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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2022-07-27 compared with 2022-04-28 · 55 added, 53 removed, 157 unchanged (41% of the section changed)

5 unchanged sentences

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 $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

The fair value of our investment portfolio was $21.443 billion at June 30, 2022, down $2.894 billion from year-end 2021, including a $1.089 billion decrease in the fixed-maturity portfolio and a $1.805 billion decrease in the equity portfolio.

(Dollars in millions) At June 30, 2022 At December 31, 2021

amortized cost Percent

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Total $ 16,702 100.0 % $ 21,443 100.0 % $ 16,351 100.0 % $ 24,337 100.0 %

At March 31, 2022, substantially all of our consolidated investment portfolio, measured at fair value, are classified as Level 1 or Level 2.

At June 30, 2022, substantially all of our consolidated investment portfolio, measured at fair value, is 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 $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

Other invested assets included $288 million of private equity investments, $37 million in Lloyd's deposits, $35 million of real estate through direct property ownership and development projects in the United States and $31 million of life policy loans at June 30, 2022.

Cincinnati Financial Corporation Second-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 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.

In the first six 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 a widening of corporate credit spreads.

At June 30, 2022, our fixed-maturity portfolio with an average rating of A3/A was valued at 95.5% of its amortized cost, compared with 106.5% at December 31, 2021.

At June 30, 2022, our investment-grade and noninvestment-grade fixed-maturity securities represented 79.6% and 4.8% of the portfolio, respectively.

The remaining 15.6% represented fixed-maturity securities that were not rated by Moody's or S&P Global Ratings.

Attributes of the fixed-maturity portfolio include:

At March 31, 2022 At December 31, 2021

At June 30, 2022 At December 31, 2021

Weighted average yield-to-amortized cost 4.04 % 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 First-Quarter 2022 10-Q

Cincinnati Financial Corporation Second-Quarter 2022 10-Q

TAXABLE FIXED MATURITIES

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

Our taxable fixed-maturity portfolio, with a fair value of $8.114 billion at June 30, 2022, included:

(Dollars in millions) At June 30, 2022 At December 31, 2021

Investment-grade corporate $ 6,237 $ 6,807

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United States government 144 123

Foreign government 25 26

Government-sponsored enterprises 60 8

Foreign government 23 26

Total $ 8,114 $ 8,858

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 March 31, 2022.

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.

With the exception of United States agency issues that include government-sponsored enterprises, no individual issuer's securities accounted for more than 1.2% of the taxable fixed-maturity portfolio at June 30, 2022.

Our investment-grade corporate bonds had an average rating of Baa1 by Moody's or BBB by S&P Global Ratings and represented 76.9% of the taxable fixed-maturity portfolio's fair value at June 30, 2022, matching year-end 2021.

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

March 31, 2022, was the financial sector.

June 30, 2022, was the financial sector.

It represented 42.2% of our investment-grade corporate bond portfolio, compared with 41.4% at year-end 2021.

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

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

Our taxable fixed-maturity portfolio at June 30, 2022, included $249 million of commercial mortgage-backed securities with an average rating of Aa2/AA.

TAX-EXEMPT FIXED MATURITIES

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.

At June 30, 2022, we had $3.819 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 March 31, 2022.

No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at June 30, 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 First-Quarter 2022 10-Q

Cincinnati Financial Corporation Second-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:

1 unchanged sentence

-200 -100 - 100 200

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

At June 30, 2022 $ 13,157 $ 12,542 $ 11,933 $ 11,324 $ 10,733

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

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 effective duration of the fixed-maturity portfolio as of June 30, 2022, was 5.1 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 5.1% change in the fair value of the fixed-maturity portfolio.

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EQUITY INVESTMENTS

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.

Our equity investments, with a fair value totaling $9.510 billion at June 30, 2022, included $9.092 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 March 31, 2022 $ 7,473 $ 8,540 $ 9,608 $ 10,675 $ 11,743 $ 12,810 $ 13,878

At June 30, 2022 $ 6,657 $ 7,608 $ 8,559 $ 9,510 $ 10,461 $ 11,412 $ 12,363

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

At March 31, 2022, Apple Inc.

At June 30, 2022, Apple Inc.

