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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 (Mark one)
       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the quarterly period ended June 30, 2021.
       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
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock CINF Nasdaq Global Select Market
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. 
Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Nonaccelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes No
As of July 23, 2021, there were 161,182,879 shares of common stock outstanding.



CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED June 30, 2021
 
TABLE OF CONTENTS
 
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Cincinnati Financial Corporation Second-Quarter 2021 10-Q
Page 2


Part I – Financial Information
Item 1.    Financial Statements (unaudited)
 
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in millions, except per share data) June 30, December 31,
2021 2020
Assets    
Investments    
Fixed maturities, at fair value (amortized cost: 2021—$11,827; 2020—$11,312)
$ 12,789  $ 12,338 
Equity securities, at fair value (cost: 2021—$4,000; 2020—$3,927)
9,897  8,856 
Other invested assets 375  348 
Total investments 23,061  21,542 
Cash and cash equivalents 1,003  900 
Investment income receivable 138  136 
Finance receivable 100  95 
Premiums receivable 2,217  1,879 
Reinsurance recoverable 504  517 
Prepaid reinsurance premiums 105  65 
Deferred policy acquisition costs 924  805 
Land, building and equipment, net, for company use (accumulated depreciation:
   2021—$293; 2020—$285)
213  213 
Other assets 460  438 
Separate accounts 952  952 
Total assets $ 29,677  $ 27,542 
Liabilities    
Insurance reserves    
Loss and loss expense reserves $ 7,019  $ 6,746 
Life policy and investment contract reserves 2,980  2,915 
Unearned premiums 3,417  2,960 
Other liabilities 1,049  982 
Deferred income tax 1,495  1,299 
Note payable 59  54 
Long-term debt and lease obligations 848  845 
Separate accounts 952  952 
Total liabilities 17,819  16,753 
Commitments and contingent liabilities (Note 12)
Shareholders' Equity    
Common stock, par value—$2 per share; (authorized: 2021 and 2020—500 million
   shares; issued: 2021 and 2020—198.3 million shares)
397  397 
Paid-in capital 1,334  1,328 
Retained earnings 11,205  10,085 
Accumulated other comprehensive income 731  769 
Treasury stock at cost (2021—37.2 million shares and 2020—37.4 million shares)
(1,809) (1,790)
Total shareholders' equity 11,858  10,789 
Total liabilities and shareholders' equity $ 29,677  $ 27,542 
 Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation Second-Quarter 2021 10-Q
Page 3


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Dollars in millions, except per share data) Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Revenues        
Earned premiums $ 1,593  $ 1,482  $ 3,137  $ 2,938 
Investment income, net of expenses 175  166  349  331 
Investment gains and losses, net 520  1,060  1,024  (665)
Fee revenues 4  7 
Other revenues 3  5 
Total revenues 2,295  2,714  4,522  2,615 
Benefits and Expenses        
Insurance losses and contract holders' benefits 915  1,086  1,918  2,089 
Underwriting, acquisition and insurance expenses 490  464  929  920 
Interest expense 13  14  26  27 
Other operating expenses 5  9  10 
 Total benefits and expenses 1,423  1,569  2,882  3,046 
Income (Loss) Before Income Taxes 872  1,145  1,640  (431)
Provision (Benefit) for Income Taxes        
Current 75  23  111  26 
Deferred 94  213  206  (140)
Total provision (benefit) for income taxes 169  236  317  (114)
Net Income (Loss) $ 703  $ 909  $ 1,323  $ (317)
Per Common Share        
Net income (loss)—basic $ 4.36  $ 5.65  $ 8.21  $ (1.96)
Net income (loss)—diluted 4.31  5.63  8.13  (1.96)
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation Second-Quarter 2021 10-Q
Page 4


