Edgar Filing: CINCINNATI FINANCIAL CORP

Unassociated 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 September 30, 2010.

¨ 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 o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 o No

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

þ Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company

(Do not check if a smaller reporting company)

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

o Yes þ No

As of October 25, 2010, there were 162,736,024 shares of common stock outstanding.

Cincinnati Financial Third-Quarter 2010 10-Q

CINCINNATI FINANCIAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010

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 Shareholders’ Equity		5

Condensed Consolidated Statements of Cash Flows		6

Notes To Condensed Consolidated Financial Statements (unaudited)		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Safe Harbor Statement		19

Introduction		21

Results of Operations		28

Liquidity and Capital Resources		41

Other Matters		43

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Fixed-Maturity Investments		45

Equity Investments		47

Short-Term Investments		47

Unrealized Investment Gains and Losses		47

Item 4.	Controls and Procedures	50

Part II – Other Information		50

Item 1.	Legal Proceedings	50

Item 1A.	Risk Factors	50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 3.	Defaults upon Senior Securities	51

Item 4.	(Removed and Reserved)	51

Item 5.	Other Information	51

Item 6.	Exhibits	51

Cincinnati Financial Third-Quarter 2010 10-Q

Part I – Financial Information

Item 1.

Financial Statements (unaudited)

Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

	September 30,			December 31,
(In millions except per share data)	2010			2009

ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2010—$7,718; 2009—$7,514)	$	8,466		$	7,855
Equity securities, at fair value (cost: 2010—$2,177; 2009—$2,016)		2,757			2,701
Short-term investments, at fair value (amortized cost; 2010—$0; 2009—$6)		-			6
Other invested assets		82			81
Total investments		11,305			10,643
Cash and cash equivalents		445			557
Investment income receivable		114			118
Finance receivable		71			75
Premiums receivable		1,035			995
Reinsurance receivable		554			675
Prepaid reinsurance premiums		17			15
Deferred policy acquisition costs		469			481
Land, building and equipment, net, for company use (accumulated depreciation: 2010—$358; 2009—$335)		236			251
Other assets		176			45
Separate accounts		648			585
Total assets	$	15,070		$	14,440

LIABILITIES
Insurance reserves
Loss and loss expense reserves	$	4,225		$	4,142
Life policy reserves		1,968			1,783
Unearned premiums		1,573			1,509
Other liabilities		560			670
Deferred income tax		247			152
Note payable		49			49
Long-term debt		790			790
Separate accounts		648			585
Total liabilities		10,060			9,680

Commitments and contingent liabilities (Note 10)		—			—

SHAREHOLDERS' EQUITY
Common stock, par value—$2 per share; (authorized: 2010 and 2009—500 million shares; issued: 2010—196 million shares, 2009—196 million shares)		393			393
Paid-in capital		1,087			1,081
Retained earnings		3,919			3,862
Accumulated other comprehensive income		814			624
Treasury stock at cost (2010—33 million shares and 2009—34 million shares)		(1,203	)		(1,200	)
Total shareholders' equity		5,010			4,760
Total liabilities and shareholders' equity	$	15,070		$	14,440

Accompanying notes are an integral part of these condensed consolidated financial statements.

Cincinnati Financial Third-Quarter 2010 10-Q

Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Income

	Three months ended September 30,						Nine months ended September 30,
(In millions except per share data)	2010			2009			2010			2009
REVENUES
Earned premiums	$	784		$	766		$	2,299		$	2,301
Investment income, net of expenses		128			127			388			370
Other income		4			4			9			9
Realized investment gains (losses), net
Other-than-temporary impairments on fixed maturity securities		(1	)		(11	)		(3	)		(54	)
Other-than-temporary impairments on fixed maturity securities transferred to Other comprehensive income		-			-			-			-
Other realized investment gains (losses), net		156			121			143			144
Total realized investment gains (losses), net		155			110			140			90
Total revenues		1,071			1,007			2,836			2,770

BENEFITS AND EXPENSES
Insurance losses and policyholder benefits		575			498			1,686			1,737
Underwriting, acquisition and insurance expenses		258			247			772			750
Other operating expenses		4			4			11			14
Interest expense		13			14			40			42
Total benefits and expenses		850			763			2,509			2,543

INCOME BEFORE INCOME TAXES		221			244			327			227

PROVISION FOR INCOME TAXES
Current		59			59			84			6
Deferred		6			14			(8	)		34
Total provision (benefit) for income taxes		65			73			76			40

NET INCOME	$	156		$	171		$	251		$	187

PER COMMON SHARE
Net income—basic	$	0.95		$	1.05		$	1.54		$	1.15
Net income—diluted		0.95			1.05			1.53			1.15

Accompanying notes are an integral part of these condensed consolidated financial statements.

