Document


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 September 30, 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 October 21, 2016, there were 164,748,584 shares of common stock outstanding.




CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2016
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Results
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Cincinnati Financial Corporation Third-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)
 
September 30,
 
December 31,
 
 
2016
 
2015
Assets
 
 

 
 

Investments
 
 

 
 

Fixed maturities, at fair value (amortized cost: 2016—$9,657; 2015—$9,324)
 
$
10,257

 
$
9,650

Equity securities, at fair value (cost: 2016—$3,169; 2015—$2,938)
 
5,304

 
4,706

Other invested assets
 
81

 
67

Total investments
 
15,642

 
14,423

Cash and cash equivalents
 
700

 
544

Investment income receivable
 
121

 
129

Finance receivable
 
53

 
62

Premiums receivable
 
1,518

 
1,431

Reinsurance recoverable
 
552

 
542

Prepaid reinsurance premiums
 
68

 
54

Deferred policy acquisition costs
 
627

 
616

Land, building and equipment, net, for company use (accumulated depreciation:
   2016—$234; 2015—$459)
 
184

 
185

Other assets
 
200

 
154

Separate accounts
 
790

 
748

Total assets
 
$
20,455

 
$
18,888

 
 
 
 
 
Liabilities
 
 

 
 

Insurance reserves
 
 

 
 

Loss and loss expense reserves
 
$
4,991

 
$
4,718

Life policy and investment contract reserves
 
2,641

 
2,583

Unearned premiums
 
2,388

 
2,201

Other liabilities
 
798

 
717

Deferred income tax
 
879

 
638

Note payable
 
20

 
35

Long-term debt and capital lease obligations
 
827

 
821

Separate accounts
 
790

 
748

Total liabilities
 
13,334

 
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
 
1,244

 
1,232

Retained earnings
 
5,016

 
4,762

Accumulated other comprehensive income
 
1,752

 
1,344

Treasury stock at cost (2016—33.6 million shares and 2015—34.4 million shares)
 
(1,288
)
 
(1,308
)
Total shareholders' equity
 
7,121

 
6,427

Total liabilities and shareholders' equity
 
$
20,455

 
$
18,888

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


Cincinnati Financial Corporation Third-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 September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 

 
 

 
 

 
 

Earned premiums
$
1,191

 
$
1,127

 
$
3,518

 
$
3,332

Investment income, net of expenses
148

 
143

 
442

 
422

Realized investment gains, net
56

 
3

 
161

 
110

Fee revenues
5

 
4

 
11

 
10

Other revenues
2

 
1

 
5

 
5

Total revenues
1,402

 
1,278

 
4,137

 
3,879

Benefits and Expenses
 

 
 

 
 

 
 

Insurance losses and contract holders' benefits
753

 
670

 
2,298

 
2,131

Underwriting, acquisition and insurance expenses
380

 
348

 
1,106

 
1,033

Interest expense
13

 
14

 
39

 
40

Other operating expenses
3

 
3

 
10

 
10

 Total benefits and expenses
1,149

 
1,035

 
3,453

 
3,214

Income Before Income Taxes
253

 
243

 
684

 
665

Provision for Income Taxes
 

 
 

 
 

 
 

Current
60

 
64

 
173

 
180

Deferred
13

 
5

 
20

 
7

Total provision for income taxes
73

 
69

 
193

 
187

Net Income
$
180

 
$
174

 
$
491

 
$
478

Per Common Share
 

 
 

 
 

 
 

Net income—basic
$
1.09

 
$
1.06

 
$
2.98

 
$
2.91

Net income—diluted
1.08

 
1.05

 
2.95

 
2.89

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

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


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Dollars in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net Income
 
$
180

 
$
174

 
$
491

 
$
478

Other Comprehensive (Loss) Income
 
 

 
 

 
 

 
 

Change in unrealized gains on investments, net of tax of $21, $(127), $224 and $(254), respectively
 
41

 
(238
)
 
417

 
(473
)
Amortization of pension actuarial loss and prior service cost, net of tax of $0, $0, $1 and $1, respectively
 
—

 
1

 
1

 
3

Change in life deferred acquisition costs, life policy reserves and other, net of tax of $0, $1, $(4) and $2, respectively
 
(3
)
 
3

 
(10
)
 
6

Other comprehensive income (loss), net of tax
 
38

 
(234
)
 
408

 
(464
)
Comprehensive Income (Loss)
 
$
218

 
$
(60
)
 
$
899

 
$
14

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


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


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in millions)
 
Nine months ended September 30,
 
 
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
 
(9
)
 
(9
)
   Share-based compensation
 
18

 
16

   Other
 
3

 
2

   End of period
 
1,244

 
1,223

 
 
 
 
 
Retained Earnings
 
 
 
