CINF-2015.6.30-10Q


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, 2015.
 
¨       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, 2015, there were 164,092,853 shares of common stock outstanding.




CINCINNATI FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2015
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Results
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Cincinnati Financial Corporation Second-Quarter 2015 10-Q
Page 2


Part I – Financial Information
Item 1.    Financial Statements (unaudited)
 
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in millions except per share data)
 
June 30,
 
December 31,
 
 
2015
 
2014
Assets
 
 

 
 

Investments
 
 

 
 

Fixed maturities, at fair value (amortized cost: 2015—$9,224; 2014—$8,871)
 
$
9,675

 
$
9,460

Equity securities, at fair value (cost: 2015—$2,828; 2014—$2,728)
 
4,734

 
4,858

Short-term investments, at fair value (amortized cost: 2015—$75; 2014—$0)
 
75

 
—

Other invested assets
 
67

 
68

Total investments
 
14,551

 
14,386

Cash and cash equivalents
 
487

 
591

Investment income receivable
 
122

 
123

Finance receivable
 
68

 
75

Premiums receivable
 
1,509

 
1,405

Reinsurance recoverable
 
535

 
545

Prepaid reinsurance premiums
 
28

 
29

Deferred policy acquisition costs
 
600

 
578

Land, building and equipment, net, for company use (accumulated depreciation: 2015—$457; 2014—$446)
 
187

 
194

Other assets
 
59

 
75

Separate accounts
 
742

 
752

Total assets
 
$
18,888

 
$
18,753

 
 
 
 
 
Liabilities
 
 

 
 

Insurance reserves
 
 

 
 

Loss and loss expense reserves
 
$
4,691

 
$
4,485

Life policy and investment contract reserves
 
2,543

 
2,497

Unearned premiums
 
2,191

 
2,082

Other liabilities
 
635

 
648

Deferred income tax
 
717

 
840

Note payable
 
49

 
49

Long-term debt and capital lease obligations
 
823

 
827

Separate accounts
 
742

 
752

Total liabilities
 
12,391

 
12,180

 
 
 
 
 
Commitments and contingent liabilities (Note 12)
 
—

 
—

 
 
 
 
 
Shareholders' Equity
 
 

 
 

Common stock, par value—$2 per share; (authorized: 2015 and 2014—500 million shares; issued: 2015 and 2014—198.3 million shares)
 
397

 
397

Paid-in capital
 
1,216

 
1,214

Retained earnings
 
4,658

 
4,505

Accumulated other comprehensive income
 
1,514

 
1,744

Treasury stock at cost (2015— 34.3 million shares and 2014—34.6 million shares)
 
(1,288
)
 
(1,287
)
Total shareholders' equity
 
6,497

 
6,573

Total liabilities and shareholders' equity
 
$
18,888

 
$
18,753

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


Cincinnati Financial Corporation Second-Quarter 2015 10-Q
Page 3


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Dollars in millions except per share data)
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues
 

 
 

 
 

 
 

Earned premiums
$
1,111

 
$
1,059

 
$
2,205

 
$
2,086

Investment income, net of expenses
140

 
136

 
279

 
271

Realized investment gains, net
60

 
14

 
107

 
36

Fee revenues
3

 
3

 
6

 
6

Other revenues
2

 
2

 
4

 
4

Total revenues
1,316

 
1,214

 
2,601

 
2,403

Benefits and Expenses
 

 
 

 
 

 
 

Insurance losses and contract holders' benefits
712

 
763

 
1,461

 
1,495

Underwriting, acquisition and insurance expenses
340

 
328

 
685

 
648

Interest expense
13

 
13

 
26

 
27

Other operating expenses
3

 
3

 
7

 
7

 Total benefits and expenses
1,068

 
1,107

 
2,179

 
2,177

Income Before Income Taxes
248

 
107

 
422

 
226

Provision for Income Taxes
 

 
 

 
 

 
 

Current
70

 
18

 
116

 
38

Deferred
2

 
5

 
2

 
13

Total provision for income taxes
72

 
23

 
118

 
51

Net Income
$
176

 
$
84

 
$
304

 
$
175

Per Common Share
 

 
 

 
 

 
 

Net income—basic
$
1.07

 
$
0.51

 
$
1.85

 
$
1.07

Net income—diluted
1.06

 
0.51

 
1.84

 
1.06

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

Cincinnati Financial Corporation Second-Quarter 2015 10-Q
Page 4


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Dollars in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Net Income
 
$
176

 
$
84

 
$
304

 
$
175

Other Comprehensive (Loss) Income
 
 

