CINF-2013.6.30-10Q


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, 2013.
 
¨       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. 
þYes ¨ 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).
þYes ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated 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 ¨ Nonaccelerated 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, 2013, there were 163,668,282 shares of common stock outstanding.




CINCINNATI FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2013
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Cincinnati Financial Corporation Second-Quarter 2013 10-Q
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,
 
 
2013
 
2012
ASSETS
 
 

 
 

Investments
 
 

 
 

Fixed maturities, at fair value (amortized cost: 2013—$8,428; 2012—$8,222)
 
$
8,992

 
$
9,093

Equity securities, at fair value (cost: 2013—$2,452; 2012—$2,369)
 
3,875

 
3,373

Other invested assets
 
66

 
68

Total investments
 
12,933

 
12,534

Cash and cash equivalents
 
382

 
487

Investment income receivable
 
116

 
115

Finance receivable
 
79

 
75

Premiums receivable
 
1,350

 
1,214

Reinsurance recoverable
 
582

 
615

Prepaid reinsurance premiums
 
26

 
26

Deferred policy acquisition costs
 
546

 
470

Land, building and equipment, net, for company use (accumulated depreciation: 2013—$405; 2012—$397)
 
213

 
217

Other assets
 
94

 
61

Separate accounts
 
713

 
734

Total assets
 
$
17,034

 
$
16,548

LIABILITIES
 
 

 
 

Insurance reserves
 
 

 
 

Loss and loss expense reserves
 
$
4,284

 
$
4,230

Life policy and investment contract reserves
 
2,345

 
2,295

Unearned premiums
 
1,947

 
1,792

Other liabilities
 
597

 
660

Deferred income tax
 
512

 
453

Note payable
 
104

 
104

Long-term debt and capital lease obligations
 
833

 
827

Separate accounts
 
713

 
734

Total liabilities
 
11,335

 
11,095

Commitments and contingent liabilities (Note 12)
 
—

 
—

SHAREHOLDERS' EQUITY
 
 

 
 

Common stock, par value—$2 per share; (authorized: 2013 and 2012—500 million shares; issued and outstanding: 2013—198 million shares and 2012—197 million shares)
 
396

 
394

Paid-in capital
 
1,162

 
1,134

Retained earnings
 
4,152

 
4,021

Accumulated other comprehensive income
 
1,221

 
1,129

Treasury stock at cost (2013 and 2012—34 million shares)
 
(1,232
)
 
(1,225
)
Total shareholders' equity
 
5,699

 
5,453

Total liabilities and shareholders' equity
 
$
17,034

 
$
16,548

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


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 3


CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
Three months ended June 30,
 
Six months ended June 30,
(In millions except per share data)
 
2013
 
2012
 
2013
 
2012
REVENUES
 
 

 
 

 
 

 
 

Earned premiums
 
$
954

 
$
877

 
$
1,885

 
$
1,716

Investment income, net of expenses
 
131

 
132

 
259

 
263

Total realized investment gains, net
 
14

 
6

 
55

 
19

Fee revenues
 
3

 
2

 
4

 
3

Other revenues
 
2

 
3

 
4

 
5

Total revenues
 
1,104

 
1,020

 
2,207

 
2,006

BENEFITS AND EXPENSES
 
 

 
 

 
 

 
 

Insurance losses and policyholder benefits
 
631

 
687

 
1,199

 
1,269

Underwriting, acquisition and insurance expenses
 
307

 
287

 
607

 
561

Interest expense
 
14

 
13

 
27

 
27

Other operating expenses
 
4

 
4

 
9

 
8

 Total benefits and expenses
 
956

 
991

 
1,842

 
1,865

INCOME BEFORE INCOME TAXES
 
148

 
29

 
365

 
141

PROVISION (BENEFIT) FOR INCOME TAXES
 
 

 
 

 
 

 
 

Current
 
37

 
6

 
91

 
26

Deferred
 
1

 
(9
)
 
10

 
(3
)
Total provision (benefit) for income taxes
 
38

 
(3
)
 
101

 
23

NET INCOME
 
$
110

 
$
32

 
$
264

 
$
118

PER COMMON SHARE
 
 

 
 

 
 

 
 

Net income—basic
 
$
0.67

 
$
0.20

 
$
1.62

 
$
0.73

Net income—diluted
 
0.66

 
0.20

 
1.60

 
0.72

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

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 4



CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three months ended June 30,
 
Six months ended June 30,
(In millions)
 
2013
 
2012
 
2013
 
2012
NET INCOME
 
$
110

 
$
32

 
$
264

 
$
118

OTHER COMPREHENSIVE INCOME
 
 

 
 

 
 

 
 

Unrealized gains (losses) on investments available-for-sale, net of tax of ($85), ($19), $39 and $61, respectively
 
(159
)
 
(34
)
 
73

 
114

Amortization of pension actuarial loss and prior service cost, net of tax of $1, $0, $2 and $1, respectively
 
2

 
1

 
3

 
2

Change in life deferred acquisition costs, life policy reserves and other, net of tax of $8, $(1), $8 and $(3), respectively
 
16

 
(4
)
 
16

 
(7
)
Other comprehensive income (loss), net of tax
 
(141
)
 
(37
)
 
92

 
109

COMPREHENSIVE INCOME (LOSS)
 
$
(31
)
 
$
(5
)
 
$
356

 
$
227

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


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 5


CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
 
Common Stock
 
 
 
 
 
Accumulated
Other
 
 
 
Total
Share-
(In millions)
 
Outstanding Shares
 
Amount
 
Paid-in Capital
 
Retained Earnings
 
Comprehensive Income
 
Treasury Stock
 
holders' Equity
Balance as reported December 31, 2011
 
162

 
$
393

 
$
1,096

 
$
3,885

 
$
901

 
$
(1,220
)
 
$
5,055

Cumulative effect of a change in accounting for deferred policy acquisition costs, net of tax
 
—

 
—

 
—

 
(22
)
 
—

 
—

 
(22
)
Balance as adjusted December 31, 2011
 
162

 
393

 
1,096

 
3,863

 
901

 
(1,220
)
 
5,033

Net income
 
—

 
—

 
—

 
118

 
—

 
—

 
118

Other comprehensive income, net
 
—

 
—

 
—

 
—

 
109

 
—

 
109

Dividends declared
 
—

 
—

 
—

 
(130
)
 
—

 
—

 
(130
)
Stock-based awards exercised and vested
 
—

 
—

 
1

 
—

 
—

 
1

 
2

Stock-based compensation
 
—

 
—

 
8

 
—

 
—

 
—

 
8

Purchases
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other
 
—

 
—

 
1

 
—

 
—

 
3

 
4

Balance June 30, 2012
 
162

 
$
393

 
$
1,106

 
$
3,851

 
$
1,010

 
$
(1,216
)
 
$
5,144

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2012
 
163

 
$
394

 
$
1,134

 
$
4,021

 
$
1,129

 
$
(1,225
)
 
$
5,453

Net income
 
—

 
—

 
—

 
264

 
—

 
—

 
264

Other comprehensive income, net
 
—

 
—

 
—

 
—

 
92

 
—

 
92

Dividends declared
 
—

 
—

 
—

 
(133
)
 
—

 
—

 
(133
)
Stock-based awards exercised and vested
 
1

 
2

 
17

 
—

 
—

 
5

 
24

Stock-based compensation
 
—

 
—

 
10

 
—

 
—

 
—

 
10

Purchases
 
—

 
—

 
—

 
—

 
—

 
(15
)
 
(15
)
Other
 
—

 
—

 
1

 
—

 
—

 
3

 
4

Balance June 30, 2013
 
164

 
$
396

 
$
1,162

 
$
4,152

 
$
1,221

 
$
(1,232
)
 
$
5,699

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


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 6


CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
 
Six months ended June 30,
(In millions)
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Net income
 
$
264

 
$
118

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
20

 
22

Realized gains on investments, net
 
(55
)
 
(19
)
Stock-based compensation
 
10

 
8

Interest credited to contract holders
 
22

 
18

Deferred income tax expense (benefit)
 
10

 
(3
)
Changes in:
 
 

 
 

Investment income receivable
 
(1
)
 
1

Premiums and reinsurance receivable
 
(103
)
 
(76
)
Deferred policy acquisition costs
 
(39
)
 
(26
)
Other assets
 
(10
)
 
(11
)
Loss and loss expense reserves
 
54

 
57

Life policy reserves
 
33

 
33

Unearned premiums
 
155

 
129

Other liabilities
 
(39
)
 