Cincinnati Financial Third-Quarter 2010 10-Q

Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

											Accumulated						Total
	Common Stock										Other						Share-
	Outstanding				Paid-In			Retained			Comprehensive			Treasury			holders'
(In millions)	Shares		Amount		Capital			Earnings			Income			Stock			Equity

Balance December 31, 2008		162	$	393	$	1,069		$	3,579		$	347		$	(1,206	)	$	4,182

Net income		-		-		-			187			-			-			187
Other comprehensive income, net		-		-		-			-			434			-			434
Total comprehensive income																		621
Cumulative effect of change in accounting for other-than-temporary impairments as of April 1, 2009, net of tax		-		-		-			106			(106	)		-			-
Dividends declared		-		-		-			(191	)		-			-			(191	)
Stock options exercised		-		-		-			-			-			1			1
Stock-based compensation		-		-		8			-			-			-			8
Other		-		-		1			-			-			4			5
Balance September 30, 2009		162	$	393	$	1,078		$	3,681		$	675		$	(1,201	)	$	4,626

Balance December 31, 2009		162	$	393	$	1,081		$	3,862		$	624		$	(1,200	)	$	4,760

Net income		-		-		-			251			-			-			251
Other comprehensive income, net		-		-		-			-			190			-			190
Total comprehensive income																		441
Dividends declared		-		-		-			(194	)		-			-			(194	)
Stock options exercised		1		-		(2	)		-			-			3			1
Stock-based compensation		-		-		9			-			-			-			9
Purchases		-		-		-			-			-			(10	)		(10	)
Other		-		-		(1	)		-			-			4			3
Balance September 30, 2010		163	$	393	$	1,087		$	3,919		$	814		$	(1,203	)	$	5,010

Accompanying notes are an integral part of these condensed consolidated financial statements.

Cincinnati Financial Third-Quarter 2010 10-Q

Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

	Nine months ended September 30,
(In millions)	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	251		$	187
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items		30			21
Realized gains on investments		(140	)		(90	)
Stock-based compensation		9			8
Interest credited to contract holders		33			30
Deferred income tax (benefit) expense		(8	)		34
Changes in:
Investment income receivable		4			(11	)
Premiums and reinsurance receivable		81			65
Deferred policy acquisition costs		(19	)		(16	)
Other assets		(2	)		(4	)
Loss and loss expense reserves		83			109
Life policy reserves		86			80
Unearned premiums		64			13
Other liabilities		(27	)		(13	)
Current income tax receivable/payable		(28	)		(51	)
Net cash provided by operating activities		417			362
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of fixed maturities		136			128
Call or maturity of fixed maturities		757			577
Sale of equity securities		128			905
Collection of finance receivables		21			22
Purchase of fixed maturities		(1,145	)		(1,769	)
Purchase of equity securities		(276	)		(656	)
Change in short-term investments, net		7			72
Investment in buildings and equipment, net		(14	)		(31	)
Investment in finance receivables		(17	)		(25	)
Change in other invested assets, net		1			(7	)
Net cash used in investing activities		(402	)		(784	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of cash dividends to shareholders		(189	)		(186	)
Purchase of treasury shares		(10	)		-
Contract holders' funds deposited		130			102
Contract holders' funds withdrawn		(53	)		(49	)
Excess tax benefits on share-based compensation		1			-
Other		(6	)		(6	)
Net cash used in financing activities		(127	)		(139	)
Net change in cash and cash equivalents		(112	)		(561	)
Cash and cash equivalents at beginning of year		557			1,009
Cash and cash equivalents at end of period	$	445		$	448

Supplemental disclosures of cash flow information:
Interest paid	$	27		$	28
Income taxes paid		113			57
Non-cash activities:
Conversion of securities	$	5		$	12
Equipment acquired under capital lease obligations		-			15

Accompanying notes are an integral part of these condensed consolidated financial statements.

