonable rates
o Place us at a disadvantage in the marketplace
o Restrict our ability to execute our business model, including the way we compensate agents
• Adverse outcomes from litigation or administrative proceedings
• Events or actions, including unauthorized intentional circumvention of controls, that reduce the company’s
future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act
of 2002
• Unforeseen departure of certain executive officers or other key employees due to retirement, health or
other causes that could interrupt progress toward important strategic goals or diminish the effectiveness of
certain longstanding relationships with insurance agents and others
• Events, such as an epidemic, natural catastrophe or terrorism, that could hamper our ability to assemble our
workforce at our headquarters location
Further, the company’s insurance businesses are subject to the effects of changing social, economic and
regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and
restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand
overall regulation. The company also is subject to public and regulatory initiatives that can affect the market
value for its common stock, such as measures affecting corporate financial reporting and governance.
The ultimate changes and eventual effects, if any, of these initiatives are uncertain.
Cincinnati Financial Corporation – 2012 10-K - 99
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
INTRODUCTION
Market risk is the potential for a decrease in securities value resulting from broad yet uncontrollable forces
such as: inflation, economic growth, interest rates, world political conditions or other widespread
unpredictable events. It is comprised of many individual risks that, when combined, create a macroeconomic
impact. The company accepts and manages risks in the investment portfolio as part of the means of
achieving portfolio objectives. Some of the risks are:
• Political – the potential for a decrease in value due to the real or perceived impact of governmental
policies or conditions
• Regulatory – the potential for a decrease in value due to the impact of legislative proposals or changes
in laws or regulations
• Economic – the potential for a decrease in value due to changes in general economic factors
(recession, inflation, deflation, etc.)
• Revaluation – the potential for a decrease in value due to a change in relative value (change in market
multiple) of the market brought on by general economic factors
•
Interest-rate – the potential for a decrease in value of a security or portfolio due to its sensitivity to
changes (increases or decreases) in the general level of interest rates
• Company-specific risk – the potential for a particular issuer to experience a decline in value due to the
impact of sector or market risk on the holding or because of issues specific to the firm
• Fraud – the potential for a negative impact on an issuer’s performance due to actual or alleged illegal or
improper activity of individuals it employs
• Credit – the potential for deterioration in an issuer’s financial profile due to specific company issues,
problems it faces in the course of its operations or industry-related issues
• Default – the possibility that an issuer will not make a required payment (interest payment or return of
principal) on its debt. Generally this occurs after its financial profile has deteriorated (credit risk) and it
no longer has the means to make its payments.
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 20, 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
Cincinnati Financial Corporation – 2012 10-K - 100
Our investment portfolio had no European sovereign debt holdings but did include a relatively small amount
of other European-based securities. The December 31, 2012, fair value total of $504 million consisted of
fixed-maturity securities. The table below summarizes amounts for those securities by country.
(In millions)
Great Britain
Netherlands
France
Switzerland
Belgium
Sweden
Germany
Luxembourg
Ireland
Spain
Italy
Greece
Total European exposure
Financial
Amortized
cost
Fair
value
At December 31, 2012
Nonfinancial
Amortized
cost
Fair
value
Total
Amortized
cost
Fair
value
$
$
44 $
35
28
32
0
14
8
0
6
5
0
0
172 $
47
37
28
35
0
15
8
0
6
6
0
0
182
$
$
118 $
24
10
3
29
13
17
21
12
12
17
16
292 $
130
29
10
4
35
14
17
22
14
12
18
17
322
$
$
163 $
59
38
35
28
27
25
21
18
17
17
16
464 $
178
66
39
38
35
28
25
22
20
18
18
17
504
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
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 20.
Interest Rate Sensitivity Analysis
Because of our strong shareholders’ equity, long-term investment horizon and ability to hold most fixed-
maturity investments to maturity, we believe the company is well positioned if interest rates were to rise. A
higher rate environment would provide the opportunity to invest cash flow in higher-yielding securities, while
reducing the likelihood of untimely redemptions of currently callable securities. While higher interest rates
would be expected to increase the number of fixed-maturity holdings fair valued below 100 percent of
amortized cost, we believe lower fixed-maturity security values due solely to interest rate changes would not
signal a decline in credit quality.
Our dynamic financial planning model uses analytical tools to assess market risks. As part of this model, the
effective duration of the fixed-maturity portfolio is continually monitored by our investment department to
evaluate the theoretical impact of interest rate movements.
Cincinnati Financial Corporation – 2012 10-K - 101
The table below summarizes the effect of hypothetical changes in interest rates on the
fixed-maturity portfolio:
(In millions)
At December 31, 2012
At December 31, 2011
-200
9,888
9,597
$
$
$
$
Interest rate shift in basis points
0
100
-100
9,479
9,179
$
$
9,093
8,779
$
$
8,704
8,390
$
$
200
8,320
8,008
The effective duration of the fixed-maturity portfolio was 4.2 years at year-end 2012, compared with
4.4 years at year-end 2011. A 100-basis-point movement in interest rates would result in an approximately
4.3 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. In 2008 for example, a downturn in the economy had a negative effect on an equity
portfolio. Industry- and company-specific risks also have the potential to substantially affect the value of our
portfolio. We implemented 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 $3.373 billion in fair value and accounted for approximately 54 percent of
the unrealized appreciation of the entire portfolio at year-end 2012. See Item 1, Investments Segment,
Page 20, 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.
APPLICATION OF ASSET IMPAIRMENT POLICY
As discussed in Item 7, Critical Accounting Estimates, Asset Impairment, Page 47, our fixed-maturity and
equity investment portfolios are evaluated differently for other-than-temporary impairments. The company’s
asset impairment committee monitors a number of significant factors for indications of investments fair
valued below the carrying amount may not be recoverable. The application of our impairment policy resulted
in OTTI charges that reduced our income before income taxes by $33 million in 2012, $57 million in 2011
and $36 million in 2010. Impairments are discussed in Item 7, Investment Results of Operations, Page 79.
We expect the number of securities fair valued below 100 percent of cost or amortized cost to fluctuate as
interest rates rise or fall and credit spreads expand or contract due to prevailing economic conditions.
Further, cost or amortized cost for some securities have been revised due to impairment charges
recognized in prior periods. At year-end 2012, 68 of the 2,784 securities we owned were fair valued below
100 percent of cost or amortized cost compared with 137 of the 2,724 securities we owned at year-end
2011 and 316 of the 2,671 securities we owned at year-end 2010.
The 68 holdings fair valued below cost or amortized cost at year-end 2012 represented 1.9 percent of the
investment portfolio and $13 million in unrealized losses.
• 62 of these holdings were fair valued between 90 percent and 100 percent of cost or amortized cost.
The value of these securities fluctuates primarily because of changes in interest rates. The fair value of
these 62 securities was $224 million at year-end 2012, and they accounted for $8 million in
unrealized losses.
• Six of these holdings were fair valued between 70 percent and 90 percent of cost or amortized cost.
The fair value of these holdings was $16 million, and they accounted for $5 million in unrealized losses.
• No securities were trading below 70 percent of cost at year-end 2012.
Cincinnati Financial Corporation – 2012 10-K - 102
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, 2012
Fixed maturities:
States, municipalities and political subdivisions
Government-sponsored enterprises
Corporate securities
Subtotal
Equity securities:
Common equities
Preferred equities
Subtotal
Total
At December 31, 2011
Fixed maturities:
States, municipalities and political subdivisions
United States government
Government-sponsored enterprises
Corporate securities
Subtotal
Equity securities:
Common equities
Preferred equities
Subtotal
Total
Less than 12 months
Fair
value
Unrealized
losses
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
$
$
$
$
$
53
1
58
112
107
4
111
223 $
$
1
-
1
2
9
1
10
12 $
$
-
1
10
380
391
$
-
-
-
13
13
333
5
338
729 $
35
-
35
48 $
$
-
-
17
17
-
-
-
17 $
12 $
-
-
57
69
-
19
19
88 $
$
-
-
1
1
-
-
-
1 $
$
-
-
-
5
5
-
-
-
5 $
53 $
1
75
129
107
4
111
240 $
12 $
1
10
437
460
333
24
357
817 $
1
-
2
3
9
1
10
13
-
-
-
18
18
35
-
35
53
Cincinnati Financial Corporation – 2012 10-K - 103
The following table summarizes our investment portfolio, classifying securities based on fair values relative
to cost or amortized cost:
(Dollars in millions)
At December 31, 2012
Taxable fixed maturities:
Fair valued below 70% of amortized cost
Fair valued at 70% to less than 100% of amortized cost
Fair valued at 100% and above of amortized cost
Securities sold in current year
Total
Tax-exempt fixed maturities:
Fair valued below 70% of amortized cost
Fair valued at 70% to less than 100% of amortized cost
Fair valued at 100% and above of amortized cost
Securities sold in current year
Total
Common equities:
Fair valued below 70% of cost
Fair valued at 70% to less than 100% of cost
Fair valued at 100% and above of cost
Securities sold in current year
Total
Preferred equities:
Fair valued below 70% of cost
Fair valued at 70% to less than 100% of cost
Fair valued at 100% and above of cost
Securities sold in current year
Total
Portfolio summary:
Fair valued below 70% of cost or amortized cost
Fair valued at 70% to less than 100% of cost or amortized cost
Fair valued at 100% and above of cost or amortized cost
Investment income on securities sold in current year
Total
At December 31, 2011
Portfolio summary:
Fair valued below 70% of cost or amortized cost
Fair valued at 70% to less than 100% of cost or amortized cost
Fair valued at 100% and above of cost or amortized cost
Investment income on securities sold in current year
Total
Number
of issues
Cost or
amortized
cost
Fair
value
Gross
unrealized
gain/loss
Gross
investment
income
0 $
0 $
0 $
19
1,352
0
1,371
0
36
1,282
0
1,318
0
12
61
0
73
0
1
21
0
22
78
5,395
0
5,473
0
54
2,695
0
2,749
0
116
2,154
0
2,270
0
5
94
0
99
76
6,061
0
6,137
0
53
2,903
0
2,956
0
107
3,131
0
3,238
0
4
131
0
135
0
68
2,716
0
2,784 $
1 $
136
2,587
0
2,724 $
0
253
10,338
0
10,591 $
0
240
12,226
0
12,466 $
1 $
869
9,376
0
10,246 $
1 $
816
10,918
0
11,735 $
0 $
(2)
666
0
664
0
(1)
208
0
207
0
(9)
977
0
968
0
(1)
37
0
36
0
(13)
1,888
0
1,875 $
0 $
(53)
1,542
0
1,489 $
0
2
284
22
308
0
1
109
4
114
0
5
96
5
106
0
0
7
0
7
0
8
496
31
535
0
29
472
27
528
Cincinnati Financial Corporation – 2012 10-K - 104
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, 2012, in accordance with accounting principles generally
accepted in the United States of America (GAAP).
We are responsible for the integrity and objectivity of these financial statements. The amounts, presented on
an accrual basis, reflect our best estimates and judgment. These statements are consistent in all material
aspects with other financial information in the Annual Report on Form 10-K. Our accounting system and
related internal controls are designed to assure that our books and records accurately reflect the company’s
transactions in accordance with established policies and procedures as implemented by qualified personnel.
Our board of directors has established an audit committee of independent outside directors. We believe
these directors are free from any relationships that could interfere with their independent judgment as audit
committee members.
The audit committee meets periodically with management, our independent registered public accounting
firm and our internal auditors to discuss how each is handling its respective responsibilities. The audit
committee reports its findings to the board of directors. The audit committee recommends to the board the
annual appointment of the independent registered public accounting firm. The audit committee reviews with
this firm the scope of the audit assignment and the adequacy of internal controls and procedures.
Deloitte & Touche LLP, our independent registered public accounting firm, audited the consolidated financial
statements of Cincinnati Financial Corporation and subsidiaries for the year ended December 31, 2012. Its
report is on Page 107. Deloitte & Touche LLP 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 – 2012 10-K - 105
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, 2012, 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, 2012. The assessment led management to conclude that, as of
December 31, 2012, 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, 2012. This report appears on Page 107.
/S/ Steven J. Johnston
Steven J. Johnston, FCAS, MAAA, CFA, CERA
President and Chief Executive Officer
/S/ Michael J. Sewell
Michael J. Sewell, CPA
Chief Financial Officer, Senior Vice President and Treasurer
February 27, 2013
Cincinnati Financial Corporation – 2012 10-K - 106
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, 2012 and 2011, and the related consolidated statements
of comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2012. 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, 2012, 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 audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of,
the company’s principal executive and principal financial officers, or persons performing similar functions,
and effected by the company’s board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that: (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, 2012 and 2011 and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2012, 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, 2012, 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 accounting for
costs associated with acquiring or renewing insurance contracts in 2012.
/S/ Deloitte & Touche LLP
Cincinnati, Ohio
February 27, 2013
Cincinnati Financial Corporation – 2012 10-K - 107
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
December 31,
2012
December 31,
2011
ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2012—$8,222; 2011—$8,084)
Equity securities, at fair value (cost: 2012—$2,369; 2011—$2,162)
Other invested assets
Total investments
Cash and cash equivalents
Investment income receivable
Finance receivable
Premiums receivable
Reinsurance recoverable
Prepaid reinsurance premiums
Deferred policy acquisition costs
Land, building and equipment, net, for company use (accumulated depreciation:
2012—$397; 2011—$376)
Other assets
Separate accounts
Total assets
LIABILITIES
Insurance reserves
Loss and loss expense reserves
Life policy and investment contract reserves
Unearned premiums
Other liabilities
Deferred income tax
Note payable
Long-term debt and capital lease obligations
Separate accounts
Total liabilities
Commitments and contingent liabilities (Note 16)
SHAREHOLDERS' EQUITY
Common stock, par value—$2 per share; (authorized: 2012 and 2011—500 million shares;
issued and outstanding: 2012—197 million shares, 2011—196 million shares)
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock at cost (2012 and 2011—34 million shares)
Total shareholders' equity
Total liabilities and shareholders' equity
Accompanying notes are an integral part of these consolidated financial statements.
