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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2024-04-25 compared with 2023-10-26 · 55 added, 57 removed, 158 unchanged (41% of the section changed)

5 unchanged sentences

Our view of potential risks and our sensitivity to such risks is discussed in our 2023 Annual Report on Form 10-K, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Page 113.

The fair value of our investment portfolio was $22.874 billion at September 30, 2023, up $901 million from year-end 2022, including a $711 million increase in the fixed-maturity portfolio and a $190 million increase in the equity portfolio.

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

The fair value of our investment portfolio was $25.641 billion at March 31, 2024, up $861 million from year-end 2023, including a $293 million increase in the fixed-maturity portfolio and a $568 million increase in the equity portfolio.

(Dollars in millions) At March 31, 2024 At December 31, 2023

amortized cost Percent

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Total $ 19,022 100.0 % $ 25,641 100.0 % $ 18,643 100.0 % $ 24,780 100.0 %

At September 30, 2023, substantially all of our consolidated investment portfolio, measured at fair value, is classified as Level 1 or Level 2.

At March 31, 2024, 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 $398 million of private equity investments, $63 million of real estate through direct property ownership and development projects in the United States, $42 million in Lloyd's deposits and $31 million of life policy loans at September 30, 2023.

Cincinnati Financial Corporation Third-Quarter 2023 10-Q

Other invested assets included $477 million of private equity investments, $79 million of real estate through direct property ownership and development projects in the United States, $34 million of life policy loans and $18 million in Lloyd's deposit at March 31, 2024.

Cincinnati Financial Corporation First-Quarter 2024 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 nine months of 2023, the increase in fair value of our fixed-maturity portfolio was due to net purchases of securities and tightening of corporate credit spreads, partially offset by an increase in our net unrealized loss position that reflected an increase in U.S.

In the first three months of 2024, the increase in fair value of our fixed-maturity portfolio was due to net purchases of securities and tightening of corporate credit spreads, partially offset by an increase in our net unrealized loss position that reflected an increase in U.S.

Treasury yields.

At September 30, 2023, our fixed-maturity portfolio with an average rating of A2/A was valued at 91.4% of its amortized cost, compared with 93.5% at December 31, 2022.

At September 30, 2023, our investment-grade and noninvestment-grade fixed-maturity securities represented 80.6% and 3.9% of the portfolio, respectively.

The remaining 15.5% represented fixed-maturity securities that were not rated by Moody's or S&P Global Ratings.

At March 31, 2024, our fixed-maturity portfolio with an average rating of A2/A was valued at 95.8% of its amortized cost, compared with 96.0% at December 31, 2023.

At March 31, 2024, our investment-grade fixed-maturity securities represented 96.3% of the portfolio based on ratings provided by nationally recognized statistical rating organizations or the Securities Valuation Office of the National Association of Insurance Commissioners.

Attributes of the fixed-maturity portfolio include:

At September 30, 2023 At December 31, 2022

At March 31, 2024 At December 31, 2023

Weighted average yield-to-amortized cost 4.68 % 4.60 %

2 unchanged sentences

We discuss maturities of our fixed-maturity portfolio in our 2023 Annual Report on Form 10-K, Item 8, Note 2, Investments, Page 137, and in this quarterly report Item 2, Investments Results.

Cincinnati Financial Corporation Third-Quarter 2023 10-Q

Cincinnati Financial Corporation First-Quarter 2024 10-Q

TAXABLE FIXED MATURITIES

Our taxable fixed-maturity portfolio, with a fair value of $9.175 billion at September 30, 2023, included:

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

Our taxable fixed-maturity portfolio, with a fair value of $10.218 billion at March 31, 2024, included:

(Dollars in millions) At March 31, 2024 At December 31, 2023

Investment-grade corporate $ 7,156 $ 7,040

2 unchanged sentences

Government-sponsored enterprises 1,421 1,224

Asset-backed 189 187

United States government 178 200

Commercial mortgage-backed 196 234

Foreign government 29 25

1 unchanged sentence

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 September 30, 2023.

Our investment-grade corporate bonds had an average rating of Baa1 by Moody's or BBB by S&P Global Ratings and represented 72.3% of the taxable fixed-maturity portfolio's fair value at September 30, 2023, compared with 76.7% at year-end 2022.

With the exception of United States agency issues that include government-sponsored enterprises, no individual issuer's securities accounted for more than 1.1% of the taxable fixed-maturity portfolio at March 31, 2024.