7

Current income tax receivable
 
(70
)
 
7

Net cash provided by operating activities
 
251

 
265

CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Sale of fixed maturities
 
14

 
28

Call or maturity of fixed maturities
 
459

 
360

Sale of equity securities
 
157

 
124

Purchase of fixed maturities
 
(666
)
 
(603
)
Purchase of equity securities
 
(190
)
 
(210
)
Investment in buildings and equipment, net
 
(3
)
 
(4
)
Investment in finance receivables
 
(18
)
 
(18
)
Collection of finance receivables
 
14

 
16

Change in other invested assets, net
 
3

 
3

Net cash used in investing activities
 
(230
)
 
(304
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Payment of cash dividends to shareholders
 
(130
)
 
(128
)
Proceeds from stock options exercised
 
12

 
3

Contract holders' funds deposited
 
45

 
56

Contract holders' funds withdrawn
 
(55
)
 
(62
)
Excess tax benefits on stock-based compensation
 
9

 
1

Other
 
(7
)
 
(6
)
Net cash used in financing activities
 
(126
)
 
(136
)
Net change in cash and cash equivalents
 
(105
)
 
(175
)
Cash and cash equivalents at beginning of year
 
487

 
438

Cash and cash equivalents at end of period
 
$
382

 
$
263

Supplemental disclosures of cash flow information:
 
 

 
 

Interest paid
 
$
27

 
$
27

Income taxes paid
 
158

 
19

Non-cash activities:
 
 

 
 

Conversion of securities
 
$
54

 
$
13

Equipment acquired under capital lease obligations
 
17

 
9

Cashless exercise of stock options
 
15

 
—

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

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 — ACCOUNTING POLICIES
 
The condensed consolidated financial statements include the accounts of Cincinnati Financial Corporation and its consolidated subsidiaries, each of which is wholly owned. These statements are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
 
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. Our December 31, 2012, condensed consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by GAAP.
 
Our June 30, 2013, 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 2012 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 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
 
In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires entities to present in either a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The company adopted this ASU during the first quarter of 2013, and it did not have a material impact on our company’s financial position, cash flows or results of operations. See Note 7, Accumulated Other Comprehensive Income, for further details.
   

 

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 8


NOTE 2 – INVESTMENTS
 
The following table provides cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value for our invested assets:
(In millions)
 
Cost or
 
 
 
 
 
 
 
 
amortized
 
Gross unrealized
 
Fair
At June 30, 2013
 
cost
 
gains
 
losses
 
value
Fixed maturities:
 
 

 
 

 
 

 
 

States, municipalities and political subdivisions
 
$
3,044

 
$
162

 
$
18

 
$
3,188

Convertibles and bonds with warrants attached
 
16

 
—

 
—

 
16

United States government
 
7

 
—

 
—

 
7

Government-sponsored enterprises
 
208

 
—

 
13

 
195

Foreign government
 
10

 
—

 
—

 
10

Commercial mortgage-backed securities
 
63

 
—

 
3

 
60

Corporate securities
 
5,080

 
459

 
23

 
5,516

Subtotal
 
8,428

 
621

 
57

 
8,992

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
2,375

 
1,398

 
12

 
3,761

Preferred equities
 
77

 
37

 
—

 
114

Subtotal
 
2,452

 
1,435

 
12

 
3,875

Total
 
$
10,880

 
$
2,056

 
$
69

 
$
12,867

At December 31, 2012
 
 

 
 

 
 

 
 

Fixed maturities:
 
 

 
 

 
 

 
 