Cincinnati Financial Third-Quarter 2010 10-Q

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 are wholly owned, and are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. The December 31, 2009, condensed consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by GAAP.

We have changed our presentation of earned premiums in our condensed consolidated statements of income, effective the first quarter of 2010. We have summarized property casualty and life earned premiums to a single caption, “Earned premiums.” See Note 7, Reinsurance, Page 15, for further detail on property casualty and life earned premiums. We have changed our presentation of long-term debt in our condensed consolidated balance sheet, effective the second quarter of 2010. We have summarized the long-term debt to a single caption, “Long-term debt.” See Note 3, Fair Value Measurements, Page 10, for further detail on interest rates, year of issue and maturity of our long-term debt.

Our September 30, 2010, 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 2009 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.

With the adoption of Accounting Standards Codification (ASC) 320, Recognition and Presentation of Other-Than-Temporary Impairments, in the second quarter of 2009, we recognized a cumulative effect adjustment of $106 million, net of tax, to reclassify the non-credit component of previously recognized impairments by increasing retained earnings and reducing accumulated other comprehensive income (AOCI). ASC 320 does not allow retrospective application of the new other-than-temporary impairment (OTTI) model. Our condensed consolidated statements of income for the nine months ended September 30, 2010, are not measured on the same basis as prior period amounts and, accordingly, these amounts are not comparable.

Adopted Accounting Updates

ASU 2010-08, Technical Corrections to Various Topics

In February 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-08, Technical Corrections to Various Topics. ASU 2010-08 does not change any of the fundamentals of U.S. GAAP, but it does explain certain clarifications made to the guidance on embedded derivatives and hedging. We have adopted ASU 2010-08, effective for the first reporting period after issuance and for fiscal years beginning after December 15, 2009. It did not have a material impact on our company’s financial position, cash flows or results of operations.

ASU 2010-09, Subsequent Events

In February 2010, the FASB issued ASU 2010-09, Subsequent Events. ASU 2010-09 removes the requirement for Securities and Exchange Commission (SEC) filers to disclose the date through which subsequent events have been evaluated in both issued and revised financial statements. We have adopted ASU 2010-09, effective for the first reporting period after issuance. It did not have a material impact on our company’s financial position, cash flows or results of operations.

Pending Accounting Updates

ASU 2010-06, Fair Value Measurements and Disclosures

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures. ASU 2010-06 applies to all entities that are required to make disclosures about recurring or nonrecurring fair value measurements. ASU 2010-06 requires separate disclosures of the activity in the Level 3 category related to any purchases, sales, issuances, and settlements on a gross basis. The effective date of the disclosures regarding Level 3 category purchases, sales, issuances and settlements is for interim and annual periods beginning after December 15, 2010. The portion of ASU 2010-06 that we have not yet adopted will not have a material impact on our company’s financial position, cash flows or results of operations.

Cincinnati Financial Third-Quarter 2010 10-Q

ASU 2010-15, How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments

In April 2010, the FASB issued ASU 2010-15, How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments. ASU 2010-15 applies to all insurance entities that have separate accounts that meet the definition and requirements set in the Accounting Standards Codification Manual.

ASU 2010-15 clarifies that an insurance entity should not consider any separate account interests held for the benefit of contract holders in an investment to be the insurer’s interests. The insurance entity should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation. The insurance entity may combine those interests when the separate account interests are held for the benefit of a related-party policyholder as defined in the Variable Interest Subsections of Consolidation topic in the Codification Manual.

The effective date of the amendments in this update is for interim and annual periods beginning after December 15, 2010, with early adoption permitted. The amendments in this update do not modify the disclosures currently required by GAAP and are not expected to have a material impact on our company’s financial position, cash flows or results of operations.

ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 will improve transparency in financial reporting for companies that hold financing receivables, which include loans, lease receivables and other long-term receivables. The additional disclosures required by ASU 2010-20 are effective for interim and annual reporting periods ending on or after December 15, 2010. The ASU has not yet been adopted and is not expected to have a material impact on our company’s financial position, cash flows or results of operations.

ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU 2010-26 modifies the definitions of the type of costs incurred by insurance entities that can be capitalized in the successful acquisition of new and renewal contracts. ASU 2010-26 requires incremental direct costs of successful contract acquisition as well as certain costs related to underwriting, policy issuance and processing, medical and inspection and sales force contract selling for successful contract acquisition to be capitalized. These incremental direct costs and other costs are those that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. The effective date of ASU 2010-26 is for interim and annual reporting periods beginning after December 15, 2011. The ASU has not yet been adopted and we are currently evaluating the impact this ASU will have on our company’s financial position, cash flows or results of operations.

NOTE 2 – Investments

Fixed maturities (bonds and redeemable preferred stocks), equity securities (common and non-redeemable preferred stocks) and short-term investments have been classified as available for sale and are stated at fair values at September 30, 2010, and December 31, 2009. Realized gains and losses on investments are recognized in earnings on a specific identification basis.

The change in unrealized gains and losses, net of taxes, described in the following table, is included in other comprehensive income and shareholders’ equity.

	Three months ended September 30,						Nine months ended September 30,
(In millions)	2010			2009			2010			2009
Change in unrealized investment gains and losses and other summary:
Fixed maturities	$	198		$	407		$	407		$	787
Equity securities		85			165			(105	)		(121	)
Adjustment to deferred acquisition costs and life policy reserves		(11	)		(14	)		(18	)		(24	)
Pension obligations		-			-			1			1
Other		2			14			7			26
Income taxes on above		(96	)		(201	)		(102	)		(235	)
Total	$	178		$	371		$	190		$	434

Cincinnati Financial Third-Quarter 2010 10-Q

The following table analyzes cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value for our investments, along with the amount of cumulative non-credit OTTI losses transferred to AOCI in accordance with ASC 320-10-65, Recognition and Presentation of Other-Than-Temporary Impairments, for securities that also had a credit impairment:

	Cost or
	amortized		Gross unrealized				Fair		OTTI in
(In millions)	cost		gains		losses		value		AOCI
At September 30, 2010
Fixed maturities:
States, municipalities and political subdivisions	$	2,998	$	219	$	-	$	3,217	$	-
Convertibles and bonds with warrants attached		69		-		-		69		-
United States government		4		1		-		5		-
Government-sponsored enterprises		123		1		-		124		-
Foreign government		3		-		-		3		-
Corporate bonds		4,521		530		3		5,048		-
Subtotal		7,718		751		3		8,466		-
Equity securities:
Common equities		2,102		591		37		2,656
Preferred equities		75		27		1		101
Subtotal		2,177		618		38		2,757	NA
Total	$	9,895	$	1,369	$	41	$	11,223

At December 31, 2009
Fixed maturities:
States, municipalities and political subdivisions	$	3,007	$	128	$	6	$	3,129	$	-
Convertibles and bonds with warrants attached		91		-		-		91		-
United States government		4		-		-		4		-
Government-sponsored enterprises		354		-		7		347		-
Foreign government		3		-		-		3		-
Short-term investments		6		-		-		6		-
Collateralized mortgage obligations		37		-		6		31		-
Corporate bonds		4,018		268		36		4,250		-
Total	$	7,520	$	396	$	55	$	7,861	$	-
Equity securities	$	2,016	$	714	$	29	$	2,701	NA

The unrealized investment gains at September 30, 2010, were largely due to a net gain position in our fixed income portfolio of $748 million and a net gain position in our common stock portfolio of $554 million. The two primary contributors to the net gain position were Procter & Gamble Company (NYSE:PG) and Exxon Mobil Corporation (NYSE:XOM) common stock, which had a combined net gain position of $210 million. At September 30, 2010, we had $69 million fair value of hybrid securities included in fixed maturities that follow ASC 815-15-25, Accounting for Certain Hybrid Financial Instruments. The hybrid securities are carried at fair value, and the changes in fair value are included in realized investment gains and losses.

