CINF 10-Q Quarterly Report June 30, 2013 | Alphaminr
CINCINNATI FINANCIAL CORP
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CINF 10-Q Quarter ended June 30, 2013

Balance Sheet
Cash Flow
Income Statement
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10-Q 1 cinf-2013630x10q.htm 10-Q CINF-2013.6.30-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2013.
¨ 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.
þ Yes ¨ 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).
þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company" in Rule 12b-2 of the Exchange Act.
þ Large accelerated filer ¨ Accelerated filer ¨ Nonaccelerated filer ¨ Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
¨ Yes þ No
As of July 22, 2013, there wer e 163,668,282 shar es of common stock outstanding.




CINCINNATI FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2013
TABLE OF CONTENTS



Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 2


Part I – Financial Information
Item 1.        Financial Statements (unaudited)
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
June 30,
December 31,
2013
2012
ASSETS


Investments


Fixed maturities, at fair value (amortized cost: 2013—$8,428; 2012—$8,222)
$
8,992

$
9,093

Equity securities, at fair value (cost: 2013—$2,452; 2012—$2,369)
3,875

3,373

Other invested assets
66

68

Total investments
12,933

12,534

Cash and cash equivalents
382

487

Investment income receivable
116

115

Finance receivable
79

75

Premiums receivable
1,350

1,214

Reinsurance recoverable
582

615

Prepaid reinsurance premiums
26

26

Deferred policy acquisition costs
546

470

Land, building and equipment, net, for company use (accumulated depreciation: 2013—$405; 2012—$397)
213

217

Other assets
94

61

Separate accounts
713

734

Total assets
$
17,034

$
16,548

LIABILITIES


Insurance reserves


Loss and loss expense reserves
$
4,284

$
4,230

Life policy and investment contract reserves
2,345

2,295

Unearned premiums
1,947

1,792

Other liabilities
597

660

Deferred income tax
512

453

Note payable
104

104

Long-term debt and capital lease obligations
833

827

Separate accounts
713

734

Total liabilities
11,335

11,095

Commitments and contingent liabilities (Note 12)
—

—

SHAREHOLDERS' EQUITY


Common stock, par value—$2 per share; (authorized: 2013 and 2012—500 million shares; issued and outstanding: 2013—198 million shares and 2012—197 million shares)
396

394

Paid-in capital
1,162

1,134

Retained earnings
4,152

4,021

Accumulated other comprehensive income
1,221

1,129

Treasury stock at cost (2013 and 2012—34 million shares)
(1,232
)
(1,225
)
Total shareholders' equity
5,699

5,453

Total liabilities and shareholders' equity
$
17,034

$
16,548

Accompanying notes are an integral part of these condensed consolidated financial statements.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 3


CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended June 30,
Six months ended June 30,
(In millions except per share data)
2013
2012
2013
2012
REVENUES




Earned premiums
$
954

$
877

$
1,885

$
1,716

Investment income, net of expenses
131

132

259

263

Total realized investment gains, net
14

6

55

19

Fee revenues
3

2

4

3

Other revenues
2

3

4

5

Total revenues
1,104

1,020

2,207

2,006

BENEFITS AND EXPENSES




Insurance losses and policyholder benefits
631

687

1,199

1,269

Underwriting, acquisition and insurance expenses
307

287

607

561

Interest expense
14

13

27

27

Other operating expenses
4

4

9

8

Total benefits and expenses
956

991

1,842

1,865

INCOME BEFORE INCOME TAXES
148

29

365

141

PROVISION (BENEFIT) FOR INCOME TAXES




Current
37

6

91

26

Deferred
1

(9
)
10

(3
)
Total provision (benefit) for income taxes
38

(3
)
101

23

NET INCOME
$
110

$
32

$
264

$
118

PER COMMON SHARE




Net income—basic
$
0.67

$
0.20

$
1.62

$
0.73

Net income—diluted
0.66

0.20

1.60

0.72

Accompanying notes are an integral part of these condensed consolidated financial statements.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 4



CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended June 30,
Six months ended June 30,
(In millions)
2013
2012
2013
2012
NET INCOME
$
110

$
32

$
264

$
118

OTHER COMPREHENSIVE INCOME




Unrealized gains (losses) on investments available-for-sale, net of tax of ($85), ($19), $39 and $61, respectively
(159
)
(34
)
73

114

Amortization of pension actuarial loss and prior service cost, net of tax of $1, $0, $2 and $1, respectively
2

1

3

2

Change in life deferred acquisition costs, life policy reserves and other, net of tax of $8, $(1), $8 and $(3), respectively
16

(4
)
16

(7
)
Other comprehensive income (loss), net of tax
(141
)
(37
)
92

109

COMPREHENSIVE INCOME (LOSS)
$
(31
)
$
(5
)
$
356

$
227

Accompanying notes are an integral part of these condensed consolidated financial statements.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 5


CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
Accumulated
Other
Total
Share-
(In millions)
Outstanding Shares
Amount
Paid-in Capital
Retained Earnings
Comprehensive Income
Treasury Stock
holders' Equity
Balance as reported December 31, 2011
162

$
393

$
1,096

$
3,885

$
901

$
(1,220
)
$
5,055

Cumulative effect of a change in accounting for deferred policy acquisition costs, net of tax
—

—

—

(22
)
—

—

(22
)
Balance as adjusted December 31, 2011
162

393

1,096

3,863

901

(1,220
)
5,033

Net income
—

—

—

118

—

—

118

Other comprehensive income, net
—

—

—

—

109

—

109

Dividends declared
—

—

—

(130
)
—

—

(130
)
Stock-based awards exercised and vested
—

—

1

—

—

1

2

Stock-based compensation
—

—

8

—

—

—

8

Purchases
—

—

—

—

—

—

—

Other
—

—

1

—

—

3

4

Balance June 30, 2012
162

$
393

$
1,106

$
3,851

$
1,010

$
(1,216
)
$
5,144

Balance December 31, 2012
163

$
394

$
1,134

$
4,021

$
1,129

$
(1,225
)
$
5,453

Net income
—

—

—

264

—

—

264

Other comprehensive income, net
—

—

—

—

92

—

92

Dividends declared
—

—

—

(133
)
—

—

(133
)
Stock-based awards exercised and vested
1

2

17

—

—

5

24

Stock-based compensation
—

—

10

—

—

—

10

Purchases
—

—

—

—

—

(15
)
(15
)
Other
—

—

1

—

—

3

4

Balance June 30, 2013
164

$
396

$
1,162

$
4,152

$
1,221

$
(1,232
)
$
5,699

Accompanying notes are an integral part of these condensed consolidated financial statements.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 6


CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended June 30,
(In millions)
2013
2012
CASH FLOWS FROM OPERATING ACTIVITIES


Net income
$
264

$
118

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


Depreciation and amortization
20

22

Realized gains on investments, net
(55
)
(19
)
Stock-based compensation
10

8

Interest credited to contract holders
22

18

Deferred income tax expense (benefit)
10

(3
)
Changes in:


Investment income receivable
(1
)
1

Premiums and reinsurance receivable
(103
)
(76
)
Deferred policy acquisition costs
(39
)
(26
)
Other assets
(10
)
(11
)
Loss and loss expense reserves
54

57

Life policy reserves
33

33

Unearned premiums
155

129

Other liabilities
(39
)
7

Current income tax receivable
(70
)
7

Net cash provided by operating activities
251

265

CASH FLOWS FROM INVESTING ACTIVITIES


Sale of fixed maturities
14

28

Call or maturity of fixed maturities
459

360

Sale of equity securities
157

124

Purchase of fixed maturities
(666
)
(603
)
Purchase of equity securities
(190
)
(210
)
Investment in buildings and equipment, net
(3
)
(4
)
Investment in finance receivables
(18
)
(18
)
Collection of finance receivables
14

16

Change in other invested assets, net
3

3

Net cash used in investing activities
(230
)
(304
)
CASH FLOWS FROM FINANCING ACTIVITIES


Payment of cash dividends to shareholders
(130
)
(128
)
Proceeds from stock options exercised
12

3

Contract holders' funds deposited
45

56

Contract holders' funds withdrawn
(55
)
(62
)
Excess tax benefits on stock-based compensation
9

1

Other
(7
)
(6
)
Net cash used in financing activities
(126
)
(136
)
Net change in cash and cash equivalents
(105
)
(175
)
Cash and cash equivalents at beginning of year
487

438

Cash and cash equivalents at end of period
$
382

$
263

Supplemental disclosures of cash flow information:


Interest paid
$
27

$
27

Income taxes paid
158

19

Non-cash activities:


Conversion of securities
$
54

$
13

Equipment acquired under capital lease obligations
17

9

Cashless exercise of stock options
15

—

Accompanying notes are an integral part of these condensed consolidated financial statements.

Cincinnati Financial Corporation Second-Quarter 2013 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, 2012 , condensed consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by GAAP.
Our June 30, 2013 , 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 2012 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 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income . ASU 2013-02 requires entities to present in either a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The company adopted this ASU during the first quarter of 2013, and it did not have a material impact on our company’s financial position, cash flows or results of operations. See Note 7, Accumulated Other Comprehensive Income, for further details.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 8


NOTE 2 – INVESTMENTS
The following table provides cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value for our invested assets:
(In millions)
Cost or
amortized
Gross unrealized
Fair
At June 30, 2013
cost
gains
losses
value
Fixed maturities:




States, municipalities and political subdivisions
$
3,044

$
162

$
18

$
3,188

Convertibles and bonds with warrants attached
16

—

—

16

United States government
7

—

—

7

Government-sponsored enterprises
208

—

13

195

Foreign government
10

—

—

10

Commercial mortgage-backed securities
63

—

3

60

Corporate securities
5,080

459

23

5,516

Subtotal
8,428

621

57

8,992

Equity securities:




Common equities
2,375

1,398

12

3,761

Preferred equities
77

37

—

114

Subtotal
2,452

1,435

12

3,875

Total
$
10,880

$
2,056

$
69

$
12,867

At December 31, 2012




Fixed maturities:




States, municipalities and political subdivisions
$
3,040

$
250

$
1

$
3,289

Convertibles and bonds with warrants attached
31

—

—

31

United States government
7

1

—

8

Government-sponsored enterprises
164

—

—

164

Foreign government
3

—

—

3

Commercial mortgage-backed securities
27

1

—

28

Corporate securities
4,950

622

2

5,570

Subtotal
8,222

874

3

9,093

Equity securities:




Common equities
2,270

977

9

3,238

Preferred equities
99

37

1

135

Subtotal
2,369

1,014

10

3,373

Total
$
10,591

$
1,888

$
13

$
12,466

The net unrealized investment gains in our fixed-maturity portfolio are primarily the result of the current low interest rate environment that increased the fair value of our fixed-maturity portfolio. The three largest net unrealized investment gains in our common stock portfolio are from Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX) and The Procter & Gamble Company (NYSE:PG), which had a combined net gain position of $283 million . At At June 30, 2013 , we had $16 million fair value of hybrid securities included in fixed maturities that follow Accounting Standards Codification (ASC) 815-15-25, Accounting for Certain Hybrid Financial Instruments, compared with $31 million fair value of hybrid securities at December 31, 2012 . The hybrid securities are carried at fair value, and the changes in fair value are included in realized investment gains and losses.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 9


The table below provides fair values and unrealized losses by investment category and by the duration of the securities’ continuous unrealized loss position:
(In millions)
Less than 12 months
12 months or more
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
At June 30, 2013
value
losses
value
losses
value
losses
Fixed maturities:






States, municipalities and political
subdivisions
$
377

$
18

$
—

$
—

$
377

$
18

United States government
1

—

—

—

1

—

Foreign government
10

—

—

—

10

—

Government-sponsored enterprises
185

13

—

—

185

13

Commercial mortgage-backed securities
51

3

—

—

51

3

Corporate securities
580

22

13

1

593

23

Subtotal
1,204

56

13

1

1,217

57

Equity securities:






Common equities
202

12

—

—

202

12

Preferred equities
4

—

—

—

4

—

Subtotal
206

12

—

—

206

12

Total
$
1,410

$
68

$
13

$
1

$
1,423

$
69

At December 31, 2012






Fixed maturities:






States, municipalities and political
subdivisions
$
53

$
1

$
—

$
—

$
53

$
1

Government-sponsored enterprises
1

—

—

—

1

—

Corporate securities
58

1

17

1

75

2

Subtotal
112

2

17

1

129

3

Equity securities:






Common equities
107

9

—

—

107

9

Preferred equities
4

1

—

—

4

1

Subtotal
111

10

—

—

111

10

Total
$
223

$
12

$
17

$
1

$
240

$
13


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 10


The following table provides investment income, realized investment gains and losses and the change in unrealized investment gains and losses and other items:
(In millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
2013
2012
Investment income summary:
Interest on fixed maturities
$
103

$
106

$
205

$
212

Dividends on equity securities
30

27

57

53

Other investment income
—

1

1

2

Total
133

134

263

267

Less investment expenses
2

2

4

4

Total
$
131

$
132

$
259

$
263

Realized investment gains and losses summary:




Fixed maturities:




Gross realized gains
$
2

$
13

$
4

$
16

Gross realized losses
—

—

—

—

Other-than-temporary impairments
—

—

(2
)
—

Equity securities:




Gross realized gains
12

6

49

29

Gross realized losses
—

(1
)
—

(1
)
Other-than-temporary impairments
—

(14
)
—

(30
)
Securities with embedded derivatives
—

1

1

5

Other
—

1

3

—

Total
$
14

$
6

$
55

$
19

Change in unrealized gains and losses summary:




Fixed maturities
$
(282
)
$
29

$
(307
)
$
78

Equity securities
38

(82
)
419

97

Adjustment to deferred acquisition costs and life policy reserves
26

(8
)
29

(15
)
Amortization of pension actuarial loss and prior service cost
3

1

5

3

Other
(2
)
3

(5
)
5

Income taxes on above
76

20

(49
)
(59
)
Total
$
(141
)
$
(37
)
$
92

$
109

During the three and six months ended June 30, 2013 and 2012 , there were no credit losses on fixed-maturity securities for which a portion of other-than-temporary impairment (OTTI) has been recognized in other comprehensive income.
During the quarter ended June 30, 2013 , there were no other-than-temporarily impaired securities. At June 30, 2013, four fixed-maturity investments with a total unrealized loss of $1 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 June 30, 2013.
At December 31, 2012, four fixed-maturity investments with a total unrealized loss of $1 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, 2012.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 11


NOTE 3 – FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
In accordance with accounting guidance for fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for the valuation technique used, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2012 , and ultimately management determines fair value. See our 2012 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 121, for information on characteristics and valuation techniques used in determining fair value.

Fair Value Disclosures for Assets
The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at June 30, 2013 , and December 31, 2012. We do not have any material liabilities carried at fair value. There were no transfers between Level 1 and Level 2.
(In millions)
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
At June 30, 2013
Fixed maturities, available for sale:




States, municipalities and political subdivisions
$
—

$
3,187

$
1

$
3,188

Convertibles and bonds with warrants attached
—

16

—

16

United States government
7

—

—

7

Government-sponsored enterprises
—

195

—

195

Foreign government
—

10

—

10

Commercial mortgage-backed securities
—

60

—

60

Corporate securities
—

5,513

3

5,516

Subtotal
7

8,981

4

8,992

Common equities, available for sale
3,761

—

—

3,761

Preferred equities, available for sale
—

112

2

114

Taxable fixed maturities separate accounts
—

693

—

693

Top Hat Savings Plan (included in Other assets)
11

—

—

11

Total
$
3,779

$
9,786

$
6

$
13,571

At December 31, 2012
Fixed maturities, available for sale:




States, municipalities and political subdivisions
$
—

$
3,288

$
1

$
3,289

Convertibles and bonds with warrants attached
—

31

—

31

United States government
8

—

—

8

Government-sponsored enterprises
—

164

—

164

Foreign government
—

3

—

3

Commercial mortgage-backed securities
—

28

—

28

Corporate securities
—

5,567

3

5,570

Subtotal
8

9,081

4

9,093

Common equities, available for sale
3,238

—

—

3,238

Preferred equities, available for sale
—

134

1

135

Taxable fixed-maturities separate accounts
—

689

—

689

Top Hat Savings Plan (included in Other assets)
9

—

—

9

Total
$
3,255

$
9,904

$
5

$
13,164


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 12


Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value as of June 30, 2013 . Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the condensed consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.

The following tables provide the change in Level 3 assets for the three months ended June 30:
(In millions)
Corporate fixed
maturities
States,
municipalities
and political
subdivisions
fixed maturities
Preferred  equities
Total
Beginning balance, March 31, 2013
$
3

$
1

$
2

$
6

Total gains or losses (realized/unrealized):




Included in earnings
—

—

—

—

Included in other comprehensive income
—

—

—

—

Purchases
—

—

—

—

Sales
—

—

—

—

Transfers into Level 3
—

—

—

—

Transfers out of Level 3
—

—

—

—

Ending balance, June 30, 2013
$
3

$
1

$
2

$
6

Beginning balance, March 31, 2012
$
16

$
2

$
7

$
25

Total gains or losses (realized/unrealized):




Included in earnings
—

—

—

—

Included in other comprehensive income
—

—

—

—

Purchases
—

—

—

—

Sales
(1
)
—

—

(1
)
Transfers into Level 3
—

—

—

—

Transfers out of Level 3
(11
)
—

—

(11
)
Ending balance, June 30, 2012
$
4

$
2

$
7

$
13
























Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 13


The following tables provide the change in Level 3 assets for the six months ended June 30:
(In millions)
Corporate fixed
maturities
States,
municipalities
and political
subdivisions
fixed maturities
Preferred
equities
Total
Beginning balance, December 31, 2012
$
3

$
1

$
1

$
5

Total gains or losses (realized/unrealized):



Included in earnings
—

—

—

—

Included in other comprehensive income
—

—

—

—

Purchases
—

—

1

1

Sales
—

—

—

—

Transfers into Level 3
—

—

—

—

Transfers out of Level 3
—

—

—

—

Ending balance, June 30, 2013
$
3

$
1

$
2

$
6

Beginning balance, December 31, 2011
$
18

$
3

$
4

$
25

Total gains or losses (realized/unrealized):




Included in earnings
—

—

—

—

Included in other comprehensive income
3

—

2

5

Purchases
—

—

1

1

Sales
(4
)
(1
)
—

(5
)
Transfers into Level 3
1

—

—

1

Transfers out of Level 3
(14
)
—

—

(14
)
Ending balance, June 30, 2012
$
4

$
2

$
7

$
13



With the exception of the Level 3 reconciliation table, additional disclosure for the Level 3 category is not material.

