CINF 10-Q Quarterly Report June 30, 2017

CINCINNATI FINANCIAL CORP

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10-Q 1 cinf-2017630x10q.htm 10-Q Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2017.

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

For the transition period from _____________________ to _____________________.

Commission file number 0-4604

CINCINNATI FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



Ohio		31-0746871
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6200 S. Gilmore Road, Fairfield, Ohio		45014-5141
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (513) 870-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ 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 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

þ Large accelerated filer ¨ Accelerated filer ¨ Nonaccelerated filer ¨ Smaller reporting company

¨ Emerging growth company

(Do not check if a smaller reporting company)

¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

¨ Yes þ No

As of July 28, 2017, there were 163,982,422 shares of common stock outstanding.

CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2017

TABLE OF CONTENTS



Part I – Financial Information	3

Item 1. Financial Statements (unaudited)	3

Condensed Consolidated Balance Sheets	3

Condensed Consolidated Statements of Income	4

Condensed Consolidated Statements of Comprehensive Income	5

Condensed Consolidated Statements of Shareholders’ Equity	6

Condensed Consolidated Statements of Cash Flows	7

Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Safe Harbor Statement	31

Corporate Financial Highlights	33

Financial Results	43

Liquidity and Capital Resources	58

Other Matters	62

Item 3. Quantitative and Qualitative Disclosures about Market Risk	62

Item 4. Controls and Procedures	71

Part II – Other Information	71

Item 1. Legal Proceedings	71

Item 1A. Risk Factors	71

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	71

Item 6. Exhibits	72

Cincinnati Financial Corporation Second-Quarter 2017 10-Q

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Part I – Financial Information

Item 1. Financial Statements (unaudited)

Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Balance Sheets



(Dollars in millions except per share data)	June 30,			December 31,
	2017			2016
Assets
Investments
Fixed maturities, at fair value (amortized cost: 2017—$10,106; 2016—$9,799)	$	10,502		$	10,085
Equity securities, at fair value (cost: 2017—$3,218; 2016—$2,995)	5,799			5,334
Other invested assets	93			81
Total investments	16,394			15,500
Cash and cash equivalents	606			777
Investment income receivable	130			134
Finance receivable	54			51
Premiums receivable	1,651			1,533
Reinsurance recoverable	532			545
Prepaid reinsurance premiums	48			62
Deferred policy acquisition costs	678			637
Land, building and equipment, net, for company use (accumulated depreciation: 2017—$245; 2016—$237)	184			183
Other assets	171			198
Separate accounts	790			766
Total assets	$	21,238		$	20,386

Liabilities
Insurance reserves
Loss and loss expense reserves	$	5,281		$	5,085
Life policy and investment contract reserves	2,702			2,671
Unearned premiums	2,461			2,307
Other liabilities	767			786
Deferred income tax	1,021			865
Note payable	17			20
Long-term debt and capital lease obligations	826			826
Separate accounts	790			766
Total liabilities	13,865			13,326

Commitments and contingent liabilities (Note 12)

Shareholders' Equity
Common stock, par value—$2 per share; (authorized: 2017 and 2016—500 million shares; issued: 2017 and 2016—198.3 million shares)	397			397
Paid-in capital	1,249			1,252
Retained earnings	5,174			5,037
Accumulated other comprehensive income	1,925			1,693
Treasury stock at cost (2017—34.4 million shares and 2016—33.9 million shares)	(1,372		)	(1,319		)
Total shareholders' equity	7,373			7,060
Total liabilities and shareholders' equity	$	21,238		$	20,386

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

Cincinnati Financial Corporation Second-Quarter 2017 10-Q

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Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Income



(Dollars in millions except per share data)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017		2016
Revenues
Earned premiums	$	1,241		$	1,173		$	2,449	$	2,327
Investment income, net of expenses	151			149			300		294
Realized investment gains and losses, net	(11		)	44			149		105
Fee revenues	4			3			9		6
Other revenues	1			2			2		3
Total revenues	1,386			1,371			2,909		2,735
Benefits and Expenses
Insurance losses and contract holders' benefits	854			821			1,707		1,545
Underwriting, acquisition and insurance expenses	387			366			764		726
Interest expense	13			13			26		26
Other operating expenses	4			5			8		7
Total benefits and expenses	1,258			1,205			2,505		2,304
Income Before Income Taxes	128			166			404		431
Provision (Benefit) for Income Taxes
Current	31			48			71		113
Deferred	(3		)	(5		)	32		7
Total provision for income taxes	28			43			103		120
Net Income	$	100		$	123		$	301	$	311
Per Common Share
Net income—basic	$	0.61		$	0.75		$	1.83	$	1.89
Net income—diluted	0.60			0.74			1.81		1.87

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

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Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income



(Dollars in millions)	Three months ended June 30,					Six months ended June 30,
	2017		2016			2017		2016
Net Income	$	100	$	123		$	301	$	311
Other Comprehensive Income
Change in unrealized gains and losses on investments, net of tax of $77, $103, $123 and $203, respectively	144		186			229		376
Amortization of pension actuarial gains and losses and prior service cost, net of tax of $0, $0, $0 and $1, respectively	—		1			1		1
Change in life deferred acquisition costs, life policy reserves and other, net of tax of $0, $(3), $1 and $(4), respectively	1		(4		)	2		(7		)
Other comprehensive income	145		183			232		370
Comprehensive Income	$	245	$	306		$	533	$	681

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

Cincinnati Financial Corporation Second-Quarter 2017 10-Q

Page 5

Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholders' Equity



(Dollars in millions)	Six months ended June 30,
	2017			2016
Common Stock
Beginning of year	$	397		$	397
Share-based awards	—			—
End of period	397			397

Paid-In Capital
Beginning of year	1,252			1,232
Share-based awards	(18		)	(10		)
Share-based compensation	14			13
Other	1			2
End of period	1,249			1,237

Retained Earnings
Beginning of year	5,037			4,762
Net income	301			311
Dividends declared	(164		)	(158		)
End of period	5,174			4,915

Accumulated Other Comprehensive Income
Beginning of year	1,693			1,344
Other comprehensive income	232			370
End of period	1,925			1,714

Treasury Stock
Beginning of year	(1,319		)	(1,308		)
Share-based awards	19			23
Shares acquired - share repurchase authorization	(70		)	(2		)
Shares acquired - share-based compensation plans	(4		)	(7		)
Other	2			2
End of period	(1,372		)	(1,292		)

Total Shareholders' Equity	$	7,373		$	6,971

(In millions)
Common Stock - Shares Outstanding
Beginning of year	164.4			163.9
Share-based awards	0.6			0.7
Shares acquired - share repurchase authorization	(1.0		)	0.0
Shares acquired - share-based compensation plans	(0.1		)	(0.1		)
End of period	163.9			164.5

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

Cincinnati Financial Corporation Second-Quarter 2017 10-Q

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Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows



(Dollars in millions)	Six months ended June 30,
	2017			2016
Cash Flows From Operating Activities
Net income	$	301		$	311
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	27			24
Realized investment gains, net	(149		)	(105		)
Share-based compensation	14			13
Interest credited to contract holders'	24			25
Deferred income tax expense	32			7
Changes in:
Investment income receivable	4			3
Premiums and reinsurance receivable	(91		)	(132		)
Deferred policy acquisition costs	(45		)	(26		)
Other assets	(37		)	(39		)
Loss and loss expense reserves	196			252
Life policy reserves	50			50
Unearned premiums	154			148
Other liabilities	(82		)	(33		)
Current income tax receivable/payable	47			1
Net cash provided by operating activities	445			499
Cash Flows From Investing Activities
Sale of fixed maturities	12			15
Call or maturity of fixed maturities	540			820
Sale of equity securities	288			208
Purchase of fixed maturities	(802		)	(975		)
Purchase of equity securities	(352		)	(360		)
Investment in finance receivables	(14		)	(10		)
Collection of finance receivables	11			15
Investment in buildings and equipment, net	(9		)	(7		)
Change in other invested assets, net	(7		)	(13		)
Net cash used in investing activities	(333		)	(307		)
Cash Flows From Financing Activities
Payment of cash dividends to shareholders	(158		)	(151		)
Shares acquired - share repurchase authorization	(70		)	(2		)
Payments of note payable	(3		)	(7		)
Proceeds from stock options exercised	8			13
Contract holders' funds deposited	42			50
Contract holders' funds withdrawn	(83		)	(77		)
Excess tax benefits on share-based compensation	—			2
Other	(19		)	(17		)
Net cash used in financing activities	(283		)	(189		)
Net change in cash and cash equivalents	(171		)	3
Cash and cash equivalents at beginning of year	777			544
Cash and cash equivalents at end of period	$	606		$	547
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	26		$	26
Income taxes paid	23			110
Noncash Activities
Conversion of securities	$	5		$	3
Equipment acquired under capital lease obligations	6			12
Cashless exercise of stock options	4			7
Other assets and other liabilities	70			—

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 — Accounting Policies

The condensed consolidated financial statements include the accounts of Cincinnati Financial Corporation and its consolidated subsidiaries, each of which is wholly owned. These statements are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted.

Our June 30, 2017 , condensed consolidated financial statements are unaudited. Certain financial information that is included in annual financial statements prepared in accordance with GAAP is not required for interim reporting and has been condensed or omitted. We believe that we have made all adjustments, consisting only of normal recurring accruals, that are necessary for fair presentation. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our 2016 Annual Report on Form 10-K. The results of operations for interim periods do not necessarily indicate results to be expected for the full year.

Adopted Accounting Updates

ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-07, Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. ASU 2016-07 eliminates the requirement to retroactively adjust an investment, results of operations, and retained earnings once an investment qualifies for use of the equity method. It requires the equity method investor to add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting without retroactive adjustment. The effective date of ASU 2016-07 was for interim and annual reporting periods beginning after December 15, 2016, and was applied prospectively. The company adopted this ASU effective January 1, 2017, and it did not have a material impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The effective date of ASU 2016-09 was for interim and annual reporting periods beginning after December 15, 2016. The recognition and classification of the excess tax benefit provisions were applied prospectively in the results of operations and statement of cash flows. This adoption resulted in excess tax benefits of $6 million , which reduced our current provision for income taxes in our results of operations for both the three and six months ended June 30, 2017, respectively. The statutory tax withholding classification, which are cash payments made to taxing authorities for shares withheld, were applied retrospectively and reclassified the statutory tax withholding requirements in the statement of cash flows from Other liabilities in operating activities to Other in financing activities. This statutory tax withholding reclassification resulted in $12 million and $9 million being included in financing activities for the six months ended June 30, 2017 and 2016, respectively. There were no cumulative effect adjustments upon adoption of this ASU.

Pending Accounting Updates

ASU 2014-09 Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers . ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.

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Insurance contracts do not fall within the scope of this ASU. The effective date of ASU 2014-09 is for interim and annual reporting periods beginning after December 15, 2017. 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.

ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. Our results of operations will be impacted as changes in fair value of equity securities will be reported in net income instead of reported in other comprehensive income. The effective date of ASU 2016-01 is for interim and annual reporting periods beginning after December 15, 2017 and will be applied prospectively. The ASU has not yet been adopted. Had we adopted this ASU on June 30, 2017, $1.677 billion of after-tax unrealized gains on equity securities would have been reclassified from accumulated other comprehensive income to retained earnings. The actual amount reclassified upon adoption will vary depending on the future changes in fair value of our equity portfolio.

ASU 2016-02, Leases (Topic 842)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main provision of ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The effective date of ASU 2016-02 is for interim and annual reporting periods beginning after December 15, 2018. The ASU has not yet been adopted. Management is currently evaluating the impact on our company’s consolidated financial position, cash flows and results of operations.

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

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

ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments

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

ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Postretirement Benefit Costs . ASU 2017-07 provides guidance on how to present the components of net periodic benefit costs in the income statement for pension plans and other post-retirement benefit plans. The effective date of ASU 2017-07 is for interim and annual reporting periods beginning after December 15, 2017. The ASU has not yet been adopted; however, it is not expected to have a material impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 amends guidance on the

Cincinnati Financial Corporation Second-Quarter 2017 10-Q

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amortization period of premiums on certain purchased callable debt securities. The amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment to beginning retained earnings. The effective date of ASU 2017-08 is for interim and annual reporting periods beginning after December 15, 2018. The ASU has not yet been adopted. Management is currently evaluating the impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting

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

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NOTE 2 – Investments

The following table provides cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value for our fixed-maturity and equity securities:



(Dollars in millions)	Cost or amortized cost
			Gross unrealized				Fair value
At June 30, 2017			gains		losses		Fair value
Fixed maturity securities:
Corporate	$	5,530	$	281	$	14	$	5,797
States, municipalities and political subdivisions	4,029		142		17		4,154
Commercial mortgage-backed	282		8		1		289
Government-sponsored enterprises	235		—		3		232
United States government	15		—		—		15
Foreign government	10		—		—		10
Convertibles and bonds with warrants attached	5		—		—		5
Subtotal	10,106		431		35		10,502
Equity securities:
Common equities	3,038		2,559		16		5,581
Nonredeemable preferred equities	180		38		—		218
Subtotal	3,218		2,597		16		5,799
Total	$	13,324	$	3,028	$	51	$	16,301
At December 31, 2016
Fixed maturity securities:
Corporate	$	5,555	$	252	$	26	$	5,781
States, municipalities and political subdivisions	3,770		100		42		3,828
Commercial mortgage-backed	282		7		2		287
Government-sponsored enterprises	167		—		3		164
United States government	10		—		—		10
Foreign government	10		—		—		10
Convertibles and bonds with warrants attached	5		—		—		5
Subtotal	9,799		359		73		10,085
Equity securities:
Common equities	2,812		2,320		9		5,123
Nonredeemable preferred equities	183		28		—		211
Subtotal	2,995		2,348		9		5,334
Total	$	12,794	$	2,707	$	82	$	15,419

The net unrealized investment gains in our fixed-maturity portfolio at June 30, 2017 , are primarily the result of the continued low interest rate environment that increased the fair value of our fixed-maturity portfolio. Our commercial mortgage-backed securities had an average rating of Aa1/AA at June 30, 2017 and December 31, 2016 . At June 30, 2017, the seven largest unrealized investment gains in our common stock portfolio are from Honeywell International Incorporated (NYSE:HON), JP Morgan Chase & Co. (NYSE:JPM), Hasbro Inc. (Nasdaq:HAS), Blackrock Inc. (Nasdaq: BLK), Apple Inc. (Nasdaq:AAPL), Johnson & Johnson (NYSE:JNJ) and Microsoft Corporation (Nasdaq: MSFT), which had a combined gross unrealized gain of $829 million . At June 30, 2017 , JP Morgan Chase & Co. was our largest single equity holding with a fair value of $206 million , which was 3.7 percent of our publicly traded common equities portfolio and 1.3 percent of the total investment portfolio.

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The table below provides fair values and gross unrealized losses by investment category and by the duration of the securities’ continuous unrealized loss positions:



(Dollars in millions)	Less than 12 months				12 months or more				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
At June 30, 2017	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Fixed maturity securities:
Corporate	$	290	$	8	$	136	$	6	$	426	$	14
States, municipalities and political subdivisions	665		17		2		—		667		17
Commercial mortgage-backed securities	53		1		3		—		56		1
Government-sponsored enterprises	190		3		—		—		190		3
United States government	7		—		—		—		7		—
Subtotal	1,205		29		141		6		1,346		35
Equity securities:
Common equities	354		16		—		—		354		16
Subtotal	354		16		—		—		354		16
Total	$	1,559	$	45	$	141	$	6	$	1,700	$	51
At December 31, 2016
Fixed maturity securities:
Corporate	$	733	$	15	$	189	$	11	$	922	$	26
States, municipalities and political subdivisions	989		42		—		—		989		42
Commercial mortgage-backed	89		2		2		—		91		2
Government-sponsored enterprises	155		3		—		—		155		3
United States government	6		—		—		—		6		—
Subtotal	1,972		62		191		11		2,163		73
Equity securities:
Common equities	103		9		—		—		103		9
Nonredeemable preferred equities	4		—		—		—		4		—
Subtotal	107		9		—		—		107		9
Total	$	2,079	$	71	$	191	$	11	$	2,270	$	82

Contractual maturity dates for fixed-maturity investments were:



(Dollars in millions)	Amortized cost		Fair value		% of fair value
At June 30, 2017	Amortized cost		Fair value		% of fair value
Maturity dates:
Due in one year or less	$	699	$	714	6.8	%
Due after one year through five years	2,690		2,830		26.9
Due after five years through ten years	3,822		3,970		37.8
Due after ten years	2,895		2,988		28.5
Total	$	10,106	$	10,502	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.

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The following table provides investment income, realized investment gains and losses, the change in unrealized investment gains and losses:



(Dollars in millions)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Investment income:
Interest	$	111		$	110		$	222		$	219
Dividends	42			41			81			78
Other	1			—			2			1
Total	154			151			305			298
Less investment expenses	3			2			5			4
Total	$	151		$	149		$	300		$	294

Realized investment gains and losses:
Fixed maturities:
Gross realized gains	$	3		$	4		$	13		$	7
Gross realized losses	—			—			—			(1		)
Other-than-temporary impairments	(6		)	—			(6		)	(2		)
Equity securities:
Gross realized gains	6			38			159			100
Gross realized losses	(10		)	—			(14		)	(1		)
Other-than-temporary impairments	(3		)	—			(3		)	—
Other	(1		)	2			—			2
Total	$	(11	)	$	44		$	149		$	105

Change in unrealized investment gains and losses:
Fixed maturities	$	76		$	178		$	110		$	294
Equity securities	145			111			242			285
Income tax (provision) benefit	(77		)	(103		)	(123		)	(203		)
Total	$	144		$	186		$	229		$	376

During the three and six months ended June 30, 2017 , there were five equity securities and one fixed-maturity security other-than-temporarily impaired. There were no credit losses on fixed-maturity securities for which a portion of other-than-temporary impairment (OTTI) has been recognized in other comprehensive income for the three and six months ended June 30, 2017 and 2016 .

At June 30, 2017 , 23 fixed-maturity investments with a total unrealized loss of $6 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investment had a fair value below 70 percent of amortized cost. At June 30, 2017 , no equity investment had been in an unrealized loss position for 12 months or more. There were no equity investments with a fair value below 70 percent of amortized cost. At December 31, 2016 , 32 fixed-maturity investments with a total unrealized loss of $11 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 security investments in an unrealized loss position for 12 months or more as of December 31, 2016 . There were no equity investments with a fair value below 70 percent of amortized cost at December 31, 2016.

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NOTE 3 – Fair Value Measurements

In accordance with accounting guidance for fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for the valuation technique used, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2016 , and ultimately management determines fair value. See our 2016 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 132, for information on characteristics and valuation techniques used in determining fair value.

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Fair Value Disclosures for Assets

The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at June 30, 2017 , and December 31, 2016 . We do not have any material liabilities carried at fair value. There were no transfers between Level 1 and Level 2.



(Dollars in millions)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At June 30, 2017			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
Corporate	$	—	$	5,796	$	1	$	5,797
States, municipalities and political subdivisions	—		4,149		5		4,154
Commercial mortgage-backed	—		289		—		289
Government-sponsored enterprises	—		232		—		232
United States government	15		—		—		15
Foreign government	—		10		—		10
Convertibles and bonds with warrants attached	—		5		—		5
Subtotal	15		10,481		6		10,502
Common equities, available for sale	5,581		—		—		5,581
Nonredeemable preferred equities, available for sale	—		218		—		218
Separate accounts taxable fixed maturities	—		770		—		770
Top Hat savings plan mutual funds and common equity (included in Other assets)	28		—		—		28
Total	$	5,624	$	11,469	$	6	$	17,099

At December 31, 2016
Fixed maturities, available for sale:
Corporate	$	—	$	5,703	$	78	$	5,781
States, municipalities and political subdivisions	—		3,828		—		3,828
Commercial mortgage-backed	—		287		—		287
Government-sponsored enterprises	—		164		—		164
United States government	10		—		—		10
Foreign government	—		10		—		10
Convertibles and bonds with warrants attached	—		5		—		5
Subtotal	10		9,997		78		10,085
Common equities, available for sale	5,123		—		—		5,123
Nonredeemable preferred equities, available for sale	—		211		—		211
Separate accounts taxable fixed maturities	—		750		—		750
Top Hat savings plan mutual funds and common equity (included in Other assets)	24		—		—		24
Total	$	5,157	$	10,958	$	78	$	16,193

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 June 30, 2017 . Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the condensed consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. Transfers out of Level 3 included situations where a broker quote was used without observable inputs or data that could be corroborated by our pricing vendors in the prior period and significant other observable inputs were identified in the current period. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.

