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 June 30, 2011.

¨ 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		(I.R.S. Employer Identification No.)
	incorporation or organization)

	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 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 ¨ Accelerated filer ¨ Non-accelerated filer ¨ 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):

¨ Yes þ No

As of July 22, 2011, there were 163,146,137 shares of common stock outstanding.

CINCINNATI FINANCIAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2011

TABLE OF CONTENTS

Part I – Financial Information			3
Item 1. Financial Statements (unaudited)			3
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Statements of Shareholders’ Equity			5
Condensed Consolidated Statements of Cash Flows			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Safe Harbor Statement			20
Introduction			22
Results of Operations			28
Liquidity and Capital Resources			43
Other Matters			46
Item 3. Quantitative and Qualitative Disclosures about Market Risk			47
Fixed-Maturity Investments			47
Equity Investments			50
Unrealized Investment Gains and Losses			50
Item 4. Controls and Procedures			53
Part II – Other Information			53
Item 1. Legal Proceedings			53
Item 1A. Risk Factors			53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 3. Defaults upon Senior Securities			53
Item 4. (Removed and Reserved)			53
Item 5. Other Information			53
Item 6. Exhibits			54

Page 2

Part I – Financial Information

Item 1.

Financial Statements (unaudited)

Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(In millions except per share data)	June 30,			December 31,
	2011			2010
ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2011—$8,118; 2010—$7,888)	$	8,717		$	8,383
Equity securities, at fair value (cost: 2011—$2,115; 2010—$2,286)		2,971			3,041
Other invested assets		69			84
Total investments		11,757			11,508
Cash and cash equivalents		313			385
Investment income receivable		120			119
Finance receivable		75			73
Premiums receivable		1,106			1,015
Reinsurance receivable		753			572
Prepaid reinsurance premiums		15			18
Deferred policy acquisition costs		511			488
Land, building and equipment, net, for company use (accumulated depreciation: 2011—$377; 2010—$352)		234			229
Other assets		161			67
Separate accounts		657			621
Total assets	$	15,702		$	15,095

LIABILITIES
Insurance reserves
Loss and loss expense reserves	$	4,535		$	4,200
Life policy reserves		2,148			2,034
Unearned premiums		1,630			1,553
Other liabilities		512			556
Deferred income tax		324			260
Note payable		49			49
Long-term debt		790			790
Separate accounts		657			621
Total liabilities		10,645			10,063

Commitments and contingent liabilities (Note 10)		—			—

SHAREHOLDERS' EQUITY
Common stock, par value—$2 per share; (authorized: 2011 and 2010—500 million shares; issued: 2011 and 2010—196 million shares)		393			393
Paid-in capital		1,094			1,091
Retained earnings		3,862			3,980
Accumulated other comprehensive income		903			769
Treasury stock at cost (2011—33 million shares and 2010—34 million shares)		(1,195	)		(1,201	)
Total shareholders' equity		5,057			5,032
Total liabilities and shareholders' equity	$	15,702		$	15,095

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

Page 3

Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(In millions except per share data)	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
REVENUES
Earned premiums	$	773		$	768		$	1,555		$	1,515
Investment income, net of expenses		132			130			263			260
Fee revenues		1			1			2			2
Other revenues		2			2			5			3
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		-			(1	)		-			(2	)
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income		-			-			-			-
Other realized investment gains (losses), net		67			(22	)		79			(13	)
Total realized investment gains (losses), net		67			(23	)		79			(15	)
Total revenues		975			878			1,904			1,765

BENEFITS AND EXPENSES
Insurance losses and policyholder benefits		801			595			1,376			1,111
Underwriting, acquisition and insurance expenses		251			246			512			514
Other operating expenses		6			3			10			7
Interest expense		14			13			27			27
Total benefits and expenses		1,072			857			1,925			1,659

INCOME (LOSS) BEFORE INCOME TAXES		(97	)		21			(21	)		106

PROVISION (BENEFIT) FOR INCOME TAXES
Current		(50	)		10			(26	)		25
Deferred		2			(16	)		(8	)		(14	)
Total provision (benefit) for income taxes		(48	)		(6	)		(34	)		11

