filings.toolsItem 3. Quantitative and Qualitative Disclosures About Market Risk
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our greatest exposure to market risk is through our investment portfolio. Market risk is the potential for a decrease in securities' fair value resulting from broad yet uncontrollable forces such as: inflation, economic growth or recession, interest rates, world political conditions or other widespread unpredictable events. It is comprised of many individual risks that, when combined, create a macroeconomic impact.
Our view of potential risks and our sensitivity to such risks is discussed in our 2023 Annual Report on Form 10-K, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Page 113.
The fair value of our investment portfolio was $27.441 billion at September 30, 2024, up $2.661 billion from year-end 2023, including a $2.080 billion increase in the fixed-maturity portfolio and a $581 million increase in the equity portfolio.
| (Dollars in millions) | At September 30, 2024 | At December 31, 2023 | |||||||||||||||||||||||||||||||||
| Cost or amortized cost | Percent of total | Fair value | Percent of total | Cost or amortized cost | Percent of total | Fair value | Percent of total | ||||||||||||||||||||||||||||
| Taxable fixed maturities | $ | 12,038 | 59.9 | % | $ | 11,882 | 43.4 | % | $ | 10,414 | 55.8 | % | $ | 9,889 | 40.0 | % | |||||||||||||||||||
| Tax-exempt fixed maturities | 4,036 | 20.1 | 3,989 | 14.5 | 3,947 | 21.2 | 3,902 | 15.7 | |||||||||||||||||||||||||||
| Common equities | 3,626 | 18.0 | 11,200 | 40.8 | 3,869 | 20.8 | 10,641 | 42.9 | |||||||||||||||||||||||||||
| Nonredeemable preferred equities | 408 | 2.0 | 370 | 1.3 | 413 | 2.2 | 348 | 1.4 | |||||||||||||||||||||||||||
| Total | $ | 20,108 | 100.0 | % | $ | 27,441 | 100.0 | % | $ | 18,643 | 100.0 | % | $ | 24,780 | 100.0 | % | |||||||||||||||||||
At September 30, 2024, substantially all of our consolidated investment portfolio, measured at fair value, is classified as Level 1 or Level 2. See Item 1, Note 3, Fair Value Measurements, for additional discussion of our valuation techniques.
In addition to our investment portfolio, the total investments amount reported in our condensed consolidated balance sheets includes Other invested assets. Other invested assets included $528 million of private equity investments, $84 million of real estate through direct property ownership and development projects in the United States, $35 million of life policy loans and $16 million in Lloyd's deposit at September 30, 2024.
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FIXED-MATURITY SECURITIES INVESTMENTS
By maintaining a well-diversified fixed-maturity portfolio, we attempt to reduce overall risk. We invest new money in the bond market on a regular basis, targeting what we believe to be optimal risk-adjusted, after-tax yields. Risk, in this context, includes interest rate, call, reinvestment rate, credit and liquidity risk. We do not make a concerted effort to alter duration on a portfolio basis in response to anticipated movements in interest rates. By regularly investing in the bond market, we build a broad, diversified portfolio that we believe mitigates the impact of adverse economic factors.
In the first nine months of 2024, the increase in fair value of our fixed-maturity portfolio was due to net purchases of securities, plus a decrease in our net unrealized loss position that reflected realized losses from the sales of some lower-yielding bonds, as well as a decrease in U.S. Treasury yields in addition to tightening of corporate credit spreads. At September 30, 2024, our fixed-maturity portfolio with an average rating of A2/A was valued at 98.7% of its amortized cost, compared with 96.0% at December 31, 2023.
At September 30, 2024, our investment-grade fixed-maturity securities represented 97.4% of the portfolio based on ratings provided by nationally recognized statistical rating organizations or the Securities Valuation Office of the National Association of Insurance Commissioners.
Attributes of the fixed-maturity portfolio include:
| At September 30, 2024 | At December 31, 2023 | |||||||||||||||||||
| Weighted average yield-to-amortized cost | 4.98 | % | 4.60 | % | ||||||||||||||||
| Weighted average maturity | 9.5 | yrs | 7.9 | yrs | ||||||||||||||||
| Effective duration | 4.6 | yrs | 4.3 | yrs | ||||||||||||||||
We discuss maturities of our fixed-maturity portfolio in our 2023 Annual Report on Form 10-K, Item 8, Note 2, Investments, Page 137, and in this quarterly report Item 2, Investments Results.
