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CINCINNATI FINANCIAL CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 29, 2014

The following discussion highlights significant factors influencing the 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 2013 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 2013 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 31. 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 or assumptions used for critical accounting estimates

• Declines in overall stock market values negatively affecting the company's

equity portfolio and book value

• 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 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 • 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

• 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 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


• Increased competition that could result in a significant reduction in the

company's premium volume

• Changing consumer insurance-buying habits and consolidation of independent

insurance agencies that could alter our competitive advantages

• Inability to obtain adequate reinsurance on acceptable terms, amount of

reinsurance purchased, financial strength of reinsurers and the potential for

nonpayment or delay in payment by reinsurers Cincinnati Financial Corporation Second-Quarter 2014 10-Q Page 25


• 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. Cincinnati Financial Corporation Second-Quarter 2014 10-Q Page 26 --------------------------------------------------------------------------------


Net Income and Comprehensive Income Data (In millions except per share data) Three months ended June 30,

Six months ended June 30,

2014 2013 % Change 2014 2013 % Change Net income and comprehensive income data: Earned premiums $ 1,059$ 954 11 $ 2,086$ 1,885 11 Investment income, net of expenses (pretax) 136 131 4 271 259 5 Realized investment gains and losses, net (pretax) 14 14 0 36 55 (35 ) Total revenues 1,214 1,104 10 2,403 2,207 9 Net income 84 110 (24 ) 175 264 (34 ) Comprehensive income (loss) 238 (31 ) nm 403 356 13 Net income-diluted $ 0.51$ 0.66 (23 ) $ 1.06$ 1.60 (34 ) Cash dividends declared 0.44 0.4075 8 0.88 0.815 8 Adjusted weighted average shares outstanding 165.1 165.4 0 165.1 165.2 0 Revenues rose for the second quarter and the first six months of 2014 compared with the same periods of 2013, primarily due to growth in earned premiums. Premium and investment revenue trends are discussed further in the respective sections of Results of Operations. 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 2014 compared with the same quarter of 2013 decreased $26 million, primarily due to a decrease in property casualty underwriting income of $27 million after taxes. Higher catastrophe losses, mostly weather related, accounted for $25 million of that decrease. After-tax investment income in our investment segment results for the second quarter of 2014 rose $4 million compared with the same quarter of 2013. Life insurance segment results on a pretax basis were $4 million lower. For the six-month period ended June 30, 2014, net income decreased $89 million compared with the same period of 2013, also primarily due to a decrease in property casualty underwriting income of $78 million after taxes, including $75 million from higher catastrophe losses. After-tax investment income increased by $10 million while after-tax net realized investment gains and losses were $13 million lower. Life insurance segment results on a pretax basis were $11 million lower. Performance by segment is discussed below in Results of Operations. As discussed in our 2013 Annual Report on Form 10-K, Item 7, Factors Influencing Our Future Performance, Page 48, there are several reasons that our performance during 2014 may be below our long-term targets. In that annual report, as part of Results of Operations, we also discussed the full-year 2014 outlook for each reporting segment. The board of directors is committed to rewarding shareholders directly through cash dividends and through share repurchase authorizations. Through 2013, the company had increased the indicated annual cash dividend rate for 53 consecutive years, a record we believe was matched by only nine other publicly traded companies. In January 2014, the board of directors increased the second-quarter dividend to 44 cents per share, setting the stage for our 54th consecutive year of increasing cash dividends. During the first six months of 2014, cash dividends declared by the company increased approximately 8 percent compared with the same period of 2013. That increase reflected board actions in both August 2013 and January 2014 that raised the per-share amount of regular dividends. Our board regularly evaluates relevant factors in decisions related to dividends and share repurchases. The 2014 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. Cincinnati Financial Corporation Second-Quarter 2014 10-Q Page 27 -------------------------------------------------------------------------------- Balance Sheet Data and Performance Measures (In millions except share data) At June 30, At December 31, 2014 2013 Balance sheet data: Invested assets $ 14,060$ 13,564 Total assets 18,335 17,662 Short-term debt 49 104 Long-term debt 790 790 Shareholders' equity 6,343 6,070 Book value per share 38.77 37.21 Debt-to-total-capital ratio 11.7 % 12.8 % Total assets at June 30, 2014, increased 4 percent compared with year-end 2013, primarily due to growth in invested assets that was largely driven by higher valuations. Shareholders' equity rose 4 percent, and book value per share also rose 4 percent during the first six months of 2014. Our debt-to-total-capital ratio (capital is the sum of debt plus shareholders' equity) decreased compared with year-end 2013. The value creation ratio, a non-GAAP measure defined below, was slightly higher for the first six months of 2014 compared with 2013, due to more benefit from the rise in unrealized investment gains for our investment portfolio. The $1.56 increase in book value per share during the first six months of 2014 contributed 4.2 percentage points to the value creation ratio, while dividends declared at $0.88 per share contributed 2.4 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, 2014 2013 2014 2013 Value creation ratio major components: Net income before realized gains 1.2 % 1.8 % 2.5 % 4.2 % Change in realized and unrealized gains, fixed-maturity securities 1.0 (3.2 ) 2.0 (3.6 ) Change in realized and unrealized gains, equity securities 1.6 0.6 2.2 5.6 Other 0.1 0.4 (0.1 ) 0.2 Value creation ratio 3.9 % (0.4 )% 6.6 % 6.4 % (Dollars are per outstanding share) Three months ended June 30, Six months ended June 30, 2014 2013 2014 2013 Book value change per share: End of period book value $ 38.77$ 34.83$ 38.77$ 34.83 Less beginning of period book value 37.73 35.41 37.21 33.48 Change in book value $ 1.04$ (0.58 )$ 1.56$ 1.35 Change in book value: Net income before realized gains $ 0.46$ 0.62$ 0.93$ 1.40 Change in realized and unrealized gains, fixed-maturity securities 0.38 (1.12 ) 0.73 (1.21 ) Change in realized and unrealized gains, equity securities 0.62 0.20 0.81 1.86 Dividend declared to shareholders (0.44 ) (0.41 ) (0.88 ) (0.82 ) Other 0.02 0.13 (0.03 ) 0.12 Change in book value $ 1.04$ (0.58 )$ 1.56$ 1.35 Cincinnati Financial Corporation Second-Quarter 2014 10-Q Page 28 --------------------------------------------------------------------------------