$
$
$
$
9,093
3,373
68
12,534
487
115
75
1,214
615
26
470
217
61
734
16,548
4,230
2,295
1,792
660
453
104
827
734
11,095
$
$
$
8,779
2,956
66
11,801
438
119
76
1,087
622
24
477
227
93
671
15,635
4,339
2,214
1,633
517
303
104
821
671
10,602
—
—
394
1,134
4,021
1,129
(1,225)
5,453
16,548
$
393
1,096
3,863
901
(1,220)
5,033
15,635
Cincinnati Financial Corporation – 2012 10-K - 108
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions except per share data)
REVENUES
Earned premiums
Investment income, net of expenses
Realized investment gains, net
Fee revenues
Other revenues
Total revenues
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits
Underwriting, acquisition and insurance expenses
Interest expense
Other operating expenses
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
NET INCOME
OTHER COMPREHENSIVE INCOME, BEFORE TAX
Unrealized gains on investments available-for-sale
Reclassification adjustment for (gains) included in net income
Unrealized (losses) on other
Unrealized gains on investments available-for-sale and other
Amortization of pension actuarial (loss) gain and prior service cost
Other comprehensive income before tax
Income taxes on above
Other comprehensive income, net of tax
COMPREHENSIVE INCOME
Accompanying notes are an integral part of these consolidated financial statements.
Years ended December 31,
2011
2012
2010
$
$
$
$
$
3,522
531
42
6
10
4,111
2,322
1,155
54
14
3,545
566
119
26
145
421
2.59
2.57
421
428
(42)
(21)
365
(13)
352
124
228
649
$
$
$
$
$
3,194
525
70
4
10
3,803
2,524
1,039
54
13
3,630
173
27
(18)
9
164
1.01
1.01
164
309
(70)
(11)
228
(25)
203
71
132
296
$
$
$
$
$
3,082
518
159
4
9
3,772
2,180
1,024
54
16
3,274
498
94
29
123
375
2.30
2.30
375
383
(159)
(4)
220
3
223
78
145
520
Cincinnati Financial Corporation – 2012 10-K - 109
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions)
Balance December 31, 2009
Cumulative effect of a change in accounting
for deferred policy acquisition costs, net of tax
Balance as adjusted January 1, 2010
Net income
Other comprehensive income, net
Dividends declared
Stock-based awards exercised and vested
Stock-based compensation
Purchases
Other
Balance December 31, 2010
Balance December 31, 2010
Net income
Other comprehensive income, net
Dividends declared
Stock-based awards exercised and vested
Stock-based compensation
Purchases
Other
Balance December 31, 2011
Balance December 31, 2011
Net income
Other comprehensive income, net
Dividends declared
Stock-based awards exercised and vested
Stock-based compensation
Purchases
Other
Balance December 31, 2012
Common Stock
Outstanding
Shares
Amount
Paid-In
Capital
Accumulated
Other
Retained Comprehensive Treasury
Income
Earnings
Stock
Total
Share-
holders'
Equity
162
$
393
$
1,081
$
3,862
$
624
$
(1,200)
$
4,760
-
162
-
-
-
1
-
-
-
163
$
163
$
-
-
-
-
-
(1)
-
162
$
162
$
-
-
-
1
-
-
-
163
$
-
393
-
-
-
-
-
-
-
393
393
-
-
-
-
-
-
-
393
393
-
-
-
1
-
-
-
394
$
$
$
$
$
-
1,081
-
-
-
(2)
11
-
1
1,091
1,091
-
-
-
(10)
13
-
2
1,096
$
$
$
(18)
3,844
375
-
(259)
-
-
-
-
3,960
3,960
164
-
(261)
-
-
-
-
3,863
$
$
$
-
624
-
145
-
-
-
-
-
769
769
-
132
-
-
-
-
-
901
$
$
$
-
(1,200)
-
-
-
2
-
(10)
7
(1,201)
$
(18)
4,742
375
145
(259)
-
11
(10)
8
5,012
(1,201)
$
5,012
-
-
-
6
-
(32)
7
(1,220)
$
164
132
(261)
(4)
13
(32)
9
5,033
1,096
$
3,863
$
901
$
(1,220)
$
5,033
-
-
-
19
16
-
3
1,134
$
421
-
(263)
-
-
-
-
4,021
$
-
228
-
-
-
-
-
1,129
$
-
-
-
2
-
(12)
5
(1,225)
$
421
228
(263)
22
16
(12)
8
5,453
Accompanying notes are an integral part of these consolidated financial statements.
Cincinnati Financial Corporation – 2012 10-K - 110
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 and amortization
Realized gains on investments, net
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
Purchase of fixed maturities
Purchase of equity securities
Change in short-term investments, net
Investment in buildings and equipment, net
Investment in finance receivables
Collection of finance receivables
Change in other invested assets, net
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of cash dividends to shareholders
Purchase of treasury shares
Increase in notes payable
Proceeds from stock options exercised
Contract holders' funds deposited
Contract holders' funds withdrawn
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
Income taxes paid
Non-cash activities:
Conversion of investment securities
Equipment acquired under capital lease obligations
Cashless exercise of stock options
Accompanying notes are an integral part of these consolidated financial statements.
Years ended December 31,
2011
2012
2010
$
421
$
164
$
375
44
(42)
16
44
26
4
(122)
(28)
(4)
(109)
72
159
78
79
638
144
927
216
(1,166)
(425)
-
(6)
(33)
34
5
(304)
42
(70)
13
51
(18)
-
(128)
(30)
2
139
76
80
(49)
(25)
247
71
808
539
(1,087)
(337)
-
(7)
(32)
30
7
(8)
(256)
-
-
10
99
(126)
1
(13)
(285)
49
438
487
54
38
26
23
12
$
$
$
(255)
(32)
55
1
172
(121)
5
(11)
(186)
53
385
438
53
51
$
$
$
-
28
-
$
$
$
41
(159)
11
48
29
(1)
80
(20)
3
58
113
44
(18)
(73)
531
199
886
273
(1,483)
(396)
7
(17)
(27)
29
-
(529)
(252)
(10)
-
-
170
(74)
2
(10)
(174)
(172)
557
385
53
167
5
-
-
Cincinnati Financial Corporation – 2012 10-K - 111
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Operations
Cincinnati Financial Corporation (CFC) operates through our insurance group and two complementary
subsidiary companies.
The Cincinnati Insurance Company leads our standard market property casualty insurance group that also
includes two subsidiaries: The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This
group markets a broad range of standard market business, homeowner and auto policies. The group
provides quality customer service to our select group of 1,408 independent insurance agencies with
1,758 reporting locations across 39 states. Other subsidiaries of The Cincinnati Insurance Company include
The Cincinnati Life Insurance Company, which markets life and disability income insurance and fixed
annuities, and The Cincinnati Specialty Underwriters Insurance Company, which offers excess and surplus
lines property and casualty insurance products.
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 wholly owned subsidiaries
and are presented in conformity with accounting principles generally accepted in the United States of
America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires us to make estimates and
assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual
results could differ from those estimates.
On January 1, 2012, we retrospectively adopted ASU 2010-26, Accounting for Costs Associated with
Acquiring or Renewing Insurance Contracts. All prior years’ information has been restated.
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.
Stock-Based Compensation
We account for stock-based compensation in accordance with Accounting Standards Codification (ASC)
718, Compensation – Stock Compensation. We grant qualified and nonqualified 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. We grant service-based restricted stock units that cliff vest three years
after the date of grant. We also grant performance-based restricted stock units that vest if certain market
conditions are attained. In 2012, the CFC compensation committee approved a mix of incentive stock
options, nonqualified stock options, service-based restricted and performance-based restricted stock units.
See Note 17, Stock-Based Associate Compensation Plans, Page 135, for further details.
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 130 for more information about 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. Certain expenses associated with successfully acquiring insurance policies –
primarily commissions, premium taxes and underwriting costs – are deferred and amortized over the terms
of the policies. All acquisition costs reflect the retrospective adoption of ASU 2010-26, Accounting for Costs
Associated with Acquiring or Renewing Insurance Contracts, which we adopted on January 1, 2012.
We assess recoverability of deferred acquisition costs at the segment level, consistent with the way we
acquire, service and manage insurance policies and measure profitability. We analyze our acquisition cost
assumptions to reflect actual experience, and we test for potential premium deficiencies.
Cincinnati Financial Corporation – 2012 10-K - 112
A segment premium deficiency is recorded when the sum of expected loss and loss adjustment expenses,
expected policyholder dividends and unamortized deferred acquisition expenses exceeds the total of
unearned premiums and anticipated investment income. A premium deficiency is first recognized by
charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If
the premium deficiency is greater than unamortized acquisition costs, a liability is accrued for the excess
deficiency. We did not record a premium deficiency for the three years ended 2012, 2011 and 2010.
Certain property casualty policies are not entered into underwriting systems before the effective date. An
actuarial estimate is made to determine the amount of these unprocessed written premiums. A large
majority of the estimate is unearned and does not have a material impact on earned premiums.
Premiums receivable are reviewed for impairment on a quarterly basis. We currently do not have an
allowance for uncollectible premiums.
We establish reserves to cover the expected cost of claims, losses and expenses related to investigating,
processing and resolving claims. Although the appropriate amount of reserves is inherently uncertain, we
base our decisions on past experience and current facts. Reserves are based on claims reported prior to the
end of the year and estimates of unreported claims. We take into account the fact that we may recover
some of our costs through salvage and subrogation. We regularly review and update reserves using the
most current information available. Any resulting adjustments are reflected in current calendar year
insurance losses and policyholder benefits.
The consolidated property casualty companies actively write property casualty insurance through
independent agencies in 39 states. Our 10 largest states generated 65.4 percent and 66.5 percent of total
earned premiums in 2012 and 2011, respectively. Ohio, our largest state, accounted for 19.1 percent and
19.5 percent of total earned premiums in 2012 and 2011, respectively. Illinois, Indiana, Pennsylvania,
Georgia, North Carolina and Michigan each accounted for between 4 percent and 8 percent of total earned
premiums in 2012. Our largest single agency relationship accounted for approximately 0.9 percent of our
total property casualty earned premiums in 2012. No aggregate agency relationship locations under a single
ownership structure accounted for more than 2.1 percent of our total property casualty earned premiums
in 2012.
Policyholder Dividends
Certain workers’ compensation policies include the possibility of a policyholder earning a return of a portion
of its premium in the form of a policyholder dividend. The dividend generally is calculated by determining
the profitability of a policy year along with the associated premium. We reserve for all probable future
policyholder dividend payments. We record policyholder dividends as underwriting, acquisition and
insurance expenses.
Profit-Sharing Commission Accrual
We calculate the profit-sharing commission accrual estimate from property casualty underwriting results.
These commissions are paid to agencies using a formula that takes into account agency profitability and
premium volume. The commission accrual of $102 million at December 31, 2012, contributed
3.1 percentage points to the consolidated property casualty combined ratio. The profit-sharing commission
accrual at December 31, 2011, was $68 million.
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 life and health contracts similarly to property casualty contracts.
Long-duration contracts are written to provide coverage for an extended period of time. Traditional long-
duration contracts require policyholders to pay scheduled gross premiums, generally not less frequently
than annually, over the term of the coverage. Premiums for these contracts are recognized as revenue
when due. Whole life insurance and disability income insurance are examples. Some traditional long-
duration contracts have premium payment periods shorter than the period over which coverage is provided.
For these contracts, the excess of premium over the amount required to pay expenses and benefits is
recognized over the term of the coverage rather than over the premium payment period. Ten-pay whole life
insurance is an example.
Cincinnati Financial Corporation – 2012 10-K - 113
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
related to the successful acquisition 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 used
in establishing the liability for the contract. All acquisition costs reflect the retrospective adoption of ASU
2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, which we
adopted on January 1, 2012. We update our acquisition cost assumptions periodically to reflect actual
experience, and we evaluate our deferred acquisition cost for recoverability.
Universal life contracts are long-duration contracts for which contractual provisions are not fixed, unlike
whole life insurance. Universal life contracts allow policyholders to vary the amount of premium, within
limits, without our consent. However, we may vary the mortality, expense charges and the interest
crediting rate, within limits, used to accumulate policy values. We do not record universal life premiums as
revenue. Instead we recognize as revenue the mortality charges, administration charges and surrender
charges when received. Some of our universal life contracts assess administration charges in the early
years of the contract that are compensation for services we will provide in the later years of the contract.
These administration charges are deferred and are recognized over the period when we provide those
future services.
For universal life long-duration contracts, we 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 in accordance with the recognition of
gross profit from the contract. When we charge deferred policy acquisition costs to expenses, we use
assumptions based on our best estimates of long-term experience. We review and modify these
assumptions on a regular basis.
Separate Accounts
We issue universal life contracts with guaranteed minimum returns, referred to as bank-owned life insurance
contracts (BOLIs). A BOLI is designed so the bank is the policy owner and the policy beneficiary. We legally
segregate and record as separate accounts the assets and liabilities for some of our BOLIs, based on the
specific contract provisions. We guarantee minimum investment returns, account values and death benefits
for our separate account BOLIs. Our other BOLIs are general account products.
We carry the assets of separate account BOLIs at fair value. The liabilities on separate account BOLIs
primarily are the contract holders’ claims to the related assets and are carried at an amount equal to the
contract holders’ account value. At December 31, 2012, the current fair value of the BOLI invested assets
and cash exceeded the current fair value of the contract holders’ account value by approximately
$77 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 comprehensive
income. Revenues and expenses related to separate accounts consist of contractual fees and mortality,
surrender and expense risk charges. Also, each separate account BOLI includes a negotiated capital gain
and loss sharing arrangement between the company and the bank. A percentage of each separate
account’s realized capital gain and loss representing contract fees and assessments accrues to us and is
transferred from the separate account to our general account and is recognized as revenue or expense.
Cincinnati Financial Corporation – 2012 10-K - 114
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 these ceded reinsurance contracts transfer the economic risk of loss. We assume risk in a limited
way as a reinsurer for other insurance companies, reinsurers and involuntary state pools.
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, which approximates fair value.
Investments
Our portfolio investments are primarily in publicly traded fixed-maturity, equity and short-term investments.
Fixed-maturity investments (taxable bonds, tax-exempt bonds, redeemable preferred stocks and
commercial mortgage backed securities) and equity investments (common and nonredeemable preferred
stocks) are classified as available for sale and recorded at fair value in the consolidated financial
statements. The number of fixed-maturity securities with fair value below 100 percent of amortized cost can
be expected to fluctuate as interest rates rise or fall. Because of our strong surplus and long-term
investment horizon, our general intent is to hold fixed-maturity investments until maturity, regardless of
short-term fluctuations in fair values.
