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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2022-10-31 compared with 2022-07-27 · 47 added, 47 removed, 165 unchanged (36% 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 $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

The fair value of our investment portfolio was $20.574 billion at September 30, 2022, down $3.763 billion from year-end 2021, including a $1.288 billion decrease in the fixed-maturity portfolio and a $2.475 billion decrease in the equity portfolio.

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

amortized cost Percent

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Total $ 17,104 100.0 % $ 20,574 100.0 % $ 16,351 100.0 % $ 24,337 100.0 %

At June 30, 2022, substantially all of our consolidated investment portfolio, measured at fair value, is classified as Level 1 or Level 2.

At September 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 $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

Other invested assets included $311 million of private equity investments, $38 million in Lloyd's deposits, $35 million of real estate through direct property ownership and development projects in the United States and $30 million of life policy loans at September 30, 2022.

Cincinnati Financial Corporation Third-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 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.

In the first nine 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.

At September 30, 2022, our fixed-maturity portfolio with an average rating of A3/A was valued at 91.6% of its amortized cost, compared with 106.5% at December 31, 2021.

At September 30, 2022, our investment-grade and noninvestment-grade fixed-maturity securities represented 79.6% and 4.5% of the portfolio, respectively.

The remaining 15.9% 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, 2022 At December 31, 2021

At September 30, 2022 At December 31, 2021

Weighted average yield-to-amortized cost 4.12 % 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 Second-Quarter 2022 10-Q

Cincinnati Financial Corporation Third-Quarter 2022 10-Q

TAXABLE FIXED MATURITIES

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

Our taxable fixed-maturity portfolio, with a fair value of $8.036 billion at September 30, 2022, included:

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

Investment-grade corporate $ 6,160 $ 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 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.

Our investment-grade corporate bonds had an average rating of Baa1 by Moody's or BBB by S&P Global Ratings and represented 76.6% of the taxable fixed-maturity portfolio's fair value at September 30, 2022, compared with 76.9% at year-end 2021.

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

June 30, 2022, was the financial sector.

September 30, 2022, was the financial sector.

It represented 43.9% 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 June 30, 2022, included $249 million of commercial mortgage-backed securities with an average rating of Aa2/AA.

Our taxable fixed-maturity portfolio at September 30, 2022, included $240 million of commercial mortgage-backed securities with an average rating of Aa2/AA-.

TAX-EXEMPT FIXED MATURITIES

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.

At September 30, 2022, we had $3.698 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, 2022.

No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at September 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 Second-Quarter 2022 10-Q

Cincinnati Financial Corporation Third-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 June 30, 2022 $ 13,157 $ 12,542 $ 11,933 $ 11,324 $ 10,733

At September 30, 2022 $ 12,928 $ 12,329 $ 11,734 $ 11,145 $ 10,580

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

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 effective duration of the fixed-maturity portfolio as of September 30, 2022, was 5.0 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 $9.510 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.

Our equity investments, with a fair value totaling $8.840 billion at September 30, 2022, included $8.433 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, 2022 $ 6,657 $ 7,608 $ 8,559 $ 9,510 $ 10,461 $ 11,412 $ 12,363

At September 30, 2022 $ 6,188 $ 7,072 $ 7,956 $ 8,840 $ 9,724 $ 10,608 $ 11,492

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

At June 30, 2022, Apple Inc.

At September 30, 2022, Apple Inc.

(Nasdaq:AAPL) was our largest single common stock holding with a fair value of $638 million, or 7.6% of our publicly traded common stock portfolio and 3.1% of the total investment portfolio.

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

Cincinnati Financial Corporation Second-Quarter 2022 10-Q

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

Cincinnati Financial Corporation Third-Quarter 2022 10-Q

Common Stock Portfolio Industry Sector Distribution

Percent of common stock portfolio

At June 30, 2022 At December 31, 2021

At September 30, 2022 At December 31, 2021

Financial S&P 500 Industry

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UNREALIZED INVESTMENT GAINS AND LOSSES

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.

At September 30, 2022, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $37 million and unrealized investment losses amounted to $1.115 billion before taxes.

The $1.078 billion net unrealized loss position in our fixed-maturity portfolio at September 30, 2022, moved from a net unrealized gain position to a net unrealized loss position in the first nine months of 2022, primarily due to an increase in U.S.

Treasury yields and a widening of corporate credit spreads.

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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, 2022, consisted of a net gain position in our equity portfolio of $5.305 billion.

On this basis, the net unrealized investment gains at September 30, 2022, consisted of a net gain position in our equity portfolio of $4.548 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), UnitedHealth Group Inc.

(NYSE:UNH), AbbVie Inc.

(NYSE:ABBV) and Accenture Co.

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

(NYSE:UNH), Accenture Co.

(NYSE:ACN) and AbbVie Inc.

(NYSE:ABBV), which had a combined fair value of $2.069 billion.

Unrealized Investment Losses

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

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.

At September 30, 2022, 4,049 of the 4,495 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 4,049 holdings with fair values below amortized cost at September 30, 2022, represented 90.7% of the fair value of our fixed-maturity investment portfolio and $1.115 billion in unrealized losses.

• 2,508 of the 4,049 holdings had fair value between 90% and 100% of amortized cost at September 30, 2022.

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

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• 1,423 of the 4,049 fixed-maturity holdings had fair value between 70% and 90% of amortized cost at

June 30, 2022.

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

Cincinnati Financial Corporation Second-Quarter 2022 10-Q

principal upon maturity.

September 30, 2022.

We believe the 1,423 fixed-maturity securities will continue to pay interest and ultimately

Cincinnati Financial Corporation Third-Quarter 2022 10-Q

pay principal upon maturity.

The issuers of these 1,423 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 $3.132 billion, and they accounted for $742 million in unrealized losses.

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

• 118 of the 4,049 fixed-maturity holdings had fair value below 70% of amortized cost at September 30, 2022.

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

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

At June 30, 2022 Fair value Unrealized

At September 30, 2022 Fair value Unrealized

losses Fair value Unrealized

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

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.

At September 30, 2022, applying our invested asset impairment policy, we determined that the total of $1.115 billion, for securities in an unrealized loss position in the table above, was not the result of a credit loss.

During the first nine 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 nine months of 2021, five securities were written down to fair value due to an intention to be sold, resulting in $1 million of noncash charges, 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.

1 unchanged sentence

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

Cincinnati Financial Corporation Second-Quarter 2022 10-Q

Cincinnati Financial Corporation Third-Quarter 2022 10-Q

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

3 unchanged sentences

gain (loss) Gross investment income

At June 30, 2022

At September 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