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Net Income (Loss) $ 703  $ 909  $ 1,323  $ (317)
Other Comprehensive Income (Loss)        
Change in unrealized gains on investments, net of tax (benefit) of $27, $107, $(14) and $39, respectively
105  399  (50) 143 
Amortization of pension actuarial loss and prior service cost, net of tax of $0, $0, $1 and $0, respectively
1  4 
Change in life deferred acquisition costs, life policy reserves and other, net of tax (benefit) of $0, $(2), $2 and $1, respectively
  (7) 8 
Other comprehensive income (loss) 106  393  (38) 149 
Comprehensive Income (Loss) $ 809  $ 1,302  $ 1,285  $ (168)
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

Cincinnati Financial Corporation Second-Quarter 2021 10-Q
Page 5


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Common Stock
   Beginning of period $ 397  $ 397  $ 397  $ 397 
   Share-based awards   —    — 
   End of period 397  397  397  397 
Paid-In Capital
   Beginning of period 1,322  1,300  1,328  1,306 
   Share-based awards 2  —  (14) (16)
   Share-based compensation 8  17  16 
   Other 2  3 
   End of period 1,334  1,309  1,334  1,309 
Retained Earnings
   Beginning of period 10,603  7,932  10,085  9,257 
Cumulative effect of change in accounting for credit losses as of January 1, 2020   —    (2)
Adjusted beginning of year 10,603  7,932  10,085  9,255 
   Net income (loss) 703  909  1,323  (317)
Dividends declared (101) (96) (203) (193)
   End of period 11,205  8,745  11,205  8,745 
Accumulated Other Comprehensive Income
   Beginning of period 625  204  769  448 
   Other comprehensive income (loss) 106  393  (38) 149 
   End of period 731  597  731  597 
Treasury Stock
   Beginning of period (1,809) (1,791) (1,790) (1,544)
   Share-based awards 3  15  12 
   Shares acquired - share repurchase authorization   —  (28) (256)
   Shares acquired - share-based compensation plans (4) —  (7) (3)
   Other 1  —  1 
   End of period (1,809) (1,790) (1,809) (1,790)
      Total Shareholders' Equity $ 11,858  $ 9,258  $ 11,858  $ 9,258 
(In millions, except per common share)
Common Stock - Shares Outstanding
   Beginning of period 161.0  160.8  160.9  162.9 
   Share-based awards 0.1  —  0.5  0.4 
   Shares acquired - share repurchase authorization   —  (0.3) (2.5)
   End of period 161.1  160.8  161.1  160.8 
Dividends declared per common share $ 0.63  $ 0.60  $ 1.26  $ 1.20 
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation Second-Quarter 2021 10-Q
Page 6


Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
 (Dollars in millions) Six months ended June 30,
2021 2020
Cash Flows From Operating Activities    
Net income (loss) $ 1,323  $ (317)
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 46  42 
Investment gains and losses, net (1,011) 669 
Share-based compensation 17  16 
Interest credited to contract holders 23  23 
Deferred income tax expense 206  (140)
Changes in:    
Investment income receivable (2)
Premiums and reinsurance receivable (365) (232)
Deferred policy acquisition costs (94) (59)
Other assets (23) (25)
Loss and loss expense reserves 273  316 
Life policy and investment contract reserves 55  65 
Unearned premiums 457  319 
Other liabilities 23  (51)
Current income tax receivable/payable (11) (14)
Net cash provided by operating activities 917  614 
Cash Flows From Investing Activities    
Sale of fixed maturities 73  87 
Call or maturity of fixed maturities 690  563 
Sale of equity securities 110  222 
Purchase of fixed maturities (1,228) (757)
Purchase of equity securities (152) (371)
Investment in finance receivables (22) (23)
Collection of finance receivables 18  15 
Investment in building and equipment (9) (10)
Change in other invested assets, net (6) 32 
Net cash used in investing activities (526) (242)
Cash Flows From Financing Activities    
Payment of cash dividends to shareholders (195) (185)
Shares acquired - share repurchase authorization (28) (256)
Changes in note payable
5  83 
Proceeds from stock options exercised 8 
Contract holders' funds deposited 47  44 
Contract holders' funds withdrawn (75) (83)
Other (50) (40)
Net cash used in financing activities (288) (433)
Net change in cash and cash equivalents 103  (61)
Cash and cash equivalents at beginning of year 900  767 
Cash and cash equivalents at end of period $ 1,003  $ 706 
Supplemental Disclosures of Cash Flow Information:    
Interest paid $ 26  $ 27 
Income taxes paid 113  31 
Noncash Activities    
Equipment acquired under finance lease obligations $ 8  $
Share-based compensation 21 
Other assets and other liabilities 83  48 
 Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation Second-Quarter 2021 10-Q
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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. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been condensed or omitted.
 
