CINCINNATI FINANCIAL CORP 10-Q

Item 1. Financial Statements (unaudited) Cincinnati Financial Corporation and Subsidiaries Condensed Consolidated Balance Sheets (Dollars in millions, except per share data) March 31, December 31, 2022 2021 Assets Investments Fixed maturities, at fair value (amortized cost: 2022—$ 12,330 ; 2021—$ 12,230 ) $ 12,376 $ 13,022 Equity securities, at fair value (cost: 2022—$ 4,167 ; 2021—$ 4,121 ) 10,675 11,315 Other invested assets 348 329 Total investments 23,399 24,666 Cash and cash equivalents 987 1,139 Investment income receivable 147 144 Finance receivable 92 98 Premiums receivable 2,248 2,053 Reinsurance recoverable 556 570 Prepaid reinsurance premiums 79 78 Deferred policy acquisition costs 979 905 Land, building and equipment, net, for company use (accumulated depreciation: 2022—$ 309 ; 2021—$ 303 ) 203 205 Other assets 657 570 Separate accounts 903 959 Total assets $ 30,250 $ 31,387 Liabilities Insurance reserves Loss and loss expense reserves $ 7,366 $ 7,305 Life policy and investment contract reserves 3,027 3,014 Unearned premiums 3,560 3,271 Other liabilities 952 1,092 Deferred income tax 1,460 1,744 Note payable 49 54 Long-term debt and lease obligations 841 843 Separate accounts 903 959 Total liabilities 18,158 18,282 Commitments and contingent liabilities (Note 12) Shareholders' Equity Common stock, par value—$ 2 per share; (authorized: 2022 and 2021— 500 million shares; issued: 2022 and 2021— 198.3 million shares) 397 397 Paid-in capital 1,354 1,356 Retained earnings 12,241 12,625 Accumulated other comprehensive income 59 648 Treasury stock at cost (2022— 38.0 million shares and 2021— 38.0 million shares) ( 1,959 ) ( 1,921 ) Total shareholders' equity 12,092 13,105 Total liabilities and shareholders' equity $ 30,250 $ 31,387 Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 3 Cincinnati Financial Corporation and Subsidiaries Condensed Consolidated Statements of Income (Dollars in millions, except per share data) Three months ended March 31, 2022 2021 Revenues Earned premiums $ 1,690 $ 1,544 Investment income, net of expenses 185 174 Investment gains and losses, net ( 666 ) 504 Fee revenues 4 3 Other revenues 2 2 Total revenues 1,215 2,227 Benefits and Expenses Insurance losses and contract holders' benefits 1,039 1,003 Underwriting, acquisition and insurance expenses 519 439 Interest expense 13 13 Other operating expenses 4 4 Total benefits and expenses 1,575 1,459 Income (Loss) Before Income Taxes ( 360 ) 768 Provision (Benefit) for Income Taxes Current 41 36 Deferred ( 128 ) 112 Total provision (benefit) for income taxes ( 87 ) 148 Net Income (Loss) $ ( 273 ) $ 620 Per Common Share Net income (loss)—basic $ ( 1.70 ) $ 3.85 Net income (loss)—diluted ( 1.70 ) 3.82 Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 4 Cincinnati Financial Corporation and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Dollars in millions) Three months ended March 31, 2022 2021 Net Income (Loss) $ ( 273 ) $ 620 Other Comprehensive Income (Loss) Change in unrealized gains and losses on investments, net of tax (benefit) of $( 157 ) and $( 41 ), respectively ( 589 ) ( 155 ) Amortization of pension actuarial loss and prior service cost, net of tax of $ 0 and $ 1 , respectively — 3 Change in life deferred acquisition costs, life policy reserves and other, net of tax of $ 0 and $ 2 , respectively — 8 Other comprehensive income (loss) ( 589 ) ( 144 ) Comprehensive Income (Loss) $ ( 862 ) $ 476 Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 5 Cincinnati Financial Corporation and Subsidiaries Condensed Consolidated Statements of Shareholders' Equity (Dollars in millions) Three months ended March 31, 2022 2021 Common Stock Beginning of period $ 397 $ 397 Share-based awards — — End of period 397 397 Paid-In Capital Beginning of period 1,356 1,328 Share-based awards ( 14 ) ( 16 ) Share-based compensation 11 9 Other 1 1 End of period 1,354 1,322 Retained Earnings Beginning of period 12,625 10,085 Net income (loss) ( 273 ) 620 Dividends declared ( 111 ) ( 102 ) End of period 12,241 10,603 Accumulated Other Comprehensive Income Beginning of period 648 769 Other comprehensive loss ( 589 ) ( 144 ) End of period 59 625 Treasury Stock Beginning of period ( 1,921 ) ( 1,790 ) Share-based awards 9 12 Shares acquired - share repurchase authorization ( 45 ) ( 28 ) Shares acquired - share-based compensation plans ( 2 ) ( 3 ) End of period ( 1,959 ) ( 1,809 ) Total Shareholders' Equity $ 12,092 $ 11,138 (In millions, except per common share) Common Stock - Shares Outstanding Beginning of period 160.3 160.9 Share-based awards 0.4 0.4 Shares acquired - share repurchase authorization ( 0.4 ) ( 0.3 ) End of period 160.3 161.0 Dividends declared per