 
   Beginning of year
 
4,762

 
4,505

   Net income
 
491

 
478

   Dividends declared
 
(237
)
 
(227
)
   End of period
 
5,016

 
4,756

 
 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
 
   Beginning of year
 
1,344

 
1,744

   Other comprehensive income, net
 
408

 
(464
)
   End of period
 
1,752

 
1,280

 
 
 
 
 
Treasury Stock
 
 
 
 
   Beginning of year
 
(1,308
)
 
(1,287
)
   Share-based awards
 
29

 
29

   Shares acquired - share repurchase authorization
 
(2
)
 
(41
)
   Shares acquired - share-based compensation plans
 
(10
)
 
(11
)
   Other
 
3

 
4

   End of period
 
(1,288
)
 
(1,306
)
 
 
 
 
 
      Total Shareholders' Equity
 
$
7,121

 
$
6,350

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

 
163.7

   Share-based awards
 
0.8

 
1.0

   Shares acquired - share repurchase authorization
 
—

 
(0.8
)
   Shares acquired - share-based compensation plans
 
(0.1
)
 
(0.2
)
   Other
 
0.1

 
0.1

   End of period
 
164.7

 
163.8

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


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


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
 (Dollars in millions)
 
Nine months ended September 30,
 
 
2016
 
2015
Cash Flows From Operating Activities
 
 

 
 

Net income
 
$
491

 
$
478

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

 
 

Depreciation and amortization
 
34

 
39

Realized investment gains, net
 
(161
)
 
(110
)
Stock-based compensation
 
18

 
16

Interest credited to contract holders'
 
36

 
32

Deferred income tax expense
 
20

 
7

Changes in:
 
 

 
 

Investment income receivable
 
8

 
4

Premiums and reinsurance receivable
 
(111
)
 
(96
)
Deferred policy acquisition costs
 
(31
)
 
(20
)
Other assets
 
(32
)
 
—

Loss and loss expense reserves
 
273

 
215

Life policy reserves
 
75

 
70

Unearned premiums
 
187

 
133

Other liabilities
 
—

 
(11
)
Current income tax receivable/payable
 
17

 
(2
)
Net cash provided by operating activities
 
824

 
755

Cash Flows From Investing Activities
 
 

 
 

Sale of fixed maturities
 
15

 
25

Call or maturity of fixed maturities
 
1,160

 
961

Sale of equity securities
 
311

 
241

Purchase of fixed maturities
 
(1,465
)
 
(1,397
)
Purchase of equity securities
 
(396
)
 
(379
)
Purchase of short-term investments
 
—

 
(75
)
Investment in finance receivables
 
(13
)
 
(10
)
Collection of finance receivables
 
24

 
22

Investment in buildings and equipment, net
 
(9
)
 
(7
)
Change in other invested assets, net
 
(13
)
 
(1
)
Net cash used in investing activities
 
(386
)
 
(620
)
Cash Flows From Financing Activities
 
 

 
 

Payment of cash dividends to shareholders
 
(229
)
 
(218
)
Shares acquired - share repurchase authorization
 
(2
)
 
(41
)
Payments of note payable
 
(15
)
 
(14
)
Proceeds from stock options exercised
 
17

 
14

Contract holders' funds deposited
 
71

 
62

Contract holders' funds withdrawn
 
(118
)
 
(101
)
Excess tax benefits on stock-based compensation
 
4

 
4

Other
 
(10
)
 
(13
)
Net cash used in financing activities
 
(282
)
 
(307
)
Net change in cash and cash equivalents
 
156

 
(172
)
Cash and cash equivalents at beginning of year
 
544

 
591

Cash and cash equivalents at end of period
 
$
700

 
$
419

Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Interest paid
 
$
26

 
$
26

Income taxes paid
 
152

 
179

Noncash Activities
 
 

 
 

Conversion of securities
 
$
4

 
$
—

Equipment acquired under capital lease obligations
 
18

 
16

Cashless exercise of stock options
 
10

 
11

Other assets and other liabilities
 
29

 
—

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

Cincinnati Financial Corporation Third-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 September 30, 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; however, it is not expected to 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 Third-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 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.