Fair Value Disclosure for Assets and Liabilities Not Carried at Fair Value
The disclosures below are presented to provide timely information about the effects of current market conditions on financial instruments that are not reported at fair value in our condensed consolidated financial statements.
This table summarizes the book value and principal amounts of our long-term debt:
(In millions)
Book value
Principal amount
June 30,
December 31,
June 30,
December 31,
Interest rate
Year of issue
2013
2012
2013
2012
6.900
%
1998
Senior debentures, due 2028
$
28

$
28

$
28

$
28

6.920
%
2005
Senior debentures, due 2028
391

391

391

391

6.125
%
2004
Senior notes, due 2034
371

371

374

374


Total
$
790

$
790

$
793

$
793


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 14


The following table shows fair values of our note payable and long-term debt subject to fair value disclosure requirements:
(In millions)
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
At June 30, 2013
Note payable
$
—

$
104

$
—

$
104

6.900% senior debentures, due 2028
—

33

—

33

6.920% senior debentures, due 2028
—

469

—

469

6.125% senior notes, due 2034
—

402

—

402

Total
$
—

$
1,008

$
—

$
1,008

At December 31, 2012
Note payable
$
—

$
104

$
—

$
104

6.900% senior debentures, due 2028
—

31

—

31

6.920% senior debentures, due 2028
—

479

—

479

6.125% senior notes, due 2034
—

431

—

431

Total
$
—

$
1,045

$
—

$
1,045

The following table shows the fair value of our life policy loans, included in other invested assets, subject to fair value disclosure requirements:
(In millions)
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
At June 30, 2013
Life policy loans
$
—

$
—

$
46

$
46

At December 31, 2012
Life policy loans
$
—

$
—

$
50

$
50

Outstanding principal and interest for these life policy loans was $35 million and $37 million at June 30, 2013 , and December 31, 2012 , respectively.
The following table shows fair values of our deferred annuities and structured settlements, included in life policy and investment contract reserves, subject to fair value disclosure requirements:
(In millions)
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
At June 30, 2013
Deferred annuities
$
—

$
—

$
887

$
887

Structured settlements
—

227

—

227

Total
$
—

$
227

$
887

$
1,114

At December 31, 2012
Deferred annuities
$
—

$
—

$
898

$
898

Structured settlements
—

240

—

240

Total
$
—

$
240

$
898

$
1,138


Recorded reserves for the deferred annuities and structured settlements were $1.049 billion and $1.043 billion at June 30, 2013 , and December 31, 2012 , respectively.


Cincinnati Financial Corporation Second-Quarter 2013 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:
(In millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
2013
2012
Gross loss and loss expense reserves, beginning of period
$
4,173

$
4,289

$
4,169

$
4,280

Less reinsurance receivable
349

352

356

375

Net loss and loss expense reserves, beginning of period
3,824

3,937

3,813

3,905

Net incurred loss and loss expenses related to:




Current accident year
675

725

1,209

1,380

Prior accident years
(92
)
(85
)
(102
)
(201
)
Total incurred
583

640

1,107

1,179

Net paid loss and loss expenses related to:




Current accident year
249

282

370

414

Prior accident years
272

290

664

665

Total paid
521

572

1,034

1,079

Net loss and loss expense reserves, end of period
3,886

4,005

3,886

4,005

Plus reinsurance receivable
333

332

333

332

Gross loss and loss expense reserves, end of period
$
4,219

$
4,337

$
4,219

$
4,337

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 $65 million at June 30, 2013 , and $59 million at June 30, 2012 , for certain life and health loss and loss expense reserves.

For the three months ended June 30, 2013 , we experienced $92 million of favorable development on prior accident years, including $66 million of favorable development in commercial lines and $26 million of favorable development in personal lines. There was $8 million from favorable development of catastrophe losses for the three months ended June 30, 2013 , compared with $5 million of favorable development of catastrophe losses that occurred for the three months ended June 30, 2012 .

For the six months ended June 30, 2013 , we experienced $102 million of favorable development on prior accident years, including $78 million of favorable development in commercial lines, $22 million of favorable development in personal lines and $2 million favorable development in excess and surplus lines. There was $15 million from favorable development of catastrophe losses for the six months ended June 30, 2013 , compared with $27 million of favorable development of catastrophe losses that occurred for the six months ended June 30, 2012 .




Cincinnati Financial Corporation Second-Quarter 2013 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:
(In millions)
June 30,
2013
December 31, 2012
Ordinary/traditional life
$
778

$
752

Universal life
501

483

Deferred annuities
858

850

Structured settlements
192

193

Other
16

17

Total life policy and investment contract reserves
$
2,345

$
2,295


NOTE 6 – DEFERRED ACQUISITION COSTS
Expenses directly related to successfully acquiring 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.
(In millions)
Three months ended June 30,
Six months ended June 30,

2013
2012
2013
2012
Deferred policy acquisition costs asset at beginning of period
$
491

$
483

$
470

$
477

Capitalized deferred policy acquisition costs
203

192

401

362

Amortized deferred policy acquisition costs
(183
)
(181
)
(362
)
(337
)
Amortized shadow deferred policy acquisition costs
35

(10
)
37

(18
)
Deferred policy acquisition costs asset at end of period
$
546

$
484

$
546

$
484


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 Second-Quarter 2013 10-Q
Page 17


NOTE 7 – ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income includes changes in unrealized gains and losses on available for sale investments and other invested assets, changes in pension obligations and changes in life deferred acquisition costs, life policy reserves and other as follows:

(In millions)
Three months ended June 30,
2013
2012
Before tax
Income tax
Net
Before tax
Income tax
Net
Accumulated unrealized gains, net, on investments available for sale,
beginning of period
$
2,231

$
771

$
1,460

$
1,717

$
592

$
1,125

Other comprehensive income before reclassification
(230
)
(81
)
(149
)
(47
)
(17
)
(30
)
Reclassification adjustment for realized investment gains, net, included in
net income
(14
)
(4
)
(10
)
(6
)
(2
)
(4
)
Effect on other comprehensive income
(244
)
(85
)
(159
)
(53
)
(19
)
(34
)
Accumulated unrealized gains, net, on investments available for sale,
end of period
$
1,987

$
686

$
1,301

$
1,664

$
573

$
1,091

Accumulated unrealized losses, net, for pension obligations,
beginning of period
$
(99
)
$
(34
)
$
(65
)
$
(86
)
$
(30
)
$
(56
)
Other comprehensive income before reclassification
—

—

—

—

—

—

Reclassification adjustment for amortization of actuarial loss and prior
service cost, net, included in net income
3

1

2

1

—

1

Effect on other comprehensive income
3

1

2

1

—

1

Accumulated unrealized losses, net, for pension obligations, end of period
$
(96
)
$
(33
)
$
(63
)
$
(85
)
$
(30
)
$
(55
)
Accumulated unrealized losses, net, on life deferred acquisition costs, life
policy reserves and other, beginning of period
$
(50
)
$
(17
)
$
(33
)
$
(34
)
$
(12
)
$
(22
)
Effect on other comprehensive income
24

8

16

(5
)
(1
)
(4
)
Accumulated unrealized losses, net, on life deferred acquisition costs, life
policy reserves and other, end of period
$
(26
)
$
(9
)
$
(17
)
$
(39
)
$
(13
)
$
(26
)
Accumulated other comprehensive income, beginning of period
$
2,082

$
720

$
1,362

$
1,597

$
550

$
1,047

Change in unrealized gains, net, on investments available for sale
(244
)
(85
)
(159
)
(53
)
(19
)
(34
)
Change in pension obligations
3

1

2

1

—

1

Change in life deferred acquisition costs, life policy reserves and other
24

8

16

(5
)
(1
)
(4
)
Effect on other comprehensive income
(217
)
(76
)
(141
)
(57
)
(20
)
(37
)
Accumulated other comprehensive income, end of period
$
1,865

$
644

$
1,221

$
1,540

$
530

$
1,010


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 18


(In millions)
Six months ended June 30,
2013
2012
Before tax
Income tax
Net
Before tax
Income tax
Net
Accumulated unrealized gains, net, on investments available for sale,
beginning of period
$
1,875

$
647

$
1,228

$
1,489

$
512

$
977

Other comprehensive income before reclassification
164

56

108

194

67

127

Reclassification adjustment for realized investment gains, net, included in net income
(52
)
(17
)
(35
)
(19
)
(6
)
(13
)
Effect on other comprehensive income
112

39

73

175

61

114

Accumulated unrealized gains, net, on investments available for sale,
end of period
$
1,987

$
686

$
1,301

$
1,664

$
573

$
1,091

Accumulated unrealized losses, net, for pension obligations,
beginning of period
$
(101
)
$
(35
)
$
(66
)
$
(88
)
$
(31
)
$
(57
)
Other comprehensive income before reclassification
—

—

—

—

—

—

Reclassification adjustment for amortization of actuarial loss and prior
service cost, net, included in net income
5

2

3

3

1

2

Effect on other comprehensive income
5

2

3

3

1

2

Accumulated unrealized losses, net, for pension obligations, end of period
$
(96
)
$
(33
)
$
(63
)
$
(85
)
$
(30
)
$
(55
)
Accumulated unrealized losses, net, on life deferred acquisition costs, life
policy reserves and other, beginning of period
$
(50
)
$
(17
)
$
(33
)
$
(29
)
$
(10
)
$
(19
)
Other comprehensive income before reclassification
27

10

17

(10
)
(3
)
(7
)
Reclassification adjustment for life deferred acquisition costs, life policy
reserves and other, net, included in net income
(3
)
(2
)
(1
)
—

—

—

Effect on other comprehensive income
24

8

16

(10
)
(3
)
(7
)
Accumulated unrealized losses, net, on life deferred acquisition costs, life
policy reserves and other, end of period
$
(26
)
$
(9
)
$
(17
)
$
(39
)
$
(13
)
$
(26
)
Accumulated other comprehensive income, beginning of period
$
1,724

$
595

$
1,129

$
1,372

$
471

$
901

Change in unrealized gains, net, on investments available for sale
112

39

73

175

61

114

Change in pension obligations
5

2

3

3

1

2

Change in life deferred acquisition costs, life policy reserves and other
24

8

16

(10
)
(3
)
(7
)
Effect on other comprehensive income
141

49

92

168

59

109

Accumulated other comprehensive income, end of period
$
1,865

$
644

$
1,221

$
1,540

$
530

$
1,010


The reclassification adjustment for realized gains on investments available for sale are recorded in the total realized investment gains, net, line item of the condensed consolidated statements of income. The reclassification adjustment for amortization of actuarial loss and prior service cost, net, are recorded in the insurance losses and policyholder benefits, underwriting, acquisition and insurance expenses and the other operating expenses line items of the condensed consolidated statements of income.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 19


NOTE 8 – REINSURANCE
Reinsurance mitigates the risk of highly uncertain exposures and limits the maximum net loss that can arise from large risks or risks concentrated in areas of exposure. Management's decisions about the appropriate level of risk retention are affected by various factors, including changes in our underwriting practices, capacity to retain risks and reinsurance market conditions. Primary components of our property and casualty reinsurance program include a property per risk treaty, property excess treaty, casualty per occurrence treaty, casualty excess treaty, property catastrophe treaty and catastrophe bonds.

Our condensed consolidated statements of income include earned consolidated property casualty insurance premiums on assumed and ceded business:
(In millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
2013
2012
Direct earned premiums
$
958

$
868

$
1,893

$
1,707

Assumed earned premiums
3

3

5

6

Ceded earned premiums
(51
)
(45
)
(99
)
(89
)
Net earned premiums
$
910

$
826

$
1,799

$
1,624

Our condensed consolidated statements of income include incurred consolidated property casualty insurance loss and loss expenses on assumed and ceded business:
(In millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
2013
2012
Direct incurred loss and loss expenses
$
593

$
647

$
1,128

$
1,183

Assumed incurred loss and loss expenses
5

1

7

6

Ceded incurred loss and loss expenses
(15
)
(8
)
(28
)
(10
)
Net incurred loss and loss expenses
$
583

$
640

$
1,107

$
1,179

Our life insurance company purchases reinsurance for protection of a portion of the risk that is written. Primary components of our life reinsurance program include individual mortality coverage and aggregate catastrophe and accidental death coverage in excess of certain deductibles.

Our condensed consolidated statements of income include earned life insurance premiums on ceded business:
(In millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
2013
2012
Direct earned premiums
$
58

$
64

$
114

$
118

Assumed earned premiums
—

—

—

—

Ceded earned premiums
(14
)
(13
)
(28
)
(26
)
Net earned premiums
$
44

$
51

$
86

$
92

Our condensed consolidated statements of income include life insurance policyholders’ benefits incurred on ceded business:
(In millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
2013
2012
Direct policyholders' benefits incurred
$
62

$
57

$
126

$
110

Assumed policyholders' benefits incurred
—

—

—

—

Ceded policyholders' benefits incurred
(14
)
(10
)
(34
)
(20
)
Net policyholders' benefits incurred
$
48

$
47

$
92

$
90

The ceded benefits incurred can vary depending on the type of life insurance policy held and the year the policy was sold.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 20



NOTE 9 – INCOME TAXES
As of June 30, 2013 , and December 31, 2012 , we had no liability for unrecognized tax benefits. Details about our liability for unrecognized tax benefits are found in our 2012 Annual Report on Form 10-K, Item 8, Note 11, Income Taxes, Page 129.
The differences between the 35 percent statutory income tax rate and our effective income tax rate were as follows:
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
2013
2012
Tax at statutory rate
$
52

35.0
%
$
10

35.0
%
$
128

35.0
%
$
49

35.0
%
Increase (decrease) resulting from:








Tax-exempt income from municipal bonds
(9
)
(6.1
)
(8
)
(27.6
)
(16
)
(4.4
)
(17
)
(12.1
)
Dividend received exclusion
(6
)
(4.2
)
(6
)
(20.7
)
(12
)
(3.3
)
(11
)
(7.8
)
Other
1

1.0

1

3.0

1

0.4

2

1.2

Provision (benefit) for income taxes
$
38

25.7
%
$
(3
)
(10.3
)%
$
101

27.7
%
$
23

16.3
%
The change in our effective tax rate was primarily due to changes in pretax income from underwriting results and realized investment gains and losses, compared with unchanged levels of permanent book-tax differences.

NOTE 10 – NET INCOME PER COMMON SHARE
Basic earnings per share are computed based on the weighted average number of shares outstanding. Diluted earnings per share are computed based on the weighted average number of common and dilutive potential common shares outstanding using the treasury stock method.
The table shows calculations for basic and diluted earnings per share:

(Dollars in millions except share data in thousands)
Three months ended June 30,
Six months ended June 30,
2013
2012
2013
2012
Numerator:




Net income—basic and diluted
$
110

$
32

$
264

$
118

Denominator:




Weighted-average common shares outstanding
163,512

162,425

163,323

162,351

Effect of stock-based awards:




Stock options
1,239

419

1,098

375

Nonvested shares
691

670

730

602

Adjusted weighted-average shares
165,442

163,514

165,151

163,328

Earnings per share:




Basic
$
0.67

$
0.20

$
1.62

$
0.73

Diluted
0.66

0.20

1.60

0.72

Number of anti-dilutive stock-based awards
340

6,059

393

6,072


The current sources of dilution of our common shares are certain equity-based awards as discussed in our 2012 Annual Report on Form 10-K, Item 8, Note 17, Stock-Based Associate Compensation Plans, Page 135. The above table shows the number of anti-dilutive stock-based awards for the three and six months ended June 30, 2013 and 2012. We did not include these stock-based awards in the computation of net income per common share (diluted) because their exercise would have anti-dilutive effects.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 21


NOTE 11 – EMPLOYEE RETIREMENT BENEFITS
The following summarizes the components of net periodic costs for our qualified and supplemental pension plans:

(In millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
2013
2012
Service cost
$
3

$
3

$
6

$
6

Interest cost
3

4

6

7

Expected return on plan assets
(4
)
(4
)
(8
)
(8
)
Amortization of actuarial loss and prior service cost
3

1

5

3

Net periodic benefit cost
$
5

$
4

$
9

$
8


See our 2012 Annual Report on Form 10-K, Item 8, Note 13, Employee Retirement Benefits, Page 130, for information on our retirement benefits. We made matching contributions of $2 million and $3 million to our 401(k) and Top Hat savings plans during the second quarter of 2013 and 2012 and contributions of $5 million for the first six months of 2013 and 2012, respectively.

We contributed $15 million to our qualified pension plan during the first quarter of 2013. We do not anticipate further contributions to our qualified pension plan during the remainder of 2013.

NOTE 12 – COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of conducting business, the company and its subsidiaries are named as defendants in various legal proceedings. Most of these proceedings are claims litigation involving the company ' s insurance subsidiaries in which the company is either defending or providing indemnity for third-party claims brought against insureds or litigating first-party coverage claims. The company accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. We believe that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, is immaterial to our consolidated financial condition, results of operations and cash flows.
The company and its subsidiaries also are occasionally involved in other legal and regulatory proceedings, some of which assert claims for substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national class. Such proceedings have alleged, for example, breach of an alleged duty to search national data bases to ascertain unreported deaths of insureds under life insurance policies. The company ' s insurance subsidiaries also are occasionally parties to individual actions in which extra-contractual damages, punitive damages or penalties are sought, such as claims alleging bad faith handling of insurance claims or writing unauthorized coverage and claims alleging discrimination by former associates.
On a quarterly basis, we review these outstanding matters. Under current accounting guidance, we establish accruals when it is probable that a loss has been incurred and we can reasonably estimate its potential exposure. The company accounts for such probable and estimable losses, if any, through the establishment of legal expense reserves. Based on our quarterly review, we believe that our accruals for probable and estimable losses are reasonable and that the amounts accrued do not have a material effect on our consolidated financial condition or results of operations. However, if any one or more of these matters results in a judgment against us or settlement for an amount that is significantly greater than the amount accrued, the resulting liability could have a material effect on the company ' s consolidated results of operations or cash flows. Based on our most recent review, our estimate for any other matters for which the risk of loss is not probable, but more than remote is less than $2 million .

