10-Q


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, 2016.
 
¨       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 22, 2016, there were 164,479,622 shares of common stock outstanding.




CINCINNATI FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2016
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Results
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Cincinnati Financial Corporation First-Quarter 2016 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)
 
March 31,
 
December 31,
 
 
2016
 
2015
Assets
 
 

 
 

Investments
 
 

 
 

Fixed maturities, at fair value (amortized cost: 2016—$9,442; 2015—$9,324)
 
$
9,884

 
$
9,650

Equity securities, at fair value (cost: 2016—$2,999; 2015—$2,938)
 
4,941

 
4,706

Other invested assets
 
64

 
67

Total investments
 
14,889

 
14,423

Cash and cash equivalents
 
613

 
544

Investment income receivable
 
121

 
129

Finance receivable
 
60

 
62

Premiums receivable
 
1,468

 
1,431

Reinsurance recoverable
 
532

 
542

Prepaid reinsurance premiums
 
50

 
54

Deferred policy acquisition costs
 
618

 
616

Land, building and equipment, net, for company use (accumulated depreciation: 2016—$465; 2015—$459)
 
188

 
185

Other assets
 
135

 
154

Separate accounts
 
773

 
748

Total assets
 
$
19,447

 
$
18,888

 
 
 
 
 
Liabilities
 
 

 
 

Insurance reserves
 
 

 
 

Loss and loss expense reserves
 
$
4,804

 
$
4,718

Life policy and investment contract reserves
 
2,601

 
2,583

Unearned premiums
 
2,248

 
2,201

Other liabilities
 
675

 
717

Deferred income tax
 
751

 
638

Note payable
 
35

 
35

Long-term debt and capital lease obligations
 
825

 
821

Separate accounts
 
773

 
748

Total liabilities
 
12,712

 
12,461

 
 
 
 
 
Commitments and contingent liabilities (Note 12)
 
—

 
—

 
 
 
 
 
Shareholders' Equity
 
 

 
 

Common stock, par value—$2 per share; (authorized: 2016 and 2015—500 million shares; issued: 2016 and 2015—198.3 million shares)
 
397

 
397

Paid-in capital
 
1,230

 
1,232

Retained earnings
 
4,871

 
4,762

Accumulated other comprehensive income
 
1,531

 
1,344

Treasury stock at cost (2016— 33.9 million shares and 2015—34.4 million shares)
 
(1,294
)
 
(1,308
)
Total shareholders' equity
 
6,735

 
6,427

Total liabilities and shareholders' equity
 
$
19,447

 
$
18,888

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


Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 3


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Dollars in millions except per share data)
Three months ended March 31,
 
2016
 
2015
Revenues
 

 
 

Earned premiums
$
1,154

 
$
1,094

Investment income, net of expenses
145

 
139

Realized investment gains, net
61

 
47

Fee revenues
3

 
3

Other revenues
1

 
2

Total revenues
1,364

 
1,285

Benefits and Expenses
 

 
 

Insurance losses and contract holders' benefits
724

 
749

Underwriting, acquisition and insurance expenses
360

 
345

Interest expense
13

 
13

Other operating expenses
2

 
4

 Total benefits and expenses
1,099

 
1,111

Income Before Income Taxes
265

 
174

Provision for Income Taxes
 

 
 

Current
65

 
46

Deferred
12

 
—

Total provision for income taxes
77

 
46

Net Income
$
188

 
$
128

Per Common Share
 

 
 

Net income—basic
$
1.14

 
$
0.78

Net income—diluted
1.13

 
0.77

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

Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 4


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Dollars in millions)
Three months ended March 31,
 
2016
 
2015
Net Income
$
188

 
$
128

Other Comprehensive (Loss) Income
 

 
 

Change in unrealized gains on investments, net of tax of $100 and $(15), respectively
190

 
(28
)
Amortization of pension actuarial loss and prior service cost, net of tax of $1 and $0, respectively
—

 
1

Change in life deferred acquisition costs, life policy reserves and other, net of tax of $(1) and $0, respectively
(3
)
 
(1
)
Other comprehensive income (loss), net of tax
187

 
(28
)
Comprehensive Income
$
375

 
$
100

 
 