NET INCOME (LOSS)	$	(49	)	$	27		$	13		$	95

PER COMMON SHARE
Net income (loss)—basic	$	(0.30	)	$	0.17		$	0.08		$	0.59
Net income (loss)—diluted		(0.30	)		0.17			0.08			0.58

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

Page 4

Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

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

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

Net income		-		-		-			95			-		-			95
Other comprehensive income, net		-		-		-			-			12		-			12
Total comprehensive income																	107
Dividends declared		-		-		-			(129	)		-		-			(129	)
Stock options exercised		1		-		(2	)		-			-		3			1
Stock-based compensation		-		-		6			-			-		-			6
Purchases		-		-		-			-			-		(10	)		(10	)
Other		-		-		(1	)		-			-		3			2
Balance June 30, 2010		163	$	393	$	1,084		$	3,828		$	636	$	(1,204	)	$	4,737

Balance December 31, 2010		163	$	393	$	1,091		$	3,980		$	769	$	(1,201	)	$	5,032

Net income		-		-		-			13			-		-			13
Other comprehensive income, net		-		-		-			-			134		-			134
Total comprehensive income																	147
Dividends declared		-		-		-			(131	)		-		-			(131	)
Stock options exercised		-		-		(5	)		-			-		3			(2	)
Stock-based compensation		-		-		7			-			-		-			7
Other		-		-		1			-			-		3			4
Balance June 30, 2011		163	$	393	$	1,094		$	3,862		$	903	$	(1,195	)	$	5,057

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

Page 5

Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In millions)	Six months ended June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	13		$	95
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items		23			17
Realized (gains) losses on investments		(79	)		15
Stock-based compensation		7			6
Interest credited to contract holders		27			22
Deferred income tax benefit		(8	)		(14	)
Changes in:
Investment income receivable		(1	)		(2	)
Premiums and reinsurance receivable		(269	)		72
Deferred policy acquisition costs		(28	)		(18	)
Other assets		(7	)		(4	)
Loss and loss expense reserves		335			42
Life policy reserves		60			58
Unearned premiums		77			63
Other liabilities		(66	)		(12	)
Current income tax receivable/payable		(80	)		(87	)
Net cash provided by operating activities		4			253
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of fixed maturities		42			99
Call or maturity of fixed maturities		391			340
Sale of equity securities		342			60
Collection of finance receivables		14			15
Purchase of fixed maturities		(645	)		(756	)
Purchase of equity securities		(100	)		(158	)
Change in short-term investments, net		-			6
Investment in buildings and equipment, net		(4	)		(11	)
Investment in finance receivables		(16	)		(12	)
Change in other invested assets, net		2			2
Net cash provided by (used in) investing activities		26			(415	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of cash dividends to shareholders		(127	)		(126	)
Purchase of treasury shares		-			(10	)
Proceeds from stock options exercised		1			-
Contract holders' funds deposited		73			103
Contract holders' funds withdrawn		(44	)		(34	)
Excess tax benefits on share-based compensation		2			2
Other		(7	)		(5	)
Net cash used in financing activities		(102	)		(70	)
Net change in cash and cash equivalents		(72	)		(232	)
Cash and cash equivalents at beginning of year		385			557
Cash and cash equivalents at end of period	$	313		$	325

Supplemental disclosures of cash flow information:
Interest paid	$	27		$	27
Income taxes paid		55			112
Non-cash activities:
Conversion of securities	$	-		$	1
Equipment acquired under capital lease obligations		20			-

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

Page 6

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, 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, 2010, condensed consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by GAAP.

Our June 30, 2011, 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 2010 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 2010-06, Fair Value Measurements and Disclosures

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 these separate disclosures is for interim and annual periods beginning after December 15, 2010. This portion of ASU 2010-06 does not have a material impact on our company’s financial position, cash flows or results of operations as it focuses on additional disclosures.

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 forth 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 the 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 do not have a material impact on our company’s financial position, cash flows or results of operations.