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The following table provides the change in Level 3 assets for the three months ended June 30:



(Dollars in millions)	Asset fair value measurements using significant unobservable inputs (Level 3)
	Corporate fixed maturities			Taxable fixed maturities - separate accounts		States, municipalities and political subdivisions fixed maturities		Nonredeemable preferred equities			Total
Beginning balance, April 1, 2017	$	1		$	—	$	—	$	—		$	1
Total gains or losses (realized/unrealized):
Included in net income	—			—		—		—			—
Included in other comprehensive income	—			—		—		—			—
Purchases	—			—		—		—			—
Sales	—			—		—		—			—
Transfers into Level 3	—			—		5		—			5
Transfers out of Level 3	—			—		—		—			—
Ending balance, June 30, 2017	$	1		$	—	$	5	$	—		$	6

Beginning balance, April 1, 2016	$	51		$	1	$	—	$	2		$	54
Total gains or losses (realized/unrealized):
Included in net income	—			—		—		—			—
Included in other comprehensive income	—			—		—		—			—
Purchases	17			—		—		—			17
Sales	—			—		—		(2		)	(2		)
Transfers into Level 3	—			—		—		—			—
Transfers out of Level 3	(16		)	—		—		—			(16		)
Ending balance, June 30, 2016	$	52		$	1	$	—	$	—		$	53

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The following table provides the change in Level 3 assets for the six months ended June 30 :



(Dollars in millions)	Asset fair value measurements using significant unobservable inputs
		Corporate fixed maturities			Taxable fixed maturities - separate accounts		States, municipalities and political subdivisions fixed maturities		Nonredeemable preferred equities			Total
Beginning balance, January 1, 2017		$	78		$	—	$	—	$	—		$	78
Total gains or losses (realized/unrealized):
Included in net income		—			—		—		—			—
Included in other comprehensive income		—			—		—		—			—
Purchases		—			—		5		—			5
Sales		—			—		—		—			—
Transfers into Level 3		—			—		—		—			—
Transfers out of Level 3		(77		)	—		—		—			(77		)
Ending balance, June 30, 2017		$	1		$	—	$	5	$	—		$	6

Beginning balance, January 1, 2016		$	51		$	1	$	—	$	3		$	55
Total gains or losses (realized/unrealized):
Included in net income		—			—		—		—			—
Included in other comprehensive income		—			—		—		(1		)	(1		)
Purchases		22			—		—		—			22
Sales		—			—		—		(2		)	(2		)
Transfers into Level 3		—			—		—		—			—
Transfers out of Level 3		(21		)	—		—		—			(21		)
Ending balance, June 30, 2016		$	52		$	1	$	—	$	—		$	53

Additional disclosures for the Level 3 category are not material.

Fair Value Disclosures for Assets and Liabilities Not Carried at Fair Value

The disclosures below are presented to provide information about the effects of current market conditions on financial instruments that are not reported at fair value in our condensed consolidated financial statements.

This table summarizes the book value and principal amounts of our long-term debt:



(Dollars in millions)				Book value				Principal amount
Interest rate		Year of issue		June 30,		December 31,		June 30,		December 31,
Interest rate		Year of issue		2017		2016		2017		2016
6.900	%	1998	Senior debentures, due 2028	$	26	$	26	$	28	$	28
6.920	%	2005	Senior debentures, due 2028	391		391		391		391
6.125	%	2004	Senior notes, due 2034	370		370		374		374
			Total	$	787	$	787	$	793	$	793

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The following table shows fair values of our note payable and long-term debt:



(Dollars in millions)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At June 30, 2017			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Note payable	$	—	$	17	$	—	$	17
6.900% senior debentures, due 2028	—		34		—		34
6.920% senior debentures, due 2028	—		506		—		506
6.125% senior notes, due 2034	—		458		—		458
Total	$	—	$	1,015	$	—	$	1,015

At December 31, 2016
Note payable	$	—	$	20	$	—	$	20
6.900% senior debentures, due 2028	—		33		—		33
6.920% senior debentures, due 2028	—		488		—		488
6.125% senior notes, due 2034	—		435		—		435
Total	$	—	$	976	$	—	$	976

The following table shows the fair value of our life policy loans included in other invested assets:



(Dollars in millions)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At June 30, 2017			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Life policy loans	$	—	$	—	$	41	$	41

At December 31, 2016
Life policy loans	$	—	$	—	$	40	$	40

Outstanding principal and interest for these life policy loans totaled $31 million at June 30, 2017 and December 31, 2016 .

The following table shows fair values of our deferred annuities and structured settlements included in life policy and investment contract reserves:



(Dollars in millions)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At June 30, 2017			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Deferred annuities	$	—	$	—	$	846	$	846
Structured settlements	—		206		—		206
Total	$	—	$	206	$	846	$	1,052

At December 31, 2016
Deferred annuities	$	—	$	—	$	839	$	839
Structured settlements	—		206		—		206
Total	$	—	$	206	$	839	$	1,045

Recorded reserves for the deferred annuities were $851 million and $861 million at June 30, 2017 , and December 31, 2016, respectively. Recorded reserves for the structured settlements were $164 million and $170 million at June 30, 2017 , and December 31, 2016 , respectively.

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NOTE 4 – Property Casualty Loss and Loss Expenses

This table summarizes activity for our consolidated property casualty loss and loss expense reserves:



(Dollars in millions)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Gross loss and loss expense reserves, beginning of period	$	5,128		$	4,750		$	5,035		$	4,660
Less reinsurance recoverable	297			272			298			281
Net loss and loss expense reserves, beginning of period	4,831			4,478			4,737			4,379
Net incurred loss and loss expenses related to:
Current accident year	832			808			1,658			1,531
Prior accident years	(38		)	(49		)	(76		)	(111		)
Total incurred	794			759			1,582			1,420
Net paid loss and loss expenses related to:
Current accident year	373			328			558			474
Prior accident years	322			301			831			717
Total paid	695			629			1,389			1,191
Net loss and loss expense reserves, end of period	4,930			4,608			4,930			4,608
Plus reinsurance recoverable	283			310			283			310
Gross loss and loss expense reserves, end of period	$	5,213		$	4,918		$	5,213		$	4,918

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, claims, underwriting, loss prevention and accounting management. This committee 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 condensed consolidated balance sheets also included $68 million at June 30, 2017 , and

$52 million at June 30, 2016 , for certain life and health loss and loss expense reserves.

For the three months ended June 30, 2017, we experienced $38 million of favorable development on prior accident years, including $26 million of favorable development in commercial lines, $3 million of favorable development in personal lines and $9 million of favorable development in excess and surplus lines. This included $3 million from favorable development of catastrophe losses for the three months ended June 30, 2017 . For the three months ended June 30, 2017, we recognized favorable reserve development of $12 million for the workers' compensation line, $7 million for the commercial casualty line, $5 million for the commercial property line and $11 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. For the three months ended June 30, 2017, we recognized unfavorable reserve development of $9 million for the commercial auto line.

For the six months ended June 30, 2017 , we experienced $76 million of favorable development on prior accident years, including $37 million of favorable development in commercial lines, $13 million of favorable development in personal lines, $22 million of favorable development in excess and surplus lines and $4 million of favorable development in our reinsurance assumed operations. This included $14 million from favorable development of catastrophe losses for the six months ended June 30, 2017 . For the six months ended June 30, 2017, we recognized favorable reserve development of $31 million for the workers' compensation line, $15 million for the commercial property line and $19 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. For the six months ended June 30, 2017, we recognized unfavorable reserve development of $20 million for the commercial auto line and $8 million for the commercial casualty line. Commercial auto developed unfavorably due to higher loss cost effects in recent accident years,

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resulting in an increase of our reserve estimate for claims that have not yet been settled. The unfavorable reserve development for commercial casualty reflected higher than usual large loss activity.

For the three months ended June 30, 2016, we experienced $49 million of favorable development on prior accident years, including $58 million of favorable development in commercial lines, $10 million of adverse development in personal lines and $1 million of favorable development in excess and surplus lines. We recognized favorable reserve development during the three months ended June 30, 2016 , of $23 million for the workers' compensation line, $20 million for commercial casualty line, $15 million for the other commercial lines and $14 million for the commercial property line due to reduced uncertainty of prior accident year loss and loss adjustment expenses for these lines. Our personal auto line developed unfavorably by $14 million for the three months ended June 30, 2016, largely due to $8 million of adverse development for accident year 2015. Our commercial auto line developed unfavorably by $13 million for the three months ended June 30, 2016, due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled.

For the six months ended June 30, 2016 , we experienced $111 million of favorable development on prior accident years, including $87 million of favorable development in commercial lines, $8 million of favorable development in personal lines, $15 million of favorable development in excess and surplus lines, and $1 million of favorable development in our reinsurance assumed operations. This included $7 million from favorable development of catastrophe losses for the six months ended June 30, 2016 . We recognized favorable reserve development during the six months ended June 30, 2016 , of $35 million for the workers' compensation line, $23 million for the commercial casualty line, $22 million for the commercial property line and $28 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expenses for these lines. Our commercial auto line developed unfavorably by $21 million for the six months ended June 30, 2016 , due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled. Our personal auto line developed unfavorably by $6 million for the six months ended June 30, 2016 for accident years prior to 2015.

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NOTE 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 deferred annuity, universal life 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:



(Dollars in millions)	June 30, 2017		December 31, 2016
Life policy reserves:
Ordinary/traditional life	$	1,045	$	1,011
Other	46		45
Subtotal	1,091		1,056
Investment contract reserves:
Deferred annuities	851		861
Universal life	590		578
Structured settlements	164		170
Other	6		6
Subtotal	1,611		1,615
Total life policy and investment contract reserves	$	2,702	$	2,671

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NOTE 6 – Deferred Policy Acquisition Costs

Expenses directly related to successfully acquired 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. The table below shows the deferred policy acquisition costs and asset reconciliation.



(Dollars in millions)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Property casualty:
Deferred policy acquisition costs asset, beginning of period	$	428		$	397		$	408		$	388
Capitalized deferred policy acquisition costs	237			218			463			428
Amortized deferred policy acquisition costs	(217		)	(203		)	(423		)	(404		)
Deferred policy acquisition costs asset, end of period	$	448		$	412		$	448		$	412

Life:
Deferred policy acquisition costs asset, beginning of period	$	232		$	221		$	229		$	228
Capitalized deferred policy acquisition costs	12			12			25			24
Amortized deferred policy acquisition costs	(12		)	(11		)	(20		)	(22		)
Amortized shadow deferred policy acquisition costs	(2		)	(10		)	(4		)	(18		)
Deferred policy acquisition costs asset, end of period	$	230		$	212		$	230		$	212

Consolidated:
Deferred policy acquisition costs asset, beginning of period	$	660		$	618		$	637		$	616
Capitalized deferred policy acquisition costs	249			230			488			452
Amortized deferred policy acquisition costs	(229		)	(214		)	(443		)	(426		)
Amortized shadow deferred policy acquisition costs	(2		)	(10		)	(4		)	(18		)
Deferred policy acquisition costs asset, end of period	$	678		$	624		$	678		$	624

No premium deficiencies were recorded in the condensed consolidated statements of income, as the sum of the anticipated loss and loss expenses, policyholder dividends and unamortized deferred acquisition expenses did not exceed the related unearned premiums and anticipated investment income.

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NOTE 7 – Accumulated Other Comprehensive Income

Accumulated other comprehensive income (AOCI) includes changes in unrealized gains and losses on investments, changes in pension obligations and changes in life deferred acquisition costs, life policy reserves and other as follows:



(Dollars in millions)	Three months ended June 30,
	2017									2016
	Before tax			Income tax			Net			Before tax			Income tax			Net
Investments:
AOCI, beginning of period	$	2,756		$	954		$	1,802		$	2,384		$	822		$	1,562
OCI before realized gains recognized in net income	211			74			137			331			118			213
Realized gains and losses recognized in net income	10			3			7			(42		)	(15		)	(27		)
OCI	221			77			144			289			103			186
AOCI, end of period	$	2,977		$	1,031		$	1,946		$	2,673		$	925		$	1,748

Pension obligations:
AOCI, beginning of period	$	(25	)	$	(8	)	$	(17	)	$	(41	)	$	(13	)	$	(28	)
OCI excluding amortization recognized in net income	—			—			—			—			—			—
Amortization recognized in net income	—			—			—			1			—			1
OCI	—			—			—			1			—			1
AOCI, end of period	$	(25	)	$	(8	)	$	(17	)	$	(40	)	$	(13	)	$	(27	)

Life deferred acquisition costs, life policy reserves and other:
AOCI, beginning of period	$	(7	)	$	(2	)	$	(5	)	$	(3	)	$	—		$	(3	)
OCI before realized gains recognized in net income	—			(1		)	1			(5		)	(2		)	(3		)
Realized gains and losses recognized in net income	1			1			—			(2		)	(1		)	(1		)
OCI	1			—			1			(7		)	(3		)	(4		)
AOCI, end of period	$	(6	)	$	(2	)	$	(4	)	$	(10	)	$	(3	)	$	(7	)

Summary of AOCI:
AOCI, beginning of period	$	2,724		$	944		$	1,780		$	2,340		$	809		$	1,531
Investments OCI	221			77			144			289			103			186
Pension obligations OCI	—			—			—			1			—			1
Life deferred acquisition costs, life policy reserves and other OCI	1			—			1			(7		)	(3		)	(4		)
Total OCI	222			77			145			283			100			183
AOCI, end of period	$	2,946		$	1,021		$	1,925		$	2,623		$	909		$	1,714

Cincinnati Financial Corporation Second-Quarter 2017 10-Q

Page 23



(Dollars in millions)	Six months ended June 30,
	2017									2016
	Before tax			Income tax			Net			Before tax			Income tax			Net
Investments:
AOCI, beginning of period	$	2,625		$	908		$	1,717		$	2,094		$	722		$	1,372
OCI before realized gains recognized in net income	501			176			325			682			239			443
Realized gains recognized in net income	(149		)	(53		)	(96		)	(103		)	(36		)	(67		)
OCI	352			123			229			579			203			376
AOCI, end of period	$	2,977		$	1,031		$	1,946		$	2,673		$	925		$	1,748

Pension obligations:
AOCI, beginning of period	$	(26	)	$	(8	)	$	(18	)	$	(42	)	$	(14	)	$	(28	)
OCI excluding amortization recognized in net income	—			—			—			—			—			—
Amortization recognized in net income	1			—			1			2			1			1
OCI	1			—			1			2			1			1
AOCI, end of period	$	(25	)	$	(8	)	$	(17	)	$	(40	)	$	(13	)	$	(27	)

Life deferred acquisition costs, life policy reserves and other:
AOCI, beginning of period	$	(9	)	$	(3	)	$	(6	)	$	1		$	1		$	—
OCI before realized gains recognized in net income	3			1			2			(9		)	(3		)	(6		)
Realized gains recognized in net income	—			—			—			(2		)	(1		)	(1		)
OCI	3			1			2			(11		)	(4		)	(7		)
AOCI, end of period	$	(6	)	$	(2	)	$	(4	)	$	(10	)	$	(3	)	$	(7	)

Summary of AOCI:
AOCI, beginning of period	$	2,590		$	897		$	1,693		$	2,053		$	709		$	1,344
Investments OCI	352			123			229			579			203			376
Pension obligations OCI	1			—			1			2			1			1
Life deferred acquisition costs, life policy reserves and other OCI	3			1			2			(11		)	(4		)	(7		)
Total OCI	356			124			232			570			200			370
AOCI, end of period	$	2,946		$	1,021		$	1,925		$	2,623		$	909		$	1,714

Investments realized gains and life deferred acquisition costs, life policy reserves and other realized gains are recorded in the realized investment gains, net, line item in the condensed consolidated statements of income. Amortization on pension obligations is recorded in the insurance losses and contract holders' benefits and underwriting, acquisition and insurance expenses in the condensed consolidated statements of income.

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NOTE 8 – Reinsurance

Primary components of our property casualty reinsurance assumed operations include involuntary and voluntary assumed as well as contracts from our reinsurance assumed operations, known as Cincinnati Re. Primary components of our ceded reinsurance include a property per risk treaty, property excess treaty, casualty per occurrence treaty, casualty excess treaty, property catastrophe treaty and catastrophe bonds and retrocessions on our reinsurance assumed operations. 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.

The table below includes our net written consolidated property casualty insurance premiums on assumed and ceded business:



(Dollars in millions)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Direct written premiums	$	1,265		$	1,211		$	2,491		$	2,372
Assumed written premiums	42			42			75			63
Ceded written premiums	(36		)	(59		)	(64		)	(94		)
Net written premiums	$	1,271		$	1,194		$	2,502		$	2,341

Our condensed consolidated statements of income include earned consolidated property casualty insurance premiums on assumed and ceded business:



(Dollars in millions)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Direct earned premiums	$	1,189		$	1,137		$	2,352		$	2,256
Assumed earned premiums	33			16			60			31
Ceded earned premiums	(41		)	(39		)	(80		)	(77		)
Earned premiums	$	1,181		$	1,114		$	2,332		$	2,210

Our condensed consolidated statements of income include incurred consolidated property casualty insurance loss and loss expenses on assumed and ceded business:



(Dollars in millions)	Three months ended June 30,					Six months ended June 30,
	2017		2016			2017			2016
Direct incurred loss and loss expenses	$	770	$	792		$	1,558		$	1,440
Assumed incurred loss and loss expenses	20		11			35			21
Ceded incurred loss and loss expenses	4		(44		)	(11		)	(41		)
Incurred loss and loss expenses	$	794	$	759		$	1,582		$	1,420

Our life insurance company purchases reinsurance for protection of a portion of the risks that are written. Primary components of our life reinsurance program include individual mortality coverage, aggregate catastrophe and accidental death coverage in excess of certain deductibles.

Our condensed consolidated statements of income include earned life insurance premiums on ceded business:



(Dollars in millions)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Direct earned premiums	$	77		$	75		$	151		$	146
Ceded earned premiums	(17		)	(16		)	(34		)	(29		)
Earned premiums	$	60		$	59		$	117		$	117

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Our condensed consolidated statements of income include life insurance contract holders' benefits incurred on ceded business:



(Dollars in millions)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Direct contract holders' benefits incurred	$	87		$	80		$	163		$	156
Ceded contract holders' benefits incurred	(27		)	(18		)	(38		)	(31		)
Contract holders' benefits incurred	$	60		$	62		$	125		$	125

The ceded benefits incurred can vary depending on the type of life insurance policy held and the year the policy was issued.

NOTE 9 – Income Taxes

As of June 30, 2017 , and December 31, 2016 , we had no liability for unrecognized tax benefits.

The differences between the 35 percent statutory federal income tax rate and our effective income tax rate were as follows:



(Dollars in millions)	Three months ended June 30,										Six months ended June 30,
	2017					2016					2017					2016
Tax at statutory rate:	$	44		35.0	%	$	58		35.0	%	$	141		35.0	%	$	151		35.0	%
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds	(9		)	(7.0	)	(8		)	(4.8	)	(18		)	(4.5	)	(17		)	(3.9	)
Dividend received exclusion	(9		)	(7.0	)	(8		)	(4.8	)	(17		)	(4.2	)	(16		)	(3.7	)
Other	2			0.9		1			0.5		(3		)	(0.8	)	2			0.4
Provision for income taxes	$	28		21.9	%	$	43		25.9	%	$	103		25.5	%	$	120		27.8	%

The provision for federal income taxes is based upon filing a consolidated income tax return for the company and its subsidiaries.

Included in Other above is the adoption of ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , which decreased both the provision for income taxes and the effective income tax rate by an immaterial amount during the three months ended June 30, 2017 and $6 million and 1.5 percent , during the six months ended June 30, 2017.

As of June 30, 2017 , we had no operating or capital loss carry forwards.

