Item 1. Financial Statements
Item 1. Financial Statements (unaudited)
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in millions, except per share data) June 30, December 31,
2023 2022
Assets
Investments
Fixed maturities, at fair value (amortized cost: 2023—$ 13,708 ; 2022—$ 12,979 )
$ 12,870 $ 12,132
Equity securities, at fair value (cost: 2023—$ 4,382 ; 2022—$ 4,294 )
10,502 9,841
Other invested assets 507 452
Total investments 23,879 22,425
Cash and cash equivalents 748 1,264
Investment income receivable 163 160
Finance receivable 98 92
Premiums receivable 2,749 2,322
Reinsurance recoverable 694 665
Prepaid reinsurance premiums 95 51
Deferred policy acquisition costs 1,109 1,013
Land, building and equipment, net, for company use (accumulated depreciation:
2023—$ 329 ; 2022—$ 322 )
198 202
Other assets 708 646
Separate accounts 911 892
Total assets $ 31,352 $ 29,732
Liabilities
Insurance reserves
Loss and loss expense reserves $ 8,873 $ 8,400
Life policy and investment contract reserves 3,038 3,015
Unearned premiums 4,222 3,689
Other liabilities 1,253 1,229
Deferred income tax 1,158 1,054
Note payable 25 50
Long-term debt and lease obligations 842 841
Separate accounts 911 892
Total liabilities 20,322 19,170
Commitments and contingent liabilities (Note 12)
Shareholders' Equity
Common stock, par value—$ 2 per share; (authorized: 2023 and 2022— 500 million
shares; issued: 2023 and 2022— 198.3 million shares)
397 397
Paid-in capital 1,410 1,392
Retained earnings 12,235 11,711
Accumulated other comprehensive income ( 626 ) ( 614 )
Treasury stock at cost (2023— 41.5 million shares and 2022— 41.2 million shares)
( 2,386 ) ( 2,324 )
Total shareholders' equity 11,030 10,562
Total liabilities and shareholders' equity $ 31,352 $ 29,732
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 3
Table of Contents
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Dollars in millions, except per share data) Three months ended June 30, Six months ended June 30,
2023 2022 2023 2022
Revenues
Earned premiums $ 1,943 $ 1,773 $ 3,861 $ 3,466
Investment income, net of expenses 220 195 430 380
Investment gains and losses, net 434 ( 1,154 ) 540 ( 1,820 )
Fee revenues 6 3 10 7
Other revenues 2 3 5 5
Total revenues 2,605 820 4,846 2,038
Benefits and Expenses
Insurance losses and contract holders' benefits 1,340 1,322 2,738 2,354
Underwriting, acquisition and insurance expenses 579 533 1,135 1,053
Interest expense 13 13 27 26
Other operating expenses 7 5 12 9
Total benefits and expenses 1,939 1,873 3,912 3,442
Income (Loss) Before Income Taxes 666 ( 1,053 ) 934 ( 1,404 )
Provision (Benefit) for Income Taxes
Current 51 30 67 71
Deferred 81 ( 265 ) 108 ( 391 )
Total provision (benefit) for income taxes 132 ( 235 ) 175 ( 320 )
Net Income (Loss) $ 534 $ ( 818 ) $ 759 $ ( 1,084 )
Per Common Share
Net income (loss)—basic $ 3.40 $ ( 5.12 ) $ 4.83 $ ( 6.77 )
Net income (loss)—diluted 3.38 ( 5.12 ) 4.80 ( 6.77 )
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 4
Table of Contents
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2023 2022 2023 2022
Net Income (Loss) $ 534 $ ( 818 ) $ 759 $ ( 1,084 )
Other Comprehensive Income (Loss)
Change in unrealized gains and losses on investments, net of tax (benefit) of $( 32 ), $( 127 ), $ 3 and $( 284 ), respectively
( 122 ) ( 483 ) 6 ( 1,072 )
Amortization of pension actuarial loss and prior service cost, net of tax (benefit) of $( 1 ), $ 0 , $( 2 ) and $ 0 , respectively
— — ( 5 ) —
Change in life policy reserves, reinsurance recoverable and other, net of tax (benefit) of $ 6 , $ 38 , $( 3 ) and $ 79 , respectively
23 143 ( 13 ) 298
Other comprehensive income (loss) ( 99 ) ( 340 ) ( 12 ) ( 774 )
Comprehensive Income (Loss) $ 435 $ ( 1,158 ) $ 747 $ ( 1,858 )
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 5
Table of Contents
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2023 2022 2023 2022
Common Stock
Beginning of period $ 397 $ 397 $ 397 $ 397
Share-based awards — — — —
End of period 397 397 397 397
Paid-In Capital
Beginning of period 1,398 1,354 1,392 1,356
Share-based awards — 2 ( 6 ) ( 12 )
Share-based compensation 10 9 22 20
Other 2 2 2 3
End of period 1,410 1,367 1,410 1,367
Retained Earnings
Beginning of period 11,818 12,258 11,711 12,625
Cumulative effect of change in accounting for long-duration insurance contracts (Note 1) — — — 10
Adjusted beginning of period 11,818 12,258 11,711 12,635
Net income (loss) 534 ( 818 ) 759 ( 1,084 )
Dividends declared ( 117 ) ( 109 ) ( 235 ) ( 220 )
End of period 12,235 11,331 12,235 11,331
Accumulated Other Comprehensive Income (Loss)
Beginning of period ( 527 ) ( 138 ) ( 614 ) 648
Cumulative effect of change in accounting for long-duration insurance contracts (Note 1) — — — ( 352 )
Adjusted beginning of period ( 527 ) ( 138 ) ( 614 ) 296
Other comprehensive loss ( 99 ) ( 340 ) ( 12 ) ( 774 )
End of period ( 626 ) ( 478 ) ( 626 ) ( 478 )
Treasury Stock
Beginning of period ( 2,345 ) ( 1,959 ) ( 2,324 ) ( 1,921 )
Share-based awards — 3 7 12
Shares acquired - share repurchase authorization ( 42 ) ( 151 ) ( 67 ) ( 196 )
Shares acquired - share-based compensation plans — ( 6 ) ( 3 ) ( 8 )
Other 1 1 1 1
End of period ( 2,386 ) ( 2,112 ) ( 2,386 ) ( 2,112 )
Total Shareholders' Equity $ 11,030 $ 10,505 $ 11,030 $ 10,505
(In millions, except per common share)
Common Stock - Shares Outstanding
Beginning of period 157.2 160.3 157.1 160.3
Share-based awards — 0.1 0.3 0.5
Shares acquired - share repurchase authorization ( 0.4 ) ( 1.2 ) ( 0.6 ) ( 1.6 )
End of period 156.8 159.2 156.8 159.2
Dividends declared per common share $ 0.75 $ 0.69 $ 1.50 $ 1.38
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 6
Table of Contents
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in millions) Six months ended June 30,
2023 2022
Cash Flows From Operating Activities
Net income (loss) $ 759 $ ( 1,084 )
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other 74 78
Investment gains and losses, net ( 526 ) 1,829
Interest credited to contract holders 21 23
Deferred income tax expense 108 ( 391 )
Changes in:
Premiums and reinsurance receivable ( 504 ) ( 427 )
Deferred policy acquisition costs ( 96 ) ( 130 )
Other assets ( 17 ) ( 29 )
Loss and loss expense reserves 473 364
Life policy and investment contract reserves 56 38
Unearned premiums 533 596
Other liabilities ( 27 ) ( 31 )
Current income tax receivable/payable ( 29 ) ( 81 )
Net cash provided by operating activities 825 755
Cash Flows From Investing Activities
Sale, call or maturity of fixed maturities 581 702
Sale of equity securities 4 178
Purchase of fixed maturities ( 1,313 ) ( 942 )
Purchase of equity securities ( 97 ) ( 218 )
Changes in finance receivables ( 6 ) 11
Investment in building and equipment ( 8 ) ( 8 )
Change in other invested assets, net ( 81 ) ( 47 )
Net cash used in investing activities ( 920 ) ( 324 )
Cash Flows From Financing Activities
Payment of cash dividends to shareholders ( 223 ) ( 208 )
Shares acquired - share repurchase authorization ( 66 ) ( 196 )
Changes in note payable
( 25 ) ( 10 )
Proceeds from stock options exercised 6 6
Contract holders' funds deposited 45 34
Contract holders' funds withdrawn ( 113 ) ( 62 )
Other ( 45 ) ( 36 )
Net cash used in financing activities ( 421 ) ( 472 )
Net change in cash and cash equivalents ( 516 ) ( 41 )
Cash and cash equivalents at beginning of year 1,264 1,139
Cash and cash equivalents at end of period $ 748 $ 1,098
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 27 $ 26
Income taxes paid 79 142
Noncash Activities
Equipment acquired under finance lease obligations $ 4 $ 6
Share-based compensation 13 24
Other assets and other liabilities 65 180
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 7
Table of Contents
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 June 30, 2023, 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 2022 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.
