CINCINNATI FINANCIAL CORP 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk Our greatest exposure to market risk is through our investment portfolio. Market risk is the potential for a decrease in securities' fair value resulting from broad yet uncontrollable forces such as: inflation, economic growth or recession, interest rates, world political conditions or other widespread unpredictable events. It is comprised of many individual risks that, when combined, create a macroeconomic impact. 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 $26.043 billion at June 30, 2024, up $1.263 billion from year-end 2023, including a $618 million increase in the fixed-maturity portfolio and a $645 million increase in the equity portfolio. (Dollars in millions) At June 30, 2024 At December 31, 2023 Cost or amortized cost Percent of total Fair value Percent of total Cost or amortized cost Percent of total Fair value Percent of total Taxable fixed maturities $ 11,152 57.5 % $ 10,584 40.7 % $ 10,414 55.8 % $ 9,889 40.0 % Tax-exempt fixed maturities 3,957 20.4 3,825 14.7 3,947 21.2 3,902 15.7 Common equities 3,870 20.0 11,283 43.3 3,869 20.8 10,641 42.9 Nonredeemable preferred equities 408 2.1 351 1.3 413 2.2 348 1.4 Total $ 19,387 100.0 % $ 26,043 100.0 % $ 18,643 100.0 % $ 24,780 100.0 % At June 30, 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 $507 million of private equity investments, $81 million of real estate through direct property ownership and development projects in the United States, $35 million of life policy loans and $18 million in Lloyd's deposit at June 30, 2024. Cincinnati Financial Corporation Second-Quarter 2024 10-Q Page 64 Table of Contents FIXED-MATURITY SECURITIES INVESTMENTS By maintaining a well-diversified fixed-maturity portfolio, we attempt to reduce overall risk. We invest new money in the bond market on a regular basis, targeting what we believe to be optimal risk-adjusted, after-tax yields. Risk, in this context, includes interest rate, call, reinvestment rate, credit and liquidity risk. We do not make a concerted effort to alter duration on a portfolio basis in response to anticipated movements in interest rates. By regularly investing in the bond market, we build a broad, diversified portfolio that we believe mitigates the impact of adverse economic factors. In the first six months of 2024, the increase in fair value of our fixed-maturity portfolio was due to net purchases of securities, partially offset by an increase in our net unrealized loss position that reflected an increase in U.S. Treasury yields. At June 30, 2024, our fixed-maturity portfolio with an average rating of A2/A was valued at 95.4% of its amortized cost, compared with 96.0% at December 31, 2023. At June 30, 2024, our investment-grade fixed-maturity securities represented 96.6% 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 June 30, 2024 At December 31, 2023 Weighted average yield-to-amortized cost 4.64 % 4.60 % Weighted average maturity 8.5 yrs 7.9 yrs Effective duration 4.4 yrs 4.3 yrs 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 Second-Quarter 2024 10-Q Page 65 Table of Contents TAXABLE FIXED MATURITIES Our taxable fixed-maturity portfolio, with a fair value of $10.584 billion at June 30, 2024, included: (Dollars in millions) At June 30, 2024 At December 31, 2023 Investment-grade corporate $ 7,308 $ 7,040 States, municipalities and political subdivisions 786 801 Noninvestment-grade corporate 417 412 Government-sponsored enterprises 1,607 1,224 Asset-backed 247 187 United States government 186 200 Foreign government 33 25 Total $ 10,584 $ 9,889 Our strategy is to buy, and typically hold, fixed-maturity investments to maturity, but we monitor credit profiles and fair value movements when determining holding periods for individual securities. With the exception of United States agency issues that include government-sponsored enterprises, no individual issuer's securities accounted for more than 0.9% of the taxable fixed-maturity portfolio at June 30, 2024. Our investment-grade corporate bonds had an average rating of Baa1 by Moody's or BBB+ by S&P Global Ratings and represented 69.0% of the taxable fixed-maturity portfolio's fair value at