 
 


Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 5


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in millions)
 
Three months ended March 31,
 
 
2016
 
2015
Common Stock
 
 
 
 
   Beginning of year
 
$
397

 
$
397

   Share-based awards
 
—

 
—

   End of period
 
397

 
397

 
 
 
 
 
Paid-In Capital
 
 
 
 
   Beginning of year
 
1,232

 
1,214

   Share-based awards
 
(10
)
 
(11
)
   Share-based compensation
 
7

 
6

   Other
 
1

 
1

   End of period
 
1,230

 
1,210

 
 
 
 
 
Retained Earnings
 
 
 
 
   Beginning of year
 
4,762

 
4,505

   Net income
 
188

 
128

   Dividends declared
 
(79
)
 
(76
)
   End of period
 
4,871

 
4,557

 
 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
 
   Beginning of year
 
1,344

 
1,744

   Other comprehensive income, net
 
187

 
(28
)
   End of period
 
1,531

 
1,716

 
 
 
 
 
Treasury Stock
 
 
 
 
   Beginning of year
 
(1,308
)
 
(1,287
)
   Share-based awards
 
18

 
19

   Shares acquired - share repurchase authorization
 
—

 
—

   Shares acquired - share-based compensation plans
 
(5
)
 
(5
)
   Other
 
1

 
1

   End of period
 
(1,294
)
 
(1,272
)
 
 
 
 
 
      Total Shareholders' Equity
 
$
6,735

 
$
6,608

 
 
 
 
 
(In millions)
 
 
 
 
Common Stock - Shares Outstanding
 
 
 
 
   Beginning of year
 
163.9

 
163.7

   Share-based awards
 
0.5

 
0.6

   Shares acquired - share repurchase authorization
 
—

 
—

   Shares acquired - share-based compensation plans
 
—

 
—

   Other
 
—

 
—

   End of period
 
164.4

 
164.3

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


Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 6


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
 (Dollars in millions)
 
Three months ended March 31,
 
 
2016
 
2015
Cash Flows From Operating Activities
 
 

 
 

Net income
 
$
188

 
$
128

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

 
 

Depreciation and amortization
 
12

 
14

Realized investment gains, net
 
(61
)
 
(47
)
Stock-based compensation
 
7

 
7

Interest credited to contract holders'
 
13

 
12

Deferred income tax expense
 
12

 
—

Changes in:
 
 

 
 

Investment income receivable
 
8

 
—

Premiums and reinsurance receivable
 
(23
)
 
(22
)
Deferred policy acquisition costs
 
(9
)
 
2

Other assets
 
(12
)
 
4

Loss and loss expense reserves
 
86

 
138

Life policy reserves
 
22

 
20

Unearned premiums
 
47

 
27

Other liabilities
 
(98
)
 
(100
)
Current income tax receivable/payable
 
65

 
32

Net cash provided by operating activities
 
257

 
215

Cash Flows From Investing Activities
 
 

 
 

Sale of fixed maturities
 
14

 
13

Call or maturity of fixed maturities
 
368

 
267

Sale of equity securities
 
132

 
67

Purchase of fixed maturities
 
(496
)
 
(348
)
Purchase of equity securities
 
(129
)
 
(67
)
Purchase of short-term investments
 
—

 
(25
)
Investment in finance receivables
 
(6
)
 
(3
)
Collection of finance receivables
 
8

 
8

Investment in buildings and equipment, net
 
(3
)
 
(1
)
Change in other invested assets, net
 
4

 
1

Net cash used in investing activities
 
(108
)
 
(88
)
Cash Flows From Financing Activities
 
 

 
 

Payment of cash dividends to shareholders
 
(74
)
 
(71
)
Proceeds from stock options exercised
 
9

 
7

Contract holders' funds deposited
 
26

 
20

Contract holders' funds withdrawn
 
(39
)
 
(33
)
Excess tax benefits on stock-based compensation
 
2

 
3

Other
 
(4
)
 
(4
)
Net cash used in financing activities
 
(80
)
 
(78
)
Net change in cash and cash equivalents
 
69

 
49

Cash and cash equivalents at beginning of year
 
544

 
591

Cash and cash equivalents at end of period
 
$
613

 
$
640

Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Income taxes (refunded) paid
 
(1
)
 
11

Noncash Activities
 
 

 
 

Conversion of securities
 
$
3

 
$
—

Equipment acquired under capital lease obligations
 
9

 
3

Cashless exercise of stock options
 
5

 
5

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

Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 — Accounting Policies
The condensed consolidated financial statements include the accounts of Cincinnati Financial Corporation and its consolidated subsidiaries, each of which is wholly owned. These statements are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
 
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. Our December 31, 2015, condensed consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by GAAP.
 