Our invested asset impairment policy states that fixed maturities below their amortized cost that the
company (1) intends to sell or (2) more likely than not will be required to sell before recovery of their
amortized cost basis are deemed to be other-than-temporarily impaired (OTTI). The amortized cost of any
such securities is reduced to fair value as the new cost basis, and a realized loss is recorded in the period in
which it is recognized. When these two criteria are not met, and the company believes that full collection of
interest and/or principal is not likely, we determine the net present value of future cash flows by using the
effective interest rate implicit in the security at the date of acquisition as the discount rate and compare that
amount with the amortized cost and fair value of the security. The difference between the net present value
of the expected future cash flows and amortized cost of the security is considered a credit loss and
recognized as a realized loss in the period in which it occurred. The difference between the fair value and
the net present value of the cash flows of the security, the noncredit loss, is recognized in other
comprehensive income as an unrealized loss.
When determining OTTI charges for our equity portfolio, our invested asset impairment policy considers
qualitative and quantitative factors, including facts and circumstances specific to individual securities, asset
classes, the financial condition of the issuer, changes in dividend payment, the length of time fair value had
been less than cost, the severity of the decline in fair value below cost, the volatility of the security and our
ability and intent to hold each position until its forecasted recovery.
We include the noncredit portion of fixed-maturity OTTI charges and all other unrealized gains and losses
on investments, net of taxes, in shareholders’ equity as accumulated other comprehensive income (AOCI).
Realized gains and losses on investments are recognized in net income based on the trade date
accounting method.
Included within our other invested assets are $37 million of life policy loans and $31 million of venture
capital fund investments. Life policy loans are carried at the receivable value, which approximates fair value.
The venture capital funds provide their financial statements to us and generally report investments on their
balance sheets at fair value. We use the equity method of accounting for venture capital fund investments.
Investment income consists mainly of interest and dividends. We record interest on an accrual basis and
record dividends at the ex-dividend date. We amortize premiums and discounts on fixed-maturity securities
using the effective interest method over the expected life of the security.
Fair Value Disclosures
We account for our investment portfolio at fair value and apply fair value measurements as defined by
ASC 820, Fair Value Measurements and Disclosures, to financial instruments. Fair value is applicable to
ASC 320, Investments-Debt and Equity Securities, ASC 815, Derivatives and Hedging, and ASC 825,
Financial Instruments.
ASC 820 defines fair value as the exit price or the amount that would be (1) received to sell an asset or
(2) paid to transfer a liability in an orderly transaction between marketplace participants at the measurement
date. When determining an exit price, we rely upon observable market data whenever possible.
We primarily base fair value for investments in equity and fixed-maturity securities (including redeemable
preferred stock and assets held in separate accounts) on quoted market prices or on prices from a pricing
Cincinnati Financial Corporation – 2012 10-K - 115
vendor, an outside resource that supplies global securities pricing, dividend, corporate action and
descriptive information to support fund pricing, securities operations, research and portfolio management.
The company obtains and reviews the pricing service’s valuation methodologies and related inputs and
validates these prices by replicating a sample across each asset class using a discounted cash flow model.
When a price is not available from these sources, as in the case of securities that are not publicly traded, we
determine the fair value using various inputs including quotes from independent brokers. The fair value of
investments not priced by a pricing vendor is less than 1 percent of the fair value of our total
investment portfolio.
For the purpose of ASC 825 disclosure, we base fair value for long-term senior notes on market pricing of
similar debt instruments that are actively trading. We base fair value for notes payable on our year-end
outstanding balance because it is short term and tied to a variable interest rate. We estimate the fair value
of liabilities for investment contracts and annuities using discounted cash flow calculations across a wide
range of economic interest rate scenarios with a provision for our nonperformance risk. We estimate the fair
value for policyholder loans on insurance contracts using a discounted cash flow model. Determination of
fair value for structured settlements assumes the discount rates used to calculate the present value of
expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at
December 31, 2012, to account for nonperformance risk. See Note 3, Fair Value Measurements, Page 121,
for further details.
Finance Receivables
Our leasing subsidiary provides auto and equipment direct financing (leases and loans) to commercial and
individual clients. We generally transfer ownership of the property to the client as the terms of the leases
expire. Our lease contracts contain bargain purchase options. We account for these leases and loans as
direct financing-type leases. We capitalize and amortize lease or loan origination costs over the life of the
financing, using the effective interest method. These costs may include, but are not limited to finder fees,
broker fees, filing fees and the cost of credit reports. We record income over the financing term using the
effective interest method. Finance receivables are reviewed for impairment on a quarterly basis and
considered insignificant to our consolidated financial condition, results of operations and cash flows.
Land, Building and Equipment
We record land at cost, and record building and equipment at cost less accumulated depreciation.
Equipment held under capital leases also is classified as property and equipment with the related lease
obligations recorded as liabilities. We capitalize and amortize costs for internally developed computer
software during the application development stage. These costs generally consist of external consulting,
payroll and payroll-related costs. Our depreciation is based on estimated useful lives (ranging from three
years to 39½ years) using straight-line and accelerated methods. Depreciation expense was $37 million in
2012, $46 million in 2011, and $40 million in 2010. We monitor land, building and equipment and software
assets for potential impairments. Potential impairments may include a significant decrease in the fair values
of the assets, considerable cost overruns on projects, a change in legal factors or business climate or other
factors that indicate that the carrying amount may not be recoverable or useful. There were no recorded
land, building and equipment impairments for 2012, 2011 or 2010.
Income Taxes
We calculate deferred income tax liabilities and assets using tax rates in effect when temporary differences
in financial statement income and taxable income are expected to reverse. We recognize deferred income
taxes for numerous temporary differences between our taxable income and financial statement income and
other changes in shareholders’ equity. Such temporary differences relate primarily to unrealized gains and
losses on investments and differences in the recognition of deferred acquisition costs, unearned premium
and insurance reserves. We charge deferred income taxes associated with unrealized appreciation and
depreciation of investments (except the amounts related to the effect of income tax rate changes) to
shareholders’ equity in AOCI. We charge deferred taxes associated with other differences to income.
See Note 11, Income Taxes, Page 129, for further detail on our uncertain tax positions. Although no Internal
Revenue Service (IRS) penalties currently are accrued, if incurred, they would be recognized as a
component of income tax expense. Accrued IRS interest expense is recognized as other operating expense
in the consolidated statements of comprehensive income.
Subsequent Events
There were no subsequent events requiring adjustment to the financial statements or disclosure.
Cincinnati Financial Corporation – 2012 10-K - 116
Pending Accounting Standards
•
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2011-11, Disclosures About Offsetting Assets and Liabilities. ASU 2011-11 requires
entities to disclose information about offsetting and related arrangements to enable users of its financial
statements to understand the effect of those arrangements on its financial position. The ASU is effective
for interim and annual reporting periods beginning on or after January 1, 2013, and should be applied
retrospectively for all comparative periods presented. The ASU has not yet been adopted and will not
have a material impact on our company’s financial position, cash flows or results of operations.
•
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income. ASU 2013-02 requires entities to present in either a single
note or parenthetically on the face of the financial statements, the effect of significant amounts
reclassified from each component of accumulated other comprehensive income based on its source and
the income statement line items affected by the reclassification. Items not required to be reclassified to
net income in their entirety are cross referenced to a related footnote for additional information. The
ASU is effective for interim and annual periods beginning after December 15, 2012. The ASU has not
yet been adopted and will not have a material impact on our company’s financial position, cash flows or
results of operations.
Adopted Accounting Standards
•
In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or
Renewing Insurance Contracts. ASU 2010-26 modified the definitions of the type of costs incurred by
insurance entities that can be capitalized in the successful acquisition of new and renewal contracts.
ASU 2010-26 requires incremental direct costs of successful contract acquisition as well as certain
costs related to underwriting, policy issuance and processing, medical and inspection and sales force
contract selling for successful contract acquisition to be capitalized. These incremental direct costs and
other costs are those that are essential to the contract transaction and would not have been incurred
had the contract transaction not occurred. We retrospectively adopted as of January 1, 2008, ASU
2010-26 on January 1, 2012.
The following table illustrates the effect of adopting ASU 2010-26 in the consolidated
balance sheets:
(In millions, except per share amounts)
Deferred policy acquisition costs
Total assets
Deferred income tax liability
Shareholders' equity
Book value per share
December 31,
2012
$
As originally
reported
$
470
16,548
453
5,453
33.48
510
15,668
314
5,055
31.16
December 31,
2011
As
adjusted
$
477 $
15,635
303
5,033
31.03
Difference
(33)
(33)
(11)
(22)
(0.13)
The following table illustrates the effect of adopting ASU 2010-26 in the consolidated statements of
comprehensive income:
(In millions, except per share amounts)
Years ended December 31,
Underwriting, acquisition and insurance expenses
Net income
Net income per share:
Basic
Diluted
$
$
1,155
421
2.59
2.57
$
$
$
$
1,036
166
1.02
1.02
2012
As
originally
reported
2011
As
adjusted
As
originally
reported
$
$
$
$
1,021
377
2.32
2.31
2010
As
adjusted
1,024 $
375
Difference
3
(2)
2.30 $
2.30
(0.02)
(0.01)
Difference
3
(2)
1,039 $
164
1.01 $
1.01
(0.01)
(0.01)
•
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurements, Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International
Financial Reporting Standards (IFRS). The ASU converges fair value measurement and disclosures
among U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and
expands disclosure requirements. The company adopted ASU 2011-04 during the first quarter of 2012,
and it did not have a material impact on our company’s financial position, cash flows or results
of operations.
Cincinnati Financial Corporation – 2012 10-K - 117
•
In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to
the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update 2011-05, Presentation of Comprehensive Income. ASU 2011-05 requires
entities to present the total of comprehensive income, the components of net income and the
components of other comprehensive income either in a single, continuous statement of comprehensive
income or in two separate but consecutive statements. ASU 2011-12 defers the changes in ASU 2011-
05 that relate to the presentation of reclassification adjustments. The company adopted ASU 2011-12
and ASU 2011-05 during the first quarter of 2012, and it did not have a material impact on our
company’s financial position, cash flows or results of operations.
INVESTMENTS
2.
The following table provides cost or amortized cost, gross unrealized gains, gross unrealized losses and
fair value for our invested assets:
(In millions)
At December 31, 2012
Fixed maturities:
States, municipalities and political subdivisions
Convertibles and bonds with warrants attached
United States government
Government-sponsored enterprises
Foreign government
Commercial mortgage-backed securities
Corporate securities
Subtotal
Equity securities:
Common equities
Preferred equities
Subtotal
Total
At December 31, 2011
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
Cost or
amortized
cost
Gross unrealized
gains
losses
Fair
value
$
$
$
$
3,040 $
31
7
164
3
27
4,950
8,222
2,270
99
2,369
10,591 $
3,006 $
59
6
159
3
4,851
8,084
2,088
74
2,162
10,246 $
250 $
-
1
-
-
1
622
874
977
37
1,014
1,888 $
246 $
-
1
1
-
465
713
801
28
829
1,542 $
$
1
-
-
-
-
-
2
3
9
1
10
13 $
$
-
-
-
-
-
18
18
35
-
35
53 $
3,289
31
8
164
3
28
5,570
9,093
3,238
135
3,373
12,466
3,252
59
7
160
3
5,298
8,779
2,854
102
2,956
11,735
The net unrealized investment gains in our fixed-maturity portfolio are primarily the result of the current low
interest rate environment that increased the fair value of our fixed-maturity portfolio. The three largest net
unrealized investment gains in our common stock portfolio are from Exxon Mobil Corporation (NYSE:XOM),
The Procter & Gamble Company (NYSE:PG), and Chevron Corporation (NYSE:CVX), which had
a combined net gain position of $282 million. At December 31, 2012, we had $31 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.
Cincinnati Financial Corporation – 2012 10-K - 118
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, 2012
Fixed maturities:
States, municipalities and political subdivisions
Government-sponsored enterprises
Corporate securities
Subtotal
Equity securities:
Common equities
Preferred equities
Subtotal
Total
At December 31, 2011
Fixed maturities:
States, municipalities and political subdivisions
United States government
Government-sponsored enterprises
Corporate securities
Subtotal
Equity securities:
Common equities
Preferred equities
Subtotal
Total
Less than 12 months
Fair
value
Unrealized
losses
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
$
$
$
$
$
53
1
58
112
107
4
111
223 $
$
1
-
1
2
9
1
10
12 $
$
-
1
10
380
391
$
-
-
-
13
13
333
5
338
729 $
35
-
35
48 $
$
-
-
17
17
-
-
-
17 $
12 $
-
-
57
69
-
19
19
88 $
$
-
-
1
1
-
-
-
1 $
$
-
-
-
5
5
-
-
-
5 $
53 $
1
75
129
107
4
111
240 $
12 $
1
10
437
460
333
24
357
817 $
1
-
2
3
9
1
10
13
-
-
-
18
18
35
-
35
53
At December 31, 2012, contractual maturity dates for fixed-maturity investments were:
(Dollars in millions)
Maturity dates occurring:
Less than 1 year
Years 1 - 5
Years 6 - 10
Due after ten years
Total
Amortized
cost
Fair
value
% of fair
value
$
$
588 $
2,927
3,511
1,196
8,222 $
598
3,149
4,002
1,344
9,093
6.6 %
34.6
44.0
14.8
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, 2012, fixed-maturity investments with amortized cost of $85 million and fair value of
$93 million were on deposit with various states in compliance with regulatory requirements.
Cincinnati Financial Corporation – 2012 10-K - 119
The following table provides investment income, realized investment gains and losses and the change in
unrealized investment gains and losses and other items, by investment category:
(In millions)
Investment income summary:
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,
2011
2010
2012
$
$
$
$
$
$
420 $
115
3
538
7
531 $
35 $
-
(1)
39
(2)
(32)
1
2
42 $
176 $
210
(28)
(13)
7
(124)
228 $
424 $
104
4
532
7
525 $
11 $
-
(5)
151
(40)
(52)
(1)
6
70 $
200 $
39
(14)
(25)
3
(71)
132 $
423
99
4
526
8
518
25
(12)
(3)
174
-
(33)
10
(2)
159
154
70
(9)
3
5
(78)
145
For the years ended December 31, 2012 and 2011, there were no credit losses on fixed-maturity securities
for which a portion of OTTI has been recognized in other comprehensive income.
During 2012, we other-than-temporarily impaired 13 securities. At December 31, 2012, four fixed-maturity
investments with a total unrealized loss of $1 million had been in an unrealized loss position for 12 months
or more. Of that total, no fixed-maturity investments had fair values below 70 percent of amortized cost.
There were no equity investments in an unrealized loss position for 12 months or more as of
December 31, 2012.