States, municipalities and political subdivisions
 
$
3,040

 
$
250

 
$
1

 
$
3,289

Convertibles and bonds with warrants attached
 
31

 
—

 
—

 
31

United States government
 
7

 
1

 
—

 
8

Government-sponsored enterprises
 
164

 
—

 
—

 
164

Foreign government
 
3

 
—

 
—

 
3

Commercial mortgage-backed securities
 
27

 
1

 
—

 
28

Corporate securities
 
4,950

 
622

 
2

 
5,570

Subtotal
 
8,222

 
874

 
3

 
9,093

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
2,270

 
977

 
9

 
3,238

Preferred equities
 
99

 
37

 
1

 
135

Subtotal
 
2,369

 
1,014

 
10

 
3,373

Total
 
$
10,591

 
$
1,888

 
$
13

 
$
12,466

 
The net unrealized investment gains in our fixed-maturity portfolio are primarily the result of the current low interest rate environment that increased the fair value of our fixed-maturity portfolio. The three largest net unrealized investment gains in our common stock portfolio are from Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX) and The Procter & Gamble Company (NYSE:PG), which had a combined net gain position of $283 million. At At June 30, 2013, we had $16 million fair value of hybrid securities included in fixed maturities that follow Accounting Standards Codification (ASC) 815-15-25, Accounting for Certain Hybrid Financial Instruments, compared with $31 million fair value of hybrid securities at December 31, 2012. The hybrid securities are carried at fair value, and the changes in fair value are included in realized investment gains and losses.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
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, 2013
 
value
 
losses
 
value
 
losses
 
value
 
losses
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

 
 

States, municipalities and political
   subdivisions
 
$
377

 
$
18

 
$
—

 
$
—

 
$
377

 
$
18

United States government
 
1

 
—

 
—

 
—

 
1

 
—

Foreign government
 
10

 
—

 
—

 
—

 
10

 
—

Government-sponsored enterprises
 
185

 
13

 
—

 
—

 
185

 
13

Commercial mortgage-backed securities
 
51

 
3

 
—

 
—

 
51

 
3

Corporate securities
 
580

 
22

 
13

 
1

 
593

 
23

Subtotal
 
1,204

 
56

 
13

 
1

 
1,217

 
57

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
202

 
12

 
—

 
—

 
202

 
12

Preferred equities
 
4

 
—

 
—

 
—

 
4

 
—

Subtotal
 
206

 
12

 
—

 
—

 
206

 
12

Total
 
$
1,410

 
$
68

 
$
13

 
$
1

 
$
1,423

 
$
69

At December 31, 2012
 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturities:
 
 

 
 

 
 

 
 

 
 

 
 

States, municipalities and political
   subdivisions
 
$
53

 
$
1

 
$
—

 
$
—

 
$
53

 
$
1

Government-sponsored enterprises
 
1

 
—

 
—

 
—

 
1

 
—

Corporate securities
 
58

 
1

 
17

 
1

 
75

 
2

Subtotal
 
112

 
2

 
17

 
1

 
129

 
3

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
107

 
9

 
—

 
—

 
107

 
9

Preferred equities
 
4

 
1

 
—

 
—

 
4

 
1

Subtotal
 
111

 
10

 
—

 
—

 
111

 
10

Total
 
$
223

 
$
12

 
$
17

 
$
1

 
$
240

 
$
13

 

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 10


The following table provides investment income, realized investment gains and losses and the change in unrealized investment gains and losses and other items:
(In millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Investment income summary:
 
 
 
 
 
 
 
 
Interest on fixed maturities
 
$
103

 
$
106

 
$
205

 
$
212

Dividends on equity securities
 
30

 
27

 
57

 
53

Other investment income
 
—

 
1

 
1

 
2

Total
 
133

 
134

 
263

 
267

Less investment expenses
 
2

 
2

 
4

 
4

Total
 
$
131

 
$
132

 
$
259

 
$
263

 
 
 
 
 
 
 
 
 
Realized investment gains and losses summary:
 
 

 
 

 
 

 
 

Fixed maturities:
 
 

 
 

 
 

 
 

Gross realized gains
 
$
2

 
$
13

 
$
4

 
$
16

Gross realized losses
 
—

 
—

 
—

 
—

Other-than-temporary impairments
 
—

 
—

 
(2
)
 
—

Equity securities:
 
 

 
 

 
 

 
 

Gross realized gains
 
12

 
6

 
49

 
29

Gross realized losses
 
—

 
(1
)
 
—

 
(1
)
Other-than-temporary impairments
 
—

 
(14
)
 
—

 
(30
)
Securities with embedded derivatives
 
—

 
1

 
1

 
5

Other
 
—

 
1

 
3

 
—

Total
 
$
14

 
$
6

 
$
55

 
$
19

 
 
 
 
 
 
 
 
 
Change in unrealized gains and losses summary:
 
 

 
 

 
 

 
 

Fixed maturities
 
$
(282
)
 
$
29

 
$
(307
)
 
$
78

Equity securities
 
38

 
(82
)
 
419

 
97

Adjustment to deferred acquisition costs and life policy reserves
 
26

 
(8
)
 
29

 
(15
)
Amortization of pension actuarial loss and prior service cost
 
3

 
1

 
5

 
3

Other
 
(2
)
 
3

 
(5
)
 
5

Income taxes on above
 
76

 
20

 
(49
)
 
(59
)
Total
 
$
(141
)
 
$
(37
)
 
$
92

 
$
109

 
During the three and six months ended June 30, 2013 and 2012, there were no credit losses on fixed-maturity securities for which a portion of other-than-temporary impairment (OTTI) has been recognized in other comprehensive income.
 