Our March 31, 2016, 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 2015 Annual Report on Form 10-K. The results of operations for interim periods do not necessarily indicate results to be expected for the full year.

Adopted Accounting Updates

ASU 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 Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 was for interim and annual reporting periods beginning after December 15, 2015. The company adopted this ASU and it did 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 was for interim and annual reporting periods beginning after December 15, 2015. The company adopted this ASU and it did not have a material impact on our company’s financial position, cash flows or results of operations.

Pending Accounting Updates

ASU 2014-09 Revenue from Contracts with Customers
In May 2014, the FASB issued 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. 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 2015-09, 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 loss and loss expense reserves to increase the transparency of significant estimates. ASU 2015-09 also requires entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for loss and loss expense reserves, 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 loss and loss expense reserves for

Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 8


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.

ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The effective date of ASU 2016-01 is for interim and annual reporting periods beginning after December 15, 2017. The ASU has not yet been adopted. Management is currently evaluating the impact on our company’s consolidated financial position, cash flows and results of operations.

ASU 2016-02, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main provision of ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The effective date of ASU 2016-02 is for interim and annual reporting periods beginning after December 15, 2018. The ASU has not yet been adopted. Management is currently evaluating the impact on our company’s consolidated financial position, cash flows and results of operations.

ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
In March 2016, the FASB issued ASU 2016-07, Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. ASU 2016-07 eliminates the requirement to retroactively adjust an investment, results of operations, and retained earnings once an investment qualifies for use of the equity method. It requires the equity method investor to add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting without retroactive adjustment. The effective date of ASU 2016-07 is for interim and annual reporting periods beginning after December 15, 2016. The ASU has not yet been adopted; however, it is not expected to have a material impact on our company's consolidated financial position, cash flows or results of operations.

ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies and improves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The effective date of ASU 2016-09 is for interim and annual reporting periods beginning after December 15, 2016. The ASU has not yet been adopted; however, it is not expected to have a material impact on our company's consolidated financial position, cash flows or results of operations.



Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 9


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 March 31, 2016
 
 
gains
 
losses
 
Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,395

 
$
295

 
$
66

 
$
5,624

States, municipalities and political subdivisions
 
3,499

 
204

 
—

 
3,703

Commercial mortgage-backed
 
289

 
11

 
2

 
298

Government-sponsored enterprises
 
240

 
—

 
—

 
240

Foreign government
 
10

 
—

 
—

 
10

Convertibles and bonds with warrants attached
 
5

 
—

 
—

 
5

United States government
 
4

 
—

 
—

 
4

Subtotal
 
9,442

 
510

 
68

 
9,884

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
2,810

 
1,954

 
44

 
4,720

Nonredeemable preferred equities
 
189

 
33

 
1

 
221

Subtotal
 
2,999

 
1,987

 
45

 
4,941

Total
 
$
12,441

 
$
2,497

 
$
113

 
$
14,825

At December 31, 2015
 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,294

 
$
255

 
$
96

 
$
5,453

States, municipalities and political subdivisions
 
3,440

 
172

 
1

 
3,611

Commercial mortgage-backed
 
287

 
4

 
2

 
289

Government-sponsored enterprises
 
284

 
—

 
6

 
278

Foreign government
 
10

 
—

 
—

 
10

Convertibles and bonds with warrants attached
 
5

 
—

 
—

 
5

United States government
 
4

 
—

 
—

 
4

Subtotal
 
9,324

 
431

 
105

 
9,650

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
2,749

 
1,787

 
51

 
4,485

Nonredeemable preferred equities
 
189

 
32

 
—

 
221

Subtotal
 
2,938

 
1,819

 
51

 
4,706

Total
 
$
12,262

 
$
2,250

 
$
156

 
$
14,356

 
 
