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)	March 31,		December 31,
	2022		2021
Assets
Investments
Fixed maturities, at fair value (amortized cost: 2022—$12,330; 2021—$12,230)	$	12,376	$	13,022
Equity securities, at fair value (cost: 2022—$4,167; 2021—$4,121)	10,675		11,315

Other invested assets	348		329
Total investments	23,399		24,666
Cash and cash equivalents	987		1,139

Investment income receivable	147		144
Finance receivable	92		98
Premiums receivable	2,248		2,053
Reinsurance recoverable	556		570
Prepaid reinsurance premiums	79		78
Deferred policy acquisition costs	979		905
Land, building and equipment, net, for company use (accumulated depreciation: 2022—$309; 2021—$303)	203		205
Other assets	657		570
Separate accounts	903		959
Total assets	$	30,250	$	31,387

Liabilities
Insurance reserves
Loss and loss expense reserves	$	7,366	$	7,305
Life policy and investment contract reserves	3,027		3,014
Unearned premiums	3,560		3,271
Other liabilities	952		1,092
Deferred income tax	1,460		1,744
Note payable	49		54
Long-term debt and lease obligations	841		843
Separate accounts	903		959
Total liabilities	18,158		18,282

Commitments and contingent liabilities (Note 12)

Shareholders' Equity
Common stock, par value—$2 per share; (authorized: 2022 and 2021—500 million shares; issued: 2022 and 2021—198.3 million shares)	397		397
Paid-in capital	1,354		1,356
Retained earnings	12,241		12,625
Accumulated other comprehensive income	59		648
Treasury stock at cost (2022—38.0 million shares and 2021—38.0 million shares)	(1,959)		(1,921)
Total shareholders' equity	12,092		13,105
Total liabilities and shareholders' equity	$	30,250	$	31,387

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

Cincinnati Financial Corporation First-Quarter 2022 10-Q

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Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Income


(Dollars in millions, except per share data)	Three months ended March 31,
		2022		2021
Revenues
Earned premiums		$	1,690	$	1,544
Investment income, net of expenses		185		174
Investment gains and losses, net		(666)		504
Fee revenues		4		3
Other revenues		2		2
Total revenues		1,215		2,227
Benefits and Expenses
Insurance losses and contract holders' benefits		1,039		1,003
Underwriting, acquisition and insurance expenses		519		439
Interest expense		13		13
Other operating expenses		4		4
Total benefits and expenses		1,575		1,459
Income (Loss) Before Income Taxes		(360)		768
Provision (Benefit) for Income Taxes
Current		41		36
Deferred		(128)		112
Total provision (benefit) for income taxes		(87)		148
Net Income (Loss)		$	(273)	$	620
Per Common Share
Net income (loss)—basic		$	(1.70)	$	3.85
Net income (loss)—diluted		(1.70)		3.82

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 March 31,
		2022		2021
Net Income (Loss)		$	(273)	$	620
Other Comprehensive Income (Loss)
Change in unrealized gains and losses on investments, net of tax (benefit) of $(157) and $(41), respectively		(589)		(155)
Amortization of pension actuarial loss and prior service cost, net of tax of $0 and $1, respectively		—		3
Change in life deferred acquisition costs, life policy reserves and other, net of tax of $0 and $2, respectively		—		8
Other comprehensive income (loss)		(589)		(144)
Comprehensive Income (Loss)		$	(862)	$	476

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

Cincinnati Financial Corporation First-Quarter 2022 10-Q

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Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholders' Equity


(Dollars in millions)	Three months ended March 31,
		2022		2021
Common Stock
Beginning of period		$	397	$	397
Share-based awards		—		—
End of period		397		397

Paid-In Capital
Beginning of period		1,356		1,328
Share-based awards		(14)		(16)
Share-based compensation		11		9
Other		1		1
End of period		1,354		1,322

Retained Earnings
Beginning of period		12,625		10,085


Net income (loss)		(273)		620
Dividends declared		(111)		(102)
End of period		12,241		10,603

Accumulated Other Comprehensive Income
Beginning of period		648		769


Other comprehensive loss		(589)		(144)
End of period		59		625

Treasury Stock
Beginning of period		(1,921)		(1,790)
Share-based awards		9		12
Shares acquired - share repurchase authorization		(45)		(28)
Shares acquired - share-based compensation plans		(2)		(3)

End of period		(1,959)		(1,809)

Total Shareholders' Equity		$	12,092	$	11,138

(In millions, except per common share)
Common Stock - Shares Outstanding
Beginning of period		160.3		160.9
Share-based awards		0.4		0.4
Shares acquired - share repurchase authorization		(0.4)		(0.3)


End of period		160.3		161.0

Dividends declared per common share		$	0.69	$	0.63

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

Cincinnati Financial Corporation First-Quarter 2022 10-Q

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Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows


(Dollars in millions)	Three months ended March 31,
	2022		2021
Cash Flows From Operating Activities
Net income (loss)	$	(273)	$	620
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	29		23
Investment gains and losses, net	674		(501)
Share-based compensation	11		9
Interest credited to contract holders	12		11
Deferred income tax expense	(128)		112
Changes in:
Investment income receivable	(3)		2
Premiums and reinsurance receivable	(182)		(166)
Deferred policy acquisition costs	(68)		(49)
Other assets	(20)		(33)
Loss and loss expense reserves	61		204
Life policy and investment contract reserves	17		15
Unearned premiums	289		221
Other liabilities	(136)		(80)
Current income tax receivable/payable	(85)		(34)
Net cash provided by operating activities	198		354
Cash Flows From Investing Activities
Sale of fixed maturities	55		30
Call or maturity of fixed maturities	296		300
Sale of equity securities	56		65
Purchase of fixed maturities	(460)		(467)
Purchase of equity securities	(90)		(78)


Investment in finance receivables	(3)		(12)
Collection of finance receivables	9		8
Investment in building and equipment	(4)		(5)
Change in other invested assets, net	(21)		6
Net cash used in investing activities	(162)		(153)
Cash Flows From Financing Activities
Payment of cash dividends to shareholders	(99)		(95)
Shares acquired - share repurchase authorization	(45)		(28)
Changes in note payable	(5)		3
Proceeds from stock options exercised	4		4
Contract holders' funds deposited	18		27
Contract holders' funds withdrawn	(32)		(33)
Other	(29)		(32)
Net cash used in financing activities	(188)		(154)
Net change in cash and cash equivalents	(152)		47
Cash and cash equivalents at beginning of year	1,139		900
Cash and cash equivalents at end of period	$	987	$	947
Supplemental Disclosures of Cash Flow Information:

Income taxes paid	121		66
Noncash Activities

Equipment acquired under finance lease obligations	$	2	$	3
Share-based compensation	16		16
Other assets and other liabilities	10		44

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

Cincinnati Financial Corporation First-Quarter 2022 10-Q

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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 March 31, 2022, 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 2021 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.

The company continues to monitor the impact of the coronavirus (SARS-CoV-2 or COVID-19) pandemic outbreak. 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 requires changes to the measurement and disclosure of long-duration insurance contracts. In November 2020, the FASB issued an ASU that delayed the effective date of ASU 2018-12 to interim and annual reporting periods beginning after December 15, 2022. We plan to adopt these ASUs on a modified retrospective basis on January 1, 2023, with a transition date of January 1, 2021.

Related to the company's term and whole life products included in life policy and investment contract reserves, the new guidance requires that cash flow assumptions be reviewed at least annually to determine any necessary updates. Additionally, the discount rate assumption is required to be updated quarterly based on upper-medium grade fixed-income instrument yields (market value discount rates). The life policy and investment contract reserves balance is adjusted through insurance losses and contract holders' benefits for cash flow assumption updates and through accumulated other comprehensive income (AOCI) for discount rate updates.

These ASUs also amend the previous guidance related to life deferred policy acquisition costs by requiring amortization of those costs on a constant level basis for a group of contracts that approximates straight-line and the removal of shadow deferred policy acquisition costs for universal life and deferred annuity products. These ASUs also require entities to provide additional disclosures including disaggregated rollforwards of the life policy and investment contract reserves, separate account liabilities and life deferred policy acquisition costs.

Management has identified that the requirement to measure term and whole life policy reserves using updated discount rates is expected to have a material impact on shareholders' equity, through an increase to life policy and investment contract reserves and a decrease to AOCI, at the transition date. The company is in the process of addressing necessary implementation-related items, including modifications to reporting and analysis capabilities as well as actuarial systems and associated data processes. Further, the company continues to refine its accounting policy decisions associated with the new guidance. Additional impacts of these ASUs on our company's consolidated financial position, results of operations and cash flows are being further evaluated by management.

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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 cost			Gross unrealized					Fair value
At March 31, 2022			gains			losses
Fixed maturity securities:
Corporate	$	7,131		$	184		$	166	$	7,149
States, municipalities and political subdivisions	4,780			106			76		4,810
Commercial mortgage-backed	267			1			2		266
United States government	113			—			1		112
Foreign government	25			—			—		25
Government-sponsored enterprises	14			—			—		14

Total	$	12,330		$	291		$	245	$	12,376






At December 31, 2021
Fixed maturity securities:
Corporate	$	7,043		$	467		$	13	$	7,497
States, municipalities and political subdivisions	4,768			330			3		5,095
Commercial mortgage-backed	264			9			—		273
United States government	121			2			—		123
Foreign government	26			—			—		26
Government-sponsored enterprises	8			—			—		8






Total	$	12,230		$	808		$	16	$	13,022

The decrease in net unrealized investment gains in our fixed-maturity portfolio at March 31, 2022, is primarily due to an increase in U.S. Treasury yields and a widening of corporate credit spreads. Our commercial mortgage-backed securities had an average rating of Aa2/AA at March 31, 2022, and December 31, 2021.

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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 months				12 months or more				Total
At March 31, 2022	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Fixed maturity securities:
Corporate	$	2,603	$	157	$	78	$	9	$	2,681	$	166
States, municipalities and political subdivisions	977		72		21		4		998		76
Commercial mortgage-backed	128		2		10		—		138		2
United States government	72		1		—		—		72		1
Foreign government	7		—		—		—		7		—
Government-sponsored enterprises	10		—		3		—		13		—
Total	$	3,797	$	232	$	112	$	13	$	3,909	$	245





At December 31, 2021
Fixed maturity securities:
Corporate	$	861	$	13	$	15	$	—	$	876	$	13
States, municipalities and political subdivisions	105		2		2		1		107		3
Commercial mortgage-backed	10		—		11		—		21		—
United States government	48		—		—		—		48		—
Foreign government	16		—		—		—		16		—
Government-sponsored enterprises	7		—		—		—		7		—





Total	$	1,047	$	15	$	28	$	1	$	1,075	$	16

Contractual maturity dates for fixed-maturities securities were:


(Dollars in millions)	Amortized cost		Fair value		% of fair value
At March 31, 2022
Maturity dates:
Due in one year or less	$	686	$	690	5.6	%
Due after one year through five years	3,636		3,690		29.8
Due after five years through ten years	3,460		3,525		28.5
Due after ten years	4,548		4,471		36.1
Total	$	12,330	$	12,376	100.0	%

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

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


(Dollars in millions)	Three months ended March 31,
		2022		2021
Investment income:
Interest		$	123	$	118
Dividends		65		58
Other		1		2
Total		189		178
Less investment expenses		4		4
Total		$	185	$	174

Investment gains and losses, net:
Equity securities:
Investment gains and losses on securities sold, net		$	8	$	4
Unrealized gains and losses on securities still held, net		(683)		487

Subtotal		(675)		491
Fixed maturities:
Gross realized gains		4		3
Gross realized losses		(1)		—

Subtotal		3		3

Other		6		10

Total		$	(666)	$	504

The fair value of our equity portfolio was $10.675 billion and $11.315 billion at March 31, 2022, and December 31, 2021, respectively. At March 31, 2022, and December 31, 2021, Apple Inc. (Nasdaq:AAPL), an equity holding, was our largest single investment holding with a fair value of $848 million and $862 million, which was 8.3% and 7.9% of our publicly traded common equities portfolio and 3.7% and 3.5% of the total investment portfolio, respectively.

At March 31, 2022, and December 31, 2021, the allowance for credit losses, including changes in the amount during each period, was less than $1 million. During the three months ended March 31, 2022, there was one fixed-maturity security that was written down to fair value due to an intention to be sold resulting in an impairment charge of less than $1 million. During the three months ended March 31, 2021, there were no fixed-maturity securities that were written down to fair value due to an intention to be sold.

At March 31, 2022, 1,377 fixed-maturity securities with a total unrealized loss of $245 million were in an unrealized loss position. Of that total, no fixed-maturity securities had fair values below 70% of amortized cost. At December 31, 2021, 278 fixed-maturity securities with a total unrealized loss of $16 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, 2021, and ultimately management determines fair value. See our 2021 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 137, for information on characteristics and valuation techniques used in determining fair value.

Fair Value Disclosures for Assets

The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at March 31, 2022, and December 31, 2021. 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 March 31, 2022
Fixed maturities, available for sale:
Corporate	$	—	$	7,149	$	—	$	7,149
States, municipalities and political subdivisions	—		4,810		—		4,810
Commercial mortgage-backed	—		266		—		266
United States government	112		—		—		112
Foreign government	—		25		—		25
Government-sponsored enterprises	—		14		—		14


Subtotal	112		12,264		—		12,376
Common equities	10,245		—		—		10,245
Nonredeemable preferred equities	—		430		—		430

Separate accounts taxable fixed maturities	—		887		—		887
Top Hat savings plan mutual funds and common equity (included in Other assets)	70		—		—		70
Total	$	10,427	$	13,581	$	—	$	24,008

At December 31, 2021
Fixed maturities, available for sale:
Corporate	$	—	$	7,497	$	—	$	7,497
States, municipalities and political subdivisions	—		5,095		—		5,095
Commercial mortgage-backed	—		273		—		273
United States government	123		—		—		123
Foreign government	—		26		—		26
Government-sponsored enterprises	—		8		—		8

Subtotal	123		12,899		—		13,022
Common equities	10,862		—		—		10,862
Nonredeemable preferred equities	—		453		—		453
Separate accounts taxable fixed maturities	—		948		—		948
Top Hat savings plan mutual funds and common equity (included in Other assets)	64		—		—		64
Total	$	11,049	$	14,300	$	—	$	25,349

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We also held Level 1 cash and cash equivalents of $987 million and $1.139 billion at March 31, 2022, and December 31, 2021, 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 value				Principal amount
Interest rate	Year of issue		March 31,		December 31,		March 31,		December 31,
		2022	2021		2022		2021
6.900%	1998	Senior debentures, due 2028	$	27	$	27	$	28	$	28
6.920%	2005	Senior debentures, due 2028	391		391		391		391
6.125%	2004	Senior notes, due 2034	371		371		374		374
Total			$	789	$	789	$	793	$	793

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


(Dollars in millions)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At March 31, 2022
Note payable	$	—	$	49	$	—	$	49
6.900% senior debentures, due 2028	—		32		—		32
6.920% senior debentures, due 2028	—		466		—		466
6.125% senior notes, due 2034	—		462		—		462
Total	$	—	$	1,009	$	—	$	1,009

At December 31, 2021
Note payable	$	—	$	54	$	—	$	54
6.900% senior debentures, due 2028	—		34		—		34
6.920% senior debentures, due 2028	—		501		—		501
6.125% senior notes, due 2034	—		510		—		510
Total	$	—	$	1,099	$	—	$	1,099

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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 March 31, 2022
Life policy loans	$	—	$	—	$	40	$	40

Deferred annuities	—		—		704		704
Structured settlements	—		177		—		177
Total	$	—	$	177	$	704	$	881

At December 31, 2021
Life policy loans	$	—	$	—	$	44	$	44

Deferred annuities	—		—		778		778
Structured settlements	—		201		—		201
Total	$	—	$	201	$	778	$	979

Outstanding principal and interest for these life policy loans totaled $30 million and $31 million at March 31, 2022, and December 31, 2021, respectively.

Recorded reserves for the deferred annuities were $757 million and $762 million at March 31, 2022, and December 31, 2021, respectively. Recorded reserves for the structured settlements were $135 million and $136 million at March 31, 2022, and December 31, 2021, 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 March 31,
		2022		2021
Gross loss and loss expense reserves, beginning of period		$	7,229	$	6,677
Less reinsurance recoverable		327		277
Net loss and loss expense reserves, beginning of period		6,902		6,400





Net incurred loss and loss expenses related to:
Current accident year		997		1,033
Prior accident years		(41)		(110)
Total incurred		956		923
Net paid loss and loss expenses related to:
Current accident year		169		143
Prior accident years		721		562
Total paid		890		705
Net loss and loss expense reserves, end of period		6,968		6,618
Plus reinsurance recoverable		319		262
Gross loss and loss expense reserves, end of period		$	7,287	$	6,880

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 $79 million at March 31, 2022, and $70 million at March 31, 2021, for certain life and health loss and loss expense reserves.

For the three months ended March 31, 2022, we experienced $41 million of favorable development on prior accident years, including $18 million of favorable development in commercial lines, $34 million of favorable development in personal lines and $5 million of favorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $10 million for the workers' compensation line and $6 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 development of $31 million for the homeowner line.

For the three months ended March 31, 2021, we experienced $110 million of favorable development on prior accident years, including $83 million of favorable development in commercial lines, $20 million of favorable development in personal lines and $4 million of unfavorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $25 million for the workers' compensation line, $24 million for the commercial auto line and $21 million for the commercial property line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Within personal lines, we recognized favorable reserve development of $15 million in personal auto.

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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)	March 31, 2022		December 31, 2021
Life policy reserves:
Ordinary/traditional life	$	1,395	$	1,376
Other	52		52
Subtotal	1,447		1,428
Investment contract reserves:
Deferred annuities	757		762
Universal life	680		679
Structured settlements	135		136
Other	8		9
Subtotal	1,580		1,586
Total life policy and investment contract reserves	$	3,027	$	3,014

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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 March 31,
		2022		2021
Property casualty:
Deferred policy acquisition costs asset, beginning of period		$	602	$	542
Capitalized deferred policy acquisition costs		364		312
Amortized deferred policy acquisition costs		(301)		(268)
Deferred policy acquisition costs asset, end of period		$	665	$	586

Life:
Deferred policy acquisition costs asset, beginning of period		$	303	$	263
Capitalized deferred policy acquisition costs		15		14
Amortized deferred policy acquisition costs		(10)		(9)
Shadow deferred policy acquisition costs		6		26
Deferred policy acquisition costs asset, end of period		$	314	$	294

Consolidated:
Deferred policy acquisition costs asset, beginning of period		$	905	$	805
Capitalized deferred policy acquisition costs		379		326
Amortized deferred policy acquisition costs		(311)		(277)
Shadow deferred policy acquisition costs		6		26
Deferred policy acquisition costs asset, end of period		$	979	$	880

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 March 31,
	2022						2021
	Before tax		Income tax		Net		Before tax		Income tax		Net
Investments:
AOCI, beginning of period	$	792	$	165	$	627	$	1,026	$	215	$	811


OCI before investment gains and losses, net, recognized in net income	(743)		(157)		(586)		(193)		(41)		(152)
Investment gains and losses, net, recognized in net income	(3)		—		(3)		(3)		—		(3)
OCI	(746)		(157)		(589)		(196)		(41)		(155)
AOCI, end of period	$	46	$	8	$	38	$	830	$	174	$	656

Pension obligations:
AOCI, beginning of period	$	27	$	7	$	20	$	(41)	$	(7)	$	(34)
OCI excluding amortization recognized in net income	—		—		—		2		1		1
Amortization recognized in net income	—		—		—		2		—		2
OCI	—		—		—		4		1		3
AOCI, end of period	$	27	$	7	$	20	$	(37)	$	(6)	$	(31)

Life deferred acquisition costs, life policy reserves and other:
AOCI, beginning of period	$	1	$	—	$	1	$	(10)	$	(2)	$	(8)
OCI before investment gains and losses, net, recognized in net income	—		—		—		10		2		8
Investment gains and losses, net, recognized in net income	—		—		—		—		—		—
OCI	—		—		—		10		2		8
AOCI, end of period	$	1	$	—	$	1	$	—	$	—	$	—

Summary of AOCI:
AOCI, beginning of period	$	820	$	172	$	648	$	975	$	206	$	769


Investments OCI	(746)		(157)		(589)		(196)		(41)		(155)
Pension obligations OCI	—		—		—		4		1		3
Life deferred acquisition costs, life policy reserves and other OCI	—		—		—		10		2		8
Total OCI	(746)		(157)		(589)		(182)		(38)		(144)
AOCI, end of period	$	74	$	15	$	59	$	793	$	168	$	625

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 as well as contracts from our reinsurance assumed operations, known as Cincinnati Re. Primary components of our ceded reinsurance include a property per risk treaty, property excess treaty, casualty per occurrence treaty, casualty excess treaty, property catastrophe treaty and catastrophe bonds 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 March 31,
		2022		2021
Direct written premiums		$	1,703	$	1,545
Assumed written premiums		263		205
Ceded written premiums		(67)		(57)
Net written premiums		$	1,899	$	1,693

Direct earned premiums		$	1,561	$	1,429
Assumed earned premiums		121		101
Ceded earned premiums		(64)		(55)
Earned premiums		$	1,618	$	1,475

Direct incurred loss and loss expenses		$	895	$	868
Assumed incurred loss and loss expenses		73		78
Ceded incurred loss and loss expenses		(12)		(23)
Incurred loss and loss expenses		$	956	$	923

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.

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


(Dollars in millions)	Three months ended March 31,
		2022		2021
Direct earned premiums		$	90	$	87

Ceded earned premiums		(18)		(18)
Earned premiums		$	72	$	69

Direct contract holders' benefits incurred		114		107

Ceded contract holders' benefits incurred		(31)		(27)
Contract holders' benefits incurred		$	83	$	80

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

At March 31, 2022, and December 31, 2021, the allowance for uncollectible property casualty premiums was $14 million. At March 31, 2022, and December 31, 2021, 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 March 31,
		2022	2021
Tax at statutory rate:			$	(76)	21.0	%	$	161	21.0	%
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds			(5)		1.4		(5)		(0.7)
Dividend received exclusion			(5)		1.4		(5)		(0.7)

Other			(1)		0.4		(3)		(0.3)
Provision (benefit) for income taxes			$	(87)	24.2	%	$	148	19.3	%

The provision (benefit) for federal income taxes is based upon filing a consolidated income tax return for the company and its domestic subsidiaries.

We continue to believe that after considering all positive and negative evidence of taxable income in the carryback and carryforward periods as permitted by law, it is more likely than not that all of the deferred tax assets on our U.S. domestic operations will be realized. As a result, we have no valuation allowance for our U.S. domestic operations at March 31, 2022, and December 31, 2021. As more fully discussed below, we do carry a valuation allowance on the deferred tax assets related to Cincinnati Global Underwriting Ltd.SM (Cincinnati Global).

Unrecognized Tax Benefits

At March 31, 2022, and December 31, 2021, we had a gross unrecognized tax benefit of $34 million. There were no changes to this amount during the first quarter of 2022. 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 March 31, 2022, Cincinnati Global decreased its net deferred tax assets by $3 million with an offsetting decrease of $3 million to the valuation allowance. At March 31, 2022, Cincinnati Global had a net deferred tax asset of $50 million and an offsetting valuation allowance of $50 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, we continue to believe it is appropriate to carry a valuation allowance at March 31, 2022.

At March 31, 2022, and December 31, 2021, Cincinnati Global had operating loss carryforwards in the United States of $6 million and $8 million, respectively, and in the United Kingdom of $130 million for both periods. 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 (Loss) Per Common Share

Basic earnings per share are computed based on the weighted average number of common shares outstanding. Diluted earnings per share are computed based on the weighted average number of common and dilutive potential common shares outstanding using the treasury stock method. The table shows calculations for basic and diluted earnings per share:


(In millions, except per share data)	Three months ended March 31,
		2022			2021
Numerator:
Net income (loss)—basic and diluted			$	(273)		$	620
Denominator:
Basic weighted-average common shares outstanding			160.4			161.0
Effect of share-based awards:
Stock options			—			0.9
Nonvested shares			—			0.6
Diluted weighted-average shares			160.4			162.5
Earnings (loss) per share:
Basic			$	(1.70)		$	3.85
Diluted			$	(1.70)		$	3.82
Number of anti-dilutive share-based awards			2.3			1.0

In accordance with Accounting Standards Codification 260, Earnings per Share, the assumed exercise of share-based awards were excluded from the computation of diluted loss per share for the three months ended March 31, 2022. See our 2021 Annual Report on Form 10-K, Item 8, Note 17, Share-Based Associate Compensation Plans, Page 169, for information about share-based awards. The above table shows the number of anti-dilutive share-based awards for the three months ended March 31, 2022 and 2021. These share-based awards were not included in the computation of net income (loss) 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 March 31,
		2022		2021
Service cost		$	2	$	2
Non-service (benefit) costs:
Interest cost		3		2
Expected return on plan assets		(6)		(5)
Amortization of actuarial loss and prior service cost		—		2
Other		—		2
Total non-service (benefit) cost		(3)		1
Net periodic (benefit) cost		$	(1)	$	3

See our 2021 Annual Report on Form 10-K, Item 8, Note 13, Employee Retirement Benefits, Page 162, 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 2022 and 2021.

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We made matching contributions totaling $8 million and $6 million to our 401(k) and Top Hat savings plans during the first quarter of 2022 and 2021, respectively.

We made no contributions to our qualified pension plan during the first three months of 2022.

NOTE 12 – Commitments and Contingent Liabilities

The company, through its insurance subsidiaries, is involved in claims litigation arising in the ordinary course of conducting its business, both as a liability insurer defending or providing indemnity for third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The company accounts for such activity through the establishment of unpaid loss and loss expense reserves. Subject to the uncertainties discussed in Note 4, Property Casualty Loss and Loss Expenses, and in the discussion in the balance of this Note, we believe that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses, costs of defense, and reinsurance recoveries, is immaterial to our consolidated financial position, results of operations and cash flows.

Beginning in April 2020, like many companies in the property casualty insurance industry, the company’s property casualty subsidiaries, were named as defendants in lawsuits seeking insurance coverage under commercial property insurance policies issued by the company for alleged losses resulting from the shutdown or suspension of their businesses due to the COVID-19 pandemic. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts for claim denials, interest and attorney fees. Some of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages.

The company denies the allegations in these lawsuits and intends to continue to vigorously defend the lawsuits. The company maintains that it has no coverage obligations with respect to these lawsuits for business income allegedly lost by the plaintiffs due to the COVID-19 pandemic based on the terms of the applicable insurance policies. Although the policy terms vary, in general, the claims at issue in these lawsuits were denied because the policyholder identified no direct physical loss or damage to property at the insured premises, and the governmental orders that led to the complete or partial shutdown of the business were not due to the existence of any direct physical loss or damage to property in the immediate vicinity of the insured premises and did not prohibit access to the insured premises, as required by the terms of the insurance policies. Depending on the individual policy, additional policy terms and conditions may also prohibit coverage, such as exclusions for pollutants, ordinance or law, loss of use, and acts or decisions. The company’s standard commercial property insurance policies generally did not contain a specific virus exclusion.

In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present a number of uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any class may be certified, and the size and scope of any such classes. The legal theories advanced by plaintiffs vary by case as do the state laws that govern the policy interpretation. These lawsuits are at various stages of litigation; many complaints continue to be amended; several have been dismissed voluntarily and may be refiled; and others have been dismissed by trial courts and appealed. While early appellate decisions have been favorable, many remain to be decided. In some jurisdictions, many cases have been stayed pending appellate decisions in their state or federal circuit. Accordingly, little discovery has occurred on pending cases. In addition, business income calculations depend upon a wide range of factors that are particular to the circumstances of each individual policyholder and, here, virtually none of the plaintiffs have submitted proofs of loss or otherwise quantified or factually supported any allegedly covered loss. Moreover, the company’s experience shows that demands for damages often bear little relation to a reasonable estimate of potential loss. Accordingly, management cannot now reasonably estimate the possible loss or range of loss, if any. Nonetheless, given the number of claims and potential claims, the indeterminate amounts sought, and the inherent unpredictability of litigation, it is possible that adverse outcomes, if any, in the aggregate could have a material adverse effect on the company’s consolidated financial position, results of operations and cash flows.

The company and its subsidiaries also are occasionally involved in other legal and regulatory proceedings, some of which assert claims for substantial amounts. These actions include, among others, putative class actions seeking certification of a national class. Such proceedings have alleged, for example, breach of an alleged duty to search national databases to ascertain unreported deaths of insureds under life insurance policies. The company’s insurance subsidiaries also are occasionally parties to individual actions in which extra-contractual damages,

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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, 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 2021 Annual Report on Form 10-K, Item 8, Note 18, Segment Information, Page 172, 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 March 31,
		2022		2021
Revenues:
Commercial lines insurance
Commercial casualty		$	336	$	303
Commercial property		274		253
Commercial auto		205		193
Workers' compensation		67		67
Other commercial		80		70
Commercial lines insurance premiums		962		886
Fee revenues		1		1
Total commercial lines insurance		963		887

Personal lines insurance
Personal auto		152		152
Homeowner		195		174
Other personal		55		50
Personal lines insurance premiums		402		376
Fee revenues		1		1
Total personal lines insurance		403		377

Excess and surplus lines insurance		112		89
Fee revenues		1		—
Total excess and surplus lines insurance		113		89

Life insurance premiums		72		69
Fee revenues		1		1
Total life insurance		73		70

Investments
Investment income, net of expenses		185		174
Investment gains and losses, net		(666)		504
Total investment revenue		(481)		678

Other
Premiums		142		124

Other		2		2
Total other revenues		144		126
Total revenues		$	1,215	$	2,227

Income (loss) before income taxes:
Insurance underwriting results
Commercial lines insurance		$	76	$	130
Personal lines insurance		65		(3)
Excess and surplus lines insurance		16		8
Life insurance		(2)		(2)
Investments		(508)		652
Other		(7)		(17)
Total income (loss) before income taxes		$	(360)	$	768


Identifiable assets:	March 31, 2022		December 31, 2021
Property casualty insurance	$	4,607	$	4,421
Life insurance	1,577		1,590
Investments	23,201		24,481
Other	865		895
Total	$	30,250	$	31,387

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