Our June 30, 2021, condensed consolidated financial statements are unaudited. 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 2020 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.

Beginning in mid-March 2020, the coronavirus (SARS-CoV-2 or COVID-19) pandemic outbreak, and unprecedented actions taken to contain the virus, caused an economic downturn on a global scale as well as market disruption and volatility. The company continues to monitor the impact of the pandemic as it unfolds. The company cannot predict the impact the pandemic will have on its future consolidated financial position, results of operations and cash flows, however the impact could be material.

Pending Accounting Updates
ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows. The ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts and simplify amortization of deferred acquisition costs while improving and expanding required disclosures. In November 2020, the FASB issued an ASU that delayed the effective date of ASU 2018-12 to interim and annual reporting periods beginning after December 15, 2022. These ASU's have not yet been adopted. Management is currently evaluating the impact on our company's consolidated financial position, results of operations and cash flows.

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NOTE 2 – Investments
The following table provides amortized cost, gross unrealized gains, gross unrealized losses and fair value for our fixed-maturity securities:
(Dollars in millions) Amortized
cost
Gross unrealized Fair value
At June 30, 2021 gains losses
Fixed maturity securities:        
Corporate $ 6,775  $ 581  $ 2  $ 7,354 
States, municipalities and political subdivisions 4,632  367  2  4,997 
Commercial mortgage-backed 268  14    282 
United States government 122  4    126 
Foreign government 23      23 
Government-sponsored enterprises 7      7 
Total $ 11,827  $ 966  $ 4  $ 12,789 
At December 31, 2020        
Fixed maturity securities:        
Corporate $ 6,281  $ 621  $ $ 6,895 
States, municipalities and political subdivisions 4,604  395  4,997 
Commercial mortgage-backed 271  15  285 
United States government 115  —  120 
Foreign government 29  —  —  29 
Government-sponsored enterprises 12  —  —  12 
Total $ 11,312  $ 1,036  $ 10  $ 12,338 
 
The net unrealized investment gains in our fixed-maturity portfolio at June 30, 2021, are primarily the result of the continued low interest rate environment that increased the fair value of our fixed-maturity portfolio. Our commercial mortgage-backed securities had an average rating of Aa1/AA at June 30, 2021 and December 31, 2020.

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The table below provides fair values and gross unrealized losses by investment category and by the duration of the securities' continuous unrealized loss positions:
(Dollars in millions) Less than 12 months 12 months or more Total
At June 30, 2021 Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fixed maturity securities:            
Corporate $ 207  $ 1  $ 27  $ 1  $ 234  $ 2 
States, municipalities and political subdivisions 46  1  7  1  53  2 
Commercial mortgage-backed 4    9    13   
United States government 9        9   
Foreign government 5        5   
Government-sponsored enterprises 5        5   
Total $ 276  $ 2  $ 43  $ 2  $ 319  $ 4 
At December 31, 2020            
Fixed maturity securities:            
Corporate $ 330  $ $ 46  $ $ 376  $
States, municipalities and political subdivisions 31  —  33 
Commercial mortgage-backed 23  —  29 
United States government 12  —  —  —  12  — 
Foreign government 10  —  —  —  10  — 
Total $ 406  $ $ 54  $ $ 460  $ 10 

