Edgar Filing: CINCINNATI FINANCIAL CORP

CINF-2014.3.31-10Q

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 March 31, 2014.

¨ 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 April 21, 2014, there were 163,519,128 shares of common stock outstanding.

CINCINNATI FINANCIAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED March 31, 2014

TABLE OF CONTENTS



Part I – Financial Information	3

Item 1. Financial Statements (unaudited)	3

Condensed Consolidated Balance Sheets	3

Condensed Consolidated Statements of Income	4

Condensed Consolidated Statements of Comprehensive Income	5

Condensed Consolidated Statements of Shareholders’ Equity	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	23

Safe Harbor Statement	23

Corporate Financial Highlights	25

Results of Operations	31

Liquidity and Capital Resources	50

Other Matters	54

Item 3. Quantitative and Qualitative Disclosures about Market Risk	54

Item 4. Controls and Procedures	63

Part II – Other Information	63

Item 1. Legal Proceedings	63

Item 1A. Risk Factors	63

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3. Defaults upon Senior Securities	64

Item 4. Mine Safety Disclosures	64

Item 5. Other Information	64

Item 6. Exhibits	64

Cincinnati Financial Corporation First-Quarter 2014 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)	March 31,			December 31,
	2014			2013
Assets
Investments
Fixed maturities, at fair value (amortized cost: 2014—$8,609; 2013—$8,638)	$	9,180		$	9,121
Equity securities, at fair value (cost: 2014—$2,545; 2013—$2,523)	4,426			4,375
Other invested assets	72			68
Total investments	13,678			13,564
Cash and cash equivalents	521			433
Investment income receivable	116			121
Finance receivable	83			85
Premiums receivable	1,396			1,346
Reinsurance recoverable	546			547
Prepaid reinsurance premiums	27			26
Deferred policy acquisition costs	564			565
Land, building and equipment, net, for company use (accumulated depreciation: 2014—$424; 2013—$420)	207			210
Other assets	79			73
Separate accounts	725			692
Total assets	$	17,942		$	17,662
Liabilities
Insurance reserves
Loss and loss expense reserves	$	4,375		$	4,311
Life policy and investment contract reserves	2,435			2,390
Unearned premiums	2,035			1,976
Other liabilities	545			611
Deferred income tax	721			673
Note payable	104			104
Long-term debt and capital lease obligations	834			835
Separate accounts	725			692
Total liabilities	11,774			11,592
Commitments and contingent liabilities (Note 12)	—			—
Shareholders' Equity
Common stock, par value—$2 per share; (authorized: 2014 and 2013—500 million shares; issued: 2014 and 2013—198 million shares)	397			397
Paid-in capital	1,191			1,191
Retained earnings	4,287			4,268
Accumulated other comprehensive income	1,578			1,504
Treasury stock at cost (2014 and 2013—35 million shares)	(1,285		)	(1,290		)
Total shareholders' equity	6,168			6,070
Total liabilities and shareholders' equity	$	17,942		$	17,662

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

Cincinnati Financial Corporation First-Quarter 2014 10-Q

Page 3

CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME



(In millions except per share data)	Three months ended March 31,
	2014		2013
Revenues
Earned premiums	$	1,027	$	931
Investment income, net of expenses	135		128
Realized investment gains, net	22		41
Fee revenues	3		1
Other revenues	2		2
Total revenues	1,189		1,103
Benefits and Expenses
Insurance losses and policyholder benefits	732		568
Underwriting, acquisition and insurance expenses	320		300
Interest expense	14		13
Other operating expenses	4		5
Total benefits and expenses	1,070		886
Income Before Income Taxes	119		217
Provision for Income Taxes
Current	20		54
Deferred	8		9
Total provision for income taxes	28		63
Net Income	$	91	$	154
Per Common Share
Net income—basic	$	0.56	$	0.95
Net income—diluted	0.55		0.94

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

Cincinnati Financial Corporation First-Quarter 2014 10-Q

Page 4

CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



(In millions)	Three months ended March 31,
	2014			2013
Net Income	$	91		$	154
Other Comprehensive Income
Unrealized gains on investments available-for-sale, net of tax of $41 and $124, respectively	76			232
Net change in pension actuarial loss and prior service cost, net of tax of $0 and $1, respectively	(1		)	1
Change in life deferred acquisition costs, life policy reserves and other, net of tax of $0 and $0, respectively	(1		)	—
Other comprehensive income, net of tax	74			233
Comprehensive Income	$	165		$	387

CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



(In millions)	Common Stock								Accumulated Other					Total Share-
	Outstanding Shares	Amount		Paid-in Capital		Retained Earnings			Comprehensive Income		Treasury Stock			holders' Equity
Balance December 31, 2012	163	$	394	$	1,134	$	4,021		$	1,129	$	(1,225	)	$	5,453
Net income	—	—		—		154			—		—			154
Other comprehensive income, net	—	—		—		—			233		—			233
Dividends declared	—	—		—		(66		)	—		—			(66		)
Treasury stock acquired—share repurchase authorization	—	—		—		—			—		—			—
Other	—	1		12		—			—		(2		)	11
Balance March 31, 2013	163	$	395	$	1,146	$	4,109		$	1,362	$	(1,227	)	$	5,785

Balance December 31, 2013	163	$	397	$	1,191	$	4,268		$	1,504	$	(1,290	)	$	6,070
Net income	—	—		—		91			—		—			91
Other comprehensive income, net	—	—		—		—			74		—			74
Dividends declared	—	—		—		(72		)	—		—			(72		)
Treasury stock acquired—share repurchase authorization	—	—		—		—			—		(7		)	(7		)
Other	—	—		—		—			—		12			12
Balance March 31, 2014	163	$	397	$	1,191	$	4,287		$	1,578	$	(1,285	)	$	6,168

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

Cincinnati Financial Corporation First-Quarter 2014 10-Q

Page 5

CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



(In millions)	Three months ended March 31,
	2014			2013
Cash Flows From Operating Activities
Net income	$	91		$	154
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13			9
Realized gains on investments, net	(22		)	(41		)
Stock-based compensation	6			5
Interest credited to contract holders	10			11
Deferred income tax expense	8			9
Changes in:
Investment income receivable	5			(2		)
Premiums and reinsurance receivable	(50		)	(82		)
Deferred policy acquisition costs	(5		)	(19		)
Other assets	(5		)	(2		)
Loss and loss expense reserves	64			10
Life policy reserves	49			13
Unearned premiums	59			83
Other liabilities	(102		)	(88		)
Current income tax receivable/payable	8			(3		)
Net cash provided by operating activities	129			57
Cash Flows From Investing Activities
Sale of fixed maturities	24			12
Call or maturity of fixed maturities	252			221
Sale of equity securities	31			98
Purchase of fixed maturities	(236		)	(325		)
Purchase of equity securities	(33		)	(108		)
Investment in finance receivables	(4		)	(8		)
Collection of finance receivables	7			7
Investment in buildings and equipment, net	(3		)	(1		)
Change in other invested assets, net	1			2
Net cash provided by (used in) investing activities	39			(102		)
Cash Flows From Financing Activities
Payment of cash dividends to shareholders	(67		)	(65		)
Purchase of treasury shares	(7		)	—
Proceeds from stock options exercised	8			6
Contract holders' funds deposited	20			24
Contract holders' funds withdrawn	(32		)	(31		)
Other	(2		)	4
Net cash used in financing activities	(80		)	(62		)
Net change in cash and cash equivalents	88			(107		)
Cash and cash equivalents at beginning of year	433			487
Cash and cash equivalents at end of period	$	521		$	380
Supplemental disclosures of cash flow information:
Interest paid	$	—		$	—
Income taxes paid	11			54
Non-cash activities:
Conversion of securities	$	—		$	43
Equipment acquired under capital lease obligations	5			12
Cashless exercise of stock options	4			9

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

Cincinnati Financial Corporation First-Quarter 2014 10-Q

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. 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, 2013, condensed consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by GAAP.

Our March 31, 2014, 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 2013 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.

