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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2021-10-27 compared with 2021-07-28 · 46 added, 47 removed, 161 unchanged (37% of the section changed)

5 unchanged sentences

Our view of potential risks and our sensitivity to such risks is discussed in our 2020 Annual Report on Form 10-K, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Page 118.

The fair value of our investment portfolio was $22.686 billion at June 30, 2021, up $1.492 billion from year-end 2020, including a $451 million increase in the fixed-maturity portfolio and a $1.041 billion increase in the equity portfolio.

(Dollars in millions) At June 30, 2021 At December 31, 2020

The fair value of our investment portfolio was $22.795 billion at September 30, 2021, up $1.601 billion from year-end 2020, including a $570 million increase in the fixed-maturity portfolio and a $1.031 billion increase in the equity portfolio.

(Dollars in millions) At September 30, 2021 At December 31, 2020

amortized cost Percent

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Total $ 16,130 100.0 % $ 22,795 100.0 % $ 15,239 100.0 % $ 21,194 100.0 %

At June 30, 2021, substantially all of our consolidated investment portfolio, measured at fair value, are classified as Level 1 or Level 2.

At September 30, 2021, substantially all of our consolidated investment portfolio, measured at fair value, are classified as Level 1 or Level 2.

See Item 1, Note 3, Fair Value Measurements, for additional discussion of our valuation techniques.

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 $154 million in Lloyd's deposits, $160 million of private equity investments, $31 million of life policy loans and $30 million of real estate through direct property ownership and development projects in the United States at June 30, 2021.

Cincinnati Financial Corporation Second-Quarter 2021 10-Q

Other invested assets included $212 million of private equity investments, $153 million in Lloyd's deposits, $30 million of life policy loans and $23 million of real estate through direct property ownership and development projects in the United States at September 30, 2021.

Cincinnati Financial Corporation Third-Quarter 2021 10-Q

FIXED-MATURITY SECURITIES INVESTMENTS

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By regularly investing in the bond market, we build a broad, diversified portfolio that we believe mitigates the impact of adverse economic factors.

In the first six months of 2021, the increase in fair value of our fixed-maturity portfolio reflected net purchases of securities, somewhat offset by a slight decrease in net unrealized gains, primarily due to an increase in U.S.

In the first nine months of 2021, the increase in fair value of our fixed-maturity portfolio reflected net purchases of securities, somewhat offset by a decrease in net unrealized gains, primarily due to an increase in U.S.

Treasury yields.

At June 30, 2021, our fixed-maturity portfolio with an average rating of A3/A was valued at 108.1% of its amortized cost, compared with 109.1% at December 31, 2020.

At June 30, 2021, our investment-grade and noninvestment-grade fixed-maturity securities represented 80.2% and 5.0% of the portfolio, respectively.

At September 30, 2021, our fixed-maturity portfolio with an average rating of A3/A was valued at 107.3% of its amortized cost, compared with 109.1% at December 31, 2020.

At September 30, 2021, our investment-grade and noninvestment-grade fixed-maturity securities represented 80.4% and 5.4% of the portfolio, respectively.

The remaining 14.2% represented fixed-maturity securities that were not rated by Moody's or S&P Global Ratings.

Attributes of the fixed-maturity portfolio include:

At June 30, 2021 At December 31, 2020

At September 30, 2021 At December 31, 2020

Weighted average yield-to-amortized cost 4.03 % 4.12 %

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We discuss maturities of our fixed-maturity portfolio in our 2020 Annual Report on Form 10-K, Item 8, Note 2, Investments, Page 140, and in this quarterly report Item 2, Investments Results.

Cincinnati Financial Corporation Second-Quarter 2021 10-Q

Cincinnati Financial Corporation Third-Quarter 2021 10-Q

TAXABLE FIXED MATURITIES

Our taxable fixed-maturity portfolio, with a fair value of $8.598 billion at June 30, 2021, included:

(Dollars in millions) At June 30, 2021 At December 31, 2020

Our taxable fixed-maturity portfolio, with a fair value of $8.780 billion at September 30, 2021, included:

(Dollars in millions) At September 30, 2021 At December 31, 2020

Investment-grade corporate $ 6,805 $ 6,416

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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 United States agency issues that include government-sponsored enterprises, no individual issuer's securities accounted for more than 0.9% of the taxable fixed-maturity portfolio at June 30, 2021.

Our investment-grade corporate bonds had an average rating of Baa2 by Moody's or BBB by S&P Global Ratings and represented 78.3% of the taxable fixed-maturity portfolio's fair value at June 30, 2021, compared with 79.7% at year-end 2020.