common share $ 0.69 $ 0.63 Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 6 Cincinnati Financial Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (Dollars in millions) Three months ended March 31, 2022 2021 Cash Flows From Operating Activities Net income (loss) $ ( 273 ) $ 620 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 29 23 Investment gains and losses, net 674 ( 501 ) Share-based compensation 11 9 Interest credited to contract holders 12 11 Deferred income tax expense ( 128 ) 112 Changes in: Investment income receivable ( 3 ) 2 Premiums and reinsurance receivable ( 182 ) ( 166 ) Deferred policy acquisition costs ( 68 ) ( 49 ) Other assets ( 20 ) ( 33 ) Loss and loss expense reserves 61 204 Life policy and investment contract reserves 17 15 Unearned premiums 289 221 Other liabilities ( 136 ) ( 80 ) Current income tax receivable/payable ( 85 ) ( 34 ) Net cash provided by operating activities 198 354 Cash Flows From Investing Activities Sale of fixed maturities 55 30 Call or maturity of fixed maturities 296 300 Sale of equity securities 56 65 Purchase of fixed maturities ( 460 ) ( 467 ) Purchase of equity securities ( 90 ) ( 78 ) Investment in finance receivables ( 3 ) ( 12 ) Collection of finance receivables 9 8 Investment in building and equipment ( 4 ) ( 5 ) Change in other invested assets, net ( 21 ) 6 Net cash used in investing activities ( 162 ) ( 153 ) Cash Flows From Financing Activities Payment of cash dividends to shareholders ( 99 ) ( 95 ) Shares acquired - share repurchase authorization ( 45 ) ( 28 ) Changes in note payable ( 5 ) 3 Proceeds from stock options exercised 4 4 Contract holders' funds deposited 18 27 Contract holders' funds withdrawn ( 32 ) ( 33 ) Other ( 29 ) ( 32 ) Net cash used in financing activities ( 188 ) ( 154 ) Net change in cash and cash equivalents ( 152 ) 47 Cash and cash equivalents at beginning of year 1,139 900 Cash and cash equivalents at end of period $ 987 $ 947 Supplemental Disclosures of Cash Flow Information: Income taxes paid 121 66 Noncash Activities Equipment acquired under finance lease obligations $ 2 $ 3 Share-based compensation 16 16 Other assets and other liabilities 10 44 Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Cincinnati Financial Corporation First-Quarter 2022 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. 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 March 31, 2022, 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 2021 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. The company continues to monitor the impact of the coronavirus (SARS-CoV-2 or COVID-19) pandemic outbreak. 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 requires changes to the measurement and disclosure of long-duration insurance contracts. 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. We plan to adopt these ASUs on a modified retrospective basis on January 1, 2023, with a transition date of January 1, 2021. Related to the company's term and whole life products included in life policy and investment contract reserves, the new guidance requires that cash flow assumptions be reviewed at least annually to determine any necessary updates. Additionally, the discount rate assumption is required to be updated quarterly based on upper-medium grade fixed-income instrument yields (market value discount rates). The life policy and investment contract reserves balance is adjusted through insurance losses and contract holders' benefits for cash flow assumption updates and through accumulated other comprehensive income (AOCI) for discount rate updates. These ASUs also amend the previous guidance related to life deferred policy acquisition costs by requiring amortization of those costs on a constant level basis for a group of contracts that approximates straight-line and the removal of shadow deferred policy acquisition costs for universal life and deferred annuity products. These ASUs also require entities to provide additional disclosures including disaggregated rollforwards of the life policy and investment contract reserves, separate account liabilities and life deferred policy acquisition costs. Management has identified that the requirement to measure term and whole life policy reserves using updated discount rates is expected to have a material impact on shareholders' equity, through an increase to life policy and investment contract reserves and a decrease to AOCI, at the transition date. The company is in the process of addressing necessary implementation-related items, including modifications to reporting and analysis capabilities as well as actuarial systems and associated data processes. Further, the company continues to refine its accounting policy decisions associated with the new guidance. Additional impacts of these ASUs on our company's consolidated financial position, results of operations and cash flows are being further evaluated by management . Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 8 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 March 31, 2022 gains losses Fixed maturity securities: Corporate $ 7,131 $ 184 $ 166 $ 7,149 States, municipalities and political subdivisions 4,780 106 76 4,810 Commercial mortgage-backed 267 1 2 266 United States government 113 — 1 112 Foreign government 25 — — 25 Government-sponsored enterprises 14 — — 14 Total $ 12,330 $ 291 $ 245 $ 12,376 At December 31, 2021 Fixed maturity securities: Corporate $ 7,043 $ 467 $ 13 $ 7,497 States, municipalities and political subdivisions 4,768 330 3 5,095 Commercial mortgage-backed 264 9 — 273 United States government 121 2 — 123 Foreign government 26 — — 26 Government-sponsored enterprises 8 — — 8 Total $ 12,230 $ 808 $ 16 $ 13,022 The decrease in net unrealized investment gains in our fixed-maturity portfolio at March 31, 2022, is primarily due to an increase in U.S. Treasury yields and a widening of corporate credit spreads. Our commercial mortgage-backed securities had an average rating of Aa2/AA at March 31, 2022, and December 31, 2021. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 9 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 March 31, 2022 Fair value Unrealized losses Fair value Unrealized losses Fair value Unrealized losses Fixed maturity securities: Corporate $ 2,603 $ 157 $ 78 $ 9 $ 2,681 $ 166 States, municipalities and political subdivisions 977 72 21 4 998 76 Commercial mortgage-backed 128 2 10 — 138 2 United States government 72 1 — — 72 1 Foreign government 7 — — — 7 — Government-sponsored enterprises 10 — 3 — 13 — Total $ 3,797 $ 232 $ 112 $ 13 $ 3,909 $ 245 At December 31, 2021 Fixed maturity securities: Corporate $ 861 $ 13 $ 15 $ — $ 876 $ 13 States, municipalities and political subdivisions 105 2 2 1 107 3 Commercial mortgage-backed 10 — 11 — 21 — United States government 48 — — — 48 — Foreign government 16 — — — 16 — Government-sponsored enterprises 7 — — — 7 — Total $ 1,047 $ 15 $ 28 $ 1 $ 1,075 $ 16 Contractual maturity dates for fixed-maturities securities were: (Dollars in millions) Amortized cost Fair value % of fair value At March 31, 2022 Maturity dates: Due in one year or less $ 686 $ 690 5.6 % Due after one year through five years 3,636 3,690 29.8 Due after five years through ten years 3,460 3,525 28.5 Due after ten years 4,548 4,471 36.1 Total $ 12,330 $ 12,376 100.0 % Actual maturities may differ from contractual maturities when there is a right to call or prepay obligations with or without call or prepayment penalties. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 10 The following table provides investment income and investment gains and losses, net: (Dollars in millions) Three months ended March 31, 2022 2021 Investment income: Interest $ 123 $ 118 Dividends 65 58 Other 1 2 Total 189 178 Less investment expenses 4 4 Total $ 185 $ 174 Investment gains and losses, net: Equity securities: Investment gains and losses on securities sold, net $ 8 $ 4 Unrealized gains and losses on securities still held, net ( 683 ) 487 Subtotal ( 675 ) 491 Fixed maturities: Gross realized gains 4 3 Gross realized losses ( 1 ) — Subtotal 3 3 Other 6 10 Total $ ( 666 ) $ 504 The fair value of our equity portfolio was $ 10.675 billion and $ 11.315 billion at March 31, 2022, and December 31, 2021, respectively. At March 31, 2022, and December 31, 2021, Apple Inc. (Nasdaq:AAPL) , an equity holding, was our largest single investment holding with a fair value of $ 848 million and $ 862 million, which was 8.3 % and 7.9 % of our publicly traded common equities portfolio and 3.7 % and 3.5 % of the total investment portfolio, respectively. At March 31, 2022, and December 31, 2021, the allowance for credit losses, including changes in the amount during each period, was less than $ 1 million. During the three months ended March 31, 2022, there was one fixed-maturity security that was written down to fair value due to an intention to be sold resulting in an impairment charge of less than $ 1 million. During the three months ended March 31, 2021, there were no fixed-maturity securities that were written down to fair value due to an intention to be sold. At March 31, 2022, 1,377 fixed-maturity securities with a total unrealized loss of $ 245 million were in an unrealized loss position. Of that total, no fixed-maturity securities had fair values below 70 % of amortized cost. 