Item 1. Financial Statements (unaudited)

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Item 1. Financial Statements (unaudited)

Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Dollars in millions, except per share data)September 30,December 31,
20212020
Assets
Investments
Fixed maturities, at fair value (amortized cost: 2021—$12,034; 2020—$11,312)$12,908$12,338
Equity securities, at fair value (cost: 2021—$4,096; 2020—$3,927)9,8878,856
Other invested assets418348
Total investments23,21321,542
Cash and cash equivalents1,085900
Investment income receivable142136
Finance receivable9895
Premiums receivable2,1061,879
Reinsurance recoverable548517
Prepaid reinsurance premiums8765
Deferred policy acquisition costs915805
Land, building and equipment, net, for company use (accumulated depreciation: 2021—$299; 2020—$285)209213
Other assets548438
Separate accounts956952
Total assets$29,907$27,542
Liabilities
Insurance reserves
Loss and loss expense reserves$7,292$6,746
Life policy and investment contract reserves2,9992,915
Unearned premiums3,3422,960
Other liabilities1,120982
Deferred income tax1,4531,299
Note payable5954
Long-term debt and lease obligations845845
Separate accounts956952
Total liabilities18,06616,753
Commitments and contingent liabilities (Note 12)
Shareholders' Equity
Common stock, par value—$2 per share; (authorized: 2021 and 2020—500 million shares; issued: 2021 and 2020—198.3 million shares)397397
Paid-in capital1,3441,328
Retained earnings11,25710,085
Accumulated other comprehensive income663769
Treasury stock at cost (2021—37.2 million shares and 2020—37.4 million shares)(1,820)(1,790)
Total shareholders' equity11,84110,789
Total liabilities and shareholders' equity$29,907$27,542

Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

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Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Income

(Dollars in millions, except per share data)Three months ended September 30,Nine months ended September 30,
2021202020212020
Revenues
Earned premiums$1,669$1,522$4,806$4,460
Investment income, net of expenses179167528498
Investment gains and losses, net(70)533954(132)
Fee revenues42118
Other revenues3388
Total revenues1,7852,2276,3074,842
Benefits and Expenses
Insurance losses and contract holders' benefits1,0721,1432,9903,232
Underwriting, acquisition and insurance expenses5114521,4401,372
Interest expense13133940
Other operating expenses551415
Total benefits and expenses1,6011,6134,4834,659
Income Before Income Taxes1846141,824183
Provision (Benefit) for Income Taxes
Current555516681
Deferred(24)75182(65)
Total provision for income taxes3113034816
Net Income$153$484$1,476$167
Per Common Share
Net income—basic$0.95$3.01$9.16$1.03
Net income—diluted0.942.999.071.03

Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

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Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Dollars in millions)Three months ended September 30,Nine months ended September 30,
2021202020212020
Net Income$153$484$1,476$167
Other Comprehensive Income (Loss)
Change in unrealized gains and losses on investments, net of tax of $(19), $23, $(33) and $62, respectively(69)89(119)232
Amortization of pension actuarial loss and prior service cost, net of tax of $1, $0, $2 and $0, respectively1—52
Change in life deferred acquisition costs, life policy reserves and other, net of tax of $0, $0, $2 and $1, respectively——84
Other comprehensive income (loss)(68)89(106)238
Comprehensive Income$85$573$1,370$405

Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

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Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholders' Equity