 
 
 
 
 
 
 
 
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 March 31, 2016, and December 31, 2015. The seven largest unrealized investment gains in our common stock portfolio are from Honeywell International Incorporated (NYSE:HON), Exxon Mobil Corporation (NYSE:XOM), The Procter & Gamble Company (NYSE:PG), BlackRock Inc. (NYSE:BLK), Johnson and Johnson (NYSE:JNJ), Hasbro Incorporated (Nasdaq:HAS), and Microsoft Corporation (Nasdaq:MSFT), which had a combined gross unrealized gain of $597 million. At March 31, 2016, Apple was our largest single common stock holding with a fair value of $153 million, which was 3.2 percent of our publicly traded common stock portfolio and 1.0 percent of the total investment portfolio.


Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 10


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 March 31, 2016
 
 
 
 
 
 
Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
801

 
$
43

 
$
153

 
$
23

 
$
954

 
$
66

States, municipalities and political subdivisions
 
28

 
—

 
4

 
—

 
32

 
—

Commercial mortgage-backed
 
49

 
1

 
2

 
1

 
51

 
2

Government-sponsored enterprises
 
29

 
—

 
19

 
—

 
48

 
—

Subtotal
 
907

 
44

 
178

 
24

 
1,085

 
68

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
345

 
44

 
—

 
—

 
345

 
44

Nonredeemable preferred equities
 
42

 
1

 
—

 
—

 
42

 
1

Subtotal
 
387

 
45

 
—

 
—

 
387

 
45

Total
 
$
1,294

 
$
89

 
$
178

 
$
24

 
$
1,472

 
$
113

At December 31, 2015
 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
1,099

 
$
63

 
$
133

 
$
33

 
$
1,232

 
$
96

States, municipalities and political subdivisions
 
47

 
1

 
22

 
—

 
69

 
1

Commercial mortgage-backed
 
103

 
2

 
2

 
—

 
105

 
2

Government-sponsored enterprises
 
100

 
2

 
127

 
4

 
227

 
6

Subtotal
 
1,349

 
68

 
284

 
37

 
1,633

 
105

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
270

 
51

 
—

 
—

 
270

 
51

Nonredeemable preferred equities
 
35

 
—

 
—

 
—

 
35

 
—

Subtotal
 
305

 
51

 
—

 
—

 
305

 
51

Total
 
$
1,654

 
$
119

 
$
284

 
$
37

 
$
1,938

 
$
156

 
 
 
 
 
 
 
 
 
 
 
 
 

Contractual maturity dates for fixed-maturity investments were:
(Dollars in millions)
 
Amortized
cost
 
Fair
value
 
% of fair
value
At March 31, 2016
 
 
 
Maturity dates:
 
 

 
 

 
 

Due in one year or less
 
$
481

 
$
488

 
4.9
%
Due after one year through five years
 
3,017

 
3,202

 
32.4

Due after five years through ten years
 
3,676

 
3,797

 
38.4

Due after ten years
 
2,268

 
2,397

 
24.3

Total
 
$
9,442

 
$
9,884

 
100.0
%
 
 
 
 
 
 
 

Actual maturities may differ from contractual maturities when there is a right to call or prepay obligations with or without call or prepayment penalties.
 

Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 11


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 March 31,
 
2016
 
2015
Investment income:
 
 
 
Interest
$
109

 
$
105

Dividends
37

 
36

Other
1

 
—

Total
147

 
141

Less investment expenses
2

 
2

Total
$
145

 
$
139

 
 
 
 
Realized investment gains and losses summary:
 

 
 

Fixed maturities:
 

 
 

Gross realized gains
$
3

 
$
3

Gross realized losses
(1
)
 
—

Other-than-temporary impairments
(2
)
 
—

Equity securities:
 

 
 

Gross realized gains
62

 
44

Gross realized losses
(1
)
 
(1
)
Other-than-temporary impairments
—

 
—

Other
—

 
1

Total
$
61

 
$
47

 
 
 
 
Change in unrealized investment gains and losses:
 

 
 

Fixed maturities
$
116

 
$
46

Equity securities
174

 
(89
)
Less income taxes
(100
)
 
15

Total
$
190

 
$
(28
)
 
 
 
 
 
During the three months ended March 31, 2016, there were no equity securities and two 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 months ended March 31, 2016 and 2015. At March 31, 2016, 44 fixed-maturity investments with a total unrealized loss of $24 million had been in an unrealized loss position for 12 months or more. Of that total, two 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 March 31, 2016.
 