Adopted 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.
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.
We adopted these ASUs on a modified retrospective basis on January 1, 2023, resulting in an after-tax increase to shareholders' equity of $ 31 million.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 8
Table of Contents
The following table illustrates the effect of adopting ASU 2018-12 in the condensed consolidated balance sheets:
(Dollars in millions) June 30, 2023 December 31, 2022
As originally reported As adjusted Difference
Reinsurance recoverable $ 694 $ 640 $ 665 $ 25
Prepaid reinsurance premiums 95 79 51 ( 28 )
Deferred policy acquisition costs 1,109 1,014 1,013 ( 1 )
Total assets 31,352 29,736 29,732 ( 4 )
Life policy and investment contract reserves 3,038 3,059 3,015 ( 44 )
Deferred income tax 1,158 1,045 1,054 9
Total liabilities 20,322 19,205 19,170 ( 35 )
Retained earnings 12,235 11,702 11,711 9
Accumulated other comprehensive income ( 626 ) ( 636 ) ( 614 ) 22
Total shareholders' equity 11,030 10,531 10,562 31
Total liabilities and shareholders' equity 31,352 29,736 29,732 ( 4 )
The following table illustrates the effect of adopting ASU 2018-12 in the condensed consolidated statements of income and condensed consolidated statements of comprehensive income:
(Dollars in millions, except per share data) Three months ended June 30,
2023 2022
As originally reported As adjusted Difference
Earned premiums $ 1,943 $ 1,773 $ 1,773 $ —
Insurance losses and contract holders' benefits 1,340 1,309 1,322 13
Underwriting, acquisition and insurance expenses 579 534 533 ( 1 )
Deferred income tax expense 81 ( 263 ) ( 265 ) ( 2 )
Net Income (Loss) 534 ( 808 ) ( 818 ) ( 10 )
Change in life policy reserves, reinsurance recoverable and other, net of tax 23 1 143 142
Other comprehensive income (loss) ( 99 ) ( 482 ) ( 340 ) 142
Comprehensive Income (Loss) 435 ( 1,290 ) ( 1,158 ) 132
Net income (loss) per share:
Basic $ 3.40 $ ( 5.06 ) $ ( 5.12 ) $ ( 0.06 )
Diluted 3.38 ( 5.06 ) ( 5.12 ) ( 0.06 )
(Dollars in millions, except per share data) Six months ended June 30,
2023 2022
As originally reported As adjusted Difference
Earned premiums $ 3,861 $ 3,463 $ 3,466 $ 3
Insurance losses and contract holders' benefits 2,738 2,348 2,354 6
Underwriting, acquisition and insurance expenses 1,135 1,053 1,053 —
Deferred income tax expense 108 ( 391 ) ( 391 ) —
Net Income (Loss) 759 ( 1,081 ) ( 1,084 ) ( 3 )
Change in life policy reserves, reinsurance recoverable and other, net of tax ( 13 ) 1 298 297
Other comprehensive income (loss) ( 12 ) ( 1,071 ) ( 774 ) 297
Comprehensive Income (Loss) 747 ( 2,152 ) ( 1,858 ) 294
Net income (loss) per share:
Basic $ 4.83 $ ( 6.76 ) $ ( 6.77 ) $ ( 0.01 )
Diluted 4.80 ( 6.76 ) ( 6.77 ) ( 0.01 )
The adoption of ASU 2018-12 did not have a material impact on the company's condensed consolidated cash flows.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 9
Table of Contents
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 June 30, 2023 gains losses
Fixed-maturity securities:
Corporate $ 7,719 $ 39 $ 608 $ 7,150
States, municipalities and political subdivisions 4,951 23 262 4,712
Government-sponsored enterprises 582 — 8 574
Commercial mortgage-backed 227 — 17 210
United States government 209 — 5 204
Foreign government 20 — — 20
Total $ 13,708 $ 62 $ 900 $ 12,870
At December 31, 2022
Fixed-maturity securities:
Corporate $ 7,412 $ 37 $ 580 $ 6,869
States, municipalities and political subdivisions 4,901 24 303 4,622
Government-sponsored enterprises 186 — 3 183
Commercial mortgage-backed 250 — 16 234
United States government 196 — 5 191
Foreign government 34 — 1 33
Total $ 12,979 $ 61 $ 908 $ 12,132
Th e net unrealized investment losses in our fixed-maturity portfolio at June 30, 2023, are 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 June 30, 2023, and December 31, 2022.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 10
Table of Contents
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 June 30, 2023 Fair
value Unrealized
losses Fair
value Unrealized
losses Fair
value Unrealized
losses
Fixed-maturity securities:
Corporate $ 2,133 $ 94 $ 4,347 $ 514 $ 6,480 $ 608
States, municipalities and political subdivisions 1,042 11 1,897 251 2,939 262
Government-sponsored enterprises 502 6 32 2 534 8
Commercial mortgage-backed 1 — 208 17 209 17
United States government 144 2 60 3 204 5
Foreign government 15 — — — 15 —
Total $ 3,837 $ 113 $ 6,544 $ 787 $ 10,381 $ 900
At December 31, 2022
Fixed-maturity securities:
Corporate $ 5,651 $ 412 $ 661 $ 168 $ 6,312 $ 580
States, municipalities and political subdivisions 2,600 274 77 29 2,677 303
Government-sponsored enterprises 123 3 3 — 126 3
Commercial mortgage-backed 215 13 14 3 229 16
United States government 146 3 41 2 187 5
Foreign government 25 1 4 — 29 1
Total $ 8,760 $ 706 $ 800 $ 202 $ 9,560 $ 908
Contractual maturity dates for fixed-maturities securities were:
(Dollars in millions) Amortized
cost Fair
value % of fair
value
At June 30, 2023
Maturity dates:
Due in one year or less $ 772 $ 766 6.0 %
Due after one year through five years 4,348 4,179 32.5
Due after five years through ten years 3,508 3,312 25.7
Due after ten years 5,080 4,613 35.8
Total $ 13,708 $ 12,870 100.0 %
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 Second-Quarter 2023 10-Q
Page 11
Table of Contents
The following table provides investment income and investment gains and losses, net:
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2023 2022 2023 2022
Investment income:
Interest $ 147 $ 124 $ 287 $ 247
Dividends 70 72 136 137
Other 6 2 13 3
Total 223 198 436 387
Less investment expenses 3 3 6 7
Total $ 220 $ 195 $ 430 $ 380
Investment gains and losses, net:
Equity securities:
Investment gains and losses on securities sold, net $ — $ 5 $ ( 4 ) $ 37
Unrealized gains and losses on securities still held, net 459 ( 1,175 ) 568 ( 1,882 )
