What changed in this filing

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2023-07-27 compared with 2023-04-27 · 51 added, 51 removed, 164 unchanged (38% of the section changed)

5 unchanged sentences

Our view of potential risks and our sensitivity to such risks is discussed in our 2022 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 $22.645 billion at March 31, 2023, up $672 million from year-end 2022, including a $546 million increase in the fixed-maturity portfolio and a $126 million increase in the equity portfolio.

(Dollars in millions) At March 31, 2023 At December 31, 2022

The fair value of our investment portfolio was $23.372 billion at June 30, 2023, up $1,399 million from year-end 2022, including a $738 million increase in the fixed-maturity portfolio and a $661 million increase in the equity portfolio.

(Dollars in millions) At June 30, 2023 At December 31, 2022

amortized cost Percent

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Total $ 18,090 100.0 % $ 23,372 100.0 % $ 17,273 100.0 % $ 21,973 100.0 %

At March 31, 2023, substantially all of our consolidated investment portfolio, measured at fair value, is classified as Level 1 or Level 2.

At June 30, 2023, 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 $352 million of private equity investments, $60 million of real estate through direct property ownership and development projects in the United States, $36 million in Lloyd's deposits and $30 million of life policy loans at March 31, 2023.

Cincinnati Financial Corporation First-Quarter 2023 10-Q

Other invested assets included $368 million of private equity investments, $65 million of real estate through direct property ownership and development projects in the United States, $43 million in Lloyd's deposits and $31 million of life policy loans at June 30, 2023.

Cincinnati Financial Corporation Second-Quarter 2023 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 2023, the increase in fair value of our fixed-maturity portfolio reflected net purchases of securities and a decrease in net unrealized losses, primarily due to a decrease in U.S.

Treasury yields that was partially offset by a widening of corporate credit spreads.

At March 31, 2023, our fixed-maturity portfolio with an average rating of A2/A was valued at 94.9% of its amortized cost, compared with 93.5% at December 31, 2022.

At March 31, 2023, our investment-grade and noninvestment-grade fixed-maturity securities represented 80.4% and 4.1% of the portfolio, respectively.

In the first six months of 2023, the increase in fair value of our fixed-maturity portfolio reflected net purchases of securities and a small decrease in net unrealized losses, primarily due to a decrease in U.S.

Treasury yields as well as a tightening of corporate credit spreads.

At June 30, 2023, our fixed-maturity portfolio with an average rating of A2/A was valued at 93.9% of its amortized cost, compared with 93.5% at December 31, 2022.

At June 30, 2023, our investment-grade and noninvestment-grade fixed-maturity securities represented 81.0% and 3.9% of the portfolio, respectively.

The remaining 15.1% 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, 2023 At December 31, 2022

At June 30, 2023 At December 31, 2022

Weighted average yield-to-amortized cost 4.55 % 4.22 %

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We discuss maturities of our fixed-maturity portfolio in our 2022 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 2023 10-Q

Cincinnati Financial Corporation Second-Quarter 2023 10-Q

TAXABLE FIXED MATURITIES

Our taxable fixed-maturity portfolio, with a fair value of $8.749 billion at March 31, 2023, included:

(Dollars in millions) At March 31, 2023 At December 31, 2022

Our taxable fixed-maturity portfolio, with a fair value of $8.966 billion at June 30, 2023, included:

(Dollars in millions) At June 30, 2023 At December 31, 2022

Investment-grade corporate $ 6,652 $ 6,369

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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 1.3% of the taxable fixed-maturity portfolio at March 31, 2023.

Our investment-grade corporate bonds had an average rating of Baa1 by Moody's or BBB by S&P Global Ratings and represented 75.2% of the taxable fixed-maturity portfolio's fair value at March 31, 2023, compared with 76.7% at year-end 2022.

Our investment-grade corporate bonds had an average rating of Baa1 by Moody's or BBB by S&P Global Ratings and represented 74.2% of the taxable fixed-maturity portfolio's fair value at June 30, 2023, compared with 76.7% at year-end 2022.

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

March 31, 2023, was the financial sector.

June 30, 2023, was the financial sector.

