What changed in this filing

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2022-04-28 compared with 2021-10-27 · 59 added, 56 removed, 151 unchanged (43% of the section changed)

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Our view of potential risks and our sensitivity to such risks is discussed in our 2021 Annual Report on Form 10-K, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Page 112.

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

The fair value of our investment portfolio was $23.051 billion at March 31, 2022, down $1.286 billion from year-end 2021, including a $646 million decrease in the fixed-maturity portfolio and a $640 million decrease in the equity portfolio.

(Dollars in millions) At March 31, 2022 At December 31, 2021

amortized cost Percent

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Total $ 16,497 100.0 % $ 23,051 100.0 % $ 16,351 100.0 % $ 24,337 100.0 %

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

At March 31, 2022, 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 $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

Other invested assets included $249 million of private equity investments, $35 million of real estate through direct property ownership and development projects in the United States, $34 million in Lloyd's deposits and $30 million of life policy loans at March 31, 2022.

Cincinnati Financial Corporation First-Quarter 2022 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 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 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.

In the first three months of 2022, the decrease in fair value of our fixed-maturity portfolio reflected net purchases of securities, offset by a decrease in net unrealized gains, primarily due to an increase in U.S.

Treasury yields and to a lesser degree a widening of corporate credit spreads.

At March 31, 2022, our fixed-maturity portfolio with an average rating of A3/A was valued at 100.4% of its amortized cost, compared with 106.5% at December 31, 2021.

At March 31, 2022, our investment-grade and noninvestment-grade fixed-maturity securities represented 79.9% and 5.1% of the portfolio, respectively.

The remaining 15.0% represented fixed-maturity securities that were not rated by Moody's or S&P Global Ratings.

Attributes of the fixed-maturity portfolio include:

At September 30, 2021 At December 31, 2020

At March 31, 2022 At December 31, 2021

Weighted average yield-to-amortized cost 4.00 % 4.02 %

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We discuss maturities of our fixed-maturity portfolio in our 2021 Annual Report on Form 10-K, Item 8, Note 2, Investments, Page 134, and in this quarterly report Item 2, Investments Results.

Cincinnati Financial Corporation Third-Quarter 2021 10-Q

Cincinnati Financial Corporation First-Quarter 2022 10-Q

TAXABLE FIXED MATURITIES

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

Our taxable fixed-maturity portfolio, with a fair value of $8.467 billion at March 31, 2022, included:

(Dollars in millions) At March 31, 2022 At December 31, 2021

Investment-grade corporate $ 6,535 $ 6,807

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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 September 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 77.5% of the taxable fixed-maturity portfolio's fair value at September 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 77.2% of the taxable fixed-maturity portfolio's fair value at March 31, 2022, compared with 76.9% at year-end 2021.

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

September 30, 2021, was the financial sector.

March 31, 2022, was the financial sector.

It represented 41.0% of our investment-grade corporate bond portfolio, compared with 41.4% at year-end 2021.

The energy sector represented 10.7% and was less than 10% at year-end 2021.

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

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

Our taxable fixed-maturity portfolio at March 31, 2022, included $266 million of commercial mortgage-backed securities with an average rating of Aa2/AA.

TAX-EXEMPT FIXED MATURITIES

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.

At March 31, 2022, we had $3.909 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 September 30, 2021.

No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at March 31, 2022.

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 Third-Quarter 2021 10-Q

Cincinnati Financial Corporation First-Quarter 2022 10-Q

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

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-200 -100 - 100 200

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

At March 31, 2022 $ 13,620 $ 12,989 $ 12,376 $ 11,763 $ 11,151

At December 31, 2021 $ 14,327 $ 13,656 $ 13,022 $ 12,399 $ 11,768

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 effective duration of the fixed-maturity portfolio as of March 31, 2022, was 4.9 years, up from 4.8 years at year-end 2021.

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 5.0% change in the fair value of the fixed-maturity portfolio.

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EQUITY INVESTMENTS

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.

Our equity investments, with a fair value totaling $10.675 billion at March 31, 2022, included $10.245 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 September 30, 2021 $ 6,921 $ 7,910 $ 8,898 $ 9,887 $ 10,876 $ 11,864 $ 12,853

At March 31, 2022 $ 7,473 $ 8,540 $ 9,608 $ 10,675 $ 11,743 $ 12,810 $ 13,878

At December 31, 2021 $ 7,921 $ 9,052 $ 10,184 $ 11,315 $ 12,447 $ 13,578 $ 14,710

At September 30, 2021, Apple Inc.

At March 31, 2022, Apple Inc.

(Nasdaq:AAPL) was our largest single common stock holding with a fair value of $848 million, or 8.3% of our publicly traded common stock portfolio and 3.7% of the total investment portfolio.

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

Cincinnati Financial Corporation Third-Quarter 2021 10-Q

Forty-four holdings among 10 different sectors each had a fair value greater than $100 million.