Subtotal 459 ( 1,170 ) 564 ( 1,845 )
Fixed-maturity securities:
Gross realized gains — 2 1 6
Gross realized losses — ( 2 ) ( 1 ) ( 3 )
Write-down of impaired securities with intent to sell ( 4 ) — ( 4 ) —
Subtotal ( 4 ) — ( 4 ) 3
Other ( 21 ) 16 ( 20 ) 22
Total $ 434 $ ( 1,154 ) $ 540 $ ( 1,820 )
The fair value of our equity portfolio was $ 10.502 billion and $ 9.841 billion at June 30, 2023, and December 31, 2022, respectively. Apple Inc. (Nasdaq:AAPL), an equity holding, was our largest single investment holding with a fair value of $ 892 million and $ 597 million, which was 8.8 % and 6.3 % of our publicly traded common equities portfolio and 3.8 % and 2.7 % of the total investment portfolio at June 30, 2023, and December 31, 2022, respectively.
The allowance for credit losses was $ 4 million and $ 1 million at June 30, 2023, and December 31, 2022, respectively. Changes in the allowance were $ 3 million for both the three and six months ended June 30, 2023 and
less than $ 1 million for both the three and six months ended June 30, 2022.
There were 3,452 fixed-maturity securities with a total unrealized loss of $ 900 million, which were in an unrealized loss position at June 30, 2023. Of that total, 23 fixed-maturity securities had fair values below 70 % of amortized cost. There were 3,272 fixed-maturity securities with a total unrealized loss of $ 908 million, which were in an unrealized loss position at December 31, 2022. Of that total, 49 fixed-maturity securities had fair values below 70 % of amortized cost.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 12
Table of Contents
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, 2022, and ultimately management determines fair value. See our 2022 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 June 30, 2023, and December 31, 2022. We do not have any liabilities carried at fair value.
(Dollars in millions) Level 1 Level 2 Level 3 Total
At June 30, 2023
Fixed maturities, available for sale:
Corporate $ — $ 7,150 $ — $ 7,150
States, municipalities and political subdivisions — 4,712 — 4,712
Government-sponsored enterprises — 574 — 574
Commercial mortgage-backed — 210 — 210
United States government 204 — — 204
Foreign government — 20 — 20
Subtotal 204 12,666 — 12,870
Common equities 10,124 — — 10,124
Nonredeemable preferred equities — 378 — 378
Separate accounts taxable fixed maturities — 837 — 837
Top Hat savings plan mutual funds and common
equity (included in Other assets) 62 — — 62
Total $ 10,390 $ 13,881 $ — $ 24,271
At December 31, 2022
Fixed maturities, available for sale:
Corporate $ — $ 6,869 $ — $ 6,869
States, municipalities and political subdivisions — 4,622 — 4,622
Government-sponsored enterprises — 183 — 183
Commercial mortgage-backed — 234 — 234
United States government 191 — — 191
Foreign government — 33 — 33
Subtotal 191 11,941 — 12,132
Common equities 9,454 — — 9,454
Nonredeemable preferred equities — 387 — 387
Separate accounts taxable fixed maturities — 815 — 815
Top Hat savings plan mutual funds and common
equity (included in Other assets) 57 — — 57
Total $ 9,702 $ 13,143 $ — $ 22,845
We also held Level 1 cash and cash equivalents of $ 748 million and $ 1.264 billion at June 30, 2023, and December 31, 2022, respectively.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 13
Table of Contents
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 June 30, December 31, June 30, December 31,
2023 2022 2023 2022
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) Level 1 Level 2 Level 3 Total
At June 30, 2023
Note payable $ — $ 25 $ — $ 25
6.900 % senior debentures, due 2028
— 29 — 29
6.920 % senior debentures, due 2028
— 419 — 419
6.125 % senior notes, due 2034
— 396 — 396
Total $ — $ 869 $ — $ 869
At December 31, 2022
Note payable $ — $ 50 $ — $ 50
6.900 % senior debentures, due 2028
— 29 — 29
6.920 % senior debentures, due 2028
— 418 — 418
6.125 % senior notes, due 2034
— 388 — 388
Total $ — $ 885 $ — $ 885
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) Level 1 Level 2 Level 3 Total
At June 30, 2023
Life policy loans $ — $ — $ 37 $ 37
Deferred annuities — — 599 599
Structured settlements — 141 — 141
Total $ — $ 141 $ 599 $ 740
At December 31, 2022
Life policy loans $ — $ — $ 37 $ 37
Deferred annuities — — 621 621
Structured settlements — 143 — 143
Total $ — $ 143 $ 621 $ 764
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 14
Table of Contents
Outstanding principal and interest for these life policy loans totaled $ 31 million at both June 30, 2023, and December 31, 2022.
Recorded reserves for the deferred annuities were $ 696 million and $ 734 million at June 30, 2023, and December 31, 2022, respectively. Recorded reserves for the structured settlements were $ 126 million and $ 129 million at June 30, 2023, and December 31, 2022, respectively.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 15
Table of Contents
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 June 30, Six months ended June 30,
2023 2022 2023 2022
Gross loss and loss expense reserves, beginning of period $ 8,626 $ 7,287 $ 8,336 $ 7,229
Less reinsurance recoverable 424 319 405 327
Net loss and loss expense reserves, beginning of period 8,202 6,968 7,931 6,902
Net incurred loss and loss expenses related to:
Current accident year 1,363 1,299 2,739 2,296
Prior accident years ( 101 ) ( 59 ) ( 160 ) ( 100 )
Total incurred 1,262 1,240 2,579 2,196
Net paid loss and loss expenses related to:
Current accident year 502 368 689 537
Prior accident years 579 524 1,438 1,245
Total paid 1,081 892 2,127 1,782
Net loss and loss expense reserves, end of period 8,383 7,316 8,383 7,316
Plus reinsurance recoverable 424 287 424 287
Gross loss and loss expense reserves, end of period $ 8,807 $ 7,603 $ 8,807 $ 7,603
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 $ 66 million at both June 30, 2023, and 2022, for certain life and health loss and loss expense reserves.