(Dollars in millions)Three months ended September 30,Nine months ended September 30,
2021202020212020
Common Stock
Beginning of period$397$397$397$397
Share-based awards————
End of period397397397397
Paid-In Capital
Beginning of period1,3341,3091,3281,306
Share-based awards1—(13)(16)
Share-based compensation882524
Other1144
End of period1,3441,3181,3441,318
Retained Earnings
Beginning of period11,2058,74510,0859,257
Cumulative effect of change in accounting for credit losses as of January 1, 2020———(2)
Adjusted beginning of year11,2058,74510,0859,255
Net income1534841,476167
Dividends declared(101)(97)(304)(290)
End of period11,2579,13211,2579,132
Accumulated Other Comprehensive Income
Beginning of period731597769448
Other comprehensive income (loss)(68)89(106)238
End of period663686663686
Treasury Stock
Beginning of period(1,809)(1,790)(1,790)(1,544)
Share-based awards1—1612
Shares acquired - share repurchase authorization(12)—(40)(256)
Shares acquired - share-based compensation plans——(7)(3)
Other—213
End of period(1,820)(1,788)(1,820)(1,788)
Total Shareholders' Equity$11,841$9,745$11,841$9,745
(In millions, except per common share)
Common Stock - Shares Outstanding
Beginning of period161.1160.8160.9162.9
Share-based awards0.1—0.60.4
Shares acquired - share repurchase authorization(0.1)—(0.4)(2.5)
End of period161.1160.8161.1160.8
Dividends declared per common share$0.63$0.60$1.89$1.80

Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

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Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in millions)Nine months ended September 30,
20212020
Cash Flows From Operating Activities
Net income$1,476$167
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization6962
Investment gains and losses, net(933)137
Share-based compensation2524
Interest credited to contract holders3333
Deferred income tax expense182(65)
Changes in:
Investment income receivable(6)2
Premiums and reinsurance receivable(280)(93)
Deferred policy acquisition costs(84)(46)
Other assets(12)(25)
Loss and loss expense reserves546600
Life policy and investment contract reserves7694
Unearned premiums382236
Other liabilities95(34)
Current income tax receivable/payable(51)27
Net cash provided by operating activities1,5181,119
Cash Flows From Investing Activities
Sale of fixed maturities88100
Call or maturity of fixed maturities1,049756
Sale of equity securities123471
Purchase of fixed maturities(1,831)(1,092)
Purchase of equity securities(276)(640)
Investment in finance receivables(30)(33)
Collection of finance receivables2826
Investment in building and equipment(12)(16)
Change in other invested assets, net(30)16
Net cash used in investing activities(891)(412)
Cash Flows From Financing Activities
Payment of cash dividends to shareholders(295)(280)
Shares acquired - share repurchase authorization(40)(256)
Changes in note payable584
Proceeds from stock options exercised105
Contract holders' funds deposited6464
Contract holders' funds withdrawn(104)(123)
Other(82)(54)
Net cash used in financing activities(442)(560)
Net change in cash and cash equivalents185147
Cash and cash equivalents at beginning of year900767
Cash and cash equivalents at end of period$1,085$914
Supplemental Disclosures of Cash Flow Information:
Interest paid$26$27
Income taxes paid20542
Noncash Activities
Equipment acquired under finance lease obligations$9$13
Share-based compensation223
Other assets and other liabilities13763

Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

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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 September 30, 2021, 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 2020 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.

Beginning in mid-March 2020, the coronavirus (SARS-CoV-2 or COVID-19) pandemic outbreak, and unprecedented actions taken to contain the virus, caused an economic downturn on a global scale as well as market disruption and volatility. The company continues to monitor the impact of the pandemic as it unfolds. The company cannot predict the impact the pandemic will have on its future consolidated financial position, results of operations and cash flows, however the impact could be material.

Pending 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 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows. The ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts and simplify amortization of deferred acquisition costs while improving and expanding required disclosures. 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. These ASUs have not yet been adopted. Management is currently evaluating the impact on our company's consolidated financial position, results of operations and cash flows.

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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 costGross unrealizedFair value
At September 30, 2021gainslosses
Fixed maturity securities:
Corporate$6,962$542$8$7,496
States, municipalities and political subdivisions4,64632844,970
Commercial mortgage-backed26613—279
United States government1273—130
Foreign government26——26
Government-sponsored enterprises7——7
Total$12,034$886$12$12,908
At December 31, 2020
Fixed maturity securities:
Corporate$6,281$621$7$6,895
States, municipalities and political subdivisions4,60439524,997
Commercial mortgage-backed271151285
United States government1155—120
Foreign government29——29
Government-sponsored enterprises12——12
Total$11,312$1,036$10$12,338

The net unrealized investment gains in our fixed-maturity portfolio at September 30, 2021, are primarily the result of the continued low interest rate environment that increased the fair value of our fixed-maturity portfolio. Our commercial mortgage-backed securities had an average rating of Aa1/AA at September 30, 2021 and December 31, 2020.

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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 months12 months or moreTotal
At September 30, 2021Fair valueUnrealized lossesFair valueUnrealized lossesFair valueUnrealized losses
Fixed maturity securities:
Corporate$647$8$17$—$664$8
States, municipalities and political subdivisions1543511594
Commercial mortgage-backed7—11—18—
United States government6———6—
Foreign government——————
Government-sponsored enterprises4———4—
Total$818$11$33$1$851$12
At December 31, 2020
Fixed maturity securities:
Corporate$330$5$46$2$376$7
States, municipalities and political subdivisions3122—332
Commercial mortgage-backed2316—291
United States government12———12—
Foreign government10———10—
Total$406$8$54$2$460$10

Contractual maturity dates for fixed-maturities securities were:

(Dollars in millions)Amortized costFair value% of fair value
At September 30, 2021
Maturity dates:
Due in one year or less$572$5804.5%
Due after one year through five years3,7223,96130.7
Due after five years through ten years3,4453,75129.1
Due after ten years4,2954,61635.7
Total$12,034$12,908100.0%

Actual maturities may differ from contractual maturities when there is a right to call or prepay obligations with or without call or prepayment penalties.

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The following table provides investment income and investment gains and losses, net:

(Dollars in millions)Three months ended September 30,Nine months ended September 30,
2021202020212020
Investment income:
Interest$121$113$356$339
Dividends6155179161
Other1247
Total183170539507
Less investment expenses43119
Total$179$167$528$498
Investment gains and losses, net:
Equity securities:
Investment gains and losses on securities sold, net$(1)$55$6$75
Unrealized gains and losses on securities still held, net(104)475869(130)
Subtotal(105)530875(55)
Fixed maturities:
Gross realized gains104249
Gross realized losses(1)—(3)(3)
Write-down of impaired securities(1)(1)(1)(78)
Subtotal8320(72)
Other27—59(5)
Total$(70)$533$954$(132)

The fair value of our equity portfolio was $9.887 billion and $8.856 billion at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021 and December 31, 2020, Apple Inc. (Nasdaq:AAPL), an equity holding, was our largest single investment holding with a fair value of $687 million and $644 million, which was 7.3% and 7.5% of our publicly traded common equities portfolio, respectively, and 3.0% of the total investment portfolio for both periods.

At September 30, 2021 and December 31, 2020, there were no fixed-maturity securities with an allowance for credit losses. During the three and nine months ended September 30, 2021, there were five fixed-maturity securities from the municipal sector that were written down to fair value due to an intention to be sold. During the three months ended September 30, 2020, there were two fixed-maturity securities from the municipal sector that were written down to fair value due to an intention to be sold and during the nine months ended September 30, 2020, there were 14 fixed-maturity securities from the energy, real estate, consumer goods, municipal and technology & electronics sectors that were written down to fair value due to an intention to be sold.

At September 30, 2021, 244 fixed-maturity securities with a total unrealized loss of $12 million were in an unrealized loss position. Of that total, one fixed-maturity security had a fair value below 70% of amortized cost. At December 31, 2020, 128 fixed-maturity securities with a total unrealized loss of $10 million were in an unrealized loss position. Of that total, no fixed-maturity securities had fair values below 70% of amortized cost.

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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, 2020, and ultimately management determines fair value. See our 2020 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 143, 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 September 30, 2021 and December 31, 2020. We do not have any liabilities carried at fair value.