Our investment-grade corporate bonds had an average rating of Baa1 by Moody's or BBB by S&P Global Ratings and represented 70.0% of the taxable fixed-maturity portfolio's fair value at March 31, 2024, compared with 71.2% at year-end 2023.

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

September 30, 2023, was the financial sector.

March 31, 2024, was the financial sector.

It represented 37.7% of our investment-grade corporate bond portfolio, compared with 38.2% at year-end 2023.

The energy sector represented 11.2% and was 10.8% at year-end 2022.

The energy and utility sectors represented 11.3% and 10.0%, respectively, compared with 11.2% and less than 10% at year-end 2023.

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

1 unchanged sentence

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 September 30, 2023, included $196 million of commercial mortgage-backed securities with an average rating of Aa3/AA-.

Our taxable fixed-maturity portfolio at March 31, 2024, included $189 million of asset-backed securities with an average rating of Aa3/AA-.

TAX-EXEMPT FIXED MATURITIES

At September 30, 2023, we had $3.668 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody's and S&P Global Ratings.

At March 31, 2024, we had $3.866 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 1,800 municipal bond issuers.

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

No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at March 31, 2024.

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 Third-Quarter 2023 10-Q

Cincinnati Financial Corporation First-Quarter 2024 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 September 30, 2023 $ 14,050 $ 13,452 $ 12,843 $ 12,229 $ 11,629

At March 31, 2024 $ 15,281 $ 14,681 $ 14,084 $ 13,458 $ 12,802

At December 31, 2023 $ 14,962 $ 14,375 $ 13,791 $ 13,179 $ 12,543

The effective duration of the fixed-maturity portfolio as of September 30, 2023, was 4.7 years, matching year-end 2022.

The effective duration of the fixed-maturity portfolio as of March 31, 2024, was 4.3 years, matching year-end 2023.

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 4.3% change in the fair value of the fixed-maturity portfolio.

5 unchanged sentences

EQUITY INVESTMENTS

Our equity investments, with a fair value totaling $10.031 billion at September 30, 2023, included $9.678 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 $11.557 billion at March 31, 2024, included $11.203 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.

5 unchanged sentences

-30% -20% -10% — 10% 20% 30%

At September 30, 2023 $ 7,022 $ 8,025 $ 9,028 $ 10,031 $ 11,034 $ 12,037 $ 13,040

At March 31, 2024 $ 8,090 $ 9,246 $ 10,401 $ 11,557 $ 12,713 $ 13,868 $ 15,024

At December 31, 2023 $ 7,692 $ 8,791 $ 9,890 $ 10,989 $ 12,088 $ 13,187 $ 14,286

At September 30, 2023, Apple Inc.

(Nasdaq:AAPL) was our largest single common stock holding with a fair value of $764 million, or 7.9% of our publicly traded common stock portfolio and 3.3% of the total investment portfolio.

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

Cincinnati Financial Corporation Third-Quarter 2023 10-Q

At March 31, 2024, Microsoft (Nasdaq:MSFT) was our largest single common stock holding with a fair value of $942 million, or 8.4% of our publicly traded common stock portfolio and 3.7% of the total investment portfolio.

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

Cincinnati Financial Corporation First-Quarter 2024 10-Q

Common Stock Portfolio Industry Sector Distribution

Percent of common stock portfolio

At September 30, 2023 At December 31, 2022

At March 31, 2024 At December 31, 2023

Financial S&P 500 Industry

3 unchanged sentences

Financial 13.9 13.1 13.9 13.0

Healthcare 12.7 13.3 15.0 15.8

Industrials 12.4 8.8 11.9 8.8

Healthcare 11.4 12.4 11.6 12.6

Consumer staples 7.0 6.0 7.0 6.2

7 unchanged sentences

UNREALIZED INVESTMENT GAINS AND LOSSES

At September 30, 2023, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $29 million and unrealized investment losses amounted to $1.236 billion before taxes.

The $1.207 billion net unrealized loss position in our fixed-maturity portfolio at September 30, 2023, increased in the first nine months of 2023, primarily due to an increase in U.S.

At March 31, 2024, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $89 million and unrealized investment losses amounted to $714 million before taxes.

The $625 million net unrealized loss position in our fixed-maturity portfolio at March 31, 2024, increased in the first three months of 2024, primarily due to an increase in U.S.

Treasury yields that were partially offset by tightening of corporate credit spreads.