During 2011, we other-than-temporarily impaired 12 securities. At December 31, 2011, 20 fixed-maturity
investments with a total unrealized loss of $5 million had been in an unrealized loss position for 12 months
or more. Of that total, no fixed-maturity investments had fair values below 70 percent of amortized cost.
Two equity investments with a total unrealized loss of less than $1 million had been in an unrealized loss
position for 12 months or more as of December 31, 2011. Of that total, no equity investments were trading
below 70 percent of cost.
During 2010, we other-than-temporarily 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 had fair values below 70 percent of amortized cost.
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 cost.
When determining OTTI charges for our fixed-maturity portfolio, management places significant emphasis
on whether issuers of debt are current on contractual payments and whether future contractual amounts are
likely to be paid. As required by ASC 320, our invested asset impairment policy for fixed-maturity securities
states that OTTI is considered to have occurred (1) if we intend to sell the impaired fixed-maturity security or
(2) if it is more likely than not we will be required to sell the impaired fixed-maturity security before recovery
of its amortized cost basis. If we intend to sell or it is more likely than not we will be required to sell, the
amortized cost of any such securities is reduced to fair value as the new cost basis, and a realized loss is
recorded in the period in which it is recognized. When we believe that full collection of interest and/or
principal is not likely, we determine the net present value of future cash flows by using the effective interest
rate implicit in the security at the date of acquisition as the discount rate and compare that amount to the
amortized cost and fair value of the security. The difference between the net present value of the expected
future cash flows and amortized cost of the security is considered a credit loss and recognized as a realized
loss in the period in which it occurred. The difference between the fair value and the net present value of the
Cincinnati Financial Corporation – 2012 10-K - 120
cash flows of the security, the noncredit loss, is recognized in other comprehensive income as an
unrealized loss.
When determining OTTI charges for our equity portfolio, our invested asset impairment policy considers
qualitative and quantitative factors, including facts and circumstances specific to individual securities, asset
classes, the financial condition of the issuer, changes in dividend payment, the length of time fair value had
been less than cost, the severity of the decline in fair value below cost, the volatility of the security and our
ability and intent to hold each position until its forecasted recovery.
For each of our equity securities in an unrealized loss position at December 31, 2012, we applied the
objective qualitative and quantitative criteria of our invested asset impairment policy for OTTI. Our long-term
equity investment philosophy, emphasizing companies with strong indications of paying and growing
dividends, combined with our strong surplus, liquidity and cash flow, supports our ability to hold these
investments to recovery. Based on the individual qualitative and quantitative factors, as discussed above,
we evaluate and determine an expected recovery period for each security. A change in the condition of a
security can warrant impairment before the expected recovery period. If the security has not recovered cost
within the expected recovery period, the security is other-than-temporarily impaired.
3.
Fair Value Hierarchy
In accordance with accounting guidance for fair value measurements and disclosures, we categorized our
financial instruments, based on the priority of the observable and market-based data for the valuation
technique used, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to
quoted prices with readily available independent data in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for
measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a
significant impact on fair value measurement is used. Our valuation techniques have not changed from
those used at December 31, 2011, 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.
FAIR VALUE MEASUREMENTS
• 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; or
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. 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 a nationally recognized pricing
vendor, an outside resource that supplies global securities pricing, dividend, corporate action and
descriptive information to support fund pricing, securities operations, research and portfolio management.
The company obtains and reviews the pricing service’s valuation methodologies and related inputs and
validates these prices by replicating a sample across each asset class using a discounted cash flow model.
When a price is not available from these sources, as in the case of securities that are not publicly traded, we
determine the fair value using various inputs including quotes from independent brokers. We have generally
obtained and evaluated two nonbinding quotes from brokers; our investment professionals determine our
best estimate of fair value. The fair value of investments not priced by a pricing vendor is less than 1 percent
of the fair value of our total investment portfolio. Reclassification of certain financial instruments may occur
when input observability changes. All 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.
The technique used for the Level 2 fixed-maturity securities and taxable fixed maturities in separate
accounts is the application of matrix pricing. The inputs used include relevant market information by asset
class, trade activity of like securities, yield to maturity and economic events. All of the Level 2 fixed-maturity
securities are priced by a nationally recognized pricing vendor.
Cincinnati Financial Corporation – 2012 10-K - 121
The Level 2 preferred equities technique used is the application of matrix pricing. The inputs used, similar to
those used by the pricing vendor for our fixed-maturity securities, include relevant market information, trade
activity of like securities, yield to maturity, corporate action notices and economic events. All of the Level 2
preferred equities are priced by a nationally recognized pricing vendor.
The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring
basis for the years ended December 31, 2012 and 2011. We do not have any material liabilities carried at
fair value. There were no transfers between Level 1 and Level 2.
(In millions)
At December 31, 2012
Fixed maturities, available for sale:
States, municipalities and political subdivisions
Convertibles and bonds with warrants attached
United States government
Government-sponsored enterprises
Foreign government
Commercial mortgage-backed securities
Corporate securities
Subtotal
Common equities, available for sale
Preferred equities, available for sale
Taxable fixed-maturities separate accounts
Top Hat Savings Plan
Total
At December 31, 2011
Fixed maturities, available for sale:
States, municipalities and political subdivisions
Convertibles and bonds with warrants attached
United States government
Government-sponsored enterprises
Foreign government
Corporate securities
Subtotal
Common equities, available for sale
Preferred equities, available for sale
Taxable fixed-maturities separate accounts
Top Hat Savings Plan
Total
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$
$
$
$
$
-
-
8
-
-
-
-
8
3,238
-
-
9
3,255 $
$
-
-
7
-
-
-
7
2,854
-
-
8
2,869 $
3,288 $
31
-
164
3
28
5,567
9,081
-
134
689
-
9,904 $
3,249 $
59
-
160
3
5,280
8,751
-
98
628
-
9,477 $
$
1
-
-
-
-
-
3
4
-
1
-
-
5 $
$
3
-
-
-
-
18
21
-
4
-
-
25 $
3,289
31
8
164
3
28
5,570
9,093
3,238
135
689
9
13,164
3,252
59
7
160
3
5,298
8,779
2,854
102
628
8
12,371
Cincinnati Financial Corporation – 2012 10-K - 122
Each financial instrument that was deemed to have significant unobservable inputs when determining
valuation is identified in the following tables by security type with a summary of changes in fair value as of
December 31, 2012. Total Level 3 assets continue to be less than 1 percent of financial assets measured at
fair value in the consolidated balance sheets. Assets presented in the table below were valued based
primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the
valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available
to us.
The following tables provide the change in Level 3 assets during 2012 and 2011:
(In millions)
Asset fair value measurements using significant unobservable inputs (Level 3)
Beginning balance, January 1, 2012
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)
Included in other comprehensive income
Purchases
Sales
Transfers into Level 3
Transfers out of Level 3
Ending balance, December 31, 2012
Beginning balance, January 1, 2011
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)
Included in other comprehensive income
Purchases
Sales
Transfers into Level 3
Transfers out of Level 3
Ending balance, December 31, 2011
$
$
$
$
Corporate fixed
maturities
Taxable fixed
maturities-
separate
accounts
18
$
$
-
States,
municipalities
and political
subdivisions
fixed maturities
3
-
2
-
(4)
1
(14)
3
20
-
-
16
-
10
(28)
18
$
$
$
-
-
-
-
-
-
-
$
2
$
-
-
-
-
-
(2)
-
$
-
-
-
(2)
-
-
1
4
-
-
-
(1)
-
-
3
$
$
$
$
Preferred
equities
4
$
Total
-
2
1
-
-
(6)
1
5
-
-
-
-
1
(2)
4
$
$
$
25
-
4
1
(6)
1
(20)
5
31
-
-
16
(1)
11
(32)
25
With the exception of the Level 3 reconciliation table, additional disclosure for the Level 3 category is
not material.
Fair Value Disclosure for Assets and Liabilities Not Carried at Fair Value
The disclosures below are presented to provide information about the effects of current market conditions
on financial instruments that are not reported at fair value in our consolidated financial statements.
The following table shows fair values of our note payable and long-term debt subject to fair value disclosure
requirements:
(In millions)
At December 31, 2012
Note payable
6.900% senior debentures, due 2028
6.920% senior debentures, due 2028
6.125% senior notes, due 2034
Total
At December 31, 2011
Note payable
6.900% senior debentures, due 2028
6.920% senior debentures, due 2028
6.125% senior notes, due 2034
Total
$
$
$
$
Quoted prices
in active
markets for
identical assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
104
31
479
431
1,045
104
31
410
373
918
$
$
$
$
-
-
-
-
-
-
-
-
-
-
104
31
479
431
1,045
104
31
410
373
918
$
$
Fair value of the note payable was determined based upon the outstanding balance at December 31, 2012,
because it is short term and tied to a variable interest rate. The note payable was classified as Level 2 as a
market does not exist.
Fair value of the long-term debt was determined under the fair value measurements and disclosure
accounting rules based on market pricing of similar debt instruments that are actively trading. We determine
fair value for our debt the same way that we value corporate fixed maturities in our investment portfolio.
Fair value can vary with macroeconomic conditions. Regardless of the fluctuations in fair value, the
outstanding principal amount of our long-term debt is $793 million. None of the long-term debt is
encumbered by rating triggers.
Cincinnati Financial Corporation – 2012 10-K - 123
The following table shows the fair value of our life policy loans, included in other invested assets, subject to
fair value disclosure requirements:
(In millions)
At December 31, 2012
Life policy loans
At December 31, 2011
Life policy loans
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
$
$
-
$
-
$
$
-
$
-
Significant
unobservable
inputs
(Level 3)
Total
50
$
43
$
50
43
Outstanding principal and interest for these life policy loans was $37 million at December 31, 2012, and
December 31, 2011. To determine the fair value, we make the following significant assumptions: (1) the
discount rates used to calculate the present value of expected payments are the risk-free spot rates as
nonperformance risk is minimal; and (2) the loan repayment rate by which policyholders pay off their loan
balances is in line with past experience.
The following table shows fair value of our deferred annuities and structured settlements, included in life
policy and investment contract reserves, subject to fair value disclosure requirements:
(In millions)
At December 31, 2012
Deferred annuities
Structured settlements
Total
At December 31, 2011
Deferred annuities
Structured settlements
Total
$
$
$
$
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
$
$
$
$
$
$
Significant
unobservable
inputs
(Level 3)
Total
898
-
898
794
-
794
$
$
$
$
898
240
1,138
794
208
1,002
-
240
240
-
208
208
$
$
-
-
-
-
-
-
Recorded reserves for the deferred annuities and structured settlements were $1.043 billion and
$1.025 billion at December 31, 2012, and December 31, 2011, respectively.
Fair values for deferred annuities 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 at December 31, 2012, to account
for nonperformance risk; (2) the rate of interest credited to policyholders is the portfolio net earned interest
rate less a spread for expenses and profit; and (3) additional lapses occur when the credited interest rate is
exceeded by an assumed competitor credited rate, which is a function of the risk-free rate of the economic
scenario being modeled.
Determination of fair value for structured settlements assumes the discount rates used to calculate the
present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial
issuers at December, 2012, to account for nonperformance risk.
Cincinnati Financial Corporation – 2012 10-K - 124
4.
This table summarizes activity for our consolidated property casualty loss and loss expense reserves:
PROPERTY CASUALTY LOSS AND LOSS EXPENSES
(In millions)
Gross loss and loss expense reserves, January 1
Less reinsurance receivable
Net loss and loss expense reserves, January 1
Net incurred loss and loss expenses related to:
Current accident year
Prior accident years
Total incurred
Net paid loss and loss expenses related to:
Current accident year
Prior accident years
Total paid
Net loss and loss expense reserves, December 31
Plus reinsurance receivable
Gross loss and loss expense reserves, December 31
Years ended December 31,
2011
2012
2010
$
$
4,280 $
375
3,905
2,533
(396)
2,137
1,123
1,106
2,229
3,813
356
4,169 $
4,137 $
326
3,811
2,620
(285)
2,335
1,206
1,035
2,241
3,905
375
4,280 $
4,096
435
3,661
2,319
(304)
2,015
939
926
1,865
3,811
326
4,137
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 that is familiar with
relevant company and industry business, claims and underwriting trends, as well as general economic and
legal trends, that could affect future loss and loss expense payments. The amount we will actually have to
pay for claims can be highly uncertain. This uncertainty, together with the size of our reserves, makes the
loss and loss expense reserves our most significant estimate. The reserve for loss and loss expenses in the
consolidated balance sheets also includes $61 million, $59 million and $63 million for certain life and health
loss reserves at December 31, 2012, 2011 and 2010, respectively.
During 2012, we experienced $396 million of favorable loss and loss expense reserve development on prior
accident years including $292 million in commercial lines. Favorable development in 2012 was $111 million
more than in 2011, in part due to $39 million for catastrophe losses. Overall favorable development for
commercial lines reserves illustrated the potential for revisions inherent in estimating reserves, especially for
long-tail lines such as commercial casualty and workers’ compensation. We recognized favorable reserve
development of $177 million for the commercial casualty line, $74 million for the workers’ compensation line
and $52 million for the homeowner line due to reduced uncertainty of these lines one year later.
During 2011, we experienced $285 million of favorable loss development on prior accident years including
$234 million in commercial lines. Overall favorable development for commercial lines reserves illustrated the
potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial
casualty and workers’ compensation. We recognized favorable reserve development of $132 million for the
commercial casualty line and $97 million for the workers’ compensation line due to reduced uncertainty of
these lines one year later.
During 2010, we experienced $304 million of favorable loss development on prior accident years including
$269 million in commercial lines. Overall favorable development for commercial lines reserves illustrated the
potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial
casualty and workers’ compensation. We recognized favorable reserve development of $186 million for the
commercial casualty line and $39 million for the workers’ compensation line due to reduced uncertainty of
these lines one year later.
Asbestos and Environmental Reserves
We carried $67 million of net loss and loss expense reserves for asbestos and environmental claims and
$54 million of reserves for mold claims at year-end 2012, compared with $74 million and $62 million,
respectively, for such claims at year-end 2011. The asbestos and environmental claims amounts for each
respective year constituted 1.8 percent and 1.9 percent of total loss and loss expense reserves at these
year-end dates.
We believe our exposure to asbestos and environmental claims is limited, largely because our reinsurance
retention was $500,000 or below prior to 1987. We also were predominantly a personal lines company in the
1960s and 1970s. During the 1980s and early 1990s, commercial lines grew as a percentage of our overall
business and our exposure to asbestos and environmental claims grew accordingly. Over that period, we
included an asbestos and environmental exclusion in most policies or endorsed the exclusion to the policies.
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.
Cincinnati Financial Corporation – 2012 10-K - 125
5.
LIFE POLICY AND INVESTMENT CONTRACT RESERVES
We establish the reserves for traditional life insurance policies based on expected expenses, mortality,
morbidity, withdrawal rates, timing of claim presentation and investment yields, including a provision for
uncertainty. Once these assumptions are established, they generally are maintained throughout the lives of
the contracts. We use both our own experience and industry experience, adjusted for historical trends, in
arriving at our assumptions for expected mortality, morbidity and withdrawal rates as well as for expected
expenses. We base our assumptions for expected investment income on our own experience adjusted for
current economic conditions.
We establish reserves for the company’s universal life, deferred annuity and structured settlement policies
equal to the cumulative account balances, which include premium deposits plus credited interest less
charges and withdrawals. Some of our universal life policies contain no-lapse guarantee provisions. For
these policies, we establish a reserve in addition to the account balance, based on expected no-lapse
guarantee benefits and expected policy assessments.
This table summarizes our life policy and investment contract reserves:
(In millions)
Ordinary/traditional life
Universal life
Deferred annuities
Structured settlements
Other
Total life policy and investment contract reserves
At December 31,
2012
2011
$
$
752 $
483
850
193
17
2,295 $
691
481
827
198
17
2,214
DEFERRED POLICY ACQUISITION COSTS
6.
Expenses associated with successfully acquiring insurance policies – primarily commissions, premium taxes
and underwriting costs – are deferred and amortized over the terms of the policies. We update our
acquisition cost assumptions periodically to reflect actual experience, and we evaluate the costs for
recoverability. All acquisition costs reflect ASU 2010-26, Accounting for Costs Associated with Acquiring or
Renewing Insurance Contracts, which we retrospectively adopted on January 1, 2012. The table below
shows the deferred policy acquisition costs and asset reconciliation.
(In millions)
Deferred policy acquisition costs asset at January 1
Capitalized deferred policy acquisition costs
Amortized deferred policy acquisition costs
Amortized shadow deferred policy acquisition costs
Deferred policy acquisition costs asset at December 31
Years ended December 31,
2011
2010
2012
$
$
477 $
734
(706)
(35)
470 $
458 $
661
(631)
(11)
477 $
454
627
(607)
(16)
458
NOTE PAYABLE
No premium deficiencies were recorded in the consolidated statements of comprehensive income, as the
sum of the anticipated loss and loss adjustment expenses, policyholder dividends and unamortized deferred
acquisition expenses did not exceed the related unearned premiums and anticipated investment income.
7.
We have one line of credit with multiple commercial banks with a borrowing capacity of $225 million, with an
additional $50 million accordion feature. At December 31, 2012, $104 million was drawn on the line of credit.
This credit agreement replaces the two lines of credit with commercial banks with an aggregate borrowing
capacity of $225 million at December 31, 2011. The 2012 credit agreement is a new $225 million unsecured
revolving credit facility with a term of five years expiring May 31, 2017. We had no compensating balance
requirements on short-term debt for either 2012 or 2011. The interest rate charged on our borrowings on
this credit agreement ranged from 0.7 percent to 2.58 percent during 2012.
Cincinnati Financial Corporation – 2012 10-K - 126
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION
8.
This table summarizes the principal amounts of our long-term debt excluding unamortized discounts, none
of which are encumbered by rating triggers:
(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,
2012
December 31,
2011
December 31,
2012
December 31,
2011
$
$
28 $
391
371
790 $
28 $
391
371
790 $
28 $
391
374
793 $
28
391
374
793
Below are the expected capital lease obligations, totaling $37 million, excluding an insignificant amount of
interest, that we expect to pay over the next five years:
(In millions)
Capital lease obligations
2013
17
$
$
Years ended December 31,
2015
7
$
$
2014
10
2016
3
2017
0
$
SHAREHOLDERS’ EQUITY AND DIVIDEND RESTRICTIONS
9.
Our insurance subsidiary declared dividends to the parent company of $300 million in 2012, $180 million in
2011 and $220 million in 2010. 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 2013, the total that our insurance subsidiary, which is the parent
of all other insurance subsidiaries, may declare in dividends is approximately $391 million.
As of December 31, 2012, 9.3 million shares of common stock were available for future equity award grants.
Declared cash dividends per share were $1.62, $1.605 and $1.59 for the years ended
December 31, 2012, 2011 and 2010, respectively.
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
Increase in unrealized gains
Reclassification adjustment for (gains) losses
included in net income
Adjustment to deferred acquisition costs and
life policy reserves and other
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
2012
Income
tax
Net
Years ended December 31,
2011
Income
tax
Before
tax
Net
Before
tax
2010
Income
tax
Net
$
1,460
$
502
$
958
$
1,232
$
422
$
810
$
1,012
$
345
$
667
428
(42)
(21)
365
152
(15)
(9)
128
276
(27)
(12)
237
309
(70)
(11)
228
108
(25)
(3)
80
201
(45)
(8)
148
383
136
247
(159)
(56)
(103)
(4)
220
(3)
77
(1)
143
$
1,825
$
630
$
1,195
$
1,460
$
502
$
958
$
1,232
$
422
$
810
$
(88)
$
(31)
$
(57)
$
(63)
$
(22)
$
(13)
(4)
(9)
(25)
(9)
(41)
(16)
$
(66)
$
(23)
$
(43)
3
1
2
$
(101)
$
(35)
$
(66)
$
(88)
$
(31)
$
(57)
$
(63)
$
(22)
$
(41)
$
1,372
$
471
$
901
$
1,169
$
400
$
769
$
946
$
322
$
624
365
(13)
128
(4)
237
(9)
228
(25)
80
(9)
148
(16)
220
3
77
1
143
2
$
1,724
$
595
$
1,129
$
1,372
$
471
$
901
$
1,169
$
400
$
769
Cincinnati Financial Corporation – 2012 10-K - 127
REINSURANCE
10.
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. Primary components of our property
and casualty reinsurance program include a property risk treaty, casualty per occurrence treaty and property
catastrophe treaty.
Our consolidated statements of comprehensive 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,
2011
2012
2010
$
$
3,520 $
9
(185)
3,344 $
3,236 $
12
(219)
3,029 $
3,080
10
(166)
2,924
Changes in 2012 ceded earned premiums compared with 2011 are related to ceded earned reinstatement
premiums for additional reinsurance coverage as a result of the increase in catastrophe losses that occurred
during 2011.
Our consolidated statements of comprehensive 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,
2011
2012
2010
$
$
2,235 $
6
(104)
2,137 $
2,588 $
24
(277)
2,335 $
2,003
11
(4)
2,010
Changes in 2012 ceded loss and loss expenses compared with 2011 are related to our increase in
catastrophe losses in 2011 that resulted in increased ceded incurred losses to our reinsurers.
For the year ended December 31, 2010, a reserve reduction occurred in our USAIG pool. Direct and ceded
incurred loss and loss expenses were reduced by $33 million, and there was no effect on net incurred loss
and loss expenses.
Our life insurance company purchases reinsurance for protection of a portion of the risk that is written.
Primary components of our life reinsurance program include individual mortality coverage and aggregate
catastrophe and accidental death coverage in excess of certain deductibles.
Our consolidated statements of comprehensive income include earned life insurance premiums on
ceded business:
(In millions)
Direct earned premiums
Ceded earned premiums
Net earned premiums
Years ended December 31,
2011
2012
2010
$
$
235 $
(57)
178 $
220 $
(55)
165 $
211
(53)
158
Our consolidated statements of comprehensive income include life insurance contract holders’ benefits
incurred on assumed and ceded business:
(In millions)
Direct contract holders' benefits incurred
Ceded contract holders' benefits incurred
Net incurred loss and loss expenses
Years ended December 31,
2011
2012
2010
$
$
232 $
(47)
185 $
232 $
(43)
189 $
233
(63)
170
The ceded benefits incurred can vary depending on the type of life insurance policy held and the year the
policy was sold.
Cincinnati Financial Corporation – 2012 10-K - 128
INCOME TAXES
11.
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 other
Deferred acquisition costs
Life policy reserves
Other
Total
Net deferred tax liability
At December 31,
2012
2011
202 $
124
31
39
396
605
163
65
16
849
453 $
201
113
36
46
396
481
156
42
20
699
303
$
$
Deferred tax assets and liabilities reflect temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amount recognized for tax purposes.
The differences between the 35 percent statutory income tax rate and our effective income tax rate were
as follows:
(Dollars in millions)
Tax at statutory rate
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds
Dividend received exclusion
Other
Effective tax
2012
Years ended December 31,
2011
2010
198
35.0 % $
61
35.0 % $
174
35.0 %
(33)
(24)
4
145
(5.9)
(4.2)
0.7
25.6 % $
(35)
(20)
3
9
(20.0)
(11.7)
1.9
5.2 % $
(36)
(19)
4
123
(7.2)
(3.8)
0.7
24.7 %
$
$
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, 2012, we had no operating or capital loss carry forwards.
The change in our effective tax rate was primarily due to changes in pretax income from underwriting
results, changes in investment income and the amount of realized investment gains and losses. Changes to
tax-exempt interest and the dividend received deduction in the current year compared with prior years also
contributed to the change.
Unrecognized Tax Benefits
As a result of positions either taken in our 2011 federal tax return filed with the IRS or expected to be taken
in the 2012 filing, we believe it is more likely than not that our tax liability will be sustained upon examination
by the IRS. We therefore carry no amount for unrecognized tax benefits for the years ended 2012, 2011
and 2010.
The statute of limitations for federal and state income tax purposes have closed for tax years 2008 and
earlier. In November, 2011, the IRS began its audit of tax years 2009 and 2010. In December 2012, the IRS
Exam Team completed its phase of the audit with no material changes to the returns as filed. As is
standard practice whenever large refunds are received, the Joint Committee on Taxation in Washington DC
is currently reviewing the 2009 and 2010 IRS audit and is expected to complete its review by mid-2013.
Income taxes paid in our Consolidated Statements of Cash Flows are shown net of refunds received of
$11 million, $2 million and $10 million for 2012, 2011 and 2010, respectively.
In addition to our IRS filings, we file income tax returns with immaterial amounts in various
state jurisdictions.
Cincinnati Financial Corporation – 2012 10-K - 129
NET INCOME PER COMMON SHARE
12.
Basic earnings per share are computed based on the weighted average number of common shares
outstanding. Diluted earnings per share are computed based on the weighted average number of common
and dilutive potential common shares outstanding using the treasury stock method. The table shows
calculations for basic and diluted earnings per share:
(In millions except share data in thousands)
Numerator:
Net income—basic and diluted
Denominator:
Weighted-average common shares outstanding
Effect of stock-based awards:
Nonvested shares
Stock options
Adjusted diluted weighted-average shares
Earnings per share:
Basic
Diluted
Number of anti-dilutive stock-based awards
Years ended December 31,
2011
2010
2012
$
421 $
164 $
375
162,504
162,667
162,778
684
473
163,661
509
83
163,259
$
2.59 $
2.57
1.01 $
1.01
5,938
7,758
484
12
163,274
2.30
2.30
9,538
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 135. The above table includes the number of
anti-dilutive stock-based awards at year-end 2012, 2011 and 2010. 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. During 2008, we changed the form of retirement benefit we
offer some associates to a company match on contributions to a 401(k) plan from the defined benefit
pension plan. We froze entry into the pension plan for new associates as of June 30, 2008, and only
participants 40 years of age or older as of August 31, 2008, could elect to continue to participate. For
participants remaining in the pension plan, we continue to contribute to fund future benefit obligations.
Benefits for the defined benefit pension plan are based on years of credited service and compensation level.
Contributions are based on the prescribed method defined in the Pension Protection Act. Our pension
expense is based on certain actuarial assumptions and also is composed of several components that are
determined using the projected unit credit actuarial cost method. During the fourth quarters of 2012 and
2011, we offered limited opportunities for distribution of vested balances to terminated participants in the
qualified pension plan. The plan paid $2 million and $9 million to these terminated vested participants during
2012 and 2011, respectively. The qualified plan was amended to allow for distribution of vested balances to
terminated participants on an ongoing basis.
We also sponsor a defined contribution plan (401(k) plan). Matching contributions totaled $9 million,
$8 million and $8 million during the years 2012, 2011 and 2010, respectively. Associates who are not
accruing benefits under the pension plan are eligible to receive the company match of up to 6 percent of
cash compensation. We also pay all operating expenses for the 401(k) plan. Participants vest in the
company match for the 401(k) plan after three years of eligible service.
We maintain a supplemental executive retirement plan (SERP) with obligations of $9 million at year-end
2012 and $8 million at year-end 2011, which are included in the obligation and expense amounts. The
company also makes available to a select group of associates the CFC Top Hat Savings Plan, a
nonqualified deferred compensation plan.
Cincinnati Financial Corporation – 2012 10-K - 130
Defined Benefit Pension Plan Assumptions
We evaluate our pension plan assumptions annually and update them as necessary. The weighted-average
assumptions used to determine benefit obligations at December 31 follow:
Discount rate
Rate of compensation increase
Qualified Pension Plan
SERP
2012
2011
2012
2011
4.20 %
5.10 %
3.95 %
4.75 %
2.75-3.25
3.50-5.50
2.75-3.25
3.50-5.50
To determine the discount rate for each plan, a hypothetical diversified portfolio of actual domestic Aa rated
bonds was 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. Based on this analysis, we decreased the rate from the prior year by 0.90 percentage points for the
qualified plan and by 0.80 percentage points for the SERP due to market interest rate conditions at year-end
2012. Compensation increase assumptions reflect anticipated rates of inflation, real return on wage growth
and merit and promotional increases. We decreased our compensation assumption to reflect the current
demographics of participants in the plans and expectations of near-term salary increases.
This is a summary of the weighted-average assumptions we use to determine our net expense for the plans:
Discount rate
Expected return on plan assets
Rate of compensation increase
Qualified Pension Plan
2011
2012
2010
2012
SERP
2011
2010
5.10 %
7.50
5.85 %
7.50
6.10 %
8.00
4.75 %
5.55 %
6.10 %
n/a
n/a
n/a
3.50-5.50 3.50-5.50 4.00-6.00 3.50-5.50 3.50-5.50 4.00-6.00
The discount rate was decreased by 0.75 percentage points for the qualified pension plan and
0.80 percentage points for the SERP due to market interest rate conditions at the beginning of 2012.