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 22




NOTE 13 – SEGMENT INFORMATION
We operate primarily in two industries, property casualty insurance and life insurance. We regularly review our reporting segments to make decisions about allocating resources and assessing performance:
•
Commercial lines property casualty insurance
•
Personal lines property casualty insurance
•
Excess and surplus lines property casualty insurance
•
Life insurance
•
Investments

We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company. See our 2012 Annual Report on Form 10-K, Item 8, Note 18, Segment Information, Page 137, for a description of revenue, income or loss before income taxes and identifiable assets for each of the five segments.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 23


Segment information is summarized in the following table:
(In millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
2013
2012
Revenues:




Commercial lines insurance




Commercial casualty
$
211

$
191

$
415

$
372

Commercial property
152

134

299

265

Commercial auto
117

106

231

207

Workers' compensation
87

85

175

166

Specialty packages
37

37

76

75

Surety and executive risk
30

27

59

54

Machinery and equipment
11

10

21

19

Commercial lines insurance premiums
645

590

1,276

1,158

Fee revenue
1

1

1

2

Total commercial lines insurance
646

591

1,277

1,160

Personal lines insurance




Personal auto
109

100

216

198

Homeowner
99

87

195

171

Other personal lines
29

27

57

54

Personal lines insurance premiums
237

214

468

423

Fee revenue
1

1

1

1

Total personal lines insurance
238

215

469

424

Excess and surplus lines insurance
28

22

55

43

Life insurance
44

51

86

92

Separate account investment management fees
1

—

2

—

Total life insurance
45

51

88

92

Investment operations
Investment income, net of expenses
131

132

259

263

Realized investment gains, net
14

6

55

19

Total investment revenue
145

138

314

282


Other
2

3

4

5

Total revenues
$
1,104

$
1,020

$
2,207

$
2,006

Income (loss) before income taxes:




Insurance underwriting results




Commercial lines insurance
$
34

$
(20
)
$
92

$
14

Personal lines insurance
(1
)
(55
)
19

(77
)
Excess and surplus lines insurance
1

(2
)
1

(5
)
Life insurance
3

2

10

(1
)
Investment operations
127

118

275

241

Other
(16
)
(14
)
(32
)
(31
)
Total
$
148

$
29

$
365

$
141

Identifiable assets:
June 30,
2013
December 31, 2012
Property casualty insurance
$
2,489

$
2,395

Life insurance
1,254

1,201

Investment operations
12,983

12,599

Other
308

353

Total
$
17,034

$
16,548


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 24



Item 2.    Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion highlights significant factors influencing the consolidated results of operations and financial position of Cincinnati Financial Corporation (CFC). It should be read in conjunction with the consolidated financial statements and related notes included in our 2012 Annual Report on Form 10-K. Unless otherwise noted, the industry data is prepared by A.M. Best Co., a leading insurance industry statistical, analytical and financial strength rating organization. Information from A.M. Best is presented on a statutory basis. When we provide our results on a comparable statutory basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP).
We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and dividends. Dollar amounts are rounded to millions; calculations of percent changes are based on dollar amounts rounded to the nearest million. Certain percentage changes are identified as not meaningful (nm).
SAFE HARBOR STATEMENT
This is our “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in our 2012 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 26.
Factors that could cause or contribute to such differences include, but are not limited to:
•
Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes
•
Increased frequency and/or severity of claims
•
Inadequate estimates or assumptions used for critical accounting estimates
•
Recession or other economic conditions resulting in lower demand for insurance products or increased payment delinquencies
•
Declines in overall stock market values negatively affecting the company’s equity portfolio and book value
•
Events resulting in capital market or credit market uncertainty, followed by prolonged periods of economic instability or recession, that lead to:
◦
Significant or prolonged decline in the value of a particular security or group of securities and impairment of the asset(s)
◦
Significant decline in investment income due to reduced or eliminated dividend payouts from a particular security or group of securities
◦
Significant rise in losses from surety and director and officer policies written for financial institutions or other insured entities
•
Prolonged low interest rate environment or other factors that limit the company’s ability to generate growth in investment income or interest rate fluctuations that result in declining values of fixed-maturity investments, including declines in accounts in which we hold bank-owned life insurance contract assets
•
Increased competition that could result in a significant reduction in the company’s premium volume
•
Delays or performance inadequacies from ongoing development and implementation of underwriting and pricing methods or technology projects and enhancements expected to increase our pricing accuracy, underwriting profit and competitiveness
•
Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could alter our competitive advantages
•
Inability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased, financial strength of reinsurers and the potential for nonpayment or delay in payment by reinsurers
•
Difficulties with technology or data security breaches, including cyber attacks, that could negatively affect our ability to conduct business and our relationships with agents, policyholders and others

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 25


•
Inability to defer policy acquisition costs for any business segment if pricing and loss trends would lead management to conclude that segment could not achieve sustainable profitability
•
Events or conditions that could weaken or harm the company’s relationships with its independent agencies and hamper opportunities to add new agencies, resulting in limitations on the company’s opportunities for growth, such as:
◦
Downgrades of the company’s financial strength ratings
◦
Concerns that doing business with the company is too difficult
◦
Perceptions that the company’s level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace
•
Actions of insurance departments, state attorneys general or other regulatory agencies, including a change to a federal system of regulation from a state-based system, that:
◦
Impose new obligations on us that increase our expenses or change the assumptions underlying our critical accounting estimates
◦
Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations
◦
Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business
◦
Add assessments for guaranty funds, other insurance related assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes
◦
Increase our provision for federal income taxes due to changes in tax law
◦
Increase our other expenses
◦
Limit our ability to set fair, adequate and reasonable rates
◦
Place us at a disadvantage in the marketplace
◦
Restrict our ability to execute our business model, including the way we compensate agents
•
Adverse outcomes from litigation or administrative proceedings
•
Events or actions, including unauthorized intentional circumvention of controls, that reduce the company’s future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002
•
Unforeseen departure of certain executive officers or other key employees due to retirement, health or other causes that could interrupt progress toward important strategic goals or diminish the effectiveness of certain longstanding relationships with insurance agents and others
•
Events, such as an epidemic, natural catastrophe or terrorism, that could hamper our ability to assemble our workforce at our headquarters location

Further, the company’s insurance businesses are subject to the effects of changing social, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock, such as measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 26




INTRODUCTION
CORPORATE FINANCIAL HIGHLIGHTS
Statements of Income and Comprehensive Income and Per Share Data
(Dollars in millions except share data in thousands)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Statement of income and comprehensive income data:





Earned premiums
$
954

$
877

9

$
1,885

$
1,716

10

Investment income, net of expenses (pretax)
131

132

(1
)
259

263

(2
)
Realized investment gains and losses, net (pretax)
14

6

133

55

19

189

Total revenues
1,104

1,020

8

2,207

2,006

10

Net income
110

32

244

264

118

124

Comprehensive income (loss)
(31
)
(5
)
(520
)
356

227

57

Per share data





Net income - diluted
$
0.66

$
0.20

230

$
1.60

$
0.72

122

Cash dividends declared
0.4075

0.4025

1

0.815

0.805

1

Weighted average shares outstanding
165,442

163,514

1

165,151

163,328

1


Revenues rose for the second quarter and the first six months of 2013 compared with the same periods of 2012, primarily due to growth in earned premiums. Premium and investment revenue trends are discussed further in the respective sections of Results of Operations.
Realized investment gains and losses are recognized on the sales of investments or as otherwise required by GAAP. We have substantial discretion in the timing of investment sales, and that timing generally is independent of the insurance underwriting process. GAAP also requires us to recognize in net income the gains or losses from certain changes in fair values of securities even though we continue to hold the securities.
Net income for the second quarter of 2013 compared with the second quarter of 2012 rose $78 million, primarily due to stronger property casualty underwriting income that rose $72 million after taxes. Lower catastrophe losses, mostly weather related, improved after-tax property casualty underwriting results by $47 million compared with the second quarter of 2012. After-tax investment income in our investment segment results for the second quarter of 2013 declined $1 million compared with the second quarter of 2012, while life insurance segment results on a pretax basis rose by $1 million. Second-quarter 2013 after-tax net realized investment gains and losses were $6 million higher than the same quarter a year ago.

For the six-month period ended June 30, 2013, net income increased $146 million compared with the same period of 2012, also primarily due to higher property casualty underwriting results that rose $117 million after taxes, including $98 million from lower catastrophe losses. After-tax investment income decreased by $3 million while after-tax net realized investment gains and losses were $23 million higher. Life insurance segment results on a pretax basis were $11 million higher.

Performance by segment is discussed below in Results of Operations. As discussed in our 2012 Annual Report on Form 10-K, Item 7, Factors Influencing Our Future Performance, Page 42, there are several reasons that our performance during 2013 may be below our long-term targets. In that annual report, as part of Results of Operations, we also discussed the full-year 2013 outlook for each reporting segment.
The board of directors is committed to rewarding shareholders directly through cash dividends and through share repurchase authorizations. Through 2012, the company had increased the indicated annual cash dividend rate for 52 consecutive years, a record we believe was matched by only nine other publicly traded companies. During the first six months of 2013, cash dividends declared by the company increased approximately 1 percent compared with the same period of 2012. Our board regularly evaluates relevant factors in decisions related to dividends and

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 27


share repurchases. Increasing the dividend in 2012 signaled management’s and the board’s confidence in our strong capital, liquidity and financial flexibility, as well as progress on our initiatives to improve earnings performance.

Balance Sheet Data and Performance Measures

(Dollars in millions except share data)
At June 30,
At December 31,
2013
2012
Balance sheet data:


Invested assets
$
12,933

$
12,534

Total assets
17,034

16,548

Short-term debt
104

104

Long-term debt
790

790

Shareholders' equity
5,699

5,453

Book value per share
34.83

33.48

Debt-to-total-capital ratio
13.6
%
14.1
%

Total assets at June 30, 2013, increased 3 percent compared with year-end 2012, primarily due to growth in invested assets that was driven by additional purchases of securities. Shareholders’ equity rose 5 percent, and book value per share was up 4 percent during the first six months of 2013. Our debt-to-total-capital ratio (capital is the sum of debt plus shareholders’ equity) decreased compared with year-end 2012. The value creation ratio, a non-GAAP measure defined below, improved for the first six months of 2013 compared with 2012, reflecting higher unrealized investment gains and net income. The $1.35 increase in book value per share during the first six months of 2013 contributed 4.0 percentage points to the value creation ratio, while dividends declared at $0.815 per share contributed 2.4 points. Value creation ratio trends in total and by major components, along with a reconciliation of the non-GAAP measure to comparable GAAP measures, are shown in the tables below.


Three months ended June 30,
Six months ended June 30,

2013
2012
2013
2012
Value creation ratio major components:




Net income before realized gains
1.8
%
0.5
%
4.2
%
2.1
%
Change in realized and unrealized gains,
fixed-maturity securities
(3.2
)
0.6

(3.6
)
1.3

Change in realized and unrealized gains,
equity securities
0.6

(1.1
)
5.6

1.2

Other
0.4

0.0

0.2

(0.4
)
Value creation ratio
(0.4
)%
0.0
%
6.4
%
4.2
%


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 28



(Dollars are per outstanding share)
Three months ended June 30,
Six months ended June 30,
2013
2012
2013
2012
Book value change per share:
End of period book value
$
34.83

$
31.66

$
34.83

$
31.66

Less beginning of period book value
35.41

32.07

33.48

31.03

Change in book value
$
(0.58
)
$
(0.41
)
$
1.35

$
0.63

Change in book value:




Net income before realized gains
$
0.62

$
0.17

$
1.40

$
0.65

Change in realized and unrealized gains,
fixed-maturity securities
(1.12
)
0.18

(1.21
)
0.39

Change in realized and unrealized gains,
equity securities
0.20

(0.36
)
1.86

0.38

Dividend declared to shareholders
(0.41
)
(0.40
)
(0.82
)
(0.81
)
Other
0.13

0.00

0.12

0.02

Total change in book value
$
(0.58
)
$
(0.41
)
$
1.35

$
0.63




(Dollars are per outstanding share)
Three months ended June 30,
Six months ended June 30,
2013
2012
2013
2012
Book value change per share:
Book value as originally reported December 31, 2011
$
31.16

Cumulative effect of a change in accounting for deferred policy acquisition costs, net of tax
(0.13
)
Book value as adjusted December 31, 2011
$
31.03


Value creation ratio:




End of period book value
$
34.83

$
31.66

$
34.83

$
31.66

Less beginning of period book value - as
originally reported
35.41

32.07

33.48

31.16

Change in book value
(0.58
)
(0.41
)
$
1.35

$
0.50

Dividend declared to shareholders
0.4075

0.4025

0.815

0.805

Total contribution to value creation ratio
$
(0.1725
)
$
(0.0075
)
$
2.165

$
1.305

Contribution to value creation ratio from
change in book value*
(1.6
)%
(1.3
)%
4.0
%
1.6
%
Contribution to value creation ratio from dividends
declared to shareholders**
1.2

1.3

2.4

2.6

Value creation ratio
(0.4
)%
0.0
%
6.4
%
4.2
%
*Change in book value divided by the beginning of period book value as originally reported
**Dividend declared to shareholders divided by beginning of period book value as originally reported

The cumulative effect of a change in accounting for deferred policy acquisition costs, net of tax, in the above book value reconciliation is the result of our adoption of Accounting Standards Update (ASU) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts . We retrospectively adopted this ASU on January 1, 2012. See our 2012 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 112, for information on our adopted accounting standards.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 29


PROGRESS TOWARD LONG-TERM VALUE CREATION
Operating through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on 2012 net written premium volume for approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies in 39 states as discussed in our 2012 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 3.

We maintain a long-term perspective that guides us in addressing immediate challenges or opportunities while focusing on the major decisions that best position our company for success through all market cycles. We believe that this forward-looking view has consistently benefited our policyholders, agents, shareholders and associates.

To measure our long-term progress in creating shareholder value, we have defined a value creation metric that we believe captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders. This measure, our value creation ratio or VCR, is made up of two primary components: (1) our rate of growth in book value per share plus (2) the ratio of dividends declared per share to beginning book value per share. As discussed in our 2012 Annual Report on Form 10-K, Item 7, Executive Summary, Page 38, for the period 2013 through 2017, an annual value creation ratio averaging 10 percent to 13 percent is our primary performance target. Management believes this non-GAAP measure is a meaningful indicator of our long-term progress in creating shareholder value and is a useful supplement to GAAP information.

Performance Drivers
When looking at our long-term objectives, we see three performance drivers:

•
Premium growth - We believe over any five-year period our agency relationships and initiatives can lead to a property casualty written premium growth rate that exceeds the industry average. For the first six months of 2013, our total property casualty net written premiums' year-over-year growth was 12 percent, comparing favorably with A.M. Best's February 2013 projection of approximately 5 percent full-year 2013 growth for the industry excluding its mortgage and financial guaranty lines of business. Our premium growth initiatives are discussed below in Highlights of Our Strategies and Supporting Initiatives.

•
Combined ratio - We believe our underwriting philosophy and initiatives can generate a GAAP combined ratio over any five-year period that is consistently within the range of 95 percent to 100 percent. For the first six months of 2013, our GAAP combined ratio was 93.9 percent and our statutory combined ratio was 91.8 percent, both including 5.6 percentage points of current accident year catastrophe losses offset by 5.6 percentage points of favorable loss reserve development on prior accident years. As of February 2013, A.M. Best forecast the industry's full-year 2013 statutory combined ratio at approximately 101 percent, including approximately 5 percentage points of catastrophe losses and a favorable impact of approximately 3 percentage points from prior accident year reserve releases. The industry's ratio again excludes its mortgage and financial guaranty lines of business.

•
Investment contribution - We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year return of the Standard & Poor's 500 Index. For the first six months of 2013, pretax investment income was $259 million, down 2 percent compared with the same period in 2012. We believe our investment portfolio mix provides an appropriate balance of income stability and growth with capital appreciation potential.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 30


Highlights of Our Strategy and Supporting Initiatives
Management has worked to identify a strategy that can lead to long-term success, with concurrence by the board of directors. Our strategy is intended to position us to compete successfully in the markets we have targeted while appropriately managing risk. Further description of our long-term, proven strategy can be found in our 2012 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 3. We believe successful implementation of initiatives that support our strategy, summarized below, will help us better serve our agent customers and reduce variability in our financial results while we also grow earnings and book value over the long term, successfully navigating challenging economic, market or industry pricing cycles.

•
Improve insurance profitability - Implementation of these initiatives is intended to enhance underwriting expertise and knowledge, thereby increasing our ability to manage our business while also gaining efficiency. Additional information and more focused action on underperforming product lines, plus expanding pricing capabilities through the use of technology and analytics, can lead to better profit margins. Improved internal processes with additional performance metrics can help us be more efficient and effective. These initiatives also support the ability of the independent agencies that represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage agency expenses.

•
Drive premium growth - Implementation of these initiatives is intended to further penetrate each market we serve through our independent agency network. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Diversified growth also may reduce variability of losses from weather-related catastrophes.

Below we discuss key initiatives supporting these strategies, along with an assessment of our progress.
Improve Insurance Profitability
The main initiatives to improve our insurance profitability include:

•
Enhance underwriting expertise and knowledge - We continue efforts to increase our use of information and to develop our skills for improved underwriting performance, such as expanding our pricing capabilities by using predictive analytics. Expanded capabilities include streamlining and optimizing data to improve accuracy, timeliness and ease of use. We also continue to develop additional business data and tools to support more accurate underwriting, including more granular pricing, by further developing our data warehouse used in our property casualty and life insurance operations.

Work continues on initiatives to more profitably underwrite property coverages, including more staff specialization, increased insured property inspections to provide enhanced underwriting knowledge and greater use of deductibles or other policy terms and conditions as policies renew. Progress on initiatives during the first six months of 2013 included conducting over 30,000 inspections or applying loss control activities on a significant number of commercial properties and homes across several states, allowing us to increase our emphasis on roof conditions or other policy underwriting attributes. As expected, the inspections are resulting in underwriting or pricing actions – in some cases minor and in some cases significant – for a substantial portion of the inspected properties. We are also increasing our use of higher minimum loss deductible amounts and per-building deductibles for commercial risks, along with more use of wind and hail deductibles in areas subject to severe convective storm activity. We are expanding use of actual cash value coverage for older roofs and cosmetic damage exclusions for certain roof types. We expect these actions, along with others such as the use of hail-mapping technology to identify possible roof damage from prior hailstorms, to improve underwriting profitability over time for our property-related lines of business.

Similar initiatives are underway to more profitably underwrite our commercial auto line of business. A multi-department, multi-disciplinary taskforce has been working to determine ways to improve profitability, similar to the approach we used to improve workers' compensation results. Initiatives in process during the first half of 2013 included continuing education for underwriters and field marketing representatives and more

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
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f ocus on factors to improve pricing precision. These factors include proper classification of insured commercial autos, information about their cost-new, and improvements in the collection and use of accurate commercial vehicle identification numbers. We also are carefully managing limits when we provide umbrella liability coverage over commercial auto liability coverage .
We continue to refine our pricing precision during 2013, including use in additional states of predictive modeling tools for small business policies written through our CinciPak TM product. Progress during the first six months of 2013 included implementing CinciPak in four additional states, bringing the total number of states where that product was available to 12 at midyear. We are also making progress with predictive modeling for dwelling fire policies and development of a by-peril rating plan for homeowners. We plan to introduce both in select states in 2014. By-peril rating will improve pricing precision by separately pricing for the risk of losses from distinct perils, such as wind versus fire.

•
Improve internal processes - Improved processes support our strategic goals, reducing internal costs and allowing us to focus more resources on providing agency services. Related efforts include additional streamlining of processes to issue qualified personal lines or small commercial lines business without intervention by an underwriter. Progress during the first six months of 2013 included expanding streamlined processing of small commercial property and general liability policies to additional states, and it is now available in 36 states. Audits of policies processed without an underwriter continue to indicate that those automated policies are being underwritten appropriately and issued as intended.

We measure the overall success of our strategy to improve property casualty insurance profitability primarily through our GAAP combined ratio, which we believe can be consistently within the range of 95 percent to 100 percent for any five-year period. We also compare our statutory combined ratio to the industry average to gauge our progress, as discussed in the Performance Drivers section above.

In addition, we expect these initiatives to contribute to our rank as the No. 1 or No. 2 carrier based on premium volume in agencies that have represented us for at least five years. In 2012, we again earned that rank in nearly 75 percent of the agencies that have represented Cincinnati Insurance for more than five years, based on 2012 premiums. We are working to increase the percentage of agencies where we achieve that rank.

Drive Premium Growth
Primary initiatives to drive premium growth include:

•
Expansion of our marketing and service capabilities - We continue to enhance our generalist approach to allow our appointed agencies to better compete in the marketplace by providing services an agent's clients want and need. Expansion initiatives include ongoing development of targeted marketing programs, adding field marketing representatives for additional agency support in selected areas and piloting additional services to select agencies to develop our new customer care center for small commercial business policies. Progress during the first six months of 2013 included launching two of the four additional target market programs we plan to offer by the end of the year. We also completed the initial implementation in selected markets of a small consumer advertising campaign to test this mode of support for our independent agents. We expanded our excess and surplus lines field underwriting presence by adding four field marketing representatives. In addition, we added two field marketing representatives to support agencies in new marketing territories for commercial lines operations.