During the quarter ended June 30, 2013, there were no other-than-temporarily impaired securities. At June 30, 2013, four fixed-maturity investments with a total unrealized loss of $1 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below 70 percent of amortized cost. There were no equity investments in an unrealized loss position for 12 months or more as of June 30, 2013.
 
At December 31, 2012, four fixed-maturity investments with a total unrealized loss of $1 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below
70 percent of amortized cost. There were no equity investments in an unrealized loss position for 12 months or more as of December 31, 2012.
 


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 11


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, 2012, and ultimately management determines fair value. See our 2012 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 121, for information on characteristics and valuation techniques used in determining fair value.

Fair Value Disclosures for Assets
The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at June 30, 2013, and December 31, 2012. We do not have any material liabilities carried at fair value. There were no transfers between Level 1 and Level 2.
(In millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs 
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At June 30, 2013
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

States, municipalities and political subdivisions
 
$
—

 
$
3,187

 
$
1

 
$
3,188

Convertibles and bonds with warrants attached
 
—

 
16

 
—

 
16

United States government
 
7

 
—

 
—

 
7

Government-sponsored enterprises
 
—

 
195

 
—

 
195

Foreign government
 
—

 
10

 
—

 
10

Commercial mortgage-backed securities
 
—

 
60

 
—

 
60

Corporate securities
 
—

 
5,513

 
3

 
5,516

Subtotal
 
7

 
8,981

 
4

 
8,992

Common equities, available for sale
 
3,761

 
—

 
—

 
3,761

Preferred equities, available for sale
 
—

 
112

 
2

 
114

Taxable fixed maturities separate accounts
 
—

 
693

 
—

 
693

Top Hat Savings Plan (included in Other assets)
 
11

 
—

 
—

 
11

Total
 
$
3,779

 
$
9,786

 
$
6

 
$
13,571

At December 31, 2012
 
 
 
 
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

States, municipalities and political subdivisions
 
$
—

 
$
3,288

 
$
1

 
$
3,289

Convertibles and bonds with warrants attached
 
—

 
31

 
—

 
31

United States government
 
8

 
—

 
—

 
8

Government-sponsored enterprises
 
—

 
164

 
—

 
164

Foreign government
 
—

 
3

 
—

 
3

Commercial mortgage-backed securities
 
—

 
28

 
—

 
28

Corporate securities
 
—

 
5,567

 
3

 
5,570

Subtotal
 
8

 
9,081

 
4

 
9,093

Common equities, available for sale
 
3,238

 
—

 
—

 
3,238

Preferred equities, available for sale
 
—

 
134

 
1

 
135

Taxable fixed-maturities separate accounts
 
—

 
689

 
—

 
689

Top Hat Savings Plan (included in Other assets)
 
9

 
—

 
—

 
9

Total
 
$
3,255

 
$
9,904

 
$
5

 
$
13,164


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 12


 
Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value as of June 30, 2013. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the condensed consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.

The following tables provide the change in Level 3 assets for the three months ended June 30: 
 
 
 
(In millions)
 
Corporate fixed
maturities
 
States,
municipalities
and political
subdivisions
fixed maturities
 
Preferred  equities
 
Total
Beginning balance, March 31, 2013
 
$
3

 
$
1

 
$
2

 
$
6

Total gains or losses (realized/unrealized):
 
 

 
 

 
 

 
 

Included in earnings
 
—

 
—

 
—

 
—

Included in other comprehensive income
 
—

 
—

 
—

 
—

Purchases
 
—

 
—

 
—

 
—

Sales
 
—

 
—

 
—

 
—

Transfers into Level 3
 
—

 
—

 
—

 
—

Transfers out of Level 3
 
—

 
—

 
—

 
—

Ending balance, June 30, 2013
 
$
3

 
$
1

 
$
2

 
$
6

 
 