June 30, 2024, compared with 71.2% at year-end 2023. The heaviest concentration in our investment-grade corporate bond portfolio, based on fair value at June 30, 2024, was the financial sector. It represented 37.2% of our investment-grade corporate bond portfolio, compared with 38.2% at year-end 2023. The energy and utility sectors each represented 10.8%, compared with 11.2% and less than 10%, respectively, at year-end 2023. No other sector exceeded 10% of our investment-grade corporate bond portfolio. As discussed in our 2023 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 30, investments in the financial sector include various risks. 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 June 30, 2024, included $247 million of asset-backed securities with an average rating of Aa3/AA-. TAX-EXEMPT FIXED MATURITIES At June 30, 2024, we had $3.825 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 0.5% of the tax-exempt fixed-maturity portfolio at June 30, 2024. INTEREST RATE SENSITIVITY ANALYSIS Because of our strong surplus, long-term investment horizon and ability to hold most fixed-maturity investments until maturity, we believe the company is adequately positioned if interest rates were to rise. Although the fair values of our existing holdings may suffer, a higher rate environment would provide the opportunity to invest cash flow in higher-yielding securities, while reducing the likelihood of untimely redemptions of currently callable securities. While higher interest rates would be expected to continue to increase the number of fixed-maturity holdings trading below 100% of amortized cost, we believe lower fixed-maturity security values due solely to interest rate changes would not signal a decline in credit quality. We continue to manage the portfolio with an eye toward both meeting current income needs and managing interest rate risk. Our dynamic financial planning model uses analytical tools to assess market risks. As part of this model, the effective duration of the fixed-maturity portfolio is continually monitored by our investment department to evaluate the theoretical impact of interest rate movements. Cincinnati Financial Corporation Second-Quarter 2024 10-Q Page 66 Table of Contents The table below summarizes the effect of hypothetical changes in interest rates on the fair value of the fixed-maturity portfolio: (Dollars in millions) Effect from interest rate change in basis points -200 -100 — 100 200 At June 30, 2024 $ 15,661 $ 15,038 $ 14,409 $ 13,744 $ 13,055 At December 31, 2023 $ 14,962 $ 14,375 $ 13,791 $ 13,179 $ 12,543 The effective duration of the fixed-maturity portfolio as of June 30, 2024, was 4.4 years, up from 4.3 years at the end of 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 4.5% change in the fair value of the fixed-maturity portfolio. Generally speaking, the higher a bond is rated, the more directly correlated movements in its fair value are to changes in the general level of interest rates, exclusive of call features. The fair values of average- to lower-rated corporate bonds are additionally influenced by the expansion or contraction of credit spreads. In our dynamic financial planning model, the selected interest rate change of 100 to 200 basis points represents our view of a shift in rates that is quite possible over a one-year period. The rates modeled should not be considered a prediction of future events as interest rates may be much more volatile in the future. The analysis is not intended to provide a precise forecast of the effect of changes in rates on our results or financial condition, nor does it take into account any actions that we might take to reduce exposure to such risks. EQUITY INVESTMENTS Our equity investments, with a fair value totaling $11.634 billion at June 30, 2024, included $11.283 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. We believe our equity investment style is an appropriate long-term strategy. While our long-term financial position would be affected by prolonged changes in the market valuation of our investments, we believe our strong surplus position and cash flow provide a cushion against short-term fluctuations in valuation. Continued payment of cash dividends