•
New agency appointments - We continue to appoint new agencies to develop additional points of distribution, focusing on areas where our market share is less than 1 percent while also considering economic and catastrophe risk factors. In 2013, we initially targeted approximately 65 appointments of independent agencies and now intend to exceed that target by approximately 15 appointments. During the first six months of 2013, we appointed 63 new agencies that write in aggregate approximately $1.1 billion in property casualty premiums annually with various insurance carriers for an average of approximately $17 million per agency. As of June 30, 2013, a total of 1,437 agency relationships market our standard market insurance products from 1,804 reporting locations.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 32


We seek to build a close, long-term relationship with each agency we appoint. We carefully evaluate the marketing reach of each new appointment to ensure the territory can support both current and new agencies. Our 130 commercial lines field marketing territories are staffed by marketing representatives averaging 20 years of industry experience and 10 years as a Cincinnati Insurance field marketing representative. Teams of field associates for each territory work together, providing local expertise with support from headquarters associates. This agent-centered business model helps us better understand the accounts we underwrite and creates marketing advantages for our agents. Unique Cincinnati-style service supports our agents as they grow their business and attract more clients in their communities. As a result, we generally have earned a 10 percent share of an agency's business within 10 years of its appointment.

We measure the overall success of our strategy to drive premium growth primarily through changes in net written premiums, as discussed in the Performance Drivers section above. In addition to tracking our progress toward our year-end 2015 annual direct written premiums target of $5 billion, we believe we can grow faster than the industry average over any five-year period.
Financial Strength

An important part of our long-term strategy is financial strength, which is described in our 2012 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Financial Strength, Page 5. One aspect of our financial strength is prudent use of reinsurance to help manage financial performance variability due to catastrophe loss experience. A description of how we use reinsurance is included in our 2012 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, 2013 Reinsurance Programs, Page 95. Another aspect is our investment portfolios, which remain well-diversified as discussed in this quarterly report Item 3, Quantitative and Qualitative Disclosures about Market Risk. We continue to maintain strong parent-company liquidity and financial strength that increases our flexibility through all periods to maintain our cash dividend and to continue to invest in and expand our insurance operations. At June 30, 2013, we held $1.369 billion of our cash and invested assets at the parent company level, of which $1.196 billion, or 87.4 percent, was invested in common stocks, and $50 million, or 3.7 percent, was cash or cash equivalents. Our debt-to-total-capital ratio at 13.6 percent remains well below our target limit. Another important indicator of financial strength is our ratio of property casualty net written premiums to statutory surplus, which was 0.9‑to‑1 for the 12 months ended June 30, 2013, unchanged from year-end 2012.

Our financial strength ratings assigned by independent ratings firms also are important. In addition to rating our parent company's senior debt, four firms award insurer financial strength ratings to one or more of our insurance subsidiary companies based on their quantitative and qualitative analyses. These ratings primarily assess an insurer's ability to meet financial obligations to policyholders and do not necessarily address all of the matters that may be important to investors. Ratings may be subject to revision or withdrawal at any time by the rating agency, and each rating should be evaluated independently of any other rating.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
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As of July 24, 2013, our insurer financial strength ratings were:

Insurer Financial Strength Ratings
Rating
Agency

Standard Market Property
Casualty Insurance Subsidiary

Life Insurance
Subsidiary

Excess and Surplus
Insurance
Subsidiary

Date of Most Recent
Affirmation or Action



Rating
Tier



Rating
Tier



Rating
Tier

A.M. Best Co.

A+

Superior

2 of 16

A

Excellent

3 of 16

A

Excellent

3 of 16

Stable outlook (12/19/12)
Fitch Ratings

A+

Strong

5 of 21

A+

Strong

5 of 21

-

-

-

Stable outlook (5/01/13)
Moody's Investors  Service

A1

Good

5 of 21

-

-

-

-

-

-

Stable outlook (04/30/13)
Standard & Poor's  Ratings Services

A

Strong

6 of 21

A

Strong

6 of 21

-

-

-

Stable outlook (6/24/13)

All of our insurance subsidiaries continue to be highly rated.

On April 30, 2013, Moody's Investors Service affirmed our insurance financial strength ratings that it had assigned in September 2008, revising its outlook to stable from negative. Moody's reported that its rating is based on our entrenched regional franchise from our strong relationships with agents, our focus on small- and middle-market commercial lines risks and our good risk-adjusted capital position. Moody's said other strengths include consistent reserve strength with strong financial flexibility and substantial holding company liquidity. Moody's added that our strengths are tempered by factors such as exposure to Midwest weather-related catastrophes, potential investment volatility due to a sizeable position in common equities relative to peers and competition from well-capitalized nationwide commercial lines carriers.
On May 1, 2013, Fitch Ratings affirmed our ratings that it had assigned in September 2010, continuing its stable outlook. Fitch noted that ratings strengths include conservative capitalization, our sizeable holding company cash and marketable securities position and a moderate financial leverage ratio. Fitch noted our reserve adequacy and benefits from our implementation of underwriting and pricing actions. Fitch said its rating could be unfavorably affected by a combined ratio exceeding 105 percent on a sustained basis or by deterioration in current balance sheet strengths.

On June 24, 2013, Standard & Poor's Ratings Services affirmed our ratings that it had assigned in August 2011, continuing its stable outlook. S&P said its rating reflected our strong competitive position and extremely strong capital and earnings, and also noted our geographic diversity and diversification benefits from our life insurance business. S&P stated that our risk position is moderate despite potential earnings volatility stemming from exposure to weather-related catastrophe losses, and that its rating could be unfavorably affected if capital adequacy deteriorated for a prolonged period of time or if earnings weakened substantially.


RESULTS OF OPERATIONS
Consolidated results reflect the operating results of each of our five segments along with the parent company and other activities reported as “Other.” The five segments are:
•
Commercial lines property casualty insurance
•
Personal lines property casualty insurance
•
Excess and surplus lines property casualty insurance
•
Life insurance
•
Investments


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 34


We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company. See Item 1, Note 13, Segment Information, for discussion of the calculations of segment data. Results of operations for each of the five segments are discussed below.
CONSOLIDATED PROPERTY CASUALTY INSURANCE RESULTS OF OPERATIONS
Consolidated property casualty insurance results include premiums and expenses for our standard market insurance (commercial lines and personal lines segments) as well as our surplus lines operations.
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Earned premiums
$
910

$
826

10

$
1,799

$
1,624

11

Fee revenues
2

2

0

2

3

(33
)
Total revenues
912

828

10

1,801

1,627

11

Loss and loss expenses from:






Current accident year before catastrophe losses
591

573

3

1,107

1,117

(1
)
Current accident year catastrophe losses
84

152

(45
)
102

263

(61
)
Prior accident years before catastrophe losses
(84
)
(80
)
(5
)
(87
)
(174
)
50

Prior accident years catastrophe losses
(8
)
(5
)
(60
)
(15
)
(27
)
44

Loss and loss expenses
583

640

(9
)
1,107

1,179

(6
)
Underwriting expenses
295

265

11

582

516

13

Underwriting profit (loss)
$
34

$
(77
)
nm

$
112

$
(68
)
nm

Ratios as a percent of earned premiums:


Pt. Change



Pt. Change

Current accident year before catastrophe losses
64.9
%
69.5
%
(4.6
)
61.5
%
68.8
%
(7.3
)
Current accident year catastrophe losses
9.2

18.4

(9.2
)
5.6

16.2

(10.6
)
Prior accident years before catastrophe losses
(9.2
)
(9.8
)
0.6

(4.8
)
(10.8
)
6.0

Prior accident years catastrophe losses
(0.9
)
(0.6
)
(0.3
)
(0.8
)
(1.6
)
0.8

Loss and loss expenses
64.0

77.5

(13.5
)
61.5

72.6

(11.1
)
Underwriting expenses
32.4

32.0

0.4

32.4

31.8

0.6

Combined ratio
96.4
%
109.5
%
(13.1
)
93.9

104.4

(10.5
)
Combined ratio:
96.4
%
109.5
%
(13.1
)
93.9
%
104.4
%
(10.5
)
Contribution from catastrophe losses and prior years reserve development
(0.9
)
8.0

(8.9
)
0.0

3.8

(3.8
)
Combined ratio before catastrophe losses and prior years reserve development
97.3
%
101.5
%
(4.2
)
93.9
%
100.6
%
(6.7
)
Our consolidated property casualty insurance operations generated underwriting profits of $34 million and $112 million for the three and six months ended June 30, 2013, compared with underwriting losses of $77 million and $68 million for the three and six months ended June 30, 2012. The primary driver of the improved underwriting results was lower losses from natural catastrophes. Current accident year loss experience before catastrophes also improved, along with related ratios, reflecting higher pricing in addition to the effects of our initiatives to improve pricing precision and loss experience related to claims and loss control practices. Prior accident year loss experience before catastrophes during the second quarter of 2013 was slightly more favorable, compared with the second quarter of 2012, and the first six months of 2013 was less favorable than the same period in 2012. The less favorable six-month 2013 experience was primarily due to re-estimates of losses incurred but not reported (IBNR). Details of property casualty insurance results are discussed below, including our commercial lines, personal lines and excess and surplus lines segments.
We measure and analyze property casualty underwriting results primarily by the combined ratio and its component ratios. The GAAP-basis combined ratio is the percentage of incurred losses plus all expenses per each earned premium dollar – the lower the ratio, the better the performance. An underwriting profit results when the combined

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 35


ratio is below 100 percent. A combined ratio above 100 percent indicates that an insurance company’s losses and expenses exceeded premiums.

Our consolidated property casualty combined ratio for the second quarter improved 13.1 percentage points, and for the first six months of 2013 it improved 10.5 points, both compared with the same periods of 2012. In addition to catastrophe losses that were 9.5 and 9.8 percentage points lower, the loss and loss expenses ratios before catastrophe losses were 4.0 and 1.3 points lower, together accounting for most of the improvement.
The combined ratio can be affected significantly by natural catastrophe losses and other large losses as discussed in detail below. The combined ratio can also be affected by updated estimates of loss and loss expense reserves established for claims that occurred in prior periods, referred to as prior accident years. Net favorable development on prior accident year reserves, including reserves for catastrophe losses, lowered the combined ratio by 5.6 percentage points in the first six months of 2013, compared with 12.4 percentage points in the same period of 2012. Net favorable development is discussed in further detail in results of operations by property casualty insurance segment.
The ratio for current accident year loss and loss expenses before catastrophe losses also improved. The 61.5 percent ratio for the first six months of 2013 improved 7.3 percentage points compared with the 68.8 percent accident year 2012 ratio measured as of June 30, 2012, largely reflecting recent-year initiatives to improve pricing precision and loss experience related to claims and loss control practices, along with improving market conditions. Improving market conditions included overall higher pricing, somewhat offset by normal loss cost inflation. Higher new large losses incurred, shown on the table below, Consolidated Property Casualty Insurance Losses by Size, increased the 2013 ratio by 0.3 percentage points, partially offsetting overall improvement in the ratio for current accident year loss and loss expenses before catastrophe losses.
The underwriting expense ratio rose for the second quarter and first six months of 2013, compared with the same periods of 2012, primarily due to higher commissions.

Consolidated Property Casualty Insurance Premiums
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,

2013
2012
Change %
2013
2012
Change %
Agency renewal written premiums
$
879

$
798

10

$
1,724

$
1,560

11

Agency new business written premiums
139

131

6

274

239

15

Other written premiums
(34
)
(26
)
(31
)
(44
)
(53
)
17

Net written premiums
984

903

9

1,954

1,746

12

Unearned premium change
(74
)
(77
)
4

(155
)
(122
)
(27
)
Earned premiums
$
910

$
826

10

$
1,799

$
1,624

11

The trends in net written premiums and earned premiums summarized in the table above largely reflect the effects of our premium growth strategies and better pricing.
Consolidated property casualty net written premiums for the three and six months ended June 30, 2013, grew $81 million and $208 million compared with the same periods of 2012. Each of our property casualty segments grew during the second quarter and first six months of 2013. Our premium growth initiatives from prior years continue to favorably affect current year growth, particularly as newer agency relationships mature over time. We discuss current initiatives in the Highlights of Our Strategy and Supporting Initiatives section of this quarterly report. The main drivers of trends for 2013 are discussed by segment below in Results of Operations.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 36


Consolidated property casualty agency new business written premiums for the three and six months ended June 30, 2013, increased $8 million and $35 million compared with the same periods of 2012. We continued to experience new business growth related to initiatives for geographic expansion into new and underserved areas. New agency appointments during 2012 and 2013 produced an $18 million increase in standard lines new business for the first six months of 2013 compared with the same period in 2012. As we appoint new agencies that choose to move accounts to us, we report these accounts as new business. While this business is new to us, in many cases it is not new to the agent. We believe these seasoned accounts tend to be priced more accurately than business that may be less familiar to our agent upon obtaining it from a competing agent.
Other written premiums include premiums ceded to our reinsurers as part of our reinsurance program. Ceded premiums reduced net written premium growth by $7 million and $11 million for the three and six months ended June 30, 2013, compared with the same periods of 2012.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
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Catastrophe losses typically have a meaningful effect on property casualty results and can vary significantly from period to period. Losses from natural catastrophes contributed 8.3 and 4.8 percentage points to the combined ratio in the second quarter and first six months of 2013, compared with 17.8 and 14.6 percentage points in the same periods of 2012. Some of those losses were applicable to loss deductible provisions of collateralized reinsurance funded through catastrophe bonds. Aggregate losses for the first six months of 2013, for the 75 counties included in the severe convective storm portion of that catastrophe reinsurance coverage, were approximately $2 million in excess of the $5 million per-event deductible. If aggregate losses after deductibles exceed $125 million during 2013, we can recover the excess through funds that collateralize the catastrophe bonds. The following table shows catastrophe losses and loss expenses incurred, net of reinsurance, as well as the effect of loss development on prior period catastrophe events. We individually list declared catastrophe events for which our incurred losses reached or exceeded $5 million.

Catastrophe Losses Incurred

(In millions, net of reinsurance)
Three months ended June 30,
Six months ended June 30,
Comm.
Pers.
E&S

Comm.
Pers.
E&S

Dates
Event
Region
lines
lines
lines
Total
lines
lines
lines
Total
2013








Jan. 29-31
Lightning, wind
South, Northeast
$
—

$
—

$
—

$
—

$
3

$
2

$
—

$
5

Mar. 18 -19
Hail, wind
South
2

(2
)
—

—

4

7

—

11

Apr. 7-11
Hail, lightning, wind
West, Midwest
14

9

—

23

14

9

—

23

Apr. 16-19
Hail, lightning, wind
Midwest
5

7

—

12

5

7

—

12

May 18-20
Hail, lightning, wind
South, Midwest, Northeast
9

1

—

10

9

1

—

10

May 28-29
Hail, lightning, wind
South
6

3

—

9

6

3

—

9

Jun. 12-14
Hail, lightning, wind
South, Midwest
2

6

—

8

2

6

—

8

Jun. 24-26
Hail, lightning, wind
Midwest, Northeast
2

6

—

8

2

6

—

8

All other 2013 catastrophes
11

3

—

14

13

3

—

15

Development on 2012 and prior catastrophes
(6
)
(2
)
—

(8
)
(10
)
(5
)
—

(15
)
Calendar year incurred total
$
45

$
31

$
—

$
76

$
48

$
39

$
—

$
87

2012








Feb. 28-29
Hail, wind, tornado
Midwest
$
(2
)
$
—

$
—

$
(2
)
$
20

$
8

$
—

$
28

Mar. 2-3
Hail, wind, tornado
Midwest, South
1

—

—

1

29

45

1

75

Mar. 18-25
Hail, lightning, wind
Midwest, South
2

4

—

6

2

4

—

6

Apr. 28-29
Hail, lightning, wind
Midwest, South
54

22

—

76

54

22

—

76

May 2-6
Hail, lightning, wind
Midwest
5

1

—

6

5

1

—

6

Jun. 11-13
Hail, lightning, wind
West, South
6

—

—

6

6

—

—

6

Jun. 24-28
Fire
West
8

—

—

8

8

—

—

8

Jun. 28-30
Hail, lightning, wind
Midwest, Northeast, South
3

32

—

35

3

32

—

35

All other 2012 catastrophes
11

5

—

16

13

10

—

23

Development on 2011 and prior catastrophes
2

(7
)
—

(5
)
(11
)
(16
)
—

(27
)
Calendar year incurred total
$
90

$
57

$
—

$
147

$
129

$
106

$
1

$
236

The following table includes data for losses incurred of $250,000 or more per claim, net of reinsurance.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 38


Consolidated Property Casualty Insurance Losses by Size
(Dollars in millions, net of reinsurance)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
New losses greater than $4,000,000
$
13

$
4

225

$
47

$
15

213

New losses $1,000,000-$4,000,000
33

47

(30
)
68

78

(13
)
New losses $250,000-$1,000,000
48

58

(17
)
104

102

2

Case reserve development above $250,000
75

55

36

123

122

1

Total large losses incurred
169

164

3

342

317

8

Other losses excluding catastrophe losses
270

241

12

522

447

17

Catastrophe losses
74

146

(49
)
84

233

(64
)
Total losses incurred
$
513

$
551

(7
)
$
948

$
997

(5
)
Ratios as a percent of earned premiums:
Pt. Change
Pt. Change
New losses greater than $4,000,000
1.4
%
0.5
%
0.9

2.6
%
0.9
%
1.7

New losses $1,000,000-$4,000,000
3.7

5.7

(2.0
)
3.8

4.8

(1.0
)
New losses $250,000-$1,000,000
5.3

7.1

(1.8
)
5.8

6.2

(0.4
)
Case reserve development above $250,000
8.2

6.7

1.5

6.8

7.5

(0.7
)
Total large loss ratio
18.6

20.0

(1.4
)
19.0

19.4

(0.4
)
Other losses excluding catastrophe losses
29.5

29.1

0.4

29.0

27.5

1.5

Catastrophe losses
8.2

17.6

(9.4
)
4.7

14.5

(9.8
)
Total loss ratio
56.3
%
66.7
%
(10.4
)
52.7
%
61.4
%
(8.7
)

We believe the inherent variability of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the variability in addition to general inflationary trends in loss costs. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The second-quarter 2013 property casualty total large losses incurred of $169 million, net of reinsurance, were slightly lower than the $171 million quarterly average during 2012 and were higher than the $164 million for the second quarter of 2012. The ratio for these large losses and case reserve increases was 1.4 percentage points lower compared with last year’s second quarter, with new losses down 2.9 points and case reserve development up 1.5 points. Second-quarter large losses added to the ratio for total large losses incurred for the first six months of 2013, which also included a first-quarter 2013 ratio that was 0.4 points higher than the first quarter of 2012. We believe results for the three-month and six-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $250,000. Losses by size are discussed in further detail in results of operations by property casualty insurance segment.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 39



COMMERCIAL LINES INSURANCE RESULTS OF OPERATIONS
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,

2013
2012
Change %
2013
2012
Change %
Earned premiums
$
645

$
590

9

$
1,276

$
1,158

10

Fee revenues
1

1

0

1

2

(50
)
Total revenues
646

591

9

1,277

1,160

10

Loss and loss expenses from:






Current accident year before catastrophe losses
414

396

5

784

782

0

Current accident year catastrophe losses
51

89

(43
)
58

141

(59
)
Prior accident years before catastrophe losses
(60
)
(73
)
18

(68
)
(150
)
55

Prior accident years catastrophe losses
(6
)
1

nm

(10
)
(12
)
17

Loss and loss expenses
399

413

(3
)
764

761

0

Underwriting expenses
213

198

8

421

385

9

Underwriting profit (loss)
$
34

$
(20
)
nm

$
92

$
14

557

Ratios as a percent of earned premiums:
Pt. Change
Pt. Change
Current accident year before catastrophe losses
64.2
%
67.2
%
(3.0
)
61.4
%
67.5
%
(6.1
)
Current accident year catastrophe losses
7.9

15.0

(7.1
)
4.6

12.2

(7.6
)
Prior accident years before catastrophe losses
(9.4
)
(12.3
)
2.9

(5.3
)
(13.0
)
7.7

Prior accident years catastrophe losses
(0.8
)
0.2

(1.0
)
(0.8
)
(1.0
)
0.2

Loss and loss expenses
61.9
%
70.1
%
(8.2
)
59.9
%
65.7
%
(5.8
)
Underwriting expenses
33.0

33.4

(0.4
)
33.0

33.2

(0.2
)
Combined ratio
94.9
%
103.5
%
(8.6
)
92.9
%
98.9
%
(6.0
)
Combined ratio:
94.9
%
103.5
%
(8.6
)
92.9
%
98.9
%
(6.0
)
Contribution from catastrophe losses and prior
years reserve development
(2.3
)
2.9

(5.2
)
(1.5
)
(1.8
)
0.3

Combined ratio before catastrophe losses and
prior years reserve development
97.2
%
100.6
%
(3.4
)
94.4
%
100.7
%
(6.3
)

Overview
Performance highlights for the commercial lines segment include:
•
Premiums – Commercial lines earned premiums and net written premiums rose during the second quarter and first six months of 2013 primarily due to higher renewal premiums that continued to reflect improved pricing. Higher new business written premiums also contributed to premium growth, reflecting better pricing as well as our premium growth initiatives. The premiums table below analyzes the primary components of earned premiums. We continue to use predictive analytics tools to improve pricing precision while also leveraging our local relationships with agents through the efforts of our teams that work closely with them. We seek to maintain appropriate pricing discipline for both new and renewal business as our agents and underwriters assess account quality to make careful decisions on a case-by-case basis whether to write or renew a policy.