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

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In millions)	value		losses		value		losses		value		losses
At September 30, 2010
Fixed maturities:
States, municipalities and political subdivisions	$	6	$	-	$	10	$	-	$	16	$	-
Government-sponsored enterprises		15		-		-		-		15		-
Corporate bonds		25		-		83		3		108		3
Subtotal		46		-		93		3		139		3
Equity securities:
Common equities		449		37		44		-		493		37
Preferred equities		-		-		23		1		23		1
Subtotal		449		37		67		1		516		38
Total	$	495	$	37	$	160	$	4	$	655	$	41

At December 31, 2009
Fixed maturities:
States, municipalities and political subdivisions	$	196	$	4	$	29	$	2	$	225	$	6
Government-sponsored enterprises		347		7		-		-		347		7
Short-term investments		1		-		-		-		1		-
Collateralized mortgage obligations		-		-		27		6		27		6
Corporate bonds		397		19		309		17		706		36
Total		941		30		365		25		1,306		55
Equity securities		65		3		415		26		480		29
Total	$	1,006	$	33	$	780	$	51	$	1,786	$	84

Cincinnati Financial Third-Quarter 2010 10-Q

Net realized gains were $140 million for the nine months ended September 30, 2010, compared with net realized gains of $90 million for the same period in 2009. For the quarter, the net realized gains were $155 million for the three months ended September 30, 2010, and $110 million for the same period in 2009. The net realized gains for the three months ended September 30, 2010, were largely due to the sale of Verisk Analytics Inc. (NYSE: VRSK) common stock, contributing $128 million during the third quarter of 2010.

Other-than-temporary Impairment Charges

During the three and nine months ended September 30, 2010, there were no credit losses on fixed-maturity securities for which a portion of OTTI has been recognized in other comprehensive income. The following table provides the amount of OTTI charges for the three and nine months ended September 30, 2010:

	Three months ended September 30,				Nine months ended September 30,
(In millions)	2010		2009		2010		2009
Fixed maturities	$	1	$	11	$	3	$	54
Equity securities		-		-		33		59
Total	$	1	$	11	$	36	$	113

During the quarter ended September 30, 2010, we impaired five fixed-maturity securities for a total of $1 million. For the nine months ended September 30, 2010, we impaired nine fixed-maturity securities for a total of $3 million and six equity securities for a total of $33 million. At September 30, 2010, 28 fixed-maturity investments with a total unrealized loss of $3 million had been in an unrealized loss position for 12 months or more, but none were trading below 70 percent of book value. At September 30, 2010, four equity securities with a total unrealized loss of $1 million had been in an unrealized loss position for 12 months or more, but none were trading below 70 percent of book value.

At December 31, 2009, 121 fixed-maturity investments with a total unrealized loss of $25 million had been in an unrealized loss position for 12 months or more. Of that total, eight fixed maturity investments were trading below 70 percent of book value with a total unrealized loss of $2 million. At December 31, 2009, ten equity investments with a total unrealized loss of $26 million had been in an unrealized loss position for 12 months or more but none were trading below 70 percent of book value.

NOTE 3 –Fair Value Measurements

Fair Value Hierarchy

In accordance with fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2009, and ultimately management determines fair value.

Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:

·	Level 1 – Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in active markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.

·	Level 2 – Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets and liabilities that are actively traded. This also includes pricing models for which the inputs are corroborated by market data.

·	Level 3 – Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following:

Quotes from brokers or other external sources that are not considered binding;

Quotes from brokers or other external sources where it cannot be determined that market participants would in fact transact for the asset or liability at the quoted price; or

Quotes from brokers or other external sources where the inputs are not deemed observable.

We conduct a thorough review of fair value hierarchy classifications on a quarterly basis. Reclassification of certain financial instruments may occur when input observability changes. As noted below in the Level 3 disclosure table, reclassifications are reported as transfers in or out of the Level 3 category as of the beginning of the quarter in which the reclassification occurred.

Cincinnati Financial Third-Quarter 2010 10-Q

The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at September 30, 2010, and December 31, 2009. We do not have any material liabilities carried at fair value. There were no significant transfers between Level 1 and Level 2.

Fair Value Disclosures for Assets

	Asset fair value measurements at September 30, 2010 using:
(In millions)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
Corporate securities	$	-	$	5,096	$	21	$	5,117
Foreign government		-		3		-		3
U.S. Treasury and U.S. government agencies		5		124		-		129
States, municipalities and political subdivisions		-		3,213		4		3,217
Subtotal		5		8,436		25		8,466
Common equities, available for sale		2,656		-		-		2,656
Preferred equities, available for sale		-		96		5		101
Taxable fixed maturities separate accounts		-		610		2		612
Top Hat Savings Plan		8		-		-		8
Total	$	2,669	$	9,142	$	32	$	11,843