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NOTE 10 – Net Income Per Common Share

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 per share data)	Three months ended June 30,				Six months ended June 30,
(In millions except per share data)	2017		2016		2017		2016
Numerator:
Net income—basic and diluted	$	100	$	123	$	301	$	311
Denominator:
Basic weighted-average common shares outstanding	164.3		164.5		164.4		164.4
Effect of share-based awards:
Stock options	1.0		1.1		1.1		1.1
Nonvested shares	0.7		0.9		0.7		0.8
Diluted weighted-average shares	166.0		166.5		166.2		166.3
Earnings per share:
Basic	$	0.61	$	0.75	$	1.83	$	1.89
Diluted	0.60		0.74		1.81		1.87
Number of anti-dilutive share-based awards	0.6		0.3		0.7		0.4

The sources of dilution of our common shares are certain equity-based awards. See our 2016 Annual Report on Form 10-K, Item 8, Note 17, Share-Based Associate Compensation Plans, Page 160, for information about equity-based awards. The above table shows the number of anti-dilutive share-based awards for the three and six months ended June 30, 2017 and 2016 . We did not include these share-based awards in the computation of net income per common share (diluted) because their exercise would have anti-dilutive effects.

NOTE 11 – Employee Retirement Benefits

The following summarizes the components of net periodic benefit cost for our qualified and supplemental pension plans:



(Dollars in millions)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Service cost	$	2		$	2		$	5		$	5
Interest cost	4			4			7			7
Expected return on plan assets	(5		)	(4		)	(10		)	(9		)
Amortization of actuarial loss and prior service cost	—			1			1			2
Net periodic benefit cost	$	1		$	3		$	3		$	5

See our 2016 Annual Report on Form 10-K, Item 8, Note 13, Employee Retirement Benefits, Page 155, for information on our retirement benefits. We made matching contributions totaling $3 million and $4 million to our 401(k) and Top Hat savings plans during the second quarter of 2017 and 2016 and contributions of $9 million and $8 million for the first half of 2017 and 2016, respectively.

We contributed $5 million to our qualified pension plan during the first six months of 2017.

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NOTE 12 – 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 or litigating first-party coverage claims. The company accounts for such activity through the establishment of unpaid loss and loss 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 databases 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 handling of insurance claims or writing unauthorized coverage or claims alleging discrimination by former or current 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 of losses for any other matters for which the risk of loss is not probable, but more than remote, is immaterial.

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NOTE 13 – Segment Information

We operate primarily in two industries, property casualty insurance and life insurance. Our chief operating decision maker regularly reviews our reporting segments to make decisions about allocating resources and assessing performance. Our reporting segments are:


•	Commercial lines insurance


•	Personal lines insurance


•	Excess and surplus lines insurance


•	Life insurance


•	Investments

We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company and Cincinnati Re, our reinsurance assumed operations. See our 2016 Annual Report on Form 10-K, Item 8, Note 18, Segment Information, Page 163, for a description of revenue, income or loss before income taxes and identifiable assets for each of the five segments.

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Page 29

Segment information is summarized in the following table:



(Dollars in millions)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Revenues:
Commercial lines insurance
Commercial casualty	$	271		$	263		$	536		$	520
Commercial property	226			215			449			429
Commercial auto	158			147			313			291
Workers' compensation	86			89			170			178
Other commercial	55			57			109			113
Commercial lines insurance premiums	796			771			1,577			1,531
Fee revenues	1			1			2			2
Total commercial lines insurance	797			772			1,579			1,533

Personal lines insurance
Personal auto	144			135			285			266
Homeowner	128			121			253			240
Other personal	35			32			69			65
Personal lines insurance premiums	307			288			607			571
Fee revenues	1			1			3			2
Total personal lines insurance	308			289			610			573

Excess and surplus lines insurance	52			45			100			88
Fee revenues	1			—			1			—
Total excess and surplus lines insurance	53			45			101			88

Life insurance premiums	60			59			117			117
Fee revenues	1			1			3			2
Total life insurance	61			60			120			119

Investments
Investment income, net of expenses	151			149			300			294
Realized investment gains and losses, net	(11		)	44			149			105
Total investment revenue	140			193			449			399

Other
Cincinnati Re insurance premiums	26			10			48			20
Other	1			2			2			3
Total other revenues	27			12			50			23
Total revenues	$	1,386		$	1,371		$	2,909		$	2,735

Income (loss) before income taxes:
Insurance underwriting results
Commercial lines insurance	$	24		$	26		$	22		$	76
Personal lines insurance	(24		)	(20		)	(39		)	8
Excess and surplus lines insurance	19			5			37			22
Life insurance	4			1			4			—
Investments	117			171			403			355
Other	(12		)	(17		)	(23		)	(30		)
Total income before income taxes	$	128		$	166		$	404		$	431



Identifiable assets:	June 30, 2017		December 31, 2016
Property casualty insurance	$	3,042	$	2,967
Life insurance	1,427		1,366
Investments	16,431		15,569
Other	338		484
Total	$	21,238	$	20,386

Cincinnati Financial Corporation Second-Quarter 2017 10-Q

Page 30

Item 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations

The following discussion highlights significant factors influencing the condensed consolidated results of operations and financial position of Cincinnati Financial Corporation. It should be read in conjunction with the consolidated financial statements and related notes included in our 2016 Annual Report on Form 10-K. 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 basis. When we provide our results on a comparable statutory basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP).

We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and dividends. Dollar amounts are rounded to millions; calculations of percent changes are based on dollar amounts rounded to the nearest million. Certain percentage changes are identified as not meaningful (nm).

SAFE HARBOR STATEMENT

This is our “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in our 2016 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 29.

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 or development of claims that are unforeseen at the time of policy issuance


•	Inadequate estimates, assumptions or reliance on third-party data used for critical accounting estimates


•	Declines in overall stock market values negatively affecting the company’s equity portfolio and book value


•	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


•	Domestic and global events resulting in capital market or credit market uncertainty, followed by prolonged periods of economic instability or recession, that lead to:


◦	Significant or prolonged decline in the fair value of a particular security or group of securities and impairment of the asset(s)


◦	Significant decline in investment income due to reduced or eliminated dividend payouts from a particular security or group of securities


◦	Significant rise in losses from surety and director and officer policies written for financial institutions or other insured entities


•	Recession or other economic conditions resulting in lower demand for insurance products or increased payment delinquencies


•	Difficulties with technology or data security breaches, including cyberattacks, that could negatively affect our ability to conduct business and our relationships with agents, policyholders and others


•	Disruption of the insurance market caused by technology innovations such as driverless cars that could decrease consumer demand for insurance products


•	Delays, inadequate data developed internally or from third parties, or performance inadequacies from ongoing development and implementation of underwriting and pricing methods, including telematics and other usage-based insurance methods, or technology projects and enhancements expected to increase our pricing accuracy, underwriting profit and competitiveness


•	Increased competition that could result in a significant reduction in the company’s premium volume


•	Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could alter our competitive advantages

Cincinnati Financial Corporation Second-Quarter 2017 10-Q

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•	Inability to obtain adequate ceded reinsurance on acceptable terms, amount of reinsurance coverage purchased, financial strength of reinsurers and the potential for nonpayment or delay in payment by reinsurers


•	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


•	Inability of our subsidiaries to pay dividends consistent with current or past levels


•	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:


◦	Downgrades of the company’s financial strength ratings


◦	Concerns that doing business with the company is too difficult


◦	Perceptions that the company’s level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace


◦	Inability or unwillingness to nimbly develop and introduce coverage product updates and innovations that our competitors offer and consumers expect to find 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:


◦	Impose new obligations on us that increase our expenses or change the assumptions underlying our critical accounting estimates


◦	Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations


◦	Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business


◦	Add assessments for guaranty funds, other insurance‑related assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes


◦	Increase our provision for federal income taxes due to changes in tax law


◦	Increase our other expenses


◦	Limit our ability to set fair, adequate and reasonable rates


◦	Place us at a disadvantage in the marketplace


◦	Restrict our ability to execute our business model, including the way we compensate agents


•	Adverse outcomes from litigation or administrative proceedings


•	Events or actions, including unauthorized intentional circumvention of controls, that reduce the company’s future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002


•	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, global, 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.

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Page 32

CORPORATE FINANCIAL HIGHLIGHTS

Net Income and Comprehensive Income Data



(Dollars in millions except per share data)	Three months ended June 30,							Six months ended June 30,
	2017			2016		% Change		2017		2016		% Change
Earned premiums	$	1,241		$	1,173	6		$	2,449	$	2,327	5
Investment income, net of expenses (pretax)	151			149		1		300		294		2
Realized investment gains and losses, net (pretax)	(11		)	44		nm		149		105		42
Total revenues	1,386			1,371		1		2,909		2,735		6
Net income	100			123		(19	)	301		311		(3	)
Comprehensive income	245			306		(20	)	533		681		(22	)
Net income per share—diluted	0.60			0.74		(19	)	1.81		1.87		(3	)
Cash dividends declared per share	0.50			0.48		4		1.00		0.96		4
Diluted weighted average shares outstanding	166.0			166.5		0		166.2		166.3		0

Total revenues increased slightly for the second quarter of 2017, compared with the same period of 2016, as higher earned premiums offset a reduction in realized investment gains. For the first six months of 2017, compared with the same period a year ago, total revenues also rose, primarily due to higher earned premiums and an increase in realized investment gains. Premium and investment revenue trends are discussed further in the respective sections of Financial Results.

Realized investment gains and losses are recognized on the sales of investments or as otherwise required by GAAP. We have substantial discretion in the timing of investment sales, and that timing generally is independent of the insurance underwriting process. GAAP also requires us to recognize in net income the gains or losses from certain changes in fair values of securities even though we continue to hold the securities.

Net income for the second quarter of 2017, compared with second-quarter 2016, decreased $23 million due to a $35 million reduction in after-tax net realized investment gains and losses that offset an improvement of $8 million in after-tax property casualty underwriting income. Catastrophe losses, mostly weather related, were $33 million less after taxes and favorably affected both net income and property casualty underwriting income. Life insurance segment income on a pretax basis for the second quarter of 2017 increased $3 million compared with second-quarter 2016.

For the six months ended June 30, 2017, net income decreased $10 million compared with the first six months of 2016, reflecting a $50 million decrease in after-tax property casualty underwriting income that offset a $28 million increase in after-tax net realized investment gains. The property casualty underwriting income decrease included an unfavorable $14 million after-tax effect from higher catastrophe losses. After-tax investment income in our investment segment results for the first six months of 2017 rose $5 million compared with the same period of 2016. Life insurance segment results on a pretax basis increased by $4 million.

Performance by segment is discussed below in Financial Results. As discussed in our 2016 Annual Report on Form 10-K, Item 7, Factors Influencing Our Future Performance, Page 47, there are several reasons that our performance during 2017 may be below our long-term targets. In that annual report, as part of Financial Results, we also discussed the full-year 2017 outlook for each reporting segment.

The board of directors is committed to rewarding shareholders directly through cash dividends and through share repurchase authorizations. Through 2016, the company had increased the annual cash dividend rate for 56 consecutive years, a record we believe is matched by only seven other publicly traded companies. In January 2017, the board of directors increased the regular quarterly dividend to 50 cents per share, setting the stage for our 57 ^th consecutive year of increasing cash dividends. During the first six months of 2017, cash dividends declared by the company increased slightly more than 4 percent compared with the same period of 2016. Our board regularly evaluates relevant factors in decisions related to dividends and share repurchases.

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Page 33

The 2017 dividend increase reflected our strong earnings performance and signaled management’s and the board’s positive outlook and confidence in our outstanding capital, liquidity and financial flexibility.

Balance Sheet Data and Performance Measures



(In millions except share data)	At June 30,			At December 31,
	2017			2016
Total investments	$	16,394		$	15,500
Total assets	21,238			20,386
Short-term debt	17			20
Long-term debt	787			787
Shareholders' equity	7,373			7,060
Book value per share	44.97			42.95
Debt-to-total-capital ratio	9.8		%	10.3		%

Total assets at June 30, 2017, increased 4 percent compared with year-end 2016, and included 6 percent growth in investments that reflected a combination of net purchases and higher fair values for many securities in our portfolio. Shareholders’ equity increased 4 percent, and book value per share increased 5 percent during the first six months of 2017. Our debt-to-total-capital ratio (capital is the sum of debt plus shareholders’ equity) was lower than at year-end 2016.

Our value creation ratio is a non-GAAP measure defined below and is our primary performance metric. That ratio was 7.0 percent for the first six months of 2017, and was less than the same period in 2016 primarily due to less net income before net realized gains and less overall net gains from our investment portfolio. The $2.02 increase in book value per share during the first six months of 2017 contributed 4.7 percentage points to the value creation ratio, while dividends declared at $1.00 per share contributed 2.3 points. Value creation ratio trends in total and by major components, along with a reconciliation of the non-GAAP measure to comparable GAAP measures, are shown in the tables below.



	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
Value creation ratio major components:
Net income before net realized gains	1.5	%	1.4	%	2.9	%	3.8	%
Change in fixed-maturity securities, realized and unrealized gains	0.7		1.8		1.1		3.0
Change in equity securities, realized and unrealized gains	1.2		1.4		3.5		3.9
Other	(0.2	)	0.0		(0.5	)	(0.2	)
Value creation ratio	3.2	%	4.6	%	7.0	%	10.5	%

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(Dollars are per share)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Book value change per share:
End of period book value	$	44.97		$	42.37		$	44.97		$	42.37
Less beginning of period book value	44.07			40.96			42.95			39.20
Change in book value	$	0.90		$	1.41		$	2.02		$	3.17

Change in book value:
Net income before realized gains	$	0.65		$	0.58		$	1.25		$	1.48
Change in fixed-maturity securities, realized and unrealized gains	0.29			0.72			0.47			1.18
Change in equity securities, realized and unrealized gains	0.54			0.59			1.51			1.52
Dividend declared to shareholders	(0.50		)	(0.48		)	(1.00		)	(0.96		)
Other	(0.08		)	0.00			(0.21		)	(0.05		)
Change in book value	$	0.90		$	1.41		$	2.02		$	3.17



(Dollars are per share)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Value creation ratio:
End of period book value	$	44.97		$	42.37		$	44.97		$	42.37
Less beginning of period book value	44.07			40.96			42.95			39.20
Change in book value	0.90			1.41			2.02			3.17
Dividend declared to shareholders	0.50			0.48			1.00			0.96
Total value creation	$	1.40		$	1.89		$	3.02		$	4.13

Value creation ratio from change in book value*	2.1		%	3.4		%	4.7		%	8.1		%
Value creation ratio from dividends declared to shareholders**	1.1			1.2			2.3			2.4
Value creation ratio	3.2		%	4.6		%	7.0		%	10.5		%

*Change in book value divided by the beginning of period book value
**Dividend declared to shareholders divided by beginning of period book value

DRIVERS OF LONG-TERM VALUE CREATION

Operating through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on 2016 net written premiums for approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies as discussed in our 2016 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. At June 30, 2017, we actively marketed through agencies located in 41 states. We maintain a long-term perspective that guides us in addressing immediate challenges or opportunities while focusing on the major decisions that best position our company for success through all market cycles.

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To measure our long-term progress in creating shareholder value, our value creation ratio is our primary financial performance target. As discussed in our 2016 Annual Report on Form 10-K, Item 7, Executive Summary, Page 43, management believes this non-GAAP measure is a meaningful indicator of our long-term progress in creating shareholder value, is a useful supplement to GAAP information and has three primary performance drivers:

•

Premium growth – We believe our agency relationships and initiatives can lead to a property casualty written premium growth rate over any five-year period that exceeds the industry average. For the first six months of 2017, our consolidated property casualty net written premium year-over-year growth was 7 percent, comparing favorably with A.M. Best's January 2017 projection of approximately 3 percent full-year growth for the industry. For the five-year period 2012 through 2016, our growth rate was approximately double that of the 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 generate a GAAP combined ratio over any five-year period that is consistently within the range of 95 percent to 100 percent. For the first six months of 2017, our GAAP combined ratio was 99.0 percent and our statutory combined ratio was 97.9 percent, both including 10.1 percentage points of current accident year catastrophe losses partially offset by 3.3 percentage points of favorable loss reserve development on prior accident years. As of January 2017, A.M. Best projected the industry's full-year 2017 statutory combined ratio at approximately 100 percent, including approximately 5 percentage points of catastrophe losses and a favorable effect of approximately 2 percentage points of loss reserve development on prior accident years. The industry's ratio again excludes its mortgage and financial guaranty lines of business.

•

Investment contribution – We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year return of the Standard & Poor’s 500 Index. For the first six months of 2017, pretax investment income was $300 million, up 2 percent compared with the same period in 2016. We believe our investment portfolio mix provides an appropriate balance of income stability and growth with capital appreciation potential.

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Highlights of Our Strategy and Supporting Initiatives

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. Further description of our long-term, proven strategy can be found in our 2016 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. 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.

•

Manage 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. Better profit margins can arise from additional information and more focused action on underperforming product lines, plus pricing capabilities we are expanding through the use of technology and analytics. In addition to enhancing company efficiency, improving internal processes also supports 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.

We continue to enhance our property casualty underwriting expertise and to effectively and efficiently underwrite individual policies and process transactions. Ongoing initiatives supporting this work include expanding our pricing and segmentation capabilities through experience and use of predictive analytics and additional data. Our segmentation efforts emphasize identification and retention of insurance policies we believe have relatively stronger pricing, while seeking more aggressive renewal terms and conditions on policies we believe have relatively weaker pricing. In 2017, we continue to improve underwriting and rate adequacy for our commercial auto and personal auto lines of business. Our commercial auto policies that renewed during the first six months of 2017 experienced an estimated average price percentage increase near the high end of in the mid-single-digit range, with the second quarter higher than the first quarter. Our personal auto policies that renewed during the first six months of 2017 also averaged an estimated price percentage increase near the high end of the mid-single-digit range.

•

Drive premium growth – Implementation of these initiatives is intended to further penetrate each market we serve through our independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Premium growth initiatives also include expansion of Cincinnati Re ^SM – our reinsurance assumed operation. Diversified growth also may reduce variability of losses from weather-related catastrophes.

We continue to appoint new agencies to develop additional points of distribution. In 2017, we are planning approximately 100 appointments of independent agencies that offer most or all of our property casualty insurance products. During the first six months of 2017, we appointed 66 new agencies that meet that criteria.

We also plan to appoint additional agencies that focus on high net worth personal lines clients. In 2017, we are targeting the appointment of approximately 100 agencies that market only personal lines products for us. During the first six months of 2017, we appointed 64 new agencies that meet that criteria.

As of June 30, 2017, a total of 1,675 agency relationships market our property casualty insurance products from 2,203 reporting locations.

We also continue to grow premiums through the disciplined expansion of Cincinnati Re. During the first six months of 2017, Cincinnati Re contributed $45 million of growth in consolidated property casualty insurance net written premiums.

Financial Strength

An important part of our long-term strategy is financial strength, which is described in our 2016 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Financial Strength, Page 7. One aspect of our financial strength is prudent use of reinsurance ceded to help manage financial performance variability due to catastrophe loss experience. A description of how we use reinsurance ceded is included in our 2016 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, 2017 Reinsurance Ceded Programs, Page 101. Another aspect of our financial strength is our investment portfolio, which remains well-diversified as discussed in this quarterly report in Item 3, Quantitative and Qualitative Disclosures About Market Risk. Our strong parent-company liquidity and financial strength increase our flexibility to maintain a cash dividend through all periods and to continue to invest in and expand our insurance operations.

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At June 30, 2017, we held $2.290 billion of our cash and invested assets at the parent-company level, of which $2.110 billion, or 92.1 percent, was invested in common stocks, and $95 million, or 4.1 percent, was cash or cash equivalents. Our debt-to-total-capital ratio of 9.8 percent remains well below our target limit. Another important indicator of financial strength is our ratio of property casualty net written premiums to statutory surplus, which was 1.0-to-1 for the 12 months ended June 30, 2017, matching year-end 2016.

Financial strength ratings assigned to us by independent rating firms also are important. In addition to rating our parent company’s senior debt, four firms award insurer financial strength ratings to one or more of our insurance subsidiary companies based on their quantitative and qualitative analyses. These ratings primarily 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 investors. Ratings are under continuous review and subject to change or withdrawal at any time by the rating agency. Each rating should be evaluated independently of any other rating; please see each rating agency's website for its most recent report on our ratings.