We experienced $ 101 million of favorable development on prior accident years, including $ 59 million of favorable development in commercial lines, $ 15 million of favorable development in personal lines and $ 5 million of favorable development in excess and surplus lines for the three months ended June 30, 2023. Within commercial lines, we recognized favorable reserve development of $ 34 million for the commercial casualty line and $ 11 million for the workers' compensation line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines.
We experienced $ 160 million of favorable development on prior accident years, including $ 91 million of favorable development in commercial lines, $ 46 million of favorable development in personal lines and $ 14 million of favorable development in excess and surplus lines for the six months ended June 30, 2023. Within commercial lines, we recognized favorable reserve development of $ 36 million for the commercial casualty line, $ 26 million for the workers' compensation line and $ 25 million for the commercial property 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 $ 35 million for the homeowner line and $ 12 million for the personal auto line.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 16
Table of Contents
We experienced $ 59 million of favorable development on prior accident years, including $ 29 million of favorable development in commercial lines, $ 14 million of favorable development in personal lines and $ 1 million of favorable development in excess and surplus lines for the three months ended June 30, 2022. Within commercial lines, we recognized favorable reserve development of $ 18 million for the workers' compensation line and $ 7 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 $ 16 million for the homeowner line.
We experienced $ 100 million of favorable development on prior accident years, including $ 47 million of favorable development in commercial lines, $ 48 million of favorable development in personal lines and $ 6 million of favorable development in excess and surplus lines for the six months ended June 30, 2022. Within commercial lines, we recognized favorable reserve development of $ 27 million for the workers' compensation line and $ 12 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 $ 46 million for the homeowner line.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 17
Table of Contents
NOTE 5 – Life Policy and Investment Contract Reserves
In the first quarter of 2023, we adopted ASU 2018-12 which resulted in changes to the life policy and investment contract reserves and the expansion of required disclosures. The below disclosures represent application of the updated guidance. See Note 1, Accounting Policies, for further discussion.
We establish the reserves for traditional life policies including term, whole life and other products based on certain cash flow assumptions including expected expenses, mortality, morbidity, withdrawal rates and timing of claim presentation. These assumptions are established based on our current expectations and are reviewed annually to determine any necessary updates. Assumptions are also updated on an interim basis if evidence suggests that they should be revised. 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. These reserves also include a discount rate assumption that is based on market value discount rates and is updated quarterly. Certain assumptions, including the mortality, lapse and long-term interest rate reversion targets, were updated in the second quarter of 2023 as part of our annual assumption unlocking. Changes in the inputs, judgments and assumptions during the period and the related measurement impact on the liability are reflected in the below tables.
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.
The following table summarizes our life policy and investment contract reserves and provides a reconciliation of the balances described in the below tables to those in the condensed consolidated balance sheets:
(Dollars in millions) June 30,
2023 December 31,
2022
Life policy reserves:
Term $ 1,015 $ 961
Whole life 421 408
Other 95 94
Subtotal 1,531 1,463
Investment contract reserves:
Deferred annuities 696 734
Universal life 578 578
Structured settlements 126 129
Other 107 111
Subtotal 1,507 1,552
Total life policy and investment contract reserves $ 3,038 $ 3,015
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 18
Table of Contents
The table below shows the ASU 2018-12 adoption impacts to the life policy and investment contract reserves as of January 1, 2021 (transition date), pretax:
(Dollars in millions) Term Whole life Deferred annuity Universal life Other Total
At January 1, 2021
Balance, pre-adoption at December 31, 2020 $ 901 $ 363 $ 761 $ 567 $ 323 $ 2,915
Removal of shadow adjustments — — — — 13 13
Net premiums in excess of gross premiums 14 1 — — — 15
Remeasurement at market value discount rates 372 245 — — — 617
Balance, post-adoption at January 1, 2021 $ 1,287 $ 609 $ 761 $ 567 $ 336 $ 3,560
The table below shows the ASU 2018-12 adoption impacts to the life reinsurance recoverable asset as of January 1, 2021, pretax:
(Dollars in millions) Term Whole life Deferred annuity Universal life Other Total
At January 1, 2021
Balance, pre-adoption at December 31, 2020 $ 113 $ 26 $ — $ — $ 78 $ 217
Remeasurement at market value discount rates 29 18 — — — 47
Other adjustments 20 1 — 2 — 23
Balance, post-adoption at January 1, 2021 $ 162 $ 45 $ — $ 2 $ 78 $ 287
Other above includes structured settlements, other life policy reserves and other investment contract reserves. The removal of shadow adjustments above represents an increase to the life policy and investment contract reserve balance as it is no longer required under ASU 2018-12 for liabilities amortized in accordance with deferred acquisition costs. Shadow adjustments were historically included to present the carrying amount of the liability as if unrealized holding gains and losses had been realized. The net premiums in excess of gross premiums adjustment represents an increase to the liability as the remeasured net premiums, calculated as the present value of future benefits and related expenses using updated cash flow assumptions as of the transition date less the carrying amount of the liability prior to transition, exceeded the present value of future gross premiums. For purposes of calculating the updated present value of future benefits and related expenses above, the discount rate assumption that was used prior to adoption of ASU 2018-12 was retained. The remeasurement at market value discount rates adjustment represents the increase to the liability as a result of updating the discount rate assumption for our term and whole life products from the rates used prior to adoption of ASU 2018-12 to market value discount rates that existed at the transition date. As the discount rate assumption decreased significantly from the date the contracts were initially made, this adjustment represents the largest impact on the liability as a result of the initial adoption of ASU 2018-12. The life reinsurance recoverable asset is included in the remeasurement as the assumptions used in estimating the life reinsurance recoverable are consistent with those used in estimating the related liabilities. Other adjustments includes a reclassification from prepaid reinsurance premiums to reinsurance recoverable.