(Nasdaq:AAPL) was our largest single common stock holding with a fair value of $664 million, or 7.3% of our publicly traded common stock portfolio and 3.1% of the total investment portfolio.

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

Cincinnati Financial Corporation First-Quarter 2022 10-Q

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

Cincinnati Financial Corporation Second-Quarter 2022 10-Q

Common Stock Portfolio Industry Sector Distribution

Percent of common stock portfolio

At March 31, 2022 At December 31, 2021

At June 30, 2022 At December 31, 2021

Financial S&P 500 Industry

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UNREALIZED INVESTMENT GAINS AND LOSSES

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.

In addition, changes in interest rates can cause rapid, significant changes in fair values of fixed-maturity securities and the net gain position, as discussed in Quantitative and Qualitative Disclosures About Market Risk.

At June 30, 2022, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $98 million and unrealized investment losses amounted to $662 million before taxes.

The $564 million net unrealized loss position in our fixed-maturity portfolio at June 30, 2022, moved from a net unrealized gain position to a net unrealized loss position in the first six months of 2022, primarily due to an increase in U.S.

Treasury yields and a widening of corporate credit spreads.

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

In addition, changes in interest rates can cause rapid, significant changes in fair values of fixed-maturity securities and the net loss position, as discussed in Quantitative and Qualitative Disclosures About Market Risk.

For federal income tax purposes, taxes on gains from appreciated investments generally are not due until securities are sold.

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 March 31, 2022, consisted of a net gain position in our equity portfolio of $6.508 billion.

On this basis, the net unrealized investment gains at June 30, 2022, consisted of a net gain position in our equity portfolio of $5.305 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), Accenture Co.

(NYSE:ACN), UnitedHealth Group Inc.

(NYSE:UNH) and BlackRock Inc.

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

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

(NYSE:UNH), AbbVie Inc.

(NYSE:ABBV) and Accenture Co.

(NYSE:ACN), which had a combined fair value of $2.225 billion.

Unrealized Investment Losses

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

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.

At June 30, 2022, 2,735 of the 4,420 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 2,735 holdings with fair values below amortized cost at June 30, 2022, represented 64.0% of the fair value of our fixed-maturity investment portfolio and $662 million in unrealized losses.

• 1,787 of the 2,735 holdings had fair value between 90% and 100% of amortized cost at June 30, 2022.

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

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• 941 of the 2,735 fixed-maturity holdings had fair value between 70% and 90% of amortized cost at

March 31, 2022.

June 30, 2022.

We believe the 941 fixed-maturity securities will continue to pay interest and ultimately pay

Cincinnati Financial Corporation First-Quarter 2022 10-Q

Cincinnati Financial Corporation Second-Quarter 2022 10-Q

principal upon maturity.

The issuers of these 941 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 $2.186 billion, and they accounted for $468 million in unrealized losses.

• 7 of the 2,735 fixed-maturity holdings had fair value below 70% of amortized cost at June 30, 2022.

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

The fair value of these securities was $15 million, and they accounted for $7 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 March 31, 2022 Fair value Unrealized

At June 30, 2022 Fair value Unrealized

losses Fair value Unrealized

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United States government 85 2 11 — 96 2

Foreign government 7 — — — 7 —

Government-sponsored enterprises 36 — 3 — 39 —

Foreign government 16 — — — 16 —

Total $ 7,483 $ 630 $ 151 $ 32 $ 7,634 $ 662

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United States government 48 — — — 48 —

Foreign government 16 — — — 16 —

Government-sponsored enterprises 7 — — — 7 —

Foreign government 16 — — — 16 —

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

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.

At June 30, 2022, applying our invested asset impairment policy, we determined that the total of $662 million, for securities in an unrealized loss position in the table above, was not the result of a credit loss.

During the first six months of 2022, two fixed-maturity securities that were 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 six 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.

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Of that total, no fixed-maturity securities had fair values below 70% of amortized cost.

Cincinnati Financial Corporation First-Quarter 2022 10-Q

Cincinnati Financial Corporation Second-Quarter 2022 10-Q

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

3 unchanged sentences

gain (loss) Gross investment income

At March 31, 2022

At June 30, 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