During 2015, we other-than-temporarily impaired 20 securities. At December 31, 2015, 69 fixed-maturity investments with a total unrealized loss of $37 million had been in an unrealized loss position for 12 months or more. Of that total, five fixed-maturity investments had fair values below 70 percent of amortized cost. There were no equity security investments in an unrealized loss position for 12 months or more as of December 31, 2015.
 


Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 12


NOTE 3 – Fair Value Measurements

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, 2015, and ultimately management determines fair value. See our 2015 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 133, 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, 2016, and December 31, 2015. We do not have any material liabilities carried at fair value. There were no transfers between Level 1 and Level 2.
(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 March 31, 2016
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$
—

 
$
5,573

 
$
51

 
$
5,624

States, municipalities and political subdivisions
 
—

 
3,703

 
—

 
3,703

Commercial mortgage-backed
 
—

 
298

 
—

 
298

Government-sponsored enterprises
 
—

 
240

 
—

 
240

Foreign government
 
—

 
10

 
—

 
10

Convertibles and bonds with warrants attached
 
—

 
5

 
—

 
5

United States government
 
4

 
—

 
—

 
4

Subtotal
 
4

 
9,829

 
51

 
9,884

Common equities, available for sale
 
4,720

 
—

 
—

 
4,720

Nonredeemable preferred equities, available for sale
 
—

 
219

 
2

 
221

Separate accounts taxable fixed maturities
 
—

 
755

 
1

 
756

Top Hat savings plan mutual funds and common
  equity (included in Other assets)
 
22

 
—

 
—

 
22

Total
 
$
4,746

 
$
10,803

 
$
54

 
$
15,603

At December 31, 2015
 
 
 
 
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$
—

 
$
5,402

 
$
51

 
$
5,453

States, municipalities and political subdivisions
 
—

 
3,611

 
—

 
3,611

Commercial mortgage-backed
 
—

 
289

 
—

 
289

Government-sponsored enterprises
 
—

 
278

 
—

 
278

Foreign government
 
—

 
10

 
—

 
10

Convertibles and bonds with warrants attached
 
—

 
5

 
—

 
5

United States government
 
4

 
—

 
—

 
4

Subtotal
 
4

 
9,595

 
51

 
9,650

Common equities, available for sale
 
4,485

 
—

 
—

 
4,485

Nonredeemable preferred equities, available for sale
 
—

 
218

 
3

 
221

Separate accounts taxable fixed maturities
 
—

 
736

 
1

 
737

Top Hat savings plan mutual funds and common
  equity (included in Other assets)
 
21

 
—

 
—

 
21

Total
 
$
4,510

 
$
10,549

 
$
55

 
$
15,114

 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 13


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, 2016. 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 March 31:
(Dollars in millions)
Asset fair value measurements using significant unobservable inputs (Level 3)
 
 
Corporate
fixed
maturities
 
Separate
accounts
taxable
fixed
maturities
 
States,
municipalities
and political
subdivisions
fixed maturities
 
Nonredeemable
preferred
equities
 
Total
Beginning balance, January 1, 2016
 
$
51

 
$
1

 
$
—

 
$
3

 
$
55

Total gains or losses (realized/unrealized):
 
 
 
 
 
 

 
 

 
 

Included in net income
 
—

 
—

 
—

 
—

 
—

Included in other comprehensive income
 
—

 
—

 
—

 
(1
)
 
(1
)
Purchases
 
5

 
—

 
—

 
—

 
5

Sales
 
—

 
—

 
—

 
—

 
—

Transfers into Level 3
 
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
 
(5
)
 