The shadow removal and remeasurement at market value discount rates adjustments were recorded as an increase to the life policy and investment contract reserves liability and a decrease to opening AOCI as of the transition date. The net premiums in excess of gross premiums adjustment was recorded as an increase to the life policy and investment contract reserves liability and a decrease to the opening balance of retained earnings as of the transition date.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 19
Table of Contents
The balances and changes in the term and whole life policy reserves included in life policy and investment contract reserves is as follows:
(Dollars in millions) Three months ended June 30,
2023 2022
Term Whole life Term Whole life
Present value of expected net premiums:
Balance, beginning of period $ 1,699 $ 217 $ 1,686 $ 226
Beginning balance at original discount rate 1,715 220 1,542 207
Effect of changes in cash flow assumptions ( 5 ) ( 6 ) 149 ( 1 )
Effect of actual variances from expected experience ( 9 ) — ( 3 ) —
Adjusted beginning of period balance 1,701 214 1,688 206
Issuances 40 10 45 8
Interest accrual 17 2 17 2
Net premiums collected ( 46 ) ( 7 ) ( 46 ) ( 7 )
Ending balance at original discount rate 1,712 219 1,704 209
Effect of changes in discount rate assumptions ( 48 ) ( 7 ) 19 1
Balance, end of period 1,664 212 1,723 210
Present value of expected future policy benefits:
Balance, beginning of period 2,691 644 2,745 736
Beginning balance at original discount rate 2,712 614 2,463 586
Effect of changes in cash flow assumptions 5 ( 10 ) 166 ( 3 )
Effect of actual variances from expected experience ( 11 ) — ( 1 ) —
Adjusted beginning of period balance 2,706 604 2,628 583
Issuances 40 11 45 7
Interest accrual 30 7 28 8
Benefits paid ( 39 ) ( 7 ) ( 38 ) ( 8 )
Ending balance at original discount rate 2,737 615 2,663 590
Effect of changes in discount rate assumptions ( 75 ) 18 39 56
Balance, end of period 2,662 633 2,702 646
Net liability for future policy benefits:
Present value of expected future policy benefits less expected net premiums 998 421 979 436
Impact of flooring at cohort level 17 — 20 2
Net life policy reserves 1,015 421 999 438
Less reinsurance recoverable at original discount rate ( 100 ) ( 25 ) ( 104 ) ( 25 )
Less effect of discount rate assumption changes on reinsurance recoverable ( 8 ) ( 5 ) ( 13 ) ( 7 )
Net life policy reserves, after reinsurance recoverable $ 907 $ 391 $ 882 $ 406
Weighted-average duration of the net life policy reserves in years 12 16 12 17
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 20
Table of Contents
(Dollars in millions) Six months ended June 30,
2023 2022
Term Whole life Term Whole life
Present value of expected net premiums:
Balance, beginning of period $ 1,643 $ 208 $ 1,801 $ 241
Beginning balance at original discount rate 1,708 217 1,503 201
Effect of changes in cash flow assumptions ( 5 ) ( 6 ) 145 ( 1 )
Effect of actual variances from expected experience ( 12 ) 1 8 —
Adjusted beginning of period balance 1,691 212 1,656 200
Issuances 78 17 104 19
Interest accrual 35 4 32 4
Net premiums collected ( 92 ) ( 14 ) ( 88 ) ( 14 )
Ending balance at original discount rate 1,712 219 1,704 209
Effect of changes in discount rate assumptions ( 48 ) ( 7 ) 19 1
Balance, end of period 1,664 212 1,723 210
Present value of expected future policy benefits:
Balance, beginning of period 2,584 614 2,993 826
Beginning balance at original discount rate 2,692 607 2,425 577
Effect of changes in cash flow assumptions 5 ( 10 ) 162 ( 3 )
Effect of actual variances from expected experience ( 13 ) 1 17 —
Adjusted beginning of period balance 2,684 598 2,604 574
Issuances 78 17 104 18
Interest accrual 60 15 55 15
Benefits paid ( 85 ) ( 15 ) ( 100 ) ( 17 )
Ending balance at original discount rate 2,737 615 2,663 590
Effect of changes in discount rate assumptions ( 75 ) 18 39 56
Balance, end of period 2,662 633 2,702 646
Net liability for future policy benefits:
Present value of expected future policy benefits less expected net premiums 998 421 979 436
Impact of flooring at cohort level 17 — 20 2
Net life policy reserves 1,015 421 999 438
Less reinsurance recoverable at original discount rate ( 100 ) ( 25 ) ( 104 ) ( 25 )
Less effect of discount rate assumption changes on reinsurance recoverable ( 8 ) ( 5 ) ( 13 ) ( 7 )
Net life policy reserves, after reinsurance recoverable $ 907 $ 391 $ 882 $ 406
Weighted-average duration of the net life policy reserves in years 12 16 12 17
The total impact of flooring at cohort level in the above tables includes the effect of discount rate assumption change s of $ 3 million and $ 10 million at June 30, 2023 and 2022, respectively.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 21
Table of Contents
The following table shows the amount of undiscounted and discounted expected future benefit payments and expected gross premiums for our term and whole life policies:
(Dollars in millions) At June 30,
2023 2022
Undiscounted Discounted Undiscounted Discounted
Term
Expected future benefit payments $ 4,738 $ 2,662 $ 4,589 $ 2,702
Expected future gross premiums 4,345 2,583 4,378 2,690
Whole life
Expected future benefit payments $ 1,610 $ 633 $ 1,517 $ 646
Expected future gross premiums 641 390 583 372
The following table shows the amount of revenue and interest recognized in the condensed consolidated statements of income related to our term and whole life policies:
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2023 2022 2023 2022
Gross premiums
Term $ 73 $ 71 $ 146 $ 140
Whole life 13 12 25 24
Total $ 86 $ 83 $ 171 $ 164
Interest accretion
Term $ 12 $ 11 $ 24 $ 23
Whole life 5 6 11 11
Total $ 17 $ 17 $ 35 $ 34
Adverse development that resulted in an immediate charge to income due to net premiums exceeding gross premiums was immaterial for the three and six months ended June 30, 2023, and 2022.
The following table shows the weighted-average interest rate for our term and whole life products :
At June 30,
2023 2022
Term
Interest accretion rate 5.29 % 5.16 %
Current discount rate 5.11 4.20
Whole life
Interest accretion rate 5.93 % 5.98 %
Current discount rate 5.22 4.74
The discount rate assumption was developed by calculating forward rates from market yield curves of upper-medium grade fixed-income instruments.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 22
Table of Contents
The following table shows the balances and changes in policyholders' account balances included in investment contract reserves:
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2023 2022 2023 2022
Deferred annuity Universal life Deferred annuity Universal life Deferred annuity Universal life Deferred annuity Universal life
Balance, beginning of period $ 711 $ 458 $ 756 $ 456 $ 734 $ 457 $ 763 $ 454
Premiums received 15 9 5 10 25 20 11 21
Policy charges — ( 10 ) — ( 9 ) — ( 20 ) — ( 19 )
Surrenders and withdrawals ( 32 ) ( 4 ) ( 8 ) ( 2 ) ( 68 ) ( 7 ) ( 20 ) ( 5 )
Benefit payments ( 3 ) ( 2 ) ( 4 ) ( 2 ) ( 6 ) ( 4 ) ( 10 ) ( 3 )
Interest credited 5 5 6 4 11 10 11 9
Balance, end of period $ 696 $ 456 $ 755 $ 457 $ 696 $ 456 $ 755 $ 457
Weighted average crediting rate 3.41 % 4.29 % 3.06 % 4.25 % 3.41 % 4.29 % 3.06 % 4.25 %
Net amount at risk $ — $ 4,030 $ — $ 4,141 $ — $ 4,030 $ — $ 4,141
Cash surrender value 691 423 750 422 691 423 750 422
The net amount at risk above represents the guaranteed benefit amount in excess of the current account balances.