(Dollars in millions)Quoted prices in active markets for identical assets (Level 1)Significant other observable inputs (Level 2)Significant unobservable inputs (Level 3)Total
At September 30, 2021
Fixed maturities, available for sale:
Corporate$—$7,496$—$7,496
States, municipalities and political subdivisions—4,970—4,970
Commercial mortgage-backed—279—279
United States government130——130
Foreign government—26—26
Government-sponsored enterprises—7—7
Subtotal13012,778—12,908
Common equities9,465——9,465
Nonredeemable preferred equities—422—422
Separate accounts taxable fixed maturities—923—923
Top Hat savings plan mutual funds and common equity (included in Other assets)62——62
Total$9,657$14,123$—$23,780
At December 31, 2020
Fixed maturities, available for sale:
Corporate$—$6,895$—$6,895
States, municipalities and political subdivisions—4,997—4,997
Commercial mortgage-backed—285—285
United States government120——120
Foreign government—29—29
Government-sponsored enterprises—12—12
Subtotal12012,218—12,338
Common equities8,541——8,541
Nonredeemable preferred equities—315—315
Separate accounts taxable fixed maturities—903—903
Top Hat savings plan mutual funds and common equity (included in Other assets)51——51
Total$8,712$13,436$—$22,148

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We also held Level 1 cash and cash equivalents of $1.085 billion and $900 million at September 30, 2021 and December 31, 2020, respectively.

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 valuePrincipal amount
Interest rateYear of issueSeptember 30,December 31,September 30,December 31,
2021202020212020
6.900%1998Senior debentures, due 2028$27$27$28$28
6.920%2005Senior debentures, due 2028391391391391
6.125%2004Senior notes, due 2034371370374374
Total$789$788$793$793

The following table shows fair values of our note payable and long-term debt:

(Dollars in millions)Quoted prices in active markets for identical assets (Level 1)Significant other observable inputs (Level 2)Significant unobservable inputs (Level 3)Total
At September 30, 2021
Note payable$—$59$—$59
6.900% senior debentures, due 2028—35—35
6.920% senior debentures, due 2028—508—508
6.125% senior notes, due 2034—510—510
Total$—$1,112$—$1,112
At December 31, 2020
Note payable$—$54$—$54
6.900% senior debentures, due 2028—35—35
6.920% senior debentures, due 2028—515—515
6.125% senior notes, due 2034—522—522
Total$—$1,126$—$1,126

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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)Quoted prices in active markets for identical assets (Level 1)Significant other observable inputs (Level 2)Significant unobservable inputs (Level 3)Total
At September 30, 2021
Life policy loans$—$—$43$43
Deferred annuities——800800
Structured settlements—205—205
Total$—$205$800$1,005
At December 31, 2020
Life policy loans$—$—$49$49
Deferred annuities——836836
Structured settlements—227—227
Total$—$227$836$1,063

Outstanding principal and interest for these life policy loans totaled $30 million and $33 million at September 30, 2021 and December 31, 2020, respectively.

Recorded reserves for the deferred annuities were $767 million and $761 million at September 30, 2021 and December 31, 2020, respectively. Recorded reserves for the structured settlements were $139 million and $145 million at September 30, 2021 and December 31, 2020, respectively.

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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 September 30,Nine months ended September 30,
2021202020212020
Gross loss and loss expense reserves, beginning of period$6,955$6,409$6,677$6,088
Less reinsurance recoverable274294277342
Net loss and loss expense reserves, beginning of period6,6816,1156,4005,746
Net incurred loss and loss expenses related to:
Current accident year1,0901,0823,0723,099
Prior accident years(102)(11)(331)(91)
Total incurred9881,0712,7413,008
Net paid loss and loss expenses related to:
Current accident year416443893998
Prior accident years3493361,3441,349
Total paid7657792,2372,347
Net loss and loss expense reserves, end of period6,9046,4076,9046,407
Plus reinsurance recoverable322285322285
Gross loss and loss expense reserves, end of period$7,226$6,692$7,226$6,692

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 September 30, 2021 and $55 million at September 30, 2020, for certain life and health loss and loss expense reserves.

For the three months ended September 30, 2021, we experienced $102 million of favorable development on prior accident years, including $107 million of favorable development in commercial lines, $3 million of favorable development in personal lines and $3 million of unfavorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $52 million for the commercial casualty line and $34 million for the commercial property line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines.

For the nine months ended September 30, 2021, we experienced $331 million of favorable development on prior accident years, including $276 million of favorable development in commercial lines, $35 million of favorable development in personal lines and $6 million of unfavorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $85 million for the commercial casualty line, $68 million for the commercial property line, $59 million for the workers' compensation line and $44 million for the commercial auto 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 $24 million in personal auto.

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For the three months ended September 30, 2020, we experienced $11 million of favorable development on prior accident years, including $8 million of favorable development in commercial lines, less than $1 million of unfavorable development in personal lines and $1 million of favorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $10 million for the commercial casualty line and $6 million for the workers' compensation line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. This was partially offset by unfavorable reserve development of $10 million for the commercial auto line.

For the nine months ended September 30, 2020, we experienced $91 million of favorable development on prior accident years, including $59 million of favorable development in commercial lines, $28 million of favorable development in personal lines and $8 million of unfavorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $36 million for the commercial casualty line and $32 million for the workers' compensation line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. This was partially offset by unfavorable reserve development of $14 million for the commercial auto line. Within personal lines, we recognized favorable reserve development of $19 million in personal auto and $10 million for the homeowner line of business.

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NOTE 5 – Life Policy and Investment Contract Reserves

We establish the reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates, timing of claim presentation and investment yields, including a provision for uncertainty. Once these assumptions are established, they generally are maintained throughout the lives of the contracts. 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 as well as for expected expenses. We base our assumptions for expected investment income on our own experience adjusted for current and future economic conditions.

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.

This table summarizes our life policy and investment contract reserves:

(Dollars in millions)September 30, 2021December 31, 2020
Life policy reserves:
Ordinary/traditional life$1,358$1,301
Other5252
Subtotal1,4101,353
Investment contract reserves:
Deferred annuities767761
Universal life674647
Structured settlements139145
Other99
Subtotal1,5891,562
Total life policy and investment contract reserves$2,999$2,915

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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, and we evaluate the costs for recoverability. The table below shows the deferred policy acquisition costs and asset reconciliation.

(Dollars in millions)Three months ended September 30,Nine months ended September 30,
2021202020212020
Property casualty:
Deferred policy acquisition costs asset, beginning of period$630$567$542$512
Capitalized deferred policy acquisition costs287258924830
Amortized deferred policy acquisition costs(300)(274)(849)(791)
Deferred policy acquisition costs asset, end of period$617$551$617$551
Life:
Deferred policy acquisition costs asset, beginning of period$294$267$263$262
Capitalized deferred policy acquisition costs15144443
Amortized deferred policy acquisition costs(12)(12)(35)(36)
Shadow deferred policy acquisition costs1(3)26(3)
Deferred policy acquisition costs asset, end of period$298$266$298$266
Consolidated:
Deferred policy acquisition costs asset, beginning of period$924$834$805$774
Capitalized deferred policy acquisition costs302272968873
Amortized deferred policy acquisition costs(312)(286)(884)(827)
Shadow deferred policy acquisition costs1(3)26(3)
Deferred policy acquisition costs asset, end of period$915$817$915$817

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.

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NOTE 7 – Accumulated Other Comprehensive Income

Accumulated other comprehensive income (AOCI) includes changes in unrealized gains and losses on investments, changes in pension obligations and changes in life deferred acquisition costs, life policy reserves and other as follows:

(Dollars in millions)Three months ended September 30,
20212020
Before taxIncome taxNetBefore taxIncome taxNet
Investments:
AOCI, beginning of period$962$201$761$772$162$610
OCI before investment gains and losses, net, recognized in net income(80)(18)(62)1152392
Investment gains and losses, net, recognized in net income(8)(1)(7)(3)—(3)
OCI(88)(19)(69)1122389
AOCI, end of period$874$182$692$884$185$699
Pension obligations:
AOCI, beginning of period$(36)$(6)$(30)$(7)$—$(7)
OCI excluding amortization recognized in net income——————
Amortization recognized in net income211———
OCI211———
AOCI, end of period$(34)$(5)$(29)$(7)$—$(7)
Life deferred acquisition costs, life policy reserves and other:
AOCI, beginning of period$—$—$—$(8)$(2)$(6)
OCI before investment gains and losses, net, recognized in net income——————
Investment gains and losses, net, recognized in net income——————
OCI——————
AOCI, end of period$—$—$—$(8)$(2)$(6)
Summary of AOCI:
AOCI, beginning of period$926$195$731$757$160$597
Investments OCI(88)(19)(69)1122389
Pension obligations OCI211———
Life deferred acquisition costs, life policy reserves and other OCI——————
Total OCI(86)(18)(68)1122389
AOCI, end of period$840$177$663$869$183$686

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(Dollars in millions)Nine months ended September 30,
20212020
Before taxIncome taxNetBefore taxIncome taxNet
Investments:
AOCI, beginning of period$1,026$215$811$590$123$467
OCI before investment gains and losses, net, recognized in net income(132)(29)(103)22246176
Investment gains and losses, net, recognized in net income(20)(4)(16)721656
OCI(152)(33)(119)29462232
AOCI, end of period$874$182$692$884$185$699
Pension obligations:
AOCI, beginning of period$(41)$(7)$(34)$(9)$—$(9)
OCI excluding amortization recognized in net income211———
Amortization recognized in net income5142—2
OCI7252—2
AOCI, end of period$(34)$(5)$(29)$(7)$—$(7)
Life deferred acquisition costs, life policy reserves and other:
AOCI, beginning of period$(10)$(2)$(8)$(13)$(3)$(10)
OCI before investment gains and losses, net, recognized in net income1028514
Investment gains and losses, net, recognized in net income——————
OCI1028514
AOCI, end of period$—$—$—$(8)$(2)$(6)
Summary of AOCI:
AOCI, beginning of period$975$206$769$568$120$448
Investments OCI(152)(33)(119)29462232
Pension obligations OCI7252—2
Life deferred acquisition costs, life policy reserves and other OCI1028514
Total OCI(135)(29)(106)30163238
AOCI, end of period$840$177$663$869$183$686

Investment gains and losses, net, and life deferred acquisition costs, life policy reserves 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.

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NOTE 8 – Reinsurance

Primary components of our property casualty reinsurance assumed operations include involuntary and voluntary assumed risks as well as contracts from Cincinnati Re®, our reinsurance assumed operations. 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 September 30,Nine months ended September 30,
2021202020212020
Direct written premiums$1,527$1,386$4,721$4,383
Assumed written premiums6655432267
Ceded written premiums(55)(48)(208)(180)
Net written premiums$1,538$1,393$4,945$4,470
Direct earned premiums$1,553$1,439$4,447$4,198
Assumed earned premiums11778327207
Ceded earned premiums(74)(67)(189)(163)
Earned premiums$1,596$1,450$4,585$4,242
Direct incurred loss and loss expenses$876$1,039$2,525$2,915
Assumed incurred loss and loss expenses16554297133
Ceded incurred loss and loss expenses(53)(22)(81)(40)
Incurred loss and loss expenses$988$1,071$2,741$3,008

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.

The table below summarizes our consolidated life insurance earned premiums and contract holders' benefits incurred:

(Dollars in millions)Three months ended September 30,Nine months ended September 30,
2021202020212020
Direct earned premiums$93$90$278$273
Ceded earned premiums(20)(18)(57)(55)
Earned premiums$73$72$221$218
Direct contract holders' benefits incurred10385310270
Ceded contract holders' benefits incurred(19)(13)(61)(46)
Contract holders' benefits incurred$84$72$249$224

The ceded benefits incurred can vary depending on the type of life insurance policy held and the year the policy was issued.

At September 30, 2021, and December 31, 2020, the allowance for uncollectible property casualty premiums was

$15 million and $19 million, respectively. At September 30, 2021, and December 31, 2020, the allowances for credit losses on other premiums receivable and recoverable assets were immaterial.