Cincinnati Financial Corporation First-Quarter 2022 10-Q

Common Stock Portfolio Industry Sector Distribution

Percent of common stock portfolio

At September 30, 2021 At December 31, 2020

At March 31, 2022 At December 31, 2021

Financial S&P 500 Industry

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Information technology 30.1 % 28.0 % 31.1 % 29.2 %

Financial 15.6 11.4 14.2 10.4

Healthcare 14.2 13.6 13.5 13.3

Financial 13.9 11.1 14.2 10.7

Industrials 11.0 7.9 11.1 7.8

Consumer discretionary 8.2 12.4 8.9 12.7

Consumer staples 7.3 6.1 6.9 5.9

Consumer discretionary 7.1 12.0 8.3 12.5

Energy 5.2 3.9 4.0 2.7

Materials 4.1 2.6 4.4 2.5

Real estate 2.5 2.6 2.7 2.4

Utilities 2.9 2.7 2.2 2.5

Real estate 2.6 2.7 2.7 2.8

Telecomm services 1.6 9.4 1.6 10.1

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UNREALIZED INVESTMENT GAINS AND LOSSES

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.

At March 31, 2022, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $291 million and unrealized investment losses amounted to $245 million before taxes.

The $46 million net unrealized gain position in our fixed-maturity portfolio at March 31, 2022, decreased in the first three months of 2022, primarily due to an increase in U.S.

Treasury yields and to a lesser degree a widening of corporate credit spreads.

The net gain position for our current fixed-maturity holdings will naturally decline over time as individual securities mature.

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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 September 30, 2021, consisted of a net gain position in our equity portfolio of $5.791 billion.

On this basis, the net unrealized investment gains at March 31, 2022, consisted of a net gain position in our equity portfolio of $6.508 billion.

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

The five largest holdings in our common stock portfolio were Apple, Microsoft (Nasdaq:MSFT), BlackRock Inc.

(NYSE:BLK), JPMorgan Chase (NYSE:JPM) and Accenture Co.

(NYSE:ACN), which had a combined fair value of $2.447 billion.

The five largest holdings in our common stock portfolio were Apple, Microsoft (Nasdaq:MSFT), Accenture Co.

(NYSE:ACN), UnitedHealth Group Inc.

(NYSE:UNH) and BlackRock Inc.

(NYSE:BLK), which had a combined fair value of $2.633 billion.

Unrealized Investment Losses

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

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.

At March 31, 2022, 1,377 of the 4,362 fixed-maturity securities we owned had fair values below amortized cost, compared with 278 of the 4,329 securities we owned at year-end 2021.

The 1,377 holdings with fair values below amortized cost at March 31, 2022, represented 31.6% of the fair value of our fixed-maturity investment portfolio and $245 million in unrealized losses.

• 1,103 of the 1,377 holdings had fair value between 90% and 100% of amortized cost at March 31, 2022.

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 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 Third-Quarter 2021 10-Q

contractual obligation to make principal payments.

The fair value of these 1,103 securities was $3.063 billion, and they accounted for $121 million in unrealized losses.

• 274 of the 1,377 fixed-maturity holdings had fair value between 70% and 90% of amortized cost at

March 31, 2022.

We believe the 274 fixed-maturity securities will continue to pay interest and ultimately pay

Cincinnati Financial Corporation First-Quarter 2022 10-Q

principal upon maturity.

The issuers of these 274 securities have strong cash flow to service their debt and meet their contractual obligation to make principal payments.

The fair value of these securities was $846 million, and they accounted for $124 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.

• None of the fixed-maturity holdings had fair value below 70% of amortized cost at March 31, 2022.

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 September 30, 2021 Fair value Unrealized

At March 31, 2022 Fair value Unrealized

losses Fair value Unrealized

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Foreign government 16 — — — 16 —

Government-sponsored enterprises 7 — — — 7 —

Total $ 1,047 $ 15 $ 28 $ 1 $ 1,075 $ 16

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 March 31, 2022, applying our invested asset impairment policy, we determined that the total of $245 million, for securities in an unrealized loss position in the table above, was not the result of a credit loss.

During the first three months of 2022, one fixed-maturity security that was written down to fair value, due to an intention to be sold, and changes in allowance for credit losses were each less than $1 million.

During the first three months of 2021, no securities were written down to fair value due to an intention to be sold and we had no allowance for credit losses.

During the full year of 2021, we wrote down five securities and recorded $1 million in impairment charges.

At December 31, 2021, 278 fixed-maturity securities with a total unrealized loss of $16 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 Third-Quarter 2021 10-Q

Cincinnati Financial Corporation First-Quarter 2022 10-Q

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

3 unchanged sentences

gain (loss) Gross investment income

At September 30, 2021

At March 31, 2022

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