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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2024-10-24 compared with 2024-07-25 · 57 added, 56 removed, 157 unchanged (42% 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 $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

The fair value of our investment portfolio was $27.441 billion at September 30, 2024, up $2.661 billion from year-end 2023, including a $2.080 billion increase in the fixed-maturity portfolio and a $581 million increase in the equity portfolio.

(Dollars in millions) At September 30, 2024 At December 31, 2023

amortized cost Percent

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Total $ 20,108 100.0 % $ 27,441 100.0 % $ 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.

At September 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

Other invested assets included $528 million of private equity investments, $84 million of real estate through direct property ownership and development projects in the United States, $35 million of life policy loans and $16 million in Lloyd's deposit at September 30, 2024.

Cincinnati Financial Corporation Third-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 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.

In the first nine months of 2024, the increase in fair value of our fixed-maturity portfolio was due to net purchases of securities, plus a decrease in our net unrealized loss position that reflected realized losses from the sales of some lower-yielding bonds, as well as a decrease in U.S.

Treasury yields in addition to tightening of corporate credit spreads.

At September 30, 2024, our fixed-maturity portfolio with an average rating of A2/A was valued at 98.7% of its amortized cost, compared with 96.0% at December 31, 2023.

At September 30, 2024, our investment-grade fixed-maturity securities represented 97.4% 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

At September 30, 2024 At December 31, 2023

Weighted average yield-to-amortized cost 4.98 % 4.60 %

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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

Cincinnati Financial Corporation Third-Quarter 2024 10-Q

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

Our taxable fixed-maturity portfolio, with a fair value of $11.882 billion at September 30, 2024, included:

(Dollars in millions) At September 30, 2024 At December 31, 2023

Investment-grade corporate $ 8,010 $ 7,040

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Our strategy is to buy, and typically hold, fixed-maturity investments to maturity, but we monitor credit profiles and fair value movements when determining holding periods for individual securities.

With the exception of United States agency issues that include government-sponsored enterprises, no individual issuer's securities accounted for more than 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.

Our investment-grade corporate bonds had an average rating of Baa1 by Moody's or BBB+ by S&P Global Ratings and represented 67.4% of the taxable fixed-maturity portfolio's fair value at September 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.

September 30, 2024, was the financial sector.

It represented 35.6% 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.

The utility and energy sectors represented 12.5% and 10.6%, compared with less than 10% and 11.2%, respectively, at year-end 2023.

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

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

Our taxable fixed-maturity portfolio at June 30, 2024, included $247 million of asset-backed securities with an average rating of Aa3/AA-.

Our taxable fixed-maturity portfolio at September 30, 2024, included $314 million of asset-backed securities with an average rating of Aa2/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.

At September 30, 2024, we had $3.989 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.

No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at September 30, 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 Second-Quarter 2024 10-Q

Cincinnati Financial Corporation Third-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 June 30, 2024 $ 15,661 $ 15,038 $ 14,409 $ 13,744 $ 13,055

At September 30, 2024 $ 17,326 $ 16,590 $ 15,871 $ 15,107 $ 14,301

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 effective duration of the fixed-maturity portfolio as of September 30, 2024, was 4.6 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 4.7% change in the fair value of the fixed-maturity portfolio.

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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.

Our equity investments, with a fair value totaling $11.570 billion at September 30, 2024, included $11.200 billion of common stock securities of companies generally with strong indications of paying and growing their dividends.

Other criteria we evaluate include increasing sales and earnings, proven management and a favorable outlook.

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-30% -20% -10% — 10% 20% 30%

At June 30, 2024 $ 8,144 $ 9,307 $ 10,471 $ 11,634 $ 12,797 $ 13,961 $ 15,124

At September 30, 2024 $ 8,099 $ 9,256 $ 10,413 $ 11,570 $ 12,727 $ 13,884 $ 15,041

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

At September 30, 2024, Apple Inc.(Nasdaq:AAPL) was our largest single common stock holding with a fair value of $885 million, or 7.9% of our publicly traded common stock portfolio and 3.2% of the total investment portfolio.

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

Cincinnati Financial Corporation Third-Quarter 2024 10-Q

Common Stock Portfolio Industry Sector Distribution

Percent of common stock portfolio

At June 30, 2024 At December 31, 2023

At September 30, 2024 At December 31, 2023

Financial S&P 500 Industry

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Information technology 32.3 % 31.7 % 33.1 % 28.9 %

Financial 13.1 12.4 13.9 13.0

Industrials 13.5 8.5 11.9 8.8

Healthcare 11.8 11.6 11.6 12.6

Consumer staples 6.8 5.8 7.0 6.2

Financial 11.4 12.9 13.9 13.0

Consumer discretionary 7.7 10.1 7.0 10.8

Energy 4.3 3.6 4.1 3.9

Consumer staples 7.3 5.9 7.0 6.2

Materials 4.8 2.2 4.7 2.4

Energy 4.2 3.3 4.1 3.9

Utilities 3.2 2.5 2.7 2.3

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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.

At September 30, 2024, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $201 million and unrealized investment losses amounted to $404 million before taxes.

The $203 million net unrealized loss position in our fixed-maturity portfolio at September 30, 2024, decreased in the first nine months of 2024, primarily due to the sale of low-yielding bonds sold at a loss and a decrease in U.S.

Treasury yields in addition to tightening of corporate credit spreads.

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

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We believe that the appreciated value of equity securities, compared with the cost of securities that is generally used as a tax basis, is a useful measure to help evaluate how fair value can change over time.

On this basis, the net unrealized investment gains at June 30, 2024, consisted of a net gain position in our equity portfolio of $7.356 billion.

On this basis, the net unrealized investment gains at September 30, 2024, consisted of a net gain position in our equity portfolio of $7.536 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.

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

(Nasdaq:AVGO), UnitedHealth Group Inc (NYSE:UNH) and Abbvie Inc.

(NYSE:ABBV), which had a combined fair value of $3.046 billion.

Unrealized Investment Losses

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

At June 30, 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.

At September 30, 2024, 2,495 of the 4,988 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 2,495 holdings with fair values below amortized cost at September 30, 2024, represented 48.7% of the fair value of our fixed-maturity investment portfolio and $404 million in unrealized losses.

• 1,854 of the 2,495 holdings had fair value between 90% and 100% of amortized cost at September 30, 2024.

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

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• 636 of the 2,495 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

their contractual obligation to make principal payments.

September 30, 2024.

We believe the 636 fixed-maturity securities will continue to pay interest and ultimately

Cincinnati Financial Corporation Third-Quarter 2024 10-Q

pay principal upon maturity.

The issuers of these 636 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 $1.217 billion, and they accounted for $247 million in unrealized losses.

• 16 of the 3,784 fixed-maturity holdings had fair value below 70% of amortized cost at June 30, 2024.

• Five of the 2,495 fixed-maturity holdings had fair value below 70% of amortized cost at September 30, 2024.

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

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

At June 30, 2024 Fair value Unrealized

At September 30, 2024 Fair value Unrealized

losses Fair value Unrealized

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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.

At September 30, 2024, applying our invested asset impairment policy, we determined that the total of $404 million, 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 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 nine months of 2024.

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

1 unchanged sentence

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

Cincinnati Financial Corporation Second-Quarter 2024 10-Q

Cincinnati Financial Corporation Third-Quarter 2024 10-Q

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

3 unchanged sentences

gain (loss) Gross investment income

At June 30, 2024

At September 30, 2024

Taxable fixed maturities:

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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

Cincinnati Financial Corporation Third-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