At August 1, 2017, our insurance subsidiaries continued to be highly rated.



Insurer Financial Strength Ratings
Rating agency	Standard market property casualty insurance subsidiaries			Life insurance subsidiary			Excess and surplus lines insurance subsidiary			Outlook
			Rating tier			Rating tier			Rating tier
A.M. Best Co. ambest.com	A+	Superior	2 of 16	A	Excellent	3 of 16	A+	Superior	2 of 16	Stable
Fitch Ratings fitchratings.com	A+	Strong	5 of 21	A+	Strong	5 of 21	-	-	-	Stable
Moody's Investors Service moodys.com	A1	Good	5 of 21	-	-	-	-	-	-	Stable
S&P Global Ratings spratings.com	A+	Strong	5 of 21	A+	Strong	5 of 21	-	-	-	Stable

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CONSOLIDATED PROPERTY CASUALTY INSURANCE HIGHLIGHTS

Consolidated property casualty insurance results include premiums and expenses for our standard market insurance segments (commercial lines and personal lines), our excess and surplus lines segment and our reinsurance assumed operations.



(Dollars in millions)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Earned premiums	$	1,181		$	1,114		6		$	2,332		$	2,210		6
Fee revenues	3			2			50		6			4			50
Total revenues	1,184			1,116			6		2,338			2,214			6
Loss and loss expenses from:
Current accident year before catastrophe losses	714			643			11		1,423			1,325			7
Current accident year catastrophe losses	118			165			(28	)	235			206			14
Prior accident years before catastrophe losses	(35		)	(49		)	29		(62		)	(104		)	40
Prior accident years catastrophe losses	(3		)	—			nm		(14		)	(7		)	(100	)
Loss and loss expenses	794			759			5		1,582			1,420			11
Underwriting expenses	367			347			6		727			688			6
Underwriting profit	$	23		$	10		130		$	29		$	106		(73	)

Ratios as a percent of earned premiums:							Pt. Change								Pt. Change
Current accident year before catastrophe losses	60.5		%	57.8		%	2.7		61.0		%	59.9		%	1.1
Current accident year catastrophe losses	10.0			14.8			(4.8	)	10.1			9.3			0.8
Prior accident years before catastrophe losses	(3.0		)	(4.4		)	1.4		(2.7		)	(4.7		)	2.0
Prior accident years catastrophe losses	(0.2		)	0.0			(0.2	)	(0.6		)	(0.3		)	(0.3	)
Loss and loss expenses	67.3			68.2			(0.9	)	67.8			64.2			3.6
Underwriting expenses	31.0			31.1			(0.1	)	31.2			31.2			0.0
Combined ratio	98.3		%	99.3		%	(1.0	)	99.0		%	95.4		%	3.6

Combined ratio	98.3		%	99.3		%	(1.0	)	99.0		%	95.4		%	3.6
Contribution from catastrophe losses and prior years reserve development	6.8			10.4			(3.6	)	6.8			4.3			2.5
Combined ratio before catastrophe losses and prior years reserve development	91.5		%	88.9		%	2.6		92.2		%	91.1		%	1.1

Our consolidated property casualty insurance operations generated an underwriting profit of $23 million and $29 million for the three and six months ended June 30, 2017. The three-month increase of $13 million, compared with the same period of 2016, was driven by a decrease of $50 million in losses from weather-related natural catastrophes. The six-month decrease of $77 million, compared with the first half of 2016, included an increase of $22 million in losses from weather-related natural catastrophes. We believe future property casualty underwriting results will continue to benefit from price increases and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices.

For all property casualty lines of business in aggregate, net loss and loss expense reserves at June 30, 2017, were $193 million higher than at year-end 2016, including $70 million for the incurred but not reported (IBNR) portion. The $193 million reserve increase raised year-end 2016 net loss and loss expense reserves by 4 percent.

We measure and analyze property casualty underwriting results primarily by the combined ratio and its component ratios. The GAAP-basis combined ratio is the percentage of incurred losses plus all expenses per each earned premium dollar – the lower the ratio, the better the performance. An underwriting profit results when the combined ratio is below 100 percent. A combined ratio above 100 percent indicates that an insurance company’s losses and expenses exceeded premiums.

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Our consolidated property casualty combined ratio for the second quarter of 2017 improved 1.0 percentage point, compared with the same period of 2016, including 5.0 points from lower catastrophe losses and loss expenses. For the first half of 2017, compared with the same period of 2016, our consolidated property casualty combined ratio rose 3.6 percentage points, including 0.5 points from higher catastrophe losses and loss expenses.

The combined ratio can be affected significantly by natural catastrophe losses and other large losses as discussed in detail below. The combined ratio can also be affected by updated estimates of loss and loss expense reserves established for claims that occurred in prior periods, referred to as prior accident years. Net favorable development on prior accident year reserves, including reserves for catastrophe losses, benefited the combined ratio by 3.3 percentage points in the first six months of 2017, compared with 5.0 percentage points in the same period of 2016. Net favorable development is discussed in further detail in Financial Results by property casualty insurance segment.

The ratio for current accident year loss and loss expenses before catastrophe losses rose in the first six months of 2017. That 61.0 percent ratio increased 1.1 percentage points compared with the 59.9 percent accident year 2016 ratio measured as of June 30, 2016, including an unfavorable effect of approximately 1 point from a higher amount of 2017 weather-related losses not identified as part of designated catastrophe events for the property casualty industry, typically referred to as noncatastrophe weather losses.

The underwriting expense ratio for the second quarter and first six months of 2017 was essentially flat, compared with the same periods of 2016. Strategic investments that include enhancement of underwriting expertise were offset by the favorable effects of higher earned premiums and ongoing expense management efforts.

Consolidated Property Casualty Insurance Premiums



(Dollars in millions)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Agency renewal written premiums	$	1,090		$	1,057		3		$	2,147		$	2,085		3
Agency new business written premiums	165			143			15		318			268			19
Cincinnati Re net written premiums	40			16			150		80			35			129
Other written premiums	(24		)	(22		)	(9	)	(43		)	(47		)	9
Net written premiums	1,271			1,194			6		2,502			2,341			7
Unearned premium change	(90		)	(80		)	(13	)	(170		)	(131		)	(30	)
Earned premiums	$	1,181		$	1,114		6		$	2,332		$	2,210		6

The trends in net written premiums and earned premiums summarized in the table above include the effects of price increases. Price change trends that heavily influence renewal written premium increases or decreases, along with other premium growth drivers for 2017, are discussed in more detail by segment below in Financial Results.

Consolidated property casualty net written premiums for the three and six months ended June 30, 2017, grew $77 million and $161 million compared with the same periods of 2016. Each of our property casualty segments continued to grow during the second quarter and first six months of 2017. Our premium growth initiatives from prior years have provided an ongoing favorable effect on growth during the current year, particularly as newer agency relationships mature over time.

Consolidated property casualty agency new business written premiums rose $22 million and $50 million for the second quarter and first half of 2017, compared with the same periods of 2016. New business written premiums in the second quarter and first six months of 2017 were higher than the same period of 2016 for each of our property casualty insurance segments. New agency appointments during 2016 and 2017 produced a $27 million increase in standard lines new business for the first six months of 2017 compared with the same period of 2016. As we appoint new agencies that choose to move accounts to us, we report these accounts as new business. While this business is new to us, in many cases it is 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 upon obtaining it from a competing agent.

Net written premiums for Cincinnati Re increased $24 million and $45 million for the second quarter and first half of 2017, compared with the same periods of 2016. Cincinnati Re assumes risks through reinsurance treaties and in

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some cases cedes part of the risk and related premiums to one or more unaffiliated reinsurance companies through transactions known as retrocessions. For the first six months of 2017, earned premiums for Cincinnati Re totaled $48 million, compared with $20 million earned in the same period a year ago.

Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. Those ceded premium totals for the second quarter and first six months of 2017 were substantially similar to the same periods of 2016.

Catastrophe losses and loss expenses typically have a material effect on property casualty results and can vary significantly from period to period. Losses from natural catastrophes contributed 9.8 and 9.5 percentage points to the combined ratio in the second quarter and first six months of 2017, respectively, compared with 14.8 and 9.0 percentage points in the same periods of 2016. Some of those losses were applicable to annual loss deductible provisions of our collateralized reinsurance funded through catastrophe bonds. For our collateralized reinsurance arrangement that became effective in January 2017, aggregate losses occurring from January 23, 2017, through June 30, 2017, totaled $119 million from nine occurrences. These aggregate losses reached the applicable loss deductible provision for the specific geographic locations included in the severe convective storm portion of that coverage. If aggregate losses, after the $8 million per occurrence deductible, exceed $190 million during an annual coverage period, we can recover the excess through funds that collateralize the catastrophe bonds. The following table shows consolidated property casualty insurance catastrophe losses and loss expenses incurred, net of reinsurance, as well as the effect of loss development on prior period catastrophe events. We individually list declared catastrophe events for which our incurred losses reached or exceeded $10 million.

Consolidated Property Casualty Insurance Catastrophe Losses and Loss Expenses Incurred



(Dollars in millions, net of reinsurance)		Three months ended June 30,														Six months ended June 30,
		Comm.			Pers.			E&S			Cin.					Comm.			Pers.			E&S		Cin.
Dates	Region	lines			lines			lines			Re		Total			lines			lines			lines		Re			Total
2017
Feb. 28- Mar. 1	Midwest, South	$	—		$	1		$	—		$	—	$	1		$	22		$	22		$	—	$	—		$	44
Mar. 6-9	Midwest, Northeast, South	2			(2		)	—			—		—			24			11			—		—			35
Mar. 21-22	South	9			(1		)	—			—		8			22			9			—		—			31
Apr. 4-6	Midwest, South	8			12			—			—		20			8			12			—		—			20
May 8-11	Midwest, South, West	14			—			1			—		15			14			—			1		—			15
Jun. 11	Midwest	4			13			—			—		17			4			13			—		—			17
All other 2017 catastrophes		33			25			(1		)	—		57			44			29			—		—			73
Development on 2016 and prior catastrophes		(2		)	(1		)	—			—		(3		)	(11		)	(2		)	—		(1		)	(14		)
Calendar year incurred total		$	68		$	47		$	—		$	—	$	115		$	127		$	94		$	1	$	(1	)	$	221

2016
Apr. 2-3	Midwest, Northeast, South	$	6		$	6		$	—		$	—	$	12		$	6		$	6		$	—	$	—		$	12
Apr. 10-15	South	55			—			1			—		56			55			—			1		—			56
Apr. 25-28	Midwest, South	9			4			—			—		13			9			4			—		—			13
Apr. 29- May 3	Midwest, South	18			7			—			—		25			18			7			—		—			25
May 7-10	Midwest, South, West	14			6			—			—		20			14			6			—		—			20
May 11-12	Midwest, South	11			2			—			—		13			11			2			—		—			13
May 21-28	Midwest, South, West	11			2			—			—		13			11			2			—		—			13
All other 2016 catastrophes		5			7			1			—		13			35			18			1		—			54
Development on 2015 and prior catastrophes		(1		)	1			—			—		—			(6		)	(1		)	—		—			(7		)
Calendar year incurred total		$	128		$	35		$	2		$	—	$	165		$	153		$	44		$	2	$	—		$	199

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The following table includes data for losses incurred of $1 million or more per claim, net of reinsurance.

Consolidated Property Casualty Insurance Losses Incurred by Size



(Dollars in millions, net of reinsurance)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Current accident year losses greater than $5 million	$	—		$	23		(100	)	$	28		$	23		22
Current accident year losses $1 million - $5 million	48			34			41		77			76			1
Large loss prior accident year reserve development	21			3			nm		38			3			nm
Total large losses incurred	69			60			15		143			102			40
Losses incurred but not reported	(1		)	34			nm		3			107			(97	)
Other losses excluding catastrophe losses	487			399			22		954			801			19
Catastrophe losses	112			163			(31	)	215			196			10
Total losses incurred	$	667		$	656		2		$	1,315		$	1,206		9

Ratios as a percent of earned premiums:							Pt. Change								Pt. Change
Current accident year losses greater than $5 million	—		%	2.0		%	(2.0	)	1.2		%	1.0		%	0.2
Current accident year losses $1 million - $5 million	4.1			3.1			1.0		3.3			3.5			(0.2	)
Large loss prior accident year reserve development	1.8			0.3			1.5		1.6			0.1			1.5
Total large loss ratio	5.9			5.4			0.5		6.1			4.6			1.5
Losses incurred but not reported	(0.1		)	3.1			(3.2	)	0.1			4.8			(4.7	)
Other losses excluding catastrophe losses	41.3			35.7			5.6		40.9			36.2			4.7
Catastrophe losses	9.4			14.6			(5.2	)	9.3			8.9			0.4
Total loss ratio	56.5		%	58.8		%	(2.3	)	56.4		%	54.5		%	1.9

We believe the inherent variability 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 variability in addition to general inflationary trends in loss costs. Our analysis continues to indicate no unexpected concentration of large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The second-quarter 2017 property casualty total large losses incurred of $69 million, net of reinsurance, were higher than the $51 million quarterly average during full-year 2016 and higher than the $60 million experienced for the second quarter of 2016. The ratio for these large losses was 0.5 percentage points higher compared with last year’s second quarter. The second-quarter 2017 amount of total large losses incurred helped contribute to the increase in the six-month 2017 total large loss ratio, compared with 2016, in addition to a first-quarter 2017 ratio that was 2.6 points higher than the first quarter of 2016. We believe results for the three- and six-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million. Losses by size are discussed in further detail in results of operations by property casualty insurance segment.

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FINANCIAL RESULTS

Consolidated results reflect the operating results of each of our five segments along with the parent company, Cincinnati Re and other activities reported as “Other.” The five segments are:


•	Commercial lines property casualty insurance


•	Personal lines property casualty insurance


•	Excess and surplus lines property casualty insurance


•	Life insurance


•	Investments

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COMMERCIAL LINES INSURANCE RESULTS



(Dollars in millions)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Earned premiums	$	796		$	771		3		$	1,577		$	1,531		3
Fee revenues	1			1			0		2			2			0
Total revenues	797			772			3		1,579			1,533			3
Loss and loss expenses from:
Current accident year before catastrophe losses	475			429			11		953			897			6
Current accident year catastrophe losses	70			129			(46	)	138			159			(13	)
Prior accident years before catastrophe losses	(24		)	(57		)	58		(26		)	(81		)	68
Prior accident years catastrophe losses	(2		)	(1		)	(100	)	(11		)	(6		)	(83	)
Loss and loss expenses	519			500			4		1,054			969			9
Underwriting expenses	254			246			3		503			488			3
Underwriting profit	$	24		$	26		(8	)	$	22		$	76		(71	)

Ratios as a percent of earned premiums:							Pt. Change								Pt. Change
Current accident year before catastrophe losses	59.7		%	55.7		%	4.0		60.4		%	58.6		%	1.8
Current accident year catastrophe losses	8.7			16.8			(8.1	)	8.7			10.4			(1.7	)
Prior accident years before catastrophe losses	(3.0		)	(7.4		)	4.4		(1.6		)	(5.3		)	3.7
Prior accident years catastrophe losses	(0.2		)	(0.2		)	0.0		(0.6		)	(0.4		)	(0.2	)
Loss and loss expenses	65.2			64.9			0.3		66.9			63.3			3.6
Underwriting expenses	31.9			31.9			0.0		31.9			31.9			0.0
Combined ratio	97.1		%	96.8		%	0.3		98.8		%	95.2		%	3.6

Combined ratio	97.1		%	96.8		%	0.3		98.8		%	95.2		%	3.6
Contribution from catastrophe losses and prior years reserve development	5.5			9.2			(3.7	)	6.5			4.7			1.8
Combined ratio before catastrophe losses and prior years reserve development	91.6		%	87.6		%	4.0		92.3		%	90.5		%	1.8

Overview

Performance highlights for the commercial lines segment include:

•

Premiums – Earned premiums and net written premiums for the commercial lines segment grew during the second quarter and first six months of 2017, in part due to renewal premium growth that continued to reflect price increases and a higher level of insured exposures. Higher new business written premiums also contributed to the increase in net written premiums for the three and six months ended June 30, 2017. The table below analyzes the primary components of premiums. We continue using predictive analytics tools to improve pricing precision and segmentation while also leveraging our local relationships with agents through the efforts of our teams that work closely with them. We seek to maintain appropriate pricing discipline for both new and renewal business as our agents and underwriters assess account quality to make careful decisions on a case-by-case basis whether to write or renew a policy.

Agency renewal written premiums grew 2 percent for both the three and six months ended June 30, 2017, compared with the same periods of 2016. The growth reflected price increases and improving economic conditions. During the second quarter of 2017, our overall standard commercial lines policies continued to average estimated renewal price increases at percentages in the low-single-digit range, up slightly from the first quarter of 2017. We continue to segment commercial lines policies, emphasizing identification and retention of policies we believe have relatively stronger pricing. Conversely, we have been seeking stricter renewal terms and conditions on policies we believe have relatively weaker pricing, in turn retaining fewer of those policies. We measure average changes in commercial lines renewal pricing as the percentage 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 the respective policies.

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Our average overall commercial lines renewal pricing change includes the impact of flat pricing of certain coverages within package policies written for a three-year term that were in force but did not expire during the period being measured. Therefore, the change in average commercial lines renewal pricing we report reflects a blend of three-year policies that did not expire and other policies that did expire during the measurement period. For commercial lines policies that did expire and were then renewed during the second quarter of 2017, we estimate that our average percentage price increase for commercial auto was in the high-single-digit range, up from the mid-single-digit range of the first quarter. The estimated average percentage price change for our commercial property line of business was an increase in the mid-single-digit range and for commercial casualty it was an increase near the low end of the low-single-digit range. The estimated average percentage price change for workers’ compensation was a decrease in the mid-single-digit range.

Renewal premiums for our commercial casualty and workers’ compensation lines include the results of policy audits that adjust initial premium amounts based on differences between estimated and actual sales or payroll related to a specific policy. Audits completed during the first six months of 2017 contributed $37 million to net written premiums.

New business written premiums for commercial lines increased $6 million and $22 million during the second quarter and first six months of 2017, compared with the same periods of 2016, reflecting growth for each major line of business in our commercial lines insurance segment. Trend analysis for year-over-year comparisons of individual quarters are more difficult to assess for commercial lines new business written premiums, due to inherent variability. That variability is often driven by larger policies with annual premiums greater than $100,000.

Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. For our commercial lines insurance segment, ceded premium totals for the second quarter and first six months of 2017 were similar to the same periods of 2016.

Commercial Lines Insurance Premiums



(Dollars in millions)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Agency renewal written premiums	$	729		$	718		2		$	1,501		$	1,476		2
Agency new business written premiums	99			93			6		202			180			12
Other written premiums	(15		)	(14		)	(7	)	(25		)	(32		)	22
Net written premiums	813			797			2		1,678			1,624			3
Unearned premium change	(17		)	(26		)	35		(101		)	(93		)	(9	)
Earned premiums	$	796		$	771		3		$	1,577		$	1,531		3

•

Combined ratio – The commercial lines combined ratio rose slightly for the second quarter of 2017, compared with the same period last year, despite an 8.1 percentage-point reduction in weather-related natural catastrophe losses and loss expenses. Offsets to that reduction included a lower amount of favorable reserve development on prior accident years, discussed below, and a higher amount of noncatastrophe weather losses that increased the second-quarter and six-month 2017 combined ratios each by approximately 1 percentage point. For the first six months of 2017, the combined ratio increased by 3.6 percentage points, compared with the first six months of 2016, primarily due to a lower amount of favorable reserve development on prior accident years.

Catastrophe losses and loss expenses accounted for 8.5 and 8.1 percentage points of the combined ratio for the second quarter and first six months of 2017, compared with 16.6 and 10.0 percentage points for the same periods a year ago. The 10-year annual average for that catastrophe measure through 2016 for the commercial lines segment was 4.8 percentage points, and the five-year annual average was 5.2 percentage points.