Pending Accounting Updates

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 it will have on our company’s financial position, cash flows or results of operations.

Page 7

ASU 2011-04, Fair Value Measurements, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurements, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The ASU converges fair value measurement and disclosures among U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and expands disclosure requirements, particularly for Level 3 inputs. The ASU is effective for interim and annual periods beginning after December 15, 2011, and should be applied prospectively. 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 2011-05, Presentation of Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05 requires entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The ASU is effective for interim and annual reporting periods beginning after December 15, 2011, and should be applied prospectively. 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.

NOTE 2 – Investments

Fixed maturities (bonds and redeemable preferred stocks) and equity securities (common and non-redeemable preferred stocks) have been classified as available for sale and are stated at fair values at June 30, 2011, and December 31, 2010. 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.

(In millions)	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Change in unrealized investment gains and losses and other summary:
Fixed maturities	$	96		$	123		$	104		$	209
Equity securities		(21	)		(254	)		101			(190	)
Adjustment to deferred acquisition costs and life policy reserves		(4	)		(4	)		(4	)		(7	)
Pension obligations		1			-			2			1
Other		2			3			3			5
Income taxes on above		(26	)		46			(72	)		(6	)
Total	$	48		$	(86	)	$	134		$	12

Page 8

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 other-than-temporary impairment (OTTI) losses transferred to accumulated other comprehensive income (AOCI) in accordance with ASC 320-10-65, Recognition and Presentation of Other-Than-Temporary Impairments, for securities that also had a credit impairment:

(In millions)	Cost or
	amortized		Gross unrealized				Fair		OTTI in
At June 30, 2011	cost		gains		losses		value		AOCI
Fixed maturities:
States, municipalities and political subdivisions	$	3,077	$	157	$	3	$	3,231	$	-
Convertibles and bonds with warrants attached		73		-		-		73		-
United States government		5		1		-		6		-
Government-sponsored enterprises		163		-		1		162		-
Foreign government		3		-		-		3		-
Corporate securities		4,797		449		4		5,242		-
Subtotal		8,118		607		8		8,717	$	-
Equity securities:
Common equities		2,040		845		21		2,864
Preferred equities		75		33		1		107
Subtotal		2,115		878		22		2,971	NA
Total	$	10,233	$	1,485	$	30	$	11,688

At December 31, 2010
Fixed maturities:
States, municipalities and political subdivisions	$	3,043	$	110	$	10	$	3,143	$	-
Convertibles and bonds with warrants attached		69		-		-		69		-
United States government		4		1		-		5		-
Government-sponsored enterprises		201		-		1		200		-
Foreign government		3		-		-		3		-
Corporate securities		4,568		404		9		4,963		-
Subtotal		7,888		515		20		8,383	$	-
Equity securities:
Common equities		2,211		757		28		2,940
Preferred equities		75		27		1		101
Subtotal		2,286		784		29		3,041	NA
Total	$	10,174	$	1,299	$	49	$	11,424

The unrealized investment gains at June 30, 2011, were largely due to a net gain position in our fixed maturity portfolio of $599 million and a net gain position in our common stock portfolio of $824 million. The unrealized investment gains in our fixed maturity portfolio are primarily composed of $445 million in unrealized gains from the corporate bond portfolio and $154 million in unrealized gains from the municipal bond portfolio. The primary contributors to the net gain position in the common stock portfolio were The Procter & Gamble Company (NYSE:PG), Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) common stock, which had a combined net gain position of $283 million. At June 30, 2011, we had $73 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.

Page 9

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

(In millions)	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
At June 30, 2011	value		losses		value		losses		value		losses
Fixed maturities:
States, municipalities and political subdivisions	$	123	$	2	$	9	$	1	$	132	$	3
Government-sponsored enterprises		77		1		-		-		77		1
Corporate securities		256		2		28		2		284		4
Subtotal		456		5		37		3		493		8
Equity securities:
Common equities		197		21		-		-		197		21
Preferred equities		5		-		18		1		23		1
Subtotal		202		21		18		1		220		22
Total	$	658	$	26	$	55	$	4	$	713	$	30

At December 31, 2010
Fixed maturities:
States, municipalities and political subdivisions	$	325	$	9	$	9	$	1	$	334	$	10
Government-sponsored enterprises		133		1		-		-		133		1
Corporate securities		354		6		39		3		393		9
Subtotal		812		16		48		4		860		20
Equity securities:
Common equities		337		28		-		-		337		28
Preferred equities		5		-		23		1		28		1
Subtotal		342		28		23		1		365		29
Total	$	1,154	$	44	$	71	$	5	$	1,225	$	49

Net realized gains were $67 million and $79 million for the three and six months ended June 30, 2011, compared with net realized losses of $23 million and $15 million for the three and six months ended June 30, 2010. The realized gains for the three months ended June 30, 2011 were $67 million, offset by less than a $1 million impairment charge. The realized gains for the six months ended June 30, 2011, were $109 million, offset by a $30 million impairment charge in the first six months of 2011. The realized gains for the three and six months ended June 30, 2010, were $11 million and $20 million, offset by an impairment charge of less than $1 million in the first quarter of 2010 and $34 million in the second quarter of 2010.

Other-than-temporary Impairment Charges

During the three and six months ended June 30, 2011, 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 six months ended June 30, 2011:

(In millions)	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Fixed maturities	$	-	$	1	$	-	$	2
Equity securities		-		33		30		33
Total	$	-	$	34	$	30	$	35

During the quarter ended June 30, 2011, we impaired one fixed-maturity security for less than $1 million. At June 30, 2011, 14 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 amortized cost. At June 30, 2011, two 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 amortized cost.

At December 31, 2010, 17 fixed-maturity investments with a total unrealized loss of $4 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed maturity investments were trading below 70 percent of amortized cost. Three equity investments with a total unrealized loss of $1 million had been in an unrealized loss position for 12 months or more as of December 31, 2010. Of that total, no equity investments were trading below 70 percent of amortized cost.

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NOTE 3 – Fair Value Measurements

Fair Value Hierarchy

In accordance with accounting guidance for fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for the valuation technique used, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2010, 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.

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The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at June 30, 2011, and December 31, 2010. 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

(In millions)	Asset fair value measurements at June 30, 2011 using:
	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
States, municipalities and political subdivisions	$	-	$	3,227	$	4	$	3,231
Convertibles and bonds with warrants attached		-		73		-		73
United States government		6		-		-		6
Government-sponsored enterprises		-		162		-		162
Foreign government		-		3		-		3
Corporate securities		-		5,227		15		5,242
Subtotal		6		8,692		19		8,717
Common equities, available for sale		2,864		-		-		2,864
Preferred equities, available for sale		-		100		7		107
Taxable fixed maturities separate accounts		-		626		-		626
Top Hat Savings Plan		8		-		-		8
Total	$	2,878	$	9,418	$	26	$	12,322

(In millions)	Asset fair value measurements at December 31, 2010 using:
	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
States, municipalities and political subdivisions	$	-	$	3,139	$	4	$	3,143
Convertibles and bonds with warrants attached		-		69		-		69
United States government		5		-		-		5
Government-sponsored enterprises		-		200		-		200
Foreign government		-		3		-		3
Corporate securities		-		4,943		20		4,963
Subtotal		5		8,354		24		8,383
Common equities, available for sale		2,940		-		-		2,940
Preferred equities, available for sale		-		96		5		101
Taxable fixed maturities separate accounts		-		606		2		608
Top Hat Savings Plan		9		-		-		9
Total	$	2,954	$	9,056	$	31	$	12,041

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 as of June 30, 2011. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value. At June 30, 2011, total fair value of assets priced with broker quotes and other non-observable market inputs for the fair value measurements and disclosures was $26 million.

Page 12

The following table provides the change in Level 3 assets for the three months ended June 30, 2011. Level 3 corporate fixed-maturity securities increased by $4 million as one security was purchased for $7 million and two securities totaling $3 million were transferred into Level 2. There were no other significant changes to Level 3 assets during this period.