It represented 41.7% of our investment-grade corporate bond portfolio, compared with 42.7% at year-end 2022.

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See risk factors entitled “Financial disruption or a prolonged economic downturn could materially and adversely affect our investment performance” and “Our ability to achieve our performance objectives could be affected by changes in the financial, credit and capital markets or the general economy”.

Our taxable fixed-maturity portfolio at March 31, 2023, included $225 million of commercial mortgage-backed securities with an average rating of Aa2/AA-.

Our taxable fixed-maturity portfolio at June 30, 2023, included $210 million of commercial mortgage-backed securities with an average rating of Aa2/AA-.

TAX-EXEMPT FIXED MATURITIES

At March 31, 2023, we had $3.929 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, 2023, we had $3.904 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, 2023.

No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at June 30, 2023.

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 2023 10-Q

Cincinnati Financial Corporation Second-Quarter 2023 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, 2023 $ 13,866 $ 13,268 $ 12,678 $ 12,082 $ 11,485

At June 30, 2023 $ 14,056 $ 13,462 $ 12,870 $ 12,267 $ 11,660

At December 31, 2022 $ 13,300 $ 12,714 $ 12,132 $ 11,548 $ 10,974

The effective duration of the fixed-maturity portfolio as of March 31, 2023, was 4.6 years, down from 4.7 years at year-end 2022.

The effective duration of the fixed-maturity portfolio as of June 30, 2023, was 4.6 years, down from 4.7 years at year-end 2022.

The above table is a theoretical presentation showing that an instantaneous, parallel shift in the yield curve of 100 basis points could produce an approximately 4.6% change in the fair value of the fixed-maturity portfolio.

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EQUITY INVESTMENTS

Our equity investments, with a fair value totaling $9.967 billion at March 31, 2023, included $9.589 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 $10.502 billion at June 30, 2023, included $10.124 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, 2023 $ 6,977 $ 7,974 $ 8,970 $ 9,967 $ 10,964 $ 11,960 $ 12,957

At June 30, 2023 $ 7,351 $ 8,402 $ 9,452 $ 10,502 $ 11,552 $ 12,602 $ 13,653

At December 31, 2022 $ 6,889 $ 7,873 $ 8,857 $ 9,841 $ 10,825 $ 11,809 $ 12,793

At March 31, 2023, Apple Inc.

At June 30, 2023, Apple Inc.

(Nasdaq:AAPL) was our largest single common stock holding with a fair value of $892 million, or 8.8% of our publicly traded common stock portfolio and 3.8% of the total investment portfolio.

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

Cincinnati Financial Corporation First-Quarter 2023 10-Q

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

Cincinnati Financial Corporation Second-Quarter 2023 10-Q

Common Stock Portfolio Industry Sector Distribution

Percent of common stock portfolio

At March 31, 2023 At December 31, 2022

At June 30, 2023 At December 31, 2022

Financial S&P 500 Industry

2 unchanged sentences

Information technology 31.9 % 28.3 % 26.5 % 25.7 %

Healthcare 13.1 14.2 15.0 15.8

Financial 12.6 12.9 13.6 11.7

Industrials 12.4 8.5 11.9 8.7

Financial 12.3 12.4 13.6 11.7

Healthcare 12.2 13.4 15.0 15.8

Consumer staples 8.1 6.7 8.8 7.2

Consumer discretionary 7.4 10.7 7.7 9.8

Energy 4.9 4.6 5.0 5.2

Materials 4.6 2.4 5.0 2.7

Energy 4.4 4.1 5.0 5.2

Utilities 2.8 2.6 2.9 3.2

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UNREALIZED INVESTMENT GAINS AND LOSSES

At March 31, 2023, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $92 million and unrealized investment losses amounted to $776 million before taxes.

The $684 million net unrealized loss position in our fixed-maturity portfolio at March 31, 2023, decreased in the first three months of 2023, primarily due to a decrease in U.S.

Treasury yields that was partially offset by a widening of corporate credit spreads.

At June 30, 2023, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $62 million and unrealized investment losses amounted to $900 million before taxes.