—

 
—

 
—

 
(5
)
Ending balance, March 31, 2016
 
$
51

 
$
1

 
$
—

 
$
2

 
$
54

 
 
 
 
 
 
 
 
 
 
 
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, March 31, 2015
 
$
18

 
$
—

 
$
1

 
$
2

 
$
21

 
 
 
 
 
 
 
 
 
 
 

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
 
 
 
 
 
 
March 31,
 
December 31,
 
March 31,
 
December 31,
Interest rate
 
Year of issue
 
 
 
2016
 
2015
 
2016
 
2015
6.900
%
 
1998
 
Senior debentures, due 2028
 
$
26

 
$
26

 
$
28

 
$
28

6.920
%
 
2005
 
Senior debentures, due 2028
 
391

 
391

 
391

 
391

6.125
%
 
2004
 
Senior notes, due 2034
 
369

 
369

 
374

 
374

 

 
 
 
Total
 
$
786

 
$
786

 
$
793

 
$
793

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation First-Quarter 2016 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 March 31, 2016
 
 
 
 
Note payable
 
$
—

 
$
35

 
$
—

 
$
35

6.900% senior debentures, due 2028
 
—

 
33

 
—

 
33

6.920% senior debentures, due 2028
 
—

 
492

 
—

 
492

6.125% senior notes, due 2034
 
—

 
437

 
—

 
437

Total
 
$
—

 
$
997

 
$
—

 
$
997

 
 
 
 
 
 
 
 
 
At December 31, 2015
 
 
 
 
 
 
 
 
Note payable
 
$
—

 
$
35

 
$
—

 
$
35

6.900% senior debentures, due 2028
 
—

 
31

 
—

 
31

6.920% senior debentures, due 2028
 
—

 
480

 
—

 
480

6.125% senior notes, due 2034
 
—

 
425

 
—

 
425

Total
 
$
—

 
$
971

 
$
—

 
$
971

 
 
 
 
 
 
 
 
 
 
The following table shows the fair value of our life policy loans included in other invested assets:
(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 March 31, 2016
 
 
 
 
Life policy loans
 
$
—

 
$
—

 
$
42

 
$
42

 
 
 
 
 
 
 
 
 
At December 31, 2015
 
 
 
 
 
 
 
 
Life policy loans
 
$
—

 
$
—

 
$
40

 
$
40

 
 
 
 
 
 
 
 
 
 
Outstanding principal and interest for these life policy loans totaled $30 million and $31 million at March 31, 2016, and December 31, 2015, respectively.
 
The following table shows fair values of our deferred annuities and structured settlements included in life policy and investment contract reserves:
(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 March 31, 2016
 
 
 
 
Deferred annuities
 
$
—

 
$
—

 
$
917

 
$
917

Structured settlements
 
—

 
212

 
—

 
212

Total
 
$
—

 
$
212

 
$
917

 
$
1,129

 
 
 
 
 
 
 
 
 
At December 31, 2015
 
 
 
 
 
 
 
 
Deferred annuities
 
$
—

 
$
—

 
$
886

 
$
886

Structured settlements
 
—

 
208

 
—

 
208

Total
 
$
—

 
$
208

 
$
886

 
$
1,094

 
 
 
 
 
 
 
 
 

Recorded reserves for the deferred annuities were $860 million at March 31, 2016 and December 31, 2015. Recorded reserves for the structured settlements were $175 million and $174 million at March 31, 2016, and December 31, 2015, respectively.



Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 15


NOTE 4 – Property Casualty Loss and Loss Expenses
This table summarizes activity for our consolidated property casualty loss and loss expense reserves:
(Dollars in millions)
Three months ended March 31,
 
2016
 
2015
Gross loss and loss expense reserves, beginning of period
$
4,660

 
$
4,438

Less reinsurance recoverable
281

 
282

Net loss and loss expense reserves, beginning of period
4,379

 
4,156

Net incurred loss and loss expenses related to:
 

 
 

Current accident year
723

 
711

Prior accident years
(62
)
 
(22
)
Total incurred
661

 
689

Net paid loss and loss expenses related to:
 

 
 

Current accident year
146

 
147

Prior accident years
416

 
399

Total paid
562

 
546

Net loss and loss expense reserves, end of period
4,478

 
4,299

Plus reinsurance recoverable
272

 
278

Gross loss and loss expense reserves, end of period
$
4,750

 
$
4,577

 
 
 
 
 
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 $54 million at March 31, 2016, and $46 million at March 31, 2015, for certain life and health loss and loss expense reserves.