(In millions)	Asset fair value measurements using significant unobservable inputs (Level 3)
	Corporate fixed maturities			States, municipalities and political subdivisions fixed maturities		Preferred equities		Total
Beginning balance, March 31, 2011	$	11		$	4	$	6	$	21
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		-			-		-		-
Included in other comprehensive income		-			-		1		1
Purchases		7			-		-		7
Transfers into Level 3		-			-		-		-
Transfers out of Level 3		(3	)		-		-		(3	)
Ending balance, June 30, 2011	$	15		$	4	$	7	$	26

(In millions)	Asset fair value measurements using significant unobservable inputs (Level 3)
	Taxable fixed maturities			Tax-exempt fixed maturities		Preferred equities			Total
Beginning balance, March 31, 2010	$	28		$	4	$	6		$	38
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		(3	)		-		-			(3	)
Transfers in and/or out of Level 3		(2	)		-		-			(2	)
Ending balance, June 30, 2010	$	23		$	4	$	5		$	32

The following table provides the change in Level 3 assets for the six months ended June 30, 2011. As a result of available observable inputs, four Level 3 corporate fixed-maturity securities transferred into Level 2 resulting in a $12 million decrease. There were no other significant changes to Level 3 assets during this period.

(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		Preferred equities		Total
Beginning balance, December 31, 2010	$	20		$	2		$	4	$	5	$	31
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		-			-			-		-		-
Included in other comprehensive income		-			-			-		1		1
Purchases		7			-			-		-		7
Transfers into Level 3		-			-			-		1		1
Transfers out of Level 3		(12	)		(2	)		-		-		(14	)
Ending balance, June 30, 2011	$	15		$	-		$	4	$	7	$	26

(In millions)	Asset fair value measurements using significant unobservable inputs (Level 3)
	Taxable fixed maturities			Taxable fixed maturities- separate accounts		Tax-exempt fixed maturities		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		-			-		-		-		-
Purchases, sales, issuances, and settlements		2			-		-		-		2
Transfers in and/or out of Level 3		(6	)		-		-		-		(6	)
Ending balance, June 30, 2010	$	23		$	-	$	4	$	5	$	32

Page 13

Fair Value Disclosure for Senior Debt and Life Insurance Assets and Liabilities

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

This table summarizes the amortized cost and principal amounts of our long-term debt:

(In millions)			Book value				Principal amount
			June 30,		December 31,		June 30,		December 31,
Interest rate	Year of issue		2011		2010		2011		2010
6.900%	1998	Senior debentures, due 2028	$	28	$	28	$	28	$	28
6.920%	2005	Senior debentures, due 2028		391		391		391		391
6.125%	2004	Senior notes, due 2034		371		371		374		374
		Total	$	790	$	790	$	793	$	793

The fair value of our senior debt approximated $799 million at June 30, 2011, compared with $783 million at year-end 2010. Fair value was determined under the fair value measurements and disclosure accounting rules based on market pricing of these or similar debt instruments that are actively trading. Fair value can vary with macro-economic conditions. Regardless of the fluctuations in fair value, the outstanding principal amount of our long-term debt is $793 million. None of the long-term debt is encumbered by rating triggers. Also, we have one note payable with outstanding principal amount of $49 million, which approximates fair value.

The fair value of life policy loans outstanding principal and interest approximated $45 million, compared with amortized cost of $38 million reported in the condensed consolidated balance sheets at June 30, 2011.

Life reserves and liabilities for deferred annuities and other investment contracts were $1.005 billion and $930 million at June 30, 2011, and December 31, 2010, respectively. Fair value for these deferred annuities and investment contracts was $968 million and $933 million at June 30, 2011, and December 31, 2010, respectively. Fair values of liabilities associated with certain investment contracts are calculated based upon internally developed models because active, observable markets do not exist for those items. To determine the fair value, we make the following significant assumptions: (1) the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at June 30, 2011, to account for non-performance risk; (2) the rate of interest credited to policyholders is the portfolio net earned interest rate less a spread for expenses and profit; and (3) additional lapses occur when the credited interest rate is exceeded by an assumed competitor credited rate, which is a function of the risk-free rate of the economic scenario being modeled.