Agency renewal written premiums rose 9 percent and 10 percent for the second quarter and first half of 2013, reflecting higher pricing and improving economic conditions. We measure average changes in commercial lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies. During the second quarter of 2013, our standard commercial lines policies averaged estimated price increases in a mid-single-digit range, essentially in line with average increases in the first quarter. Our average commercial lines pricing change includes the flat pricing effect of certain coverages within package policies written for a three-year term that were in force but did not expire during the period being measured. Therefore, the average commercial lines pricing change we report reflects a blend of

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 40


three‑year policies that did not expire and other policies that did expire during the measurement period. For only those commercial lines policies that did expire and were subsequently renewed during the second quarter of 2013, we estimate that the average price increase was again near the upper end of the mid-single-digit range, with smaller commercial property policies again experiencing average renewal price increases at a low-double-digit rate.

Renewal premiums for our commercial casualty and workers’ compensation lines include the result of policy audits that adjust initial premium amounts based on differences between estimated and actual sales or payroll related to a specific policy. Net written premiums from audits during the second quarter and first six months of 2013 netted a positive $11 million and $21 million, respectively. Audits contributed $2 million to the $52 million net increase in net written premiums for the second quarter of 2013 and $7 million to the $154 million net increase in net written premiums for the first six months of 2013, both compared with the same periods a year ago. The $118 million increase in earned premiums during the first six months of 2013, compared with 2012, included a decrease from audit premiums of less than $1 million.
New business written premiums for commercial lines increased 10 percent and 19 percent during the second quarter and first six months of 2013, compared with the same periods last year. In 24 of the 39 states where we offer standard market commercial lines policies, new business written premiums grew at a double-digit rate or higher for the first half of 2013 compared with the same period of 2012.
Other written premiums – which primarily include premiums ceded to our reinsurers as part of our reinsurance program – included ceded commercial lines premiums for the second quarter of 2013 that totaled $2 million more than the second quarter of 2012. For the first six months of 2013, ceded premiums totaled $3 million more than the same period of 2012. Other written premiums also included a less favorable adjustment for the second quarter and a more favorable adjustment for the first six months of 2013, compared with the same periods last year, for estimated direct written premiums of policies in effect but not yet processed. The adjustments had an immaterial effect on earned premiums.
Commercial Lines Insurance Premiums
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Agency renewal written premiums
$
602

$
552

9

$
1,233

$
1,123

10

Agency new business written premiums
100

91

10

197

166

19

Other written premiums
(24
)
(17
)
(41
)
(24
)
(37
)
35

Net written premiums
678

626

8

1,406

1,252

12

Unearned premium change
(33
)
(36
)
8

(130
)
(94
)
(38
)
Earned premiums
$
645

$
590

9

$
1,276

$
1,158

10

•
Combined ratio – The commercial lines combined ratio improved for the three and six months ended June 30, 2013, compared with the same periods of 2012, primarily due to weather-related natural catastrophe losses that were 8.1 and 7.4 percentage points lower.

Catastrophe losses accounted for 7.1 and 3.8 percentage points of the combined ratio for the three and six months ended June 30, 2013, compared with 15.2 and 11.2 percentage points for the same periods last year. The 10-year annual average catastrophe loss impact through 2012 for the commercial lines segment is 4.3 percentage points, and the five-year annual average is 5.9 percentage points.
The ratio for current accident year loss and loss expenses before catastrophe losses improved. The 61.4 percent ratio for the first six months of 2013 improved 6.1 percentage points compared with the 67.5 percent accident year 2012 ratio measured as of June 30, 2012, reflecting both our profit-improvement initiatives and improving market conditions. Higher new large losses incurred, shown in the table below, increased the 2013 ratio 2.0 percentage points more than in 2012 and partially offset other effects that improved the ratio. We believe the net improvement is largely due to initiatives to improve pricing precision and loss experience related to claims and loss control practices, in addition to higher prices that were somewhat offset by normal loss cost inflation or inherent variability of large losses.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 41



The net effect of reserve development on prior accident years during the second quarter and first six months of 2013 was favorable for commercial lines overall by $66 million and $78 million compared with $72 million and $162 million for the same periods in 2012. For the six months ended June 30, 2013, favorable reserve development on prior accident years in the commercial casualty line of business represented 71 percent of the commercial lines favorable development. Workers' compensation accounted for 29 percent of the favorable development, with the remaining commercial lines of business netting to less than 1 percent. The favorable reserve development recognized during the first six months of 2013 for commercial lines included approximately 42 percent for accident year 2012 and approximately 27 percent for accident year 2011, and was primarily due to lower than anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2012 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 43.
The commercial lines underwriting expense ratio decreased for the second quarter and first half of 2013, compared with the same periods of 2012, primarily due to higher earned premiums.
Underwriting results and related measures for the combined ratio are summarized in the first table of Commercial Lines Insurance Results of Operations. The tables and discussion below provide additional details for certain primary drivers of underwriting results.
Commercial Lines Insurance Losses by Size
(Dollars in millions, net of reinsurance)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
New losses greater than $4,000,000
$
13

$
4

225

$
47

$
15

213

New losses $1,000,000-$4,000,000
29

33

(12
)
59

56

5

New losses $250,000-$1,000,000
33

36

(8
)
74

68

9

Case reserve development above $250,000
71

51

39

113

115

(2
)
Total large losses incurred
146

124

18

293

254

15

Other losses excluding catastrophe losses
164

138

19

314

243

29

Catastrophe losses
44

89

(51
)
46

127

(64
)
Total losses incurred
$
354

$
351

1

$
653

$
624

5

Ratios as a percent of earned premiums:
Pt. Change
Pt. Change
New losses greater than $4,000,000
1.9
%
0.7
%
1.2

3.7
%
1.3
%
2.4

New losses $1,000,000-$4,000,000
4.5

5.5

(1.0
)
4.6

4.9

(0.3
)
New losses $250,000-$1,000,000
5.2

6.2

(1.0
)
5.8

5.9

(0.1
)
Case reserve development above $250,000
11.1

8.7

2.4

8.9

9.9

(1.0
)
Total large loss ratio
22.7

21.1

1.6

23.0

22.0

1.0

Other losses excluding catastrophe losses
25.3

23.4

1.9

24.6

21.0

3.6

Catastrophe losses
6.9

15.1

(8.2
)
3.6

11.0

(7.4
)
Total loss ratio
54.9
%
59.6
%
(4.7
)
51.2
%
54.0
%
(2.8
)

We continue to monitor new losses and case reserve increases greater than $250,000 for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The second-quarter 2013 commercial lines total large losses incurred of $146 million, net of reinsurance, were somewhat higher than the $141 million quarterly average during 2012. They were also higher than the $124 million total large losses incurred for the second quarter of 2012, primarily due to higher 2013 commercial fire losses. The ratio for these large losses and case reserve increases was 1.6 percentage points higher compared with last year’s second quarter as the increase in total large losses incurred offset higher earned premiums. Second-quarter large losses added to the ratio for total large losses incurred for the first six months of 2013, which also included a higher number of claims and higher incurred losses for commercial fires during the first quarter. We believe results for the three-month period largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $250,000.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 42



Commercial Lines of Business Analysis
Approximately 95 percent of our commercial lines premiums relate to accounts with coverages from more than one of our business lines. As a result, we believe that our commercial lines business is best measured and evaluated on a segment basis. However, we provide line of business data to summarize premium and loss trends separately for each line. The ratios shown in the table below are components of loss and loss expenses as a percentage of earned premiums.
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Commercial casualty:






Written premiums
$
222

$
202

10

$
459

$
404

14

Earned premiums
211

191

10

415

372

12

Current accident year before catastrophe losses
55.7
%
67.2
%

58.2
%
68.7
%

Current accident year catastrophe losses
—

—


—

—


Prior accident years before catastrophe losses
(15.1
)
(29.2
)

(13.3
)
(28.0
)

Prior accident years catastrophe losses
—

—


—

—


Total loss and loss expenses ratio
40.6
%
38.0
%

44.9
%
40.7
%

Commercial property:






Written premiums
$
164

$
146

12

$
330

$
287

15

Earned premiums
152

134

13

299

265

13

Current accident year before catastrophe losses
52.9
%
55.3
%

50.9
%
56.2
%

Current accident year catastrophe losses
28.4

56.7


15.8

44.3


Prior accident years before catastrophe losses
(6.0
)
(3.4
)

(2.0
)
(4.0
)

Prior accident years catastrophe losses
(3.2
)
1.3


(2.6
)
(2.2
)

Total loss and loss expenses ratio
72.1
%
109.9
%

62.1
%
94.3
%

Commercial auto:






Written premiums
$
127

$
115

10

$
262

$
229

14

Earned premiums
117

106

10

231

207

12

Current accident year before catastrophe losses
76.3
%
71.8
%

68.1
%
72.8
%

Current accident year catastrophe losses
1.5

3.2


1.0

2.4


Prior accident years before catastrophe losses
(3.2
)
(1.8
)

(0.7
)
(6.8
)

Prior accident years catastrophe losses
(0.3
)
(0.3
)

(0.2
)
(0.4
)

Total loss and loss expenses ratio
74.3
%
72.9
%

68.2
%
68.0
%

Workers' compensation:






Written premiums
$
85

$
86

(1
)
$
198

$
179

11

Earned premiums
87

85

2

175

166

5

Current accident year before catastrophe losses
84.8
%
80.8
%

78.3
%
81.7
%

Current accident year catastrophe losses
—

—


—

—


Prior accident years before catastrophe losses
(17.8
)
(14.3
)

(12.9
)
(16.6
)

Prior accident years catastrophe losses
—

—


—

—


Total loss and loss expenses ratio
67.0
%
66.5
%

65.4
%
65.1
%

Specialty packages:






Written premiums
$
36

$
38

(5
)
$
76

$
78

(3
)
Earned premiums
37

37

—

76

75

1

Current accident year before catastrophe losses
80.0
%
72.8
%

76.7
%
69.6
%

Current accident year catastrophe losses
16.1

23.9


11.2

24.4


Prior accident years before catastrophe losses
(3.3
)
(3.0
)

(2.8
)
(8.5
)

Prior accident years catastrophe losses
(0.6
)
(0.2
)

(2.0
)
(6.5
)

Total loss and loss expenses ratio
92.2
%
93.5
%

83.1
%
79.0
%


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 43


(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Surety and executive risk:






Written premiums
$
33

$
29

14

$
59

$
56

5

Earned premiums
30

27

11

59

54

9

Current accident year before catastrophe losses
60.1
%
72.1
%

52.4
%
60.9
%

Current accident year catastrophe losses
—

—


—

—


Prior accident years before catastrophe losses
4.8

10.3


32.4

22.3


Prior accident years catastrophe losses
—

—


—

—


Total loss and loss expenses ratio
64.9
%
82.4
%

84.8
%
83.2
%

Machinery and equipment:






Written premiums
$
11

$
10

10

$
22

$
19

16

Earned premiums
11

10

10

21

19

11

Current accident year before catastrophe losses
45.8
%
23.8
%

30.5
%
29.8
%

Current accident year catastrophe losses
—

—


—

—


Prior accident years before catastrophe losses
(4.9
)
(2.5
)

1.5

0.4


Prior accident years catastrophe losses
—

—


—

—


Total loss and loss expenses ratio
40.9
%
21.3
%

32.0
%
30.2
%


As discussed above, the loss and loss expenses ratio component of the combined ratio is an important measure of underwriting profit and performance. Catastrophe losses are volatile and can distort short-term profitability trends, particularly for certain lines of business. Development of loss and loss expense reserves on prior accident years can also distort trends in measures of profitability for recently written business. To illustrate these effects, we separate their impact on the ratios shown in the table above. For the three and six months ended June 30, 2013, the commercial lines of business with the most significant profitability challenge were surety and executive risk and specialty packages. Our first-half 2013 surety and executive risk results included unfavorable development on prior accident year reserves for director and officer liability related to financial institutions. As discussed in our 2012 Annual Report on Form 10-K, Item 7, Commercial Lines Insurance Results of Operations, Page 66, we have taken steps to actively manage the potentially high risk of writing director and officer liability. On 10-K Page 65, we noted that specialty package results were expected to improve over time due to efforts to improve pricing precision in addition to various initiatives related to the property coverage portion of this line of business. Those underwriting actions, and the introduction of CinciPak – a new program designed to replace many of our specialty products, are partly responsible for a 29 percent reduction in specialty packages new business written premiums for the first six months of 2013, compared with a 9 percent increase for the same period of 2012.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 44


PERSONAL LINES INSURANCE RESULTS OF OPERATIONS
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Earned premiums
$
237

$
214

11

$
468

$
423

11

Fee revenues
1

1

0

1

1

0

Total revenues
238

215

11

469

424

11

Loss and loss expenses from:






Current accident year before catastrophe losses
159

160

(1
)
285

302

(6
)
Current accident year catastrophe losses
33

63

(48
)
44

121

(64
)
Prior accident years before catastrophe losses
(24
)
(7
)
(243
)
(17
)
(24
)
29

Prior accident years catastrophe losses
(2
)
(6
)
67

(5
)
(15
)
67

Loss and loss expenses
166

210

(21
)
307

384

(20
)
Underwriting expenses
73

60

22

143

117

22

Underwriting profit (loss)
$
(1
)
$
(55
)
98

$
19

$
(77
)
nm

Ratios as a percent of earned premiums:
Pt. Change
Pt. Change
Current accident year before catastrophe losses
66.8
%
75.2
%
(8.4
)
60.9
%
71.6
%
(10.7
)
Current accident year catastrophe losses
13.7

29.4

(15.7
)
9.3

28.8

(19.5
)
Prior accident years before catastrophe losses
(9.9
)
(3.9
)
(6.0
)
(3.5
)
(5.8
)
2.3

Prior accident years catastrophe losses
(1.1
)
(2.8
)
1.7

(1.2
)
(3.8
)
2.6

Loss and loss expenses
69.5

97.9

(28.4
)
65.5

90.8

(25.3
)
Underwriting expenses
30.9

28.2

2.7

30.6

27.8

2.8

Combined ratio
100.4
%
126.1
%
(25.7
)
96.1
%
118.6
%
(22.5
)
Combined ratio:
100.4
%
126.1
%
(25.7
)
96.1
%
118.6
%
(22.5
)
Contribution from catastrophe losses and prior
years reserve development
2.7

22.7

(20.0
)
4.6

19.2

(14.6
)
Combined ratio before catastrophe losses and
prior years reserve development
97.7
%
103.4
%
(5.7
)
91.5
%
99.4
%
(7.9
)

Overview
Performance highlights for the personal lines segment include:
•
Premiums – Personal lines earned premiums and net written premiums for the second quarter and first half of 2013 continued to grow primarily due to higher renewal premiums. The increase reflected improved pricing and a steady, high level of policy retention. Higher new business written premiums also contributed to premium growth, reflecting better pricing as well as our premium growth initiatives. The premiums table below analyzes the primary components of earned premiums.

Agency renewal written premiums increased 11 percent for both the second quarter and first six months of 2013 because of rate increases in recent years, ongoing high levels of policy retention, premium growth initiatives and a higher level of insured exposures. Rate increases that we began implementing in October 2012 for the homeowner line of business have averaged approximately 9 percent, with some individual policy rate increases lower or higher based on risk characteristics of the insured exposure.
In the first half of the year, we began implementing our 2013 rate changes for our personal auto line of business in the majority of the 30 states where we market personal auto policies. The average rate change was an increase in the low-single-digit range, with some individual policies experiencing lower or higher rates based on enhanced pricing precision enabled by predictive models. Rate changes for personal auto beginning in late 2010 and 2011 also represented an average rate increase in the low-single-digit range.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 45


Personal lines new business written premiums continued to grow during the first six months of 2013, up 9 percent compared with the first half of 2012, with growth slowing during the second quarter as expected due to underwriting actions such as expanded use of actual cash value loss settlement for older roofs. We continue to believe we are successful in attracting more of our agents’ preferred business when it is priced more accurately based on insured exposure.
Other written premiums – which primarily include premiums ceded to our reinsurers as part of our reinsurance program – decreased net written premium growth by $2 million and $4 million more for the three and six months ended June 30, 2013, than for the same periods of 2012.

We continue to implement strategies discussed in our 2012 Annual Report on Form 10-K, Item 1, Strategic Initiatives, Page 10, to enhance our responsiveness to marketplace changes and to help achieve our long-term objectives for personal lines growth and profitability. These strategies include several initiatives to more profitably underwrite property coverages.
Personal Lines Insurance Premiums
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Agency renewal written premiums
$
251

$
227

11

$
446

$
402

11

Agency new business written premiums
30

29

3

58

53

9

Other written premiums
(8
)
(6
)
(33
)
(16
)
(12
)
(33
)
Net written premiums
273

250

9

488

443

10

Unearned premium change
(36
)
(36
)
0

(20
)
(20
)
0

Earned premiums
$
237

$
214

11

$
468

$
423

11

•
Combined ratio – The personal lines combined ratio improved for the three and six months ended June 30, 2013, compared with the same periods of 2012, primarily due to weather-related catastrophe losses that were 14.0 and 16.9 percentage points lower.