Contractual maturity dates for fixed-maturities securities were:
(Dollars in millions) Amortized
cost
Fair
value
% of fair
value
At June 30, 2021
Maturity dates:      
Due in one year or less $ 516  $ 524  4.1  %
Due after one year through five years 3,669  3,924  30.7 
Due after five years through ten years 3,574  3,904  30.5 
Due after ten years 4,068  4,437  34.7 
Total $ 11,827  $ 12,789  100.0  %

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

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The following table provides investment income and investment gains and losses, net:
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Investment income:
Interest $ 117  $ 114  $ 235  $ 226 
Dividends 60  53  118  106 
Other 1  3 
Total 178  169  356  337 
Less investment expenses 3  7 
Total $ 175  $ 166  $ 349  $ 331 
Investment gains and losses, net:        
Equity securities:        
Investment gains and losses on securities sold, net $   $ 24  $ 6  $ 17 
Unrealized gains and losses on securities still held, net 489  1,044  974  (602)
Subtotal 489  1,068  980  (585)
Fixed maturities:        
Gross realized gains 11  14 
Gross realized losses (2) (3) (2) (3)
Write-down of impaired securities   —    (77)
Subtotal 9  —  12  (75)
Other 22  (8) 32  (5)
Total $ 520  $ 1,060  $ 1,024  $ (665)
 
The fair value of our equity portfolio was $9.897 billion and $8.856 billion at June 30, 2021 and December 31, 2020, respectively. At June 30, 2021 and December 31, 2020, Apple Inc. (Nasdaq:AAPL), an equity holding, was our largest single investment holding with a fair value of $665 million and $644 million, which was 7.0% and 7.5% of our publicly traded common equities portfolio and 2.9% and 3.0% of the total investment portfolio, respectively.

At June 30, 2021 and December 31, 2020, there were no fixed-maturity securities with an allowance for credit losses. During the three and six months ended June 30, 2021, there were no fixed-maturity securities that were written down to fair value due to an intention to be sold. During the three months ended June 30, 2020, there were no fixed-maturity securities that were written down to fair value due to an intention to be sold and during the six months ended June 30, 2020, there were 12 fixed-maturity securities from the energy, real estate, consumer goods and technology & electronics sectors that were written down to fair value due to an intention to be sold.

At June 30, 2021, 108 fixed-maturity securities with a total unrealized loss of $4 million were in an unrealized loss position. Of that total, two fixed-maturity securities had fair values below 70% of amortized cost. At December 31, 2020, 128 fixed-maturity securities with a total unrealized loss of $10 million were in an unrealized loss position. Of that total, no fixed-maturity securities had fair values below 70% of amortized cost.

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NOTE 3 – Fair Value Measurements
In accordance with accounting guidance for fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for the valuation technique used, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2020, and ultimately management determines fair value. See our 2020 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 143, 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, 2021 and December 31, 2020. We do not have any liabilities carried at fair value.
(Dollars in millions) Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs (Level 2)
Significant
unobservable
inputs
(Level 3)
Total
At June 30, 2021
Fixed maturities, available for sale:        
Corporate $   $ 7,354  $   $ 7,354 
States, municipalities and political subdivisions   4,997    4,997 
Commercial mortgage-backed   282    282 
United States government 126      126 
Foreign government   23    23 
Government-sponsored enterprises   7    7 
Subtotal 126  12,663    12,789 
Common equities 9,522      9,522 
Nonredeemable preferred equities   375    375 
Separate accounts taxable fixed maturities   912    912 
Top Hat savings plan mutual funds and common
   equity (included in Other assets)
63      63 
Total $ 9,711  $ 13,950  $   $ 23,661 
At December 31, 2020
Fixed maturities, available for sale:        
Corporate $ —  $ 6,895  $ —  $ 6,895 
States, municipalities and political subdivisions —  4,997  —  4,997 
Commercial mortgage-backed —  285  —  285 
United States government 120  —  —  120 
Foreign government —  29  —  29 
Government-sponsored enterprises —  12  —  12 
Subtotal 120  12,218  —  12,338 
Common equities 8,541  —  —  8,541 
Nonredeemable preferred equities —  315  —  315 
Separate accounts taxable fixed maturities —  903  —  903 
Top Hat savings plan mutual funds and common
  equity (included in Other assets)
51  —  —  51 
Total $ 8,712  $ 13,436  $ —  $ 22,148 
 
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We also held Level 1 cash and cash equivalents of $1.003 billion and $900 million at June 30, 2021 and December 31, 2020, respectively.