(Dollars are per outstanding share) Three months ended June 30, Six months ended June 30, 2014 2013 2014 2013 Value creation ratio: End of period book value $ 38.77$ 34.83$ 38.77$ 34.83 Less beginning of period book value 37.73 35.41 37.21 33.48 Change in book value 1.04 (0.58 ) 1.56 1.35 Dividend declared to shareholders 0.44 0.4075 0.88 0.815 Total contribution to value creation ratio $ 1.48$ (0.1725 )

$ 2.44$ 2.165

Contribution to value creation ratio from change in book value* 2.7 % (1.6 )% 4.2 % 4.0 % Contribution to value creation ratio from dividends declared to shareholders** 1.2 1.2 2.4 2.4 Value creation ratio 3.9 % (0.4 )% 6.6 % 6.4 %

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

PROGRESS TOWARD 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 2013 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 in 39 states as discussed in our 2013 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5.

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. We believe that this forward-looking view has consistently benefited our policyholders, agents, shareholders and associates.

To measure our long-term progress in creating shareholder value, we have defined a value creation metric that we believe captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders. This measure, our value creation ratio or VCR, is made up of two primary components: (1) our rate of growth in book value per share plus (2) the ratio of dividends declared per share to beginning book value per share. As discussed in our 2013 Annual Report on Form 10-K, Item 7, Executive Summary, Page 43, for the period 2013 through 2017, an annual value creation ratio averaging 10 percent to 13 percent is our primary performance target. Management believes this non-GAAP measure is a meaningful indicator of our long-term progress in creating shareholder value and is a useful supplement to GAAP information.