Catastrophe losses accounted for 12.6 and 8.1 percentage points of the combined ratio for the three and six months ended June 30, 2013, compared with 26.6 and 25.0 percentage points for the same periods last year. The 10-year annual average catastrophe loss ratio through 2012 for the personal lines segment was 11.4 percentage points, and the five-year annual average is 15.6 percentage points.
The ratio for current accident year loss and loss expenses before catastrophe losses for the six months ended June 30, 2013, also improved compared with the same 2012 period. The 60.9 percent ratio for the first six months of 2013 improved 10.7 percentage points compared with the 71.6 percent accident year 2012 ratio measured as of June 30, 2012. This improvement largely reflected higher rates in addition to recent-year initiatives to improve pricing precision and risk selection. Lower new large losses incurred, shown in the table below, contributed 4.8 percentage points to the 2013 ratio improvement.
In addition to the rate increases discussed above, we continue to refine our pricing to better match premiums to the risk of loss on individual policies. The results of improved pricing per risk and broad-based rate increases are expected to help position the combined ratio at a profitable level over the long term. In addition, greater geographic diversification is expected over time to reduce the volatility of homeowner loss ratios attributable to weather-related catastrophe losses.
Personal lines reserve development on prior accident years continued to emerge favorably during the second quarter and first six months of 2013. Favorable reserve development was $17 million lower for the first six months of 2013 compared with the same period of 2012, with catastrophe loss development contributing $10 million of the decrease. Approximately half of the $22 million of favorable reserve development on prior accident years recognized during the first six months of 2013 occurred in the homeowner line of business and roughly one-quarter occurred in the other personal line of business, reflecting lower than anticipated loss emergence on known claims. Approximately three-quarters of the personal lines favorable reserve development recognized during the first six months of 2013 was for accident year 2012 and approximately one-quarter was

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 46


for accident year 2011, with all other accident years netting to less than 5 percent. Reserve estimates are inherently uncertain as described in our 2012 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Reserves, Page 43.
The underwriting expense ratio rose for the second quarter and first six months of 2013 compared with the same periods of 2012, primarily due to higher commissions.
Personal Lines Insurance Losses by Size
(Dollars in millions, net of reinsurance)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
New losses greater than $4,000,000
$
—

$
—

nm

$
—

$
—

nm

New losses $1,000,000-$4,000,000
2

13

(85
)
6

18

(67
)
New losses $250,000-$1,000,000
9

18

(50
)
21

26

(19
)
Case reserve development above $250,000
4

3

33

10

5

100

Total large losses incurred
15

34

(56
)
37

49

(24
)
Other losses excluding catastrophe losses
100

96

4

194

192

1

Catastrophe losses
29

56

(48
)
37

105

(65
)
Total losses incurred
$
144

$
186

(23
)
$
268

$
346

(23
)
Ratios as a percent of earned premiums:
Pt. Change
Pt. Change
New losses greater than $4,000,000
0.0
%
0.0
%
0.0

0.0
%
0.0
%
0.0

New losses $1,000,000-$4,000,000
0.9

6.4

(5.5
)
1.2

4.4

(3.2
)
New losses $250,000-$1,000,000
3.8

8.4

(4.6
)
4.6

6.2

(1.6
)
Case reserve development above $250,000
1.6

1.2

0.4

2.0

1.1

0.9

Total large losses incurred
6.3

16.0

(9.7
)
7.8

11.7

(3.9
)
Other losses excluding catastrophe losses
41.9

45.0

(3.1
)
41.5

45.3

(3.8
)
Catastrophe losses
12.4

26.2

(13.8
)
7.9

24.8

(16.9
)
Total loss ratio
60.6
%
87.2
%
(26.6
)
57.2
%
81.8
%
(24.6
)

We continue to monitor new losses and case reserve increases greater than $250,000 for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the second quarter of 2013, the personal lines total ratio for these losses and case reserve increases, net of reinsurance, was 9.7 percentage points lower compared with last year’s second quarter, reflecting a lower number of homeowner fire claims and incurred losses. Second-quarter large losses added to the ratio for total large losses incurred for the first six months of 2013, which also included a higher number of claims and incurred losses for our personal auto line of business during the first quarter. We believe results for the three-month period largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $250,000.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 47


Personal Lines of Business Analysis
We prefer to write personal lines coverages on an account basis to include both auto and homeowner coverages as well as coverages from the other personal business line. As a result, we believe that our personal lines business is best measured and evaluated on a segment basis. However, we provide the line of business data to summarize premium and loss trends separately for each line. The ratios shown in the table below are components of loss and loss expenses as a percentage of earned premiums.
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Personal auto:




Written premiums
$
125

$
115

9
$
225

$
206

9
Earned premiums
109

100

9
216

198

9
Current accident year before catastrophe losses
85.4
%
78.0
%
76.3
%
75.8
%
Current accident year catastrophe losses
1.4

9.7

1.4

7.4

Prior accident years before catastrophe losses
(10.2
)
(4.7
)
(1.2
)
(6.4
)
Prior accident years catastrophe losses
(0.4
)
(0.7
)
(0.4
)
(0.8
)
Total loss and loss expenses ratio
76.2
%
82.3
%
76.1
%
76.0
%
Homeowner:




Written premiums
$
116

$
103

13
$
205

$
180

14
Earned premiums
99

87

14
195

171

14
Current accident year before catastrophe losses
50.5
%
74.0
%
45.6
%
68.6
%
Current accident year catastrophe losses
30.1

59.2

19.9

59.8

Prior accident years before catastrophe losses
(7.4
)
(6.0
)
(4.1
)
(4.5
)
Prior accident years catastrophe losses
(2.0
)
(5.7
)
(2.2
)
(7.7
)
Total loss and loss expenses ratio
71.2
%
121.5
%
59.2
%
116.2
%
Other personal:




Written premiums
$
32

$
32

—
$
58

$
57

2
Earned premiums
29

27

7
57

54

6
Current accident year before catastrophe losses
52.5
%
68.6
%
54.5
%
65.9
%
Current accident year catastrophe losses
4.3

6.0

2.9

8.8

Prior accident years before catastrophe losses
(17.8
)
6.2

(9.5
)
(7.8
)
Prior accident years catastrophe losses
(0.9
)
(1.2
)
(1.1
)
(2.1
)
Total loss and loss expenses ratio
38.1
%
79.6
%
46.8
%
64.8
%
As discussed above, the loss and loss expenses ratio component of the combined ratio is an important measure of underwriting profit and performance. Catastrophe losses are volatile and can distort short-term profitability trends, particularly for certain lines of business. Development of loss and loss expense reserves on prior accident years can also distort trends in measures of profitability for recently written business. To illustrate these effects, we separate their impact on the ratios shown in the table above. For the three and six months ended June 30, 2013, the personal line of business with the most significant profitability challenge was personal auto, in part due to large losses as discussed above. As discussed in Personal Lines Insurance Results of Operations, Overview, we continue actions to improve pricing per risk and overall rates, which are expected to improve future profitability. The higher personal auto ratios for 2013 were driven by higher estimates for losses incurred but not reported, as the ratio for case incurred losses improved, compared with the same periods of 2012.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 48


EXCESS AND SURPLUS LINES INSURANCE RESULTS OF OPERATIONS
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Earned premiums
$
28

$
22

27

$
55

$
43

28

Loss and loss expenses from:






Current accident year before catastrophe losses
18

17

6

38

33

15

Current accident year catastrophe losses
—

—

nm

—

1

(100
)
Prior accident years before catastrophe losses
—

—

nm

(2
)
—

nm

Prior accident years catastrophe losses
—

—

nm

—

—

nm

Loss and loss expenses
18

17

6

36

34

6

Underwriting expenses
9

7

29

18

14

29

Underwriting profit (loss)
$
1

$
(2
)
nm

$
1

$
(5
)
nm

Ratios as a percent of earned premiums:
Pt. Change
Pt. Change
Current accident year before catastrophe losses
65.7

74.6

(8.9
)
69.6
%
76.4
%
(6.8
)
Current accident year catastrophe losses
0.9

3.2

(2.3
)
0.6

2.8

(2.2
)
Prior accident years before catastrophe losses
(0.7
)
0.7

(1.4
)
(4.7
)
0.2

(4.9
)
Prior accident years catastrophe losses
1.0

0.3

0.7

0.6

0.7

(0.1
)
Loss and loss expenses
66.9

78.8

(11.9
)
66.1

80.1

(14.0
)
Underwriting expenses
31.8

31.9

(0.1
)
32.3

32.0

0.3

Combined ratio
98.7
%
110.7
%
(12.0
)
98.4
%
112.1
%
(13.7
)
Combined ratio:
98.7
%
110.7
%
(12.0
)
98.4

112.1
%
(13.7
)
Contribution from catastrophe losses and prior years reserve development
1.2

4.2

(3.0
)
(3.5
)
3.7

(7.2
)
Combined ratio before catastrophe losses and prior years reserve development
97.5
%
106.5
%
(9.0
)
101.9
%
108.4
%
(6.5
)
Overview
Performance highlights for the excess and surplus lines segment include:
•
Premiums – Excess and surplus lines earned premiums and net written premiums continued to grow during the second quarter and first six months of 2013. Growth in renewal written premiums contributed most of the increase.

Renewal written premiums rose 37 percent and 29 percent for the second quarter and first six months of 2013, compared with the same periods of 2012, reflecting the opportunity to renew many accounts for the first time as well as higher renewal pricing. Renewal pricing increases estimated for our excess and surplus lines policies on average continued in a low-double-digit range. We measure average changes in excess and surplus lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies.
New business written premiums declined for the second quarter and first six months of 2013, compared with the same periods of 2012, primarily because we wrote fewer new large-premium accounts. Some of what we report as new business came from accounts that were not new to our agents. We believe our agents’ seasoned accounts tend to be priced more accurately than business that may be less familiar to them.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 49


Excess and Surplus Lines Insurance Premiums
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Agency renewal written premiums
$
26

$
19

37

$
45

$
35

29

Agency new business written premiums
9

11

(18
)
19

20

(5
)
Other written premiums
(2
)
(3
)
33

(4
)
(4
)
0

Net written premiums
33

27

22

60

51

18

Unearned premium change
(5
)
(5
)
0

(5
)
(8
)
38

Earned premiums
$
28

$
22

27

$
55

$
43

28

•
Combined ratio – The excess and surplus lines combined ratio improved for the second quarter and first six months of 2013 by 12.0 and 13.7 percentage points compared with the same periods of 2012, primarily due to lower current accident year loss and loss expenses before catastrophe losses, which reflected higher pricing and typical variability from new losses incurred of $250,000 or more.

The 69.6 percent ratio for current accident year loss and loss expenses before catastrophe losses for the first six months of 2013 improved 6.8 percentage points compared with the 76.4 percent accident year 2012 ratio measured as of June 30, 2012. This decrease reflects higher pricing and new losses incurred of $250,000 or more that improved by 3.2 points for the first six months of 2013, compared with 2012, as shown in the Excess and Surplus Lines Insurance Losses by Size table below.
Catastrophe losses accounted for 1.9 and 1.2 percentage points of the combined ratio for the three and six months ended June 30, 2013, compared with 3.5 percentage points for both of the same periods of 2012.
Excess and surplus lines net favorable reserve development on prior accident years as a ratio to earned premiums was not material for the second quarter and was 4.1 percentage points for the first six months of 2013, compared with 1.0 and 0.9 percentage points of unfavorable reserve development for the same periods of 2012. Reserve estimates are inherently uncertain as described in our 2012 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Reserves, Page 43.
The underwriting expense ratio for the second quarter and first six months of 2013 was essentially flat compared with the same periods of 2012.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 50


Excess and Surplus Lines Insurance Losses by Size
(Dollars in millions, net of reinsurance)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
New losses greater than $4,000,000
$
—

$
—

nm

$
—

$
—

nm

New losses $1,000,000-$4,000,000
2

1

100

3

3

—

New losses $250,000-$1,000,000
6

4

50

9

8

13

Case reserve development above $250,000
—

1

(100
)
—

3

(100
)
Total large losses incurred
8

6

33

12

14

(14
)
Other losses excluding catastrophe losses
6

7

(14
)
14

12

17

Catastrophe losses
1

1

—

1

2

(50
)
Total losses incurred
$
15

$
14

7

$
27

$
28

(4
)
Ratios as a percent of earned premiums:
Pt. Change
Pt. Change
New losses greater than $4,000,000
0.0
%
0.0
%
0.0

0.0
%
0.0
%
0.0

New losses $1,000,000-$4,000,000
7.8

4.4

3.4

6.1

7.7

(1.6
)
New losses $250,000-$1,000,000
19.7

16.5

3.2

15.5

17.1

(1.6
)
Case reserve development above $250,000
1.0

6.4

(5.4
)
1.0

6.0

(5.0
)
Total large losses incurred
28.5

27.3

1.2

22.6

30.8

(8.2
)
Other losses excluding catastrophe losses
21.7

29.1

(7.4
)
26.0

28.4

(2.4
)
Catastrophe losses
1.9

3.4

(1.5
)
1.1

3.5

(2.4
)
Total loss ratio
52.1
%
59.8
%
(7.7
)
49.7
%
62.7
%
(13.0
)

We continue to monitor new losses and case reserve increases greater than $250,000 for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the second quarter of 2013, the excess and surplus line total ratio for these losses and case reserve increases, net of reinsurance, was 1.2 percentage points higher compared with last year’s second quarter, largely due to a higher frequency of large losses. The 22.6 percent ratio for total large losses incurred for the first six months of 2013 was lower than the full-year 2012 ratio of 25.5 percent. Second-quarter large losses added to the ratio for total large losses incurred for the first six months of 2013, which included a lower frequency of large losses during the first quarter. We believe results for the three-month period ended June 30, 2013, largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $250,000.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 51




LIFE INSURANCE RESULTS OF OPERATIONS
(In millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Earned premiums
$
44

$
51

(14
)
$
86

$
92

(7
)
Separate account investment management fees
1

—

nm

2

—

nm

Total revenues
45

51

(12
)
88

92

(4
)
Contract holders' benefits incurred
48

47

2

92

90

2

Investment interest credited to contract holders
(18
)
(20
)
10

(39
)
(41
)
5

Operating expenses incurred
12

22

(45
)
25

44

(43
)
Total benefits and expenses
42

49

(14
)
78

93

(16
)
Life insurance segment profit (loss)
$
3

$
2

50

$
10

$
(1
)
nm

Overview
Performance highlights for the life insurance segment include:
•
Revenues – Revenues decreased for the three and six months ended June 30, 2013, primarily due to lower earned premiums from universal life insurance products. The unlocking of interest rate assumptions for our universal life contracts during the second quarter slowed the amortization of unearned front-end loads, reducing universal life earned premiums. For the comparable period in 2012, unlocking increased the amortization of unearned front-end loads, increasing universal life earned premiums.

Net in-force life insurance policy face amounts increased to $46.637 billion at June 30, 2013, from $45.126 billion at year-end 2012.
Fixed annuity deposits received for the three and six months ended June 30, 2013, were $10 million and $21 million compared with $13 million and $30 million for the same periods of 2012. Fixed annuity deposits have a minimal impact to earned premiums because deposits received are initially recorded as liabilities. Profit is earned over time by way of interest rate spreads. We do not write variable or equity annuities and are currently de-emphasizing fixed annuity sales due to the low interest rate environment.
Life Insurance Premiums
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,

2013
2012
Change %
2013
2012
Change %
Term life insurance
$
31

$
30

3

$
60

$
57

5

Universal life insurance
4

13

(69
)
9

20

(55
)
Other life insurance, annuity and disability income products
9

8

13

17

15

13

Net earned premiums
$
44

$
51

(14
)
$
86

$
92

(7
)
•
Profitability – Our life insurance segment typically reports a small profit or loss on a GAAP basis because profits from investment income spreads are included in our investment segment results. We include only investment income credited to contract holders (including interest assumed in life insurance policy reserve calculations) in our life insurance segment results. A gain of $10 million for our life insurance segment in the first six months of 2013 compared with a loss of $1 million for the same period of 2012, primarily due to favorable mortality experience and decreased operating expenses.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 52


Although we report most of our life insurance company investment income in our investments segment results, we recognize that assets under management, capital appreciation and investment income are integral to evaluation of the success of the life insurance segment because of the long duration of life products. On a basis that includes investment income and realized gains or losses from life insurance related invested assets, the life insurance company reported a net profit of $14 million and $28 million in the three and six months ended June 30, 2013, compared with a net profit of $11 million and $18 million for the same periods of 2012. The life insurance company portfolio had after-tax realized investment gains of $2 million for both the three and six months ended June 30, 2013, compared with after-tax realized investment gains of less than $1 million and $1 million for the same periods of 2012.
Life segment benefits and expenses consist principally of contract holders’ (policyholders’) benefits incurred related to traditional life and interest-sensitive products and operating expenses incurred, net of deferred acquisition costs. Total benefits increased modestly in the first six months of 2013. Through the first six months, mortality results were better than projected and were well within our pricing expectations.

Operating expenses for the first six months of 2013 decreased compared with the same period a year ago. Unlocking of interest rate assumptions, discussed in the revenues section above, also increased the amount of expenses deferred to future periods, reducing operating expenses for the second quarter and first six months of 2013. For the comparable periods in 2012, unlocking decreased the amount of expenses deferred to future periods, increasing operating expenses. During the first six months of 2012 , operating expenses were further increased by an actuarial adjustment decreasing reinsurance-related expenses deferred to future periods .