The following table shows the balance of account values by range of guaranteed minimum crediting rates, in basis points, and the related range of the difference between rates being credited to policyholders and the respective guaranteed minimums for our deferred annuity and universal life contracts:
(Dollars in millions) At guaranteed minimum 1 to 50 basis points above 51-150 basis points above Greater than 150 basis points Total
At June 30, 2023
Deferred annuity
1.00-3.00% $ 5 $ 400 $ 17 $ 224 646
3.01-4.00% 50 — — — 50
Total $ 55 $ 400 $ 17 $ 224 $ 696
Universal life
1.00-3.00% $ 61 $ — $ 56 $ 3 $ 120
3.01-4.00% 53 — — — 53
Greater than 4.00% 283 — — — 283
Total $ 397 $ — $ 56 $ 3 $ 456
At June 30, 2022
Deferred annuity
1.00-3.00% $ 475 $ — $ 173 $ 56 $ 704
3.01-4.00% 51 — — — 51
Total $ 526 $ — $ 173 $ 56 $ 755
Universal life
1.00-3.00% $ 60 $ 45 $ 7 $ 2 $ 114
3.01-4.00% 52 — — — 52
Greater than 4.00% 291 — — — 291
Total $ 403 $ 45 $ 7 $ 2 $ 457
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 23
Table of Contents
The following table shows the balances and changes in the other additional liability related to the no-lapse guarantees contained within our universal life contracts:
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2023 2022 2023 2022
Balance, beginning of period $ 125 $ 127 $ 121 $ 133
Balance, beginning of period before shadow reserve adjustments 127 127 123 131
Effect of changes in cash flow assumptions ( 5 ) ( 2 ) ( 5 ) ( 2 )
Effect of actual variances from expected experience — 2 ( 1 ) 5
Adjusted beginning of period balance 122 127 117 134
Interest accrual 1 1 2 2
Excess death benefits ( 2 ) ( 4 ) ( 2 ) ( 12 )
Attributed assessments 3 3 6 6
Effect of changes in interest rate assumptions — ( 4 ) 1 ( 7 )
Balance, end of period before shadow reserve adjustments 124 123 124 123
Shadow reserve adjustments ( 2 ) ( 1 ) ( 2 ) ( 1 )
Balance, end of period 122 122 122 122
Less reinsurance recoverable, end of period 7 6 7 6
Net other additional liability, after reinsurance recoverable $ 129 $ 128 $ 129 $ 128
Weighted-average duration of the other additional liability in years 32 35 32 35
The following table shows balances and changes in separate account balances during the period:
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2023 2022 2023 2022
Balance, beginning of period $ 899 $ 903 $ 892 $ 959
Interest credited before policy charges 10 10 20 20
Change in unrealized gains and losses impacting separate account liabilities — ( 53 ) — ( 105 )
Benefit payments ( 1 ) — ( 3 ) ( 10 )
Other 3 — 2 ( 4 )
Balance, end of period $ 911 $ 860 $ 911 $ 860
Cash surrender value $ 906 $ 878 $ 906 $ 878
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 24
Table of Contents
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. For property casualty, we evaluate the costs for recoverability. The adoption of ASU 2018-12 on January 1, 2023 resulted in a simplified amortization of life deferred acquisition costs and the removal of shadow deferred acquisition costs. See Note 1, Accounting Policies, for further discussion. The table below shows the deferred policy acquisition costs and asset reconciliation.
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2023 2022 2023 2022
Property casualty:
Deferred policy acquisition costs asset, beginning of period $ 714 $ 665 $ 682 $ 602
Capitalized deferred policy acquisition costs 407 375 779 739
Amortized deferred policy acquisition costs ( 350 ) ( 317 ) ( 690 ) ( 618 )
Deferred policy acquisition costs asset, end of period $ 771 $ 723 $ 771 $ 723
Life:
Deferred policy acquisition costs asset, beginning of period $ 334 $ 319 $ 331 $ 314
Capitalized deferred policy acquisition costs 11 10 22 22
Amortized deferred policy acquisition costs ( 7 ) ( 6 ) ( 15 ) ( 13 )
Deferred policy acquisition costs asset, end of period $ 338 $ 323 $ 338 $ 323
Consolidated:
Deferred policy acquisition costs asset, beginning of period $ 1,048 $ 984 $ 1,013 $ 916
Capitalized deferred policy acquisition costs 418 385 801 761
Amortized deferred policy acquisition costs ( 357 ) ( 323 ) ( 705 ) ( 631 )
Deferred policy acquisition costs asset, end of period $ 1,109 $ 1,046 $ 1,109 $ 1,046
The removal of shadow deferred policy acquisition costs as a result of the adoption of ASU 2018-12 resulted in a $ 33 million increase, across all products, from $ 263 million pre-adoption at December 31, 2020, to $ 296 million post-adoption at January 1, 2021.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 25
Table of Contents
The table below shows the life deferred policy acquisition costs asset by product:
(Dollars in millions)
Three months ended June 30, 2023 Term Whole life Deferred annuity Universal life Total
Balance, beginning of period $ 231 $ 44 $ 7 $ 52 $ 334
Capitalized deferred policy acquisition costs 7 2 1 1 11
Amortized deferred policy acquisition costs ( 5 ) ( 1 ) — ( 1 ) ( 7 )
Balance, end of period $ 233 $ 45 $ 8 $ 52 $ 338
Three months ended June 30, 2022
Balance, beginning of period $ 220 $ 39 $ 7 $ 53 $ 319
Capitalized deferred policy acquisition costs 8 1 — 1 $ 10
Amortized deferred policy acquisition costs ( 6 ) — — — $ ( 6 )
Balance, end of period $ 222 $ 40 $ 7 $ 54 $ 323
(Dollars in millions)
Six months ended June 30, 2023 Term Whole life Deferred annuity Universal life Total
Balance, beginning of period $ 228 $ 43 $ 7 $ 53 $ 331
Capitalized deferred policy acquisition costs 16 4 1 1 22
Amortized deferred policy acquisition costs ( 11 ) ( 2 ) — ( 2 ) ( 15 )
Balance, end of period $ 233 $ 45 $ 8 $ 52 $ 338
Six months ended June 30, 2022
Balance, beginning of period $ 215 $ 38 $ 7 $ 54 $ 314
Capitalized deferred policy acquisition costs 18 3 — 1 $ 22
Amortized deferred policy acquisition costs ( 11 ) ( 1 ) — ( 1 ) $ ( 13 )
Balance, end of period $ 222 $ 40 $ 7 $ 54 $ 323