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TAXABLE FIXED MATURITIES
Our taxable fixed-maturity portfolio, with a fair value of $11.882 billion at September 30, 2024, included:
| (Dollars in millions) | At September 30, 2024 | At December 31, 2023 | ||||||||||||
| Investment-grade corporate | $ | 8,010 | $ | 7,040 | ||||||||||
| States, municipalities and political subdivisions | 820 | 801 | ||||||||||||
| Noninvestment-grade corporate | 329 | 412 | ||||||||||||
| Government-sponsored enterprises | 2,151 | 1,224 | ||||||||||||
| Asset-backed | 314 | 187 | ||||||||||||
| United States government | 227 | 200 | ||||||||||||
| Foreign government | 31 | 25 | ||||||||||||
| Total | $ | 11,882 | $ | 9,889 | ||||||||||
Our strategy is to buy, and typically hold, fixed-maturity investments to maturity, but we monitor credit profiles and fair value movements when determining holding periods for individual securities. With the exception of United States agency issues that include government-sponsored enterprises, no individual issuer's securities accounted for more than 0.9% of the taxable fixed-maturity portfolio at September 30, 2024. Our investment-grade corporate bonds had an average rating of Baa1 by Moody's or BBB+ by S&P Global Ratings and represented 67.4% of the taxable fixed-maturity portfolio's fair value at September 30, 2024, compared with 71.2% at year-end 2023.
The heaviest concentration in our investment-grade corporate bond portfolio, based on fair value at
September 30, 2024, was the financial sector. It represented 35.6% of our investment-grade corporate bond portfolio, compared with 38.2% at year-end 2023. The utility and energy sectors represented 12.5% and 10.6%, compared with less than 10% and 11.2%, respectively, at year-end 2023. No other sector exceeded 10% of our investment-grade corporate bond portfolio.
As discussed in our 2023 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 30, investments in the financial sector include various risks. See risk factors entitled “Financial disruption or a prolonged economic downturn could materially and adversely affect our investment performance” and “Our ability to achieve our performance objectives could be affected by changes in the financial, credit and capital markets or the general economy.”
Our taxable fixed-maturity portfolio at September 30, 2024, included $314 million of asset-backed securities with an average rating of Aa2/AA-.
TAX-EXEMPT FIXED MATURITIES
At September 30, 2024, we had $3.989 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody's and S&P Global Ratings. We traditionally have purchased municipal bonds focusing on general obligation and essential services issues, such as water, waste disposal or others. The portfolio is well diversified among approximately 1,800 municipal bond issuers. No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at September 30, 2024.
INTEREST RATE SENSITIVITY ANALYSIS
Because of our strong surplus, long-term investment horizon and ability to hold most fixed-maturity investments until maturity, we believe the company is adequately positioned if interest rates were to rise. Although the fair values of our existing holdings may suffer, a higher rate environment would provide the opportunity to invest cash flow in higher-yielding securities, while reducing the likelihood of untimely redemptions of currently callable securities. While higher interest rates would be expected to continue to increase the number of fixed-maturity holdings trading below 100% of amortized cost, we believe lower fixed-maturity security values due solely to interest rate changes would not signal a decline in credit quality. We continue to manage the portfolio with an eye toward both meeting current income needs and managing interest rate risk.
Our dynamic financial planning model uses analytical tools to assess market risks. As part of this model, the effective duration of the fixed-maturity portfolio is continually monitored by our investment department to evaluate the theoretical impact of interest rate movements.
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The table below summarizes the effect of hypothetical changes in interest rates on the fair value of the fixed-maturity portfolio:
| (Dollars in millions) | Effect from interest rate change in basis points | |||||||||||||||||||||||||||||||
| -200 | -100 | — | 100 | 200 | ||||||||||||||||||||||||||||
| At September 30, 2024 | $ | 17,326 | $ | 16,590 | $ | 15,871 | $ | 15,107 | $ | 14,301 | ||||||||||||||||||||||
| At December 31, 2023 | $ | 14,962 | $ | 14,375 | $ | 13,791 | $ | 13,179 | $ | 12,543 | ||||||||||||||||||||||
The effective duration of the fixed-maturity portfolio as of September 30, 2024, was 4.6 years, up from 4.3 years at the end of 2023. The above table is a theoretical presentation showing that an instantaneous, parallel shift in the yield curve of 100 basis points could produce an approximately 4.7% change in the fair value of the fixed-maturity portfolio. Generally speaking, the higher a bond is rated, the more directly correlated movements in its fair value are to changes in the general level of interest rates, exclusive of call features. The fair values of average- to lower-rated corporate bonds are additionally influenced by the expansion or contraction of credit spreads.