The earnings effect of interest rate unlocking, for the respective first six-month periods of 2013 and 2012, is minimal because the change in earned premiums is essentially offset by the change in operating expenses.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 53




INVESTMENT RESULTS OF OPERATIONS
Overview
The investments segment contributes investment income and realized gains and losses to results of operations. Investments traditionally are our primary source of pretax and after-tax profits.
Investment Income
Pretax investment income decreased 1 percent and 2 percent for the three and six months ended June 30, 2013, compared with the same periods of 2012. Interest income declined due to the continuing effects of the low interest rate environment. Higher dividend income for the three-month and six-month periods reflected rising dividend rates and net purchases of securities. Six-month 2013 dividend growth was partially offset by certain holdings that accelerated payments from the first quarter into the fourth quarter of 2012 in response to anticipated tax law changes. Average yields in the table below are based on the average invested asset and cash amounts indicated in the table, using fixed-maturity securities valued at amortized cost and all other securities at fair value. In our 2012 Annual Report on Form 10-K, Item 1, Investments Segment, Page 20, and Item 7, Investments Outlook, Page 83, we discussed our portfolio strategies. We discuss risks related to our investment income and our fixed-maturity and equity investment portfolios in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk.
We continue to position our portfolio with consideration to both the challenges presented by the current low interest rate environment and the risks presented by potential future inflation. As bonds in our generally laddered portfolio mature or are called over the near term, we will be challenged to replace their current yield. Approximately 18.4 percent of our fixed-maturity investments mature during July 2013 through December 2015 with an average pretax yield-to-amortized cost of 4.6 percent, including 3.3 percent of the portfolio maturing during the last six months of 2013 and yielding 4.5 percent. While our bond portfolio more than covers our insurance reserve liabilities, we believe our diversified common stock portfolio of mainly blue chip, dividend-paying companies represents one of our best investment opportunities for the long term.
Investment Results
(In millions)
Three months ended June 30,
Six months ended June 30,

2013
2012
Change %
2013
2012
Change %
Total investment income, net of expenses, pretax
$
131

$
132

(1
)
$
259

$
263

(2
)
Investment interest credited to contract holders
(18
)
(20
)
10

(39
)
(41
)
5

Realized investment gains and losses summary:






Realized investment gains and losses
14

19

(26
)
56

44

27

Change in fair value of securities with embedded derivatives
—

1

(100
)
1

5

(80
)
Other-than-temporary impairment charges
—

(14
)
100

(2
)
(30
)
93

Total realized investment gains and losses
14

6

133

55

19

189

Investment operations profit
$
127

$
118

8

$
275

$
241

14


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 54


(In millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Investment income:






Interest
$
103

$
106

(3
)
$
205

$
212

(3
)
Dividends
30

27

11

57

53

8

Other
—

1

(100
)
1

2

(50
)
Investment expenses
(2
)
(2
)
—

(4
)
(4
)
0

Total investment income, net of expenses, pretax
131

132

(1
)
259

263

(2
)
Income taxes
(32
)
(32
)
—

(63
)
(64
)
2

Total net investment income
$
99

$
100

(1
)
$
196

$
199

(2
)
Effective tax rate
24.1
%
24.5
%

24.2
%
24.4
%

Average invested assets plus cash and cash equivalents
$
12,661

$
11,777


$
12,451

$
11,633


Average yield pretax
4.14
%
4.48
%

4.16
%
4.52
%

Average yield after-tax
3.13
%
3.40
%

3.15
%
3.42
%

Effective fixed-maturity tax rate
27.1
%
27.0
%

27.0
%
26.9
%

Average fixed-maturity at amortized cost
$
8,376

$
8,232


$
8,325

$
8,168


Average fixed-maturity yield pretax
4.92
%
5.15
%

4.92
%
5.19
%

Average fixed-maturity yield after-tax
3.59
%
3.76
%

3.60
%
3.79
%


Net Realized Gains and Losses
We reported net realized investment gains of $14 million and $55 million in the three and six months ended June 30, 2013, as net gains from investment sales and bond calls were partially offset by other-than-temporary impairment (OTTI) charges. OTTI charges during the three-month and six-month periods ended June 30, 2013, were none and $2 million, respectively. We reported net realized investment gains of $6 million and $19 million for the three and six months ended June 30, 2012, as net gains from investment sales and bond calls offset OTTI charges.
Investment gains or losses are recognized upon the sales of investments or as otherwise required under GAAP. The timing of realized gains or losses from sales can have a material effect on results in any quarter. However, such gains or losses usually have little, if any, effect on total shareholders’ equity because most equity and fixed-maturity investments are carried at fair value, with the unrealized gain or loss included as a component of accumulated other comprehensive income. Accounting requirements for OTTI charges for the fixed-maturity portfolio are disclosed in our 2012 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 115.
The total net realized investment gains for the first six months of 2013 included:
•
$49 million in net gains from the sale of various common and preferred stock holdings.
•
$4 million in net gains from fixed-maturity security sales and calls.
•
$4 million in other net realized gains, including $1 million in gains from changes in fair value of securities with embedded derivatives.
•
$2 million in OTTI charges to write down five fixed-maturity securities.
Of the 2,839 securities in the portfolio, no securities were trading below 70 percent of amortized cost at June 30, 2013. Our asset impairment committee regularly monitors the portfolio, including a quarterly review of the entire portfolio for potential OTTI charges. We believe that if the improving liquidity in the markets were to reverse or the economic recovery were to significantly stall, we could experience declines in portfolio values and possibly additional OTTI charges.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 55


The table below provides additional detail for OTTI charges.
(In millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
2013
2012
Fixed maturities




Utilities
$
—

$
—

$
1

$
—

Municipal
—

—

1

—

Total fixed maturities
—

—

2

—

Common equities




Energy
$
—

$
—

$
—

$
1

Industrial
—

2

—

8

Consumer discretionary
—

5

—

14

Material
—

7

—

7

Total common equities
—

14

—

30

Total
$
—

$
14

$
2

$
30


OTHER
We report as Other the noninvestment operations of the parent company and a noninsurer subsidiary, CFC Investment Company. Losses before income taxes for Other were largely driven by interest expense from debt of the parent company.
(In millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Interest and fees on loans and leases
$
1

$
2

(50
)
$
3

$
4

(25
)
Other revenues
1

1

0

1

1

0

Total revenues
2

3

(33
)
4

5

(20
)
Interest expense
14

13

8

27

27

0

Operating expenses
4

4

0

9

9

0

Total expenses
18

17

6

36

36

0

Other loss
$
(16
)
$
(14
)
(14
)
$
(32
)
$
(31
)
(3
)
TAXES
We had $38 million and $101 million of income tax expense for the three and six months ended June 30, 2013, compared with an income tax benefit of $3 million for second quarter of 2012 and income tax expense of $23 million for the first six months of 2012. The effective tax rate for the three and six months ended June 30, 2013, was 25.7 percent and 27.7 percent compared with negative 10.3 percent and positive 16.3 percent for the same periods last year. The change in our effective tax rates was primarily due to changes in pretax income from underwriting results and realized investment gains and losses, with unchanged levels of permanent book-tax differences.
Historically, we have pursued a strategy of investing some portion of cash flow in tax-advantaged fixed-maturity and equity securities to minimize our overall tax liability and maximize after-tax earnings. See Tax-Exempt Fixed Maturities for further discussion on municipal bond purchases in our fixed-maturity investment portfolio. For our insurance subsidiaries, approximately 85 percent of income from tax-advantaged fixed-maturity investments is exempt from federal tax. Our noninsurance companies own an immaterial amount of tax-advantaged, fixed-maturity investments. For our insurance subsidiaries, the dividend received deduction, after the dividend proration of the 1986 Tax Reform Act, exempts approximately 60 percent of dividends from qualified equities from federal tax. For our noninsurance companies, the dividend received deduction exempts 70 percent of dividends from qualified

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 56


equities. Details about our effective tax rate are found in our 2012 Annual Report on Form 10-K, Item 8, Note 11, Income Taxes, Page 129, and in this quarterly report Item 1, Note 9 – Income Taxes.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2013, shareholders’ equity was $5.699 billion compared with $5.453 billion at December 31, 2012. Total debt was $894 million at June 30, 2013, and at December 31, 2012. At June 30, 2013, cash and cash equivalents totaled $382 million compared with $487 million at December 31, 2012.
SOURCES OF LIQUIDITY
Subsidiary Dividends
Our lead insurance subsidiary declared dividends of $175 million to the parent company during the first six months of 2013, $25 million more than the same period of 2012. Another subsidiary, CFC Investment Company, declared and paid dividends of $25 million to the parent company during the first six months of 2013, in the first quarter, compared with none for full-year 2012. For the full-year 2012, subsidiary dividends declared totaled $300 million. State of Ohio regulatory requirements restrict the dividends our insurance subsidiary can pay. During 2013, total dividends that our insurance subsidiary could pay to our parent company without regulatory approval are approximately $391 million.
Investing Activities
Investment income is a source of liquidity for both the parent company and its insurance subsidiary. We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth.
Parent company obligations can be funded with income on investments held at the parent company level or through sales of securities in that portfolio, although we prefer to follow an investment philosophy seeking to compound cash flows over the long term. These sources of capital can help minimize subsidiary dividends to the parent company, protecting insurance subsidiary capital.

We own no European sovereign debt. Our European-based securities held at year-end 2012 are summarized by country in our 2012 Annual Report on Form 10-K, Item 7A, Qualitative and Quantitative Disclosures About Market Risk, Page 101. See our 2012 Annual Report on Form 10-K, Item 1, Investment Segment, Page 20, for a discussion of our historic investment strategy, portfolio allocation and quality.
Insurance Underwriting
Our property casualty and life insurance underwriting operations provide liquidity because we generally receive premiums before paying losses under the policies purchased with those premiums. After satisfying our cash requirements, we use excess cash flows for investment, increasing future investment income.
Historically, cash receipts from property casualty and life insurance premiums, along with investment income, have been more than sufficient to pay claims, operating expenses and dividends to the parent company.
The table below shows a summary of operating cash flow for property casualty insurance (direct method):
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2013
2012
Change %
2013
2012
Change %
Premiums collected
$
973

$
869

12

$
1,933

$
1,720

12

Loss and loss expenses paid
(521
)
(572
)
9

(1,034
)
(1,079
)
4

Commissions and other underwriting expenses paid
(264
)
(246
)
(7
)
(634
)
(546
)
(16
)
Cash flow from underwriting
188

51

269

265

95

179

Investment income received
88

88

0

175

178

(2
)
Cash flow from operations
$
276

$
139

99

$
440

$
273

61


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 57


Collected premiums for property casualty insurance rose $213 million during the first six months of 2013, compared with the same period in 2012. Loss and loss expenses paid decreased $45 million, primarily due to lower catastrophe losses paid. Commissions and other underwriting expenses paid rose $88 million, primarily due to higher commissions paid to agencies, reflecting the increase in collected premiums.
We discuss our future obligations for claims payments and for underwriting expenses in our 2012 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 86, and Other Commitments, also on Page 86.
Capital Resources
At June 30, 2013, our debt-to-total-capital ratio was 13.6 percent, with $790 million in long-term debt and $104 million in borrowing on our revolving short-term line of credit. There was no change in the amount of the $104 million short-term debt during the first six months of 2013. Based on our present capital requirements, we do not anticipate a material increase in debt levels during the remainder of 2013. As a result, we expect changes in our debt-to-total-capital ratio to continue to be largely a function of the contribution of unrealized investment gains or losses to shareholders’ equity.
We provide details of our three long-term notes in our 2012 Annual Report on Form 10-K, Item 8, Note 8, Long-Term Debt and Capital Lease Obligations, Page 127. None of the notes are encumbered by rating triggers.
Four independent ratings firms award insurer financial strength ratings to our property casualty insurance companies and three firms rate our life insurance company. Those firms made no changes to our debt ratings during the first six months of 2013. Our debt ratings are discussed in our 2012 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, Additional Sources of Liquidity, Page 84.
Off-Balance Sheet Arrangements
We do not use any special-purpose financing vehicles or have any undisclosed off-balance sheet arrangements (as that term is defined in applicable SEC rules) that are reasonably likely to have a current or future material effect on the company’s financial condition, results of operation, liquidity, capital expenditures or capital resources. Similarly, the company holds no fair-value contracts for which a lack of marketplace quotations would necessitate the use of fair-value techniques.
USES OF LIQUIDITY
Our parent company and insurance subsidiary have contractual obligations and other commitments. In addition, one of our primary uses of cash is to enhance shareholder return.
Contractual Obligations
In our 2012 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 86, we estimated our future contractual obligations as of December 31, 2012. There have been no material changes to our estimates of future contractual obligations since our 2012 Annual Report on Form 10-K.

Other Commitments
In addition to our contractual obligations, we have other property casualty operational commitments.
•
Commissions – Commissions paid were $395 million in the first six months of 2013. Commission payments generally track with written premiums, except for annual profit-sharing commissions typically paid during the first quarter of the year.
•
Other underwriting expenses – Many of our underwriting expenses are not contractual obligations, but reflect the ongoing expenses of our business. Noncommission underwriting expenses paid were $239 million in the first six months of 2013.
•
In addition to contractual obligations for hardware and software, we anticipate capitalizing approximately $4 million in spending for key technology initiatives in 2013. Capitalized development costs related to key technology initiatives were $2 million in the first six months of 2013. These activities are conducted at our discretion, and we have no material contractual obligations for activities planned as part of these projects.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 58



We contributed $15 million to our qualified pension plan during the first six months of 2013. We do not anticipate further contributions to our qualified pension plan during the remainder of 2013.
Investing Activities
After fulfilling operating requirements, we invest cash flows from underwriting, investment and other corporate activities in fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We discuss our investment strategy and certain portfolio attributes in Item 3, Quantitative and Qualitative Disclosures about Market Risk.
Uses of Capital
Uses of cash to enhance shareholder return include dividends to shareholders. In February and April 2013, the board of directors declared a regular quarterly cash dividend of 40.75 cents per share for an indicated annual rate of $1.63 per share. During the first six months of 2013, we used $130 million to pay cash dividends to shareholders.
PROPERTY CASUALTY INSURANCE RESERVES
For the business lines in the commercial and personal lines insurance segments, and in total for the excess and surplus lines segment, the following table details gross reserves among case, IBNR and loss expense reserves, net of salvage and subrogation reserves. Reserving practices are discussed in our 2012 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves, Page 88.
Total gross reserves at June 30, 2013, increased $50 million compared with December 31, 2012. Case reserves for losses increased $17 million while IBNR reserves increased by $54 million and total loss expense reserves decreased by $21 million.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 59


Property and Casualty Gross Reserves
(In millions)
Loss reserves
Loss
Total
Case
IBNR
expense
gross
Percent
At June 30, 2013
reserves
reserves
reserves
reserves
of total
Commercial lines:





Commercial casualty
$
820

$
361

$
488

$
1,669

39.5
%
Commercial property
199

28

36

263

6.2

Commercial auto
254

44

66

364

8.6

Workers' compensation
412

492

91

995

23.6

Specialty packages
112

4

26

142

3.4

Surety and executive risk
135

11

74

220

5.2

Machinery and equipment
0

2

2

4

0.1

Subtotal
1,932

942

783

3,657

86.6

Personal lines:





Personal auto
155

(4
)
56

207

4.9

Homeowner
84

13

24

121

2.9

Other personal
42

40

5

87

2.1

Subtotal
281

49

85

415

9.9

Excess and surplus lines
74

40

33

147

3.5

Total
$
2,287

$
1,031

$
901

$
4,219

100.0
%
At December 31, 2012





Commercial lines:





Commercial casualty
$
816

$
348

$
503

$
1,667

40.0
%
Commercial property
197

22

38

257

6.2

Commercial auto
252

35

66

353

8.5

Workers' compensation
433

473

97

1,003

24.1

Specialty packages
129

3

27

159

3.8

Surety and executive risk
121

6

74

201

4.8

Machinery and equipment
1

2

2

5

0.1

Subtotal
1,949

889

807

3,645

87.5

Personal lines:





Personal auto
140

(10
)
53

183

4.4

Homeowner
81

21

27

129

3.1

Other personal
39

42

5

86

2.1

Subtotal
260

53

85

398

9.6

Excess and surplus lines
61

35

30

126

2.9

Total
$
2,270

$
977

$
922

$
4,169

100.0
%
LIFE POLICY AND INVESTMENT CONTRACT RESERVES
Gross life policy and investment contract reserves were $2.345 billion at June 30, 2013, compared with $2.295 billion at year-end 2012, reflecting continued growth in life insurance policies in force. We discuss our life insurance reserving practices in our 2012 Annual Report on Form 10-K, Item 7, Life Insurance Policyholder Obligations and Reserves, Page 94.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 60


OTHER MATTERS
SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are discussed in our 2012 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 112, and updated in this quarterly report Item 1, Note 1, Accounting Policies.
In conjunction with those discussions, in the Management’s Discussion and Analysis in the 2012 Annual Report on Form 10-K, management reviewed the estimates and assumptions used to develop reported amounts related to the most significant policies. Management discussed the development and selection of those accounting estimates with the audit committee of the board of directors.
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
Our greatest exposure to market risk is through our investment portfolio. Market risk is the potential for a decrease in securities’ fair value resulting from broad yet uncontrollable forces such as: inflation, economic growth or recession, interest rates, world political conditions or other widespread unpredictable events. It is comprised of many individual risks that, when combined, create a macroeconomic impact.
Our view of potential risks and our sensitivity to such risks is discussed in our 2012 Annual Report on Form 10-K, Item 7a, Quantitative and Qualitative Disclosures about Market Risk, Page 100.
The fair value of our investment portfolio was $12.867 billion at June 30, 2013, up $401 million from year-end 2012, largely due to an increase in the common equities portfolio of $523 million.
(In millions)
At June 30, 2013
At December 31, 2012
Cost or
amortized cost
Percent to
total
Fair value
Percent to
total
Cost or
amortized cost
Percent
to total
Fair value
Percent to
total
Taxable fixed maturities
$
5,675

52.2
%
$
6,122

47.6
%
$
5,473

51.7
%
$
6,137

49.2
%
Tax-exempt fixed maturities
2,753

25.3

2,870

22.3

2,749

26.0

2,956

23.7

Common equities
2,375

21.8

3,761

29.2

2,270

21.4

3,238

26.0

Preferred equities
77

0.7

114

0.9

99

0.9

135

1.1

Total
$
10,880

100.0
%
$
12,867

100.0
%
$
10,591

100.0
%
$
12,466

100.0
%
At June 30, 2013, our consolidated investment portfolio included $6 million of assets for which values are based on prices or valuation techniques that require significant management judgment (Level 3 assets). This represented less than 1 percent of investment portfolio assets measured at fair value. See Item 1, Note 3, Fair Value Measurements, for additional discussion of our valuation techniques. We have generally obtained and evaluated two nonbinding quotes from brokers, then our investment professionals determine our best estimate of fair value. These investments include private placements, small issues and various thinly traded securities.
In addition to our investment portfolio, the total investments amount reported in our condensed consolidated balance sheets includes Other invested assets. Other invested assets included $35 million of life policy loans and liens plus $31 million of private equity investments at June 30, 2013.
FIXED-MATURITY INVESTMENTS
By maintaining a well-diversified fixed-maturity portfolio, we attempt to reduce overall risk. We invest new money in the bond market on a regular basis, targeting what we believe to be optimal risk-adjusted after-tax yields. Risk, in this context, includes interest rate, call, reinvestment rate, credit and liquidity risk. We do not make a concerted effort to alter duration on a portfolio basis in response to anticipated movements in interest rates. By regularly investing in the bond market, we build a broad, diversified portfolio that we believe mitigates the impact of adverse economic factors.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 61


Our investment portfolio had no European sovereign debt holdings at June 30, 2013. On that date, we owned other European-based securities, primarily corporate bonds, totaling $488 million in fair value. We discussed our European-based holdings in our 2012 Annual Report on Form 10-K, Item 7a, Quantitative and Qualitative Disclosures about Market Risk, Page 101. The composition of our European-based holdings at June 30, 2013, did not materially change from the $504 million fair value total at year-end 2012.
In the first six months of 2013, the decrease in fair value of our fixed-maturity portfolio was due to a rise in interest rates. At June 30, 2013, our fixed-maturity portfolio was valued at 106.7 percent of its amortized cost, compared with 110.6 percent at December 31, 2012.
Credit ratings at June 30, 2013, compared with December 31, 2012, for the fixed-maturity and short-term portfolios were:
(In millions)
At June 30, 2013
At December 31, 2012
Fair
Percent
Fair
Percent
value
to total
value
to total
Moody's Ratings and Standard & Poor's Ratings combined