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 First-Quarter 2022 10-Q Page 11 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, 2021, and ultimately management determines fair value. See our 2021 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 137, 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 March 31, 2022, and December 31, 2021. 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 March 31, 2022 Fixed maturities, available for sale: Corporate $ — $ 7,149 $ — $ 7,149 States, municipalities and political subdivisions — 4,810 — 4,810 Commercial mortgage-backed — 266 — 266 United States government 112 — — 112 Foreign government — 25 — 25 Government-sponsored enterprises — 14 — 14 Subtotal 112 12,264 — 12,376 Common equities 10,245 — — 10,245 Nonredeemable preferred equities — 430 — 430 Separate accounts taxable fixed maturities — 887 — 887 Top Hat savings plan mutual funds and common equity (included in Other assets) 70 — — 70 Total $ 10,427 $ 13,581 $ — $ 24,008 At December 31, 2021 Fixed maturities, available for sale: Corporate $ — $ 7,497 $ — $ 7,497 States, municipalities and political subdivisions — 5,095 — 5,095 Commercial mortgage-backed — 273 — 273 United States government 123 — — 123 Foreign government — 26 — 26 Government-sponsored enterprises — 8 — 8 Subtotal 123 12,899 — 13,022 Common equities 10,862 — — 10,862 Nonredeemable preferred equities — 453 — 453 Separate accounts taxable fixed maturities — 948 — 948 Top Hat savings plan mutual funds and common equity (included in Other assets) 64 — — 64 Total $ 11,049 $ 14,300 $ — $ 25,349 Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 12 We also held Level 1 cash and cash equivalents of $ 987 million and $ 1.139 billion at March 31, 2022, and December 31, 2021, 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 March 31, December 31, March 31, December 31, 2022 2021 2022 2021 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 371 371 374 374 Total $ 789 $ 789 $ 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 March 31, 2022 Note payable $ — $ 49 $ — $ 49 6.900 % senior debentures, due 2028 — 32 — 32 6.920 % senior debentures, due 2028 — 466 — 466 6.125 % senior notes, due 2034 — 462 — 462 Total $ — $ 1,009 $ — $ 1,009 At December 31, 2021 Note payable $ — $ 54 $ — $ 54 6.900 % senior debentures, due 2028 — 34 — 34 6.920 % senior debentures, due 2028 — 501 — 501 6.125 % senior notes, due 2034 — 510 — 510 Total $ — $ 1,099 $ — $ 1,099 Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 13 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 March 31, 2022 Life policy loans $ — $ — $ 40 $ 40 Deferred annuities — — 704 704 Structured settlements — 177 — 177 Total $ — $ 177 $ 704 $ 881 At December 31, 2021 Life policy loans $ — $ — $ 44 $ 44 Deferred annuities — — 778 778 Structured settlements — 201 — 201 Total $ — $ 201 $ 778 $ 979 Outstanding principal and interest for these life policy loans totaled $ 30 million and $ 31 million at March 31, 2022, and December 31, 2021, respectively. Recorded reserves for the deferred annuities were $ 757 million and $ 762 million at March 31, 2022, and December 31, 2021, respectively. Recorded reserves for the structured settlements were $ 135 million and $ 136 million at March 31, 2022, and December 31, 2021, respectively. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 14 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 March 31, 2022 2021 Gross loss and loss expense reserves, beginning of period $ 7,229 $ 6,677 Less reinsurance recoverable 327 277 Net loss and loss expense reserves, beginning of period 6,902 6,400 Net incurred loss and loss expenses related to: Current accident year 997 1,033 Prior accident years ( 41 ) ( 110 ) Total incurred 956 923 Net paid loss and loss expenses related to: Current accident year 169 143 Prior accident years 721 562 Total paid 890 705 Net loss and loss expense reserves, end of period 6,968 6,618 Plus reinsurance recoverable 319 262 Gross loss and loss expense reserves, end of period $ 7,287 $ 6,880 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 $ 79 million at March 31, 2022, and $ 70 million at March 31, 2021, for certain life and health loss and loss expense reserves. For the three months ended March 31, 2022, we experienced $ 41 million of favorable development on prior accident years, including $ 18 million of favorable development in commercial lines, $ 34 million of favorable development in personal lines and $ 5 million of favorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $ 10 million for the workers' compensation line and $ 6 million for the commercial auto line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Within personal lines, we recognized favorable development of $ 31 million for the homeowner line. For the three months ended March 31, 2021, we experienced $ 110 million of favorable development on prior accident years, including $ 83 million of favorable development in commercial lines, $ 20 million of favorable development in personal lines and $ 4 million of unfavorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $ 25 million for the workers' compensation line, $ 24 million for the commercial auto line and $ 21 million for the commercial property 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 $ 15 million in personal auto. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 15 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) March 31, 2022 December 31, 2021 Life policy reserves: Ordinary/traditional life $ 1,395 $ 1,376 Other 52 52 Subtotal 1,447 1,428 Investment contract reserves: Deferred annuities 757 762 Universal life 680 679 Structured settlements 135 136 Other 8 9 Subtotal 1,580 1,586 Total life policy and investment contract reserves $ 3,027 $ 3,014 Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 16 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 March 31, 2022 2021 Property casualty: Deferred policy acquisition costs asset, beginning of period $ 602 $ 542 Capitalized deferred policy acquisition costs 364 312 Amortized deferred policy acquisition costs ( 301 ) ( 268 ) Deferred policy acquisition costs asset, end of period $ 665 $ 586 Life: Deferred policy acquisition costs asset, beginning of period $ 303 $ 263 Capitalized deferred policy acquisition costs 15 14 Amortized deferred policy acquisition costs ( 10 ) ( 9 ) Shadow deferred policy acquisition costs 6 26 Deferred policy acquisition costs asset, end of period $ 314 $ 294 Consolidated: Deferred policy acquisition costs asset, beginning of period $ 905 $ 805 Capitalized deferred policy acquisition costs 379 326 Amortized deferred policy acquisition costs ( 311 ) ( 277 ) Shadow deferred policy acquisition costs 6 26 Deferred policy acquisition costs asset, end of period $ 979 $ 880 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. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 17 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 March 31, 2022 2021 Before tax Income tax Net Before tax Income tax Net Investments: AOCI, beginning of period $ 792 $ 165 $ 627 $ 1,026 $ 215 $ 811 OCI before investment gains and losses, net, recognized in net income ( 743 ) ( 157 ) ( 586 ) ( 193 ) ( 41 ) ( 152 ) Investment gains and losses, net, recognized in net income ( 3 ) — ( 3 ) ( 3 ) — ( 3 ) OCI ( 746 ) ( 157 ) ( 589 ) ( 196 ) ( 41 ) ( 155 ) AOCI, end of period $ 46 $ 8 $ 38 $ 830 $ 174 $ 656 Pension obligations: AOCI, beginning of period $ 27 $ 7 $ 20 $ ( 41 ) $ ( 7 ) $ ( 34 ) OCI excluding amortization recognized in net income — — — 2 1 1 Amortization recognized in net income — — — 2 — 2 OCI — — — 4 1 3 AOCI, end of period $ 27 $ 7 $ 20 $ ( 37 ) $ ( 6 ) $ ( 31 ) Life deferred acquisition costs, life policy reserves and other: AOCI, beginning of period $ 1 $ — $ 1 $ ( 10 ) $ ( 2 ) $ ( 8 ) OCI before investment gains and losses, net, recognized in net income — — — 10 2 8 Investment gains and losses, net, recognized in net income — — — — — — OCI — — — 10 2 8 AOCI, end of period $ 1 $ — $ 1 $ — $ — $ — Summary of AOCI: AOCI, beginning of period $ 820 $ 172 $ 648 $ 975 $ 206 $ 769 Investments OCI ( 746 ) ( 157 ) ( 589 ) ( 196 ) ( 41 ) ( 155 ) Pension obligations OCI — — — 4 1 3 Life deferred acquisition costs, life policy reserves and other OCI — — — 10 2 8 Total OCI ( 746 ) ( 157 ) ( 589 ) ( 182 ) ( 38 ) ( 144 ) AOCI, end of period $ 74 $ 15 $ 59 $ 793 $ 168 $ 625 Investment gains and losses, net, and life deferred acquisition costs, life policy reserves and other investment gains and losses, net, are recorded in the investment gains and losses, net, line item in the condensed consolidated statements of income. Amortization on pension obligations is recorded in the insurance losses and contract holders' benefits and underwriting, acquisition and insurance expenses line items in the condensed consolidated statements of income. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 18 NOTE 8 – Reinsurance Primary components of our property casualty reinsurance assumed operations include involuntary and voluntary assumed as well as contracts from our reinsurance assumed operations, known as Cincinnati Re. Primary components of our ceded reinsurance include a property per risk treaty, property excess treaty, casualty per occurrence treaty, casualty excess treaty, property catastrophe treaty and catastrophe bonds and retrocessions on our reinsurance assumed operations. 