CINF-2014.6.30-10Q


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, 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 July 24, 2014, there were 163,651,181 shares of common stock outstanding.




CINCINNATI FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2014
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Cincinnati Financial Corporation Second-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)
 
June 30,
 
December 31,
 
 
2014
 
2013
Assets
 
 

 
 

Investments
 
 

 
 

Fixed maturities, at fair value (amortized cost: 2014—$8,719; 2013—$8,638)
 
$
9,383

 
$
9,121

Equity securities, at fair value (cost: 2014—$2,582; 2013—$2,523)
 
4,605

 
4,375

Other invested assets
 
72

 
68

Total investments
 
14,060

 
13,564

Cash and cash equivalents
 
462

 
433

Investment income receivable
 
116

 
121

Finance receivable
 
80

 
85

Premiums receivable
 
1,462

 
1,346

Reinsurance recoverable
 
526

 
547

Prepaid reinsurance premiums
 
26

 
26

Deferred policy acquisition costs
 
571

 
565

Land, building and equipment, net, for company use (accumulated depreciation: 2014—$431; 2013—$420)
 
203

 
210

Other assets
 
98

 
73

Separate accounts
 
731

 
692

Total assets
 
$
18,335

 
$
17,662

Liabilities
 
 

 
 

Insurance reserves
 
 

 
 

Loss and loss expense reserves
 
$
4,444

 
$
4,311

Life policy and investment contract reserves
 
2,454

 
2,390

Unearned premiums
 
2,110

 
1,976

Other liabilities
 
563

 
611

Deferred income tax
 
810

 
673

Note payable
 
49

 
104

Long-term debt and capital lease obligations
 
831

 
835

Separate accounts
 
731

 
692

Total liabilities
 
11,992

 
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
 
1,198

 
1,191

Retained earnings
 
4,299

 
4,268

Accumulated other comprehensive income
 
1,732

 
1,504

Treasury stock at cost (2014—34 million and 2013—35 million shares)
 
(1,283
)
 
(1,290
)
Total shareholders' equity
 
6,343

 
6,070

Total liabilities and shareholders' equity
 
$
18,335

 
$
17,662

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


Cincinnati Financial Corporation Second-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 June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues
 
 

 
 

 
 

 
 

Earned premiums
 
$
1,059

 
$
954

 
$
2,086

 
$
1,885

Investment income, net of expenses
 
136

 
131

 
271

 
259

Realized investment gains, net
 
14

 
14

 
36

 
55

Fee revenues
 
3

 
3

 
6

 
4

Other revenues
 
2

 
2

 
4

 
4

Total revenues
 
1,214

 
1,104

 
2,403

 
2,207

Benefits and Expenses
 
 

 
 

 
 

 
 

Insurance losses and policyholder benefits
 
763

 
631

 
1,495

 
1,199

Underwriting, acquisition and insurance expenses
 
328

 
307

 
648

 
607

Interest expense
 
13

 
14

 
27

 
27

Other operating expenses
 
3

 
4

 
7

 
9

 Total benefits and expenses
 
1,107

 
956

 
2,177

 
1,842

Income Before Income Taxes
 
107

 
148

 
226

 
365

Provision for Income Taxes
 
 

 
 

 
 

 
 

Current
 
18

 
37

 
38

 
91

Deferred
 
5

 
1

 
13

 
10

Total provision for income taxes
 
23

 
38

 
51

 
101

Net Income
 
$
84

 
$
110

 
$
175

 
$
264

Per Common Share
 
 

 
 

 
 

 
 

Net income—basic
 
$
0.51

 
$
0.67

 
$
1.07

 
$
1.62

Net income—diluted
 
0.51

 
0.66

 
1.06

 
1.60

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

Cincinnati Financial Corporation Second-Quarter 2014 10-Q
Page 4


CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (In millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Net Income
 
$
84

 
$
110

 
$
175

 
$
264

Other Comprehensive Income
 
 

 
 

 
 

 
 

Change in unrealized gains (losses) on investments available-for-sale, net of tax of $82, ($85), $123 and $39, respectively
 
153

 
(159
)
 
229

 
73

Net change in pension actuarial loss and prior service cost, net of tax of $0, $1, $0 and $2 respectively
 
—

 
2

 
(1
)
 
3

Change in life deferred acquisition costs, life policy reserves and other, net of tax of $0, $8, $0 and $8 respectively
 