In our dynamic financial planning model, the selected interest rate change of 100 to 200 basis points represents our view of a shift in rates that is quite possible over a one-year period. The rates modeled should not be considered a prediction of future events as interest rates may be much more volatile in the future. The analysis is not intended to provide a precise forecast of the effect of changes in rates on our results or financial condition, nor does it take into account any actions that we might take to reduce exposure to such risks.
EQUITY INVESTMENTS
Our equity investments, with a fair value totaling $11.570 billion at September 30, 2024, included $11.200 billion of common stock securities of companies generally with strong indications of paying and growing their dividends. Other criteria we evaluate include increasing sales and earnings, proven management and a favorable outlook. We believe our equity investment style is an appropriate long-term strategy. While our long-term financial position would be affected by prolonged changes in the market valuation of our investments, we believe our strong surplus position and cash flow provide a cushion against short-term fluctuations in valuation. Continued payment of cash dividends by the issuers of our common equity holdings can provide a floor to their valuation.
The table below summarizes the effect of hypothetical changes in market prices on fair value of our equity portfolio.
| (Dollars in millions) | Effect from market price change in percent | |||||||||||||||||||||||||||||||||||||||||||
| -30% | -20% | -10% | — | 10% | 20% | 30% | ||||||||||||||||||||||||||||||||||||||
| At September 30, 2024 | $ | 8,099 | $ | 9,256 | $ | 10,413 | $ | 11,570 | $ | 12,727 | $ | 13,884 | $ | 15,041 | ||||||||||||||||||||||||||||||
| At December 31, 2023 | $ | 7,692 | $ | 8,791 | $ | 9,890 | $ | 10,989 | $ | 12,088 | $ | 13,187 | $ | 14,286 | ||||||||||||||||||||||||||||||
At September 30, 2024, Apple Inc.(Nasdaq:AAPL) was our largest single common stock holding with a fair value of $885 million, or 7.9% of our publicly traded common stock portfolio and 3.2% of the total investment portfolio. Forty holdings among nine different sectors each had a fair value greater than $100 million.
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Common Stock Portfolio Industry Sector Distribution
| Percent of common stock portfolio | |||||||||||||||||||||||
| At September 30, 2024 | At December 31, 2023 | ||||||||||||||||||||||
| Cincinnati Financial | S&P 500 Industry Weightings | Cincinnati Financial | S&P 500 Industry Weightings | ||||||||||||||||||||
| Sector: | |||||||||||||||||||||||
| Information technology | 32.3 | % | 31.7 | % | 33.1 | % | 28.9 | % | |||||||||||||||
| Industrials | 13.5 | 8.5 | 11.9 | 8.8 | |||||||||||||||||||
| Healthcare | 11.8 | 11.6 | 11.6 | 12.6 | |||||||||||||||||||
| Financial | 11.4 | 12.9 | 13.9 | 13.0 | |||||||||||||||||||
| Consumer discretionary | 7.7 | 10.1 | 7.0 | 10.8 | |||||||||||||||||||
| Consumer staples | 7.3 | 5.9 | 7.0 | 6.2 | |||||||||||||||||||
| Materials | 4.8 | 2.2 | 4.7 | 2.4 | |||||||||||||||||||
| Energy | 4.2 | 3.3 | 4.1 | 3.9 | |||||||||||||||||||
| Utilities | 3.2 | 2.5 | 2.7 | 2.3 | |||||||||||||||||||
| Real estate | 2.4 | 2.4 | 2.6 | 2.5 | |||||||||||||||||||
| Telecomm services | 1.4 | 8.9 | 1.4 | 8.6 | |||||||||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
UNREALIZED INVESTMENT GAINS AND LOSSES
At September 30, 2024, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $201 million and unrealized investment losses amounted to $404 million before taxes.
The $203 million net unrealized loss position in our fixed-maturity portfolio at September 30, 2024, decreased in the first nine months of 2024, primarily due to the sale of low-yielding bonds sold at a loss and a decrease in U.S. Treasury yields in addition to tightening of corporate credit spreads. The net loss position for our current fixed-maturity holdings will naturally decline over time as individual securities approach maturity. In addition, changes in interest rates can cause rapid, significant changes in fair values of fixed-maturity securities and the net loss position, as discussed in Quantitative and Qualitative Disclosures About Market Risk.
For federal income tax purposes, taxes on gains from appreciated investments generally are not due until securities are sold. We believe that the appreciated value of equity securities, compared with the cost of securities that is generally used as a tax basis, is a useful measure to help evaluate how fair value can change over time. On this basis, the net unrealized investment gains at September 30, 2024, consisted of a net gain position in our equity portfolio of $7.536 billion. Events or factors such as economic growth or recession can affect the fair value and unrealized investment gains of our equity securities. The five largest holdings in our common stock portfolio were Apple, Microsoft (Nasdaq:MSFT), Broadcom Inc. (Nasdaq:AVGO), UnitedHealth Group Inc (NYSE:UNH) and Abbvie Inc. (NYSE:ABBV), which had a combined fair value of $3.046 billion.
Unrealized Investment Losses
We expect the number of fixed-maturity securities trading below amortized cost to fluctuate as interest rates rise or fall and credit spreads expand or contract due to prevailing economic conditions. Further, amortized costs for some securities are revised through write-downs recognized in prior periods. At September 30, 2024, 2,495 of the 4,988 fixed-maturity securities we owned had fair values below amortized cost, compared with 2,840 of the 4,738 securities we owned at year-end 2023. The 2,495 holdings with fair values below amortized cost at September 30, 2024, represented 48.7% of the fair value of our fixed-maturity investment portfolio and $404 million in unrealized losses.
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1,854 of the 2,495 holdings had fair value between 90% and 100% of amortized cost at September 30, 2024. These primarily consist of securities whose current valuation is largely the result of interest rate factors. The fair value of these 1,854 securities was $6.496 billion, and they accounted for $151 million in unrealized losses.
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636 of the 2,495 fixed-maturity holdings had fair value between 70% and 90% of amortized cost at September 30, 2024. We believe the 636 fixed-maturity securities will continue to pay interest and ultimately
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pay principal upon maturity. The issuers of these 636 securities have strong cash flow to service their debt and meet their contractual obligation to make principal payments. The fair value of these securities was $1.217 billion, and they accounted for $247 million in unrealized losses.
- Five of the 2,495 fixed-maturity holdings had fair value below 70% of amortized cost at September 30, 2024. We believe these fixed-maturity securities will continue to pay interest and ultimately pay principal upon maturity. The fair value of these securities was $11 million, and they accounted for $6 million in unrealized losses.
The table below reviews fair values and unrealized losses by investment category and by the overall duration of the securities' continuous unrealized loss position.
| (Dollars in millions) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||||
| At September 30, 2024 | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||||||||||||||||
| Fixed-maturity securities: | ||||||||||||||||||||||||||||||||||||||
| Corporate | $ | 402 | $ | 5 | $ | 3,937 | $ | 213 | $ | 4,339 | $ | 218 | ||||||||||||||||||||||||||
| States, municipalities and political subdivisions | 287 | 4 | 2,000 | 172 | 2,287 | 176 | ||||||||||||||||||||||||||||||||
| Government-sponsored enterprises | 715 | 1 | 128 | — | 843 | 1 | ||||||||||||||||||||||||||||||||
| Asset-backed | 48 | — | 99 | 7 | 147 | 7 | ||||||||||||||||||||||||||||||||
| United States government | — | — | 103 | 2 | 103 | 2 | ||||||||||||||||||||||||||||||||
| Foreign government | — | — | 5 | — | 5 | — | ||||||||||||||||||||||||||||||||
| Total | $ | 1,452 | $ | 10 | $ | 6,272 | $ | 394 | $ | 7,724 | $ | 404 | ||||||||||||||||||||||||||
| At December 31, 2023 | ||||||||||||||||||||||||||||||||||||||
| Fixed-maturity securities: | ||||||||||||||||||||||||||||||||||||||
| Corporate | $ | 379 | $ | 13 | $ | 5,560 | $ | 441 | $ | 5,939 | $ | 454 | ||||||||||||||||||||||||||
| States, municipalities and political subdivisions | 313 | 2 | 1,932 | 206 | 2,245 | 208 | ||||||||||||||||||||||||||||||||
| Government-sponsored enterprises | 652 | 3 | 113 | 3 | 765 | 6 | ||||||||||||||||||||||||||||||||
| Asset-backed | 5 | — | 172 | 16 | 177 | 16 | ||||||||||||||||||||||||||||||||
| United States government | 32 | — | 129 | 3 | 161 | 3 | ||||||||||||||||||||||||||||||||
| Foreign government | 3 | — | 6 | — | 9 | — | ||||||||||||||||||||||||||||||||
| Total | $ | 1,384 | $ | 18 | $ | 7,912 | $ | 669 | $ | 9,296 | $ | 687 | ||||||||||||||||||||||||||
At September 30, 2024, applying our invested asset impairment policy, we determined that the total of $404 million, for securities in an unrealized loss position in the table above, was not the result of a credit loss.