Performance Drivers When looking at our long-term objectives, we see three 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 2014, our

total property casualty net written premiums' year-over-year growth was

8 percent, comparing favorably with A.M. Best'sFebruary 2014 projection of

approximately 4 percent full-year growth for the industry. The industry's

growth rate excludes its mortgage and financial guaranty lines of business.

Our premium growth initiatives are discussed below in Highlights of Our

Strategies and Supporting Initiatives.

• 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

2014, our GAAP combined ratio was 100.6 percent and our statutory combined

ratio was 98.9 percent, both including 10.9 percentage points of current

accident Cincinnati Financial Corporation Second-Quarter 2014 10-Q Page 29

-------------------------------------------------------------------------------- year catastrophe losses partially offset by 4.8 percentage points of favorable loss reserve development on prior accident years. As of February 2014, A.M. Best forecasted the industry's full-year 2014 statutory combined ratio at approximately 99 percent, including approximately 5 percentage points of catastrophe losses and a favorable impact of approximately 5 percentage points from prior accident year reserve releases. 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 six months of

2014, pretax investment income was $271 million, up 5 percent compared with

the same period in 2013. We believe our investment portfolio mix provides an

appropriate balance of income stability and growth with capital appreciation

potential. 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 2013 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, summarized below, will help us better serve our agent customers and reduce variability in our financial results while we also grow earnings and book value over the long term, successfully navigating challenging economic, market or industry pricing cycles. • Improve insurance profitability - Implementation of these initiatives is

intended to enhance underwriting expertise and knowledge, thereby increasing

our ability to manage our business and gain efficiencies. Better profit margins can arise from additional information and more focused action on underperforming product lines, as well as pricing capabilities we are

expanding through the use of technology and analytics. Improved internal

processes with additional performance metrics can help us be more efficient

and effective. These initiatives also support the ability of the independent

agencies that represent us to grow profitably by allowing them to serve

clients faster and to more efficiently manage agency expenses.

• Drive premium growth - Implementation of these initiatives is intended to

further penetrate each market we serve through our independent agencies.

Strategies aimed at specific market opportunities, along with service

enhancements, can help our agencies grow and increase our share of their

business. Diversified growth also may reduce variability of losses from weather-related catastrophes.

Below we discuss key initiatives supporting these strategies, along with an assessment of our progress.

Improve Insurance Profitability The main initiatives to improve our insurance profitability include: • Enhance underwriting expertise and knowledge - We continue efforts to

increase our use of information and to develop our skills for improved

underwriting performance, such as expanding our pricing capabilities by using

predictive analytics. Expanded capabilities include streamlining

and optimizing data to improve accuracy, timeliness and ease of use. We also

continue to develop additional business data and tools to support more

accurate underwriting, including more granular pricing, by further developing

our data warehouse used in our property casualty and life insurance


Ongoing efforts to expand our pricing precision include enhancement of analytics and predictive modeling tools to better align individual insurance policy pricing to risk attributes. Further integration of such tools with policy administration systems is intended to better target profitability and support discussion of pricing impacts with agency personnel as we seek to remain competitive on the most desirable business while we rapidly adapt to changes in market conditions. Rate increases that apply pricing precision features for our personal auto line of business continue to be implemented, and were effective beginning second-quarter 2014 for the majority of states where we market personal lines products. On average, the rate increase was in a low-single-digit range, with approximately half of those states experiencing a mid-single-digit increase. Cincinnati Financial Corporation Second-Quarter 2014 10-Q Page 30 -------------------------------------------------------------------------------- For commercial autos we insure, pricing precision is an ongoing focus through actions such as premium rate classification improvements, including adding rating variables to our pricing model and further automating collection of key rating variables. We are also making progress with predictive modeling for dwelling fire policies and development of a by-peril rating plan for homeowner policies. We plan to introduce both in select states during 2014. By-peril rating will further improve pricing precision by separately pricing for the risk of losses from distinct perils, such as wind versus fire. Work continues on initiatives to more profitably underwrite property coverages, including more staff specialization, increased insured property inspections to prevent or reduce losses and provide enhanced underwriting knowledge, and greater use of deductibles or other policy terms and conditions as policies renew. During the warmer-weather months of 2014, we plan to complete inspections for approximately 130,000 properties, including both homes and businesses. During the first six months of 2014, we completed approximately one-third of those inspections. We are also taking other actions, such as increasing our use of higher minimum loss deductible amounts for homeowner policies and per-building deductibles for commercial risks, along with more use of wind and hail deductibles in areas subject to severe convective storm activity. • Improve internal processes - Improved processes support our strategic goals,

reducing internal costs and allowing us to focus more resources on providing

agency services. Important improvements include continuing to streamline

processing between company and agency management systems for more policies.