1

 
16

 
—

 
16

Other comprehensive income (loss), net of tax
 
154

 
(141
)
 
228

 
92

Comprehensive Income (Loss)
 
$
238

 
$
(31
)
 
$
403

 
$
356

 
 
 
 
 
 
 
 
 

CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions)
 
Common Stock
 
 
 
 
 
Accumulated
Other
Comprehensive
Income
 
 
 
Total
Share-
holders'
 Equity
 
 
Outstanding Shares
 
Amount
 
Paid-in Capital
 
Retained Earnings
 
 
Treasury Stock
 
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
)
Treasury stock acquired—share repurchase authorization
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other
 
1

 
2

 
28

 
—

 
—

 
(7
)
 
23

Balance June 30, 2013
 
164

 
$
396

 
$
1,162

 
$
4,152

 
$
1,221

 
$
(1,232
)
 
$
5,699

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2013
 
163

 
$
397

 
$
1,191

 
$
4,268

 
$
1,504

 
$
(1,290
)
 
$
6,070

Net income
 
—

 
—

 
—

 
175

 
—

 
—

 
175

Other comprehensive income, net
 
—

 
—

 
—

 
—

 
228

 
—

 
228

Dividends declared
 
—

 
—

 
—

 
(144
)
 
—

 
—

 
(144
)
Treasury stock acquired—share repurchase authorization
 
—

 
—

 
—

 
—

 
—

 
(7
)
 
(7
)
Other
 
1

 
—

 
7

 
—

 
—

 
14

 
21

Balance June 30, 2014
 
164

 
$
397

 
$
1,198

 
$
4,299

 
$
1,732

 
$
(1,283
)
 
$
6,343

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


Cincinnati Financial Corporation Second-Quarter 2014 10-Q
Page 5


CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In millions)
 
Six months ended June 30,
 
 
2014
 
2013
Cash Flows From Operating Activities
 
 

 
 

Net income
 
$
175

 
$
264

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

 
 

Depreciation and amortization
 
25

 
20

Realized gains on investments, net
 
(36
)
 
(55
)
Stock-based compensation
 
10

 
10

Interest credited to contract holders
 
23

 
22

Deferred income tax expense
 
13

 
10

Changes in:
 
 

 
 

Investment income receivable
 
5

 
(1
)
Premiums and reinsurance receivable
 
(95
)
 
(103
)
Deferred policy acquisition costs
 
(19
)
 
(39
)
Other assets
 
(5
)
 
(10
)
Loss and loss expense reserves
 
133

 
54

Life policy reserves
 
76

 
33

Unearned premiums
 
134

 
155

Other liabilities
 
(72
)
 
(39
)
Current income tax receivable
 
(16
)
 
(70
)
Net cash provided by operating activities
 
351

 
251

Cash Flows From Investing Activities
 
 

 
 

Sale of fixed maturities
 
24

 
14

Call or maturity of fixed maturities
 
481

 
459

Sale of equity securities
 
82

 
157

Purchase of fixed maturities
 
(584
)
 
(666
)
Purchase of equity securities
 
(104
)
 
(190
)
Investment in finance receivables
 
(9
)
 
(18
)
Collection of finance receivables
 
15

 
14

     Investment in buildings and equipment, net
 
(5
)
 
(3
)
Change in other invested assets, net
 
3

 
3

Net cash used in investing activities
 
(97
)
 
(230
)
Cash Flows From Financing Activities
 
 

 
 

Payment of cash dividends to shareholders
 
(138
)
 
(130
)
Purchase of treasury shares
 
(7
)
 
—

Decrease in notes payable
 
(55
)
 
—

Proceeds from stock options exercised
 
11

 
12

Contract holders' funds deposited
 
45

 
45

Contract holders' funds withdrawn
 
(75
)
 
(55
)
Excess tax benefits on stock-based compensation
 
2

 
9

Other
 
(8
)
 
(7
)
Net cash used in financing activities
 
(225
)
 
(126
)
Net change in cash and cash equivalents
 
29

 
(105
)
Cash and cash equivalents at beginning of year
 
433

 
487

Cash and cash equivalents at end of period
 
$
462

 
$
382

Supplemental disclosures of cash flow information:
 
 

 
 

Interest paid
 
$
26

 
$
27

Income taxes paid
 
52

 
158

Non-cash activities:
 
 

 
 

Conversion of securities
 
$
7

 
$
54

Equipment acquired under capital lease obligations
 
7

 
17

Cashless exercise of stock options
 
8

 
15

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

Cincinnati Financial Corporation Second-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 June 30, 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.