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. The table below summarizes our consolidated property casualty insurance net written premiums, earned premiums and incurred loss and loss expenses: (Dollars in millions) Three months ended March 31, 2022 2021 Direct written premiums $ 1,703 $ 1,545 Assumed written premiums 263 205 Ceded written premiums ( 67 ) ( 57 ) Net written premiums $ 1,899 $ 1,693 Direct earned premiums $ 1,561 $ 1,429 Assumed earned premiums 121 101 Ceded earned premiums ( 64 ) ( 55 ) Earned premiums $ 1,618 $ 1,475 Direct incurred loss and loss expenses $ 895 $ 868 Assumed incurred loss and loss expenses 73 78 Ceded incurred loss and loss expenses ( 12 ) ( 23 ) Incurred loss and loss expenses $ 956 $ 923 Our life insurance company purchases reinsurance for protection of a portion of the risks that are written. Primary components of our life reinsurance program include individual mortality coverage, aggregate catastrophe and accidental death coverage in excess of certain deductibles. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 19 The table below summarizes our consolidated life insurance earned premiums and contract holders' benefits incurred: (Dollars in millions) Three months ended March 31, 2022 2021 Direct earned premiums $ 90 $ 87 Ceded earned premiums ( 18 ) ( 18 ) Earned premiums $ 72 $ 69 Direct contract holders' benefits incurred 114 107 Ceded contract holders' benefits incurred ( 31 ) ( 27 ) Contract holders' benefits incurred $ 83 $ 80 The ceded benefits incurred can vary depending on the type of life insurance policy held and the year the policy was issued. At March 31, 2022, and December 31, 2021, the allowance for uncollectible property casualty premiums was $ 14 million. At March 31, 2022, and December 31, 2021, the allowances for credit losses on other premiums receivable and recoverable assets were immaterial. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 20 NOTE 9 – Income Taxes The differences between the 21 % statutory federal income tax rate and our effective income tax rate were as follows: (Dollars in millions) Three months ended March 31, 2022 2021 Tax at statutory rate: $ ( 76 ) 21.0 % $ 161 21.0 % Increase (decrease) resulting from: Tax-exempt income from municipal bonds ( 5 ) 1.4 ( 5 ) ( 0.7 ) Dividend received exclusion ( 5 ) 1.4 ( 5 ) ( 0.7 ) Other ( 1 ) 0.4 ( 3 ) ( 0.3 ) Provision (benefit) for income taxes $ ( 87 ) 24.2 % $ 148 19.3 % The provision (benefit) for federal income taxes is based upon filing a consolidated income tax return for the company and its domestic subsidiaries. We continue to believe that after considering all positive and negative evidence of taxable income in the carryback and carryforward periods as permitted by law, it is more likely than not that all of the deferred tax assets on our U.S. domestic operations will be realized. As a result, we have no valuation allowance for our U.S. domestic operations at March 31, 2022, and December 31, 2021. As more fully discussed below, we do carry a valuation allowance on the deferred tax assets related to Cincinnati Global Underwriting Ltd. SM (Cincinnati Global). Unrecognized Tax Benefits At March 31, 2022, and December 31, 2021, we had a gross unrecognized tax benefit of $ 34 million. There were no changes to this amount during the first quarter of 2022. It is reasonably possible that within the next 12 months, our unrecognized tax benefit could change when the IRS completes its examination of the tax year ended December 31, 2018. Cincinnati Global As a result of operations for the three months ended March 31, 2022, Cincinnati Global decreased its net deferred tax assets by $ 3 million with an offsetting decrease of $ 3 million to the valuation allowance. At March 31, 2022, Cincinnati Global had a net deferred tax asset of $ 50 million and an offsetting valuation allowance of $ 50 million. Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred tax assets will not be realized. After considering all positive and negative evidence, we continue to believe it is appropriate to carry a valuation allowance at March 31, 2022. At March 31, 2022, and December 31, 2021, Cincinnati Global had operating loss carryforwards in the United States of $ 6 million and $ 8 million, respectively, and in the United Kingdom of $ 130 million for both periods. These Cincinnati Global losses can only be utilized within the Cincinnati Global group in both the United States and in the United Kingdom and cannot offset the income of our domestic operations in the United States. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 21 NOTE 10 – Net Income (Loss) Per Common Share Basic earnings per share are computed based on the weighted average number of common 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: (In millions, except per share data) Three months ended March 31, 2022 2021 Numerator: Net income (loss)—basic and diluted $ ( 273 ) $ 620 Denominator: Basic weighted-average common shares outstanding 160.4 161.0 Effect of share-based awards: Stock options — 0.9 Nonvested shares — 0.6 Diluted weighted-average shares 160.4 162.5 Earnings (loss) per share: Basic $ ( 1.70 ) $ 3.85 Diluted $ ( 1.70 ) $ 3.82 Number of anti-dilutive share-based awards 2.3 1.0 In accordance with Accounting Standards Codification 260, Earnings per Share , the assumed exercise of share-based awards were excluded from the computation of diluted loss per share for the three months ended March 31, 2022. See our 2021 Annual Report on Form 10-K, Item 8, Note 17, Share-Based Associate Compensation Plans, Page 169, for information about share-based awards. The above table shows the number of anti-dilutive share-based awards for the three months ended March 31, 2022 and 2021. These share-based awards were not included in the computation of net income (loss) per common share (diluted) because their exercise would have anti-dilutive effects. NOTE 11 – Employee Retirement Benefits The following summarizes the components of net periodic (benefit) cost for our qualified and supplemental pension plans: (Dollars in millions) Three months ended March 31, 2022 2021 Service cost $ 2 $ 2 Non-service (benefit) costs: Interest cost 3 2 Expected return on plan assets ( 6 ) ( 5 ) Amortization of actuarial loss and prior service cost — 2 Other — 2 Total non-service (benefit) cost ( 3 ) 1 Net periodic (benefit) cost $ ( 1 ) $ 3 See our 2021 Annual Report on Form 10-K, Item 8, Note 13, Employee Retirement Benefits, Page 162, for information on our retirement benefits. Service costs and non-service costs (benefit) are allocated in the same proportion primarily to the underwriting, acquisition and insurance expenses line item with the remainder allocated to the insurance losses and contract holders' benefits line item on the condensed consolidated statements of income for both 2022 and 2021. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 22 We made matching contributions totaling $ 8 million and $ 6 million to our 401(k) and Top Hat savings plans during the first quarter of 2022 and 2021, respectively. We m ade no con tributions to our qualified pension plan during the first three months of 2022. NOTE 12 – Commitments and Contingent Liabilities The company, through its insurance subsidiaries, is involved in claims litigation arising in the ordinary course of conducting its business, both as a liability insurer defending or providing indemnity for third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The company accounts for such activity through the establishment of unpaid loss and loss expense reserves. Subject to the uncertainties discussed in Note 4, Property Casualty Loss and Loss Expenses, and in the discussion in the balance of this Note, we believe that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses, costs of defense, and reinsurance recoveries, is immaterial to our consolidated financial position, results of operations and cash flows. Beginning in April 2020, like many companies in the property casualty insurance industry, the company’s property casualty subsidiaries, were named as defendants in lawsuits seeking insurance coverage under commercial property insurance policies issued by the company for alleged losses resulting from the shutdown or suspension of their businesses due to the COVID-19 pandemic. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts for claim denials, interest and attorney fees. Some of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages. The company denies the allegations in these lawsuits and intends to continue to vigorously defend the lawsuits. The company maintains that it has no coverage obligations with respect to these lawsuits for business income allegedly lost by the plaintiffs due to the COVID-19 pandemic based on the terms of the applicable insurance policies. Although the policy terms vary, in general, the claims at issue in these lawsuits were denied because the policyholder identified no direct physical loss or damage to property at the insured premises, and the governmental orders that led to the complete or partial shutdown of the business were not due to the existence of any direct physical loss or damage to property in the immediate vicinity of the insured premises and did not prohibit access to the insured premises, as required by the terms of the insurance policies. Depending on the individual policy, additional policy terms and conditions may also prohibit coverage, such as exclusions for pollutants, ordinance or law, loss of use, and acts or decisions. The company’s standard commercial property insurance policies generally did not contain a specific