Cincinnati Financial Corporation First-Quarter 2014 10-Q

Page 7

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 March 31, 2014	cost		gains		losses		value
Fixed maturity securities:
States, municipalities and political subdivisions	$	3,113	$	143	$	12	$	3,244
Convertibles and bonds with warrants attached	17		—		—		17
United States government	7		—		—		7
Government-sponsored enterprises	211		—		20		191
Foreign government	10		—		—		10
Commercial mortgage-backed	206		2		2		206
Corporate	5,045		468		8		5,505
Subtotal	8,609		613		42		9,180
Equity securities:
Common equities	2,418		1,845		6		4,257
Nonredeemable preferred equities	127		43		1		169
Subtotal	2,545		1,888		7		4,426
Total	$	11,154	$	2,501	$	49	$	13,606
At December 31, 2013
Fixed maturity securities:
States, municipalities and political subdivisions	$	3,107	$	125	$	21	$	3,211
Convertibles and bonds with warrants attached	17		—		—		17
United States government	7		—		—		7
Government-sponsored enterprises	227		—		27		200
Foreign government	10		—		—		10
Commercial mortgage-backed	148		—		5		143
Corporate	5,122		433		22		5,533
Subtotal	8,638		558		75		9,121
Equity securities:
Common equities	2,396		1,818		1		4,213
Nonredeemable preferred equities	127		38		3		162
Subtotal	2,523		1,856		4		4,375
Total	$	11,161	$	2,414	$	79	$	13,496

The net unrealized investment gains in our fixed-maturity portfolio are primarily the result of the continued low interest rate environment that increased the fair value of our fixed-maturity portfolio. The five largest unrealized investment gains in our common stock portfolio are from Exxon Mobil Corporation (NYSE:XOM), The Procter & Gamble Company (NYSE:PG), Honeywell International Incorporated (NYSE:HON), Chevron Corporation (NYSE:CVX), and Dover Corporation (NYSE:DOV), which had a combined gross unrealized gain of $431 million. At March 31, 2014, we had $17 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 $18 million fair value of hybrid securities at December 31, 2013. 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 First-Quarter 2014 10-Q

Page 8

The table below provides fair values and gross 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		Total
	Fair		Unrealized		Fair		Unrealized		fair		unrealized
At March 31, 2014	value		losses		value		losses		value		losses
Fixed maturity securities:
States, municipalities and political subdivisions	$	289	$	7	$	98	$	5	$	387	$	12
United States government	11		—		—		—		11		—
Government-sponsored enterprises	83		8		96		12		179		20
Commercial mortgage-backed	55		1		15		1		70		2
Corporate	291		7		65		1		356		8
Subtotal	729		23		274		19		1,003		42
Equity securities:
Common equities	72		6		—		—		72		6
Nonredeemable preferred equities	39		1		—		—		39		1
Subtotal	111		7		—		—		111		7
Total	$	840	$	30	$	274	$	19	$	1,114	$	49
At December 31, 2013
Fixed maturity securities:
States, municipalities and political subdivisions	$	490	$	18	$	42	$	3	$	532	$	21
United States government	1		—		—		—		1		—
Government-sponsored enterprises	199		27		1		—		200		27
Foreign government	10		—		—		—		10		—
Commercial mortgage-backed	125		5		—		—		125		5
Corporate	572		20		43		2		615		22
Subtotal	1,397		70		86		5		1,483		75
Equity securities:
Common equities	77		1		—		—		77		1
Nonredeemable preferred equities	42		3		—		—		42		3
Subtotal	119		4		—		—		119		4
Total	$	1,516	$	74	$	86	$	5	$	1,602	$	79

Cincinnati Financial Corporation First-Quarter 2014 10-Q

Page 9

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



(In millions)	Three months ended March 31,
	2014			2013
Investment income summary:
Interest on fixed maturities	$	104		$	102
Dividends on equity securities	32			27
Other investment income	1			1
Total	137			130
Less investment expenses	2			2
Total	$	135		$	128

Realized investment gains and losses summary:
Fixed maturities:
Gross realized gains	$	2		$	2
Gross realized losses	—			—
Other-than-temporary impairments	—			(2		)
Equity securities:
Gross realized gains	18			37
Gross realized losses	—			—
Other-than-temporary impairments	(1		)	—
Securities with embedded derivatives	(1		)	1
Other	4			3
Total	$	22		$	41

Change in unrealized gains and losses summary:
Fixed maturities	$	88		$	(25	)
Equity securities	29			381
Net change in pension actuarial loss and prior service cost	(1		)	2
Adjustment to deferred acquisition costs and life policy reserves	(3		)	3
Other	2			(3		)
Income taxes on above	(41		)	(125		)
Total	$	74		$	233

During the three months ended March 31, 2014 and 2013, 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 March 31, 2014, there were two equity securities and one fixed-maturity security other-than-temporarily impaired. At March 31, 2014, ninety-nine fixed-maturity investments with a total unrealized loss of $19 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. One equity investment with a total unrealized loss of less than $500,000 had been in an unrealized loss position for 12 months or more as of March 31, 2014. This equity investment was not trading below 70 percent of cost.