by the issuers of our common equity holdings can provide a floor to their valuation. The table below summarizes the effect of hypothetical changes in market prices on fair value of our equity portfolio. (Dollars in millions) Effect from market price change in percent -30% -20% -10% — 10% 20% 30% At June 30, 2024 $ 8,144 $ 9,307 $ 10,471 $ 11,634 $ 12,797 $ 13,961 $ 15,124 At December 31, 2023 $ 7,692 $ 8,791 $ 9,890 $ 10,989 $ 12,088 $ 13,187 $ 14,286 At June 30, 2024, Microsoft (Nasdaq:MSFT) was our largest single common stock holding with a fair value of $1.001 billion, or 8.9% of our publicly traded common stock portfolio and 3.8% of the total investment portfolio. Thirty-eight holdings among eight different sectors each had a fair value greater than $100 million. Cincinnati Financial Corporation Second-Quarter 2024 10-Q Page 67 Table of Contents Common Stock Portfolio Industry Sector Distribution Percent of common stock portfolio At June 30, 2024 At December 31, 2023 Cincinnati Financial S&P 500 Industry Weightings Cincinnati Financial S&P 500 Industry Weightings Sector: Information technology 36.3 % 32.4 % 33.1 % 28.9 % Financial 13.1 12.4 13.9 13.0 Industrials 11.9 8.1 11.9 8.8 Healthcare 10.7 11.7 11.6 12.6 Consumer staples 6.8 5.8 7.0 6.2 Consumer discretionary 6.6 10.0 7.0 10.8 Energy 4.3 3.6 4.1 3.9 Materials 4.2 2.2 4.7 2.4 Utilities 2.7 2.3 2.7 2.3 Real estate 2.1 2.2 2.6 2.5 Telecomm services 1.3 9.3 1.4 8.6 Total 100.0 % 100.0 % 100.0 % 100.0 % UNREALIZED INVESTMENT GAINS AND LOSSES At June 30, 2024, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $67 million and unrealized investment losses amounted to $767 million before taxes. The $700 million net unrealized loss position in our fixed-maturity portfolio at June 30, 2024, increased in the first six months of 2024, primarily due to an increase in U.S. Treasury yields. The net loss position for our current fixed-maturity holdings will naturally decline over time as individual securities approach maturity. In addition, changes in interest rates can cause rapid, significant changes in fair values of fixed-maturity securities and the net loss position, as discussed in Quantitative and Qualitative Disclosures About Market Risk. For federal income tax purposes, taxes on gains from appreciated investments generally are not due until securities are sold. We believe that the appreciated value of equity securities, compared with the cost of securities that is generally used as a tax basis, is a useful measure to help evaluate how fair value can change over time. On this basis, the net unrealized investment gains at June 30, 2024, consisted of a net gain position in our equity portfolio of $7.356 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 Microsoft, Apple (Nasdaq:AAPL), Broadcom Inc. (Nasdaq:AVGO), JPMorgan Chase & Co (NYSE:JPM) and UnitedHealth Group Inc (NYSE:UNH), which had a combined fair value of $3.484 billion. Unrealized Investment Losses We expect the number of fixed-maturity securities trading below amortized cost to fluctuate as interest rates rise or fall and credit spreads expand or contract due to prevailing economic conditions. Further, amortized costs for some securities are revised through write-downs recognized in prior periods. At June 30, 2024, 3,784 of the 4,916 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 3,784 holdings with fair values below amortized cost at June 30, 2024, represented 78.7% of the fair value of our fixed-maturity investment portfolio and $767 million in unrealized losses. • 2,806 of the 3,784 holdings had fair value between 90% and 100% of amortized cost at June 30, 2024. These primarily consist of securities whose current valuation is largely the result of interest rate factors. The fair value of these 2,806 securities was $9.195 billion, and they accounted for $276 million in unrealized losses. • 962 of the 3,784 fixed-maturity holdings had fair value between 70% and 90% of amortized cost at June 30, 2024. We believe the 962 fixed-maturity securities will continue to pay interest and ultimately pay principal upon maturity. The issuers of these 962 securities have strong cash flow to service their debt and meet Cincinnati Financial Corporation