This streamlining allows for renewal processing of qualified personal lines

or small commercial lines business without intervention by an underwriter or

for routing of complex work items to the most appropriate associate for

optimal service. Progress during the first six months of 2014 included

deploying this streamlined process for renewals of commercial umbrella,

inland marine, crime and professional coverages. Beginning in April 2014, it

was deployed for renewing personal lines policies. Audits of policies

processed without an underwriter continue to indicate that the streamlined

process is underwriting and issuing policies as intended.

In 2014, we are also enhancing policy processing by migrating additional types of coverages to our e-CLAS® CPP commercial lines policy administration system. During the first six months, we began e-CLAS processing for workers' compensation policies in six more states, for a total of eight states representing approximately half of our workers' compensation premium volume. We also migrated our social services and manufacturing target market programs to e-CLAS, making them available in 14 states at June 30, 2014. Work also continues to improve internal processes by enhancing our policy billing or payment options and our workflow tools. We measure the overall success of our strategy to improve property casualty insurance profitability primarily through our GAAP combined ratio, which we believe can be consistently within the range of 95 percent to 100 percent for any five-year period. We also compare our statutory combined ratio to the industry average to gauge our progress, as discussed in the Performance Drivers section above. In addition, we expect these initiatives to contribute to our rank as the No. 1 or No. 2 carrier based on premium volume in agencies that have represented us for at least five years. In 2013, we again earned that rank in nearly 75 percent of the agencies that have represented Cincinnati Insurance for more than five years, based on 2013 premiums. We are working to increase the percentage of agencies where we achieve that rank. Cincinnati Financial Corporation Second-Quarter 2014 10-Q Page 31 --------------------------------------------------------------------------------

Drive Premium Growth Primary initiatives to drive premium growth include: • Expansion of our marketing and service capabilities - We continue to enhance

our generalist approach to allow our appointed agencies to better compete in

the marketplace by providing services an agent's clients want and need.

Expansion initiatives include ongoing development of targeted marketing

programs, adding field marketing representatives for additional agency

support in selected areas and piloting additional services to select agencies

to develop our new customer care center for small commercial business

policies. Progress during the first six months of 2014 included entering the

state of Connecticut for personal lines and expanding our excess and surplus

lines field underwriting presence by adding another field marketing

representative. In addition, we added two commercial lines field marketing

representatives to better support agencies in recently subdivided marketing

territories. We also continued efforts to develop new target market programs

and to expand our pilot of a customer care center for small commercial

business policies to additional agencies.

• New agency appointments - We continue to appoint new agencies to develop

additional points of distribution, focusing on areas where our market share

is less than 1 percent while also considering economic and catastrophe risk

factors. For 2014, we initially targeted approximately 100 appointments

of independent agencies. During the first six months of 2014, we appointed 50

new agencies that write, in aggregate, approximately $1.4 billion in property

casualty premiums annually with various insurance carriers for an average of

approximately $28 million per agency. As of June 30, 2014, a total of

1,467 agency relationships market our property casualty insurance products

from 1,854 reporting locations. During the first six months of 2014, our life

insurance company also appointed 51 independent life agencies that do not

represent us for property casualty insurance.