During 2013, we other-than-temporarily impaired seven fixed-maturity securities. At December 31, 2013, forty fixed-maturity investments with a total unrealized loss of $5 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, 2013.

Cincinnati Financial Corporation First-Quarter 2014 10-Q

Page 10

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, 2013, and ultimately management determines fair value. See our 2013 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 March 31, 2014, and December 31, 2013. 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 March 31, 2014			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
States, municipalities and political subdivisions	$	—	$	3,244	$	—	$	3,244
Convertibles and bonds with warrants attached	—		17		—		17
United States government	7		—		—		7
Government-sponsored enterprises	—		191		—		191
Foreign government	—		10		—		10
Commercial mortgage-backed	—		201		5		206
Corporate	—		5,497		8		5,505
Subtotal	7		9,160		13		9,180
Common equities, available for sale	4,257		—		—		4,257
Nonredeemable preferred equities, available for sale	—		167		2		169
Separate accounts taxable fixed maturities	—		700		—		700
Top Hat Savings Plan mutual funds and common equity (included in Other assets)	17		—		—		17
Total	$	4,281	$	10,027	$	15	$	14,323
At December 31, 2013
Fixed maturities, available for sale:
States, municipalities and political subdivisions	$	—	$	3,211	$	—	$	3,211
Convertibles and bonds with warrants attached	—		17		—		17
United States government	7		—		—		7
Government-sponsored enterprises	—		200		—		200
Foreign government	—		10		—		10
Commercial mortgage-backed	—		143		—		143
Corporate	—		5,531		2		5,533
Subtotal	7		9,112		2		9,121
Common equities, available for sale	4,213		—		—		4,213
Nonredeemable preferred equities, available for sale	—		160		2		162
Separate accounts taxable fixed-maturities	—		682		—		682
Top Hat Savings Plan mutual funds and common equity (included in Other assets)	14		—		—		14
Total	$	4,234	$	9,954	$	4	$	14,192

Cincinnati Financial Corporation First-Quarter 2014 10-Q

Page 11

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 March 31, 2014. 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 March 31:



(In millions)	Asset fair value measurements using significant unobservable inputs (Level 3)
		Corporate fixed maturities		Commercial mortgage- backed fixed maturities		States, municipalities and political subdivisions fixed maturities		Nonredeemable preferred equities		Total
Beginning balance, January 1, 2014		$	2	$	—	$	—	$	2	$	4
Total gains or losses (realized/unrealized):
Included in net income		—		—		—		—		—
Included in other comprehensive income		—		—		—		—		—
Purchases		—		—		—		—		—
Sales		—		—		—		—		—
Transfers into Level 3		6		5		—		—		11
Transfers out of Level 3		—		—		—		—		—
Ending balance, March 31, 2014		$	8	$	5	$	—	$	2	$	15

Beginning balance, January 1, 2013		$	3	$	—	$	1	$	1	$	5
Total gains or losses (realized/unrealized):
Included in net income		—		—		—		—		—
Included in other comprehensive income		—		—		—		—		—
Purchases		—		—		—		1		1
Sales		—		—		—		—		—
Transfers into Level 3		—		—		—		—		—
Transfers out of Level 3		—		—		—		—		—
Ending balance, March 31, 2013		$	3	$	—	$	1	$	2	$	6

Additional disclosures for the Level 3 category are 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.

Cincinnati Financial Corporation First-Quarter 2014 10-Q

Page 12

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



(In millions)				Book value				Principal amount
				March 31,		December 31,		March 31,		December 31,
Interest rate		Year of issue		2014		2013		2014		2013
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 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 March 31, 2014			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Note payable	$	—	$	104	$	—	$	104
6.900% senior debentures, due 2028	—		32		—		32
6.920% senior debentures, due 2028	—		470		—		470
6.125% senior notes, due 2034	—		419		—		419
Total	$	—	$	1,025	$	—	$	1,025

At December 31, 2013
Note payable	$	—	$	104	$	—	$	104
6.900% senior debentures, due 2028	—		30		—		30
6.920% senior debentures, due 2028	—		458		—		458
6.125% senior notes, due 2034	—		399		—		399
Total	$	—	$	991	$	—	$	991

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 March 31, 2014			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Life policy loans	$	—	$	—	$	44	$	44

At December 31, 2013
Life policy loans	$	—	$	—	$	45	$	45

Outstanding principal and interest for these life policy loans was $35 million and $36 million at March 31, 2014, and December 31, 2013, respectively.