NOTE 4 – Deferred Acquisition Costs

The expenses associated with issuing insurance policies – primarily commissions, premium taxes and underwriting costs – are deferred and amortized over the terms of the policies. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate our deferred acquisition costs for recoverability. The table below shows the deferred policy acquisition costs and asset reconciliation, including the amortized deferred policy acquisition costs.

(In millions)	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Deferred policy acquisition costs asset, beginning of period	$	503		$	485		$	488		$	481
Capitalized deferred policy acquisition costs		183			171			361			342
Amortized deferred policy acquisition costs		(170	)		(164	)		(333	)		(325	)
Amortized shadow deferred policy acquisition costs		(5	)		(7	)		(5	)		(13	)
Deferred policy acquisition costs asset, end of period	$	511		$	485		$	511		$	485

There were no premium deficiencies recorded in the reported condensed consolidated statements of operations, as the sum of the anticipated loss and loss adjustment expenses, policyholder dividends, maintenance expenses and underwriting expenses did not exceed the related unearned premiums and anticipated investment income.

Page 14

NOTE 5 – Property Casualty Loss and Loss Expenses

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

(In millions)	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Gross loss and loss expense reserves, beginning of period	$	4,179		$	4,065		$	4,137		$	4,096
Less reinsurance receivable		326			343			326			435
Net loss and loss expense reserves, beginning of period		3,853			3,722			3,811			3,661
Net incurred loss and loss expenses related to:
Current accident year		853			625			1,442			1,139
Prior accident years		(96	)		(73	)		(155	)		(113	)
Total incurred		757			552			1,287			1,026
Net paid loss and loss expenses related to:
Current accident year		391			221			522			333
Prior accident years		248			233			608			534
Total paid		639			454			1,130			867

Net loss and loss expense reserves, end of period		3,971			3,820			3,971			3,820
Plus reinsurance receivable		508			311			508			311
Gross loss and loss expense reserves, end of period	$	4,479		$	4,131		$	4,479		$	4,131

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. The actuarial estimate is subject to review and adjustment by an inter-departmental committee that includes actuarial management, who 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.

We decreased the provision for prior accident years’ incurred loss and loss expenses primarily due to reduced volatility in paid losses and reduced volatility in projections of future calendar year trends and favorable case reserve development. The reserve for loss and loss expenses in the condensed consolidated balance sheets also includes $56 million at June 30, 2011, and $53 million at June 30, 2010, for certain life and health loss and loss expense reserves.

NOTE 6 – Life Policy Reserves

We establish the reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates and investment yields, including a provision for uncertainty. Once these assumptions are established, they generally are maintained throughout the lives of the contracts. We use both our own experience and industry experience, adjusted for historical trends, in arriving at our assumptions for expected mortality, morbidity and withdrawal rates as well as for expected expenses. We base our assumptions for expected investment income on our own experience adjusted for current economic conditions.

We establish reserves for the company’s universal life, deferred annuity and investment contracts equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals. Some of our universal life policies contain no-lapse guarantee provisions. For these policies, we establish a reserve in addition to the account balance, based on expected no-lapse guarantee benefits and expected policy assessments.

(In millions)	June 30,		December 31,
	2011		2010
Ordinary/traditional life	$	657	$	628
Universal life		470		459
Deferred annuities		806		730
Investment contracts		198		200
Other		17		17
Total gross reserves	$	2,148	$	2,034

Page 15

NOTE 7 – Reinsurance

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

(In millions)	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Direct earned premiums	$	807		$	769		$	1,587		$	1,513
Assumed earned premiums		2			2			7			5
Ceded earned premiums		(79	)		(43	)		(119	)		(82	)
Net earned premiums	$	730		$	728		$	1,475		$	1,436

Changes in 2011 ceded earned premiums compared with prior periods are related to earned reinstatement premiums as a result of the increase in catastrophe losses for the second quarter of 2011.

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

(In millions)

Three months ended June 30,

Six months ended June 30,