 
 

 
 

 
 

Change in unrealized gains on investments, net of tax of $(112), $82, $(127) and $123, respectively
 
(207
)
 
153

 
(235
)
 
229

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

 
—

 
2

 
(1
)
Change in life deferred acquisition costs, life policy reserves and other, net of tax of $2, $0, $1 and $0, respectively
 
4

 
1

 
3

 
—

Other comprehensive (loss) income, net of tax
 
(202
)
 
154

 
(230
)
 
228

Comprehensive (Loss) Income
 
$
(26
)
 
$
238

 
$
74

 
$
403

 
 
 
 
 
 
 
 
 

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, 2013
 
163.1

 
$
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
 
(0.1
)
 
—

 
—

 
—

 
—

 
(7
)
 
(7
)
Other
 
0.6

 
—

 
7

 
—

 
—

 
14

 
21

Balance June 30, 2014
 
163.6

 
$
397

 
$
1,198

 
$
4,299

 
$
1,732

 
$
(1,283
)
 
$
6,343

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2014
 
163.7

 
$
397

 
$
1,214

 
$
4,505

 
$
1,744

 
$
(1,287
)
 
$
6,573

Net income
 


 
—

 
—

 
304

 
—

 
—

 
304

Other comprehensive loss, net
 
—

 
—

 
—

 
—

 
(230
)
 
—

 
(230
)
Dividends declared
 
—

 
—

 
—

 
(151
)
 
—

 
—

 
(151
)
Treasury stock acquired—share repurchase authorization
 
(0.4
)
 
—

 
—

 
—

 
—

 
(20
)
 
(20
)
Other
 
0.7

 
—

 
2

 
—

 
—

 
19

 
21

Balance June 30, 2015
 
164.0

 
$
397

 
$
1,216

 
$
4,658

 
$
1,514

 
$
(1,288
)
 
$
6,497

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


Cincinnati Financial Corporation Second-Quarter 2015 10-Q
Page 5


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
 (Dollars in millions)
 
Six months ended June 30,
 
 
2015
 
2014
Cash Flows From Operating Activities
 
 

 
 

Net income
 
$
304

 
$
175

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

 
 

Depreciation and amortization
 
27

 
25

Realized investment gains, net
 
(107
)
 
(36
)
Stock-based compensation
 
11

 
10

Interest credited to contract holders'
 
22

 
23

Deferred income tax expense
 
2

 
13

Changes in:
 
 

 
 

Investment income receivable
 
1

 
5

Premiums and reinsurance receivable
 
(93
)
 
(95
)
Deferred policy acquisition costs
 
(15
)
 
(19
)
Other assets
 
(6
)
 
(5
)
Loss and loss expense reserves
 
206

 
133

Life policy reserves
 
47

 
76

Unearned premiums
 
109

 
134

Other liabilities
 
(68
)
 
(72
)
Current income tax receivable/payable
 
30

 
(16
)
Net cash provided by operating activities
 
470

 
351

Cash Flows From Investing Activities
 
 

 
 

Sale of fixed maturities
 
19

 
24

Call or maturity of fixed maturities
 
675

 
481

Sale of equity securities
 
221

 
82

Purchase of fixed maturities
 
(1,005
)
 
(584
)
Purchase of equity securities
 
(229
)
 
(104
)
Purchase of short-term investments
 
(75
)
 
—

Investment in finance receivables
 
(6
)
 
(9
)
Collection of finance receivables
 
15

 
15

Investment in buildings and equipment, net
 
(5
)
 
(5
)
Change in other invested assets, net
 
1

 
3

Net cash used in investing activities
 
(389
)
 
(97
)
Cash Flows From Financing Activities
 
 

 
 

Payment of cash dividends to shareholders
 
(145
)
 
(138
)
Purchase of treasury shares
 
(20
)
 
(7
)
Payments of note payable
 
—

 
(55
)
Proceeds from stock options exercised
 
11

 
11

Contract holders' funds deposited
 
41

 
45

Contract holders' funds withdrawn
 
(67
)
 
(75
)
Excess tax benefits on stock-based compensation
 
4

 
2

Other
 
(9
)
 
(8
)
Net cash used in financing activities
 
(185
)
 
(225
)
Net change in cash and cash equivalents
 
(104
)
 
29

Cash and cash equivalents at beginning of year
 
591

 
433

Cash and cash equivalents at end of period
 
$
487

 
$
462

Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Interest paid
 
$
26

 
$
26

Income taxes paid
 
83

 
52

Noncash Activities:
 
 

 
 

Conversion of securities
 
$
—

 
$
7

Equipment acquired under capital lease obligations
 
6

 
7

Cashless exercise of stock options
 
6

 
8

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

Cincinnati Financial Corporation Second-Quarter 2015 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, 2014, condensed consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by GAAP.
 