The discount rate assumptions for our benefit obligation generally track with high grade corporate bond
yields chosen in our hypothetical portfolio, and yearly adjustments reflect any changes to those bond yields.
We believe the expected return on plan assets is representative of the expected long-term rate of return on
these assets. We reduced the return on plan assets assumption from 8.00 percent to 7.50 percent during
2011, which is consistent with 2012 expectations of interest rates and based partially on the fact that the
plan’s common stock holdings pay dividends. We believe this rate is representative of the expected long-
term rate of return on these plan assets. Our compensation increase assumptions in 2012 reflect anticipated
rates of inflation, real return on wage growth and merit and promotional increases.
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 January 1
Service cost
Interest cost
Actuarial loss
Benefits paid
Projected benefit obligation at December 31
Accumulated benefit obligation
Change in plan assets:
Fair value of plan assets at January 1
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at December 31
Unfunded status:
Unfunded status at December 31
At December 31,
2012
2011
281
12
14
28
(15)
320
$
$
282 $
$
216
23
14
(15)
238 $
245
11
14
30
(19)
281
236
183
17
35
(19)
216
(82) $
(65)
$
$
$
$
$
$
Cincinnati Financial Corporation – 2012 10-K - 131
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 as other liabilities in the consolidated balance sheets:
Amounts recognized in accumulated other comprehensive income not yet recognized:
Net actuarial loss
Prior service cost
Total
At December 31,
2012
2011
(82) $
(65)
100 $
1
101 $
86
2
88
$
$
$
The change in the amount recognized in other comprehensive income is largely due to the decrease in
discount rate and corresponding decreases in assumed lump sum rates. We assume that 100 percent of
participants will choose lump sum payments.
Below are the components of our net periodic benefit cost, as well as other changes in plan assets and
benefit obligations recognized in other comprehensive income for our qualified plan and SERP at
December 31:
(In millions)
Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial loss and prior service cost
Net periodic benefit cost
(In millions)
Current year actuarial loss
Recognition of actuarial loss
Recognition of prior service cost
Total loss (gain) recognized in other comprehensive income
$
$
$
$
Years ended December 31,
2011
2010
2012
12 $
14
(16)
8
18 $
11 $
14
(16)
4
13 $
10
14
(14)
2
12
Years ended December 31,
2011
2010
2012
20 $
(6)
(1)
13 $
30 $
(4)
(1)
25 $
0
(2)
(1)
(3)
The total recognized in net periodic benefit cost and other comprehensive income was $31 million,
$38 million and $9 million for the years ended December 31, 2012, 2011 and 2010, respectively.
The increase in the amount recognized in other comprehensive income from 2010 is largely due to the
decreases in discount rate and lump sum rate. The estimated costs to be amortized from AOCI into net
periodic benefit cost over the next year for our plans are an $8 million actuarial loss and a $1 million prior
service cost.
Cincinnati Financial Corporation – 2012 10-K - 132
Defined Benefit Pension Plan Assets
The pension plan assets are managed to maximize total return over the long term while providing sufficient
liquidity and current return to satisfy the cash flow requirements of the plan. The plan’s day-to-day
investment decisions are managed by our internal investment department; however, overall investment
strategies are discussed with our employee benefits committee.
Excluding cash, during 2012 we held approximately 75 percent of our pension portfolio in domestic common
equity investments, which reflect the long-term time horizon of pension obligations. The remainder of the
portfolio consists of 15 percent in states, municipalities and taxable political subdivisions fixed-maturity
investments and 10 percent in domestic corporate fixed-maturity investments. Our common equity portfolio
consists of 22 percent in the financial sector, 19 percent in the information technology sector, 13 percent in
the healthcare sector, 11 percent in the industrial sector and 10 percent in the consumer discretionary
sector during 2012. We had no additional sectors which accounted for 10 percent or more of our common
equity portfolio balance at year end 2012. We had $3 million of cash on hand at December 31, 2012, with
carrying value approximating fair value. We have purchased more fixed maturities over the past several
years to increase the duration of the fixed-maturity portfolio, diversify the types of credit risk and to better
match our liability risks, which is consistent with our investment strategy. Our fixed-maturity bond portfolio is
investment grade. The plan does not engage in derivative transactions. We do not expect to change the
current allocation of pension investments for 2013.
Investments in securities are valued based on the fair value hierarchy outlined in Note 3, Fair Value
Measurements, Page 121. The following table illustrates the fair value hierarchy for those assets measured
at fair value on a recurring basis at December 31, 2012 and 2011. The pension plan did not have any
liabilities carried at fair value or any Level 3 assets at or during the years ended December 31, 2012 and
2011. There have been no transfers between Level 1 and Level 2 for the years ended December 31, 2012
and 2011.
(In millions)
At December 31, 2012
Fixed maturities, available for sale:
States, municipalities and political subdivisions
Corporate securities
Total fixed maturities, available for sale
Common equities, available for sale
Total
At December 31, 2011
Fixed maturities, available for sale:
States, municipalities and political subdivisions
Corporate securities
Total fixed maturities, available for sale
Common equities, available for sale
Preferred equities, available for sale
Total
$
$
$
$
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$
$
-
-
-
175
175
-
-
-
149
4
153
$
$
36
24
60
-
60
34
25
59
-
-
59
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
$
$
36
24
60
175
235
34
25
59
149
4
212
$
$
Our pension plan assets included 567,113 shares of the company’s common stock, which had a fair value of
$22 million and $17 million at December 31, 2012 and 2011. The defined benefit pension plan did not
purchase any shares of our common stock during 2012 and 2011. No shares of our common stock were
sold during 2012. During 2011, the pension plan sold 75,000 shares of the company’s common stock for a
realized gain of $2 million. The company paid $1 million in cash dividends on our common stock to the
pension plan in both 2012 and 2011.
We contributed $15 million to our qualified plan during the first quarter of 2013 and expect to contribute
$3 million of benefit payments from the SERP during 2013. We expect to make the following benefit
payments for our qualified plan and SERP, reflecting expected future service:
(In millions)
Expected future benefit payments
2013
30
$
2014
25
$
2015
27
$
2016
26
$
2017
26
$
2018 - 2022
134
$
Years ended December 31,
Cincinnati Financial Corporation – 2012 10-K - 133
STATUTORY ACCOUNTING INFORMATION
14.
Insurance companies’ financial statements are presented on the basis of accounting practices prescribed or
permitted by applicable state insurance departments of domicile. Insurance companies use statutory
accounting practices (SAP) as recognized by various states. We have adopted the National Association of
Insurance Commissioners’ (NAIC) Accounting Practices and Procedures manual, version effective
January 1, 2001, and updates through the current year as a component of prescribed or permitted practices
by laws of the state of domicile. The primary differences between SAP and GAAP include the valuation of
unrealized investment gains and losses, expensing of policy acquisition costs, actuarial assumptions for life
insurance reserves and deferred income taxes based on differences in statutory and taxable income.
Statutory net income 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:
(In millions)
SAP Net Income (Loss)
Years ended December 31,
2011
2010
2012
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Specialty Underwriters Insurance Company
The Cincinnati Life Insurance Company
$
334 $
10
2
6
5
120 $
15
2
11
(13)
318
10
2
1
15
$
Capital and Surplus
At December 31,
2012
2011
$
3,914
293
76
199
276
3,747
280
73
186
281
TRANSACTIONS WITH AFFILIATED PARTIES
15.
We paid certain officers and directors, or insurance agencies of which they are shareholders, commissions
of approximately $5 million in 2012 and $6 in 2011 and 2010, on premium volume of approximately
$35 million, $34 million and $36 million for 2012, 2011 and 2010, respectively.
16.
COMMITMENTS AND CONTINGENT LIABILITIES
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 and regulatory proceedings,
some of which assert claims for substantial amounts. These actions include, among others, putative class
actions seeking certification of a state or national class. Such proceedings have alleged, for example,
breach of an alleged duty to search national data bases to ascertain unreported deaths of insureds under life
insurance policies. The company’s insurance subsidiaries also are occasionally parties to individual actions in
which extra-contractual damages, punitive damages or penalties are sought, such as claims alleging bad faith in
the handling of insurance claims or claims alleging discrimination by former associates.
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
most recent review, our estimate for any other matter for which the risk of loss is more than remote is less
than $500,000.
Cincinnati Financial Corporation – 2012 10-K - 134
STOCK-BASED ASSOCIATE COMPENSATION PLANS
17.
Four equity compensation plans currently permit us to grant various types of equity awards. We currently
grant incentive stock options, nonqualified stock options, service-based restricted stock units and
performance-based restricted stock units to associates, including some with market-based performance
objectives under our shareholder-approved plans. We also have a Holiday Stock Plan that permits annual
awards of one share of common stock to each full-time associate for each full calendar year of service up to
a maximum of 10 shares. One of our equity compensation plans permits us to grant stock to our outside
directors as a component of their annual compensation.
Stock-based compensation cost after tax was $11 million, $9 million and $8 million for the years ended
December 31, 2012, 2011 and 2010, respectively. The related income tax benefit recognized was $5 million,
$4 million and $3 million for the years ended December 31, 2012, 2011 and 2010, respectively. Options
exercised during the year ended December 31, 2012, had intrinsic value of $6 million. Options exercised
during the years ended December 31, 2011 and 2010 had intrinsic value less than $1 million. (Intrinsic value
is the market price less the exercise price.) Options vested during the year ended December 31, 2012, 2011
and 2010 had total intrinsic value of $5 million, $2 million, and $1 million, respectively.
As of December 31, 2012, we had $19 million of unrecognized total compensation cost related to nonvested
stock options and restricted stock unit awards. That cost will be recognized over a weighted-average period
of 1.8 years.
Stock Options
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
generally vest ratably over a three-year period. In determining the share-based compensation amounts, we
estimate the fair value of each option granted on the date of grant using a binomial option-pricing model.
We make 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 zero-coupon U.S. Treasury issues with a
remaining term approximating the expected term.
The following weighted average assumptions were used in determining fair value for option grants issued
during 2012 and 2011:
Weighted-average expected term
Expected volatility
Dividend yield
Risk-free rates
Weighted-average fair value of options granted during the period
This is a summary of options information:
(Dollars in millions, shares in thousands)
Outstanding at January 1, 2012
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2012
Options exercisable at end of period
2012
8-10 years
25.26-26.20%
4.51-4.52%
1.58-2.00%
6.78
$
2011
9 years
26.06-26.12%
4.70-5.29%
2.86-3.41%
7.29
$
Weighted-
average
exercise price
36.71
35.63
30.77
35.66
37.34 $
38.20 $
Shares
9,357 $
536
(708)
(1,248)
7,937
6,594 $
Aggregate
intrinsic
value
26
18
Cash received from the exercise of options was $10 million and $1 million for the years ended
December 31, 2012 and 2011, and less than $1 million for the year ended 2010. We acquired
311,524 shares totaling $12 million from associates in consideration for option exercises during 2012.
Cincinnati Financial Corporation – 2012 10-K - 135
Options outstanding and exercisable consisted of the following at December 31, 2012:
(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
$
6.39 yrs
5.06 yrs
3.95 yrs
2.53 yrs
2.93 yrs
4.10 yrs
Weighted-
average
exercise price
26.58
33.40
38.08
42.56
45.26
37.34
Shares
1,359
1,355
2,328
1,740
1,155
7,937
Options exercisable
Weighted-
average
exercise price
26.57
32.99
38.77
42.56
45.26
38.20
Shares
1,087 $
797
1,815
1,740
1,155
6,594
The weighted-average remaining contractual life for exercisable awards as of December 31, 2012, was
3.2 years. Under all active shareholder approved plans, a total of 17.3 million shares were authorized to be
granted. These include the 7 million shares available under the Cincinnati Financial Corporation 2012 Stock
Compensation Plan approved by shareholders in 2012. At December 31, 2012, 9.3 million shares remained
available for future issuance under the plans. During 2012, we granted 24,118 shares of common stock to
our directors for 2011 board service fees. We currently issue new shares or use treasury shares for stock-
based compensation award issues or exercises.
Restricted Stock Units
Service-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. Service-based restricted stock units vested during the year had an
intrinsic value of less than $1 million, $13 million and $5 million for the years ended December, 31, 2012,
2011 and 2010, respectively. Service-based shares are issued out of treasury shares.
We have performance-based awards that vest on the first day of March after a three-calendar-year
performance period. These awards vest according to the level of total shareholder return achieved
compared to a peer group over a three-year period with payouts ranging from 0-125%. Total shareholder
return is calculated by Bloomberg using annualized total return of a stock to an investor due to capital gain
appreciation plus reinvestment of all dividends. We issued 53,150 shares of performance-based restricted
stock units during 2012 at the target-level performance hurdle for the three-year performance period ending
December 31, 2011, as we achieved a three-year total shareholder return which exceeded four of our eight
peers. For the three-year performance period ended December 31, 2012, our total shareholder return
exceeded all peers in our peer group. We expect payout of these shares at the maximum level to occur on
March 1, 2013. Performance-based shares are issued out of treasury shares.
These performance-based 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. 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 of 2.87 for 2012 grants and 2.59-2.87 years for
2011 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 yields of 4.51% for 2012 grants and
4.68%-5.26% for 2011 grants were used.
• Risk-free rates are equal to the yield, as of the measurement date, of the zero-coupon U.S. Treasury bill
that is commensurate with the performance period. Risk-free rates used were 0.40% for 2012 grants
and 0.65%-1.25% for 2011 grants.
Cincinnati Financial Corporation – 2012 10-K - 136
This is a summary of restricted stock unit and performance-based share information, assuming a target
payout for performance-based shares, for the year 2012:
(Shares in thousands)
Nonvested at January 1, 2012
Granted
Vested
Forfeited or canceled
Nonvested at December 31, 2012
Service-based
shares
563 $
403
(7)
(29)
930
Weighted-
average grant
date fair value
26.05
31.14
27.84
27.96
28.18
Performance-based
shares
156 $
110
(53)
(4)
209
Weighted-
average grant
date fair value
25.86
34.89
22.88
30.98
31.26
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
• Life insurance
•
On January 1, 2012, we retrospectively adopted ASU 2010-26, Accounting for Costs Associated with
Acquiring or Renewing Insurance Contracts. All prior years’ information has been restated.
We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary,
CFC Investment Company.
Revenues come primarily from unaffiliated customers:
• All four insurance segments record revenues from insurance premiums earned. Life insurance segment
Investment operations
revenues also include separate account investment management fees.
• Fee revenues for the commercial and personal insurance segments primarily represent installment fees.