virus exclusion. In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present a number of uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any class may be certified, and the size and scope of any such classes. The legal theories advanced by plaintiffs vary by case as do the state laws that govern the policy interpretation. These lawsuits are at various stages of litigation; many complaints continue to be amended; several have been dismissed voluntarily and may be refiled; and others have been dismissed by trial courts and appealed. While early appellate decisions have been favorable, many remain to be decided. In some jurisdictions, many cases have been stayed pending appellate decisions in their state or federal circuit. Accordingly, little discovery has occurred on pending cases. In addition, business income calculations depend upon a wide range of factors that are particular to the circumstances of each individual policyholder and, here, virtually none of the plaintiffs have submitted proofs of loss or otherwise quantified or factually supported any allegedly covered loss. Moreover, the company’s experience shows that demands for damages often bear little relation to a reasonable estimate of potential loss. Accordingly, management cannot now reasonably estimate the possible loss or range of loss, if any. Nonetheless, given the number of claims and potential claims, the indeterminate amounts sought, and the inherent unpredictability of litigation, it is possible that adverse outcomes, if any, in the aggregate could have a material adverse effect on the company’s consolidated financial position, 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 national class. Such proceedings have alleged, for example, breach of an alleged duty to search national databases 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, Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 23 punitive damages or penalties are sought, such as claims alleging bad faith handling of insurance claims or writing unauthorized coverage or claims alleging discrimination by former or current 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 position, results of operations and cash flows. 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 financial position, results of operations and 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 immaterial. NOTE 13 – Segment Information We operate primarily in two industries, property casualty insurance and life insurance. Our chief operating decision maker regularly reviews our reporting segments to make decisions about allocating resources and assessing performance. Our reporting segments are: • Commercial lines insurance • Personal lines insurance • Excess and surplus lines insurance • Life insurance • Investments We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company. We also report as Other the underwriting results of Cincinnati Re and Cincinnati Global. See our 2021 Annual Report on Form 10-K, Item 8, Note 18, Segment Information, Page 172, for a description of revenue, income or loss before income taxes and identifiable assets for each of the five segments. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 24 Segment information is summarized in the following table: (Dollars in millions) Three months ended March 31, 2022 2021 Revenues: Commercial lines insurance Commercial casualty $ 336 $ 303 Commercial property 274 253 Commercial auto 205 193 Workers' compensation 67 67 Other commercial 80 70 Commercial lines insurance premiums 962 886 Fee revenues 1 1 Total commercial lines insurance 963 887 Personal lines insurance Personal auto 152 152 Homeowner 195 174 Other personal 55 50 Personal lines insurance premiums 402 376 Fee revenues 1 1 Total personal lines insurance 403 377 Excess and surplus lines insurance 112 89 Fee revenues 1 — Total excess and surplus lines insurance 113 89 Life insurance premiums 72 69 Fee revenues 1 1 Total life insurance 73 70 Investments Investment income, net of expenses 185 174 Investment gains and losses, net ( 666 ) 504 Total investment revenue ( 481 ) 678 Other Premiums 142 124 Other 2 2 Total other revenues 144 126 Total revenues $ 1,215 $ 2,227 Income (loss) before income taxes: Insurance underwriting results Commercial lines insurance $ 76 $ 130 Personal lines insurance 65 ( 3 ) Excess and surplus lines insurance 16 8 Life insurance ( 2 ) ( 2 ) Investments ( 508 ) 652 Other ( 7 ) ( 17 ) Total income (loss) before income taxes $ ( 360 ) $ 768 Identifiable assets: March 31, 2022 December 31, 2021 Property casualty insurance $ 4,607 $ 4,421 Life insurance 1,577 1,590 Investments 23,201 24,481 Other 865 895 Total $ 30,250 $ 31,387 Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 25