Our June 30, 2015, 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 2014 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, 2017. In July 2015, the FASB decided to defer by one year the effective date of this ASU. 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.

ASU 2015-02, Consolidation-Amendments to the Consolidation Analysis
In February 2015, the FASB Issued ASU 2015-02, Consolidation-Amendments to the Consolidation Analysis. ASU 2015-02 makes amendments to the current consolidation guidance, focusing mainly on the investment management industry; however, entities across all industries may be impacted. The effective date of ASU 2015-02 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.

ASU 2015-03, Interest-Imputation of Interest
In April 2015, the FASB Issued ASU 2015-03, Interest-Imputation of Interest. ASU 2015-03 reduces the complexity of disclosing debt issuance costs and debt discount and premium on the balance sheet by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The effective date of ASU 2015-03 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 2015 10-Q
Page 7


ASU 2015-09, Financial Services-Insurance: Disclosures about Short-Duration Contracts
In May 2015, the FASB Issued ASU 2015-09, Financial Services-Insurance: Disclosures About Short-Duration Contracts. ASU 2015-09 requires entities to provide additional disclosures about the liability for unpaid claims and claim adjustment expenses to increase the transparency of significant estimates. ASU 2015-09 also requires entities to disclose information about significant changes in methodologies and assumption used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. ASU 2015-09 also requires entities to disclose a rollforward of the liability of unpaid claims and claim adjustment expense for annual and interim reporting periods. The effective date of ASU 2015-09 is for annual reporting periods beginning after December 15, 2015, and interim reporting periods within annual period 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, but the ASU will require additional disclosures to our annual and interim reporting periods.



Cincinnati Financial Corporation Second-Quarter 2015 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 investment portfolio:
(Dollars in millions)
 
Cost or amortized cost
 
 
 
 
 
 
 
 
 
Gross unrealized
 
Fair value
At June 30, 2015
 
 
gains
 
losses
 
Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,243

 
$
350

 
$
16

 
$
5,577

States, municipalities and political subdivisions
 
3,426

 
136

 
15

 
3,547

Commercial mortgage-backed
 
278

 
7

 
2

 
283

Government-sponsored enterprises
 
253

 
—

 
9

 
244

Foreign government
 
10

 
—

 
—

 
10

Convertibles and bonds with warrants attached
 
7

 
—

 
—

 
7

United States government
 
7

 
—

 
—

 
7

Subtotal
 
9,224

 
493

 
42

 
9,675

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
2,628

 
1,882

 
8

 
4,502

Nonredeemable preferred equities
 
200

 
33

 
1

 
232

Subtotal
 
2,828

 
1,915

 
9

 
4,734

Total
 
$
12,052

 
$
2,408

 
$
51

 
$
14,409

At December 31, 2014
 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,117

 
$
420

 
$
11

 
$
5,526

States, municipalities and political subdivisions
 
3,267

 
178

 
2

 
3,443

Commercial mortgage-backed
 
250

 
9

 
—

 
259

Government-sponsored enterprises
 
213

 
—

 
5

 
208

Foreign government
 
10

 
—

 
—

 
10

Convertibles and bonds with warrants attached
 
7

 
—

 
—

 
7

United States government
 
7

 
—

 
—

 
7

Subtotal
 
8,871

 
607

 
18

 
9,460

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
2,583

 
2,099

 
3

 
4,679

Nonredeemable preferred equities
 
145

 
35

 
1

 
179

Subtotal
 
2,728

 
2,134

 
4

 
4,858

Total
 
$
11,599

 
$
2,741

 
$
22

 
$
14,318

 
 
 
 
 
 
 
 
 
 
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. Our commercial mortgage-backed securities had an average rating of Aa1/AA at June 30, 2015 and December 31, 2014. At June 30, 2015, we had $75 million of short-term investments, consisting of commercial paper, that had no gross unrealized gains or losses. At December 31, 2014, we held no short-term investments. The seven largest unrealized investment gains in our common stock portfolio are from Exxon Mobil Corporation (NYSE:XOM), Honeywell International Incorporated (NYSE:HON), Apple Inc. (Nasdaq:AAPL), BlackRock Inc. (NYSE:BLK), The Procter & Gamble Company (NYSE:PG), RPM International Inc. (NYSE:RPM), and JPMorgan Chase & Co. (NYSE:JPM), which had a combined gross unrealized gain of $594 million. At June 30, 2015, Apple was our largest single common stock holding with a fair value of 3.9 percent of our publicly traded common stock portfolio and 1.2 percent of the total investment portfolio.


