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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, 2014.
 
¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the transition period from _____________________ to _____________________.
Commission file number 0-4604
 
CINCINNATI FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Ohio
 
31-0746871
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification
No.)
 
 
 
6200 S. Gilmore Road, Fairfield, Ohio
 
45014-5141
(Address of principal executive offices)
 
(Zip code)
 
Registrant’s telephone number, including area code: (513) 870-2000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
þYes ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þYes ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
þ Large accelerated filer ¨ Accelerated filer ¨ Nonaccelerated filer ¨ Smaller reporting company 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
¨Yes þ No
 
As of October 23, 2014, there were 163,490,441 shares of common stock outstanding.





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



Cincinnati Financial Corporation Third-Quarter 2014 10-Q
Page 2



Part I – Financial Information
Item 1.        Financial Statements (unaudited)
 
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
 
September 30,
 
December 31,
 
 
2014
 
2013
Assets
 
 

 
 

Investments
 
 

 
 

Fixed maturities, at fair value (amortized cost: 2014—$8,924; 2013—$8,638)
 
$
9,522

 
$
9,121

Equity securities, at fair value (cost: 2014—$2,697; 2013—$2,523)
 
4,666

 
4,375

Other invested assets
 
67

 
68

Total investments
 
14,255

 
13,564

Cash and cash equivalents
 
412

 
433

Investment income receivable
 
119

 
121

Finance receivable
 
77

 
85

Premiums receivable
 
1,447

 
1,346

Reinsurance recoverable
 
549

 
547

Prepaid reinsurance premiums
 
28

 
26

Deferred policy acquisition costs
 
590

 
565

Land, building and equipment, net, for company use (accumulated depreciation: 2014—$439; 2013—$420)
 
198

 
210

Other assets
 
69

 
73

Separate accounts
 
730

 
692

Total assets
 
$
18,474

 
$
17,662

Liabilities
 
 

 
 

Insurance reserves
 
 

 
 

Loss and loss expense reserves
 
$
4,435

 
$
4,311

Life policy and investment contract reserves
 
2,484

 
2,390

Unearned premiums
 
2,128

 
1,976

Other liabilities
 
666

 
611

Deferred income tax
 
777

 
673

Note payable
 
49

 
104

Long-term debt and capital lease obligations
 
829

 
835

Separate accounts
 
730

 
692

Total liabilities
 
12,098

 
11,592

Commitments and contingent liabilities (Note 12)
 

 

Shareholders' Equity
 
 

 
 

Common stock, par value—$2 per share; (authorized: 2014 and 2013—500 million shares; issued: 2014 and 2013—198 million shares)
 
397

 
397

Paid-in capital
 
1,205

 
1,191

Retained earnings
 
4,409

 
4,268

Accumulated other comprehensive income
 
1,658

 
1,504

Treasury stock at cost (2014 and 2013—35 million shares)
 
(1,293
)
 
(1,290
)
Total shareholders' equity
 
6,376

 
6,070

Total liabilities and shareholders' equity
 
$
18,474

 
$
17,662

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


Cincinnati Financial Corporation Third-Quarter 2014 10-Q
Page 3



CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share data)
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues
 

 
 

 
 

 
 

Earned premiums
$
1,071

 
$
992

 
$
3,157

 
$
2,877

Investment income, net of expenses
138

 
133

 
409

 
392

Realized investment gains, net
65

 
22

 
101

 
77

Fee revenues
3

 
2

 
9

 
6

Other revenues
3

 
3

 
7

 
7

Total revenues
1,280

 
1,152

 
3,683

 
3,359

Benefits and Expenses
 

 
 

 
 

 
 

Insurance losses and policyholder benefits
686

 
642

 
2,181

 
1,841

Underwriting, acquisition and insurance expenses
319

 
312

 
967

 
919

Interest expense
13

 
13

 
40

 
40

Other operating expenses
3

 
3

 
10

 
12

 Total benefits and expenses
1,021

 
970

 
3,198

 
2,812

Income Before Income Taxes
259

 
182

 
485

 
547

Provision for Income Taxes
 

 
 

 
 

 
 

Current
68

 
46

 
106

 
137

Deferred
8

 
5

 
21

 
15

Total provision for income taxes
76

 
51

 
127

 
152

Net Income
$
183

 
$
131

 
$
358

 
$
395

Per Common Share
 

 
 

 
 

 
 

Net income—basic
$
1.12

 
$
0.80

 
$
2.19

 
$
2.42

Net income—diluted
1.11

 
0.79

 
2.17

 
2.39

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

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



CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (In millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net Income
 
$
183

 
$
131

 
$
358

 
$
395

Other Comprehensive Income
 
 

 
 

 
 

 
 

Change in unrealized gains (losses) on investments available-for-sale, net of tax of $(42), $22, $81 and $61, respectively
 
(78
)
 
40

 
151

 
113

Net change in pension actuarial loss and prior service cost, net of tax of $0, $1, $0 and $3, respectively
 
1

 
1

 

 
4

Change in life deferred acquisition costs, life policy reserves and other, net of tax of $2, $2, $2 and $10, respectively
 
3

 
5

 
3

 
21

Other comprehensive income (loss), net of tax
 
(74
)
 
46

 
154

 
138

Comprehensive Income
 
$
109

 
$
177

 
$
512

 
$
533

 
 
 
 
 
 
 
 
 

CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions)
 
Common Stock
 
 
 
 
 
Accumulated
Other
Comprehensive
Income
 
 
 
Total
Share-
holders'
 Equity
 
 
Outstanding Shares
 
Amount
 
Paid-in Capital
 
Retained Earnings
 
 
Treasury Stock
 
Balance December 31, 2012
 
163

 
$
394

 
$
1,134

 
$
4,021

 
$
1,129

 
$
(1,225
)
 
$
5,453

Net income
 

 

 

 
395

 

 

 
395

Other comprehensive income, net
 

 

 

 

 
138

 

 
138

Dividends declared
 

 

 

 
(202
)
 

 

 
(202
)
Treasury stock acquired—share repurchase authorization
 

 

 

 

 

 

 

Other
 
1

 
2

 
43

 

 

 
(13
)
 
32

Balance September 30, 2013
 
164

 
$
396

 
$
1,177

 
$
4,214

 
$
1,267

 
$
(1,238
)
 
$
5,816

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2013
 
163

 
$
397

 
$
1,191

 
$
4,268

 
$
1,504

 
$
(1,290
)
 
$
6,070

Net income
 

 

 

 
358

 

 

 
358

Other comprehensive income, net
 

 

 

 

 
154

 

 
154

Dividends declared
 

 

 

 
(217
)
 

 

 
(217
)
Treasury stock acquired—share repurchase authorization
 

 

 

 

 

 
(21
)
 
(21
)
Other
 

 

 
14

 

 

 
18

 
32

Balance September 30, 2014
 
163

 
$
397

 
$
1,205

 
$
4,409

 
$
1,658

 
$
(1,293
)
 
$
6,376

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


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



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

 
 

Net income
 
$
358

 
$
395

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

 
 

Depreciation and amortization
 
38

 
30

Realized gains on investments, net
 
(101
)
 
(77
)
Stock-based compensation
 
15

 
14

Interest credited to contract holders
 
35

 
31

Deferred income tax expense
 
21

 
15

Changes in:
 
 

 
 

Investment income receivable
 
2

 

Premiums and reinsurance receivable
 
(105
)
 
(148
)
Deferred policy acquisition costs
 
(32
)
 
(60
)
Other assets
 

 
(5
)
Loss and loss expense reserves
 
124

 
77

Life policy reserves
 
104

 
53

Unearned premiums
 
152

 
234

Other liabilities
 
(30
)
 
15

Current income tax receivable/payable
 
52

 
(36
)
Net cash provided by operating activities
 
633

 
538

Cash Flows From Investing Activities
 
 

 
 

Sale of fixed maturities
 
26

 
28

Call or maturity of fixed maturities
 
675

 
711

Sale of equity securities
 
225

 
178

Purchase of fixed maturities
 
(974
)
 
(1,016
)
Purchase of equity securities
 
(294
)
 
(216
)
Investment in finance receivables
 
(13
)
 
(26
)
Collection of finance receivables
 
23

 
22

     Investment in buildings and equipment, net
 
(6
)
 
(5
)
Change in other invested assets, net
 
7

 
4

Net cash used in investing activities
 
(331
)
 
(320
)
Cash Flows From Financing Activities
 
 

 
 

Payment of cash dividends to shareholders
 
(208
)
 
(195
)
Purchase of treasury shares
 
(21
)
 

Decrease in notes payable
 
(55
)
 

Proceeds from stock options exercised
 
14

 
17

Contract holders' funds deposited
 
66

 
64

Contract holders' funds withdrawn
 
(108
)
 
(78
)
Excess tax benefits on stock-based compensation
 
2

 
10

Other
 
(13
)
 
(12
)
Net cash used in financing activities
 
(323
)
 
(194
)
Net change in cash and cash equivalents
 
(21
)
 
24

Cash and cash equivalents at beginning of year
 
433

 
487

Cash and cash equivalents at end of period
 
$
412

 
$
511

Supplemental disclosures of cash flow information:
 
 

 
 

Interest paid
 
$
27

 
$
27

Income taxes paid
 
52

 
169

Non-cash activities:
 
 

 
 

Conversion of securities
 
$
7

 
$
59

Equipment acquired under capital lease obligations
 
10

 
21

Cashless exercise of stock options
 
11

 
22

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

Cincinnati Financial Corporation Third-Quarter 2014 10-Q
Page 6



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 — ACCOUNTING POLICIES
The condensed consolidated financial statements include the accounts of Cincinnati Financial Corporation and its consolidated subsidiaries, each of which is wholly owned. These statements are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
 
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. Our December 31, 2013, condensed consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by GAAP.
 
Our September 30, 2014, condensed consolidated financial statements are unaudited. Certain financial information that is included in annual financial statements prepared in accordance with GAAP is not required for interim reporting and has been condensed or omitted. We believe that we have made all adjustments, consisting only of normal recurring accruals, that are necessary for fair presentation. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our 2013 Annual Report on Form 10-K. The results of operations for interim periods do not necessarily indicate results to be expected for the full year.

Pending Accounting Updates

ASU 2014-09 Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Insurance contracts do not fall within the scope of this ASU. The effective date of ASU 2014-09 is for annual reporting periods beginning after December 15, 2016. The ASU has not yet been adopted and will not have a material impact on our company’s financial position, cash flows or results of operations.

ASU 2014-12, Compensation-Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

In June 2014, the FASB Issued ASU 2014-12, Compensation-Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that performance targets that affect vesting and that could be achieved after the requisite service period be treated as performance conditions. The effective date of ASU 2014-12 is for interim and annual reporting periods beginning after December 15, 2015. The ASU has not yet been adopted and will not have a material impact on our company’s financial position, cash flows or results of operations.

 

Cincinnati Financial Corporation Third-Quarter 2014 10-Q
Page 7



NOTE 2 – INVESTMENTS
The following table provides cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value for our invested assets:
(In millions)
 
Cost or
 
 
 
 
 
 
 
 
amortized
 
Gross unrealized
 
Fair
At September 30, 2014
 
cost
 
gains
 
losses
 
value
Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,134

 
$
449

 
$
13

 
$
5,570

States, municipalities and political subdivisions
 
3,294

 
173

 
3

 
3,464

Commercial mortgage-backed
 
250

 
5

 
1

 
254

Government-sponsored enterprises
 
222

 

 
12

 
210

Foreign government
 
10

 

 

 
10

Convertibles and bonds with warrants attached
 
7

 

 

 
7

United States government
 
7

 

 

 
7

Subtotal
 
8,924

 
627

 
29

 
9,522

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
2,552

 
1,942

 
6

 
4,488

Nonredeemable preferred equities
 
145

 
34

 
1

 
178

Subtotal
 
2,697

 
1,976

 
7

 
4,666

Total
 
$
11,621

 
$
2,603

 
$
36

 
$
14,188

At December 31, 2013
 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

Corporate
 
$
5,122

 
$
433

 
$
22

 
$
5,533

States, municipalities and political subdivisions
 
3,107

 
125

 
21

 
3,211

Government-sponsored enterprises
 
227

 

 
27

 
200

Commercial mortgage-backed
 
148

 

 
5

 
143

Convertibles and bonds with warrants attached
 
17

 

 

 
17

Foreign government
 
10

 

 

 
10

United States government
 
7

 

 

 
7

Subtotal
 
8,638

 
558

 
75

 
9,121

Equity securities:
 
 

 
 

 
 

 
 

Common equities
 
2,396

 
1,818

 
1

 
4,213

Nonredeemable preferred equities
 
127

 
38

 
3

 
162

Subtotal
 
2,523

 
1,856

 
4

 
4,375

Total
 
$
11,161

 
$
2,414

 
$
79

 
$
13,496

 
 
 
 
 
 
 
 
 
 
The net unrealized investment gains in our fixed-maturity portfolio are primarily the result of the continued low interest rate environment that increased the fair value of our fixed-maturity portfolio. The seven largest unrealized investment gains in our common stock portfolio are from Exxon Mobil Corporation (NYSE:XOM), The Procter & Gamble Company (NYSE:PG), Honeywell International Incorporated (NYSE:HON), Chevron Corporation (NYSE:CVX), Johnson & Johnson (NYSE:JNJ), BlackRock Inc. (NYSE:BLK), and RPM International (NYSE:RPM), which had a combined gross unrealized gain of $579 million. At September 30, 2014, BlackRock Inc. was our largest single common stock holding with a fair value of 3.1 percent of our publicly traded common stock portfolio and 1.0 percent of the total investment portfolio.


Cincinnati Financial Corporation Third-Quarter 2014 10-Q
Page 8



The table below provides fair values and gross unrealized losses by investment category and by the duration of the securities’ continuous unrealized loss positions:
(In millions)
 
Less than 12 months
 
12 months or more
 
Total
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
fair
 
unrealized
At September 30, 2014
 
value
 
losses
 
value
 
losses
 
value
 
losses
Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
224

 
$
9

 
$
114

 
$
4

 
$
338

 
$
13

States, municipalities and political subdivisions
 
28

 

 
218

 
3

 
246

 
3

Commercial mortgage-backed
 
37

 

 
32

 
1

 
69

 
1

Government-sponsored enterprises
 
11

 

 
176

 
12

 
187

 
12

Foreign government
 

 

 
10

 

 
10

 

United States government
 
1

 

 
1

 

 
2

 

Subtotal
 
301

 
9

 
551

 
20

 
852

 
29

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
105

 
2

 
80

 
4

 
185

 
6

Nonredeemable preferred equities
 
25

 

 
17

 
1

 
42

 
1

Subtotal
 
130

 
2

 
97

 
5

 
227

 
7

Total
 
$
431

 
$
11

 
$
648

 
$
25

 
$
1,079

 
$
36

At December 31, 2013
 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Corporate
 
$
572

 
$
20

 
$
43

 
$
2

 
$
615

 
$
22

States, municipalities and political subdivisions
 
490

 
18

 
42

 
3

 
532

 
21

Government-sponsored enterprises
 
199

 
27

 
1

 

 
200

 
27

Commercial mortgage-backed
 
125

 
5

 

 

 
125

 
5

Foreign government
 
10

 

 

 

 
10

 

United States government
 
1

 

 

 

 
1

 

Subtotal
 
1,397

 
70

 
86

 
5

 
1,483

 
75

Equity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Common equities
 
77

 
1

 

 

 
77

 
1

Nonredeemable preferred equities
 
42

 
3

 

 

 
42

 
3

Subtotal
 
119

 
4

 

 

 
119

 
4

Total
 
$
1,516

 
$
74

 
$
86

 
$
5

 
$
1,602

 
$
79

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2014 10-Q
Page 9



The following table provides investment income, realized investment gains and losses, the change in unrealized investment gains and losses, and other items:
(In millions)
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Investment income summary:
 
 
 
 
 
 
 
Interest on fixed maturities
$
105

 
$
104

 
$
312

 
$
309

Dividends on equity securities
35

 
30

 
101

 
87

Other investment income

 
1

 
2

 
2

Total
140

 
135

 
415

 
398

Less investment expenses
2

 
2

 
6

 
6

Total
$
138

 
$
133

 
$
409

 
$
392

 
 
 
 
 
 
 
 
Realized investment gains and losses summary:
 

 
 

 
 

 
 

Fixed maturities:
 

 
 

 
 

 
 

Gross realized gains
$
6

 
$
5

 
$
12

 
$
10

Gross realized losses

 

 
(4
)
 

Other-than-temporary impairments

 

 

 
(2
)
Equity securities:
 