3 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 September 30, 2023, consisted of a net gain position in our equity portfolio of $5.632 billion.

On this basis, the net unrealized investment gains at March 31, 2024, consisted of a net gain position in our equity portfolio of $7.244 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 JPMorgan Chase & Co (NYSE:JPM), which had a combined fair value of $2.605 billion.

The five largest holdings in our common stock portfolio were Microsoft, Apple (Nasdaq:AAPL), Broadcom Inc.

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

(NYSE:BLK), which had a combined fair value of $3.202 billion.

Unrealized Investment Losses

1 unchanged sentence

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

At September 30, 2023, 4,490 of the 4,707 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 4,490 holdings with fair values below amortized cost at September 30, 2023, represented 95.0% of the fair value of our fixed-maturity investment portfolio and $1.236 billion in unrealized losses.

• 2,831 of the 4,490 holdings had fair value between 90% and 100% of amortized cost at September 30, 2023.

At March 31, 2024, 3,329 of the 4,804 fixed-maturity securities we owned had fair values below amortized cost, compared with 2,840 of the 4,738 securities we owned at year-end 2023.

The 3,329 holdings with fair values below amortized cost at March 31, 2024, represented 71.4% of the fair value of our fixed-maturity investment portfolio and $714 million in unrealized losses.

• 2,413 of the 3,329 holdings had fair value between 90% and 100% of amortized cost at March 31, 2024.

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

1 unchanged sentence

• 904 of the 3,329 fixed-maturity holdings had fair value between 70% and 90% of amortized cost at

September 30, 2023.

We believe the 1,457 fixed-maturity securities will continue to pay interest and ultimately

Cincinnati Financial Corporation Third-Quarter 2023 10-Q

pay principal upon maturity.

March 31, 2024.

We believe the 904 fixed-maturity securities will continue to pay interest and ultimately pay

Cincinnati Financial Corporation First-Quarter 2024 10-Q

principal upon maturity.

The issuers of these 904 securities have strong cash flow to service their debt and meet their contractual obligation to make principal payments.

The fair value of these securities was $2.001 billion, and they accounted for $448 million in unrealized losses.

• 202 of the 4,490 fixed-maturity holdings had fair value below 70% of amortized cost at September 30, 2023.

• 12 of the 3,329 fixed-maturity holdings had fair value below 70% of amortized cost at March 31, 2024.

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 September 30, 2023 Fair value Unrealized

At March 31, 2024 Fair value Unrealized

losses Fair value Unrealized

4 unchanged sentences

Government-sponsored enterprises 396 1 168 3 564 4

Asset-backed 30 — 133 11 163 11

United States government 74 — 105 4 179 4

Commercial mortgage-backed 1 — 194 18 195 18

Foreign government 17 — 5 — 22 —

5 unchanged sentences

Government-sponsored enterprises 652 3 113 3 765 6

Asset-backed 5 — 172 16 177 16

United States government 32 — 129 3 161 3

Commercial mortgage-backed 215 13 14 3 229 16

Foreign government 3 — 6 — 9 —

Total $ 1,384 $ 18 $ 7,912 $ 669 $ 9,296 $ 687

At September 30, 2023, applying our invested asset impairment policy, we determined that the total of $1.236 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 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 nine months of 2023.

During the first nine 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.

At March 31, 2024, applying our invested asset impairment policy, we determined that the total of $714 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 2024, no fixed-maturity securities were written down to fair value, due to an intention to be sold.

The allowance for credit losses increased $9 million during the first three months of 2024.

During the first three months of 2023, no fixed-maturity securities were written down to fair value, due to an intention to be sold, and changes in allowance for credit losses were less than $1 million.

During the full year of 2023, we wrote down one security and recorded $4 million in impairment charges.

At December 31, 2023, 2,840 fixed-maturity securities with a total unrealized loss of $687 million were in an unrealized loss position.

Of that total, 20 fixed-maturity securities had fair values below 70% of amortized cost.

Cincinnati Financial Corporation Third-Quarter 2023 10-Q

Cincinnati Financial Corporation First-Quarter 2024 10-Q

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

3 unchanged sentences

gain (loss) Gross investment income

At September 30, 2023

At March 31, 2024

Taxable fixed maturities:

24 unchanged sentences

See our 2023 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Asset Impairment, Page 58.

Cincinnati Financial Corporation Third-Quarter 2023 10-Q

Cincinnati Financial Corporation First-Quarter 2024 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