Fair Value Disclosures for Assets and Liabilities Not Carried at Fair Value 
The disclosures below are presented to provide information about the effects of current market conditions on financial instruments that are not reported at fair value in our condensed consolidated financial statements.
 
This table summarizes the book value and principal amounts of our long-term debt:
(Dollars in millions)   Book value Principal amount
Interest
rate
Year of 
issue
  June 30, December 31, June 30, December 31,
  2021 2020 2021 2020
6.900  % 1998 Senior debentures, due 2028 $ 27  $ 27  $ 28  $ 28 
6.920  % 2005 Senior debentures, due 2028 391  391  391  391 
6.125  % 2004 Senior notes, due 2034 371  370  374  374 
Total   $ 789  $ 788  $ 793  $ 793 
 
The following table shows fair values of our note payable and long-term debt:
(Dollars in millions) Quoted prices in
active markets for
identical assets
(Level 1)
Significant other observable inputs (Level 2) Significant
unobservable
inputs
(Level 3)
Total
At June 30, 2021
Note payable $   $ 59  $   $ 59 
6.900% senior debentures, due 2028
  35    35 
6.920% senior debentures, due 2028
  512    512 
6.125% senior notes, due 2034
  511    511 
Total $   $ 1,117  $   $ 1,117 
At December 31, 2020
Note payable $ —  $ 54  $ —  $ 54 
6.900% senior debentures, due 2028
—  35  —  35 
6.920% senior debentures, due 2028
—  515  —  515 
6.125% senior notes, due 2034
—  522  —  522 
Total $ —  $ 1,126  $ —  $ 1,126 
 
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The following table shows the fair value of our life policy loans included in other invested assets and the fair values of our deferred annuities and structured settlements included in life policy and investment contract reserves:
(Dollars in millions) Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs (Level 2)
Significant
unobservable
inputs
(Level 3)
Total
At June 30, 2021
Life policy loans $   $   $ 44  $ 44 
Deferred annuities     811  811 
Structured settlements   212    212 
Total $   $ 212  $ 811  $ 1,023 
At December 31, 2020
Life policy loans $ —  $ —  $ 49  $ 49 
Deferred annuities —  —  836  836 
Structured settlements —  227  —  227 
Total $ —  $ 227  $ 836  $ 1,063 
 
Outstanding principal and interest for these life policy loans totaled $31 million and $33 million at June 30, 2021 and December 31, 2020, respectively.
 
Recorded reserves for the deferred annuities were $769 million and $761 million at June 30, 2021 and December 31, 2020, respectively. Recorded reserves for the structured settlements were $141 million and $145 million at June 30, 2021 and December 31, 2020, respectively.


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NOTE 4 – Property Casualty Loss and Loss Expenses
This table summarizes activity for our consolidated property casualty loss and loss expense reserves:
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Gross loss and loss expense reserves, beginning of period $ 6,880  $ 6,153  $ 6,677  $ 6,088 
Less reinsurance recoverable 262  294  277  342 
Net loss and loss expense reserves, beginning of period 6,618  5,859  6,400  5,746 
Net incurred loss and loss expenses related to:        
Current accident year 949  1,054  1,982  2,017 
Prior accident years (119) (47) (229) (80)
Total incurred 830  1,007  1,753  1,937 
Net paid loss and loss expenses related to:        
Current accident year 334  369  477  555 
Prior accident years 433  382  995  1,013 
Total paid 767  751  1,472  1,568 
Net loss and loss expense reserves, end of period 6,681  6,115  6,681  6,115 
Plus reinsurance recoverable 274  294  274  294 
Gross loss and loss expense reserves, end of period $ 6,955  $ 6,409  $ 6,955  $ 6,409 
 
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, claims, underwriting, loss prevention and accounting management. This committee 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 $64 million at June 30, 2021 and
$54 million at June 30, 2020, for certain life and health loss and loss expense reserves.