During the first nine months of 2024, no fixed maturity securities were written down to fair value, due to an intention to be sold. The allowance for credit losses increased $25 million during the first nine months of 2024. During the first nine months of 2023, one fixed-maturity security was written down to fair value, due to an intention to be sold, resulting in $4 million of noncash charges. Changes in allowance for credit losses were $3 million during the first nine months of 2023.
During the full year of 2023, we wrote down one security and recorded $4 million in impairment charges. At December 31, 2023, 2,840 fixed-maturity securities with a total unrealized loss of $687 million were in an unrealized loss position. Of that total, 20 fixed-maturity securities had fair values below 70% of amortized cost.
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The following table summarizes the investment portfolio by severity of decline:
| (Dollars in millions) | Number of issues | Amortized cost | Fair value | Gross unrealized gain (loss) | Gross investment income | |||||||||||||||||||||||||||
| At September 30, 2024 | ||||||||||||||||||||||||||||||||
| Taxable fixed maturities: | ||||||||||||||||||||||||||||||||
| Fair valued below 70% of amortized cost | 3 | $ | 9 | $ | 6 | $ | (3) | $ | — | |||||||||||||||||||||||
| Fair valued at 70% to less than 100% of amortized cost | 1,476 | 6,421 | 6,103 | (318) | 198 | |||||||||||||||||||||||||||
| Fair valued at 100% and above of amortized cost | 1,055 | 5,608 | 5,773 | 165 | 186 | |||||||||||||||||||||||||||
| Investment income on securities sold in current year | — | — | — | — | 45 | |||||||||||||||||||||||||||
| Total | 2,534 | 12,038 | 11,882 | (156) | 429 | |||||||||||||||||||||||||||
| Tax-exempt fixed maturities: | ||||||||||||||||||||||||||||||||
| Fair valued below 70% of amortized cost | 2 | 8 | 5 | (3) | — | |||||||||||||||||||||||||||
| Fair valued at 70% to less than 100% of amortized cost | 1,014 | 1,690 | 1,610 | (80) | 37 | |||||||||||||||||||||||||||
| Fair valued at 100% and above of amortized cost | 1,438 | 2,338 | 2,374 | 36 | 60 | |||||||||||||||||||||||||||
| Investment income on securities sold in current year | — | — | — | — | 3 | |||||||||||||||||||||||||||
| Total | 2,454 | 4,036 | 3,989 | (47) | 100 | |||||||||||||||||||||||||||
| Fixed-maturities summary: | ||||||||||||||||||||||||||||||||
| Fair valued below 70% of amortized cost | 5 | 17 | 11 | (6) | — | |||||||||||||||||||||||||||
| Fair valued at 70% to less than 100% of amortized cost | 2,490 | 8,111 | 7,713 | (398) | 235 | |||||||||||||||||||||||||||
| Fair valued at 100% and above of amortized cost | 2,493 | 7,946 | 8,147 | 201 | 246 | |||||||||||||||||||||||||||
| Investment income on securities sold in current year | — | — | — | — | 48 | |||||||||||||||||||||||||||
| Total | 4,988 | $ | 16,074 | $ | 15,871 | $ | (203) | $ | 529 | |||||||||||||||||||||||
| At December 31, 2023 | ||||||||||||||||||||||||||||||||
| Fixed-maturities summary: | ||||||||||||||||||||||||||||||||
| Fair valued below 70% of amortized cost | 20 | $ | 67 | $ | 44 | $ | (23) | $ | 3 | |||||||||||||||||||||||
| Fair valued at 70% to less than 100% of amortized cost | 2,820 | 9,916 | 9,252 | (664) | 409 | |||||||||||||||||||||||||||
| Fair valued at 100% and above of amortized cost | 1,898 | 4,378 | 4,495 | 117 | 162 | |||||||||||||||||||||||||||
| Investment income on securities sold in current year | — | — | — | — | 26 | |||||||||||||||||||||||||||
| Total | 4,738 | $ | 14,361 | $ | 13,791 | $ | (570) | $ | 600 | |||||||||||||||||||||||
See our 2023 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Asset Impairment, Page 58.
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