Our investment-grade corporate bonds had an average rating of Baa2 by Moody's or BBB by S&P Global Ratings and represented 77.5% of the taxable fixed-maturity portfolio's fair value at September 30, 2021, compared with 79.7% at year-end 2020.

The heaviest concentration in our investment-grade corporate bond portfolio, based on fair value at

June 30, 2021, was the financial sector.

September 30, 2021, was the financial sector.

It represented 41.5% of our investment-grade corporate bond portfolio, compared with 46.2% at year-end 2020.

No other sector exceeded 10% of our investment-grade corporate bond portfolio.

Our taxable fixed-maturity portfolio at June 30, 2021, included $282 million of commercial mortgage-backed securities with an average rating of Aa1/AA.

Our taxable fixed-maturity portfolio at September 30, 2021, included $279 million of commercial mortgage-backed securities with an average rating of Aa1/AA.

TAX-EXEMPT FIXED MATURITIES

At June 30, 2021, we had $4.191 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody's and S&P Global Ratings.

At September 30, 2021, we had $4.128 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody's and S&P Global Ratings.

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 1,700 municipal bond issuers.

No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at June 30, 2021.

No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at September 30, 2021.

INTEREST RATE SENSITIVITY ANALYSIS

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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.

Cincinnati Financial Corporation Second-Quarter 2021 10-Q

Cincinnati Financial Corporation Third-Quarter 2021 10-Q

The table below summarizes the effect of hypothetical changes in interest rates on the fair value of the fixed-maturity portfolio:

1 unchanged sentence

-200 -100 - 100 200

At June 30, 2021 $ 14,052 $ 13,402 $ 12,789 $ 12,180 $ 11,560

At September 30, 2021 $ 14,204 $ 13,540 $ 12,908 $ 12,276 $ 11,637

At December 31, 2020 $ 13,493 $ 12,900 $ 12,338 $ 11,774 $ 11,195

The effective duration of the fixed-maturity portfolio as of June 30, 2021, was 4.7 years, up from 4.5 years at year-end 2020.

The effective duration of the fixed-maturity portfolio as of September 30, 2021, was 4.8 years, up from 4.5 years at year-end 2020.

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 4.9% change in the fair value of the fixed-maturity portfolio.

5 unchanged sentences

EQUITY INVESTMENTS

Our equity investments, with a fair value totaling $9.897 billion at June 30, 2021, included $9.522 billion of common stock securities of companies generally with strong indications of paying and growing their dividends.

Our equity investments, with a fair value totaling $9.887 billion at September 30, 2021, included $9.465 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.

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-30% -20% -10% — 10% 20% 30%

At June 30, 2021 $ 6,928 $ 7,918 $ 8,907 $ 9,897 $ 10,887 $ 11,876 $ 12,866

At September 30, 2021 $ 6,921 $ 7,910 $ 8,898 $ 9,887 $ 10,876 $ 11,864 $ 12,853

At December 31, 2020 $ 6,199 $ 7,085 $ 7,970 $ 8,856 $ 9,742 $ 10,627 $ 11,513

At June 30, 2021, Apple Inc.

At September 30, 2021, Apple Inc.

(Nasdaq:AAPL) was our largest single common stock holding with a fair value of $687 million, or 7.3% of our publicly traded common stock portfolio and 3.0% of the total investment portfolio.

Forty-one holdings among eight different sectors each had a fair value greater than $100 million.

Cincinnati Financial Corporation Second-Quarter 2021 10-Q

Thirty-nine holdings among nine different sectors each had a fair value greater than $100 million.

Cincinnati Financial Corporation Third-Quarter 2021 10-Q

Common Stock Portfolio Industry Sector Distribution

Percent of common stock portfolio

At June 30, 2021 At December 31, 2020

At September 30, 2021 At December 31, 2020

Financial S&P 500 Industry

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Consumer staples 7.0 5.8 6.7 6.5

Materials 4.8 2.6 5.1 2.6

Energy 4.4 2.7 3.8 2.3

Utilities 2.4 2.4 2.6 2.8

Materials 4.3 2.5 5.1 2.6

Real estate 2.5 2.6 2.7 2.4

Utilities 2.4 2.5 2.6 2.8

Telecomm services 2.0 11.3 2.1 10.8

1 unchanged sentence

UNREALIZED INVESTMENT GAINS AND LOSSES

At June 30, 2021, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $966 million and unrealized investment losses amounted to $4 million before taxes.

The $962 million net unrealized gain position in our fixed-maturity portfolio at June 30, 2021, decreased in the first six months of 2021, primarily due to an increase in U.S.

At September 30, 2021, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $886 million and unrealized investment losses amounted to $12 million before taxes.