Second-Quarter 2024 10-Q Page 68 Table of Contents their contractual obligation to make principal payments. The fair value of these securities was $2.115 billion, and they accounted for $474 million in unrealized losses. • 16 of the 3,784 fixed-maturity holdings had fair value below 70% of amortized cost at June 30, 2024. We believe these fixed-maturity securities will continue to pay interest and ultimately pay principal upon maturity. The fair value of these securities was $32 million, and they accounted for $17 million in unrealized losses. The table below reviews fair values and unrealized losses by investment category and by the overall duration of the securities' continuous unrealized loss position. (Dollars in millions) Less than 12 months 12 months or more Total At June 30, 2024 Fair value Unrealized losses Fair value Unrealized losses Fair value Unrealized losses Fixed-maturity securities: Corporate $ 1,004 $ 17 $ 5,413 $ 458 $ 6,417 $ 475 States, municipalities and political subdivisions 1,390 20 2,090 253 3,480 273 Government-sponsored enterprises 819 2 242 3 1,061 5 Asset-backed 54 — 119 10 173 10 United States government 78 — 101 4 179 4 Foreign government 25 — 7 — 32 — Total $ 3,370 $ 39 $ 7,972 $ 728 $ 11,342 $ 767 At December 31, 2023 Fixed-maturity securities: Corporate $ 379 $ 13 $ 5,560 $ 441 $ 5,939 $ 454 States, municipalities and political subdivisions 313 2 1,932 206 2,245 208 Government-sponsored enterprises 652 3 113 3 765 6 Asset-backed 5 — 172 16 177 16 United States government 32 — 129 3 161 3 Foreign government 3 — 6 — 9 — Total $ 1,384 $ 18 $ 7,912 $ 669 $ 9,296 $ 687 At June 30, 2024, applying our invested asset impairment policy, we determined that the total of $767 million, for securities in an unrealized loss position in the table above, was not the result of a credit loss. During the first six months of 2024, no fixed maturity securities were written down to fair value, due to an intention to be sold. The allowance for credit losses increased $25 million during the first six months of 2024. During the first six months of 2023, one fixed-maturity security was written down to fair value, due to an intention to be sold, resulting in $4 million of noncash charges. Changes in allowance for credit losses were $3 million during the first six months of 2023. During the 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 Second-Quarter 2024 10-Q Page 69 Table of Contents The following table summarizes the investment portfolio by severity of decline: (Dollars in millions) Number of issues Amortized cost Fair value Gross unrealized gain (loss) Gross investment income At June 30, 2024 Taxable fixed maturities: Fair valued below 70% of amortized cost 10 $ 39 $ 25 $ (14) $ 1 Fair valued at 70% to less than 100% of amortized cost 2,044 9,154 8,548 (606) 205 Fair valued at 100% and above of amortized cost 447 1,959 2,011 52 59 Investment income on securities sold in current year — — — — 10 Total 2,501 11,152 10,584 (568) 275 Tax-exempt fixed maturities: Fair valued below 70% of amortized cost 6 10 7 (3) — Fair valued at 70% to less than 100% of amortized cost 1,724 2,906 2,762 (144) 46 Fair valued at 100% and above of amortized cost 685 1,041 1,056 15 20 Investment income on securities sold in current year — — — — 1 Total 2,415 3,957 3,825 (132) 67 Fixed-maturities summary: Fair valued below 70% of amortized cost 16 49 32 (17) 1 Fair valued at 70% to less than 100% of amortized cost 3,768 12,060 11,310 (750) 251 Fair valued at 100% and above of amortized cost 1,132 3,000 3,067 67 79 Investment income on securities sold in current year — — — — 11 Total 4,916 $ 15,109 $ 14,409 $ (700) $ 342 At December 31, 2023 Fixed-maturities summary: Fair valued below 70% of amortized cost 20 $ 67 $ 44 $ (23) $ 3 Fair valued at 70% to less than 100% of amortized cost 2,820 9,916 9,252 (664) 409 Fair valued at 100% and above of amortized cost 1,898 4,378 4,495 117 162 Investment income on securities sold in current year — — — — 26 Total 4,738 $ 14,361 $ 13,791 $ (570) $ 600 See our 2023 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Asset Impairment, Page 58. Cincinnati Financial Corporation Second-Quarter 2024 10-Q Page 70 Table of Contents