Commercial auto, representing 19 percent of 2016 earned premiums for our commercial lines insurance segment, was the only major line of business in that segment with a second-quarter 2017 total loss and loss expense ratio before catastrophe losses significantly higher than we desired. As discussed above, during the first six months of 2017, our commercial auto policies experienced average renewal price percentage increases near the high end of the mid-single-digit range, with the second quarter higher than the first quarter. We believe pricing and risk selection actions we are taking will help improve future profitability. Further segmentation of policies as they renew should also help improve profitability, as we seek more adequate pricing on individual policies that need it based on analytics and underwriter judgment. As an example, for our 2016 commercial

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auto policies that we determined have relatively weaker pricing, representing approximately one-third of commercial auto renewal written premiums, we obtained 2016 percentage price increases that averaged in the upper-single digits. We also continued to improve premium rate classification and the use of other rating variables in risk selection and pricing.

The net effect of reserve development on prior accident years during the second quarter and first six months of 2017 was favorable for commercial lines overall by $26 million and $37 million compared with $58 million and $87 million for the same periods in 2016. For the first six months of 2017, our workers’ compensation line of business was the largest contributor to the total commercial lines net favorable reserve development on prior accident years, followed by other commercial lines, which was largely attributable to director and officer liability insurance. Commercial property also contributed to the total commercial lines net favorable reserve development. Those contributions were partially offset by unfavorable reserve development for our commercial auto and commercial casualty lines of business. The unfavorable reserve development for commercial casualty reflected higher than usual large loss activity for the first quarter of 2017. The net favorable reserve development recognized during the first six months of 2017 for our commercial lines insurance segment was largely for accident year 2016 and accident years prior to 2014, and was primarily due to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2016 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 48.

The commercial lines underwriting expense ratio for the second quarter and first six months of 2017 essentially matched the same periods of 2016.

Commercial Lines Insurance Losses Incurred by Size



(Dollars in millions, net of reinsurance)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Current accident year losses greater than $5 million	$	—		$	23		(100	)	$	28		$	23		22
Current accident year losses $1 million - $5 million	33			33			0		59			69			(14	)
Large loss prior accident year reserve development	19			4			nm		36			3			nm
Total large losses incurred	52			60			(13	)	123			95			29
Losses incurred but not reported	21			2			nm		16			66			(76	)
Other losses excluding catastrophe losses	292			244			20		598			499			20
Catastrophe losses	64			126			(49	)	122			151			(19	)
Total losses incurred	$	429		$	432		(1	)	$	859		$	811		6

Ratios as a percent of earned premiums:							Pt. Change								Pt. Change
Current accident year losses greater than $5 million	—		%	2.9		%	(2.9	)	1.8		%	1.5		%	0.3
Current accident year losses $1 million - $5 million	4.2			4.2			0.0		3.7			4.5			(0.8	)
Large loss prior accident year reserve development	2.3			0.6			1.7		2.3			0.2			2.1
Total large loss ratio	6.5			7.7			(1.2	)	7.8			6.2			1.6
Losses incurred but not reported	2.7			0.3			2.4		1.0			4.3			(3.3	)
Other losses excluding catastrophe losses	36.5			31.6			4.9		37.9			32.6			5.3
Catastrophe losses	8.1			16.4			(8.3	)	7.7			9.9			(2.2	)
Total loss ratio	53.8		%	56.0		%	(2.2	)	54.4		%	53.0		%	1.4

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2016 and lower than the $60 million total large losses incurred for the second quarter of 2016. The ratio for these large losses was 1.2 percentage points lower compared with last year’s second-quarter ratio. The second-quarter 2017 amount of total large losses incurred helped to slow the increase in the six-month 2017 total large loss ratio, compared with 2016, partially offsetting a first-quarter 2017 ratio that was 4.5 points higher than the first quarter of 2016. We believe results for the three-month period largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.

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PERSONAL LINES INSURANCE RESULTS



(Dollars in millions)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Earned premiums	$	307		$	288		7		$	607		$	571		6
Fee revenues	1			1			0		3			2			50
Total revenues	308			289			7		610			573			6
Loss and loss expenses from:
Current accident year before catastrophe losses	197			180			9		390			360			8
Current accident year catastrophe losses	48			34			41		96			45			113
Prior accident years before catastrophe losses	(2		)	9			nm		(11		)	(7		)	(57	)
Prior accident years catastrophe losses	(1		)	1			nm		(2		)	(1		)	(100	)
Loss and loss expenses	242			224			8		473			397			19
Underwriting expenses	90			85			6		176			168			5
Underwriting (loss) profit	$	(24	)	$	(20	)	20		$	(39	)	$	8		nm

Ratios as a percent of earned premiums:							Pt. Change								Pt. Change
Current accident year before catastrophe losses	64.6		%	62.5		%	2.1		64.3		%	63.0		%	1.3
Current accident year catastrophe losses	15.8			12.1			3.7		15.9			7.9			8.0
Prior accident years before catastrophe losses	(0.9		)	3.1			(4.0	)	(1.8		)	(1.2		)	(0.6	)
Prior accident years catastrophe losses	(0.4		)	0.3			(0.7	)	(0.4		)	(0.2		)	(0.2	)
Loss and loss expenses	79.1			78.0			1.1		78.0			69.5			8.5
Underwriting expenses	29.3			29.5			(0.2	)	29.0			29.4			(0.4	)
Combined ratio	108.4		%	107.5		%	0.9		107.0		%	98.9		%	8.1

Combined ratio	108.4		%	107.5		%	0.9		107.0		%	98.9		%	8.1
Contribution from catastrophe losses and prior years reserve development	14.5			15.5			(1.0	)	13.7			6.5			7.2
Combined ratio before catastrophe losses and prior years reserve development	93.9		%	92.0		%	1.9		93.3		%	92.4		%	0.9

Overview

Performance highlights for the personal lines segment include:

•

Premiums – Personal lines earned premiums and net written premiums for the second quarter and first six months of 2017 continued to grow, reflecting increases in renewal written premiums and new business written premiums from agencies that represent us. Price increases and a high level of policy retention were the main drivers of renewal premium growth. The table below analyzes the primary components of premiums.

Agency renewal written premiums increased 5 percent for both the second quarter and first six months of 2017, largely reflecting rate increases. We estimate that premium rates for our personal auto line of business increased at average percentages near the high end of the mid-single-digit range during the first six months of 2017. For our homeowner line of business, we estimate that premium rates for the first six months of 2017 increased at average percentages near the low end of the mid-single-digit range. For both our personal auto and homeowner lines of business, some individual policies experienced lower or higher rate changes based on each risk's specific characteristics and enhanced pricing precision enabled by predictive models.

Personal lines new business written premiums grew $11 million or 32 percent during the second quarter and $20 million or 34 percent during the first six months of 2017, compared with the same periods of 2016. That growth included approximately $7 million for the second quarter, and $13 million for the first half of 2017, from high net worth clients of our agencies. Personal lines new business written premiums from our high net worth policies totaled approximately $17 million for the second quarter and $28 million during the first six months of 2017. The primary factors driving growth in the middle market portion included recent-year expansion into new states and other additional marketing efforts directed toward agencies. Marketing efforts included assisting agencies with processing qualified policies expiring from other insurance companies, sometimes referred to as

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“book rolls”. Similar to recent years, such processing has not materially contributed to 2017 increases or decreases in personal lines new business written premiums.

Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. For our personal lines insurance segment, ceded premium totals for the second quarter and first six months of 2017 were similar to the same periods of 2016.

We continue to implement strategies discussed in our 2016 Annual Report on Form 10-K, Item 1, Strategic Initiatives, Page 13, to enhance our responsiveness to marketplace changes and to help achieve our long-term objectives for personal lines growth and profitability. These strategies include initiatives to more profitably underwrite personal auto policies.

Personal Lines Insurance Premiums



(Dollars in millions)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Agency renewal written premiums	$	318		$	302		5		$	563		$	538		5
Agency new business written premiums	45			34			32		79			59			34
Other written premiums	(6		)	(6		)	0		(12		)	(11		)	(9	)
Net written premiums	357			330			8		630			586			8
Unearned premium change	(50		)	(42		)	(19	)	(23		)	(15		)	(53	)
Earned premiums	$	307		$	288		7		$	607		$	571		6

•

Combined ratio – Our personal lines combined ratio increased by 0.9 and 8.1 percentage points for the second quarter and first six months of 2017, compared with the same periods of 2016, primarily due to increases of 3.0 and 7.8 percentage points in the ratio for weather-related natural catastrophe losses and loss expenses, in addition to noncatastrophe large losses, discussed below, that increased by 6.1 and 2.2 percentage points, respectively.

In addition to the average rate increases discussed above, we continue to refine our pricing to better match premiums to the risk of loss on individual policies. Improved pricing precision and broad-based rate increases are expected to help position the combined ratio at a profitable level over the long term. In addition, greater geographic diversification is expected to reduce the volatility of homeowner loss ratios attributable to weather-related catastrophe losses over time.

Personal auto, representing 47 percent of 2016 earned premiums for our personal lines insurance segment, was the only major line of business in that segment with a second-quarter 2017 total loss and loss expense ratio before catastrophe losses significantly higher than we desired. As discussed above, during the first six months of 2017, our personal auto policies experienced average renewal price percentage increases near the high end of the mid-single-digit range. We believe rate increases and other actions to improve pricing precision and reduce loss costs will improve future profitability.

Catastrophe losses and loss expenses accounted for 15.4 and 15.5 percentage points of the combined ratio for the second quarter and first six months of 2017, compared with 12.4 and 7.7 percentage points for the same periods of 2016. The 10-year annual average catastrophe loss ratio through 2016 for the personal lines segment was 10.7 percentage points, and the five-year annual average was 9.3 percentage points.

The net effect of reserve development on prior accident years during the second quarter and first six months of 2017 was favorable for personal lines overall by $3 million and $13 million compared with an unfavorable $10 million and favorable $8 million for the same periods in 2016. Our homeowner and other personal lines of business were the largest contributors to the six-month 2017 total personal lines net favorable reserve development on prior accident years, followed by personal auto. The favorable reserve development was due primarily to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2016 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 48.

The underwriting expense ratio decreased 0.2 percentage points for the second quarter and 0.4 points for the first six months of 2017, compared with the same periods of 2016, as earned premiums increased at a faster pace than underwriting expenses.

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Personal Lines Insurance Losses Incurred by Size



(Dollars in millions, net of reinsurance)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Current accident year losses greater than $5 million	$	—		$	—		nm		$	—		$	—		nm
Current accident year losses $1 million - $5 million	15			—			nm		18			6			200
Large loss prior accident year reserve development	1			(2		)	nm		1			(1		)	nm
Total large losses incurred	16			(2		)	nm		19			5			280
Losses incurred but not reported	(12		)	23			nm		(2		)	34			nm
Other losses excluding catastrophe losses	164			141			16		308			274			12
Catastrophe losses	47			35			34		93			43			116
Total losses incurred	$	215		$	197		9		$	418		$	356		17

Ratios as a percent of earned premiums:							Pt. Change								Pt. Change
Current accident year losses greater than $5 million	—		%	—		%	0.0		—		%	—		%	0.0
Current accident year losses $1 million - $5 million	4.8			—			4.8		2.9			1.0			1.9
Large loss prior accident year reserve development	0.6			(0.7		)	1.3		0.2			(0.1		)	0.3
Total large loss ratio	5.4			(0.7		)	6.1		3.1			0.9			2.2
Losses incurred but not reported	(4.0		)	8.1			(12.1	)	(0.4		)	6.0			(6.4	)
Other losses excluding catastrophe losses	53.7			48.9			4.8		50.9			47.9			3.0
Catastrophe losses	15.2			12.2			3.0		15.3			7.6			7.7
Total loss ratio	70.3		%	68.5		%	1.8		68.9		%	62.4		%	6.5

We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the second quarter of 2017, the personal lines total large loss ratio, net of reinsurance, was 6.1 percentage points higher than last year’s second quarter. The second-quarter 2017 amount of total large losses incurred helped contribute to the increase in the six-month 2017 total large loss ratio, compared with 2016, offsetting a first-quarter 2017 ratio that was 1.6 points lower than the first quarter of 2016. We believe results for the three-month period largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.

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EXCESS AND SURPLUS LINES INSURANCE RESULTS



(Dollars in millions)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Earned premiums	$	52		$	45		16		$	100		$	88		14
Fee revenues	1			—			nm		1			—			nm
Total revenues	53			45			18		101			88			15

Loss and loss expenses from:
Current accident year before catastrophe losses	29			26			12		55			53			4
Current accident year catastrophe losses	—			2			(100	)	1			2			(50	)
Prior accident years before catastrophe losses	(9		)	(1		)	nm		(22		)	(15		)	(47	)
Prior accident years catastrophe losses	—			—			0		—			—			0
Loss and loss expenses	20			27			(26	)	34			40			(15	)
Underwriting expenses	14			13			8		30			26			15
Underwriting profit	$	19		$	5		280		$	37		$	22		68

Ratios as a percent of earned premiums:							Pt. Change								Pt. Change
Current accident year before catastrophe losses	54.2		%	56.7		%	(2.5	)	54.8		%	59.8		%	(5.0	)
Current accident year catastrophe losses	0.9			3.2			(2.3	)	1.1			1.9			(0.8	)
Prior accident years before catastrophe losses	(17.0		)	(1.9		)	(15.1	)	(22.0		)	(16.4		)	(5.6	)
Prior accident years catastrophe losses	0.4			0.0			0.4		0.0			(0.1		)	0.1
Loss and loss expenses	38.5			58.0			(19.5	)	33.9			45.2			(11.3	)
Underwriting expenses	27.7			29.4			(1.7	)	30.4			29.4			1.0
Combined ratio	66.2		%	87.4		%	(21.2	)	64.3		%	74.6		%	(10.3	)

Combined ratio	66.2		%	87.4		%	(21.2	)	64.3		%	74.6		%	(10.3	)
Contribution from catastrophe losses and prior years reserve development	(15.7		)	1.3			(17.0	)	(20.9		)	(14.6		)	(6.3	)
Combined ratio before catastrophe losses and prior years reserve development	81.9		%	86.1		%	(4.2	)	85.2		%	89.2		%	(4.0	)

Overview

Performance highlights for the excess and surplus lines segment include:


•	Premiums – Excess and surplus lines net written premiums continued to grow due to increases in both renewal and new business written premiums during the second quarter and first six months of 2017.

Renewal written premiums rose 16 percent and 17 percent for the three and six months ended June 30, 2017, compared with the same periods of 2016, reflecting the opportunity to renew many accounts for the first time, as well as higher renewal pricing. For the first six months of 2017, excess and surplus lines policy renewals experienced estimated average percentage price increases in the low-single-digit range. We measure average changes in excess and surplus lines renewal pricing as the percentage 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 produced by agencies increased 31 percent for the second quarter and 28 percent for the first six months of 2017, compared with the same periods of 2016, reflecting an increase in our marketing efforts as we continued to carefully underwrite each policy in a highly competitive market. Some of what we report as new business came from accounts that were not new to our agents. We believe our agents’ seasoned accounts tend to be priced more accurately than business that may be less familiar to them.

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Excess and Surplus Lines Insurance Premiums



(Dollars in millions)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Agency renewal written premiums	$	43		$	37		16		$	83		$	71		17
Agency new business written premiums	21			16			31		37			29			28
Other written premiums	(3		)	(2		)	(50	)	(6		)	(4		)	(50	)
Net written premiums	61			51			20		114			96			19
Unearned premium change	(9		)	(6		)	(50	)	(14		)	(8		)	(75	)
Earned premiums	$	52		$	45		16		$	100		$	88		14

•

Combined ratio – The excess and surplus lines combined ratio improved by 21.2 percentage points for the second quarter of 2017, compared with the same period of 2016. The decrease was primarily due to more favorable reserve development on prior accident years. For the first six months of 2017, the combined ratio improved by 10.3 percentage points, compared with the first six months of 2016, driven by lower ratios for current accident year losses and loss expenses before catastrophe losses and more favorable reserve development on prior accident years.

Excess and surplus lines net favorable reserve development on prior accident years, as a ratio to earned premiums, was 16.6 percent and 22.0 percent for the second quarter and first six months of 2017, compared with 1.9 percent and 16.5 percent for the same periods of 2016. Approximately three-fourths of the net favorable reserve development recognized during the first six months of 2017 was attributable to accident years 2015 and 2014. The favorable reserve development was due primarily to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2016 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 48.

The underwriting expense ratio for the second quarter of 2017 decreased, compared with the same period of 2016, reflecting higher earned premiums, ongoing expense management efforts and a lower level of profit-sharing commissions for agencies. For the first six months of 2017, the underwriting expense ratio increased, compared with the same period of 2016, primarily due to strategic investments that include enhancement of underwriting expertise, such as upgrades to systems used in underwriting or billing excess and surplus lines insurance policies.

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Excess and Surplus Lines Insurance Losses Incurred by Size



(Dollars in millions, net of reinsurance)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Current accident year losses greater than $5 million	$	—		$	—		nm		$	—		$	—		nm
Current accident year losses $1 million - $5 million	—			1			(100	)	—			1			(100	)
Large loss prior accident year reserve development	1			1			0		1			1			0
Total large losses incurred	1			2			(50	)	1			2			(50	)
Losses incurred but not reported	(10		)	9			nm		(11		)	7			nm
Other losses excluding catastrophe losses	19			5			280		27			14			93
Catastrophe losses	1			2			(50	)	1			2			(50	)
Total losses incurred	$	11		$	18		(39	)	$	18		$	25		(28	)

Ratios as a percent of earned premiums:							Pt. Change								Pt. Change
Current accident year losses greater than $5 million	—		%	—		%	0.0		—		%	—		%	0.0
Current accident year losses $1 million - $5 million	—			2.2			(2.2	)	—			1.1			(1.1	)
Large loss prior accident year reserve development	2.3			1.7			0.6		1.1			0.7			0.4
Total large loss ratio	2.3			3.9			(1.6	)	1.1			1.8			(0.7	)
Losses incurred but not reported	(20.2		)	20.3			(40.5	)	(11.3		)	7.8			(19.1	)
Other losses excluding catastrophe losses	37.0			12.7			24.3		27.4			16.6			10.8
Catastrophe losses	1.2			3.1			(1.9	)	1.0			1.7			(0.7	)
Total loss ratio	20.3		%	40.0		%	(19.7	)	18.2		%	27.9		%	(9.7	)

We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the second quarter of 2017, the excess and surplus lines total ratio for large losses, net of reinsurance, was 1.6 percentage points lower than last year’s second quarter. The second-quarter 2016 amount of total large losses incurred helped contribute to the decrease in the six-month 2017 total large loss ratio, compared with 2016, offsetting a first-quarter 2017 ratio that was 0.1 points higher than the first quarter of 2016. We believe results for the three-month period largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.

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LIFE INSURANCE RESULTS



(Dollars in millions)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Earned premiums	$	60		$	59		2		$	117		$	117		0
Fee revenues	1			1			0		3			2			50
Total revenues	61			60			2		120			119			1
Contract holders' benefits incurred	60			62			(3	)	125			125			0
Investment interest credited to contract holders'	(23		)	(22		)	(5	)	(46		)	(44		)	(5	)
Underwriting expenses incurred	20			19			5		37			38			(3	)
Total benefits and expenses	57			59			(3	)	116			119			(3	)
Life insurance segment profit	$	4		$	1		300		$	4		$	—		nm

Overview

Performance highlights for the life insurance segment include:


•	Revenues – Revenues increased for the six months ended June 30, 2017, due to higher earned premiums from term insurance products and higher fee revenues, partially offset by less earned premiums from other life insurance.

Net in-force life insurance policy face amounts increased to $59.126 billion at June 30, 2017, from $56.808 billion at year-end 2016.

Fixed annuity deposits received for the three and six months ended June 30, 2017, were $7 million and $17 million compared with $14 million and $26 million for same periods of 2016. Fixed annuity deposits have a minimal impact to earned premiums because deposits received are initially recorded as liabilities. Profit is earned over time by way of interest-rate spreads. We do not write variable or equity-indexed annuities.