The $838 million net unrealized loss position in our fixed-maturity portfolio at June 30, 2023, decreased in the first six months of 2023, primarily due to a decrease in U.S.

Treasury yields as well as a tightening of corporate credit spreads.

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

2 unchanged sentences

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, 2023, consisted of a net gain position in our equity portfolio of $5.656 billion.

On this basis, the net unrealized investment gains at June 30, 2023, consisted of a net gain position in our equity portfolio of $6.120 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), Broadcom Inc.

(Nasdaq:AVGO), UnitedHealth Group Inc.

(NYSE:UNH), and AbbVie Inc.

(NYSE:ABBV), which had a combined fair value of $2.411 billion.

(Nasdaq:AVGO), JPMorgan Chase & Co (NYSE:JPM) and UnitedHealth Group Inc.

(NYSE:UNH), which had a combined fair value of $2.805 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, 2023, 2,900 of the 4,606 fixed-maturity securities we owned had fair values below amortized cost, compared with 3,272 of the 4,521 securities we owned at year-end 2022.

The 2,900 holdings with fair values below amortized cost at March 31, 2023, represented 39.9% of the fair value of our fixed-maturity investment portfolio and $776 million in unrealized losses.

• 1,905 of the 2,900 holdings had fair value between 90% and 100% of amortized cost at March 31, 2023.

At June 30, 2023, 3,452 of the 4,673 fixed-maturity securities we owned had fair values below amortized cost, compared with 3,272 of the 4,521 securities we owned at year-end 2022.

The 3,452 holdings with fair values below amortized cost at June 30, 2023, represented 80.7% of the fair value of our fixed-maturity investment portfolio and $900 million in unrealized losses.

• 2,321 of the 3,452 holdings had fair value between 90% and 100% of amortized cost at June 30, 2023.

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

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• 1,108 of the 3,452 fixed-maturity holdings had fair value between 70% and 90% of amortized cost at

March 31, 2023.

June 30, 2023.

We believe the 1,108 fixed-maturity securities will continue to pay interest and ultimately pay

Cincinnati Financial Corporation First-Quarter 2023 10-Q

Cincinnati Financial Corporation Second-Quarter 2023 10-Q

principal upon maturity.

1 unchanged sentence

The fair value of these securities was $2.720 billion, and they accounted for $602 million in unrealized losses.

• 26 of the 2,900 fixed-maturity holdings had fair value below 70% of amortized cost at March 31, 2023.

• 23 of the 3,452 fixed-maturity holdings had fair value below 70% of amortized cost at June 30, 2023.

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

2 unchanged sentences

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

At March 31, 2023 Fair value Unrealized

At June 30, 2023 Fair value Unrealized

losses Fair value Unrealized

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Total $ 8,760 $ 706 $ 800 $ 202 $ 9,560 $ 908

At March 31, 2023, applying our invested asset impairment policy, we determined that the total of $776 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 2023, no fixed-maturity securities were written down to fair value, due to an intention to be sold.

Changes in allowance for credit losses were less than $1 million during the first three months of 2023.

During the first three months of 2022, one security was written down to fair value due to an intention to be sold, resulting in less than $1 million of noncash charges, in addition to less than $1 million in changes in allowance for credit losses.

At June 30, 2023, applying our invested asset impairment policy, we determined that the total of $900 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 2023, one fixed-maturity security was written down to fair value, due to an intention to be sold, resulting in $4 million of noncash charges.

Changes in allowance for credit losses were $3 million during the first six months of 2023.

During the first six months of 2022, two fixed-maturity securities 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 full year of 2022, we wrote down three securities and recorded $5 million in impairment charges.

1 unchanged sentence

Of that total, 49 fixed-maturity securities had fair values below 70% of amortized cost.

Cincinnati Financial Corporation First-Quarter 2023 10-Q

Cincinnati Financial Corporation Second-Quarter 2023 10-Q

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

3 unchanged sentences

gain (loss) Gross investment income

At March 31, 2023

At June 30, 2023

Taxable fixed maturities:

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See our 2022 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Asset Impairment, Page 58.

Cincinnati Financial Corporation Second-Quarter 2023 10-Q

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