Cincinnati Financial Corporation Second-Quarter 2015 10-Q
Page 9


The table below provides fair values and gross unrealized losses by investment category and by the duration of the securities’ continuous unrealized loss positions:
(Dollars in millions)
 
Less than 12 months
 
12 months or more
 
Total
 
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
At June 30, 2015
 
 
 
 
 
 
Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
715

 
$
14

 
$
65

 
$
2

 
$
780

 
$
16

States, municipalities and political subdivisions
 
693


14


56


1


749


15

Commercial mortgage-backed
 
74

 
2

 
2

 
—

 
76

 
2

Government-sponsored enterprises
 
90

 
2

 
152

 
7

 
242

 
9

Foreign government
 
10

 
—

 
—

 
—

 
10

 
—

Subtotal
 
1,582

 
32

 
275

 
10

 
1,857

 
42

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
165

 
8

 
—

 
—

 
165

 
8

Nonredeemable preferred equities
 
66

 
1

 
5

 
—

 
71

 
1

Subtotal
 
231

 
9

 
5

 
—

 
236

 
9

Total
 
$
1,813

 
$
41

 
$
280

 
$
10

 
$
2,093

 
$
51

At December 31, 2014
 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
261

 
$
8

 
$
90

 
$
3

 
$
351

 
$
11

States, municipalities and political subdivisions
 
17

 
—

 
135

 
2

 
152

 
2

Commercial mortgage-backed
 
3

 
—

 
23

 
—

 
26

 
—

Government-sponsored enterprises
 
11

 
—

 
181

 
5

 
192

 
5

Subtotal
 
292

 
8

 
429

 
10

 
721

 
18

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
85

 
3

 
—

 
—

 
85

 
3

Nonredeemable preferred equities
 
16

 
—

 
17

 
1

 
33

 
1

Subtotal
 
101

 
3

 
17

 
1

 
118

 
4

Total
 
$
393

 
$
11

 
$
446

 
$
11

 
$
839

 
$
22

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Second-Quarter 2015 10-Q
Page 10


The following table provides investment income, realized investment gains and losses, the change in unrealized investment gains and losses, and other items:
(Dollars in millions)
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Investment income:
 
 
 
 
 
 
 
Interest
$
106

 
$
103

 
$
211

 
$
207

Dividends
35

 
34

 
71

 
66

Other
1

 
1

 
1

 
2

Total
142

 
138

 
283

 
275

Less investment expenses
2

 
2

 
4

 
4

Total
$
140

 
$
136

 
$
279

 
$
271

 
 
 
 
 
 
 
 
Realized investment gains and losses summary:
 

 
 

 
 

 
 

Fixed maturities:
 

 
 

 
 

 
 

Gross realized gains
$
7

 
$
4

 
$
10

 
$
6

Gross realized losses
—

 
(3
)
 
—

 
(4
)
Other-than-temporary impairments
(3
)
 
—

 
(3
)
 
—

Equity securities:
 

 
 

 
 

 
 

Gross realized gains
56

 
16

 
100

 
34

Gross realized losses
—

 
—

 
(1
)
 
—

Other-than-temporary impairments
(1
)
 
—

 
(1
)
 
(1
)
Other
1

 
(3
)
 
2

 
1

Total
$
60

 
$
14

 
$
107

 
$
36

 
 
 
 
 
 
 
 
Change in unrealized investment gains and losses:
 

 
 

 
 

 
 

Fixed maturities
$
(184
)
 
$
93

 
$
(138
)
 
$
181

Equity securities
(135
)
 
142

 
(224
)
 
171

Less income taxes
112

 
(82
)
 
127

 
(123
)
Total
$
(207
)
 
$
153

 
$
(235
)
 
$
229

 
 
 
 
 
 
 
 
 
During the three and six months ended June 30, 2015, there were two equity securities and three fixed-maturity securities other-than-temporarily impaired. 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 for the three and six months ended June 30, 2015 and 2014. At June 30, 2015, 71 fixed-maturity investments with a total unrealized loss of $10 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 $1 million had been in an unrealized loss position for 12 months or more as of June 30, 2015. Of that total, no equity investments were trading below 70 percent of cost.
 
During 2014, we other-than-temporarily impaired six fixed-maturity securities. At December 31, 2014, 144 fixed-maturity investments with a total unrealized loss of $10 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 three equity security investments in an unrealized loss position for 12 months or more with a total unrealized loss of $1 million as of December 31, 2014. Of that total, no equity security investments had fair values below 70 percent of cost.
 