For the three months ended June 30, 2021, we experienced $119 million of favorable development on prior accident years, including $86 million of favorable development in commercial lines, $12 million of favorable development in personal lines and $1 million of favorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $27 million for the workers' compensation line and $26 million for the commercial casualty line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Within personal lines, we recognized favorable reserve development of $9 million in personal auto.

For the six months ended June 30, 2021, we experienced $229 million of favorable development on prior accident years, including $169 million of favorable development in commercial lines, $32 million of favorable development in personal lines and $3 million of unfavorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $52 million for the workers' compensation line, $37 million for the commercial auto line, $34 million for the commercial property line and $32 million for the commercial casualty line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Within personal lines, we recognized favorable reserve development of $24 million in personal auto.

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For the three months ended June 30, 2020, we experienced $47 million of favorable development on prior accident years, including $45 million of favorable development in commercial lines and $8 million of unfavorable development in excess and surplus lines. We had no net development in personal lines for the three months ended June 30, 2020. Within commercial lines, we recognized favorable reserve development of $21 million for the commercial casualty line and $19 million for the workers' compensation line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Within personal lines, we recognized favorable reserve development of $7 million in personal auto and unfavorable reserve development of $7 million for the homeowner line of business.

For the six months ended June 30, 2020, we experienced $80 million of favorable development on prior accident years, including $51 million of favorable development in commercial lines, $28 million of favorable development in personal lines and $9 million of unfavorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $26 million for both the workers' compensation line and the commercial casualty line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. This was partially offset by unfavorable reserve development of $3 million for the commercial auto line. Within personal lines, we recognized favorable reserve development of $20 million in personal auto and $11 million for the homeowner line of business.
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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 and future economic conditions.
 
We establish reserves for the company's deferred annuity, universal life and structured settlement policies equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals. Some of our universal life policies contain no-lapse guarantee provisions. For these policies, we establish a reserve in addition to the account balance, based on expected no-lapse guarantee benefits and expected policy assessments.

This table summarizes our life policy and investment contract reserves:
(Dollars in millions) June 30,
2021
December 31,
2020
Life policy reserves:
Ordinary/traditional life $ 1,338  $ 1,301 
Other 53  52 
Subtotal 1,391  1,353 
Investment contract reserves:
Deferred annuities 769  761 
Universal life 670  647 
Structured settlements 141  145 
Other 9 
Subtotal 1,589  1,562 
Total life policy and investment contract reserves $ 2,980  $ 2,915 

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NOTE 6 – Deferred Policy Acquisition Costs
Expenses directly related to successfully acquired insurance policies – primarily commissions, premium taxes and underwriting costs – are deferred and amortized over the terms of the policies. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate the costs for recoverability. The table below shows the deferred policy acquisition costs and asset reconciliation.
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Property casualty:
Deferred policy acquisition costs asset, beginning of period $ 586  $ 536  $ 542  $ 512 
Capitalized deferred policy acquisition costs 325  292  637  572 
Amortized deferred policy acquisition costs (281) (261) (549) (517)
Deferred policy acquisition costs asset, end of period $ 630  $ 567  $ 630  $ 567 
Life:
Deferred policy acquisition costs asset, beginning of period $ 294  $ 291  $ 263  $ 262 
Capitalized deferred policy acquisition costs 15  14  29  29 
Amortized deferred policy acquisition costs (14) (15) (23) (24)
Shadow deferred policy acquisition costs (1) (23) 25  — 
Deferred policy acquisition costs asset, end of period $ 294  $ 267  $ 294  $ 267 
Consolidated:
Deferred policy acquisition costs asset, beginning of period $ 880  $ 827  $ 805  $ 774 
Capitalized deferred policy acquisition costs 340  306  666  601 
Amortized deferred policy acquisition costs (295) (276) (572) (541)
Shadow deferred policy acquisition costs (1) (23) 25  — 
Deferred policy acquisition costs asset, end of period $ 924  $ 834  $ 924  $ 834 