Pending Accounting Updates

ASU 2014-09 Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  Insurance contracts do not fall within the scope of this ASU. The effective date of ASU 2014-09 is for annual reporting periods beginning after December 15, 2016.  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 2014-12, Compensation-Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

In June 2014, the FASB Issued ASU 2014-12, Compensation-Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that performance targets that affect vesting and that could be achieved after the requisite service period be treated as performance conditions.  The effective date of ASU 2014-12 is for interim and annual reporting periods beginning after December 15, 2015.  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.

 

Cincinnati Financial Corporation Second-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 June 30, 2014
 
cost
 
gains
 
losses
 
value
Fixed maturity securities:
 
 

 
 

 
 

 
 

States, municipalities and political subdivisions
 
$
3,205

 
$
170

 
$
5

 
$
3,370

Convertibles and bonds with warrants attached
 
7

 
—

 
—

 
7

United States government
 
7

 
—

 
—

 
7

Government-sponsored enterprises
 
221

 
—

 
13

 
208

Foreign government
 
10

 
—

 
—

 
10

Commercial mortgage-backed
 
220

 
7

 
1

 
226

Corporate
 
5,049

 
509

 
3

 
5,555

Subtotal
 
8,719

 
686

 
22

 
9,383

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
2,458

 
1,992

 
3

 
4,447

Nonredeemable preferred equities
 
124

 
35

 
1

 
158

Subtotal
 
2,582

 
2,027

 
4

 
4,605

Total
 
$
11,301

 
$
2,713

 
$
26

 
$
13,988

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 seven largest unrealized investment gains in our common stock portfolio are from Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), Dover Corporation (NYSE:DOV), The Procter & Gamble Company (NYSE:PG), Honeywell International Incorporated (NYSE:HON), Johnson & Johnson (NYSE:JNJ), and RPM International (NYSE:RPM), which had a combined gross unrealized gain of $599 million. At June 30, 2014, we had $7 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 Second-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 positions:
(In millions)
 
Less than 12 months
 
12 months or more
 
Total
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
fair
 
unrealized
At June 30, 2014
 
value
 
losses
 
value
 
losses
 
value
 
losses
Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

States, municipalities and political
   subdivisions
 
$
61

 
$
1

 
$
267

 
$
4

 
$
328

 
$
5

United States government
 
—

 
—

 
1

 
—

 
1

 
—

Government-sponsored enterprises
 
10

 
—

 
175

 
13

 
185

 
13

Foreign government
 
—

 
—

 
10

 
—

 
10

 
—

Commercial mortgage-backed
 
—

 
—

 
32

 
1

 
32

 
1

Corporate
 
49

 
—

 
127

 
3

 
176

 
3

Subtotal
 
120

 
1

 
612

 
21

 
732

 
22

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
39

 
—

 
79

 
3

 
118

 
3

Nonredeemable preferred equities
 
5

 
—

 
17

 
1

 
22

 
1

Subtotal
 
44

 
—

 
96

 
4

 
140

 
4

Total
 
$
164

 
$
1

 
$
708

 
$
25

 
$
872

 
$
26

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 Second-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 June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Investment income summary:
 
 
 
 
 
 
 
 
Interest on fixed maturities
 
$
103

 
$
103

 
$
207

 
$
205

Dividends on equity securities
 
34

 
30

 
66

 
57

Other investment income
 
1

 
—

 
2

 
1

Total
 
138

 
133

 
275

 
263

Less investment expenses
 
2

 
2

 
4

 
4

Total
 
$
136

 
$
131

 
$
271

 
$
259

 
 
 
 
 
 
 
 
 
Realized investment gains and losses summary:
 
 

 
 

 
 

 
 

Fixed maturities:
 
 

 
 

 
 

 
 

Gross realized gains
 
$
4

 
$
2

 
$
6

 
$
4

Gross realized losses
 
—

 
—

 
—

 
—

Other-than-temporary impairments
 
—

 
—

 
—

 
(2
)
Equity securities:
 
 

 
 

 
 

 
 

Gross realized gains
 
16

 
12

 
34

 
49

Gross realized losses
 
—

 
—

 
—

 
—

Other-than-temporary impairments
 
—

 
—

 
(1
)
 
—

Securities with embedded derivatives
 
(3
)
 
—

 
(4
)
 
1

Other
 
(3
)
 
—

 
1

 
3

Total
 
$
14

 
$
14

 
$
36

 
$
55

 
 
 
 
 
 
 
 
 
Change in unrealized gains and losses summary:
 
 

 
 

 
 

 
 

Fixed maturities
 
$
93

 
$
(282
)
 
$
181

 
$
(307
)
Equity securities
 
142

 
38

 
171

 
419

Net change in pension actuarial loss and prior
  service cost
 
—

 
3

 
(1
)
 
5

Adjustment to deferred acquisition costs and life
  policy reserves
 
(5
)
 
26

 
(8
)
 
29

Other
 
6

 
(2
)
 
8

 
(5
)
Income taxes on above
 
(82
)
 
76

 
(123
)
 
(49
)
Total
 
$
154

 
$
(141
)
 
$
228

 
$
92

 
 
 
 
 
 
 
 
 
 
During the three and six months ended June 30, 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 three months ended June 30, 2014, there was one equity security and no fixed-maturity securities other-than-temporarily impaired. During the six months ended June 30, 2014, there were three equity securities and one fixed-maturity security other-than-temporarily impaired. At June 30, 2014, 247 fixed-maturity investments with a total unrealized loss of $21 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. Four equity investments with a total unrealized loss of $4 million had been in an unrealized loss position for 12 months or more as of June 30, 2014. Of that total, no equity investments were trading below 70 percent of cost.
 
During 2013, we other-than-temporarily impaired seven fixed-maturity securities. At December 31, 2013, 40 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 Second-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 June 30, 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 June 30, 2014
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

States, municipalities and political subdivisions
 
$
—

 
$
3,370

 
$
—

 
$
3,370

Convertibles and bonds with warrants attached
 
—

 
7

 
—

 
7

United States government
 
7

 
—

 
—

 
7

Government-sponsored enterprises
 
—

 
208

 
—

 
208

Foreign government
 
—

 
10

 
—

 
10

Commercial mortgage-backed
 
—

 
226

 
—

 
226

Corporate
 
—

 
5,546

 
9

 
5,555

Subtotal
 
7

 
9,367

 
9

 
9,383

Common equities, available for sale
 
4,447

 
—

 
—

 
4,447

Nonredeemable preferred equities, available for sale
 
—

 
156

 
2

 
158

Separate accounts taxable fixed maturities
 
—

 
719

 
—

 
719

Top Hat Savings Plan mutual funds and common
  equity (included in Other assets)
 
17

 
—

 
—

 
17

Total
 
$
4,471

 
$
10,242

 
$
11

 
$
14,724

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 Second-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 June 30, 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 June 30:
 (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, March 31, 2014
 
$
8

 
$
5

 
$
—

 
$
2

 
$
15

Total gains or losses (realized/unrealized):
 
 

 
 
 
 

 
 

 
 

Included in net income
 
—

 
—

 
—

 
—

 
—

Included in other comprehensive income
 
—

 
—

 
—

 
—

 
—

Purchases
 
—

 
—

 
—

 
—

 
—

Sales
 
—

 
—

 
—

 
—

 
—

Transfers into Level 3
 
1

 
—

 
—

 
—

 
1

Transfers out of Level 3
 
—

 
(5
)
 
—

 
—

 
(5
)
Ending balance, June 30, 2014
 
$
9

 
$
—

 
$
—

 
$
2

 
$
11

 
 
 
 
 
 
 
 
 
 
 
Beginning balance, March 31, 2013
 
$
3

 
—

 
$
1

 
$
2

 
$
6

Total gains or losses (realized/unrealized):
 
 

 
 
 
 

 
 

 
 

Included in net income
 
—

 
—

 
—

 
—

 
—

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

 
 
 
 
 
 
 
 
 
 
 


Cincinnati Financial Corporation Second-Quarter 2014 10-Q
Page 12


The following tables provide the change in Level 3 assets for the six months ended June 30:
(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
 
7

 
5

 
—

 
—

 
12

Transfers out of Level 3
 
—

 
(5
)
 
—

 
—

 
(5
)
Ending balance, June 30, 2014
 
$
9

 
$
—

 
$
—

 
$
2

 
$
11

 
 
 
 
 
 
 
 
 
 
 
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, June 30, 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.
 
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
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Second-Quarter 2014 10-Q
Page 13


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, 2014
 
 
 
 
Note payable
 
$
—

 
$
49

 
$
—

 
$
49

6.900% senior debentures, due 2028
 
—

 
34

 
—

 
34