Cincinnati Financial Corporation Second-Quarter 2015 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, 2014, and ultimately management determines fair value. See our 2014 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 137, 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, 2015, and December 31, 2014. 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, 2015
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$
—

 
$
5,559

 
$
18

 
$
5,577

States, municipalities and political subdivisions
 
—

 
3,546

 
1

 
3,547

Commercial mortgage-backed
 
—

 
283

 
—

 
283

Government-sponsored enterprises
 
—

 
244

 
—

 
244

Foreign government
 
—

 
10

 
—

 
10

Convertibles and bonds with warrants attached
 
—

 
7

 
—

 
7

United States government
 
7

 
—

 
—

 
7

Subtotal
 
7

 
9,649

 
19

 
9,675

Common equities, available for sale
 
4,502

 
—

 
—

 
4,502

Nonredeemable preferred equities, available for sale
 
—

 
230

 
2

 
232

Short-term investments
 
—

 
75

 
—

 
75

Separate accounts taxable fixed maturities
 
—

 
732

 
—

 
732

Top Hat savings plan mutual funds and common
  equity (included in Other assets)
 
20

 
—

 
—

 
20

Total
 
$
4,529

 
$
10,686

 
$
21

 
$
15,236

At December 31, 2014
 
 
 
 
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$
—

 
$
5,508

 
$
18

 
$
5,526

States, municipalities and political subdivisions
 
—

 
3,443

 
—

 
3,443

Commercial mortgage-backed
 
—

 
259

 
—

 
259

Government-sponsored enterprises
 
—

 
208

 
—

 
208

Foreign government
 
—

 
10

 
—

 
10

Convertibles and bonds with warrants attached
 
—

 
7

 
—

 
7

United States government
 
7

 
—

 
—

 
7

Subtotal
 
7

 
9,435

 
18

 
9,460

Common equities, available for sale
 
4,679

 
—

 
—

 
4,679

Nonredeemable preferred equities, available for sale
 
—

 
177

 
2

 
179

Separate accounts taxable fixed maturities
 
—

 
731

 
—

 
731

Top Hat savings plan mutual funds and common
  equity (included in Other assets)
 
18

 
—

 
—

 
18

Total
 
$
4,704

 
$
10,343

 
$
20

 
$
15,067

 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Second-Quarter 2015 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, 2015. 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 table provides the change in Level 3 assets for the three months ended June 30:
 (Dollars 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, 2015
 
$
18

 
$
—

 
$
1

 
$
2

 
$
21

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, 2015
 
$
18

 
$
—

 
$
1

 
$
2

 
$
21

 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Second-Quarter 2015 10-Q
Page 13


The following table provides the change in Level 3 assets for the six months ended June 30:
(Dollars 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, 2015
 
$
18

 
$
—

 
$
—

 
$
2

 
$
20

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
 
—

 
—

 
—

 
—

 
—

Ending balance, June 30, 2015
 
$
18

 
$
—

 
$
1

 
$
2

 
$
21

 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 

Additional disclosures for the Level 3 category are not material.

Fair Value Disclosures 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:
(Dollars in millions)
 
 
 
Book value
 
Principal amount
 
 
 
 
 
 
June 30,
 
December 31,
 
June 30,
 
December 31,
Interest rate
 
Year of issue
 
 
 
2015
 
2014
 
2015
 
2014
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
 
372

 
372

 
374

 
374

 

 
 
 
Total
 
$
791

 
$
791

 
$
793

 
$
793

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Second-Quarter 2015 10-Q
Page 14


The following table shows fair values of our note payable and long-term debt:
(Dollars 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, 2015
 
 
 
 
Note payable
 
$
—

 
$
49

 
$
—

 
$
49

6.900% senior debentures, due 2028
 
—

 
34

 
—

 
34

6.920% senior debentures, due 2028
 
—

 
487

 
—

 
487

6.125% senior notes, due 2034
 
—

 
430

 
—

 
430

Total
 
$
—

 
$
1,000

 
$
—

 
$
1,000

 
 
 
 
 
 
 
 
 
At December 31, 2014
 
 
 
 
 
 
 
 
Note payable
 
$
—

 
$
49

 
$
—

 
$
49

6.900% senior debentures, due 2028
 
—

 
34

 
—

 
34

6.920% senior debentures, due 2028
 
—

 
496

 
—

 
496

6.125% senior notes, due 2034
 
—

 
449

 
—

 
449

Total