No premium deficiencies were recorded in the condensed consolidated statements of income, as the sum of the anticipated loss and loss expenses, policyholder dividends and unamortized deferred acquisition expenses did not exceed the related unearned premiums and anticipated investment income.
 



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NOTE 7 – Accumulated Other Comprehensive Income
Accumulated other comprehensive income (AOCI) includes changes in unrealized gains and losses on investments, changes in pension obligations and changes in life deferred acquisition costs, life policy reserves and other as follows:
(Dollars in millions) Three months ended June 30,
2021 2020
Before tax Income tax Net Before tax Income tax Net
Investments:
AOCI, beginning of period $ 830  $ 174  $ 656  $ 266  $ 55  $ 211 
OCI before investment gains and losses, net, recognized in net income 141  28  113  506  107  399 
Investment gains and losses, net, recognized in net income (9) (1) (8) —  —  — 
OCI 132  27  105  506  107  399 
AOCI, end of period $ 962  $ 201  $ 761  $ 772  $ 162  $ 610 
Pension obligations:
AOCI, beginning of period $ (37) $ (6) $ (31) $ (8) $ —  $ (8)
OCI excluding amortization recognized in net income       —  —  — 
Amortization recognized in net income 1    1  — 
OCI 1    1  — 
AOCI, end of period $ (36) $ (6) $ (30) $ (7) $ —  $ (7)
Life deferred acquisition costs, life policy reserves and other:
AOCI, beginning of period $   $   $   $ $ —  $
OCI before investment gains and losses, net, recognized in net income       (9) (2) (7)
Investment gains and losses, net, recognized in net income       —  —  — 
OCI       (9) (2) (7)
AOCI, end of period $   $   $   $ (8) $ (2) $ (6)
Summary of AOCI:
AOCI, beginning of period $ 793  $ 168  $ 625  $ 259  $ 55  $ 204 
Investments OCI 132  27  105  506  107  399 
Pension obligations OCI 1    1  — 
Life deferred acquisition costs, life policy reserves and other OCI       (9) (2) (7)
Total OCI 133  27  106  498  105  393 
AOCI, end of period $ 926  $ 195  $ 731  $ 757  $ 160  $ 597 
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(Dollars in millions) Six months ended June 30,
2021 2020
Before tax Income tax Net Before tax Income tax Net
Investments:
AOCI, beginning of period $ 1,026  $ 215  $ 811  $ 590  $ 123  $ 467 
OCI before investment gains and losses, net, recognized in net income (52) (11) (41) 107  23  84 
Investment gains and losses, net, recognized in net income (12) (3) (9) 75  16  59 
OCI (64) (14) (50) 182  39  143 
AOCI, end of period $ 962  $ 201  $ 761  $ 772  $ 162  $ 610 
Pension obligations:
AOCI, beginning of period $ (41) $ (7) $ (34) $ (9) $ —  $ (9)
OCI excluding amortization recognized in net income 2    2  —  —  — 
Amortization recognized in net income 3  1  2  — 
OCI 5  1  4  — 
AOCI, end of period $ (36) $ (6) $ (30) $ (7) $ —  $ (7)
Life deferred acquisition costs, life policy reserves and other:
AOCI, beginning of period $ (10) $ (2) $ (8) $ (13) $ (3) $ (10)
OCI before investment gains and losses, net, recognized in net income 10  2  8 
Investment gains and losses, net, recognized in net income       —  —