Life Insurance Premiums



(Dollars in millions)	Three months ended June 30,						Six months ended June 30,
	2017		2016		% Change		2017		2016		% Change
Term life insurance	$	41	$	38	8		$	79	$	75	5
Universal life insurance	11		10		10		21		21		0
Other life insurance, annuity and disability income products	8		11		(27	)	17		21		(19	)
Net earned premiums	$	60	$	59	2		$	117	$	117	0

•

Profitability – Our life insurance segment typically reports a small profit or loss on a GAAP basis because profits from investment income spreads are included in our investment segment results. We include only investment income credited to contract holders (including interest assumed in life insurance policy reserve calculations) in our life insurance segment results. A gain of $4 million for our life insurance segment in the first six months of 2017, compared with a gain of less than $1 million for the same period of 2016, was largely due to more favorable mortality results.

Life insurance segment benefits and expenses consist principally of contract holders’ (policyholders’) benefits incurred related to traditional life and interest-sensitive products and operating expenses incurred, net of deferred acquisition costs. Total benefits were flat in the first six months of 2017. Life policy and investment contract reserves increased with continued growth in net in-force life insurance policy face amounts. Mortality results decreased from the same period of 2016 and were less than our 2017 projections.

Underwriting expenses for the first six months of 2017 decreased compared with the same period a year ago. For the first six months of 2017, unlocking of interest rate and other actuarial assumptions increased the amount of expenses deferred to future periods, decreasing underwriting expenses. For the first six months of 2016, unlocking decreased the amount of expenses deferred to future periods, increasing underwriting expenses.

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We recognize that assets under management, capital appreciation and investment income are integral to evaluating 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 $12 million and $25 million in the three and six months ended June 30, 2017, compared with a net profit of $12 million and $22 million for the same periods of 2016. The life insurance company portfolio had net after-tax realized investment losses of $1 million and net after-tax realized investment gains of $2 million for the three and six months ended June 30, 2017, compared with less than $1 million and $1 million of net after-tax realized investment gains for the three and six months ended June 30, 2016.

INVESTMENTS RESULTS

Overview

The investments segment contributes investment income and realized gains and losses to results of operations. Investments traditionally are our primary source of pretax and after-tax profits.

Investment Income

Pretax investment income increased 1 percent and 2 percent for the three and six months ended June 30, 2017, compared with the same periods of 2016. Interest income rose due to net purchases of fixed-maturity securities that offset the continuing effects of the low interest rate environment. Higher dividend income reflected rising dividend rates and net purchases of equity securities.

Investments Results



(Dollars in millions)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Total investment income, net of expenses	$	151		$	149		1		$	300		$	294		2
Investment interest credited to contract holders'	(23		)	(22		)	(5	)	(46		)	(44		)	(5	)
Realized investment gains, net	(11		)	44			nm		149			105			42
Investments profit, pretax	$	117		$	171		(32	)	$	403		$	355		14

We continue to position our portfolio considering 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. The table below shows the average pretax yield-to-amortized cost associated with expected principal redemptions for our fixed-maturity portfolio. The expected principal redemptions are based on par amounts and include dated maturities, calls and prefunded municipal bonds that we expect will be called during each respective time period.



(Dollars in millions)	% Yield		Principal redemptions
At June 30, 2017	% Yield		Principal redemptions
Fixed-maturity pretax yield profile:
Expected to mature during the remainder of 2017	5.12	%	$	289
Expected to mature during 2018	5.70		923
Expected to mature during 2019	6.22		743
Average yield and total expected redemptions from the remainder of 2017 through 2019	5.81		$	1,955

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The table below shows the average pretax yield-to-amortized cost for fixed-maturity securities acquired during the periods indicated. The average yield for total fixed-maturity securities acquired during the first six months of 2017 was lower than the 4.54 percent average yield-to-amortized cost of the fixed-maturity securities portfolio at the end of 2016. Our fixed-maturity portfolio's average yield of 4.46 percent for the first six months of 2017, from the investment income table below, was also lower than that yield for the year-end 2016 fixed-maturities portfolio.



	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
Average pretax yield-to-amortized cost on new fixed-maturities:
Acquired taxable fixed-maturities	3.75	%	4.30	%	4.08	%	4.50	%
Acquired tax-exempt fixed-maturities	3.33		2.96		3.39		3.01
Average total fixed-maturities acquired	3.53		4.03		3.73		4.08

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. In our 2016 Annual Report on Form 10-K, Item 1, Investments Segment, Page 23, and Item 7, Investments Outlook, Page 86, we discussed our portfolio strategies. We discuss risks related to our investment income and our fixed-maturity and equity investment portfolios in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk.

The table below provides details about investment income. Average yields in this table 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.



(Dollars in millions)	Three months ended June 30,							Six months ended June 30,
	2017			2016			% Change	2017			2016			% Change
Investment income:
Interest	$	111		$	110		1	$	222		$	219		1
Dividends	42			41			2	81			78			4
Other	1			—			nm	2			1			100
Less investment expenses	3			2			50	5			4			25
Investment income, pretax	151			149			1	300			294			2
Less income taxes	36			35			3	71			70			1
Total investment income, after-tax	$	115		$	114		1	$	229		$	224		2

Investment returns:
Average invested assets plus cash and cash equivalents	$	16,447		$	15,223			$	16,298		$	15,014
Average yield pretax	3.67		%	3.92		%		3.68		%	3.92		%
Average yield after-tax	2.80			3.00				2.81			2.98
Effective tax rate	23.7			23.9				23.6			23.8

Fixed-maturity returns:
Average amortized cost	$	10,044		$	9,480			$	9,953		$	9,421
Average yield pretax	4.42		%	4.64		%		4.46		%	4.65		%
Average yield after-tax	3.23			3.38				3.26			3.38
Effective tax rate	26.8			27.3				26.9			27.3

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Net Realized Gains and Losses

We reported net realized investment losses of $11 million for the second quarter of 2017 and net realized investment gains of $149 million for the six months ended June 30, 2017, compared with $44 million and $105 million of net realized investment gains for the same periods of 2016. The total net realized investment gains for the first six months of 2017 included $142 million in net gains from sales of various common and preferred stock holdings, compared with $99 million for the same period of 2016.

Investment gains or losses are recognized upon the sales of investments or as otherwise required under GAAP. The timing of realized gains or losses from sales can have a material effect on results in any quarter. However, such gains or losses usually have little, if any, effect on total shareholders’ equity because most equity and fixed-maturity investments are carried at fair value, with the unrealized gain or loss included as a component of accumulated other comprehensive income (AOCI). Accounting requirements for other-than-temporary impairment (OTTI) charges for the fixed-maturity portfolio are disclosed in our 2016 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 122.

Of the 3,430 securities in the portfolio, one fixed-maturity security and no equity securities were trading below 70 percent of amortized cost at June 30, 2017. Our asset impairment committee regularly monitors the portfolio, including a quarterly review of the entire portfolio for potential OTTI charges. We believe that if liquidity in the markets were to significantly deteriorate or economic conditions were to significantly weaken, we could experience declines in portfolio values and possibly additional OTTI charges.

The table below provides additional detail for OTTI charges:



(Dollars in millions)	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
Fixed maturities:
Utilities	$	—	$	—	$	—	$	2
Banking	6		—		6		—
Total fixed maturities	6		—		6		2
Common equities:
Energy	3		—		3		—
Total common equities	3		—		3		—
Total	$	9	$	—	$	9	$	2

OTHER

We report as Other the noninvestment operations of the parent company and a noninsurance subsidiary, CFC Investment Company. We also report as Other the underwriting results of Cincinnati Re, our reinsurance assumed operation, including earned premiums, loss and loss expenses and underwriting expenses.

Total revenues for the first six months of 2017 for our Other operations increased, compared with the same period of 2016, primarily due to earned premiums from Cincinnati Re. Total expenses for Other also increased for the first six months of 2017, primarily due to losses and loss expenses and underwriting expenses from Cincinnati Re.

Other loss in the table below represents losses before income taxes. The net result of Cincinnati Re for the first six months of 2017 was an underwriting profit of approximately $9 million. For both periods shown, Other loss resulted largely from interest expense from debt of the parent company.

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(Dollars in millions)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Interest and fees on loans and leases	$	1		$	1		0		$	2		$	2		0
Earned premiums	26			10			160		48			20			140
Other revenues	—			1			(100	)	—			1			(100	)
Total revenues	27			12			125		50			23			117
Interest expense	13			13			0		26			26			0
Loss and loss expenses	13			8			63		21			14			50
Underwriting expenses	9			3			200		18			6			200
Operating expenses	4			5			(20	)	8			7			14
Total expenses	39			29			34		73			53			38
Other loss	$	(12	)	$	(17	)	29		$	(23	)	$	(30	)	23

TAXES

We had $28 million and $103 million of income tax expense for the three and six months ended June 30, 2017, compared with $43 million and $120 million for the same periods of 2016. The effective tax rates for the three and six months ended June 30, 2017, were 21.9 percent and 25.5 percent compared with 25.9 percent and 27.8 percent for the same periods last year. The change in our effective tax rate was primarily due to changes in pretax income from underwriting results and realized investment gains and losses, with immaterial changes in the amount of permanent book-tax differences. For the three and six months ended June 30, 2017, the change in our effective tax rate also reflected the adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting .

Historically, we have pursued a strategy of investing some portion of cash flow in tax-advantaged fixed-maturity and equity securities to minimize our overall tax liability and maximize after-tax earnings. See Tax-Exempt Fixed Maturities in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk for further discussion on municipal bond purchases in our fixed-maturity investment portfolio. For our property casualty insurance subsidiaries, approximately 85 percent of interest from tax-advantaged fixed-maturity investments and approximately 60 percent of dividends from qualified equities are exempt from federal tax after applying proration from the 1986 Tax Reform Act. Our noninsurance companies own an immaterial amount of tax-advantaged fixed-maturity investments. For our noninsurance companies, the dividend received deduction exempts 70 percent of dividends from qualified equities. Our life insurance company does not own tax-advantaged fixed-maturity investments or equities subject to the dividend received deduction. Details about our effective tax rate are in this quarterly report Item 1, Note 9 – Income Taxes.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2017, shareholders’ equity was $7.373 billion, compared with $7.060 billion at December 31, 2016. Total debt was $804 million at June 30, 2017, down $3 million from December 31, 2016. At June 30, 2017, cash and cash equivalents totaled $606 million, compared with $777 million at December 31, 2016.

SOURCES OF LIQUIDITY

Subsidiary Dividends

Our lead insurance subsidiary declared dividends of $190 million to the parent company in the first six months of 2017, compared with $200 million for the same period of 2016. For full-year 2016, subsidiary dividends declared totaled $475 million. State of Ohio regulatory requirements restrict the dividends our insurance subsidiary can pay. For full-year 2017, total dividends that our insurance subsidiary could pay to our parent company without regulatory approval are approximately $469 million.

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Investing Activities

Investment income is a source of liquidity for both the parent company and its insurance subsidiary. We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth.

Parent company obligations can be funded with income on investments held at the parent-company level or through sales of securities in that portfolio, although our investment philosophy seeks to compound cash flows over the long term. These sources of capital can help minimize subsidiary dividends to the parent company, protecting insurance subsidiary capital.

See our 2016 Annual Report on Form 10-K, Item 1, Investments Segment, Page 23, for a discussion of our historic investment strategy, portfolio allocation and quality.

Insurance Underwriting

Our property casualty and life insurance underwriting operations provide liquidity because we generally receive premiums before paying losses under the policies purchased with those premiums. After satisfying our cash requirements, we use excess cash flows for investment, increasing future investment income.

Historically, cash receipts from property casualty and life insurance premiums, along with investment income, have been more than sufficient to pay claims, operating expenses and dividends to the parent company.

The table below shows a summary of operating cash flow for property casualty insurance (direct method):



(Dollars in millions)	Three months ended June 30,								Six months ended June 30,
	2017			2016			% Change		2017			2016			% Change
Premiums collected	$	1,265		$	1,185		7		$	2,506		$	2,349		7
Loss and loss expenses paid	(695		)	(629		)	(10	)	(1,389		)	(1,191		)	(17	)
Commissions and other underwriting expenses paid	(333		)	(321		)	(4	)	(830		)	(763		)	(9	)
Cash flow from underwriting	237			235			1		287			395			(27	)
Investment income received	97			96			1		202			198			2
Cash flow from operations	$	334		$	331		1		$	489		$	593		(18	)

Collected premiums for property casualty insurance rose $157 million during the first six months of 2017, compared with the same period in 2016. Loss and loss expenses paid increased $198 million, including an $85 million increase for catastrophe losses and loss expenses. Commissions and other underwriting expenses paid rose $67 million, primarily due to higher commissions paid to agencies, reflecting the increase in collected premiums.

We discuss our future obligations for claims payments and for underwriting expenses in our 2016 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 91, and Other Commitments also on Page 91.

Capital Resources

At June 30, 2017, our debt-to-total-capital ratio was 9.8 percent, with $787 million in long-term debt and $17 million in borrowing on our revolving short-term line of credit. That line of credit had a $20 million balance at December 31, 2016. At June 30, 2017, $208 million was available for future cash management needs. Based on our capital requirements at June 30, 2017, we do not anticipate a material increase in debt levels during the remainder of 2017. As a result, we expect changes in our debt-to-total-capital ratio to continue to be largely a function of the contribution of unrealized investment gains or losses to shareholders’ equity.

We provide details of our three, long-term notes in this quarterly report Item 1, Note 3 – Fair Value Measurements. None of the notes are encumbered by rating triggers.

Four independent ratings firms award insurer financial strength ratings to our property casualty insurance companies and three firms rate our life insurance company. Those firms made no changes to our parent company debt ratings during the first six months of 2017. Our debt ratings are discussed in our 2016 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, Other Sources of Liquidity, Page 89.

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Off-Balance Sheet Arrangements

We do not use any special-purpose financing vehicles or have any undisclosed off-balance sheet arrangements (as that term is defined in applicable SEC rules) that are reasonably likely to have a current or future material effect on the company’s financial condition, results of operation, liquidity, capital expenditures or capital resources. Similarly, the company holds no fair-value contracts for which a lack of marketplace quotations would necessitate the use of fair-value techniques.

USES OF LIQUIDITY

Our parent company and insurance subsidiary have contractual obligations and other commitments. In addition, one of our primary uses of cash is to enhance shareholder return.

Contractual Obligations

In our 2016 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 91, we estimated our future contractual obligations as of December 31, 2016. There have been no material changes to our estimates of future contractual obligations since our 2016 Annual Report on Form 10-K.

Other Commitments

In addition to our contractual obligations, we have other property casualty operational commitments.


•	Commissions – Commissions paid were $519 million in the first six months of 2017. Commission payments generally track with written premiums, except for annual profit-sharing commissions typically paid during the first quarter of the year.


•	Other underwriting expenses – Many of our underwriting expenses are not contractual obligations, but reflect the ongoing expenses of our business. Noncommission underwriting expenses paid were $311 million in the first six months of 2017.

•

Technology costs – In addition to contractual obligations for hardware and software, we anticipate capitalizing up to $7 million in spending for key technology initiatives in 2017. Capitalized development costs related to key technology initiatives were $4 million in the first six months of 2017. These activities are conducted at our discretion, and we have no material contractual obligations for activities planned as part of these projects.

We contributed $5 million to our qualified pension plan during the first six months of 2017.

Investing Activities

After fulfilling operating requirements, we invest cash flows from underwriting, investment and other corporate activities in fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We discuss our investment strategy and certain portfolio attributes in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk.

Uses of Capital

Uses of cash to enhance shareholder return include dividends to shareholders. In January and May 2017, the board of directors declared regular quarterly cash dividends of 50 cents per share for an indicated annual rate of $2.00 per share. During the first six months of 2017, we used $158 million to pay cash dividends to shareholders.

PROPERTY CASUALTY INSURANCE LOSS AND LOSS EXPENSE 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 (incurred but not reported) and loss expense reserves, net of salvage and subrogation reserves. Reserving practices are discussed in our 2016 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves, Page 93.

Total gross reserves at June 30, 2017, increased $178 million compared with December 31, 2016. Case loss reserves for losses increased $105 million, IBNR loss reserves increased by $41 million and loss expense reserves increased by $32 million. Accounting for most of the total gross increase was the aggregate of our commercial casualty, commercial auto and commercial property lines of business and our Cincinnati Re reinsurance assumed operation.

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Property Casualty Gross Reserves



(Dollars in millions)	Loss reserves				Loss expense reserves		Total gross reserves
	Case reserves		IBNR reserves						Percent of total
At June 30, 2017	Case reserves		IBNR reserves						Percent of total
Commercial lines insurance:
Commercial casualty	$	959	$	569	$	578	$	2,106	40.3	%
Commercial property	271		30		58		359		6.9
Commercial auto	393		107		113		613		11.8
Workers' compensation	382		541		94		1,017		19.5
Other commercial	112		17		69		198		3.8
Subtotal	2,117		1,264		912		4,293		82.3
Personal lines insurance:
Personal auto	234		37		65		336		6.5
Homeowner	114		20		30		164		3.1
Other personal	56		45		5		106		2.0
Subtotal	404		102		100		606		11.6
Excess and surplus lines	102		74		67		243		4.7
Cincinnati Re	13		56		2		71		1.4
Total	$	2,636	$	1,496	$	1,081	$	5,213	100.0	%
At December 31, 2016
Commercial lines insurance:
Commercial casualty	$	928	$	553	$	556	$	2,037	40.5	%
Commercial property	253		28		58		339		6.7
Commercial auto	374		86		103		563		11.2
Workers' compensation	382		553		95		1,030		20.4
Other commercial	116		19		75		210		4.2
Subtotal	2,053		1,239		887		4,179		83.0
Personal lines insurance:
Personal auto	228		24		66		318		6.3
Homeowner	102		22		29		153		3.0
Other personal	46		47		5		98		2.0
Subtotal	376		93		100		569		11.3
Excess and surplus lines	94		86		61		241		4.8
Cincinnati Re	8		37		1		46		0.9
Total	$	2,531	$	1,455	$	1,049	$	5,035	100.0	%

LIFE POLICY AND INVESTMENT CONTRACT RESERVES

Gross life policy and investment contract reserves were $2.702 billion at June 30, 2017, compared with $2.671 billion at year-end 2016, reflecting continued growth in life insurance policies in force. We discuss our life insurance reserving practices in our 2016 Annual Report on Form 10-K, Item 7, Life Insurance Policyholder Obligations and Reserves, Page 100.

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OTHER MATTERS

SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are discussed in our 2016 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 122, and updated in this quarterly report Item 1, Note 1, Accounting Policies.

In conjunction with those discussions, in the Management’s Discussion and Analysis in the 2016 Annual Report on Form 10-K, management reviewed the estimates and assumptions used to develop reported amounts related to the most significant policies. Management discussed the development and selection of those accounting estimates with the audit committee of the board of directors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our greatest exposure to market risk is through our investment portfolio. Market risk is the potential for a decrease in securities’ fair value resulting from broad yet uncontrollable forces such as: inflation, economic growth or recession, interest rates, world political conditions or other widespread unpredictable events. It is comprised of many individual risks that, when combined, create a macroeconomic impact.

Our view of potential risks and our sensitivity to such risks is discussed in our 2016 Annual Report on Form 10-K, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Page 107.

The fair value of our investment portfolio was $16.301 billion at June 30, 2017 , up $882 million from year-end 2016, including a $417 million increase in the fixed-maturity portfolio and a $465 million increase in the equity portfolio.



(Dollars in millions)	At June 30, 2017								At December 31, 2016
	Cost or amortized cost		Percent of total		Fair value		Percent of total		Cost or amortized cost		Percent of total		Fair value		Percent of total
Taxable fixed maturities	$	6,441	48.3	%	$	6,734	41.3	%	$	6,381	49.9	%	$	6,630	43.0	%
Tax-exempt fixed maturities	3,665		27.5		3,768		23.1		3,418		26.7		3,455		22.4
Common equity securities	3,038		22.8		5,581		34.2		2,812		22.0		5,123		33.2
Nonredeemable preferred equity securities	180		1.4		218		1.4		183		1.4		211		1.4
Total	$	13,324	100.0	%	$	16,301	100.0	%	$	12,794	100.0	%	$	15,419	100.0	%

At June 30, 2017 , our consolidated investment portfolio included $6 million of assets for which values are based on prices or valuation techniques that require significant management judgment (Level 3 assets). This represented less than 1 percent of investment portfolio assets measured at fair value. See Item 1, Note 3, Fair Value Measurements, for additional discussion of our valuation techniques. We have generally obtained and evaluated two nonbinding quotes from brokers; then, our investment professionals determined our best estimate of fair value. These investments include private placements, small issues and various thinly traded securities.