Cincinnati Financial Corporation First-Quarter 2014 10-Q

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The following table shows fair values of our deferred annuities and structured settlements, included in life policy and investment contract reserves, 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 March 31, 2014			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Deferred annuities	$	—	$	—	$	900	$	900
Structured settlements	—		212		—		212
Total	$	—	$	212	$	900	$	1,112

At December 31, 2013
Deferred annuities	$	—	$	—	$	911	$	911
Structured settlements	—		219		—		219
Total	$	—	$	219	$	911	$	1,130

Recorded reserves for the deferred annuities and structured settlements were $1.051 billion at March 31, 2014, and December 31, 2013.

Cincinnati Financial Corporation First-Quarter 2014 10-Q

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NOTE 4 – PROPERTY CASUALTY LOSS AND LOSS EXPENSES

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



(In millions)	Three months ended March 31,
	2014			2013
Gross loss and loss expense reserves, beginning of period	$	4,241		$	4,169
Less reinsurance receivable	299			356
Net loss and loss expense reserves, beginning of period	3,942			3,813
Net incurred loss and loss expenses related to:
Current accident year	705			534
Prior accident years	(29		)	(10		)
Total incurred	676			524
Net paid loss and loss expenses related to:
Current accident year	197			121
Prior accident years	387			392
Total paid	584			513
Net loss and loss expense reserves, end of period	4,034			3,824
Plus reinsurance receivable	289			349
Gross loss and loss expense reserves, end of period	$	4,323		$	4,173

We use actuarial methods, models and judgment to estimate, as of a financial statement date, the property casualty loss and loss expense reserves required to pay for and settle all outstanding insured claims, including incurred but not reported (IBNR) claims, as of that date. The actuarial estimate is subject to review and adjustment by an

inter-departmental committee that includes actuarial management that is familiar with relevant company and industry business, claims and underwriting trends, as well as general economic and legal trends that could affect future loss and loss expense payments. The amount we will actually have to pay for claims can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. The reserve for loss and loss expenses in the condensed consolidated balance sheets also included $52 million at March 31, 2014, and $67 million at March 31, 2013, for certain life and health loss and loss expense reserves.

For the three months ended March 31, 2014, we experienced $29 million of favorable development on prior accident years, including $3 million of favorable development in commercial lines, $17 million of favorable development in personal lines and $9 million favorable development in excess and surplus lines. This included

$9 million from favorable development of catastrophe losses for the three months ended March 31, 2014, compared with $7 million of favorable development of catastrophe losses for the three months ended March 31, 2013.

Cincinnati Financial Corporation First-Quarter 2014 10-Q

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NOTE 5 – LIFE POLICY AND INVESTMENT CONTRACT RESERVES

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

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

This table summarizes our life policy and investment contract reserves:



(In millions)	March 31, 2014		December 31, 2013
Ordinary/traditional life	$	830	$	815
Universal life	509		508
Deferred annuities	864		862
Structured settlements	187		189
Other	45		16
Total life policy and investment contract reserves	$	2,435	$	2,390

NOTE 6 – DEFERRED ACQUISITION COSTS

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



(In millions)	Three months ended March 31,
	2014			2013
Deferred policy acquisition costs asset, beginning of period	$	565		$	470
Capitalized deferred policy acquisition costs	206			198
Amortized deferred policy acquisition costs	(201		)	(179		)
Amortized shadow deferred policy acquisition costs	(6		)	2
Deferred policy acquisition costs asset, end of period	$	564		$	491

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

Cincinnati Financial Corporation First-Quarter 2014 10-Q

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NOTE 7 – ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income includes changes in unrealized gains and losses on available for sale investments and other invested assets, changes in pension obligations and changes in life deferred acquisition costs, life policy reserves and other as follows:



(In millions)	Three months ended March 31,
	2014						2013
	Before tax		Income tax		Net		Before tax		Income tax	Net
Accumulated unrealized gains, net, on investments available for sale, beginning of period	$	2,335	$	808	$	1,527	$	1,875