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 Second-Quarter 2023 10-Q
Page 26
Table of Contents
NOTE 7 – Accumulated Other Comprehensive Income
The adoption of ASU 2018-12 on January 1, 2023 resulted in restatement of certain amounts below. See Note 1, Accounting Policies, for further discussion. Accumulated other comprehensive income (AOCI) includes changes in unrealized gains and losses on investments, changes in pension obligations and changes in life policy reserves, reinsurance recoverable and other as follows:
(Dollars in millions) Three months ended June 30,
2023 2022
Before tax Income tax Net Before tax Income tax Net
Investments:
AOCI, beginning of period $ ( 684 ) $ ( 147 ) $ ( 537 ) $ 46 $ 8 $ 38
OCI before investment gains and losses, net, recognized in net income ( 158 ) ( 34 ) ( 124 ) ( 610 ) ( 127 ) ( 483 )
Investment gains and losses, net, recognized in net income 4 2 2 — — —
OCI ( 154 ) ( 32 ) ( 122 ) ( 610 ) ( 127 ) ( 483 )
AOCI, end of period $ ( 838 ) $ ( 179 ) $ ( 659 ) $ ( 564 ) $ ( 119 ) $ ( 445 )
Pension obligations:
AOCI, beginning of period $ 30 $ 8 $ 22 $ 27 $ 7 $ 20
OCI excluding amortization recognized in net income — — — — — —
Amortization recognized in net income ( 1 ) ( 1 ) — — — —
OCI ( 1 ) ( 1 ) — — — —
AOCI, end of period $ 29 $ 7 $ 22 $ 27 $ 7 $ 20
Life policy reserves, reinsurance recoverable and other:
AOCI, beginning of period $ ( 16 ) $ ( 4 ) $ ( 12 ) $ ( 248 ) $ ( 52 ) $ ( 196 )
OCI before investment gains and losses, net, recognized in net income 29 6 23 181 38 143
Investment gains and losses, net, recognized in net income — — — — — —
OCI 29 6 23 181 38 143
AOCI, end of period $ 13 $ 2 $ 11 $ ( 67 ) $ ( 14 ) $ ( 53 )
Summary of AOCI:
AOCI, beginning of period $ ( 670 ) $ ( 143 ) $ ( 527 ) $ ( 175 ) $ ( 37 ) $ ( 138 )
Investments OCI ( 154 ) ( 32 ) ( 122 ) ( 610 ) ( 127 ) ( 483 )
Pension obligations OCI ( 1 ) ( 1 ) — — — —
Life policy reserves, reinsurance recoverable and other OCI 29 6 23 181 38 143
Total OCI ( 126 ) ( 27 ) ( 99 ) ( 429 ) ( 89 ) ( 340 )
AOCI, end of period $ ( 796 ) $ ( 170 ) $ ( 626 ) $ ( 604 ) $ ( 126 ) $ ( 478 )
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 27
Table of Contents
(Dollars in millions) Six months ended June 30,
2023 2022
Before tax Income tax Net Before tax Income tax Net
Investments:
AOCI, beginning of period $ ( 847 ) $ ( 182 ) $ ( 665 ) $ 792 $ 165 $ 627
OCI before investment gains and losses, net, recognized in net income 5 1 4 ( 1,353 ) ( 284 ) ( 1,069 )
Investment gains and losses, net, recognized in net income 4 2 2 ( 3 ) — ( 3 )
OCI 9 3 6 ( 1,356 ) ( 284 ) ( 1,072 )
AOCI, end of period $ ( 838 ) $ ( 179 ) $ ( 659 ) $ ( 564 ) $ ( 119 ) $ ( 445 )
Pension obligations:
AOCI, beginning of period $ 36 $ 9 $ 27 $ 27 $ 7 $ 20
OCI excluding amortization recognized in net income ( 5 ) ( 1 ) ( 4 ) — — —
Amortization recognized in net income ( 2 ) ( 1 ) ( 1 ) — — —
OCI ( 7 ) ( 2 ) ( 5 ) — — —
AOCI, end of period $ 29 $ 7 $ 22 $ 27 $ 7 $ 20
Life policy reserves, reinsurance recoverable and other:
AOCI, beginning of period $ 29 $ 5 $ 24 $ 1 $ — $ 1
Cumulative effect of change in accounting for long duration insurance contracts — — — ( 445 ) ( 93 ) ( 352 )
Adjusted AOCI, beginning of period 29 5 24 ( 444 ) ( 93 ) ( 351 )
OCI before investment gains and losses, net, recognized in net income ( 16 ) ( 3 ) ( 13 ) 377 79 298
Investment gains and losses, net, recognized in net income — — — — — —
OCI ( 16 ) ( 3 ) ( 13 ) 377 79 298
AOCI, end of period $ 13 $ 2 $ 11 $ ( 67 ) $ ( 14 ) $ ( 53 )
Summary of AOCI:
AOCI, beginning of period $ ( 782 ) $ ( 168 ) $ ( 614 ) $ 820 $ 172 $ 648
Cumulative effect of change in accounting for long duration insurance contracts — — — ( 445 ) ( 93 ) ( 352 )
Adjusted AOCI, beginning of period ( 782 ) ( 168 ) ( 614 ) 375 79 296
Investments OCI 9 3 6 ( 1,356 ) ( 284 ) ( 1,072 )
Pension obligations OCI ( 7 ) ( 2 ) ( 5 ) — — —
Life policy reserves, reinsurance recoverable and other OCI ( 16 ) ( 3 ) ( 13 ) 377 79 298
Total OCI ( 14 ) ( 2 ) ( 12 ) ( 979 ) ( 205 ) ( 774 )
AOCI, end of period $ ( 796 ) $ ( 170 ) $ ( 626 ) $ ( 604 ) $ ( 126 ) $ ( 478 )
Investment gains and losses, net, 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 Second-Quarter 2023 10-Q
Page 28
Table of Contents
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 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 June 30, Six months ended June 30,
2023 2022 2023 2022
Direct written premiums $ 2,071 $ 1,871 $ 3,930 $ 3,574
Assumed written premiums 194 193 438 456
Ceded written premiums ( 115 ) ( 100 ) ( 199 ) ( 167 )
Net written premiums $ 2,150 $ 1,964 $ 4,169 $ 3,863
Direct earned premiums $ 1,806 $ 1,631 $ 3,566 $ 3,192
Assumed earned premiums 134 134 293 255
Ceded earned premiums ( 77 ) ( 68 ) ( 155 ) ( 132 )
Earned premiums $ 1,863 $ 1,697 $ 3,704 $ 3,315
Direct incurred loss and loss expenses $ 1,265 $ 1,174 $ 2,564 $ 2,069
Assumed incurred loss and loss expenses 58 67 134 140
Ceded incurred loss and loss expenses ( 61 ) ( 1 ) ( 119 ) ( 13 )
Incurred loss and loss expenses $ 1,262 $ 1,240 $ 2,579 $ 2,196
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 Second-Quarter 2023 10-Q
Page 29
Table of Contents
The table below summarizes our consolidated life insurance earned premiums and contract holders' benefits incurred:
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2023 2022 2023 2022
Direct earned premiums $ 100 $ 96 $ 196 $ 189
Ceded earned premiums ( 20 ) ( 20 ) ( 39 ) ( 38 )
Earned premiums $ 80 $ 76 $ 157 $ 151
Direct contract holders' benefits incurred 100 109 197 212
Ceded contract holders' benefits incurred ( 22 ) ( 27 ) ( 38 ) ( 54 )
Contract holders' benefits incurred $ 78 $ 82 $ 159 $ 158
The ceded benefits incurred can vary depending on the type of life insurance policy held and the year the policy was issued.