Aaa, Aa, A, AAA, AA, A
$
5,489

61.0
%
$
5,544

61.0
%
Baa, BBB
3,075

34.2

3,180

35.0

Ba, BB
202

2.2

168

1.8

B, B
16

0.2

20

0.2

Caa, CCC, Ca
3

0.0

2

0.0

Daa, Da, D
0

0.0

1

0.0

Non-rated
207

2.4

178

2.0

Total
$
8,992

100.0
%
$
9,093

100.0
%
Attributes of the fixed-maturity portfolio include:
At June 30, 2013
At December 31, 2012
Weighted average yield-to-amortized cost
4.9
%
5.0
%
Weighted average maturity
6.2
yrs
6.3
yrs
Effective duration
4.4
yrs
4.2
yrs
We discuss maturities of our fixed-maturity portfolio in our 2012 Annual Report on Form 10-K, Item 8, Note 2, Investments, Page 118, and in this quarterly report Item 2, Investments Results of Operations.
TAXABLE FIXED MATURITIES
Our taxable fixed-maturity portfolio, with a fair value of $6.122 billion at June 30, 2013, included:
(In millions)
At June 30, 2013
At December 31, 2012
Investment-grade corporate
$
5,313

$
5,388

States, municipalities and political subdivisions
319

334

Below investment-grade corporate
202

182

Government sponsored enterprises
195

164

Convertibles and bonds with warrants attached
16

31

United States government
7

7

Foreign government
10

3

Commercial mortgage backed securities
60

28

Total
$
6,122

$
6,137


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 62


Our strategy is to buy and typically hold fixed-maturity investments to maturity, but we monitor credit profiles and fair value movements when determining holding periods for individual securities. With the exception of U.S. agency issues that include United States government and government sponsored enterprises, no individual issuer's securities accounted for more than 1.0 percent of the taxable fixed-maturity portfolio at June 30, 2013. Our investment-grade corporate bonds and commercial mortgage backed securities had an average rating of Baa1 by Moody’s or BBB+ by Standard & Poor’s and represented 87.8 percent of the taxable fixed-maturity portfolio’s fair value at June 30, 2013, compared with 88.2 percent at year-end 2012.
The heaviest concentration in our investment-grade corporate bond portfolio, based on fair value at June 30, 2013, is the financial-related sectors – including banking, financial services and insurance – representing 32.0 percent, compared with 31.2 percent at year-end 2012. We believe our weighting in financial-related sectors is below the average for the corporate bond market as a whole.
Most of the $319 million of securities issued by states, municipalities and political subdivisions included in our taxable fixed maturity portfolio at June 30, 2013, were Build America Bonds.
Our taxable fixed maturity portfolio at June 30, 2013, included $60 million of AAA rated commercial mortgage-backed securities.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 63


TAX-EXEMPT FIXED MATURITIES
At June 30, 2013, we had $2.870 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody’s and Standard & Poor’s. We traditionally have purchased municipal bonds focusing on general obligation and essential services issues, such as water, waste disposal or others. The portfolio is well diversified among approximately 1,000 municipal bond issuers. No single municipal issuer accounted for more than 0.7 percent of the tax-exempt fixed maturity portfolio at June 30, 2013. The following table shows our municipal bond holdings in our larger states:
(In millions)
Local issued
general obligation
Special revenue
State issued general
Percent of
At June 30, 2013
bonds
bonds
obligation bonds
Total
total
Texas
$
378

$
78

$
—

$
456

15.9
%
Indiana
13

256

—

269

9.4

Michigan
240

12

—

252

8.8

Illinois
212

20

—

232

8.1

Ohio
133

93

—

226

7.9

Washington
170

35

2

207

7.2

Wisconsin
99

30

2

131

4.6

Pennsylvania
84

10

6

100

3.5

Arizona
55

31

—

86

3.0

Florida
20

63

—

83

2.9

Colorado
46

18

—

64

2.2

New York
33

22

3

58

2.0

New Jersey
41

17

—

58

2.0

Kansas
34

23

—

57

2.0

Utah
23

19

—

42

1.5

All other states
295

250

4

549

19.0

Total
$
1,876

$
977

$
17

$
2,870

100.0
%
At December 31, 2012





Texas
$
398

$
95

$
—

$
493

16.7
%
Indiana
15

286

—

301

10.2

Michigan
260

12

—

272

9.2

Illinois
226

20

—

246

8.3

Ohio
135

96

—

231

7.8

Washington
174

39

3

216

7.3

Wisconsin
106

27

3

136

4.6

Pennsylvania
83

8

—

91

3.1

Florida
21

65

—

86

2.9

Arizona
55

26

—

81

2.7

Colorado
45

19

—

64

2.2

New Jersey
38

17

—

55

1.9

New York
29

24

—

53

1.8

Kansas
28

21

—

49

1.7

Minnesota
36

6

—

42

1.4

All other states
285

253

2

540

18.2

Total
$
1,934

$
1,014

$
8

$
2,956

100.0
%

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 64


Interest Rate Sensitivity Analysis
Because of our strong surplus, long-term investment horizon and ability to hold most fixed-maturity investments until maturity, we believe the company is adequately positioned if interest rates were to rise. Although the fair values of our existing holdings may suffer, a higher rate environment would provide the opportunity to invest cash flow in higher yielding securities, while reducing the likelihood of untimely redemptions of currently callable securities. While higher interest rates would be expected to continue to increase the number of fixed-maturity holdings trading below 100 percent of amortized cost, we believe lower fixed-maturity security values due solely to interest rate changes would not signal a decline in credit quality. We continue to manage the portfolio with an eye toward both meeting current income needs and managing interest rate risk.
Our dynamic financial planning model uses analytical tools to assess market risks. As part of this model, the effective duration of the fixed-maturity portfolio is continually monitored by our investment department to evaluate the theoretical impact of interest rate movements.
The table below summarizes the effect of hypothetical changes in interest rates on the fair value of the fixed-maturity portfolio:
(In millions)
Interest Rate Shift in Basis Points
-200
-100
—
100
200
At June 30, 2013
$
9,789

$
9,390

$
8,992

$
8,591

$
8,205

At December 31, 2012
$
9,888

$
9,479

$
9,093

$
8,704

$
8,320

The effective duration of the fixed-maturity portfolio as of June 30, 2013, was 4.4 years, compared with 4.2 years at year-end 2012. The above table is a theoretical presentation showing that an instantaneous, parallel shift in the yield curve of 100 basis points could produce an approximately 4.4 percent change in the fair value of the fixed‑maturity portfolio. Generally speaking, the higher a bond is rated, the more directly correlated movements in its fair value are to changes in the general level of interest rates, exclusive of call features. The fair values of average- to lower-rated corporate bonds are additionally influenced by the expansion or contraction of credit spreads.
In our dynamic financial planning model, the selected interest rate change of 100 to 200 basis points represents our view of a shift in rates that is quite possible over a one-year period. The rates modeled should not be considered a prediction of future events as interest rates may be much more volatile in the future. The analysis is not intended to provide a precise forecast of the effect of changes in rates on our results or financial condition, nor does it take into account any actions that we might take to reduce exposure to such risks.
EQUITY INVESTMENTS
Our equity investments, with a fair value totaling $3.875 billion at June 30, 2013, include $3.761 billion of common stock securities of companies generally with strong indications of paying and growing their dividends. Other criteria we evaluate include increasing sales and earnings, proven management and a favorable outlook. We believe our equity investment style is an appropriate long-term strategy. While our long-term financial position would be affected by prolonged changes in the market valuation of our investments, we believe our strong surplus position and cash flow provide a cushion against short-term fluctuations in valuation. Continued payment of cash dividends by the issuers of the common equities we hold can provide a floor to their valuation. A $100 million unrealized change in the value of the common stocks owned at period end would cause a change of $65 million, or approximately 40 cents per share, in our shareholders’ equity.
At June 30, 2013, our largest holding had a fair value of 3.4 percent of our publicly-traded common stock portfolio. Exxon Mobil Corporation (NYSE:XOM) w as our largest single common stock investment, comprising 1.0 percent of the investment portfolio at the end of the second quarter of 2013.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 65


Common Stock Portfolio Industry Sector Distribution
Percent of Publicly Traded Common Stock Portfolio
At June 30, 2013
At December 31, 2012
Cincinnati
Financial
S&P 500 Industry
Weightings
Cincinnati
Financial
S&P 500 Industry
Weightings
Sector:




Information technology
18.4
%
17.8
%
16.0
%
19.1
%
Industrials
12.7

10.2

12.9

10.1

Financial
11.8

16.7

11.2

15.6

Healthcare
11.6

12.7

12.2

12.0

Energy
11.6

10.5

12.0

11.0

Consumer staples
10.7

10.5

11.7

10.6

Consumer discretionary
10.0

12.2

9.7

11.5

Materials
5.2

3.3

5.7

3.6

Utilities
4.5

3.3

4.8

3.4

Telecomm services
3.5

2.8

3.8

3.1

Total
100.0
%
100.0
%
100.0
%
100.0
%
UNREALIZED INVESTMENT GAINS AND LOSSES
At June 30, 2013, unrealized investment gains before taxes for the consolidated investment portfolio totaled $2.056 billion and unrealized investment losses amounted to $69 million.
The unrealized investment gains at June 30, 2013, were due to a pretax net gain position in our fixed-maturity portfolio of $564 million and a net gain position in our equity portfolio of $1.423 billion. The net gain position in our fixed-maturity portfolio has grown in recent years due largely to a declining interest rate environment. During the second quarter of 2013, the portfolio's net gain position declined $282 million largely due to rising interest rates. The net gain position for our current fixed-maturity holdings will naturally decline over time as individual securities mature. In addition, changes in interest rates can cause rapid, significant changes in fair values of fixed-maturity securities and the net gain position, as discussed in Quantitative and Qualitative Disclosures about Market Risk. The three largest contributors to our equity portfolio net gain position were ExxonMobil, Chevron (NYSE:CVX) and The Procter & Gamble Company (NYSE:PG) common stocks, which had a combined net gain position of $283 million.

Unrealized Investment Losses
We expect the number of securities trading below amortized cost to fluctuate as interest rates rise or fall and credit spreads expand or contract due to prevailing economic conditions. Further, amortized costs for some securities are revised through OTTI recognized in prior periods. At June 30, 2013, 449 of the 2,839 securities we owned had fair values below amortized cost, compared with 68 of the 2,784 securities we owned at year-end 2012. The 449 holdings with fair values below cost or amortized cost at June 30, 2013, represented 11.1 percent of fair value of our investment portfolio and $69 million in unrealized losses.
•
437 of the 449 holdings had fair values between 90 percent and 100 percent of amortized cost at June 30, 2013. Seven of these 437 holdings are equity securities that may be subject to OTTI charges taken through earnings should they not recover by the recovery dates we determined. The remaining 430 securities primarily consist of fixed-maturity securities whose current valuation is largely the result of interest rate factors. The fair value of these 437 securities was $1.397 billion, and they accounted for $66 million in unrealized losses.
•
12 of the 449 holdings had fair values between 70 percent and 90 percent of amortized cost at June 30, 2013. 11 of these are fixed-maturity securities that we believe will continue to pay interest and ultimately pay principal upon maturity. The issuers of these securities have strong cash flow to service their debt and meet their contractual obligation to make principal payments. The fair value of these 12 securities was $26 million, and they accounted for $3 million in unrealized losses.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 66


•
No securities were trading below 70 percent of amortized cost at June 30, 2013.

The table below reviews fair values and unrealized losses by investment category and by the overall duration of the securities’ continuous unrealized loss position.
(In millions)
Less than 12 months
12 months or more
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
At June 30, 2013
value
losses
value
losses
value
losses
Fixed maturities:






States, municipalities and political subdivisions
$
377

$
18

$
—

$
—

$
377

$
18

Government-sponsored enterprises
185

13

—

—

185

13

Commercial mortgage-backed securities
51

3

—

—

51

3

Corporate securities
580

22

13

1

593

23

Subtotal
1,204

56

13

1

1,217

57

Equity securities:






Common equities
202

12

—

—

202

12

Preferred equities
4

—

—

—

4

—

Subtotal
206

12

—

—

206

12

Total
$
1,410

$
68

$
13

$
1

$
1,423

$
69

At December 31, 2012






Fixed maturities:





States, municipalities and political subdivisions
$
53

$
1

$
—

$
—

$
53

$
1

Government-sponsored enterprises
1

—

—

—

1

—

Corporate securities
58

1

17

1

75

2

Subtotal
112

2

17

1

129

3

Equity securities:






Common equities
107

9

—

—

107

9

Preferred equities
4

1

—

—

4

1

Subtotal
111

10

—

—

111

10

Total
$
223

$
12

$
17

$
1

$
240

$
13

At June 30, 2013, four fixed-maturity securities with a total unrealized loss of $1 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity securities had fair values below 70 percent of amortized cost; One fixed-maturity security with a fair value of less than $1 million had a fair value from 70 percent to less than 90 percent of amortized cost and accounted for less than $1 million in unrealized losses; and three fixed-maturity securities with a fair value of $13 million had fair values from 90 percent to less than 100 percent of amortized cost and accounted for $1 million in unrealized losses.
At June 30, 2013, no equity securities had been in an unrealized loss position for 12 months or more.
At June 30, 2013, applying our invested asset impairment policy, we determined that the $69 million in total unrealized losses in the table above were not other-than-temporarily impaired.

During the second quarter of 2013, no securities were written down through impairment charges, for a total of five during the six months ended June 30, 2013. OTTI resulted in pretax, noncash charges of none and $2 million for the three and six months ended June 30, 2013. During the same periods of 2012, we wrote down securities resulting in $14 million and $30 million in OTTI charges.
During full-year 2012, we wrote down 13 securities and recorded $33 million in OTTI charges. At December 31, 2012, four fixed-maturity investments with a total unrealized loss of $1 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. No equity investments had been in an unrealized loss position for 12 months or more as of December 31, 2012.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 67


The following table summarizes the investment portfolio by severity of decline:
(In millions)
At June 30, 2013
Number
of
issues
Cost or
amortized
cost
Fair
value
Gross
unrealized
gain/loss
Gross
investment
income
Taxable fixed maturities:
Fair valued below 70% of amortized cost
—

$
—

$
—

$
—

$
—

Fair valued at 70% to less than 100% of amortized cost
192

885

845

(40
)
12

Fair valued at 100% and above of amortized cost
1,205

4,790

5,277

487

135

Securities sold in current year
—

—

—

—

4

Total
1,397

5,675

6,122

447

151

Tax-exempt fixed maturities:





Fair valued below 70% of amortized cost
—

—

—

—

—

Fair valued at 70% to less than 100% of amortized cost
249

389

372

(17
)
4

Fair valued at 100% and above of amortized cost
1,098

2,364

2,498

134

50

Securities sold in current year
—

—

—

—

1

Total
1,347

2,753

2,870

117

55

Common equities:





Fair valued below 70% of cost
—

—

—

—

—

Fair valued at 70% to less than 100% of cost
6

214

202

(12
)
2

Fair valued at 100% and above of cost
68

2,161

3,559

1,398

50

Securities sold in current year
—

—

—

—

1

Total
74

2,375

3,761

1,386

53

Preferred equities:





Fair valued below 70% of cost
—

—

—

—

—

Fair valued at 70% to less than 100% of cost
2

4

4

—

—

Fair valued at 100% and above of cost
19

73

110

37

3

Securities sold in current year
—

—

—

—

—

Total
21

77

114

37

3

Portfolio summary:





Fair valued below 70% of cost or amortized cost
—

—

—

—

—

Fair valued at 70% to less than 100% of cost or amortized cost
449

1,492

1,423

(69
)
18

Fair valued at 100% and above of cost or amortized cost
2,390

9,388

11,444

2,056

238

Investment income on securities sold in current year
—

—

—

—

6

Total
2,839

$
10,880

$
12,867

$
1,987

$
262

At December 31, 2012





Portfolio summary:





Fair valued below 70% of cost or amortized cost
—

$
—

$
—

$
—

$
—

Fair valued at 70% to less than 100% of cost or amortized cost
68

253

240

(13
)
8

Fair valued at 100% and above of cost or amortized cost
2,716

10,338

12,226

1,888

496

Investment income on securities sold in current year
—

—

—

—

31

Total
2,784

$
10,591

$
12,466

$
1,875

$
535

See our 2012 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Asset Impairment, Page 47.


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 68


Item 4.        Controls and Procedures
Evaluation of Disclosure Controls and Procedures – The company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)).
Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The company’s management, with the participation of the company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of the company’s disclosure controls and procedures as of June 30, 2013. Based upon that evaluation, the company’s chief executive officer and chief financial officer concluded that the design and operation of the company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to ensure:
•
that information required to be disclosed in the company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and
•
that such information is accumulated and communicated to the company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting – During the three months ended June 30, 2013, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 69



Part II – Other Information

Item 1.        Legal Proceedings
Neither the company nor any of our subsidiaries is involved in any litigation believed to be material other than ordinary, routine litigation incidental to the nature of our business.
Item 1A.    Risk Factors
Our risk factors have not changed materially since they were described in our 2012 Annual Report on Form 10-K filed February 27, 2013.
Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any of our shares that were not registered under the Securities Act during the first six months of 2013. The board of directors has authorized share repurchases since 1996. Purchases are expected to be made generally through open market transactions. During the second quarter of 2013, we acquired 120,409 shares for $6 million from associates as consideration for options exercised. During the first six months of 2013 we acquired 320,522 shares for $15 million from associates as consideration for options exercised. The board gives management discretion to purchase shares at reasonable prices in light of circumstances at the time of purchase, subject to SEC regulations. On October 24, 2007, the board of directors expanded the existing repurchase authorization to approximately 13 million shares. We have 6,806,716 shares available for purchase under our programs at June 30, 2013.
Period
Total number
of shares
purchased
Average
price paid
per share
Total number of shares
purchased as part of
publicly announced
plans or programs
Maximum number of
shares that may yet be
purchased under the
plans or programs
April 1-30, 2013
30,274

48.17

30,274

6,896,851

May 1-31, 2013
82,600

49.27

82,600

6,814,251

June 1-30, 2013
7,535

46.55

7,535

6,806,716

Totals
120,409

48.82

120,409



Item 3.        Defaults Upon Senior Securities
We have not defaulted on any interest or principal payment, and no arrearage in the payment of dividends has occurred.
Item 4.        Mine Safety Disclosures
Not applicable.
Item 5.        Other Information
None.
Item 6.        Exhibits

Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 70


Exhibit No.
Exhibit Description
3.1

Amended and Restated Articles of Incorporation of Cincinnati Financial Corporation (incorporated by reference to the company’s 2010 Annual Report on Form 10-K dated February 25, 2011, Exhibit 3.1)
3.2

Regulations of Cincinnati Financial Corporation, as amended through May 1, 2010 (incorporated by reference to the company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Exhibit 3.2)
31A

Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 – Chief Executive Officer
31B

Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 – Chief Financial Officer
32

Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
Page 71


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CINCINNATI FINANCIAL CORPORATION
Date: July 25, 2013

/S/ Eric N. Mathews
Eric N. Mathews, CPCU, AIAF
Vice President, Assistant Secretary and Assistant Treasurer
(Principal Accounting Officer)


Cincinnati Financial Corporation Second-Quarter 2013 10-Q
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TABLE OF CONTENTS