 
 

 
 

 
 

Gross realized gains
59

 
15

 
93

 
64

Gross realized losses

 

 

 

Other-than-temporary impairments

 

 
(1
)
 

Other

 
2

 
1

 
5

Total
$
65

 
$
22

 
$
101

 
$
77

 
 
 
 
 
 
 
 
Change in unrealized gains and losses summary:
 

 
 

 
 

 
 

Fixed maturities
$
(66
)
 
$
(28
)
 
$
115

 
$
(335
)
Equity securities
(54
)
 
90

 
117

 
509

Net change in pension actuarial loss and prior
  service cost
1

 
2

 

 
7

Adjustment to deferred acquisition costs and life
  policy reserves
4

 
9

 
(4
)
 
38

Other
1

 
(2
)
 
9

 
(7
)
Income taxes on above
40

 
(25
)
 
(83
)
 
(74
)
Total
$
(74
)
 
$
46

 
$
154

 
$
138

 
 
 
 
 
 
 
 
 
During the three months ended September 30, 2014, there were no equity securities and no fixed-maturity securities other-than-temporarily impaired. During the nine months ended September 30, 2014, there were    three equity securities and one fixed-maturity security 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, 2014 and 2013. At September 30, 2014, 212 fixed-maturity investments with a total unrealized loss of $20 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below  
70 percent of amortized cost. Four equity investments with a total unrealized loss of $5 million had been in an unrealized loss position for 12 months or more as of September 30, 2014. Of that total, no equity investments were trading below 70 percent of cost.
 
During 2013, we other-than-temporarily impaired seven fixed-maturity securities. At December 31, 2013, 40 fixed-maturity investments with a total unrealized loss of $5 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below 70 percent of amortized cost. There were no equity investments in an unrealized loss position for 12 months or more as of December 31, 2013.
 


Cincinnati Financial Corporation Third-Quarter 2014 10-Q
Page 10



NOTE 3 – FAIR VALUE MEASUREMENTS

Fair Value Hierarchy
In accordance with accounting guidance for fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for the valuation technique used, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2013, and ultimately management determines fair value. See our 2013 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 121, for information on characteristics and valuation techniques used in determining fair value.

Fair Value Disclosures for Assets
The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at September 30, 2014, and December 31, 2013. We do not have any material liabilities carried at fair value. There were no transfers between Level 1 and Level 2.
(In millions)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs 
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
At September 30, 2014
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$

 
$
5,542

 
$
28

 
$
5,570

States, municipalities and political subdivisions
 

 
3,464

 

 
3,464

Commercial mortgage-backed
 

 
254

 

 
254

Government-sponsored enterprises
 

 
210

 

 
210

Foreign government
 

 
10

 

 
10

Convertibles and bonds with warrants attached
 

 
7

 

 
7

United States government
 
7

 

 

 
7

Subtotal
 
7

 
9,487

 
28

 
9,522

Common equities, available for sale
 
4,488

 

 

 
4,488

Nonredeemable preferred equities, available for sale
 

 
176

 
2

 
178

Separate accounts taxable fixed maturities
 

 
694

 

 
694

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

 

 

 
17

Total
 
$
4,512

 
$
10,357

 
$
30

 
$
14,899

At December 31, 2013
 
 
 
 
 
 
 
 
Fixed maturities, available for sale:
 
 

 
 

 
 

 
 

Corporate
 
$

 
$
5,531

 
$
2

 
$
5,533

States, municipalities and political subdivisions
 

 
3,211

 

 
3,211

Government-sponsored enterprises
 

 
200

 

 
200

Commercial mortgage-backed
 

 
143

 

 
143

Convertibles and bonds with warrants attached
 

 
17

 

 
17

Foreign government
 

 
10

 

 
10

United States government
 
7

 

 

 
7

Subtotal
 
7

 
9,112

 
2

 
9,121

Common equities, available for sale
 
4,213

 

 

 
4,213

Nonredeemable preferred equities, available for sale
 

 
160

 
2

 
162

Separate accounts taxable fixed-maturities
 

 
682

 

 
682

Top Hat Savings Plan mutual funds and common
  equity (included in Other assets)
 
14

 

 

 
14

Total
 
$
4,234

 
$
9,954

 
$
4

 
$
14,192

 
 
 
 
 
 
 
 
 

Cincinnati Financial Corporation Third-Quarter 2014 10-Q
Page 11



 
Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value as of September 30, 2014. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the condensed consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.