 
 
 
 
 
 
 
Beginning balance, March 31, 2012
 
$
16

 
$
2

 
$
7

 
$
25

Total gains or losses (realized/unrealized):
 
 

 
 

 
 

 
 

Included in earnings
 
—

 
—

 
—

 
—

Included in other comprehensive income
 
—

 
—

 
—

 
—

Purchases
 
—

 
—

 
—

 
—

Sales
 
(1
)
 
—

 
—

 
(1
)
Transfers into Level 3
 
—

 
—

 
—

 
—

Transfers out of Level 3
 
(11
)
 
—

 
—

 
(11
)
Ending balance, June 30, 2012
 
$
4

 
$
2

 
$
7

 
$
13
























Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 13


 The following tables provide the change in Level 3 assets for the six months ended June 30:
 
 
(In millions)
 
Corporate fixed
maturities
 
States,
municipalities
and political
subdivisions
fixed maturities
 
Preferred
equities
 
Total
Beginning balance, December 31, 2012
 
$
3

 
$
1

 
$
1

 
$
5

Total gains or losses (realized/unrealized):
 
 
 
 

 
 

 
 

Included in earnings
 
—

 
—

 
—

 
—

Included in other comprehensive income
 
—

 
—

 
—

 
—

Purchases
 
—

 
—

 
1

 
1

Sales
 
—

 
—

 
—

 
—

Transfers into Level 3
 
—

 
—

 
—

 
—

Transfers out of Level 3
 
—

 
—

 
—

 
—

Ending balance, June 30, 2013
 
$
3

 
$
1

 
$
2

 
$
6

 
 
 
 
 
 
 
 
 
Beginning balance, December 31, 2011
 
$
18

 
$
3

 
$
4

 
$
25

Total gains or losses (realized/unrealized):
 
 
 
 

 
 

 


Included in earnings
 
—

 
—

 
—

 
—

Included in other comprehensive income
 
3

 
—

 
2

 
5

Purchases
 
—

 
—

 
1

 
1

Sales
 
(4
)
 
(1
)
 
—

 
(5
)
Transfers into Level 3
 
1

 
—

 
—

 
1

Transfers out of Level 3
 
(14
)
 
—

 
—

 
(14
)
Ending balance, June 30, 2012
 
$
4

 
$
2

 
$
7

 
$
13



With the exception of the Level 3 reconciliation table, additional disclosure for the Level 3 category is not material.

Fair Value Disclosure for Assets and Liabilities Not Carried at Fair Value
 
The disclosures below are presented to provide timely information about the effects of current market conditions on financial instruments that are not reported at fair value in our condensed consolidated financial statements.
 
This table summarizes the book value and principal amounts of our long-term debt:
 
(In millions)
 
 
 
 
 
Book value
 
Principal amount
 
 
 
 
 
 
June 30,
 
December 31,
 
June 30,
 
December 31,
Interest rate
 
Year of issue
 
 
 
2013
 
2012
 
2013
 
2012
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

 

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 14


The following table shows fair values of our note payable and long-term debt subject to fair value disclosure requirements:
 
(In millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs 
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At June 30, 2013
 
 
 
 
Note payable
 
$
—

 
$
104

 
$
—

 
$
104

6.900% senior debentures, due 2028
 
—

 
33

 
—

 
33

6.920% senior debentures, due 2028
 
—

 
469

 
—

 
469

6.125% senior notes, due 2034
 
—

 
402

 
—

 
402

Total
 
$
—

 
$
1,008

 
$
—

 
$
1,008

 
 
 
 
 
 
 
 
 
At December 31, 2012
 
 
 
 
 
 
 
 
Note payable
 
$
—

 
$
104

 
$
—

 
$
104

6.900% senior debentures, due 2028
 
—

 
31

 
—

 
31

6.920% senior debentures, due 2028
 
—

 
479

 
—

 
479

6.125% senior notes, due 2034
 
—

 
431

 
—

 
431

Total
 
$
—

 
$
1,045

 
$
—

 
$
1,045

 
 
The following table shows the fair value of our life policy loans, included in other invested assets, subject to fair value disclosure requirements:
 
(In millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs 
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At June 30, 2013
 
 
 
 
Life policy loans
 
$
—

 
$
—

 
$
46

 
$
46