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends previous guidance on the impairment of financial instruments by adding an impairment model that allows an entity to recognize expected credit losses as an allowance rather than impairing as they are incurred. The new guidance is intended to reduce complexity of credit impairment models and result in a more timely recognition of expected credit losses. The effective date of ASU 2016-13 is for interim and annual reporting periods beginning after December 15, 2019. 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 Third-Quarter 2016 10-Q
Page 9


ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of ASU 2016-15 is for interim and annual reporting periods beginning after December 15, 2017. 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 Third-Quarter 2016 10-Q
Page 10



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 September 30, 2016
 
 
gains
 
losses
 
Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,621

 
$
375

 
$
14

 
$
5,982

States, municipalities and political subdivisions
 
3,619

 
222

 
1

 
3,840

Commercial mortgage-backed
 
290

 
18

 
—

 
308

Government-sponsored enterprises
 
108

 
—

 
—

 
108

Foreign government
 
10

 
—

 
—

 
10

Convertibles and bonds with warrants attached
 
5

 
—

 
—

 
5

United States government
 
4

 
—

 
—

 
4

Subtotal
 
9,657

 
615

 
15

 
10,257

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
2,982

 
2,156

 
61

 
5,077

Nonredeemable preferred equities
 
187

 
40

 
—

 
227

Subtotal
 
3,169

 
2,196

 
61

 
5,304

Total
 
$
12,826

 
$
2,811

 
$
76

 
$
15,561

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 September 30, 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), Johnson & Johnson (NYSE:JNJ), BlackRock Inc. (NYSE:BLK), 3M Co (NYSE:MMM) and Microsoft Corporation (Nasdaq:MSFT), which had a combined gross unrealized gain of $649 million. At September 30, 2016, Apple Inc. (Nasdaq:AAPL) was our largest single common stock holding with a fair value of $158 million, which was 3.1 percent of our publicly traded common stock portfolio and 1.0 percent of the total investment portfolio.


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


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 September 30, 2016
 
 
 
 
 
 
Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
166

 
$
4

 
$
200

 
$
10

 
$
366

 
$
14

States, municipalities and political subdivisions
 
128

 
1

 
—

 
—

 
128

 
1

Commercial mortgage-backed
 
8

 
—

 
3

 
—

 
11

 
—

Government-sponsored enterprises
 
43

 
—

 
—

 
—

 
43

 
—

Subtotal
 
345

 
5

 
203

 
10

 
548

 
15

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
177

 
6

 
203

 
55

 
380

 
61

Total
 
$
522

 
$
11

 
$
406

 
$
65

 
$
928

 
$
76

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 September 30, 2016
 
 
 
Maturity dates:
 
 

 
 

 
 

Due in one year or less
 
$
446

 
$
452

 
4.4
%
Due after one year through five years
 
3,049

 
3,265

 
31.8

Due after five years through ten years
 
3,856

 
4,067

 
39.7

Due after ten years
 
2,306

 
2,473

 
24.1

Total
 
$
9,657

 
$
10,257

 
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 Third-Quarter 2016 10-Q
Page 12


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 September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Investment income:
 
 
 
 
 
 
 
Interest
$
111

 
$
108

 
$
330

 
$
319

Dividends
39

 
37

 
117

 
108

Other
1

 
1

 
2

 
2

Total
151

 
146

 
449

 
429

Less investment expenses
3

 
3

 
7

 
7

Total
$
148

 
$
143

 
$
442

 
$
422

 
 
 
 
 
 
 
 
Realized investment gains and losses summary:
 

 
 

 
 

 
 

Fixed maturities:
 

 
 

 
 

 
 

Gross realized gains
$
10

 
$
4

 
$
17

 
$
14

Gross realized losses
—

 
—

 
(1
)
 
—

Other-than-temporary impairments
—

 
(8
)
 
(2
)
 
(11
)
Equity securities:
 

 
 

 
 

 
 

Gross realized gains
47

 
6

 
147

 
106

Gross realized losses
—

 
—

 
(1
)
 
(1
)
Other-than-temporary impairments
—

 
—

 
—

 
(1
)
Other
(1
)
 
1

 
1

 
3

Total
$
56

 
$
3

 
$
161

 
$
110

 
 
 
 
 
 
 
 
Change in unrealized investment gains and losses:
 

 
 

 
 

 
 

Fixed maturities
$
(20
)
 
$
(15
)
 
$
274

 
$
(153
)
Equity securities
82

 
(350
)
 
367

 
(574
)
Income tax (provision) benefit
(21
)
 
127

 
(224
)
 
254

Total
$
41

 
$
(238
)
 
$
417

 
$
(473
)
 
 
 
 
 
 
 
 
 
During the three months ended September 30, 2016, there were no equity securities and no fixed-maturity securities other-than-temporarily impaired. During the nine months ended September 30, 2016, there were no equity securities and four 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 nine months ended September 30, 2016 and 2015. At September 30, 2016, 36 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, one fixed-maturity investment had a fair value below 70 percent of amortized cost. At September 30, 2016, three equity investments with a total unrealized loss of $55 million had been in an unrealized loss position for 12 months or more. Of that total, one equity investment with a total unrealized loss of $36 million had a fair value below 70 percent of amortized cost.
 