In addition to our investment portfolio, the total investments amount reported in our condensed consolidated balance sheets includes Other invested assets. Other invested assets included $31 million of life policy loans, $28 million of private equity investments and $34 million of real estate through direct property ownership and development projects in the United States at June 30, 2017 .

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FIXED-MATURITY SECURITIES INVESTMENTS

By maintaining a well-diversified fixed-maturity portfolio, we attempt to reduce overall risk. We invest new money in the bond market on a regular basis, targeting what we believe to be optimal risk-adjusted, after-tax yields. Risk, in this context, includes interest rate, call, reinvestment rate, credit and liquidity risk. We do not make a concerted effort to alter duration on a portfolio basis in response to anticipated movements in interest rates. By regularly investing in the bond market, we build a broad, diversified portfolio that we believe mitigates the impact of adverse economic factors.

In the first six months of 2017, the increase in fair value of our fixed-maturity portfolio was driven by the combination of net purchases of securities and an increase in net unrealized gains that primarily reflected a slight decrease in interest rates and a slight decline in corporate credit spreads. At June 30, 2017 , our fixed-maturity portfolio with an average rating of A2/A was valued at 103.9 percent of its amortized cost, compared with 102.9 percent at December 31, 2016.

At June 30, 2017 , our investment-grade and noninvestment-grade fixed-maturity securities represented 87.9 percent and 3.9 percent of the portfolio, respectively. The remaining 8.2 percent represented fixed-maturity securities that were not rated by Moody's or S&P Global Ratings .

Attributes of the fixed-maturity portfolio include:



	At June 30, 2017		At December 31, 2016
Weighted average yield-to-amortized cost	4.52	%	4.54	%
Weighted average maturity	7.5	yrs	7.1	yrs
Effective duration	5.2	yrs	5.0	yrs

We discuss maturities of our fixed-maturity portfolio in our 2016 Annual Report on Form 10-K, Item 8, Note 2, Investments, Page 129, and in this quarterly report Item 2, Investments Results.

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TAXABLE FIXED MATURITIES

Our taxable fixed-maturity portfolio, with a fair value of $6.734 billion at June 30, 2017 , included:



(Dollars in millions)	At June 30, 2017		At December 31, 2016
Investment-grade corporate	$	5,385	$	5,336
Noninvestment-grade corporate	412		445
States, municipalities and political subdivisions	386		373
Commercial mortgage-backed	289		287
Government sponsored enterprises	232		164
United States government	15		10
Foreign government	10		10
Convertibles and bonds with warrants attached	5		5
Total	$	6,734	$	6,630

Our strategy is to buy, and typically hold, fixed-maturity investments to maturity, but we monitor credit profiles and fair value movements when determining holding periods for individual securities. With the exception of United States agency issues that include government-sponsored enterprises, no individual issuer’s securities accounted for more than 1.2 percent of the taxable fixed-maturity portfolio at June 30, 2017 . Our investment-grade corporate bonds had an average rating of Baa2 by Moody’s or BBB+ by S&P Global Ratings and represented 80.0 percent of the taxable fixed-maturity portfolio’s fair value at June 30, 2017 , compared with 80.5 percent at year-end 2016.

The heaviest concentration in our investment-grade corporate bond portfolio, based on fair value at

June 30, 2017 , was the financial sector. It represented 44.5 percent of our investment-grade corporate bond portfolio, compared with 42.5 percent at year-end 2016. No other sector exceeded 10 percent of our investment-grade corporate bond portfolio.

Most of the $386 million of securities issued by states, municipalities and political subdivisions included in our taxable fixed-maturity portfolio at June 30, 2017 , were Build America Bonds.

Our taxable fixed-maturity portfolio at June 30, 2017 , included $289 million of commercial mortgage-backed securities with an average rating of Aa1/AA.

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TAX-EXEMPT FIXED MATURITIES

At June 30, 2017 , we had $3.768 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody’s and S&P Global Ratings . We traditionally have purchased municipal bonds focusing on general obligation and essential services issues, such as water, waste disposal or others. The portfolio is well diversified among approximately 1,400 municipal bond issuers. No single municipal issuer accounted for more than 0.7 percent of the tax-exempt fixed-maturity portfolio at June 30, 2017 .

INTEREST RATE SENSITIVITY ANALYSIS

Because of our strong surplus, long-term investment horizon and ability to hold most fixed-maturity investments until maturity, we believe the company is adequately positioned if interest rates were to rise. Although the fair values of our existing holdings may suffer, a higher rate environment would provide the opportunity to invest cash flow in higher-yielding securities, while reducing the likelihood of untimely redemptions of currently callable securities. While higher interest rates would be expected to continue to increase the number of fixed-maturity holdings trading below 100 percent of amortized cost, we believe lower fixed-maturity security values due solely to interest rate changes would not signal a decline in credit quality. We continue to manage the portfolio with an eye toward both meeting current income needs and managing interest rate risk.

Our dynamic financial planning model uses analytical tools to assess market risks. As part of this model, the effective duration of the fixed-maturity portfolio is continually monitored by our investment department to evaluate the theoretical impact of interest rate movements.

The table below summarizes the effect of hypothetical changes in interest rates on the fair value of the fixed-maturity portfolio:



(Dollars in millions)	Effect from interest rate change in basis points
	-200		-100		-		100		200
At June 30, 2017	$	11,616	$	11,058	$	10,502	$	9,951	$	9,431
At December 31, 2016	$	11,131	$	10,603	$	10,085	$	9,577	$	9,094

The effective duration of the fixed-maturity portfolio as of June 30, 2017 , was 5.2 years, up from 5.0 years at year-end 2016. The above table is a theoretical presentation showing that an instantaneous, parallel shift in the yield curve of 100 basis points could produce an approximately 5.3 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 our dynamic financial planning model, the selected interest rate change of 100 to 200 basis points represents our view 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.

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EQUITY INVESTMENTS

Our equity investments, with a fair value totaling $5.799 billion at June 30, 2017 , included $5.581 billion of common stock securities of companies generally with strong indications of paying and growing their dividends. Other criteria we evaluate include increasing sales and earnings, proven management and a favorable outlook. We believe our equity investment style is an appropriate long-term strategy. While our long-term financial position would be affected by prolonged changes in the market valuation of our investments, we believe our strong surplus position and cash flow provide a cushion against short-term fluctuations in valuation. Continued payment of cash dividends by the issuers of our common equity holdings can provide a floor to their valuation.

The table below summarizes the effect of hypothetical changes in market prices on fair value of our equity portfolio.



(Dollars in millions)	Effect from market price change in percent
		-30%		-20%		-10%		—		10%		20%		30%
At June 30, 2017		$	4,059	$	4,639	$	5,219	$	5,799	$	6,379	$	6,959	$	7,539
At December 31, 2016		$	3,734	$	4,267	$	4,801	$	5,334	$	5,867	$	6,401	$	6,934

At June 30, 2017 , JP Morgan Chase & Co. (NYSE:JPM) was our largest single common stock holding with a fair value of $206 million , or 3.7 percent of our publicly traded common stock portfolio and 1.3 percent of the total investment portfolio. Twenty-nine holdings among eight different sectors each had a fair value greater than $100 million.

Common Stock Portfolio Industry Sector Distribution



	Percent of common stock portfolio
	At June 30, 2017				At December 31, 2016
	Cincinnati Financial		S&P 500 Industry Weightings		Cincinnati Financial		S&P 500 Industry Weightings
Sector:
Information technology	16.4	%	22.3	%	17.6	%	20.8	%
Financial	15.3		14.5		15.6		14.8
Industrials	15.1		10.3		14.9		10.3
Healthcare	14.5		14.5		12.6		13.6
Consumer discretionary	13.7		12.3		10.4		12.0
Consumer staples	8.5		9.0		10.3		9.4
Energy	7.1		6.0		8.5		7.5
Materials	5.5		2.9		5.8		2.8
Utilities	2.2		3.2		2.2		3.2
Telecomm services	1.7		2.1		2.1		2.7
Real Estate	—		2.9		—		2.9
Total	100.0	%	100.0	%	100.0	%	100.0	%

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UNREALIZED INVESTMENT GAINS AND LOSSES

At June 30, 2017 , unrealized investment gains before taxes for the consolidated investment portfolio totaled

$3.028 billion and unrealized investment losses amounted to $51 million .

The net unrealized investment gains at June 30, 2017 , consisted of a pretax net gain position in our fixed-maturity portfolio of $396 million and a net gain position in our equity portfolio of $2.581 billion . The net gain position in our fixed-maturity portfolio increased in the first six months of 2017 primarily due to slight declines in both interest rates and corporate credit spreads. The net gain position for our current fixed-maturity holdings will naturally decline over time as individual securities mature. In addition, changes in interest rates can cause rapid, significant changes in fair values of fixed-maturity securities and the net gain position, as discussed in Quantitative and Qualitative Disclosures About Market Risk. Events or factors such as economic growth or recession can also affect the fair value of our equity securities. The seven largest contributors to our common stock portfolio net gain position were Honeywell International Inc. (NYSE:HON), JP Morgan Chase, Hasbro Inc. (Nasdaq:HAS), Blackrock Inc. (NYSE:BLK), Apple Inc. (Nasdaq:AAPL), Johnson & Johnson (NYSE:JNJ) and Microsoft Corporation (Nasdaq:MSFT) which had a combined gross unrealized gain position of $829 million .

Unrealized Investment Losses

We expect the number of securities trading below amortized cost to fluctuate as interest rates rise or fall and credit spreads expand or contract due to prevailing economic conditions. Further, amortized costs for some securities are revised through OTTI recognized in prior periods. At June 30, 2017 , 486 of the 3,430 securities we owned had fair values below amortized cost, compared with 784 of the 3,315 securities we owned at year-end 2016. The 486 holdings with fair values below cost or amortized cost at June 30, 2017 , represented 10.4 percent of the fair value of our investment portfolio and $51 million in unrealized losses.

•

482 of the 486 holdings had fair value between 90 percent and 100 percent of amortized cost at June 30, 2017 . Four of these 482 holdings are equity securities that may be subject to OTTI charges taken through earnings should they not recover by the recovery dates we determined. The fair value of these four equity securities was $354 million , and they accounted for $16 million in unrealized losses. The remaining 478 securities primarily consist of fixed-maturity securities whose current valuation is largely the result of interest rate factors. The fair value of these 478 securities was $1.333 billion , and they accounted for $33 million in unrealized losses.

•

Three of the 486 holdings had fair value between 70 percent and 90 percent of amortized cost at June 30, 2017 . None of these holdings were equity securities. We believe the three fixed-maturity securities will continue to pay interest and ultimately pay principal upon maturity. The issuers of these three securities have strong cash flow to service their debt and meet their contractual obligation to make principal payments. The fair value of these securities was $12 million , and they accounted for $2 million in unrealized losses.


•	One holding had fair value below 70 percent of amortized cost at June 30, 2017 . It is a fixed-maturity security whose current valuation is largely the result of interest rate factors. The fair value of this security was $1 million, and it accounted for less than $1 million in unrealized losses.

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The table below reviews fair values and unrealized losses by investment category and by the overall duration of the securities’ continuous unrealized loss position.



(Dollars in millions)	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
At June 30, 2017	value		losses		value		losses		value		losses
Fixed maturity securities:
Corporate	$	290	$	8	$	136	$	6	$	426	$	14
States, municipalities and political subdivisions	665		17		2		—		667		17
Commercial mortgage-backed securities	53		1		3		—		56		1
Government-sponsored enterprises	190		3		—		—		190		3
United States government	7		—		—		—		7		—
Subtotal	1,205		29		141		6		1,346		35
Equity securities:
Common equities	354		16		—		—		354		16
Subtotal	354		16		—		—		354		16
Total	$	1,559	$	45	$	141	$	6	$	1,700	$	51
At December 31, 2016
Fixed maturity securities:
Corporate	$	733	$	15	$	189	$	11	$	922	$	26
States, municipalities and political subdivisions	989		42		—		—		989		42
Commercial mortgage-backed	89		2		2		—		91		2
Government-sponsored enterprises	155		3		—		—		155		3
United States government	6		—		—		—		6		—
Subtotal	1,972		62		191		11		2,163		73
Equity securities:
Common equities	103		9		—		—		103		9
Nonredeemable preferred equities	4		—		—		—		4		—
Subtotal	107		9		—		—		107		9
Total	$	2,079	$	71	$	191	$	11	$	2,270	$	82

At June 30, 2017 , 23 fixed-maturity securities with a total unrealized loss of $6 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity security had a fair value below 70 percent of amortized cost; three fixed-maturity securities with a fair value of $12 million had a fair value from 70 percent to less than 90 percent of amortized cost and accounted for $2 million in unrealized losses; and 20 fixed-maturity securities with a fair value of $129 million had fair values from 90 percent to less than 100 percent of amortized cost and accounted for $4 million in unrealized losses.

At June 30, 2017 , no equity securities had been in an unrealized loss position for 12 months or more.

At June 30, 2017 , applying our invested asset impairment policy, we determined that the total of $6 million, for securities in an unrealized loss position for 12 months or more in the table above, was not other-than-temporarily impaired.

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During the second quarter of 2017, six securities were written down through an impairment charge, for a total of six during the first six months of 2017, as none were written down during the first quarter of 2017. OTTI resulted in pretax, noncash charges of $9 million for the three and six months ended June 30, 2017. During the first six months of 2016, four securities were written down resulting in $2 million in OTTI charges.

During full-year 2016, we wrote down four securities and recorded $2 million in OTTI charges. At December 31, 2016, 32 fixed-maturity investments with a total unrealized loss of $11 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 security investments in an unrealized loss position for 12 months or more as of December 31, 2016.

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The following table summarizes the investment portfolio by severity of decline:



(Dollars in millions)	Number of issues	Cost or amortized cost		Fair value		Gross unrealized gain (loss)			Gross investment income
At June 30, 2017	Number of issues	Cost or amortized cost		Fair value		Gross unrealized gain (loss)			Gross investment income
Taxable fixed maturities:
Fair valued below 70% of amortized cost	1	$	1	$	1	$	—		$	—
Fair valued at 70% to less than 100% of amortized cost	213	773		754		(19		)	12
Fair valued at 100% and above of amortized cost	1,274	5,667		5,979		312			146
Investment income on securities sold in current year	—	—		—		—			5
Total	1,488	6,441		6,734		293			163
Tax-exempt fixed maturities:
Fair valued below 70% of amortized cost	—	—		—		—			—
Fair valued at 70% to less than 100% of amortized cost	268	607		591		(16		)	8
Fair valued at 100% and above of amortized cost	1,578	3,058		3,177		119			50
Investment income on securities sold in current year	—	—		—		—			2
Total	1,846	3,665		3,768		103			60
Common equities:
Fair valued below 70% of cost	—	—		—		—			—
Fair valued at 70% to less than 100% of cost	4	370		354		(16		)	4
Fair valued at 100% and above of cost	62	2,668		5,227		2,559			69
Investment income on securities sold in current year	—	—		—		—			2
Total	66	3,038		5,581		2,543			75
Nonredeemable 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	30	180		218		38			6
Investment income on securities sold in current year	—	—		—		—			—
Total	30	180		218		38			6
Portfolio summary:
Fair valued below 70% of cost or amortized cost	1	1		1		—			—
Fair valued at 70% to less than 100% of cost or amortized cost	485	1,750		1,699		(51		)	24
Fair valued at 100% and above of cost or amortized cost	2,944	11,573		14,601		3,028			271
Investment income on securities sold in current year	—	—		—		—			9
Total	3,430	$	13,324	$	16,301	$	2,977		$	304

At December 31, 2016
Portfolio summary:
Fair valued below 70% of cost or amortized cost	—	$	—	$	—	$	—		$	—
Fair valued at 70% to less than 100% of cost or amortized cost	784	2,352		2,270		(82		)	62
Fair valued at 100% and above of cost or amortized cost	2,531	10,442		13,149		2,707			501
Investment income on securities sold in current year	—	—		—		—			38
Total	3,315	$	12,794	$	15,419	$	2,625		$	601

See our 2016 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Asset Impairment, Page 53.

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Item 4. 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 June 30, 2017 . 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


•	that 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 June 30, 2017 , 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.

Part II – Other Information

Item 1. Legal Proceedings

Neither the company nor any of our subsidiaries are involved in any litigation believed to be material other than ordinary, routine litigation incidental to the nature of our business.

Item 1A. Risk Factors

Our risk factors have not changed materially since they were described in our 2016 Annual Report on Form 10-K filed February 24, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

We did not sell any of our shares that were not registered under the Securities Act during the first six months of 2017. Our repurchase program was expanded on October 22, 2007, to increase our repurchase authorization to approximately 13 million shares. Our repurchase program does not have an expiration date. We have 2,542,065 shares available for purchase under our programs at June 30, 2017 .



Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs
April 1-30, 2017	—	—		—	3,342,065
May 1-31, 2017	800,000	$	69.73	800,000	2,542,065
June 1-30, 2017	—	—		—	2,542,065
Totals	800,000	69.73		800,000

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Item 6. Exhibits



Exhibit No.		Exhibit Description
3.1		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)
3.2		Amendment to Amended and Restated Articles of Incorporation of Cincinnati Financial Corporation (incorporated by reference to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, Exhibit 3.2) (File No. 000-04604)
3.3		Regulations of Cincinnati Financial Corporation, as amended through May 1, 2010 (incorporated by reference to the company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Exhibit 3.2)
31A		Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 – Chief Executive Officer
31B		Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 – Chief Financial Officer
32		Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURE

Pursuant to the requirements 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

Date: August 2, 2017

/S/ Michael J. Sewell

Michael J. Sewell, CPA

Chief Financial Officer, Senior Vice President and Treasurer

(Principal Accounting Officer)

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TABLE OF CONTENTS

Part I Financial Informationprint Item 1. Financial Statements (unaudited)print Note 1 Accounting Policiesprint Note 2 Investmentsprint Note 3 Fair Value Measurementsprint Note 4 Property Casualty Loss and Loss Expensesprint Note 5 Life Policy and Investment Contract Reservesprint Note 6 Deferred Policy Acquisition Costsprint Note 7 Accumulated Other Comprehensive Incomeprint Note 8 Reinsuranceprint Note 9 Income Taxesprint Note 10 Net Income Per Common Shareprint Note 11 Employee Retirement Benefitsprint Note 12 Commitments and Contingent Liabilitiesprint Note 13 Segment Informationprint Item 2. Management S Discussion and Analysis Of Financial Condition andprint Item 3. Quantitative and Qualitative Disclosures About Market Riskprint Item 4. Controls and Proceduresprint Part II Other Informationprint Item 1. Legal Proceedingsprint Item 1A. Risk Factorsprint Item 2. Unregistered Sales Of Equity Securities and Use Of Proceedsprint Item 6. Exhibitsprint