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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 September 30,Nine months ended September 30,
2021202020212020
Tax at statutory rate:$3921.0%$12921.0%$38321.0%$3821.0%
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds(5)(2.7)(5)(0.8)(15)(0.8)(15)(8.2)
Dividend received exclusion(5)(2.7)(5)(0.8)(14)(0.8)(13)(7.1)
Other21.2111.8(6)(0.3)63.0
Provision for income taxes$3116.8%$13021.2%$34819.1%$168.7%

The provision 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 September 30, 2021, and December 31, 2020. As more fully discussed below, we do carry a valuation allowance on the deferred tax assets related to Cincinnati Global.

Unrecognized Tax Benefits

At September 30, 2021, and December 31, 2020, we had a gross unrecognized tax benefit of $34 million. There were no changes to this amount during the first nine months of 2021. It is reasonably possible that within the next 12 months, our unrecognized tax benefit could change when the IRS completes its examination of the tax year ended December 31, 2018.

Cincinnati Global

As a result of operations for the three months ended September 30, 2021, Cincinnati Global increased net deferred assets $4 million with an offsetting increase of $4 million to the valuation allowance. There was no change in the net deferred assets or valuation allowance for the nine months ended September 30, 2021. At September 30, 2021, Cincinnati Global had a net deferred tax asset of $56 million and an offsetting valuation allowance of $56 million.

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 related to the Cincinnati Global operations, we continue to believe it is appropriate to carry a valuation allowance at September 30, 2021.

At September 30, 2021, and December 31, 2020, Cincinnati Global had operating loss carryforwards in the United States of $26 million for both periods and in the United Kingdom of $128 million and $108 million, 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.

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NOTE 10 – Net Income 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 September 30,Nine months ended September 30,
2021202020212020
Numerator:
Net income—basic and diluted$153$484$1,476$167
Denominator:
Basic weighted-average common shares outstanding161.1160.9161.1161.3
Effect of share-based awards:
Stock options1.20.51.10.7
Nonvested shares0.60.60.60.5
Diluted weighted-average shares162.9162.0162.8162.5
Earnings per share:
Basic$0.95$3.01$9.16$1.03
Diluted$0.94$2.99$9.07$1.03
Number of anti-dilutive share-based awards0.41.40.91.4

The sources of dilution of our common shares are certain equity-based awards. See our 2020 Annual Report on Form 10-K, Item 8, Note 17, Share-Based Associate Compensation Plans, Page 176, for information about share-based awards. The above table shows the number of anti-dilutive share-based awards for the three and nine months ended September 30, 2021 and 2020. These share-based awards were not included in the computation of net income per common share (diluted) because their exercise would have anti-dilutive effects.

NOTE 11 – Employee Retirement Benefits

The following summarizes the components of net periodic benefit cost for our qualified and supplemental pension plans:

(Dollars in millions)Three months ended September 30,Nine months ended September 30,
2021202020212020
Service cost$2$2$7$7
Non-service costs (benefit):
Interest cost2379
Expected return on plan assets(5)(5)(16)(16)
Amortization of actuarial loss and prior service cost2—52
Other——2—
Total non-service benefit(1)(2)(2)(5)
Net periodic benefit cost$1$—$5$2

See our 2020 Annual Report on Form 10-K, Item 8, Note 13, Employee Retirement Benefits, Page 169, for information on our retirement benefits. Service costs and non-service costs (benefit) are 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 2021 and 2020.

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We made matching contributions totaling $7 million and $6 million to our 401(k) and Top Hat savings plans during the third quarter of 2021 and 2020 and contributions of $18 million during both the first nine months of 2021 and 2020, respectively.

We made no contributions to our qualified pension plan during the first nine months of 2021.

NOTE 12 – Commitments and Contingent Liabilities

In the ordinary course of conducting business, the company and its subsidiaries are named as defendants in various legal proceedings. Most of these proceedings are claims litigation involving the company’s insurance subsidiaries in which the company is either defending or providing indemnity for third-party claims brought against insureds or litigating first-party coverage claims. The company accounts for such activity through the establishment of unpaid loss and loss expense reserves. We believe that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, 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 economic 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 them. Although the policy terms vary, in general, the company denied the claims at issue in these lawsuits because the policyholder identified no direct physical loss or damage to property at the insured premises, and/or 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. 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, and the state laws that govern policy interpretation will guide judicial rulings on dispositive motions. These lawsuits are at various stages of litigation; many complaints continue to be amended; several have been dismissed voluntarily and may be refiled; others have been dismissed in favor of the company by trial courts; and a handful of cases are advancing toward trials. Many decisions on motion filings have been appealed. While these appeals are at various stages of the briefing and argument process, several of the cases are now fully briefed and are ripe for decision. The first two appellate cases in the nation to consider these issues were recently decided by the Federal Courts of Appeals for the Eighth and Eleventh Circuits in favor of the company, applying Iowa law and Georgia law, respectively. The Federal Courts of Appeals for the Sixth and Ninth Circuits also recently decided cases on these issues in favor of other insurers, applying Ohio law and California law, respectively.

The company’s cases pending in trial courts in Ohio are stayed pending a decision by the Ohio Supreme Court on a question certified to it by the federal district court in the Northern District of Ohio in the case of Neuro-Communication Services, Inc. v. The Cincinnati Insurance Company, et al., Case No. 4:20-cv-1275 (N.D. Ohio filed June 10, 2020). The Ohio Supreme Court has agreed to answer the following question: “Does the general presence in the community, or on surfaces at a premises, of the novel coronavirus known as SARS-CoV-2, constitute direct physical loss or damage to property; or does the presence of a person infected with COVID-19 constitute direct physical loss or damage to property at that premises?"

Because most of our pending cases remain in the early stages of motion practice or appeals from trial court rulings on dispositive motions, little discovery has occurred. In addition, business income calculations depend upon a wide range of factors that are particular to the circumstances of each individual policyholder and, here, the vast majority of plaintiffs have not submitted proofs of loss or otherwise quantified or factually supported any allegedly covered loss. Moreover, the company’s experience shows that demands stated in lawsuits often bear little relation to a reasonable estimate of potential loss. Accordingly, management cannot now reasonably estimate the possible loss

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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 a national class. 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.

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, if any, 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 2020 Annual Report on Form 10-K, Item 8, Note 18, Segment Information, Page 179, for a description of revenue, income or loss before income taxes and identifiable assets for each of the five segments.

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Segment information is summarized in the following table:

(Dollars in millions)Three months ended September 30,Nine months ended September 30,
2021202020212020
Revenues:
Commercial lines insurance
Commercial casualty$323$290$938$868
Commercial property264252776755
Commercial auto200189591563
Workers' compensation6664201207
Other commercial7770221205
Commercial lines insurance premiums9308652,7272,598
Fee revenues1133
Total commercial lines insurance9318662,7302,601
Personal lines insurance
Personal auto153154457462
Homeowner184165536487
Other personal5148153141
Personal lines insurance premiums3883671,1461,090
Fee revenues1133
Total personal lines insurance3893681,1491,093
Excess and surplus lines insurance10582289238
Fee revenues1—21
Total excess and surplus lines insurance10682291239
Life insurance premiums7372221218
Fee revenues1—31
Total life insurance7472224219
Investments
Investment income, net of expenses179167528498
Investment gains and losses, net(70)533954(132)
Total investment revenue1097001,482366
Other
Premiums173136423316
Other3388
Total other revenues176139431324
Total revenues$1,785$2,227$6,307$4,842
Income (loss) before income taxes:
Insurance underwriting results
Commercial lines insurance$182$(20)$457$(32)
Personal lines insurance(10)(2)16(24)
Excess and surplus lines insurance7112519
Life insurance(5)6(9)9
Investments836741,403289
Other(73)(55)(68)(78)
Total income before income taxes$184$614$1,824$183
Identifiable assets:September 30, 2021December 31, 2020
Property casualty insurance$4,400$3,838
Life insurance1,6311,661
Investments22,94021,332
Other936711
Total$29,907$27,542

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