The allowance for uncollectible property casualty premiums was $ 14 million and $ 13 million at June 30, 2023, and December 31, 2022, respectively. The allowances for credit losses on other premiums receivable and reinsurance recoverable assets were immaterial at June 30, 2023, and December 31, 2022.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 30
Table of Contents
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 June 30, Six months ended June 30,
2023 2022 2023 2022
Tax at statutory rate: $ 140 21.0 % $ ( 220 ) 21.0 % $ 196 21.0 % $ ( 294 ) 21.0 %
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds ( 5 ) ( 0.8 ) ( 5 ) 0.5 ( 10 ) ( 1.1 ) ( 10 ) 0.7
Dividend received exclusion ( 6 ) ( 0.9 ) ( 5 ) 0.5 ( 11 ) ( 1.2 ) ( 10 ) 0.7
Other 3 0.5 ( 5 ) 0.3 — — ( 6 ) 0.4
Provision (benefit) for income taxes $ 132 19.8 % $ ( 235 ) 22.3 % $ 175 18.7 % $ ( 320 ) 22.8 %
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 June 30, 2023, and December 31, 2022. 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).
Cincinnati Global
As a result of operations for the three and six months ended June 30, 2023, Cincinnati Global decreased its net deferred tax assets by $ 5 million and $ 10 million with an offsettin g decrease of $ 5 million and $ 10 million to the valuation allowance. Cincinnati Global had a net deferred tax asset of $ 21 million and an offsetting valuation allowance of $ 21 million at June 30, 2023.
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 June 30, 2023.
Cincinnati Global had operating loss carryforwards in the United States of $ 6 million and $ 5 million and in the United Kingdom of $ 101 million and $ 109 million at June 30, 2023, and December 31, 2022, respectively. 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 Second-Quarter 2023 10-Q
Page 31
Table of Contents
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 June 30, Six months ended June 30,
2023 2022 2023 2022
Numerator:
Net income (loss)—basic and diluted
$ 534 $ ( 818 ) $ 759 $ ( 1,084 )
Denominator:
Basic weighted-average common shares outstanding 157.0 159.6 157.1 160.0
Effect of share-based awards:
Stock options 0.6 — 0.8 —
Nonvested shares 0.4 — 0.4 —
Diluted weighted-average shares 158.0 159.6 158.3 160.0
Earnings (loss) per share:
Basic $ 3.40 $ ( 5.12 ) $ 4.83 $ ( 6.77 )
Diluted $ 3.38 $ ( 5.12 ) $ 4.80 $ ( 6.77 )
Number of anti-dilutive share-based awards 1.5 2.0 1.5 2.2
The above table shows the number of anti-dilutive share-based awards for the three and six months ended June 30, 2023 and 2022. In accordance with Accounting Standards Codification 260, Earnings per Share , the assumed exercise of share-based awards was excluded from the computation of diluted loss per share for the three and six months ended June 30, 2022, because their exercise would have anti-dilutive effects. See our 2022 Annual Report on Form 10-K, Item 8, Note 17, Share-Based Associate Compensation Plans, Page 170, for information about share-based awards.
NOTE 11 – Employee Retirement Benefits
The following summarizes the components of net periodic benefit for our qualified and supplemental pension plans:
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2023 2022 2023 2022
Service cost $ 2 $ 3 $ 3 $ 5
Non-service (benefit) costs:
Interest cost 3 2 6 5
Expected return on plan assets ( 5 ) ( 5 ) ( 10 ) ( 11 )
Amortization of actuarial loss and prior service cost ( 1 ) — ( 2 ) —
Other — — ( 5 ) —
Total non-service benefit ( 3 ) ( 3 ) ( 11 ) ( 6 )
Net periodic benefit $ ( 1 ) $ — $ ( 8 ) $ ( 1 )
See our 2022 Annual Report on Form 10-K, Item 8, Note 13, Employee Retirement Benefits, Page 163, for information on our retirement benefits. The net periodic benefit is 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 2023 and 2022.
We made matching contributions totaling $ 6 million to our 401(k) and Top Hat savings plans during both the second quarter of 2023 and 2022 and contributions of $ 14 million for both the first half of 2023 and 2022.
We m ade no con tributions to our qualified pension plan during the first six months of 2023.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 32
Table of Contents
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, including several that continue to be amended; many that have been dismissed; several that may be refiled; and others that have been dismissed by trial courts and appealed. Appellate decisions issued to date generally have been favorable for the insurance industry, and the company has received numerous favorable rulings on appeal with no adverse appellate rulings to date. Some cases remain to be decided and in some jurisdictions, 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 state or national classes. Such proceedings have alleged, for example, improper depreciation of labor costs in repair estimates. The company’s insurance subsidiaries also are occasionally parties to individual actions in which extra-contractual damages, 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.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 33
Table of Contents
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 2022 Annual Report on Form 10-K, Item 8, Note 18, Segment Information, Page 173, for a description of revenue, income or loss before income taxes and identifiable assets for each of the five segments.
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 34
Table of Contents
Segment information is summarized in the following table:
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2023 2022 2023 2022
Revenues:
Commercial lines insurance
Commercial casualty $ 373 $ 350 $ 750 $ 686
Commercial property 312 280 611 554
Commercial auto 214 210 428 415
Workers' compensation 72 68 146 136
Other commercial 95 86 187 165
Commercial lines insurance premiums 1,066 994 2,122 1,956
Fee revenues 1 1 2 2
Total commercial lines insurance 1,067 995 2,124 1,958
Personal lines insurance
Personal auto 173 155 339 307
Homeowner 251 202 484 397
Other personal 69 56 134 111
Personal lines insurance premiums 493 413 957 815
Fee revenues 1 1 2 2
Total personal lines insurance 494 414 959 817
Excess and surplus lines insurance 132 124 259 236
Fee revenues 1 — 1 1
Total excess and surplus lines insurance 133 124 260 237
Life insurance premiums 80 76 157 151
Fee revenues 3 1 5 2
Total life insurance 83 77 162 153
Investments
Investment income, net of expenses 220 195 430 380
Investment gains and losses, net 434 ( 1,154 ) 540 ( 1,820 )
Total investment revenue 654 ( 959 ) 970 ( 1,440 )
Other
Premiums 172 166 366 308
Other 2 3 5 5
Total other revenues 174 169 371 313
Total revenues $ 2,605 $ 820 $ 4,846 $ 2,038
Income (loss) before income taxes:
Insurance underwriting results
Commercial lines insurance $ 33 $ ( 62 ) $ 31 $ 14
Personal lines insurance ( 36 ) ( 49 ) ( 93 ) 16
Excess and surplus lines insurance 11 19 24 35
Life insurance 13 1 21 8
Investments 624 ( 987 ) 910 ( 1,495 )
Other 21 25 41 18
Total income (loss) before income taxes $ 666 $ ( 1,053 ) $ 934 $ ( 1,404 )
Identifiable assets: June 30,
2023 December 31,
2022
Property casualty insurance $ 5,354 $ 5,178
Life insurance 1,542 1,518
Investments 23,535 22,133
Other 921 903
Total $ 31,352 $ 29,732
Cincinnati Financial Corporation Second-Quarter 2023 10-Q
Page 35
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.