FUND	NUMBER OF SHARES	VALUE ($)	PUT OR CALL
VANGUARD GROUP INC	82,548,200	3,235,889,440
Capital World Investors	33,701,044	1,424,880,140
PRICE T ROWE ASSOCIATES INC /MD/	24,147,279	1,020,948
CHARLES SCHWAB INVESTMENT MANAGEMENT INC	22,908,401	898,009,319
GEODE CAPITAL MANAGEMENT, LLC	16,959,001	715,219,153
Boston Partners	14,135,430	597,692,321
FIRST TRUST ADVISORS LP	9,531,485	402,991,191
Nuveen Asset Management, LLC	9,292,594	392,890,875
DIMENSIONAL FUND ADVISORS LP	9,067,935	383,426,497
NORGES BANK	8,794,596	371,835,519
Allspring Global Investments Holdings, LLC	7,505,621	292,193,826
FORT WASHINGTON INVESTMENT ADVISORS INC /OH/	5,616,571	220,169,583
Parametric Portfolio Associates LLC	4,731,155	203,629
UBS AM, a distinct business unit of UBS ASSET MANAGEMENT AMERICAS LLC	4,229,103	178,806,475
Legal & General Group Plc	4,190,428	177,171,301
MASSACHUSETTS FINANCIAL SERVICES CO /MA/	2,905,602	113,899,598
EATON VANCE MANAGEMENT	2,538,410	81,128
Davis Selected Advisers	2,444,176	103,339,761
HSBC HOLDINGS PLC	2,276,130	96,290,415
LSV ASSET MANAGEMENT	2,229,900	87,412
Smead Capital Management, Inc.	2,171,369	91,805,492
Clark Capital Management Group, Inc.	2,161,276	91,378,767
SUSQUEHANNA INTERNATIONAL GROUP, LLP	2,079,001	87,900,162
DEUTSCHE BANK AG\	2,070,070	81,146,743
KBC Group NV	2,004,113	78,562
ENVESTNET ASSET MANAGEMENT INC	1,895,706	74,311,667
PL Capital Advisors, LLC	1,860,320	44,000
FMR LLC	1,732,684	73,257,884
BNP PARIBAS FINANCIAL MARKETS	1,674,606	86,239,277
TODD ASSET MANAGEMENT LLC	1,639,030	69,298,188
ZACKS INVESTMENT MANAGEMENT	1,577,403	66,692,615
MANUFACTURERS LIFE INSURANCE COMPANY, THE	1,535,018	64,900,561
PANAGORA ASSET MANAGEMENT INC	1,523,062	64,395,061
Employees Retirement System of Texas	1,433,900	60,625
AMUNDI	1,395,778	59,208,904
Parallax Volatility Advisers, L.P.	1,357,319	57,387,447	Put
SCHRODER INVESTMENT MANAGEMENT GROUP	1,168,323	49,478,479
Rockefeller Capital Management L.P.	1,104,159	46,663,270
California Public Employees Retirement System	1,096,089	46,342,643
National Pension Service	1,062,783	44,934,465
Mitsubishi UFJ Asset Management Co., Ltd.	1,060,604	44,959,004
Alecta Tjanstepension Omsesidigt	1,045,900	40,988,821
MILLENNIUM MANAGEMENT LLC	1,034,746	43,749,061	Call
AMUNDI ASSET MANAGEMENT US, INC.	1,015,355	38,025
VICTORY CAPITAL MANAGEMENT INC	983,897	38,568,763
PZENA INVESTMENT MANAGEMENT LLC	950,851	37,273,359
CREDIT SUISSE AG/	930,131	34,610,175
CALIFORNIA STATE TEACHERS RETIREMENT SYSTEM	900,279	38,063,796
ATWOOD & PALMER INC	840,702	32,955,517
Artisan Partners Limited Partnership	837,981	35,429,837
LOS ANGELES CAPITAL MANAGEMENT LLC	812,102	31,834,398
AMERICAN CENTURY COMPANIES INC	775,359	32,782,214
Qube Research & Technologies Ltd	756,230	31,973,404
STATE BOARD OF ADMINISTRATION OF FLORIDA RETIREMENT SYSTEM	755,805	31,955,435
TEACHERS RETIREMENT SYSTEM OF THE STATE OF KENTUCKY	752,763	29,508
NATIXIS ADVISORS, LLC	740,550	29,030
LPL Financial LLC	706,493	27,694,521
DEPRINCE RACE & ZOLLO INC	675,478	28,559,210
NORDEA INVESTMENT MANAGEMENT AB	666,028	28,286,209
SIMPLEX TRADING, LLC	648,290	27,408	Call
CANADA LIFE ASSURANCE Co	645,145	27,265
Mirae Asset Global Investments Co., Ltd.	617,867	23,979,418
RAYMOND JAMES & ASSOCIATES	604,688	25,904,807
Mesirow Financial Investment Management, Inc.	581,754	22,804,773
Aperio Group, LLC	575,616	15,869
Candriam S.C.A.	565,162	23,895,049
ADAGE CAPITAL PARTNERS GP, L.L.C.	561,497	23,740,093
CITADEL ADVISORS LLC	526,000	22,239,280	Call
APG Asset Management N.V.	523,846	21,388,903
NEW YORK STATE TEACHERS RETIREMENT SYSTEM	502,230	19,687
AQR CAPITAL MANAGEMENT LLC	464,863	19,654,397
Mitsubishi UFJ Trust & Banking Corp	453,757	17,787,274
TRILLIUM ASSET MANAGEMENT, LLC	445,927	18,853,909
Russell Investments Group, Ltd.	442,762	18,721,485
JANE STREET GROUP, LLC	421,324	17,813,579
NEW YORK STATE COMMON RETIREMENT FUND	407,681	15,981
STATE OF WISCONSIN INVESTMENT BOARD	406,702	17,195,361
NISA INVESTMENT ADVISORS, LLC	385,703	15,262,268
EDMOND DE ROTHSCHILD HOLDING S.A.	380,000	16,066,400
Clearbridge Investments, LLC	368,694	15,588,385
AE Wealth Management LLC	367,140	14,391,917
Tredje AP-fonden	364,049	14,270,720
Squarepoint Ops LLC	358,930	15,175,560
GUGGENHEIM CAPITAL LLC	352,681	14,911,353
Chevy Chase Trust Holdings, LLC	351,666	13,785,308
Universal- Beteiligungs- und Servicegesellschaft mbH	350,364	13,734,269
Verition Fund Management LLC	349,608	14,781,426
PICTET ASSET MANAGEMENT LTD	336,743	12,874
Mariner, LLC	335,836	14,199,212
WELLINGTON MANAGEMENT GROUP LLP	325,364	13,756,390
ISTHMUS PARTNERS, LLC	316,565	12,409,348
LAWSON KROEKER INVESTMENT MANAGEMENT INC/NE	312,180	12,237,456
PUBLIC EMPLOYEES RETIREMENT SYSTEM OF OHIO	309,308	13,077,542
Pictet Asset Management Holding SA	308,628	12,098,218
Zurcher Kantonalbank (Zurich Cantonalbank)	306,342	12,008,606
Treasurer of the State of North Carolina	304,981	12,895
CANADA PENSION PLAN INVESTMENT BOARD	302,357	12,783,654
TD Asset Management Inc	300,483	11,778,934
SAPIENT CAPITAL LLC	297,689	11,779,538
Advisors Capital Management, LLC	293,896	12,425,927

DIRECTORS	AGE	BIO	OTHER DIRECTOR MEMBERSHIPS
Timothy N Spence	46	Timothy N. Spence Chair, Chief Executive Officer, and President of Fifth Third Bancorp Career Highlights: • Chair and Chief Executive Officer of Fifth Third Bancorp; President (2020-present); Executive Vice President and Head of Consumer Bank, Payments and Strategy (2018-2020); Head of Payments, Strategy and Digital Solutions (2017-2018); and Chief Strategy Officer (2015-2020) • Prior to joining Fifth Third, Mr. Spence was a Senior Partner with Oliver Wyman Key Qualifications and Experience • Broad knowledge of the Company and the financial services sector from expansive experience heading multiple Fifth Third businesses • Unique and valuable experience from leading Fifth Third’s digital transformation efforts, including completion of significant acquisitions and investments • Substantial experience leading strategic plan development and implementation Skills and Attributes: Accounting/Financial Reporting, Compensation and Benefits, Corporate Governance, Cybersecurity, Digital Innovation/FinTech, Executive Management, Financial Services Industry, Human Capital Management, Legal and Regulatory, Risk Management, Strategic Planning, Sustainability
Thomas H Harvey	64	Thomas H. Harvey Chief Executive Officer of Energy Innovation: Policy and Technology, LLC Career Highlights: • Chief Executive Officer of Energy Innovation: Policy and Technology, LLC • Former Chair of the Board of MB Financial, Inc. • Former Chief Executive Officer of ClimateWorks Foundation • Former Environmental Program Director of the William and Flora Hewlett Foundation • Former President of Energy Foundation Key Qualifications and Experience • 25 years of service in the financial services industry • Strong organizational and leadership skills and extensive investment experience derived from his executive positions with multiple foundations and organizations • Unique and diverse knowledge and experience with the emergence and growth of technology in the banking industry • Extensive knowledge and experience with renewable energy, sustainability, and climate matters Skills and Attributes: Accounting/Financial Reporting, Corporate Governance, Executive Management, Financial Services Industry, Human Capital Management, Strategic Planning, Sustainability
Nicholas K Akins	64	Mr. Akins has extensive experience guiding sustainability-related initiatives while at AEP, including specific clean energy efforts and diversity and inclusion programs. In addition, as former Chair of the Fifth Third’s Nominating and Corporate Governance Committee, he oversaw the formal development of Fifth Third’s sustainability-related programs.
Mitchell S Feiger	66	Mitchell S. Feiger Retired Chair and Chief Executive Officer of Fifth Third Bank (Chicago) Career Highlights: • Former Chief Executive Officer and President of MB Financial, Inc. • Former Chief Executive Officer and President of MB Financial Bank, National Association • Former Chief Executive Officer, President, and director of Coal City Corporation (merged with Avondale Financial Corp and was renamed MB Financial, Inc.) Key Qualifications and Experience • 35 years of experience in the financial services industry, including 27 years as the president or chief executive officer of a bank holding company or commercial bank; President and Chief Executive Officer of MB Financial, Inc. immediately prior to its merger with Fifth Third Bancorp • Extensive knowledge of the financial services industry and banking business and operations in Chicago region • Significant experience in leadership of public companies • Substantial bank regulatory experience Skills and Attributes: Accounting and Reporting, Compensation and Benefits, Corporate Governance, Digital Innovation and Fintech, Executive Management, Financial Services Industry, Human Capital Management, Legal and Regulatory, Risk Management, Strategic Planning
Linda W Clement-Holmes	62	Linda W. Clement-Holmes Retired Chief Information Officer of The Procter & Gamble Company Career Highlights: • Retired Chief Information Officer, Global Information and Decision Solutions Officer, Senior Vice President of Global Business Services, and Chief Diversity Officer of The Procter and Gamble Company Key Qualifications and Experience • 35-year career at Procter and Gamble, culminating in service as Chief Information Officer • Extensive technology, cybersecurity, and digital innovation expertise, including leadership of global Procter and Gamble technology team and responsibility for digital and IT architecture and governance, including information security • Experience in corporate strategy, including use of emerging business technologies to support speed and innovation • Knowledge of Cincinnati, Ohio regional market and leadership in inclusion and diversity efforts Skills and Attributes: Compensation and Benefits, Corporate Governance, Cybersecurity, Digital Innovation and FinTech, Executive Management, Human Capital Management, Risk Management, Strategic Planning, Sustainability	CINCINNATI FINANCIAL CORP
Laurent Desmangles	57	Laurent Desmangles Retired Senior Partner and Managing Director of Boston Consulting Group Career Highlights: • Retired Senior Partner and Managing Director, Boston Consulting Group • Advisor, Nyca Partners • Advisor, Demopolis Equity Partners • Former Director of Financial Institutions Practice, Oliver Wyman Key Qualifications and Experience • 30 years of experience advising large financial services organizations on corporate strategy, large scale transformation, digital and analytics innovation, and change management • Significant knowledge of the financial services industry, including retail and commercial banking, market dynamics, and operational opportunities • Expertise in FinTech sector Skills and Attributes: Corporate Governance, Digital Innovation and FinTech, Executive Management, Financial Services Industry, Strategic Planning, Sustainability
Kathleen A Rogers	59	Kathleen A. Rogers Retired Executive Vice President of U.S. Bank Career Highlights: • Retired Executive Vice President, Chief Financial Officer, and Chief Finance Administration Officer of U.S. Bank Key Qualifications and Experience • Business expertise from 35-year career in the financial services industry • Significant knowledge of public company financial management, including financial risk management, treasury actions, accounting policy and reporting, corporate development activities (including mergers and acquisitions), and strategic investments • Extensive experience in regulatory activities and investor relations • Substantial experience in technology in several industries, including financial services Skills and Attributes: Accounting and Financial Reporting, Compensation and Benefits, Corporate Governance, Executive Management, Financial Services Industry, Human Capital Management, Legal and Regulatory, Risk Management, Strategic Planning
Katherine B Blackburn	59	Katherine B. Blackburn Executive Vice President of Cincinnati Bengals, Inc. Career Highlights: • Executive Vice President, Cincinnati Bengals, Inc. Key Qualifications and Experience • Extensive experience managing Cincinnati Bengals professional football franchise, including human resource management, cost and efficiency management, marketing, and business negotiations • Extensive experience with inclusion and diversity initiatives, including with the National Football League’s Diversity Committee • Knowledge and familiarity of Fifth Third Bank and the Cincinnati, Ohio regional market Skills and Attributes: Compensation and Benefits, Corporate Governance, Cybersecurity, Digital Innovation and Fintech, Executive Management, Human Capital Management, Legal and Regulatory, Risk Management, Strategic Planning, Sustainability
Jorge L Benitez	65	Jorge L. Benitez Retired Chief Executive Officer of North America, Accenture Career Highlights: • Retired Chief Executive Officer of North America, Accenture • Former Chief Operating Officer, Accenture Products Operating Group Key Qualifications and Experience • Extensive experience developing and executing business strategies across a range of industries • Significant experience implementing large-scale systems integration services • Oversight of operating units within a large, multinational, publicly-traded company Skills and Attributes: Accounting/Financial Reporting, Compensation and Benefits, Corporate Governance, Cybersecurity, Digital Innovation and Fintech, Executive Management, Human Capital Management, Risk Management, Strategic Planning, Sustainability	WORLD FUEL SERVICES CORP
Gary R Heminger	71	Gary R. Heminger Retired Chair and Chief Executive Officer of Marathon Petroleum Corporation Career Highlights: • Retired Chair and Chief Executive Officer of Marathon Petroleum Corporation • Former Chief Executive Officer of MPLX GP LLC Key Qualifications and Experience • Over 40 years of experience with Marathon Petroleum Corporation in a variety of groups and functions • Extensive valuable business knowledge from overseeing all operations, performance, reporting, and financial metrics for Marathon’s refining, marketing, transportation, and Speedway businesses • Substantial financial experience through oversight of all financial data, working capital, and merger and acquisition activity at Marathon Skills and Attributes: Accounting/Financial Reporting, Compensation and Benefits, Corporate Governance, Executive Management, Human Capital Management, Risk Management, Strategic Planning, Sustainability	PPG INDUSTRIES INC
Evan Bayh	69	The Committee’s Role. The Committee is comprised of independent directors and is responsible for establishing, implementing, and monitoring the administration of compensation and benefits programs in accordance with the Company’s compensation philosophy and strategy, along with approving executive compensation and equity plan awards. Among other things, the Committee focuses on the attraction and retention of key executives. When making decisions, the Committee considers the Company’s compensation philosophy, the achievement of business goals set by the Company, relevant peer data, recommendations made by the chief executive officer, and the advice of F.W. Cook, an independent, external executive compensation consulting firm with financial services industry expertise hired by the Committee. The Committee seeks to establish “Total Rewards” for the Company’s executive officers that are reasonable, risk-balanced, and competitive. The Total Rewards program includes Total Direct Compensation, benefits, and certain perquisites. Generally, the types of compensation and benefits paid to Named Executive Officers are similar to those provided to other executive officers of the Company.	BERRY GLOBAL GROUP, INC., Marathon Petroleum Corp
Eileen A Mallesch	69	Eileen A. Mallesch Certified Public Accountant (inactive) and Retired Senior Vice President & Chief Financial Officer of Nationwide Property and Casualty Segment, Nationwide Mutual Insurance Company Career Highlights: • Certified Public Accountant • Retired Senior Vice President & Chief Financial Officer of Nationwide Property and Casualty Segment, Nationwide Mutual Insurance Company • Former Senior Vice President and Chief Financial Officer of Genworth Financial Life Insurance/Service Company Key Qualifications and Experience • More than 25 years of broad financial and strategy experience in a variety of industries, including insurance, telecommunications, consumer products, and manufacturing • Extensive financial management experience from tenure with Nationwide and Genworth • Vast knowledge of enterprise resource planning and large-scale technology integrations, strategic planning, managing acquisitions and divestitures, and risk and compliance management • Substantial experience as a public company director Skills and Attributes: Accounting/Financial Reporting, Compensation and Benefits, Corporate Governance, Cybersecurity, Executive Management, Financial Services Industry, Legal and Regulatory, Risk Management, Strategic Planning, Sustainability
Bryan Daniels	66	C. Bryan Daniels Co-Founder and Principal of Prairie Capital, a Chicago-based private equity firm Career Highlights: • Co-Founder and Principal of Prairie Capital, a Chicago-based private equity firm • Former Senior Vice President of Commercial Banking at American National Bank and Trust Company Key Qualifications and Experience • Extensive and varied experiences as an executive, director, and investor in the financial services industry • Possesses a rich and multi-faceted understanding of many different industries, companies, and business practices from his role at Prairie Capital • Substantial experience in technology in several industries, including financial services Skills and Attributes: Corporate Governance, Cybersecurity, Digital Innovation and FinTech, Executive Management, Financial Services Industry, Risk Management, Strategic Planning

2024 Summary Compensation Table
Name & Principal Position	Year		Salary ($)		Bonus ($)		Stock Awards ($)		Option Awards ($)		Non-Equity Incentive Plan Compensation ($)		All Other Compensation ($)		Total ($)
Timothy N. Spence, President and Chief Executive Officer, Fifth Third Bancorp		2024		1,073,577				5,428,553		990,002		2,314,410		300,816		10,107,358
		2023		1,025,385		—		5,481,769		900,000		1,622,250		356,322		9,385,726
		2022		826,923		—		4,621,877		815,610		1,621,220		253,029		8,138,659
Bryan D. Preston, Executive Vice President and Chief Financial Officer		2024		615,962		—		1,028,153		187,500		668,750		82,573		2,582,938
James C. Leonard, Executive Vice President and Chief Operating Officer		2024		723,462		—		4,056,258		375,000		1,042,188		124,093		6,321,001
		2023		679,616		—		1,598,835		262,502		753,500		133,807		3,428,260
		2022		638,462		—		1,434,393		253,129		893,750		129,385		3,349,119
Robert P. Shaffer, Executive Vice President and Chief Risk Officer		2024		665,000		—		3,645,023		300,000		830,588		110,390		5,551,001
		2023		608,462		—		1,004,985		164,997		610,000		109,994		2,498,438
		2022		580,770		—		1,136,869		200,619		690,000		129,450		2,737,708
Kevin P. Lavender, Executive Vice President and Head of Commercial Bank		2024		660,770		—		3,645,023		300,000		815,063		115,389		5,536,245
		2023		581,347		—		1,004,985		164,997		582,500		112,013		2,445,842
		2022		563,462		—		1,147,487		202,500		546,250		112,652		2,572,351

Supplier name	Ticker
Canaan Inc.	CAN
Toyota Motor Corporation	TM
Tesla, Inc.	TSLA
Adobe Inc.	ADBE
salesforce.com, inc.	CRM
Cisco Systems, Inc.	CSCO
International Business Machines Corporation	IBM
Oracle Corporation	ORCL

Owner	Position	Direct Shares	Indirect Shares
Spence Timothy	-	336,612	0
Spence Timothy	-	288,413	0
Leonard James C.	-	229,344	0
Shaffer Robert P	-	169,922	0
Leonard James C.	-	158,957	0
Heminger Gary R.	-	127,043	14,786
Lavender Kevin P	-	125,087	0
Schramm Jude	-	111,417	0
HARVEY THOMAS H	-	109,954	14,353
Zaunbrecher Susan B	-	96,412	0
Shaffer Robert P	-	93,215	0
Hazel Mark D	-	91,025	0
Bayh Evan	-	73,700	0
MCCALLISTER MICHAEL B	-	64,070	16,143
Lavender Kevin P	-	57,136	0
Stevens Melissa S.	-	56,950	0
Gibson Kala	-	56,769	0
Garrett Kristine R.	-	55,913	0
Hammond Howard	-	49,202	0
Lopper Jeffrey A	-	48,905	0
Gibson Kala	-	48,513	0
MALLESCH EILEEN A	-	38,596	0
Garrett Kristine R.	-	30,638	0
Pinckney Nancy C.	-	29,212	0
Feiger Mitchell Stuart	-	21,613	21,689
FEIGER MITCHELL	-	19,005	40,915
Desmangles Laurent	-	12,200	0
Rogers Kathleen A	-	4,428	0

CINF 10-Q Quarter ended June 30, 2017