• Our investment operations’ revenues consist of pretax net investment income and realized investment
gains and losses.
• Other revenues are primarily finance income.
Income or loss before income taxes for each segment is reported based on the nature of that business
area’s operations:
•
Income before income taxes for the insurance segments is defined as underwriting profit or loss.
o For commercial lines, personal lines and excess and surplus lines insurance segments, we
calculate underwriting profit or loss as premiums earned and fee revenue minus loss and loss
expenses and underwriting expenses incurred.
o For the life insurance segment, we calculate underwriting profit or loss as 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 – 2012 10-K - 137
This table summarizes segment information:
(In millions)
Years ended December 31,
2011
2010
2012
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 premiums
Separate account investment management fees
Total life insurance
Investment operations
Investment income, net of expenses
Realized investment gains, net
Total investment revenue
Other
Total revenues
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 income before income taxes
Identifiable assets:
Property casualty insurance
Life insurance
Investment operations
Other
Total
$
$
$
$
$
$
767 $
545
426
344
151
111
39
2,383
4
2,387
404
353
111
868
2
870
93
178
1
179
531
42
573
711 $
497
394
318
138
103
36
2,197
3
2,200
368
294
100
762
1
763
70
165
2
167
525
70
595
693
489
384
311
149
95
33
2,154
2
2,156
337
289
95
721
2
723
49
158
1
159
518
159
677
9
4,111 $
8
3,803 $
8
3,772
181 $
(43)
(1)
(3)
491
(59)
566 $
(102) $
(182)
6
(3)
514
(60)
173 $
14
(55)
(8)
6
598
(57)
498
December 31,
2012
December 31,
2011
2,395 $
1,201
12,599
353
16,548 $
2,272
1,237
11,883
243
15,635
Cincinnati Financial Corporation – 2012 10-K - 138
QUARTERLY SUPPLEMENTARY DATA
19.
This table includes unaudited quarterly financial information for the years ended December 31, 2012
and 2011:
(Dollars in millions except per share data)
2012
Revenues *
Income before income taxes
Net income
Net income per common share—basic
Net income per common share—diluted
2011
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
$
$
986 $
112
86
0.53
0.53
929 $
75
61
0.38
0.38
1,020 $
29
32
0.20
0.20
975 $
(99)
(50)
(0.31)
(0.31)
1,035 $
152
111
0.69
0.68
944 $
11
19
0.12
0.12
1,070 $
273
192
1.18
1.17
955 $
186
134
0.82
0.82
4,111
566
421
2.59
2.57
3,803
173
164
1.01
1.01
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 79.
Cincinnati Financial Corporation – 2012 10-K - 139
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, 2012. 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, 2012,
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 106 and 107.
Item 9B. Other Information
None
Cincinnati Financial Corporation – 2012 10-K - 140
Part III
a)
Our Proxy Statement will be filed with the SEC no later than March 18, 2013, in preparation for the
2013 Annual Meeting of Shareholders scheduled for April 27, 2013. 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
The following sections of our Proxy Statement for our Annual Meeting of Shareholders to be
held April 27, 2013, are incorporated herein by reference: “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.
Set forth below is information concerning about the company’s executive officers who are not
also directors of the company, as of February 27, 2013.
b)
c)
Name and Age as of
February 27, 2013
Teresa C. Cracas (47)
Donald J. Doyle, Jr., CPCU,
AIM (46)
Martin F. Hollenbeck, CFA,
CPCU (53)
John S. Kellington (51)
Lisa A. Love (53)
Eric N. Mathews, CPCU,
AIAF (57)
Primary Title(s) and Business Responsibilities
Since February 2008
Executive
Officer Since
Chief risk officer and senior vice president of The Cincinnati
Insurance Company; until 2011, vice president and counsel.
Responsible for strategic planning and risk management,
including oversight of modeling for financial analysis and
property casualty reserving and pricing.
Senior vice president of The Cincinnati Insurance Company.
Responsible for excess and surplus lines underwriting
and operations.
President and chief operating officer of CFC Investment
Company, a 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; until 2009, vice
president. President from 2008 to 2009 of CinFin Capital
Management Company, a former subsidiary. Responsible
for investment operations, including oversight of leasing and
financing services; also responsible until 2009 for operation
of asset management services.
Chief information officer and senior vice president of The
Cincinnati Insurance Company. Responsible for enterprise
strategic technology and oversight of all technology
activities. Until 2010, senior vice president of ACORD
Corporation, a nonprofit group that develops global
insurance standards.
Senior vice president, general counsel and corporate
secretary of Cincinnati Financial Corporation and The
Cincinnati Insurance Company. Until 2011, senior counsel of
The Cincinnati Insurance Company. Responsible for
corporate legal, governance and compliance activities,
including regulatory and consumer relations operations.
Principal accounting officer since 2008, and vice president,
assistant secretary and assistant treasurer of Cincinnati
Financial Corporation. Senior vice president of
The Cincinnati Insurance Company. Responsible for
corporate accounting, including SEC accounting.
Cincinnati Financial Corporation – 2012 10-K - 141
2011
2008
2008
2010
2011
2001
Name and Age as of
February 27, 2013
Primary Title(s) and Business Responsibilities
Since February 2008
Executive
Officer Since
Martin J. Mullen, CPCU (57)
David H. Popplewell, FALU,
LLIF (69)
Jacob F. Scherer, Jr. (60)
Michael J. Sewell (49)
Joan O. Shevchik, CPCU,
CLU (62)
Stephen M. Spray (46)
Charles P. Stoneburner II,
CPCU, AIM (60)
Timothy L. Timmel (64)
Chief claims officer and senior vice president of
The Cincinnati Insurance Company; vice president until
2008. Responsible for oversight of all 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.
Chief insurance officer since 2012 and executive vice
president of The Cincinnati Insurance Company; senior vice
president until 2008. Responsible for executive oversight of
property casualty insurance sales, marketing, underwriting,
related field services, relationships with independent agents
and reinsurance.
Chief financial officer and senior vice president since 2011
of Cincinnati Financial Corporation and The Cincinnati
Insurance Company. Treasurer since 2011 of Cincinnati
Financial Corporation. Until 2011, partner at Deloitte &
Touche LLP. Responsible for oversight of all accounting,
finance, financial reporting, purchasing, investor relations
and shareholder services.
Senior vice president of The Cincinnati Insurance Company.
Responsible for corporate communications, including media
relations and website content management.
Senior vice president of The Cincinnati Insurance Company;
vice president until 2012. Responsible for sales and
marketing, including management of field underwriters and
agency plant; responsible from 2010 to 2011 for target
markets and, prior to 2010, for excess and surplus lines
marketing and underwriting.
Senior vice president of The Cincinnati Insurance Company.
Responsible for commercial lines underwriting and
operations, including oversight of loss control, premium audit
and machinery and equipment insurance; responsible until
2008 for field claims operations.
Senior vice president of The Cincinnati Insurance Company.
Responsible for operations including oversight of
administrative services, corporate communications, data
entry, facilities maintenance and security, government
relations, human resources, learning and development, legal
litigation and printing; also responsible until 2008 for
oversight of field claims operations.
2008
1997
1995
2011
2003
2012
2008
1997
Cincinnati Financial Corporation – 2012 10-K - 142
Item 11. Executive Compensation
The “Compensation of Named Executive Officers and Directors,” section of our Proxy Statement for our
Annual Meeting of Shareholders to be held April 27, 2013, 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
a)
b)
The “Security Ownership of Principal Shareholders and Management” section of our Proxy
Statement for our Annual Meeting of Shareholders to be held April 27, 2013, 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 34. Additional information on share-based
compensation under our equity compensation plans is available in Item 8, Note 17 of the
Consolidated Financial Statements, Page 135.
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 27, 2013, are incorporated herein by reference: “Governance of Your Company — Director
Independence” and “Governance of Your Company — Certain Relationships and Transactions.”
Item 14. Principal Accounting Fees and Services
The “Audit-Related Matters,” section of our Proxy Statement for our Annual Meeting of Shareholders to be
held April 27, 2013, 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,” and “Services Provided by the Independent Registered Public Accounting Firm,” is
incorporated herein by reference.
Part IV
Item 15. Exhibits, Financial Statement Schedules
a)
b)
c)
Financial Statements – information contained in Part II, Item 8, of this report, Page 108 to
Page 111
Exhibits – see Index of Exhibits, Page 155
Financial Statement Schedules
Schedule I – Summary of Investments -- Other Than Investments in Related Parties, Page 144
Schedule II – Condensed Financial Statements of Parent Company, Page 146
Schedule III – Supplementary Insurance Information, Page 149
Schedule IV – Reinsurance, Page 151
Schedule V – Valuation and Qualifying Accounts, Page 152
Schedule VI – Supplementary Information Concerning Property Casualty Insurance Operations,
Page 153
Cincinnati Financial Corporation – 2012 10-K - 143
Summary of Investments - Other Than Investments in Related Parties
SCHEDULE I
(In millions)
Type of investment
Fixed maturities:
States, municipalities and political subdivisions:
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Specialty Underwriters Insurance Company
CSU Producer Resources Inc.
The Cincinnati Life Insurance Company
Total
Convertibles and bonds with warrants attached:
The Cincinnati Insurance Company
Cincinnati Financial Corporation
Total
United States government:
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Life Insurance Company
Total
Government-sponsored enterprises:
The Cincinnati Life Insurance Company
Total
Foreign government:
The Cincinnati Insurance Company
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 Producer Resources Inc.
Cincinnati Financial Corporation
Total
Total fixed maturities
Cost or
amortized cost
At December 31, 2012
Fair
value
Balance sheet
$
2,528 $
123
36
152
1
200
3,040
27
4
31
1
1
1
4
7
164
164
3
3
2,717 $
133
39
169
1
230
3,289
27
4
31
1
2
1
4
8
164
164
3
3
2,356
96
22
131
2,285
6
81
4,977
8,222 $
2,664
107
24
143
2,555
6
99
5,598
9,093 $
$
2,717
133
39
169
1
230
3,289
27
4
31
1
2
1
4
8
164
164
3
3
2,664
107
24
143
2,555
6
99
5,598
9,093
Cincinnati Financial Corporation – 2012 10-K - 144
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
CSU Producer Resources Inc.
Cincinnati Financial Corporation
Total
Nonredeemable preferred stocks:
The Cincinnati Insurance Company
The Cincinnati Life Insurance Company
Cincinnati Financial Corporation
Total
Total equity securities
Other invested assets:
Policy loans:
The Cincinnati Life Insurance Company
Limited partnerships:
Cincinnati Financial Corporation
Total other invested assets
Total investments
Cost or
amortized cost
At December 31, 2012
Fair
value
Balance sheet
$
$
$
$
1,432 $
47
13
43
3
4
728
2,270
91
7
1
99
2,369 $
2,136 $
68
16
52
4
5
957
3,238
121
13
1
135
3,373 $
37
31
68
10,659
—
—
—
—
$
$
2,136
68
16
52
4
5
957
3,238
121
13
1
135
3,373
37
31
68
12,534
Cincinnati Financial Corporation – 2012 10-K - 145
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
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:
2012—$100; 2011—$94)
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,
2012
2011
$
$
$
$
103 $
958
31
90
5,103
3
153
14
35
75
6,565 $
66 $
63
790
193
1,112
394
1,134
4,021
1,129
(1,225)
5,453
6,565 $
225
806
29
20
4,776
4
158
-
13
65
6,096
65
40
790
168
1,063
393
1,096
3,863
901
(1,220)
5,033
6,096
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 – 2012 10-K - 146
41
17
14
72
52
24
76
(4)
(7)
3
372
375
45
338
17
(176)
4
(8)
220
3
223
78
145
520
SCHEDULE II (CONTINUED)
Cincinnati Financial Corporation (parent company only)
Condensed Statements of Comprehensive 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 (LOSS) BEFORE INCOME TAXES AND EARNINGS OF SUBSIDIARIES
BENEFIT FOR INCOME TAXES
NET INCOME BEFORE EARNINGS OF SUBSIDIARIES
Increase in equity of subsidiaries
Years ended December 31,
2011
2010
2012
$
$
42
34
15
91
53
27
80
11
(4)
15
406
$
41
15
14
70
53
25
78
(8)
(9)
1
163
NET INCOME
OTHER COMPREHENSIVE INCOME, BEFORE TAX
Unrealized gains on investments available-for-sale
Unrealized gains on investments held by subsidiaries
Reclassification adjustment for (gains) losses included in net income
Reclassification adjustment for (gains) included in net income on subsidiaries
Unrealized gains on other
Unrealized losses on other subsidiaries
Unrealized gains on investments available-for-sale, investments held by subsidiaries and other
Amortization of pension actuarial (loss) gain and prior service cost
Other comprehensive income before tax
Income taxes on above
Other comprehensive income, net of tax
COMPREHENSIVE INCOME
$
421
$
164
$
67
361
(34)
(8)
5
(26)
365
(13)
352
124
228
649
$
59
250
(15)
(55)
1
(12)
228
(25)
203
71
132
296
$
$
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 – 2012 10-K - 147
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, net
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 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
Investment in buildings and equipment, net
Change in other invested assets, net
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable
Payment of cash dividends to shareholders
Purchase of treasury shares
Proceeds from stock options exercised
Net transfers to subsidiaries
Other
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,
2011
2010
2012
$
421 $
164
$
7
(34)
300
(406)
1
(24)
18
(2)
7
288
114
13
111
(1)
(212)
(1)
4
28
-
(256)
-
9
(2)
3
(246)
70
20
90 $
7
(15)
180
(163)
1
25
(10)
2
(23)
168
5
13
101
-
(78)
(1)
5
45
55
(255)
(32)
(4)
2
3
(231)
(18)
38
20
$
$
375
7
(17)
220
(372)
-
3
2
-
(12)
206
32
21
85
(27)
(92)
-
-
19
-
(252)
(10)
(2)
21
2
(241)
(16)
54
38
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 – 2012 10-K - 148
Cincinnati Financial Corporation and Subsidiaries
Supplementary Insurance Information
Years ended December 31,
2011
2010
2012
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
Total
$
$
$
$
$
$
$
$
$
$
235 $
93
9
337
133
470 $
3,645 $
398
126
4,169
2,341
6,510 $
1,246 $
490
54
1,790
2
1,792 $
-
-
-
-
15
15
2,383
868
93
3,344
178
3,522
$
$
$
$
204
92
7
303
174
477
3,780
419
81
4,280
2,257
6,537
1,149
440
42
1,631
2
1,633
$
$
$
$
$
$
$
-
-
-
-
16
16
2,197
762
70
3,029
165
3,194
$
$
$
204
76
6
286
172
458
3,728
353
56
4,137
2,073
6,210
1,116
401
34
1,551
2
1,553
-
-
-
-
24
24
2,154
721
49
2,924
158
3,082
Cincinnati Financial Corporation – 2012 10-K - 149
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)
Underwriting, acquisition 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
Total
Years ended December 31,
2011
2010
2012
$
$
$
$
$
$
$
$
$
$
$
-
-
-
351
137
488
1,420
652
65
2,137
185
-
2,322
462
183
17
662
45
707
324
78
12
414
34
448
2,459
918
105
3,482
3
3,485
$
$
$
$
$
$
$
$
$
$
-
-
-
350
134
484
1,570
723
42
2,335
189
-
2,524
441
144
13
598
33
631
291
78
9
378
30
408
2,218
801
79
3,098
3
3,101
$
$
$
$
$
$
$
$
$
-
-
-
348
129
477
1,437
537
41
2,015
170
(5)
2,180
424
139
9
572
36
608
281
102
7
390
26
416
2,155
750
58
2,963
3
2,966
Notes to Schedule III:
(1) The sum of gross future policy benefits, losses, claims and expense losses, gross unearned premium
and other policy claims and benefits payable is equal to the sum of Loss and loss expense reserves, Life
policy reserves and investment contract reserves and Unearned premiums reported in the company’s
consolidated balance sheets, Page 108.