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 Third-Quarter 2016 10-Q
Page 13


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 September 30, 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 September 30, 2016
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$
—

 
$
5,940

 
$
42

 
$
5,982

States, municipalities and political subdivisions
 
—

 
3,840

 
—

 
3,840

Commercial mortgage-backed
 
—

 
308

 
—

 
308

Government-sponsored enterprises
 
—

 
108

 
—

 
108

Foreign government
 
—

 
10

 
—

 
10

Convertibles and bonds with warrants attached
 
—

 
5

 
—

 
5

United States government
 
4

 
—

 
—

 
4

Subtotal
 
4

 
10,211

 
42

 
10,257

Common equities, available for sale
 
5,077

 
—

 
—

 
5,077

Nonredeemable preferred equities, available for sale
 
—

 
227

 
—

 
227

Separate accounts taxable fixed maturities
 
—

 
753

 
—

 
753

Top Hat savings plan mutual funds and common
  equity (included in Other assets)
 
24

 
—

 
—

 
24

Total
 
$
5,105

 
$
11,191

 
$
42

 
$
16,338

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 Third-Quarter 2016 10-Q
Page 14


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 September 30, 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. Transfers into Level 3 included situations where a fair value quote was not provided by the company's nationally recognized pricing vendor and as a result the price was stale or had been replaced with a broker quote where the inputs had not been corroborated to be market observable resulting in the security being classified as Level 3. Transfers out of Level 3 included situations where a broker quote was used in the prior period and a fair value quote became available from the company's nationally recognized pricing vendor in the current period. 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 September 30:
 (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, July 1, 2016
 
$
52

 
$
1

 
$
—

 
$
—

 
$
53

Total gains or losses (realized/unrealized):
 
 

 
 
 
 

 
 

 
 

Included in net income
 
—

 
—

 
—

 
—

 
—

Included in other comprehensive income
 
1

 
—

 
—

 
—

 
1

Purchases
 
—

 
—

 
—

 
—

 
—

Sales
 
(1
)
 
—

 
—

 
—

 
(1
)
Transfers into Level 3
 
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
 
(10
)
 
(1
)
 
—

 
—

 
(11
)
Ending balance, September 30, 2016
 
$
42

 
$
—

 
$
—

 
$
—

 
$
42

 
 
 
 
 
 
 
 
 
 
 
Beginning balance, July 1, 2015
 
$
18

 
$
—

 
$
1

 
$
2

 
$
21

Total gains or losses (realized/unrealized):
 
 

 
 
 
 

 
 

 
 

Included in net income
 
1

 
—

 
—

 
—

 
1

Included in other comprehensive income
 
22

 
—

 
—

 
—

 
22

Purchases
 
—

 
—

 
—

 
—

 
—

Sales
 
—

 
—

 
—

 
—

 
—

Transfers into Level 3
 
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
 
—

 
—

 
(1
)
 
—

 
(1
)
Ending balance, September 30, 2015
 
$
41

 
$
—

 
$
—

 
$
2

 
$
43

 
 
 
 
 
 
 
 
 
 
 

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


The following table provides the change in Level 3 assets for the nine months ended September 30:
(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
 
22

 
—

 
—

 
—

 
22

Sales
 
(1
)
 
—

 
—

 
(2
)
 
(3
)
Transfers into Level 3
 
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
 
(31
)
 
(1
)
 
—

 
—

 
(32
)
Ending balance, September 30, 2016
 
$
42

 
$
—

 
$
—

 
$
—

 
$
42

 
 
 
 
 
 
 
 
 
 
 
Beginning balance, January 1, 2015
 
$
18

 
$
—

 
$
—

 
$
2

 
$
20

Total gains or losses (realized/unrealized):
 
 
 
 
 
 

 
 

 
 
Included in net income
 
—

 
—

 
—

 
—

 
—

Included in other comprehensive income
 
1

 
—

 
—

 
—

 
1

Purchases
 
22

 
—

 
—

 
—

 
22

Sales
 
—

 
—

 
—

 
—

 
—

Transfers into Level 3
 
—

 
—

 
1

 
—

 
1

Transfers out of Level 3
 
—

 
—

 
(1
)
 
—

 
(1
)
Ending balance, September 30, 2015
 
$
41

 
$
—

 
$
—

 
$
2

 
$
43

 
 
 
 
 
 
 
 
 
 
 

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
 
 
 
 
 
 
September 30,
 
December 31,
 
September 30,
 
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 Third-Quarter 2016 10-Q
Page 16


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 September 30, 2016
 
 
 
 
Note payable
 
$
—

 
$
20

 
$
—

 
$
20

6.900% senior debentures, due 2028
 
—

 
35

 
—

 
35

6.920% senior debentures, due 2028
 
—

 
511

 
—

 
511

6.125% senior notes, due 2034
 
—

 
452

 
—

 
452

Total
 
$
—

 
$
1,018

 
$
—

 
$
1,018

 
 
 
 
 
 
 
 
 
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