For the three months ended March 31, 2016, we experienced $62 million of favorable development on prior accident years, including $29 million of favorable development in commercial lines, $18 million of favorable development in personal lines, $14 million of favorable development in excess and surplus lines, and $1 million of favorable development in our reinsurance assumed operations. This included $7 million from favorable development of catastrophe losses for the three months ended March 31, 2016. We recognized favorable reserve development during the three months ended March 31, 2016, of $13 million for the workers' compensation line,
$8 million for the commercial property line, $13 million for the other commercial lines and $8 million for the homeowner line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Our commercial auto line developed unfavorably by $8 million for the three months ended March 31, 2016, due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled.

For the three months ended March 31, 2015, we experienced $22 million of favorable development on prior accident years, including $14 million of favorable development in commercial lines, $3 million of favorable development in personal lines and $5 million of favorable development in excess and surplus lines. This included $11 million from favorable development of catastrophe losses for the three months ended March 31, 2015. We recognized favorable development during the three months ended March 31, 2015, of $15 million for the workers' compensation line, $11 million for the commercial property line and $7 million for the homeowner line due to reduced uncertainty of prior accident year loss and loss adjustment expenses for these lines. Our commercial auto line developed unfavorably by $11 million for the three months ended March 31, 2015, due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled.



Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 16


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:
(Dollars in millions)
 
March 31,
2016
 
December 31, 2015
Ordinary/traditional life
 
$
956

 
$
943

Deferred annuities
 
860

 
860

Universal life
 
561

 
558

Structured settlements
 
175

 
174

Other
 
49

 
48

Total life policy and investment contract reserves
 
$
2,601

 
$
2,583

 
 
 
 
 

 

Cincinnati Financial Corporation First-Quarter 2016 10-Q
Page 17


NOTE 6 – Deferred Policy Acquisition Costs
Expenses directly related to successfully acquired 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.
(Dollars in millions)
 
Three months ended March 31,

 
2016
 
2015
Property casualty:
 
 
 
 
Deferred policy acquisition costs asset, beginning of period
 
$
388

 
$
379

Capitalized deferred policy acquisition costs
 
210

 
196

Amortized deferred policy acquisition costs
 
(201
)
 
(198
)
Deferred policy acquisition costs asset, end of period
 
$
397

 
$
377

 
 
 
 
 
Life:
 
 
 
 
Deferred policy acquisition costs asset, beginning of period
 
$
228

 
$
199

Capitalized deferred policy acquisition costs
 
12

 
11

Amortized deferred policy acquisition costs
 
(11
)
 
(11
)
Amortized shadow deferred policy acquisition costs
 
(8
)
 
(5
)
Deferred policy acquisition costs asset, end of period
 
$
221

 
$
194

 
 
 
 
 
Consolidated:
 
 
 
 
Deferred policy acquisition costs asset, beginning of period
 
$
616

 
$
578

Capitalized deferred policy acquisition costs
 
222

 
207

Amortized deferred policy acquisition costs
 
(212
)
 
(209
)
Amortized shadow deferred policy acquisition costs
 
(8
)
 
(5
)
Deferred policy acquisition costs asset, end of period
 
$
618

 
$
571

 
 
 
 
 

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 2016 10-Q
Page 18


NOTE 7 – Accumulated Other Comprehensive Income
Accumulated other comprehensive income (AOCI) includes changes in unrealized gains and losses on investments, changes in pension obligations and changes in life deferred acquisition costs, life policy reserves and other as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
Three months ended March 31,
 
2016
 
 
2015
 
Before tax
 
Income tax
 
Net
 
 
Before tax
 
Income tax
 
Net
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
AOCI, beginning of period
$
2,094

 
$
722

 
$
1,372

 
 
$
2,719

 
$
942

 
$
1,777

OCI excluding realized gains recognized in net income
351

 
121

 
230