(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 – 2012 10-K - 150
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
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
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,
2011
2010
2012
$
$
$
$
$
$
$
$
$
$
$
$
81,467
2,524
897
99
3,520
235
3,755
36,340
149
30
6
185
57
242
-
8
1
-
9
-
9
45,126
2,383
868
93
3,344
178
3,522
$
$
$
$
$
$
$
$
$
$
$
$
77,691
2,348
812
76
3,236
220
3,456
35,690
162
51
6
219
55
274
1
11
1
-
12
-
12
42,001
2,197
762
70
3,029
165
3,194
$
$
$
$
$
$
$
$
$
$
$
$
74,123
2,281
746
53
3,080
211
3,291
35,016
136
26
4
166
53
219
1
9
1
-
10
-
10
39,108
2,154
721
49
2,924
158
3,082
0.0 %
0.3 %
0.1
0.0
0.3
0.0
0.3
0.0 %
0.5 %
0.2
0.0
0.4
0.0
0.4
0.0 %
0.4 %
0.2
0.0
0.4
0.0
0.4
Cincinnati Financial Corporation – 2012 10-K - 151
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
2012
At December 31,
2011
2010
$
$
2 $
1
(1)
2 $
3
2
(3)
2
$
$
3
2
(2)
3
Cincinnati Financial Corporation – 2012 10-K - 152
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,
2011
2010
2012
235 $
93
9
337 $
3,645 $
398
126
4,169 $
204
92
7
303
3,780
419
81
4,280
$
$
$
$
-
$
$
-
1,246 $
490
54
1,790 $
$
2,383
868
93
3,344 $
$
-
-
-
351 $
1,712 $
751
70
2,533 $
(292) $
(99)
(5)
(396) $
461 $
183
17
661 $
1,546 $
659
24
2,229 $
2,459 $
918
105
3,482 $
1,149
440
42
1,631
2,197
762
70
3,029
$
$
$
$
$
-
-
-
350
1,804
765
51
2,620
(234)
(42)
(9)
(285)
441
144
13
598
1,545
676
20
2,241
2,218
801
79
3,098
$
$
$
$
$
$
$
$
$
$
$
204
76
6
286
3,728
353
56
4,137
-
1,116
401
34
1,551
2,154
721
49
2,924
-
-
-
348
1,706
571
42
2,319
(269)
(34)
(1)
(304)
423
139
9
571
1,330
526
9
1,865
2,155
750
58
2,963
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 – 2012 10-K - 153
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Cincinnati Financial Corporation
/S/ Eric N. Mathews
By:
Title:
Date:
Eric N. Mathews, CPCU, AIAF
Principal Accounting Officer, Vice President, Assistant Secretary and Assistant Treasurer
February 27, 2013
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
Title
Date
/S/ Kenneth W. Stecher
Chairman of the Board
February 27, 2013
Kenneth W. Stecher
/S/ Steven J. Johnston
Steven J. Johnston
/S/ Michael J. Sewell
Michael J. Sewell
/S/ William F. Bahl
William F. Bahl
/S/ Gregory T. Bier
Gregory T. Bier
/S/ Dirk J. Debbink
Dirk J. Debbink
/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/ John J. Schiff, Jr.
John J. Schiff, Jr.
/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
President, Chief Executive Officer
and Director
Chief Financial Officer, Senior Vice
President and Treasurer
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Cincinnati Financial Corporation – 2012 10-K - 154
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
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
Exhibit Description
Amended and Restated Articles of Incorporation of Cincinnati Financial Corporation (incorporated by
reference to the company’s 2010 Annual Report on Form 10-K dated February 25, 2011, Exhibit 3.1)
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)
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)
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)
Cincinnati Financial Corporation 2012 Stock Compensation Plan (incorporated by reference to the
company’s definitive Proxy Statement dated March 16, 2012)
Amended and Restated Cincinnati Financial Corporation Supplemental Retirement Plan dated
January 1, 2009
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)
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)
Amended and Restated Cincinnati Financial Corporation Top Hat Savings Plan dated January 1, 2011
Letter Agreement by and among Cincinnati Financial Corporation , CFC Investment Company and PNC
Bank, National Association, dated August 25, 2011 renewing $75 million committed line of credit
pursuant to the Credit Agreement referenced in Exhibit 10.39 above (incorporated by reference to
Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated August 25, 2011)
Cincinnati Financial Corporation Executive Deferred Compensation Agreement by and between the
Cincinnati Financial Corporation and Michael J. Sewell, dated as of October 25, 2011 (incorporated by
reference to Exhibit 10.2 filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2011)
Cincinnati Financial Corporation – 2012 10-K - 155
Exhibit No.
10.17
10.18
11
14
21
23
31A
31B
32
Exhibit Description
Credit Agreement by and among Cincinnati Financial Corporation, CFC Investment Company, PNC
Bank, N.A. as Administrative Agent, PNC Capital Markets, LLC, as Sole Bookrunner and Joint Lead
Arranger, Fifth Third Bank, N.A., as Joint Lead Arranger and Syndication Agent, The Huntington
National Bank and U.S. Bank, N.A., as Documentation Agents, dated May 31, 2012 (incorporated by
reference to the company’s Current Report on Form 8-K dated May 31, 2012, Exhibit 10.1)
Agreement by and between The Cincinnati Insurance Company and its affiliated and subsidiary
companies and Thomas A. Joseph dated October 19, 2012 (incorporated by reference Exhibit 10.1 filed
with the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012)
Statement re: Computation of per share earnings for the years ended December 31, 2012, 2011, and
2010 contained in Part II, Item 8, Note 12 to the Consolidated Financial Statements
Cincinnati Financial Corporation Code of Ethics for Senior Financial Officers (incorporated by reference
to the company’s definitive Proxy Statement dated 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 – 2012 10-K - 156
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements of our report dated
February 27, 2013, relating to the consolidated financial statements and financial statement schedules of
Cincinnati Financial Corporation and subsidiaries and the effectiveness of internal control over financial
reporting appearing in this Annual Report on Form 10-K of Cincinnati Financial Corporation for the year
ended December 31, 2012 (which report expresses an unqualified opinion and includes an explanatory
paragraph concerning a change in accounting for costs associated with acquiring or renewing insurance
contracts in 2012).
No. 333-24817 (on Form S-8)
No. 333-103509 (on Form S-8)
No. 333-103511 (on Form S-8)
No. 333-126714 (on Form S-8), as amended
No. 333-155373 (on Form S-3), as amended
No. 333-178075 (on Form S-8)
No. 333-178080 (on Form S-3), as amended
/S/ Deloitte & Touche LLP
Cincinnati, Ohio
February 27, 2013
Cincinnati Financial Corporation – 2012 10-K - 157
EXHIBIT 31A
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES OXLEY ACT OF 2002
I, Steven J. Johnston, certify that:
1.
2.
3.
4.
5.
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.
a)
b)
c)
d)
a)
b)
Date: February 27, 2013
/S/ Steven J. Johnston
Steven J. Johnston, FCAS, MAAA, CFA, CERA
President and Chief Executive Officer
Cincinnati Financial Corporation – 2012 10-K - 158
EXHIBIT 31B
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES OXLEY ACT OF 2002
I, Michael J. Sewell, certify that:
1.
2.
3.
4.
5.
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.
a)
b)
c)
d)
a)
b)
Date: February 27, 2013
/S/ Michael J. Sewell
Michael J. Sewell, CPA
Chief Financial Officer, Senior Vice President and Treasurer
Cincinnati Financial Corporation – 2012 10-K - 159
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.
Steven J. Johnston, the chief executive officer, and Michael J. Sewell, 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 27, 2013
/S/ Steven J. Johnston
Steven J. Johnston, FCAS, MAAA, CFA, CERA
President and Chief Executive Officer
/S/ Michael J. Sewell
Michael J. Sewell, CPA
Chief Financial Officer, Senior Vice President and Treasurer
Cincinnati Financial Corporation – 2012 10-K - 160
Cincinnati Financial Corporation Directors and Officers
(as of February 27, 2013)
Directors
William F. Bahl, CFA, CIC
Chairman of the Board
Bahl & Gaynor Investment Counsel Inc.
(Independent registered investment adviser)
Director** since 1995 (1)(2)(3)(4)(5*)
Gregory T. Bier, CPA (Ret.)
Managing Partner (Ret.), Cincinnati Office
Deloitte & Touche LLP
(Independent registered public accounting firm)
Director since 2006 (1)(2)(4)
Linda W. Clement-Holmes
Senior Vice President
Global Business Services –
Procter & Gamble Company
(Consumer products)
Director since 2010 (1)
Dirk J. Debbink
Chairman and Chief Executive Officer
MSI General Corporation
(Design/build construction firm)
Director since 2012 (1)
Steven J. Johnston, FCAS, MAAA, CFA, CERA
President and Chief Executive Officer
Cincinnati Financial Corporation
Director since 2011 (3)(4)
Kenneth C. Lichtendahl
Director of Development and Sales
Heliosphere Designs LLC
(Solar product marketing)
Director since 1988 (1*)(5)
W. Rodney McMullen
President and Chief Operating Officer
The Kroger Co.
(Retail grocery chain)
Director since 2001 (2*)(3)(4)
Gretchen W. Price
Executive Vice President, Chief Financial and
Administrative Officer
Arbonne International LLC
(Beauty and nutritional products)
Director since 2002 (1)(2)(5)
Officers
Kenneth W. Stecher
Chairman of the Board
John J. Schiff, Jr., CPCU
John J. Schiff, Jr., CPCU
Chairman of the Executive Committee
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
Chairman of the Board
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
** Lead Director
W.F. Bahl
G.T. Bier
L.W. Clement-
Holmes
D.J. Debbink
S.J. Johnston
K.C. Lichtendahl
W.R. McMullen
G.W. Price
J.J. Schiff, Jr.
T.R. Schiff
D.S. Skidmore
K.W. Stecher
Martin F. Hollenbeck, CFA, CPCU
Chief Investment Officer, Senior Vice President,
Assistant Secretary and Assistant Treasurer
J. F. Steele, Jr.
L.R. Webb
E.A. Woods
Chairman of the Executive Committee
Lisa A. Love
Steven J. Johnston, FCAS, MAAA, CFA, CERA
President and Chief Executive Officer
Michael J. Sewell, CPA
Chief Financial Officer, Senior Vice President
and Treasurer
Senior Vice President, General Counsel and
Corporate Secretary
Eric N. Mathews, CPCU, AIAF
Principal Accounting Officer, Vice President,
Assistant Secretary and Assistant Treasurer
Directors Emeriti
James E. Benoski
Michael Brown
Jackson H. Randolph
Lawrence H. Rogers II
John Sawyer
Frank J. Schultheis
David B. Sharrock
John M. Shepherd
Alan R. Weiler, CPCU
William H. Zimmer
Shareholder Information
Common Stock Price and Dividend Data
Common shares are traded under the symbol CINF.
(Table source: Nasdaq Global Select Market)
Quarter:
High .........................................................................................
Low ..........................................................................................
Period-end close ....................................................................
Cash dividends declared .....................................................
___________________________________________________________________________________
2012
___________________________________________________________________________________
2011
1st
_________________
2nd
_________________
3rd
_________________
4th
_________________
1st
_________________
2nd
_________________
3rd
_________________
4th
_________________
$ 36.05 $ 38.12 $ 40.22 $ 40.96 $ 34.33 $ 33.55 $ 29.54 $ 30.79
36.96
30.06 33.06
24.66
34.51
39.16
38.07
30.46
0.4025 0.4025 0.4075 0.4075
0.4025
27.80 23.65
26.33
29.18
0.40 0.4025
31.43
32.79
0.40
36.50
37.87
Annual Meeting
Shareholders are invited to attend the Annual Meeting of Shareholders of Cincinnati Financial Corporation at 9:30 a.m. on
Saturday, April 27, 2013, 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
Shareholder Services
You can manage your registered shares of Cincinnati Financial Corporation online by setting up your My Shareholder Account.
Securely complete address changes, view your recent transactions or shareholder account statements and manage your participation
in the Shareholder Investment Plan on your schedule. Once enrolled in that plan, you can buy shares directly from the company by
making one-time purchases, setting up monthly withdrawals from your bank account or reinvesting your quarterly dividends. Get
started by going to Shareholder Information at www.cinfin.com/investors.
Shareholders who have stock certificates can choose to have the certificates canceled and the shares recorded electronically in
your account in direct registration (DRS). Simply mail your certificates and instructions to our Shareholder Services department,
P.O. Box 145496, Cincinnati, Ohio 45250. There is no charge for this service. To request other services, please email
Shareholder_inquiries@cinfin.com or call our toll-free shareholder line, 866-638-6443.
Contact Information
You may direct communications to Cincinnati Financial Corporation’s secretary, Lisa A. Love, senior vice president and general
counsel, for sharing 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.
Molly A. Grimm, CEP, FPC – Secretary, 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 Life Insurance Company
The Cincinnati Specialty Underwriters 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: 888-242-8811 or 513-870-2000
Fax: 513-870-2066
Email: cfc_corporate@cinfin.com
www.cinfin.com
Please recycle.