The following tables provide the change in Level 3 assets for the three months ended September 30:
 (In millions)
 
Asset fair value measurements using significant unobservable inputs (Level 3)
 
 
Corporate
fixed
maturities
 
Commercial
mortgage-
backed fixed maturities
 
States,
municipalities
and political
subdivisions
fixed maturities
 
Nonredeemable preferred
equities
 
Total
Beginning balance, June 30, 2014
 
$
9

 
$

 
$

 
$
2

 
$
11

Total gains or losses (realized/unrealized):
 
 

 
 
 
 

 
 

 
 

Included in net income
 

 

 

 

 

Included in other comprehensive income
 

 

 

 

 

Purchases
 

 

 

 

 

Sales
 

 

 

 

 

Transfers into Level 3
 
19

 

 

 

 
19

Transfers out of Level 3
 

 

 

 

 

Ending balance, September 30, 2014
 
$
28

 
$

 
$

 
$
2

 
$
30

 
 
 
 
 
 
 
 
 
 
 
Beginning balance, June 30, 2013
 
$
3

 
$

 
$
1

 
$
2

 
$
6

Total gains or losses (realized/unrealized):
 
 

 
 
 
 

 
 

 
 

Included in net income
 

 

 

 

 

Included in other comprehensive income
 

 

 

 

 

Purchases
 

 

 

 

 

Sales
 

 

 
(1
)
 

 
(1
)
Transfers into Level 3
 

 

 

 

 

Transfers out of Level 3
 

 

 

 

 

Ending balance, September 30, 2013
 
$
3

 
$

 
$

 
$
2

 
$
5

 
 
 
 
 
 
 
 
 
 
 


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



The following tables provide the change in Level 3 assets for the nine months ended September 30:
(In millions)
Asset fair value measurements using significant unobservable inputs (Level 3)
 
 
Corporate
fixed
maturities
 
Commercial
mortgage-
backed fixed maturities
 
States,
municipalities
and political
subdivisions
fixed maturities
 
Nonredeemable preferred
equities
 
Total
Beginning balance, January 1, 2014
 
$
2

 
$

 
$

 
$
2

 
$
4

Total gains or losses (realized/unrealized):
 
 
 
 
 
 

 
 

 
 

Included in net income
 

 

 

 

 

Included in other comprehensive income
 

 

 

 

 

Purchases
 

 

 

 

 

Sales
 

 

 

 

 

Transfers into Level 3
 
26

 
5

 

 

 
31

Transfers out of Level 3
 

 
(5
)
 

 

 
(5
)
Ending balance, September 30, 2014
 
$
28

 
$

 
$

 
$
2

 
$
30

 
 
 
 
 
 
 
 
 
 
 
Beginning balance, January 1, 2013
 
$
3

 
$

 
$
1

 
$
1

 
$
5

Total gains or losses (realized/unrealized):
 
 
 
 
 
 

 
 

 
 
Included in net income
 

 

 

 

 

Included in other comprehensive income
 

 

 

 

 

Purchases
 

 

 

 
1

 
1

Sales
 

 

 
(1
)
 

 
(1
)
Transfers into Level 3
 

 

 

 

 

Transfers out of Level 3
 

 

 

 

 

Ending balance, September 30, 2013
 
$
3

 
$

 
$

 
$
2

 
$
5

 
 
 
 
 
 
 
 
 
 
 

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:
(In millions)
 
 
 
 
 
Book value
 
Principal amount
 
 
 
 
 
 
September 30,
 
December 31,
 
September 30,
 
December 31,
Interest rate
 
Year of issue
 
 
 
2014
 
2013
 
2014
 
2013
6.900
%
 
1998
 
Senior debentures, due 2028
 
$
28

 
$
28

 
$
28

 
$
28

6.920
%
 
2005
 
Senior debentures, due 2028
 
391

 
391

 
391

 
391

6.125
%
 
2004
 
Senior notes, due 2034
 
371

 
371

 
374

 
374

 

 
 
 
Total
 
$
790

 
$
790

 
$
793

 
$
793

 
 
 
 
 
 
 
 
 
 
&