We seek to build a close, long-term relationship with each agency we appoint. We carefully evaluate the marketing reach of each new appointment to ensure the territory can support both current and new agencies. Our 132 commercial lines field marketing territories are staffed by marketing representatives averaging approximately 20 years of industry experience and 10 years as a Cincinnati Insurance field marketing representative. Teams of field associates for each territory work together, providing local expertise with support from headquarters associates. This agent-centered business model helps us better understand the accounts we underwrite and creates marketing advantages for our agents. Unique Cincinnati-style service supports our agents as they grow their business and attract more clients in their communities. As a result, we generally have earned a 10 percent share of a property casualty agency's business within 10 years of its appointment. We measure the overall success of our strategy to drive premium growth primarily through changes in net written premiums, as discussed in the Performance Drivers section above. In addition to tracking our progress toward our year-end 2015 annual direct written premiums target of $5 billion, we believe we can grow faster than the industry average over any five-year period. Financial Strength An important part of our long-term strategy is financial strength, which is described in our 2013 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 to help manage financial performance variability due to catastrophe loss experience. A description of how we use reinsurance is included in our 2013 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, 2014 Reinsurance Programs, Page 107. Another aspect is our investment portfolios, which remain well-diversified as discussed in this quarterly report Item 3, Quantitative and Qualitative Disclosures about Market Risk. We continue to maintain strong parent-company liquidity and financial strength that increase our flexibility to maintain our cash dividend through all periods and to continue to invest in and expand our insurance operations. At June 30, 2014, we held $1.654 billion of our cash and invested assets at the parent-company level, of which $1.489 billion, or 90.0 percent, was invested in common stocks, and $52 million, or 3.1 percent, was cash or cash equivalents. Our debt-to-total-capital ratio at 11.7 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 0.9-to-1 for the 12 months ended June 30, 2014, unchanged from year-end 2013. Cincinnati Financial Corporation Second-Quarter 2014 10-Q Page 32 -------------------------------------------------------------------------------- Our financial strength ratings assigned by independent ratings 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 may be subject to revision or withdrawal at any time by the rating agency, and each rating should be evaluated independently of any other rating.

All of our insurance subsidiaries continue to be highly rated. As of July 28, 2014, our insurer financial strength ratings were:

Insurer Financial Strength Ratings Date of Most Standard Market Property Excess and Surplus Lines Recent Rating Casualty Insurance Life Insurance Insurance Affirmation or Agency Subsidiaries Subsidiary Subsidiary Action Rating Rating Rating Tier Tier Tier 2 of 3 of Stable outlook

A.M. Best Co. A+ Superior 16 A Excellent 3 of 16 A Excellent 16 (12/19/13)

5 of Stable outlook Fitch Ratings A+ Strong 21 A+ Strong 5 of 21 - - - (06/10/14) Moody's Investors 5 of Stable outlook Service A1 Good 21 - - - - - - (04/30/13) Standard & Poor's 6 of Positive outlook Ratings Services A Strong 21 A Strong 6 of 21 - - - (06/18/14) On June 10, 2014, Fitch Ratings affirmed our ratings that it had assigned in August 2009, continuing its stable outlook. Fitch said our ratings strengths include very strong capitalization, our holding company's sizeable position in cash and marketable securities and our moderate financial leverage ratio. Fitch noted our reserve adequacy and benefits from our implementation of claims and risk management tools in addition to pricing actions. Fitch said its rating could be unfavorably affected by a combined ratio exceeding 105 percent on a sustained basis, evidence of deteriorating profitability on recent growth or by material and sustained deterioration in capitalization. On June 18, 2014, Standard & Poor's Ratings Services affirmed our ratings that it had assigned in July 2010, revising its outlook to positive from stable. S&P said its rating reflected our strong competitive position, favorable geographical footprint and extremely strong capital. With the positive outlook, it acknowledged our general underwriting improvement in recent years and our track record of mitigating potential capital and earnings volatility. S&P noted its rating could come under pressure if our overall operating performance or capital adequacy deteriorated significantly or upon perceived adverse changes to our competitive position.

Please see each rating agency's website for complete discussion and reports on these ratings.

RESULTS OF OPERATIONS Consolidated results reflect the operating results of each of our five segments along with the parent company 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

We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company. See Item 1, Note 13, Segment Information, for discussion of the calculations of segment data. Results of operations for each of the five segments are discussed below.

Cincinnati Financial Corporation Second-Quarter 2014 10-Q Page 33


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