	Asset fair value measurements at December 31, 2009 using:
(In millions)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
Corporate securities	$	-	$	4,314	$	27	$	4,341
Foreign government		-		3		-		3
U.S. Treasury and U.S. government agencies		4		347		-		351
Collateralized mortgage obligations		-		31		-		31
States, municipalities and political subdivisions		-		3,125		4		3,129
Taxable fixed maturities separate accounts		-		555		-		555
Subtotal		4		8,375		31		8,410
Common equities, available for sale		2,474		134		-		2,608
Preferred equities, available for sale		-		88		5		93
Short-term investments		-		6		-		6
Top Hat Savings Plan		7		-		-		7
Total	$	2,485	$	8,603	$	36	$	11,124

Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the tables below by security type with a summary of changes in fair value for periods ended September 30, 2010 and 2009. As of September 30, 2010, total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value. At September 30, 2010, total fair value of assets priced with broker quotes and other non-observable market inputs for the fair value measurements and disclosures was $32 million.

Cincinnati Financial Third-Quarter 2010 10-Q

The following table provides the change in Level 3 assets for the three months ended September 30, 2010. One Level 3 corporate fixed-maturity security matured resulting in a $4 million decrease. There were no other significant changes to Level 3 assets during this period.

	Asset fair value measurements using significant unobservable inputs (Level 3)
(In millions)	Corporate fixed maturities			Taxable fixed maturities- separate accounts		States, municipalities and political subdivisions fixed maturities		Common equities		Preferred equities		Total
Beginning balance, June 30, 2010	$	23		$	-	$	4	$	-	$	5	$	32
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		-			-		-		-		-		-
Included in other comprehensive income		1			-		-		-		-		1
Purchases, sales, issuances, and settlements		(4	)		2		-		-		-		(2	)
Transfers in and/or out of Level 3		1			-		-		-		-		1
Ending balance, September 30, 2010	$	21		$	2	$	4	$	-	$	5	$	32

	Asset fair value measurements using significant unobservable inputs (Level 3)
(In millions)	Taxable fixed maturities			Taxable fixed maturities- separate accounts		Tax-exempt fixed maturities		Common equities			Preferred equities			Total
Beginning balance, June 30, 2009	$	20		$	-	$	5	$	64		$	8		$	97
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		-			-		-		-			-			-
Included in other comprehensive income		1			-		-		(2	)		-			(1	)
Purchases, sales, issuances, and settlements		5			-		-		-			(4	)		1
Transfers in and/or out of Level 3		(2	)		-		-		-			-			(2	)
Ending balance, September 30, 2009	$	24		$	-	$	5	$	62		$	4		$	95

The following table provides the change in Level 3 assets for the nine months ended September 30, 2010. One Level 3 corporate fixed-maturity security was purchased for $5 million and two corporate fixed-maturity securities matured for $7 million, resulting in a $2 million decrease to purchases, sales, issuances, and settlements. As a result of the change in use of observable or unobservable inputs throughout the nine months ended September 30, 2010, Level 3 corporate fixed-maturity securities decreased $5 million as two securities totaling $9 million transferred from Level 3 to Level 2 and two securities totaling $4 million transferred from Level 2 to Level 3. There were no other significant changes to Level 3 assets during this period.

	Asset fair value measurements using significant unobservable inputs (Level 3)
(In millions)	Corporate fixed maturities			Taxable fixed maturities- separate accounts		States, municipalities and political subdivisions fixed maturities		Common equities		Preferred equities		Total
Beginning balance, December 31, 2009	$	27		$	-	$	4	$	-	$	5	$	36
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		-			-		-		-		-		-
Included in other comprehensive income		1			-		-		-		-		1
Purchases, sales, issuances, and settlements		(2	)		2		-		-		-		-
Transfers in and/or out of Level 3		(5	)		-		-		-		-		(5	)
Ending balance, September 30, 2010	$	21		$	2	$	4	$	-	$	5	$	32

	Asset fair value measurements using significant unobservable inputs (Level 3)
(In millions)	Taxable fixed maturities		Taxable fixed maturities- separate accounts		Tax-exempt fixed maturities		Common equities		Preferred equities		Total
Beginning balance, December 31, 2008	$	50	$	6	$	5	$	64	$	22	$	147
Total gains or losses (realized/unrealized):