The $874 million net unrealized gain position in our fixed-maturity portfolio at September 30, 2021, decreased in the first nine months of 2021, primarily due to an increase in U.S.

Treasury yields.

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We believe that the appreciated value of equity securities, compared with the cost of securities that is generally used as a tax basis, is a useful measure to help evaluate how fair value can change over time.

On this basis, the net unrealized investment gains at June 30, 2021, consisted of a net gain position in our equity portfolio of $5.897 billion.

On this basis, the net unrealized investment gains at September 30, 2021, consisted of a net gain position in our equity portfolio of $5.791 billion.

Events or factors such as economic growth or recession can affect the fair value and unrealized investment gains of our equity securities.

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Further, amortized costs for some securities are revised through write-downs recognized in prior periods.

At June 30, 2021, 108 of the 4,251 fixed-maturity securities we owned had fair values below amortized cost, compared with 128 of the 4,128 securities we owned at year-end 2020.

The 108 holdings with fair values below amortized cost at June 30, 2021, represented 2.5% of the fair value of our fixed-maturity investment portfolio and $4 million in unrealized losses.

• 103 of the 108 holdings had fair value between 90% and 100% of amortized cost at June 30, 2021.

At September 30, 2021, 244 of the 4,285 fixed-maturity securities we owned had fair values below amortized cost, compared with 128 of the 4,128 securities we owned at year-end 2020.

The 244 holdings with fair values below amortized cost at September 30, 2021, represented 6.6% of the fair value of our fixed-maturity investment portfolio and $12 million in unrealized losses.

• 240 of the 244 holdings had fair value between 90% and 100% of amortized cost at September 30, 2021.

These primarily consist of securities whose current valuation is largely the result of interest rate factors.

The fair value of these 240 securities was $843 million, and they accounted for $10 million in unrealized losses.

• 3 of the 108 fixed-maturity holdings had fair value between 70% and 90% of amortized cost at June 30, 2021.

• 3 of the 244 fixed-maturity holdings had fair value between 70% and 90% of amortized cost at September 30, 2021.

We believe the three fixed-maturity securities will continue to pay interest and ultimately pay principal upon maturity.

The issuers of these three securities have strong cash flow to service their debt and meet their

Cincinnati Financial Corporation Second-Quarter 2021 10-Q

Cincinnati Financial Corporation Third-Quarter 2021 10-Q

contractual obligation to make principal payments.

The fair value of these securities was $6 million, and they accounted for $1 million in unrealized losses.

• 2 of the 108 fixed-maturity holdings had fair value below 70% of amortized cost at June 30, 2021.

We believe these fixed-maturity securities will continue to pay interest and ultimately pay principal upon maturity.

The fair value of these securities was $1 million, and they accounted for less than $1 million in unrealized losses.

• 1 of the 244 fixed-maturity holdings had fair value below 70% of amortized cost at September 30, 2021.

We believe this fixed-maturity security will continue to pay interest and ultimately pay principal upon maturity.

The fair value of this security was $2 million, and it accounted for $1 million in unrealized losses.

The table below reviews fair values and unrealized losses by investment category and by the overall duration of the securities' continuous unrealized loss position.

(Dollars in millions) Less than 12 months 12 months or more Total

At June 30, 2021 Fair value Unrealized

At September 30, 2021 Fair value Unrealized

losses Fair value Unrealized

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Total $ 406 $ 8 $ 54 $ 2 $ 460 $ 10

At June 30, 2021, applying our invested asset impairment policy, we determined that the total of $4 million, for securities in an unrealized loss position in the table above, was not the result of a credit loss.

During the second quarter and first six months of 2021, no securities were written down to fair value through an impairment charge.

During the first six months of 2020, we wrote down 12 securities and recorded $77 million in impairment charges.

During full-year 2020, we wrote down 14 securities and recorded $78 million in impairment charges.

At September 30, 2021, applying our invested asset impairment policy, we determined that the total of $12 million, for securities in an unrealized loss position in the table above, was not the result of a credit loss.

During the third quarter and first nine months of 2021, five securities were written down to fair value through an impairment charge, resulting in $1 million of noncash charges.

During the first nine months and full year of 2020, we wrote down 14 securities and recorded $78 million in impairment charges.

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.

Cincinnati Financial Corporation Second-Quarter 2021 10-Q

Cincinnati Financial Corporation Third-Quarter 2021 10-Q

The following table summarizes the investment portfolio by severity of decline:

3 unchanged sentences

gain (loss) Gross investment income

At June 30, 2021

At September 30, 2021

Taxable fixed maturities:

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk