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,
						2023						2022
Assets
Investments
Fixed maturities, at fair value (amortized cost: 2023—$14,050; 2022—$12,979)						$	12,843					$	12,132
Equity securities, at fair value (cost: 2023—$4,399; 2022—$4,294)						10,031						9,841
Other invested assets						534						452
Total investments						23,408						22,425
Cash and cash equivalents						899						1,264
Investment income receivable						182						160
Finance receivable						103						92
Premiums receivable						2,654						2,322
Reinsurance recoverable						699						665
Prepaid reinsurance premiums						69						51
Deferred policy acquisition costs						1,101						1,013
Land, building and equipment, net, for company use (accumulated depreciation: 2023—$333; 2022—$322)						199						202
Other assets						683						646
Separate accounts						918						892
Total assets						$	30,915					$	29,732
Liabilities
Insurance reserves
Loss and loss expense reserves						$	9,077					$	8,400
Life policy and investment contract reserves						2,920						3,015
Unearned premiums						4,195						3,689
Other liabilities						1,315						1,229
Deferred income tax						997						1,054
Note payable						25						50
Long-term debt and lease obligations						844						841
Separate accounts						918						892
Total liabilities						20,291						19,170
Commitments and contingent liabilities (Note 12)
Shareholders' Equity
Common stock, par value—$2 per share; (authorized: 2023 and 2022—500 million shares; issued: 2023 and 2022—198.3 million shares)						397						397
Paid-in capital						1,422						1,392
Retained earnings						12,018						11,711
Accumulated other comprehensive income						(827)						(614)
Treasury stock at cost (2023—41.4 million shares and 2022—41.2 million shares)						(2,386)						(2,324)
Total shareholders' equity						10,624						10,562
Total liabilities and shareholders' equity						$	30,915					$	29,732

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,
			2023						2022						2023						2022
Revenues
Earned premiums			$	2,033					$	1,884					$	5,894					$	5,350
Investment income, net of expenses			225						193						655						573
Investment gains and losses, net			(456)						(674)						84						(2,494)
Fee revenues			6						5						16						12
Other revenues			3						2						8						7
Total revenues			1,811						1,410						6,657						3,448
Benefits and Expenses
Insurance losses and contract holders' benefits			1,332						1,418						4,070						3,772
Underwriting, acquisition and insurance expenses			609						551						1,744						1,604
Interest expense			13						14						40						40
Other operating expenses			5						4						17						13
Total benefits and expenses			1,959						1,987						5,871						5,429
Income (Loss) Before Income Taxes			(148)						(577)						786						(1,981)
Provision (Benefit) for Income Taxes
Current			57						19						124						90
Deferred			(106)						(180)						2						(571)
Total provision (benefit) for income taxes			(49)						(161)						126						(481)
Net Income (Loss)			$	(99)					$	(416)					$	660					$	(1,500)
Per Common Share
Net income (loss)—basic			$	(0.63)					$	(2.63)					$	4.20					$	(9.42)
Net income (loss)—diluted			(0.63)						(2.63)						4.17						(9.42)

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,
						2023						2022						2023						2022
Net Income (Loss)						$	(99)					$	(416)					$	660					$	(1,500)
Other Comprehensive Income (Loss)
Change in unrealized gains and losses on investments, net of benefit of $(79), $(109), $(76) and $(393), respectively						(290)						(405)						(284)						(1,477)
Amortization of pension actuarial loss and prior service cost, net of tax (benefit) of $0, $0, $(2) and $0, respectively						—						—						(5)						—
Change in life policy reserves, reinsurance recoverable and other, net of tax of $22, $25, $19 and $104, respectively						89						95						76						393
Other comprehensive loss						(201)						(310)						(213)						(1,084)
Comprehensive Income (Loss)						$	(300)					$	(726)					$	447					$	(2,584)

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,
						2023						2022						2023						2022
Common Stock
Beginning of period						$	397					$	397					$	397					$	397
Share-based awards						—						—						—						—
End of period						397						397						397						397
Paid-In Capital
Beginning of period						1,410						1,367						1,392						1,356
Share-based awards						1						1						(5)						(11)
Share-based compensation						9						9						31						29
Other						2						2						4						5
End of period						1,422						1,379						1,422						1,379
Retained Earnings
Beginning of period						12,235						11,331						11,711						12,625
Cumulative effect of change in accounting for long-duration insurance contracts (Note 1)						—						—						—						10
Adjusted beginning of period						12,235						11,331						11,711						12,635
Net income (loss)						(99)						(416)						660						(1,500)
Dividends declared						(118)						(109)						(353)						(329)
End of period						12,018						10,806						12,018						10,806
Accumulated Other Comprehensive Income (Loss)
Beginning of period						(626)						(478)						(614)						648
Cumulative effect of change in accounting for long-duration insurance contracts (Note 1)						—						—						—						(352)
Adjusted beginning of period						(626)						(478)						(614)						296
Other comprehensive loss						(201)						(310)						(213)						(1,084)
End of period						(827)						(788)						(827)						(788)
Treasury Stock
Beginning of period						(2,386)						(2,112)						(2,324)						(1,921)
Share-based awards						1						1						8						13
Shares acquired - share repurchase authorization						—						(203)						(67)						(399)
Shares acquired - share-based compensation plans						(2)						—						(5)						(8)
Other						1						—						2						1
End of period						(2,386)						(2,314)						(2,386)						(2,314)
Total Shareholders' Equity						$	10,624					$	9,480					$	10,624					$	9,480
(In millions, except per common share)
Common Stock - Shares Outstanding
Beginning of period						156.8						159.2						157.1						160.3
Share-based awards						—						—						0.3						0.5
Shares acquired - share repurchase authorization						—						(2.1)						(0.6)						(3.7)
Other						0.1						—						0.1						—
End of period						156.9						157.1						156.9						157.1
Dividends declared per common share						$	0.75					$	0.69					$	2.25					$	2.07

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,
						2023						2022
Cash Flows From Operating Activities
Net income (loss)						$	660					$	(1,500)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other						88						102
Investment gains and losses, net						(69)						2,513
Interest credited to contract holders						33						34
Deferred income tax expense						2						(571)
Changes in:
Premiums and reinsurance receivable						(392)						(354)
Deferred policy acquisition costs						(88)						(118)
Other assets						(30)						(6)
Loss and loss expense reserves						677						808
Life policy and investment contract reserves						73						53
Unearned premiums						506						527
Other liabilities						8						3
Current income tax receivable/payable						7						(70)
Net cash provided by operating activities						1,475						1,421
Cash Flows From Investing Activities
Sale, call or maturity of fixed maturities						826						911
Sale of equity securities						68						333
Purchase of fixed maturities						(1,853)						(1,445)
Purchase of equity securities						(157)						(380)
Changes in finance receivables						(10)						12
Investment in building and equipment						(10)						(12)
Change in other invested assets, net						(102)						(65)
Net cash used in investing activities						(1,238)						(646)
Cash Flows From Financing Activities
Payment of cash dividends to shareholders						(338)						(316)
Shares acquired - share repurchase authorization						(67)						(399)
Changes in note payable						(25)						(10)
Proceeds from stock options exercised						7						8
Contract holders' funds deposited						67						54
Contract holders' funds withdrawn						(165)						(98)
Other						(81)						(70)
Net cash used in financing activities						(602)						(831)
Net change in cash and cash equivalents						(365)						(56)
Cash and cash equivalents at beginning of year						1,264						1,139
Cash and cash equivalents at end of period						$	899					$	1,083
Supplemental Disclosures of Cash Flow Information:
Interest paid						$	28					$	27
Income taxes paid						94						144
Noncash Activities
Equipment acquired under finance lease obligations						$	10					$	13
Share-based compensation						15						24
Other assets and other liabilities						120						203

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, 2023, 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 2022 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.

Adopted 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.

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.

We adopted these ASUs on a modified retrospective basis on January 1, 2023, resulting in an after-tax increase to shareholders' equity of $31 million.

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The following table illustrates the effect of adopting ASU 2018-12 in the condensed consolidated balance sheets:

(Dollars in millions)			September 30, 2023						December 31, 2022
									As originally reported			As adjusted			Difference
Reinsurance recoverable			$	699					$	640		$	665		$	25
Prepaid reinsurance premiums			69						79			51			(28)
Deferred policy acquisition costs			1,101						1,014			1,013			(1)
Total assets			30,915						29,736			29,732			(4)
Life policy and investment contract reserves			2,920						3,059			3,015			(44)
Deferred income tax			997						1,045			1,054			9
Total liabilities			20,291						19,205			19,170			(35)
Retained earnings			12,018						11,702			11,711			9
Accumulated other comprehensive income			(827)						(636)			(614)			22
Total shareholders' equity			10,624						10,531			10,562			31
Total liabilities and shareholders' equity			30,915						29,736			29,732			(4)

The following table illustrates the effect of adopting ASU 2018-12 in the condensed consolidated statements of income and condensed consolidated statements of comprehensive income:

(Dollars in millions, except per share data)			Three months ended September 30,
			2023						2022
									As originally reported			As adjusted			Difference
Earned premiums			$	2,033					$	1,882		$	1,884		$	2
Insurance losses and contract holders' benefits			1,332						1,418			1,418			—
Underwriting, acquisition and insurance expenses			609						551			551			—
Deferred income tax expense			(106)						(180)			(180)			—
Net Income (Loss)			(99)						(418)			(416)			2
Change in life policy reserves, reinsurance recoverable and other, net of tax			89						—			95			95
Other comprehensive income (loss)			(201)						(405)			(310)			95
Comprehensive Income (Loss)			(300)						(823)			(726)			97
Net income (loss) per share:
Basic			$	(0.63)					$	(2.64)		$	(2.63)		$	0.01
Diluted			(0.63)						(2.64)			(2.63)			0.01
(Dollars in millions, except per share data)			Nine months ended September 30,
			2023						2022
									As originally reported			As adjusted			Difference
Earned premiums			$	5,894					$	5,345		$	5,350		$	5
Insurance losses and contract holders' benefits			4,070						3,766			3,772			6
Underwriting, acquisition and insurance expenses			1,744						1,604			1,604			—
Deferred income tax expense			2						(571)			(571)			—
Net Income (Loss)			660						(1,499)			(1,500)			(1)
Change in life policy reserves, reinsurance recoverable and other, net of tax			76						1			393			392
Other comprehensive income (loss)			(213)						(1,476)			(1,084)			392
Comprehensive Income (Loss)			447						(2,975)			(2,584)			391
Net income (loss) per share:
Basic			$	4.20					$	(9.41)		$	(9.42)		$	(0.01)
Diluted			4.17						(9.41)			(9.42)			(0.01)

The adoption of ASU 2018-12 did not have a material impact on the company's condensed consolidated 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 cost						Gross unrealized												Fair value
At September 30, 2023									gains						losses
Fixed-maturity securities:
Corporate						$	7,786					$	27					$	700					$	7,113
States, municipalities and political subdivisions						4,911						2						489						4,424
Government-sponsored enterprises						897						—						23						874
United States government						223						—						6						217
Commercial mortgage-backed						214						—						18						196
Foreign government						19						—						—						19
Total						$	14,050					$	29					$	1,236					$	12,843
At December 31, 2022
Fixed-maturity securities:
Corporate						$	7,412					$	37					$	580					$	6,869
States, municipalities and political subdivisions						4,901						24						303						4,622
Government-sponsored enterprises						186						—						3						183
United States government						196						—						5						191
Commercial mortgage-backed						250						—						16						234
Foreign government						34						—						1						33
Total						$	12,979					$	61					$	908					$	12,132

The net unrealized investment losses in our fixed-maturity portfolio at September 30, 2023, are primarily due to an increase in U.S. Treasury yields, partially offset by a tightening of corporate credit spreads. Our commercial mortgage-backed securities had an average rating of Aa3/AA- and Aa2/AA- at September 30, 2023, and December 31, 2022, respectively.

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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 September 30, 2023						Fair value						Unrealized losses						Fair value						Unrealized losses						Fair value						Unrealized losses
Fixed-maturity securities:
Corporate						$	1,283					$	58					$	5,431					$	642					$	6,714					$	700
States, municipalities and political subdivisions						2,331						89						1,902						400						4,233						489
Government-sponsored enterprises						742						17						95						6						837						23
United States government						80						1						130						5						210						6
Commercial mortgage-backed						1						—						194						18						195						18
Foreign government						9						—						5						—						14						—
Total						$	4,446					$	165					$	7,757					$	1,071					$	12,203					$	1,236
At December 31, 2022
Fixed-maturity securities:
Corporate						$	5,651					$	412					$	661					$	168					$	6,312					$	580
States, municipalities and political subdivisions						2,600						274						77						29						2,677						303
Government-sponsored enterprises						123						3						3						—						126						3
United States government						146						3						41						2						187						5
Commercial mortgage-backed						215						13						14						3						229						16
Foreign government						25						1						4						—						29						1
Total						$	8,760					$	706					$	800					$	202					$	9,560					$	908

Contractual maturity dates for fixed-maturities securities were:

(Dollars in millions)						Amortized cost						Fair value						% of fair value
At September 30, 2023
Maturity dates:
Due in one year or less						$	825					$	814					6.3		%
Due after one year through five years						4,507						4,314						33.6
Due after five years through ten years						3,522						3,246						25.3
Due after ten years						5,196						4,469						34.8
Total						$	14,050					$	12,843					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 September 30,												Nine months ended September 30,
			2023						2022						2023						2022
Investment income:
Interest			$	154					$	129					$	441					$	376
Dividends			69						66						205						203
Other			5						3						18						6
Total			228						198						664						585
Less investment expenses			3						5						9						12
Total			$	225					$	193					$	655					$	573
Investment gains and losses, net:
Equity securities:
Investment gains and losses on securities sold, net			$	(5)					$	16					$	2					$	34
Unrealized gains and losses on securities still held, net			(458)						(705)						99						(2,568)
Subtotal			(463)						(689)						101						(2,534)
Fixed-maturity securities:
Gross realized gains			1						—						2						6
Gross realized losses			(1)						—						(2)						(3)
Write-down of impaired securities with intent to sell			—						—						(4)						—
Subtotal			—						—						(4)						3
Other			7						15						(13)						37
Total			$	(456)					$	(674)					$	84					$	(2,494)

The fair value of our equity portfolio was $10.031 billion and $9.841 billion at September 30, 2023, and December 31, 2022, respectively. Apple Inc. (Nasdaq:AAPL), an equity holding, was our largest single investment holding with a fair value of $764 million and $597 million, which was 7.9% and 6.3% of our publicly traded common equities portfolio and 3.3% and 2.7% of the total investment portfolio at September 30, 2023, and December 31, 2022, respectively.

The allowance for credit losses was $3 million and $1 million at September 30, 2023, and December 31, 2022, respectively. Changes decreased the allowance $1 million for the three months ended September 30, 2023, and increased the allowance $2 million for the nine months ended September 30, 2023. Changes were less than $1 million for both the three and nine months ended September 30, 2022.

There were 4,490 fixed-maturity securities with a total unrealized loss of $1.236 billion, which were in an unrealized loss position at September 30, 2023. Of that total, 202 fixed-maturity securities had fair values below 70% of amortized cost. There were 3,272 fixed-maturity securities with a total unrealized loss of $908 million, which were in an unrealized loss position at December 31, 2022. Of that total, 49 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, 2022, and ultimately management determines fair value. See our 2022 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 September 30, 2023, and December 31, 2022. We do not have any liabilities carried at fair value.

(Dollars in millions)						Level 1						Level 2						Level 3						Total
At September 30, 2023
Fixed maturities, available for sale:
Corporate						$	—					$	7,113					$	—					$	7,113
States, municipalities and political subdivisions						—						4,424						—						4,424
Government-sponsored enterprises						—						874						—						874
United States government						217						—						—						217
Commercial mortgage-backed						—						196						—						196
Foreign government						—						19						—						19
Subtotal						217						12,626						—						12,843
Common equities						9,678						—						—						9,678
Nonredeemable preferred equities						—						353						—						353
Separate accounts taxable fixed maturities						—						823						—						823
Top Hat savings plan mutual funds and common equity (included in Other assets)						63						—						—						63
Total						$	9,958					$	13,802					$	—					$	23,760
At December 31, 2022
Fixed maturities, available for sale:
Corporate						$	—					$	6,869					$	—					$	6,869
States, municipalities and political subdivisions						—						4,622						—						4,622
Government-sponsored enterprises						—						183						—						183
United States government						191						—						—						191
Commercial mortgage-backed						—						234						—						234
Foreign government						—						33						—						33
Subtotal						191						11,941						—						12,132
Common equities						9,454						—						—						9,454
Nonredeemable preferred equities						—						387						—						387
Separate accounts taxable fixed maturities						—						815						—						815
Top Hat savings plan mutual funds and common equity (included in Other assets)						57						—						—						57
Total						$	9,702					$	13,143					$	—					$	22,845

We also held Level 1 cash and cash equivalents of $899 million and $1.264 billion at September 30, 2023, and December 31, 2022, respectively.

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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												September 30,						December 31,						September 30,						December 31,
												2023						2022						2023						2022
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						372						371						374						374
Total																		$	790					$	789					$	793					$	793

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

(Dollars in millions)						Level 1						Level 2						Level 3						Total
At September 30, 2023
Note payable						$	—					$	25					$	—					$	25
6.900% senior debentures, due 2028						—						28						—						28
6.920% senior debentures, due 2028						—						411						—						411
6.125% senior notes, due 2034						—						371						—						371
Total						$	—					$	835					$	—					$	835
At December 31, 2022
Note payable						$	—					$	50					$	—					$	50
6.900% senior debentures, due 2028						—						29						—						29
6.920% senior debentures, due 2028						—						418						—						418
6.125% senior notes, due 2034						—						388						—						388
Total						$	—					$	885					$	—					$	885

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)						Level 1						Level 2						Level 3						Total
At September 30, 2023
Life policy loans						$	—					$	—					$	36					$	36
Deferred annuities						—						—						595						595
Structured settlements						—						129						—						129
Total						$	—					$	129					$	595					$	724
At December 31, 2022
Life policy loans						$	—					$	—					$	37					$	37
Deferred annuities						—						—						621						621
Structured settlements						—						143						—						143
Total						$	—					$	143					$	621					$	764

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Outstanding principal and interest for these life policy loans totaled $31 million at both September 30, 2023, and December 31, 2022.

Recorded reserves for the deferred annuities were $680 million and $734 million at September 30, 2023, and December 31, 2022, respectively. Recorded reserves for the structured settlements were $124 million and $129 million at September 30, 2023, and December 31, 2022, 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,
						2023						2022						2023						2022
Gross loss and loss expense reserves, beginning of period						$	8,807					$	7,603					$	8,336					$	7,229
Less reinsurance recoverable						424						287						405						327
Net loss and loss expense reserves, beginning of period						8,383						7,316						7,931						6,902
Net incurred loss and loss expenses related to:
Current accident year						1,314						1,391						4,053						3,687
Prior accident years						(53)						(43)						(213)						(143)
Total incurred						1,261						1,348						3,840						3,544
Net paid loss and loss expenses related to:
Current accident year						597						484						1,286						1,021
Prior accident years						461						464						1,899						1,709
Total paid						1,058						948						3,185						2,730
Net loss and loss expense reserves, end of period						8,586						7,716						8,586						7,716
Plus reinsurance recoverable						419						329						419						329
Gross loss and loss expense reserves, end of period						$	9,005					$	8,045					$	9,005					$	8,045

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 $72 million and $68 million at September 30, 2023, and 2022, respectively, for certain life and health loss and loss expense reserves.

We experienced $53 million of favorable development on prior accident years, including $34 million of favorable development in commercial lines, $8 million of favorable development in personal lines and no net development in excess and surplus lines for the three months ended September 30, 2023. Within commercial lines, we recognized favorable reserve development of $20 million for the workers' compensation line and $11 million for the commercial property line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines.

We experienced $213 million of favorable development on prior accident years, including $125 million of favorable development in commercial lines, $54 million of favorable development in personal lines and $14 million of favorable development in excess and surplus lines for the nine months ended September 30, 2023. Within commercial lines, we recognized favorable reserve development of $46 million for the workers' compensation line and $36 million for both the commercial property and commercial casualty lines 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 $44 million for the homeowner line and $12 million for the personal auto line.

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We experienced $43 million of favorable development on prior accident years, including $4 million of favorable development in commercial lines, $8 million of favorable development in personal lines and $7 million of favorable development in excess and surplus lines for the three months ended September 30, 2022. Within commercial lines, we recognized favorable reserve development of $24 million for the commercial property line and $16 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 $23 million for the commercial casualty line and $16 million for the commercial auto line.

We experienced $143 million of favorable development on prior accident years, including $51 million of favorable development in commercial lines, $56 million of favorable development in personal lines and $13 million of favorable development in excess and surplus lines for the nine months ended September 30, 2022. Within commercial lines, we recognized favorable reserve development of $43 million for the workers' compensation line and $36 million for the commercial property 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 $25 million for the commercial casualty line and $15 million for the commercial auto line. Within personal lines, we recognized favorable reserve development of $51 million for the homeowner line.

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NOTE 5 – Life Policy and Investment Contract Reserves

In the first quarter of 2023, we adopted ASU 2018-12 which resulted in changes to the life policy and investment contract reserves and the expansion of required disclosures. The below disclosures represent application of the updated guidance. See Note 1, Accounting Policies, for further discussion.

We establish the reserves for traditional life policies including term, whole life and other products based on certain cash flow assumptions including expected expenses, mortality, morbidity, lapse rates and timing of claim presentation. These assumptions are established based on our current expectations and are reviewed annually to determine any necessary updates. Assumptions are also updated on an interim basis if evidence suggests that they should be revised. We use both our own experience and industry experience, adjusted for historical trends, in arriving at our assumptions for expected mortality, morbidity and lapse rates. These reserves also include a discount rate assumption that is based on market value discount rates and is updated quarterly. Certain assumptions, including the mortality, lapse and long-term interest rate reversion targets, were updated in the second quarter of 2023 as part of our annual assumption unlocking. Changes in the inputs, judgments and assumptions during the period and the related measurement impact on the liability are reflected in the below tables.

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.

The following table summarizes our life policy and investment contract reserves and provides a reconciliation of the balances described in the below tables to those in the condensed consolidated balance sheets:

(Dollars in millions)						September 30, 2023						December 31, 2022
Life policy reserves:
Term						$	956					$	961
Whole life						381						408
Other						97						94
Subtotal						1,434						1,463
Investment contract reserves:
Deferred annuities						680						734
Universal life						575						578
Structured settlements						124						129
Other						107						111
Subtotal						1,486						1,552
Total life policy and investment contract reserves						$	2,920					$	3,015

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The table below shows the ASU 2018-12 adoption impacts to the life policy and investment contract reserves as of January 1, 2021 (transition date), pretax:

(Dollars in millions)												Term						Whole life						Deferred annuity						Universal life												Other						Total
At January 1, 2021
Balance, pre-adoption at December 31, 2020												$	901					$	363					$	761					$	567											$	323					$	2,915
Removal of shadow adjustments												—						—						—						—												13						13
Net premiums in excess of gross premiums												14						1						—						—												—						15
Remeasurement at market value discount rates												372						245						—						—												—						617
Balance, post-adoption at January 1, 2021												$	1,287					$	609					$	761					$	567											$	336					$	3,560

The table below shows the ASU 2018-12 adoption impacts to the life reinsurance recoverable asset as of January 1, 2021, pretax:

(Dollars in millions)												Term						Whole life						Deferred annuity						Universal life						Other						Total
At January 1, 2021
Balance, pre-adoption at December 31, 2020												$	113					$	26					$	—					$	—					$	78					$	217
Remeasurement at market value discount rates												29						18						—						—						—						47
Other adjustments												20						1						—						2						—						23
Balance, post-adoption at January 1, 2021												$	162					$	45					$	—					$	2					$	78					$	287

Other above includes structured settlements, other life policy reserves and other investment contract reserves. The removal of shadow adjustments above represents an increase to the life policy and investment contract reserve balance as it is no longer required under ASU 2018-12 for liabilities amortized in accordance with deferred acquisition costs. Shadow adjustments were historically included to present the carrying amount of the liability as if unrealized holding gains and losses had been realized. The net premiums in excess of gross premiums adjustment represents an increase to the liability as the remeasured net premiums, calculated as the present value of future benefits and related expenses using updated cash flow assumptions as of the transition date less the carrying amount of the liability prior to transition, exceeded the present value of future gross premiums. For purposes of calculating the updated present value of future benefits and related expenses above, the discount rate assumption that was used prior to adoption of ASU 2018-12 was retained. The remeasurement at market value discount rates adjustment represents the increase to the liability as a result of updating the discount rate assumption for our term and whole life products from the rates used prior to adoption of ASU 2018-12 to market value discount rates that existed at the transition date. As the discount rate assumption decreased significantly from the date the contracts were initially made, this adjustment represents the largest impact on the liability as a result of the initial adoption of ASU 2018-12. The life reinsurance recoverable asset is included in the remeasurement as the assumptions used in estimating the life reinsurance recoverable are consistent with those used in estimating the related liabilities. Other adjustments includes a reclassification from prepaid reinsurance premiums to reinsurance recoverable.

The shadow removal and remeasurement at market value discount rates adjustments were recorded as an increase to the life policy and investment contract reserves liability and a decrease to opening AOCI as of the transition date. The net premiums in excess of gross premiums adjustment was recorded as an increase to the life policy and investment contract reserves liability and a decrease to the opening balance of retained earnings as of the transition date.

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The balances and changes in the term and whole life policy reserves included in life policy and investment contract reserves is as follows:

(Dollars in millions)						Three months ended September 30,
						2023												2022
						Term						Whole life						Term						Whole life
Present value of expected net premiums:
Balance, beginning of period						$	1,664					$	212					$	1,723					$	210
Beginning balance at original discount rate						1,712						219						1,704						209
Effect of changes in cash flow assumptions						—						(1)						(13)						(2)
Effect of actual variances from expected experience						(3)						2						(3)						—
Adjusted beginning of period balance						1,709						220						1,688						207
Issuances						33						7						50						11
Interest accrual						18						3						17						2
Net premiums collected						(45)						(7)						(44)						(6)
Ending balance at original discount rate						1,715						223						1,711						214
Effect of changes in discount rate assumptions						(133)						(17)						(94)						(13)
Balance, end of period						1,582						206						1,617						201
Present value of expected future policy benefits:
Balance, beginning of period						2,662						633						2,702						646
Beginning balance at original discount rate						2,737						615						2,663						590
Effect of changes in cash flow assumptions						—						—						(12)						(2)
Effect of actual variances from expected experience						(6)						2						(2)						—
Adjusted beginning of period balance						2,731						617						2,649						588
Issuances						33						7						49						11
Interest accrual						30						8						29						7
Benefits paid						(39)						(9)						(48)						(7)
Ending balance at original discount rate						2,755						623						2,679						599
Effect of changes in discount rate assumptions						(234)						(37)						(159)						(5)
Balance, end of period						2,521						586						2,520						594
Net liability for future policy benefits:
Present value of expected future policy benefits less expected net premiums						939						380						903						393
Impact of flooring at cohort level						17						1						22						2
Net life policy reserves						956						381						925						395
Less reinsurance recoverable at original discount rate						(99)						(25)						(98)						(25)
Less effect of discount rate assumption changes on reinsurance recoverable						(7)						(3)						(9)						(4)
Net life policy reserves, after reinsurance recoverable						$	850					$	353					$	818					$	366
Weighted-average duration of the net life policy reserves in years						11						16						11						16

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(Dollars in millions)						Nine months ended September 30,
						2023												2022
						Term						Whole life						Term						Whole life
Present value of expected net premiums:
Balance, beginning of period						$	1,643					$	208					$	1,801					$	241
Beginning balance at original discount rate						1,708						217						1,503						201
Effect of changes in cash flow assumptions						(5)						(7)						132						(3)
Effect of actual variances from expected experience						(15)						3						5						—
Adjusted beginning of period balance						1,688						213						1,640						198
Issuances						111						24						154						30
Interest accrual						53						7						49						6
Net premiums collected						(137)						(21)						(132)						(20)
Ending balance at original discount rate						1,715						223						1,711						214
Effect of changes in discount rate assumptions						(133)						(17)						(94)						(13)
Balance, end of period						1,582						206						1,617						201
Present value of expected future policy benefits:
Balance, beginning of period						2,584						614						2,993						826
Beginning balance at original discount rate						2,692						607						2,425						577
Effect of changes in cash flow assumptions						5						(10)						150						(5)
Effect of actual variances from expected experience						(19)						3						15						—
Adjusted beginning of period balance						2,678						600						2,590						572
Issuances						111						24						153						29
Interest accrual						90						23						84						22
Benefits paid						(124)						(24)						(148)						(24)
Ending balance at original discount rate						2,755						623						2,679						599
Effect of changes in discount rate assumptions						(234)						(37)						(159)						(5)
Balance, end of period						2,521						586						2,520						594
Net liability for future policy benefits:
Present value of expected future policy benefits less expected net premiums						939						380						903						393
Impact of flooring at cohort level						17						1						22						2
Net life policy reserves						956						381						925						395
Less reinsurance recoverable at original discount rate						(99)						(25)						(98)						(25)
Less effect of discount rate assumption changes on reinsurance recoverable						(7)						(3)						(9)						(4)
Net life policy reserves, after reinsurance recoverable						$	850					$	353					$	818					$	366
Weighted-average duration of the net life policy reserves in years						11						16						11						16

The total impact of flooring at cohort level in the above tables includes the effect of discount rate assumption changes of $5 million and $13 million at September 30, 2023 and 2022, respectively.

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The following table shows the amount of undiscounted and discounted expected future benefit payments and expected gross premiums for our term and whole life policies:

(Dollars in millions)						At September 30,
						2023												2022
						Undiscounted						Discounted						Undiscounted						Discounted
Term
Expected future benefit payments						$	4,768					$	2,521					$	4,618					$	2,520
Expected future gross premiums						4,364						2,464						4,402						2,528
Whole life
Expected future benefit payments						$	1,631					$	586					$	1,540					$	594
Expected future gross premiums						653						379						596						356

The following table shows the amount of revenue and interest recognized in the condensed consolidated statements of income related to our term and whole life policies:

(Dollars in millions)						Three months ended September 30,												Nine months ended September 30,
						2023						2022						2023						2022
Gross premiums
Term						$	71					$	70					$	217					$	210
Whole life						14						11						39						35
Total						$	85					$	81					$	256					$	245
Interest accretion
Term						$	13					$	12					$	37					$	35
Whole life						5						5						16						16
Total						$	18					$	17					$	53					$	51

Adverse development that resulted in an immediate charge to income due to net premiums exceeding gross premiums was immaterial for the three and nine months ended September 30, 2023, and 2022.

The following table shows the weighted-average interest rate for our term and whole life products:

						At September 30,
						2023						2022
Term
Interest accretion rate						5.29		%				5.15		%
Current discount rate						5.73						5.18
Whole life
Interest accretion rate						5.92		%				5.97		%
Current discount rate						5.95						5.51

The discount rate assumption was developed by calculating forward rates from market yield curves of upper-medium grade fixed-income instruments.

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The following table shows the balances and changes in policyholders' account balances included in investment contract reserves:

(Dollars in millions)			Three months ended September 30,																								Nine months ended September 30,
			2023												2022												2023												2022
			Deferred annuity						Universal life						Deferred annuity						Universal life						Deferred annuity						Universal life						Deferred annuity						Universal life
Balance, beginning of period			$	696					$	456					$	755					$	457					$	734					$	457					$	763					$	454
Premiums received			13						8						12						8						38						28						23						29
Policy charges			—						(9)						—						(10)						—						(29)						—						(29)
Surrenders and withdrawals			(32)						(2)						(17)						(4)						(100)						(9)						(37)						(9)
Benefit payments			(3)						(1)						(3)						(1)						(9)						(5)						(13)						(4)
Interest credited			6						4						5						5						17						14						16						14
Balance, end of period			$	680					$	456					$	752					$	455					$	680					$	456					$	752					$	455
Weighted average crediting rate			3.45		%				4.29		%				3.10		%				4.24		%				3.45		%				4.29		%				3.10		%				4.24		%
Net amount at risk			$	—					$	3,989					$	—					$	4,108					$	—					$	3,989					$	—					$	4,108
Cash surrender value			675						424						748						421						675						424						748						421

The net amount at risk above represents the guaranteed benefit amount in excess of the current account balances.

The following table shows the balance of account values by range of guaranteed minimum crediting rates, in basis points, and the related range of the difference between rates being credited to policyholders and the respective guaranteed minimums for our deferred annuity and universal life contracts:

(Dollars in millions)						At guaranteed minimum						1 to 50 basis points above						51-150 basis points above						Greater than 150 basis points						Total
At September 30, 2023
Deferred annuity
1.00-3.00%						$	5					$	380					$	16					$	229					630
3.01-4.00%						50						—						—						—						50
Total						$	55					$	380					$	16					$	229					$	680
Universal life
1.00-3.00%						$	60					$	—					$	57					$	3					$	120
3.01-4.00%						54						—						—						—						54
Greater than 4.00%						282						—						—						—						282
Total						$	396					$	—					$	57					$	3					$	456
At September 30, 2022
Deferred annuity
1.00-3.00%						$	467					$	—					$	170					$	64					$	701
3.01-4.00%						51						—						—						—						51
Total						$	518					$	—					$	170					$	64					$	752
Universal life
1.00-3.00%						$	59					$	46					$	8					$	2					$	115
3.01-4.00%						52						—						—						—						52
Greater than 4.00%						288						—						—						—						288
Total						$	399					$	46					$	8					$	2					$	455

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The following table shows the balances and changes in the other additional liability related to the no-lapse guarantees contained within our universal life contracts:

(Dollars in millions)			Three months ended September 30,												Nine months ended September 30,
			2023						2022						2023						2022
Balance, beginning of period			$	122					$	122					$	121					$	133
Balance, beginning of period before shadow reserve adjustments			124						123						123						131
Effect of changes in cash flow assumptions			—						—						(5)						(2)
Effect of actual variances from expected experience			2						1						1						6
Adjusted beginning of period balance			126						124						119						135
Interest accrual			1						1						3						3
Excess death benefits			(4)						(2)						(6)						(14)
Attributed assessments			3						3						9						9
Effect of changes in interest rate assumptions			(5)						(4)						(4)						(11)
Balance, end of period before shadow reserve adjustments			121						122						121						122
Shadow reserve adjustments			(2)						(3)						(2)						(3)
Balance, end of period			119						119						119						119
Less reinsurance recoverable, end of period			7						5						7						5
Net other additional liability, after reinsurance recoverable			$	126					$	124					$	126					$	124
Weighted-average duration of the other additional liability in years			32						34						32						34

The following table shows balances and changes in separate accounts balances during the period:

(Dollars in millions)						Three months ended September 30,												Nine months ended September 30,
						2023						2022						2023						2022
Balance, beginning of period						$	911					$	860					$	892					$	959
Interest credited before policy charges						11						9						31						29
Change in unrealized gains and losses impacting separate accounts liabilities						—						20						—						(85)
Benefit payments						(3)						—						(6)						(10)
Other						(1)						(1)						1						(5)
Balance, end of period						$	918					$	888					$	918					$	888
Cash surrender value						$	912					$	886					$	912					$	886

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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. For property casualty, we evaluate the costs for recoverability. The adoption of ASU 2018-12 on January 1, 2023 resulted in a simplified amortization of life deferred acquisition costs and the removal of shadow deferred acquisition costs. See Note 1, Accounting Policies, for further discussion. 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,
			2023						2022						2023						2022
Property casualty:
Deferred policy acquisition costs asset, beginning of period			$	771					$	723					$	682					$	602
Capitalized deferred policy acquisition costs			355						325						1,134						1,064
Amortized deferred policy acquisition costs			(366)						(342)						(1,056)						(960)
Deferred policy acquisition costs asset, end of period			$	760					$	706					$	760					$	706
Life:
Deferred policy acquisition costs asset, beginning of period			$	338					$	323					$	331					$	314
Capitalized deferred policy acquisition costs			10						11						32						33
Amortized deferred policy acquisition costs			(7)						(7)						(22)						(20)
Deferred policy acquisition costs asset, end of period			$	341					$	327					$	341					$	327
Consolidated:
Deferred policy acquisition costs asset, beginning of period			$	1,109					$	1,046					$	1,013					$	916
Capitalized deferred policy acquisition costs			365						336						1,166						1,097
Amortized deferred policy acquisition costs			(373)						(349)						(1,078)						(980)
Deferred policy acquisition costs asset, end of period			$	1,101					$	1,033					$	1,101					$	1,033

The removal of shadow deferred policy acquisition costs as a result of the adoption of ASU 2018-12 resulted in a $33 million increase, across all products, from $263 million pre-adoption at December 31, 2020, to $296 million post-adoption at January 1, 2021.

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The table below shows the life deferred policy acquisition costs asset by product:

(Dollars in millions)
Three months ended September 30, 2023						Term						Whole life						Deferred annuity						Universal life												Total
Balance, beginning of period						$	233					$	45					$	8					$	52											$	338
Capitalized deferred policy acquisition costs						8						2						—						—												10
Amortized deferred policy acquisition costs						(7)						—						—						—												(7)
Balance, end of period						$	234					$	47					$	8					$	52											$	341
Three months ended September 30, 2022
Balance, beginning of period						$	222					$	40					$	7					$	54											$	323
Capitalized deferred policy acquisition costs						9						2						—						—												$	11
Amortized deferred policy acquisition costs						(5)						(1)						—						(1)												$	(7)
Balance, end of period						$	226					$	41					$	7					$	53											$	327

(Dollars in millions)
Nine months ended September 30, 2023						Term						Whole life						Deferred annuity						Universal life												Total
Balance, beginning of period						$	228					$	43					$	7					$	53											$	331
Capitalized deferred policy acquisition costs						24						6						1						1												32
Amortized deferred policy acquisition costs						(18)						(2)						—						(2)												(22)
Balance, end of period						$	234					$	47					$	8					$	52											$	341
Nine months ended September 30, 2022
Balance, beginning of period						$	215					$	38					$	7					$	54											$	314
Capitalized deferred policy acquisition costs						27						5						—						1												$	33
Amortized deferred policy acquisition costs						(16)						(2)						—						(2)												$	(20)
Balance, end of period						$	226					$	41					$	7					$	53											$	327

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

The adoption of ASU 2018-12 on January 1, 2023 resulted in restatement of certain amounts below. See Note 1, Accounting Policies, for further discussion. Accumulated other comprehensive income (AOCI) includes changes in unrealized gains and losses on investments, changes in pension obligations and changes in life policy reserves, reinsurance recoverable and other as follows:

(Dollars in millions)						Three months ended September 30,
						2023																					2022
						Before tax						Income tax						Net									Before tax						Income tax						Net
Investments:
AOCI, beginning of period						$	(838)					$	(179)					$	(659)								$	(564)					$	(119)					$	(445)
OCI before investment gains and losses, net, recognized in net income						(369)						(79)						(290)									(514)						(109)						(405)
Investment gains and losses, net, recognized in net income						—						—						—									—						—						—
OCI						(369)						(79)						(290)									(514)						(109)						(405)
AOCI, end of period						$	(1,207)					$	(258)					$	(949)								$	(1,078)					$	(228)					$	(850)
Pension obligations:
AOCI, beginning of period						$	29					$	7					$	22								$	27					$	7					$	20
OCI excluding amortization recognized in net income						—						—						—									—						—						—
Amortization recognized in net income						—						—						—									—						—						—
OCI						—						—						—									—						—						—
AOCI, end of period						$	29					$	7					$	22								$	27					$	7					$	20
Life policy reserves, reinsurance recoverable and other:
AOCI, beginning of period						$	13					$	2					$	11								$	(67)					$	(14)					$	(53)
OCI before investment gains and losses, net, recognized in net income						111						22						89									120						25						95
Investment gains and losses, net, recognized in net income						—						—						—									—						—						—
OCI						111						22						89									120						25						95
AOCI, end of period						$	124					$	24					$	100								$	53					$	11					$	42
Summary of AOCI:
AOCI, beginning of period						$	(796)					$	(170)					$	(626)								$	(604)					$	(126)					$	(478)
Investments OCI						(369)						(79)						(290)									(514)						(109)						(405)
Pension obligations OCI						—						—						—									—						—						—
Life policy reserves, reinsurance recoverable and other OCI						111						22						89									120						25						95
Total OCI						(258)						(57)						(201)									(394)						(84)						(310)
AOCI, end of period						$	(1,054)					$	(227)					$	(827)								$	(998)					$	(210)					$	(788)

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(Dollars in millions)						Nine months ended September 30,
						2023																					2022
						Before tax						Income tax						Net									Before tax						Income tax						Net
Investments:
AOCI, beginning of period						$	(847)					$	(182)					$	(665)								$	792					$	165					$	627
OCI before investment gains and losses, net, recognized in net income						(364)						(77)						(287)									(1,867)						(392)						(1,475)
Investment gains and losses, net, recognized in net income						4						1						3									(3)						(1)						(2)
OCI						(360)						(76)						(284)									(1,870)						(393)						(1,477)
AOCI, end of period						$	(1,207)					$	(258)					$	(949)								$	(1,078)					$	(228)					$	(850)
Pension obligations:
AOCI, beginning of period						$	36					$	9					$	27								$	27					$	7					$	20
OCI excluding amortization recognized in net income						(5)						(2)						(3)									—						—						—
Amortization recognized in net income						(2)						—						(2)									—						—						—
OCI						(7)						(2)						(5)									—						—						—
AOCI, end of period						$	29					$	7					$	22								$	27					$	7					$	20
Life policy reserves, reinsurance recoverable and other:
AOCI, beginning of period						$	29					$	5					$	24								$	1					$	—					$	1
Cumulative effect of change in accounting for long duration insurance contracts						—						—						—									(445)						(93)						(352)
Adjusted AOCI, beginning of period						29						5						24									(444)						(93)						(351)
OCI before investment gains and losses, net, recognized in net income						95						19						76									497						104						393
Investment gains and losses, net, recognized in net income						—						—						—									—						—						—
OCI						95						19						76									497						104						393
AOCI, end of period						$	124					$	24					$	100								$	53					$	11					$	42
Summary of AOCI:
AOCI, beginning of period						$	(782)					$	(168)					$	(614)								$	820					$	172					$	648
Cumulative effect of change in accounting for long duration insurance contracts						—						—						—									(445)						(93)						(352)
Adjusted AOCI, beginning of period						(782)						(168)						(614)									375						79						296
Investments OCI						(360)						(76)						(284)									(1,870)						(393)						(1,477)
Pension obligations OCI						(7)						(2)						(5)									—						—						—
Life policy reserves, reinsurance recoverable and other OCI						95						19						76									497						104						393
Total OCI						(272)						(59)						(213)									(1,373)						(289)						(1,084)
AOCI, end of period						$	(1,054)					$	(227)					$	(827)								$	(998)					$	(210)					$	(788)

Investment gains and losses, net, 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 of 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 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,
						2023						2022						2023						2022
Direct written premiums						$	1,939					$	1,730					$	5,869					$	5,304
Assumed written premiums						89						92						527						548
Ceded written premiums						(71)						(72)						(270)						(239)
Net written premiums						$	1,957					$	1,750					$	6,126					$	5,613
Direct earned premiums						$	1,912					$	1,743					$	5,478					$	4,935
Assumed earned premiums						142						161						435						416
Ceded earned premiums						(97)						(95)						(252)						(227)
Earned premiums						$	1,957					$	1,809					$	5,661					$	5,124
Direct incurred loss and loss expenses						$	1,220					$	1,247					$	3,784					$	3,316
Assumed incurred loss and loss expenses						82						164						216						304
Ceded incurred loss and loss expenses						(41)						(63)						(160)						(76)
Incurred loss and loss expenses						$	1,261					$	1,348					$	3,840					$	3,544

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 September 30,												Nine months ended September 30,
						2023						2022						2023						2022
Direct earned premiums						$	97					$	94					$	293					$	283
Ceded earned premiums						(21)						(19)						(60)						(57)
Earned premiums						$	76					$	75					$	233					$	226
Direct contract holders' benefits incurred						92						90						289						302
Ceded contract holders' benefits incurred						(21)						(20)						(59)						(74)
Contract holders' benefits incurred						$	71					$	70					$	230					$	228

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

The allowance for uncollectible property casualty premiums was $16 million and $13 million at September 30, 2023, and December 31, 2022, respectively. The allowances for credit losses on other premiums receivable and reinsurance recoverable assets were immaterial at September 30, 2023, and December 31, 2022.

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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,
						2023												2022												2023												2022
Tax at statutory rate:						$	(31)					21.0		%				$	(122)					21.0		%				$	165					21.0		%				$	(416)					21.0		%
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds						(5)						3.4						(5)						0.9						(15)						(1.9)						(15)						0.8
Dividend received exclusion						(5)						3.4						(5)						0.9						(16)						(2.0)						(15)						0.8
Release of unrecognized tax benefit						—						—						(34)						5.9						—						—						(34)						1.7
Other						(8)						5.3						5						(0.8)						(8)						(1.1)						(1)						—
Provision (benefit) for income taxes						$	(49)					33.1		%				$	(161)					27.9		%				$	126					16.0		%				$	(481)					24.3		%

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 September 30, 2023, and December 31, 2022. 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

During the third quarter of 2022, we received favorable guidance from the Internal Revenue Service (IRS) supporting our tax position related to our unrecognized tax benefit set up in 2018. As a result of this guidance, we released our $34 million gross unrecognized tax benefit liability at September 30, 2022. The $34 million release was recognized as an additional income tax benefit and shown separately in our effective income tax rate reconciliation.

Cincinnati Global

As a result of operations for the three and nine months ended September 30, 2023, Cincinnati Global decreased its net deferred tax assets by $10 million and $20 million, respectively, with an offsetting decrease of $10 million and $20 million, respectively, to the valuation allowance. Cincinnati Global had a net deferred tax asset of $11 million and an offsetting valuation allowance of $11 million at September 30, 2023.

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 September 30, 2023.

Cincinnati Global had operating loss carryforwards in the United States of $6 million and $5 million and in the United Kingdom of $99 million and $109 million at September 30, 2023, and December 31, 2022, respectively. These Cincinnati Global losses can only be utilized within the Cincinnati Global group.

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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 September 30,												Nine months ended September 30,
			2023						2022						2023						2022
Numerator:
Net income (loss)—basic and diluted						$	(99)					$	(416)					$	660					$	(1,500)
Denominator:
Basic weighted-average common shares outstanding						156.9						158.0						157.0						159.3
Effect of share-based awards:
Stock options						—						—						0.7						—
Nonvested shares						—						—						0.5						—
Diluted weighted-average shares						156.9						158.0						158.2						159.3
Earnings (loss) per share:
Basic						$	(0.63)					$	(2.63)					$	4.20					$	(9.42)
Diluted						$	(0.63)					$	(2.63)					$	4.17					$	(9.42)
Number of anti-dilutive share-based awards						2.4						2.3						1.3						1.9

The above table shows the number of anti-dilutive share-based awards for the three and nine months ended September 30, 2023 and 2022. In accordance with Accounting Standards Codification 260, Earnings per Share, the assumed exercise of share-based awards was excluded from the computation of diluted loss per share for the three months ended September 30, 2023 and for the three and nine months ended September 30, 2022, because their exercise would have anti-dilutive effects. See our 2022 Annual Report on Form 10-K, Item 8, Note 17, Share-Based Associate Compensation Plans, Page 170, for information about share-based awards.

NOTE 11 – Employee Retirement Benefits

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

(Dollars in millions)						Three months ended September 30,												Nine months ended September 30,
						2023						2022						2023						2022
Service cost						$	1					$	2					$	4					$	7
Non-service (benefit) costs:
Interest cost						3						3						9						8
Expected return on plan assets						(5)						(6)						(15)						(17)
Amortization of actuarial loss and prior service cost						—						—						(2)						—
Other						—						—						(5)						—
Total non-service benefit						(2)						(3)						(13)						(9)
Net periodic benefit						$	(1)					$	(1)					$	(9)					$	(2)

See our 2022 Annual Report on Form 10-K, Item 8, Note 13, Employee Retirement Benefits, Page 163, for information on our retirement benefits. The net periodic benefit is 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 2023 and 2022.

We made matching contributions totaling $6 million to our 401(k) and Top Hat savings plans during both the third quarter of 2023 and 2022 and contributions of $20 million for both the first nine months of 2023 and 2022.

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We made no contributions to our qualified pension plan during the first nine months of 2023.

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 continues to vigorously defend them. 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. Most of these lawsuits have been dismissed, both by courts and by plaintiffs, but some have been appealed and a few others remain pending in trial courts. Appellate decisions issued to date generally have been favorable for the insurance industry, and the company has received numerous favorable rulings on appeal with no adverse appellate rulings to date. Some cases remain to be decided and in some jurisdictions, 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 state or national classes. Such proceedings have alleged, for example, improper depreciation of labor costs in repair estimates. 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.

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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 2022 Annual Report on Form 10-K, Item 8, Note 18, Segment Information, Page 173, 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,
						2023						2022						2023						2022
Revenues:
Commercial lines insurance
Commercial casualty						$	365					$	360					$	1,115					$	1,046
Commercial property						321						292						933						846
Commercial auto						216						213						644						627
Workers' compensation						66						73						212						209
Other commercial						94						90						280						256
Commercial lines insurance premiums						1,062						1,028						3,184						2,984
Fee revenues						1						1						3						3
Total commercial lines insurance						1,063						1,029						3,187						2,987
Personal lines insurance
Personal auto						185						158						524						465
Homeowner						271						213						755						609
Other personal						71						60						205						172
Personal lines insurance premiums						527						431						1,484						1,246
Fee revenues						1						1						3						3
Total personal lines insurance						528						432						1,487						1,249
Excess and surplus lines insurance						135						125						394						361
Fee revenues						1						1						2						2
Total excess and surplus lines insurance						136						126						396						363
Life insurance premiums						76						75						233						226
Fee revenues						3						2						8						4
Total life insurance						79						77						241						230
Investments
Investment income, net of expenses						225						193						655						573
Investment gains and losses, net						(456)						(674)						84						(2,494)
Total investment revenue						(231)						(481)						739						(1,921)
Other
Premiums						233						225						599						533
Other						3						2						8						7
Total other revenues						236						227						607						540
Total revenues						$	1,811					$	1,410					$	6,657					$	3,448
Income (loss) before income taxes:
Insurance underwriting results
Commercial lines insurance						$	52					$	11					$	83					$	25
Personal lines insurance						1						(18)						(92)						(2)
Excess and surplus lines insurance						14						9						38						44
Life insurance						17						13						38						21
Investments						(262)						(508)						648						(2,003)
Other						30						(84)						71						(66)
Total income (loss) before income taxes						$	(148)					$	(577)					$	786					$	(1,981)

Identifiable assets:						September 30, 2023						December 31, 2022
Property casualty insurance						$	5,302					$	5,178
Life insurance						1,556						1,518
Investments						23,063						22,133
Other						994						903
Total						$	30,915					$	29,732

Cincinnati Financial Corporation Third-Quarter 2023 10-Q

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